ITEM 1. BUSINESS
United American Healthcare Corporation (the “Company” or “UAHC”) was incorporated in Michigan on December 1, 1983 and commenced operations in May 1985. Unless the context otherwise requires, all references to the Company indicated herein shall mean United American Healthcare Corporation and its consolidated subsidiaries.
History
From November 1993 to June 2009, the Company’s indirect, wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc. (“UAHC-TN”), was a managed care organization in the TennCare program, a State of Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. On April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed care services as a TennCare contractor when its present TennCare contract expired on June 30, 2009. UAHC-TN’s TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. However, revenue under this contract was only earned through October 31, 2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare Advantage qualified organization (the “Medicare contract”) pursuant to a contract with the Centers for Medicare & Medicaid Services. The contract authorized UAHC-TN to serve members enrolled in both the Tennessee Medicaid and Medicare programs, commonly referred to as “dual-eligibles,” specifically to offer a Special Needs Plan to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan. The Company did not seek renewal of the Medicare contract, which expired December 31, 2009. The Company wound down the Medicare business over the next twelve months and substantially ended its activity on December 31, 2010.
The discontinuance of the TennCare and Medicare contracts had a material adverse effect on the Company’s operations, earnings, financial condition and cash flows in fiscal 2009 and 2010.
Acquisition of Pulse Systems, LLC
On June 18, 2010, UAHC entered into a Securities Purchase Agreement and a Warrant Purchase Agreement to acquire 100% of the outstanding common units and warrants to purchase common units of Pulse. The consideration paid to acquire the common units and warrants of Pulse totaled approximately $9.46 million, which consisted of (a) cash paid at closing of $3.40 million, (b) a non-interest bearing note payable of $1.75 million (secured by a subordinated pledge of all the common units of Pulse), (c) 1,608,039 shares of UAHC common stock determined based on an initial value of $1.6 million, (d) an estimated purchase price adjustment of $210,364 based on targeted levels of net working capital, cash and debt of Pulse at the acquisition date (e) and the funding of $2.5 million for certain obligations of Pulse as discussed below. The shares of UAHC common stock were issued on July 12, 2010, upon approval by the UAHC board of directors on July 7, 2010. The shares of UAHC common stock had a fair value of $1.05 million as of June 30, 2010, and a fair value of $884,000 on July 12, 2010, the date the shares were issued and recorded. The Company also assumed Pulse’s term loan to a bank of $4.25 million, after making a payment at closing as discussed below.
In connection with the acquisition of the Pulse common units, Pulse entered into a redemption agreement with the holders of its preferred units to redeem the preferred units for $3.99 million. Pulse was only allowed to redeem the preferred units if UAHC made additional cash equity contributions to Pulse in an amount necessary to fully fund each such redemption. UAHC funded an initial payment of $1.75 million to the preferred unitholders on June 18, 2010. Pulse agreed to redeem the remaining preferred units over a two-year period ending in June 2012. Finally, as an additional condition of closing, UAHC funded a $750,000 payment toward Pulse’s outstanding term loan with a bank and pledged all of the common units of Pulse to the bank as additional security for the remaining $4.25 million outstanding under the loan. The initial payment of $1.75 million to the preferred unitholders and the $750,000 payment to the bank by UAHC were considered additional consideration for the acquisition of Pulse. The funding of the remaining redemption payments totaling $2.24 million and the assumption of Pulse’s revolving and term loan are not included in the $9.46 million purchase price listed above.
Pulse Systems is now a wholly owned subsidiary of UAHC and represents substantially all of the ongoing operations of the Company. Pulse Systems is located in Concord, California. Pulse Systems was founded as Pulse Systems Corporation, a California corporation, in 1998. In 2004, Pulse Systems was re-incorporated as Pulse Systems, LLC, a Delaware limited liability corporation. Since August 2007, Pulse has been managed by its current President and Chief Executive Officer, Herbert J. Bellucci, who has more than 25 years of experience in the medical device industry.
The remaining sections of this Part I discuss the business of Pulse Systems. The operating results of Pulse are only included in the accompanying financial statements since the acquisition date of June 18, 2010, and the financial information disclosed in the following sections for Pulse for any historical period are substantially prior to the acquisition.
Business
Pulse Systems is a provider of contract manufacturing services to the medical device industry. In business since 1998, Pulse has developed an expertise in laser-based metal fabrication services, supplying precision components to customers developing products for use in a wide range of medical specialties, including cardiology, neurology, orthopedics, gynecology, ophthalmology and urology. For the twelve months ended June 30, 2013, approximately 73% of Pulse’s total revenue was related to products with cardiovascular applications. Components produced by Pulse Systems are used in medical device applications such as cardiovascular stents, heart valve replacements, arterial wound closures, spinal repairs, breast biopsies and brain aneurysm repairs.
Pulse Systems specializes in the following contract manufacturing services for the medical device industry:
· Laser Cutting. Pulse’s core business is providing precision laser cutting of thin-wall metal tubes. For the twelve months ended June 30, 2013, laser cutting represented approximately 95% of Pulse’s total revenue. Pulse has expertise in processing a variety of medical-grade materials, such as stainless steel, certain nickel-titanium alloys known as “Nitinol”, precious metals such as platinum and gold (often used as radio-opaque location markers for implants), as well as tantalum and cobalt chromium. Pulse utilizes automated processing workstations which deliver precise amounts of laser energy to vaporize metal materials in the specific pattern required for the customer’s part. Laser processing has technical advantages over other conventional machining techniques in processing these thin, delicate materials.
· Laser Welding. In addition to its laser cutting capabilities, Pulse provides customers with laser welding services for joining metal components into sub-assemblies. Pulse maintains a certified Class 10,000 (International Organization for Standardization (“ISO”) Class 7) cleanroom for its sub-assembly work. Similar to laser cutting, laser welding is performed by highly accurate computer-controlled equipment and is advantageous for use in medical device manufacturing because of its precision. From a biocompatibility and cleanliness perspective, the medical-grade materials of the components themselves are melted by the laser energy to form the weld, so no that additional materials or contaminants are introduced to the finished product.
· CNC Machining. During fiscal year 2013, Pulse Systems added capabilities in CNC Machining to its array of contract manufacturing services for the medical device industry. In addition to its well-established capabilities in precision laser services and implant manufacturing, Pulse Systems now offers precision CNC machining of small custom components for medical devices. The Company’s newly-acquired CNC machining equipment is capable of a variety of operations, including milling, turning, boring, and drilling of very small features on a range of biocompatible materials. In addition to machining solid metal materials such as stainless steel, Nitinol, and titanium, this equipment is also capable of handling tubular or cannulated starting materials. This wide range of machining capability was designed to leverage Pulse Systems’ existing skills in laser machining and laser welding to provide medical device manufacturers with turn-key, ISO-certified sub-assembly services.
· Nitinol Processing. Pulse has developed particular expertise in Nitinol heat-treating techniques, which enable medical device developers to utilize the shape-memory properties of the Nitinol material. In heat-treating Nitinol, components are formed into a desired shape in a fixture, then exposed to a precise transition temperature for a specific amount of time. Heat-treated Nitinol components will retain their desired shape while maintaining flexibility of the spring-like material. This process is referred to as “shape-setting”. Nitinol is often used in the design of catheter-delivered implants which can assume a desired shape when deployed inside the body.
· Surface Treatments. Pulse offers an array of surface treatment options for medical device manufacturers to meet specific design requirements:
o Electropolishing. Using electrical energy to remove precise amounts of material from metal parts, electropolishing produces bright, clean surfaces, and provides the corrosion resistance required for long-term metallic implants.
o Passivation. For certain materials, especially stainless steel, chemical passivation techniques are used to provide corrosion resistance.
o Grit-blasting. In situations where roughened surfaces are desired, such as for bonding or overmolding, parts are blasted with a stream of pressurized air carrying fine particles of aluminum oxide grit to produce the required surface roughness.
Competition
The seven largest companies in the industry account for approximately half of the approximately $1 billion market for medical device contract manufacturing. Beyond the market leaders, the medical device contract manufacturing industry is highly fragmented, consisting of several thousand companies in the United States, most of which are privately-held. Industry directories list more than 5,000 companies that contribute as contract manufacturers to serving the medical device industry. Participants range from small individually-owned shops to technical specialty firms (such as Pulse Systems) to large multi-national companies providing end-to-end medical device design, fabrication, assembly, and packaging services. Participants are primarily located in California, Minnesota and Boston, Massachusetts. Certain of Pulse’s customers also have the capability to manufacture similar products in house, if they so choose.
Pulse Systems competes with a number of other suppliers who provide similar contract manufacturing services to the medical device industry. These competitors offer a range of manufacturing services, each one differing in their mix of capabilities and production capacity for each. The major elements of competition in this industry are product quality, customer service, technical capabilities, and ISO certifications, as well as pricing. While price is an important factor, it is not the only consideration for customers choosing among the competitors in this industry. Pulse does not strive to offer the lowest price, but rather the best overall value for the customer.
Medical Device Opportunity
Powerful demographic, economic, and technologic trends are driving the development of new medical technologies. Major contributing factors are the rapid growth in the world population and the even faster growth of the population segment over the age of sixty-five. Alongside the aging population trend is the worldwide trend toward industrialization and the associated improvement in personal incomes and quality of life expectations. New medical technologies are emerging to meet the challenges of the leading causes of death, which have captured the imagination of technically astute surgeons, device developers, and investors, and have spawned the emergence of dozens of new medical device start-up companies with bold new product concepts, visionary leadership, and strong capital investment.
The contract manufacturing industry provides services to medical device companies that they cannot perform for themselves economically, or do not wish to invest in for strategic reasons. The trend in recent years has been toward selective outsourcing of manufacturing processes to free up investment capital for acquisition of new product technologies. The capital intensity of certain manufacturing processes, such as laser cutting and other metal fabrication, injection molding, and tubing extrusion, among others, favors consolidation of these investment-intensive manufacturing capabilities within specialty firms, allowing economies of scale to be shared by multiple customers.
Due to its ability to work collaboratively and responsively with the small venture-backed start-ups, as well as its strategic geographical location near the center of venture capital investment activity in the San Francisco Bay Area of California, Pulse Systems seeks to benefit from current demographic, economic, and technologic trends.
Customers
Customers range in size from broadly-based multi-billion dollar public companies to small venture-capital financed start-ups. However, most of the companies served by Pulse Systems tend to be smaller start-ups, at least in the initial service period.
For the twelve months ended June 30, 2013, Pulse Systems provided contract manufacturing services to 106 medical device customers, with approximately 61% of revenue arising from customers located in the San Francisco Bay Area. For the twelve-months ended June 30, 2013, 2012 and 2011 Pulse’s largest customer accounted for approximately 43%, 37% and 41% of its total revenue, respectively, and its second largest customer accounted for approximately 14%, 15% and 12% of its total revenue, respectively. For the twelve months ended June 30, 2013, the ten largest customers accounted for 81% of Pulse’s total revenue. Although such customers represent a significant portion of Pulse’s business, we do not believe the company is substantially dependent on any one customer.
Pulse does not have any long-term contracts with its customers. Although we obtain firm purchase orders from customers, such customers do not typically make firm orders for delivery more than 120 days in advance. In addition, such customers may reschedule or cancel firm orders on short notice in accordance with contractual terms. While firm purchase orders remain our best predictor of future shipments in the near term, we do not believe that the backlog of sales at any point time is a meaningful measure of future long-term sales. As of June 30, 2013, we had a sales backlog of approximately $2.46 million.
Marketing and Sales
Pulse Systems sells its contract manufacturing services directly to medical device manufacturing companies who are responsible for the engineering design, clinical development, regulatory approval, and marketing and sales of the end products. In selling its services, Pulse utilizes independent manufacturer’s representatives, who are granted exclusive regional territories and are paid a percentage commission for the sales revenues generated in their territories. Our manufacturing representatives are generally restricted from representing competitors in our industry during their service period to Pulse.
Pulse promotes its services nationally through several media as well as its website (www.pulsesystems.com). We also advertise selectively in certain medical device industry trade publications, and we exhibit at several industry trade shows annually. Referrals from satisfied customers are also a strong factor in our selling, and we frequently receive unsolicited requests for quotation.
Government Regulations
Pulse Systems is subject to federal, state and local environmental laws and regulations governing the emission, discharge, use, storage and disposal of hazardous materials. We are not aware of any material noncompliance with the environmental laws currently applicable to our business and we are not subject to any material claim for liability with respect to noncompliance. Pulse is also subject to various other environmental, health, safety, and labor laws as well as various other directives and regulations. To the best of our knowledge, the company is in compliance with all relevant laws and regulations.
The FDA and related state and foreign governmental agencies regulate many of our customers’ products as medical devices, all of which are not directly related to our business as currently conducted. In most cases, the U.S. Food and Drug Administration (“FDA”) or foreign government agency must approve or pre-clear those products prior to commercialization.
Intellectual Property
We have developed certain manufacturing “know-how” that we consider proprietary, and which helps to differentiate our services from those provided by others. Our engineering staff is focused on the innovative application of manufacturing technologies to meet our customers’ needs. However, Pulse does not conduct any basic research and development outside of specific tasks requested by its customers, and therefore has no expenses in that area.
Pulse Systems owns no patents, patent rights or trademarks. Further, our business is not dependent on licensed technology owned by others, except for certain proprietary technology contained in capital equipment purchased with the appropriate usage licenses and standard commercially available computer software.
Quality Assurance
Pulse Systems maintains a comprehensive quality assurance program, which includes the control and documentation of material specifications, operating procedures, equipment maintenance, and quality control methods. Our quality systems are based upon FDA requirements and ISO standards for medical device manufacturers. We believe that our operations are in substantial compliance with all applicable regulations. Pulse Systems has obtained quality certification under the ISO standards, ISO 13485:2003 and ISO 9001:2008. In order to ensure compliance with regulatory requirements, we generally permit periodic customer audits of our quality systems.
Materials
The principal raw materials used in products manufactured by Pulse Systems, which are medical-grade stainless steel and Nitinol tubing drawn to specific sizes, are either supplied by our customers or are purchased per customer specifications in conjunction with particular customer purchase orders. Such materials are purchased from multiple suppliers, and are generally readily available with reasonable delivery times. Therefore, the company does not carry significant amounts of uncommitted raw material inventory. On-hand inventories are generally limited to raw materials and work-in-process related to contracted customer shipments.
Employees
As of June 30, 2013, the Company had 31 full-time employees, including 30 full-time employees of Pulse. The Company’s employees do not belong to a collective bargaining unit and management considers its relations with employees to be good.
Further information about Pulse Systems can be found on the Internet at www.pulsesystems.com. The references to the website address of Pulse are not intended to function as a hyperlink and, except as specified herein, the information contained on such website is not part of this Annual Report on Form 10-K.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider each of the risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K, as well as any amendments or updates reflected in subsequent filings with the SEC. We believe these risks and uncertainties, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity. Further, additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our results and business operations.
Risks Related to Our Business
The existing global economic and financial market environment has had and may continue to have a negative effect on our business and operations.
The existing global economic and financial market environment has caused, among other things, lower consumer and business spending, lower consumer net worth, a general tightening in the credit markets, and lower levels of liquidity, all of which has had and may continue to have a negative effect on our business, results of operations, financial condition and liquidity. Many of our customers have been severely affected by the current economic turmoil. Current or potential customers may no longer be in business, may be unable to fund purchases or determine to reduce purchases, all of which has and could continue to lead to reduced demand for our products, reduced gross margins, and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet consumer demand or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations, difficulties if we overstrained our resources, and our long-term business approach that necessitates we remain in position to respond when market conditions improve. The timing and nature of any recovery in the credit and financial markets remains uncertain, and there can be no assurance that market conditions will significantly improve in the near future or that our results will not continue to be materially and adversely affected.
Such conditions make it very difficult to forecast operating results, make business decisions and identify and address material business risks. The foregoing conditions may also impact the valuation of certain long-lived or intangible assets that are subject to impairment testing, potentially resulting in impairment charges which may be material to our financial condition or results of operations. See “-Risks Related to Financing Activities” below for a discussion of additional risks to our liquidity resulting from the current economic and financial market environment.
Quality problems with our processes, products and services could harm our reputation for producing high quality products and erode our competitive advantage.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Many of our customers require us to adopt and comply with specific quality standards, and they periodically audit our performance. Our quality certifications are critical to the marketing success of our products and services. If we fail to meet these standards, our reputation could be damaged, we could lose customers and our sales could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision engineered components, subassemblies and finished devices using multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high quality components could be harmed, our competitive advantage could be damaged, and we could lose customers and market share.
If we experience decreasing prices for our products and services and we are unable to reduce our expenses, our results of operations will suffer.
We may experience decreasing prices for the products and services we offer due to pricing pressure experienced by our customers from managed care organizations and other third party payers, increased market power of our customers as the medical device industry consolidates, and increased competition among medical manufacturing outsourcing service providers. If the prices for our products and services decrease and we are unable to reduce our expenses, our results of operations may be materially adversely affected.
Because a significant portion of our revenue comes from a few large customers and customers in the San Francisco Bay Area, any decrease in sales to these customers could harm our operating results.
Our revenue and profitability are highly dependent on our relationships with a limited number of large medical device companies. For the twelve months ended June 30, 2013, Pulse’s two largest and ten largest customers accounted for approximately 57% and 81%, respectively, of Pulse’s total revenue. In addition, for the twelve months ended June 30, 2013 approximately 61% of Pulse’s revenue related to customers located in the San Francisco Bay Area. We are likely to continue to experience a high degree of customer concentration. The loss or a significant reduction of business from any of our major customers or from customers in the San Francisco Bay Area would adversely affect our results of operations.
We have limited contractual relationships with our customers and, as a result, our customers may unilaterally reduce the purchase of our products.
Pulse does not have any long-term contracts with its customers. Although we obtain firm purchase orders from customers, such customers do not typically make firm orders for delivery more than 120 days in advance. In addition, such customers may reschedule or cancel firm orders on short notice in accordance with contractual terms for which we may have incurred significant production costs. The loss of several customers or the cancellation of existing firm orders could, in the aggregate, materially adversely affect our operations and financial condition.
Many of our larger customers are multinational companies that purchase large quantities of medical devices and have centralized procurement departments. They generally enter into outsourcing arrangements through a tender process that solicits bids from several potential suppliers and selects the winning bid based on several attributes, including price and service. The significant negotiating leverage possessed by many of our customers and potential customers limits our ability to negotiate arrangements with favorable terms and creates pricing pressure, reducing margins industry wide. In addition, our customers may vary their order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods. In the event we lose any of our larger customers, we may not be able to quickly replace that revenue source, which could harm our financial results.
If our customers fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals to commercially distribute their products, our ability to sell our services could suffer.
Many of our customers’ medical devices are subject to rigorous regulatory pre-approval by the FDA and other federal, state and foreign governmental authorities. Our customers are typically responsible for obtaining the applicable regulatory approval for the commercial distribution of our products. The process of obtaining this approval, particularly from the FDA, can be costly and time consuming, and there can be no assurance that our customers will obtain the required approvals on a timely basis, if at all. The FDA approval process can be expensive and uncertain, requires detailed and comprehensive scientific and other data, and generally takes between three months and three years, or longer, depending on the product classification. The commercial distribution of any products developed by our customers that require regulatory clearance may be delayed by the regulatory approval process. If our customers fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals to commercially distribute their products, our ability to sell our services could suffer.
We may face competition from, and we may be unable to compete successfully against, new entrants and established companies with greater resources.
The market for outsourced manufacturing services to the medical device industry is very competitive and includes seven companies that account for approximately 49% of the approximately $1 billion market, with thousands of companies accounting for the remaining market share. As more medical device companies seek to outsource more of the prototyping and manufacturing of their products, we will face increasing competitive pressures to grow our business in order to maintain our competitive position, and we may encounter competition from and lose customers to other companies with technological and manufacturing capabilities similar to or better than ours. Some of our potential competitors have greater name recognition, greater operating revenues, larger customer bases, longer customer relationships and greater financial, technical, personnel and marketing resources than we have. Further, we believe that there are few barriers to enter into many of our product markets. As a result, we have experienced, and may continue to experience, competition from new manufacturers. When new manufacturers enter the market or existing manufacturers increase capacity, they frequently reduce prices to achieve increased market share.
An increase in competition could result in material selling price reductions or loss of our market share, which could materially adversely affect our operations and financial condition. There can be no assurance that we will be able to compete successfully in the markets for our products or that competition will not intensify.
If we do not respond to changes in technology, our manufacturing processes may become obsolete and we may experience reduced sales and lose customers.
We use proprietary processes and sophisticated machining equipment to meet the critical specifications of our customers. Without the timely incorporation of new processes and enhancements, particularly relating to quality standards and cost-effective production, our manufacturing capabilities will likely become outdated, which could cause us to lose customers and result in reduced sales or profit margins. In addition, new or revised technologies could render our existing technology less competitive or obsolete or could reduce demand for our products and services. It is also possible that finished medical device products introduced by our customers may require fewer of our components or may require components that we lack the capabilities to manufacture or assemble. In addition, we may expend resources on developing technologies that do not result in commercially viable processes for our business, which could adversely impact our margins and operating results.
Our business is subject to risks associated with a single manufacturing facility.
We internally manufacture our own products at one production facility in Concord, California. While we maintain insurance covering our manufacturing and production facility, including business interruption insurance, a catastrophic loss of the use of all or a portion of our facilities due to accident, fire, explosion, labor issues, weather conditions, other natural disaster or otherwise, whether short or long-term, could have a material adverse effect on our customer relationships and financial results.
Our business is subject to risks associated with manufacturing processes.
Unexpected failures of our equipment and machinery may result in production delays, revenue loss and significant repair costs, injuries to our employees, and customer claims. Any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative impact on our profitability and cash flows. Our business interruption insurance may not be sufficient to offset the lost revenues or increased costs that we may experience during a disruption of our operations.
Furthermore, our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. We employ safety procedures in the design and operation of our facilities and may be required to incur additional expenditures for the development of additional safety procedures in the future. There is a risk that an accident or death could occur at our facilities despite such procedures. Any accident could result in significant manufacturing delays, disruption of operations, claims for damages resulting from injuries or additional expenditures on safety procedures, which could result in decreased sales and increased expenses. To date, we have not incurred any such significant delays, disruptions or claims. The potential liability resulting from any accident or death, to the extent not covered by insurance, would require us to use other resources to satisfy our obligations and could cause our business to suffer.
We may expand into new markets or new products and our expansion may not be successful.
We may expand into new markets through the development of new product applications based on our existing specialized manufacturing capabilities and services. These efforts could require us to make substantial investments, including significant engineering and capital expenditures for new, expanded or improved manufacturing facilities which would divert resources from other aspects of our business. Expansion into new markets and products may be costly without resulting in any benefit to us. Specific risks in connection with expanding into new markets include the inability to transfer our quality standards into new products, the failure of customers in new markets to accept our products and price competition in new markets. If we choose to expand into new markets and are unsuccessful, our financial condition could be adversely affected and our business harmed.
We may selectively pursue acquisitions in the future, but, because of the uncertainty involved, we may not be able to identify suitable acquisition candidates and may not successfully integrate acquired businesses into our business and operations.
We may not be able to identify potential acquisition candidates that could complement our business or may not be able to negotiate acceptable terms for acquisition candidates we identify. As a result, we may not be able to realize this element of our growth strategy. In addition, even if we are successful in acquiring any companies, we may experience material negative consequences to our business, financial condition or results of operations if we cannot successfully integrate the operations of acquired businesses with ours.
The integration of companies that have previously been operated separately involves a number of risks, including, but not limited to:
· difficulty in realizing anticipated financial or strategic benefits of such acquisition;
· diversion of capital and potential dilution of stockholder ownership;
· the risks related to increased indebtedness, as well as the risk such financing will not be available on satisfactory terms or at all;
· diversion of management’s attention and other resources from current operations, including potential strain on financial and managerial controls and reporting systems and procedures;
· management of employee relations across facilities;
· difficulties in the assimilation of different corporate cultures and practices, as well as in the assimilation and retention of broad and geographically dispersed personnel and operations;
· difficulties and unanticipated expenses related to the integration of departments, systems (including accounting systems), technologies, books and records, procedures and controls (including internal accounting controls, procedures and policies), as well as in maintaining uniform standards, including environmental management systems;
· assumption of known and unknown liabilities, some of which may be difficult or impossible to quantify;
· inability to realize cost savings, sales increases or other benefits that we anticipate from such acquisitions, either as to amount or in the expected time frame;
· non-cash impairment charges or other accounting charges relating to the acquired assets; and
· ability to maintain strong relationships with our and our acquired companies’ customers after the acquisitions.
If our integration efforts are not successful, we may not be able to maintain the levels of revenues, earnings or operating efficiency that we and the acquired companies achieved or might achieve separately.
Our inability to access additional capital could have a negative impact on our growth strategy.
Our growth strategy will require additional capital for, among other purposes, completing any acquisitions we enter into, managing any acquired companies, acquiring new equipment and maintaining the condition of existing equipment. If cash generated internally is insufficient to fund capital requirements, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” elsewhere in this report.
We are subject to a variety of environmental, health and safety laws that could be costly for us to comply with, and we could incur liability if we fail to comply with such laws or if we are responsible for releases of contaminants to the environment.
Federal, state and local laws impose various environmental, health and safety requirements on our operations, including with respect to the management, handling, generation, emission, release, discharge, manufacturing, transportation, storage, use and disposal of hazardous substances and other materials used or generated in the manufacturing of our products. If we fail to comply with any present or future environmental, health and safety laws, we could be subject to fines, corrective action, other liabilities or the suspension of production. We could also be subject to claims under such laws, including common law, alleging the release of hazardous substances into the environment.
Infringement claims regarding patents or other intellectual property rights by third parties could result in an adverse impact on our operations, and could be costly and distracting to management.
Although we do not believe that any of our products, services or processes infringe the intellectual property rights of third parties, historically, patent applications in the United States have not been publicly disclosed until the patent is issued (or as of recently, until publication, which occurs eighteen months after filing), and we may not be aware of currently filed patent applications that relate to our products or processes. If patents later issue on these applications, we may in the future be notified that we are infringing patent or other intellectual property rights of third parties and we may be liable for infringement at that time. In the event of infringement of patent or other intellectual property rights, we may not be able to obtain licenses on commercially reasonable terms, if at all, and we may end up in litigation. The failure to obtain necessary licenses or other rights or the occurrence of litigation arising out of infringement claims could disrupt our business and impair our ability to meet our customers’ needs which, in turn, could have a negative effect on our financial condition and results of operations. Infringement claims, even if not substantiated, could result in significant legal and other costs and may be a distraction to management. We also may be subject to significant damages or injunctions against development and sale of our products.
In addition, any infringement claims, significant charges or injunctions against our customers’ products that incorporate our components may result in our customers not needing or having a reduced need for our capabilities and services.
Our earnings and financial condition could suffer if we or our customers become subject to product liability claims or recalls. We may also be required to spend significant time and money responding to investigations or requests for information related to end-products of our customers.
The manufacture and sale of products that incorporate components manufactured or assembled by us expose us to potential product liability claims and product recalls, including those that may arise from misuse or malfunction of our components or use of our components with components or systems not manufactured or sold by us. Product liability claims or product recalls with respect to our components or the end-products of our customers into which our components are incorporated, whether or not such problems related to the products and services we have provided and regardless of their ultimate outcome, could require us to pay significant damages or to spend significant time and money in litigation or responding to investigations or requests for information. We may also lose revenue from the sale of components if the commercialization of a product that incorporates our components or subassemblies is limited or ceases as a result of such claims or recalls. Expenditures on litigation or damages, to the extent not covered by insurance, and declines in revenue could impair our earnings and our financial condition. Also, if, as a result of claims or recalls our reputation is harmed, we could lose customers, which would also negatively affect our business.
In the future, we may be unable to maintain our existing insurance coverage or to do so at reasonable cost and on reasonable terms. In addition, if our insurance coverage is not sufficient to cover any costs we may incur and we may be required to pay damages if we are subject to product liability claims or product recalls, we will have to use other resources to satisfy our obligations.
A substantial amount of our assets represents goodwill, and our earnings will be reduced if our goodwill becomes impaired.
As of June 30, 2013, goodwill of approximately $10.2 million represented 64% of our total assets. Goodwill is generated in acquisitions where the cost of an acquisition exceeds the fair value of the net tangible and identifiable intangible assets we acquire. Goodwill is subject to an impairment analysis at least annually based on a comparison of the fair value of the reporting unit to its carrying value. If an impairment is indicated from this first step, the implied fair value of the goodwill must be determined. We could be required to recognize reductions in our earnings caused by the impairment of goodwill, which if significantly impaired, could materially and adversely affect our results of operations.
Our business may suffer if we are unable to recruit and retain senior management and experienced engineers and management personnel that we need to compete in the medical device industry.
Our operations are highly dependent on the efforts of John Fife, the Company’s President and Chief Executive Officer, Herbert J. Bellucci, President and CEO of Pulse who has more than 25 years of experience in the medical device industry, and certain other senior executives who have been instrumental in developing our business strategies and forging our business relationships. The loss of the leadership, knowledge and experience of Mr. Fife, Mr. Bellucci and our other executive officers could adversely affect our business. We do not currently maintain key man insurance on any of our executive officers.
In addition, our future success depends upon our ability to attract, develop and retain highly skilled engineers. We may not be successful in attracting new engineers or in retaining or motivating our existing engineers, which may lead to increased recruiting, relocation and compensation costs for such personnel. These increased costs may reduce our profit margins. Some of our manufacturing processes are highly technical in nature. Our ability to maintain or expand existing business with our customers and provide additional services to our existing customers depends on our ability to hire and retain engineers with the skills necessary to keep pace with continuing changes in the medical device industry. We compete with other companies in the medical device manufacturing industry to recruit engineers.
We depend on outside suppliers and subcontractors, and our production and reputation could be harmed if they are unable to meet our quality and volume requirements and alternative sources are not available.
Our current internal capabilities do not include all elements that are required to satisfy all of our customers’ requirements. We may rely on third party suppliers, subcontractors, and other outside sources for components or services. Manufacturing problems may occur with these third parties. A supplier may fail to supply components or services to us on a timely basis, or may supply us with components or services that do not meet our quality, quantity, or cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these components or services on a timely basis or on terms acceptable to us, which could harm our ability to deliver components or services to our customers profitably or on time. In addition, if the processes that our suppliers use to provide components or services are proprietary, we may be unable to obtain comparable components from alternative suppliers.
Our operating results may fluctuate, which may make it difficult to forecast our future performance.
Fluctuations in our operating results may cause uncertainty concerning our performance and prospects or may result in our failure to meet expectations. Our operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, which include, but are not limited to:
· the fixed nature of a substantial percentage of our costs, which results in our operations being sensitive to fluctuations in sales;
· changes in the relative portion of our sales represented by our various products, which could result in reductions in our profits if the relative portion of our sales represented by lower margin products increases;
· introduction and market acceptance of our customers’ new products and changes in demand for our customers’ existing products;
· the accuracy of our customers’ forecasts for future production requirements;
· timing of orders placed by our principal customers that account for a significant portion of our revenues;
· future price concessions as a result of pressure to compete;
· cancellations by customers which may result in recovery of only our costs;
· the availability of raw materials, including stainless steel, nitinol, platinum, tantalum, and gold;
· increased costs of raw materials, supplies or skilled labor;
· our effectiveness in managing our manufacturing processes; and
· changes in the competitive and economic conditions generally, or in our customers’ markets.
Investors should not rely on results of operations in any past period as an indication of what our results will be for any future period.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results, and stock price.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our future testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will continue to require that we incur substantial accounting expense and expend significant management time and effort. Moreover, if we are not able to continue to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Changes in accounting may affect our results of operations.
U.S. generally accepted accounting principles (“GAAP”) and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, or the adoption of new pronouncements could significantly affect our stated results of operations.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States. Our effective tax rate could be adversely affected by changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in U.S. tax laws and regulations, and changes in our interpretations of tax laws, including pending tax law changes. In addition, we are subject to the routine examination of our income tax returns by the Internal Revenue Service and other local and state tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our estimated income tax liabilities. Adverse outcomes from tax examinations, or the accounting reversal of any tax benefits or revenue previously recognized by us, could have an adverse effect on our provision for income taxes, estimated income tax liabilities, or results of operations.
Risks Related to Our Industry
We may not be able to grow our business if the trend by medical device companies to outsource their manufacturing activities does not continue or if our customers decide to manufacture internally products that we currently provide.
Our contract manufacturing business has grown partly as a result of the increase over the past several years in medical device companies outsourcing these activities. We view the increasing use of outsourcing by medical device companies as an important component of our future growth strategy. While industry analysts expect the outsourcing trend to increase, our current and prospective customers continue to evaluate our capabilities against the merits of internal production. Protecting intellectual property rights and maximizing control over regulatory compliance are among factors that may influence medical device companies to keep production in-house. Any substantial slowing of growth rates or decreases in outsourcing by medical device companies could cause our sales to decline, and we may be limited in our ability, or unable to continue, to grow our business.
We and our customers are subject to various regulations, as well as political, economic and regulatory changes in the healthcare industry or otherwise, that could force us to modify how we price our components, manufacturing capabilities and services and could harm our business.
The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Regulations affecting the healthcare industry in general, and the medical device industry in particular, are complex, change frequently and have tended to become more stringent over time. Specifically, the FDA and state and foreign governmental agencies regulate many of our customers’ products and approval/clearance is required for those products prior to commercialization in the U.S. and certain foreign jurisdictions. Some of our facilities are subject to inspection by the FDA and other regulatory agencies for compliance with regulations or regulatory requirements. Our failure to comply with these regulations or regulatory requirements may result in civil and criminal enforcement actions or fines and, in some cases, the prevention or delay of our customers’ ability to gain or maintain approval to market their products. Any failure by us to comply with applicable regulations could also result in the cessation of portions or all of our operations and restrictions on our ability to continue or expand our operations.
The recently enacted health care reform law and the implementation of that law could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
In March 2010, President Obama signed both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act, commonly referred to together as the “ACA”. This legislation enacts comprehensive changes to the U.S. health care system, components of which will be phased in at various stages over the next eight years. The legislation also imposes a franchise tax or premium excise tax of $8 billion starting in 2014, with increasing annual amounts thereafter. Such assessment may not be deductible for income tax purposes.
There are many parts of the legislation that will require further guidance in the form of regulations. Due to the breadth and complexity of the health reform legislation, the lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, the overall impact of the health reform legislation on our business over the coming years is difficult to predict and not yet fully known.
Although the U.S. Supreme Court upheld the constitutionality of ACA in June 2012, various Congressional leaders have indicated a desire to revisit or repeal the health care reform law. While the U.S House of Representatives voted to repeal the whole health care reform law, the U.S. Senate voted against such a repeal. There have separately been a number of bills introduced that would change certain provisions of the law. Because of these challenges, we cannot predict whether any or all of the legislation will be implemented as enacted, overturned, repealed, or modified. Any partial or complete repeal or amendment or implementation difficulties, or uncertainty regarding such events, could materially and adversely impact our ability to capitalize on the opportunities presented by the ACA or may cause us to incur additional costs of compliance.
Our business is indirectly subject to healthcare industry cost containment measures and other industry trends affecting pricing that could result in reduced sales of or prices for our products.
Acceptance of our customers’ products by hospitals, outpatient centers and physicians depend on, among other things, reimbursement approval of third-party payers such as Medicaid, Medicare and private insurers. The continuing efforts of government, insurance companies and other payers of healthcare costs to contain or reduce those costs could lead to lower reimbursement rates or non-reimbursement for medical procedures that use our products. If that were to occur, medical device manufacturers might insist that we lower prices on products related to the affected medical device or they might significantly reduce or eliminate their purchases from us of these related products, which could affect our profitability.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
Many healthcare industry companies, including medical device companies, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our business, financial condition and results of operations would suffer.
Inability to obtain sufficient quantities of raw materials could cause delays in our production.
Our business is dependent on a continuous supply of raw materials. The raw materials needed for our business are susceptible to fluctuations in price and availability due to transportation costs, government regulations, price controls, changes in economic climates or other unforeseen circumstances. Failure to maintain our supply of raw materials could cause production delays resulting in a loss of customers and a decline in sales. Due to the supply and demand fundamentals of raw materials used by us, we have occasionally experienced extended lead times on purchases and deliveries from our suppliers. Consequently, we have had to adjust our delivery schedule to customers. In addition, fluctuations in the cost of raw materials may increase our expenses and affect our operating results. The principal raw materials used in our business include stainless steel, nitinol, platinum, tantalum, cobalt chromium, and electricity.
Risks Relating to Financing Activities
Our audit opinion includes an explanatory paragraph that discusses that there is a substantial doubt about the Company’s ability to continue as a going concern, because we are not expected to have sufficient cash to adequately support our financial requirements for the next twelve months.
Our management and our independent registered public accountants have concluded that, due to our need for additional capital and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern. Moreover, because our auditors have expressed a going concern opinion, our ability to obtain additional financing could be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” elsewhere in this report.
We expect that we will require additional capital within the next 6 months.
Absent access to sources of external financial support, including accommodations and financing from affiliates, the Company expects to be at or below minimum levels of cash necessary to operate the business during the current fiscal year. The Company is exploring additional debt or equity financing and other accommodations, including from affiliates such as our president and chief executive officer and members of our board of directors. Any such equity financing may result in significant dilution of the Company’s existing shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” elsewhere in this report.
We are dependent on our largest shareholder for financing and could become insolvent if our largest shareholder withholds future financing.
John M. Fife, who is our President, Chief Executive Officer, and Chairman of the Board of Directors, is also our largest beneficial shareholder, because he beneficially owns, through his affiliates St. George Investments, LLC, and Chicago Venture Partners, 53% of our outstanding shares of common stock. We expect to remain dependent on our largest shareholder as our primary, and possibly only, source of financing during rest of the current fiscal year. Loan covenants under the credit facility of our subsidiary, Pulse Systems, LLC, prohibit it from distributing any cash from its operations to us, except for tax distributions.
Our largest shareholder has purchased the preferred units in Pulse Systems and would benefit from Pulse Systems’ failure to make redemption payments.
On June 18, 2010, Pulse Systems Corporation and Pulse Systems, LLC entered into a Redemption Agreement, whereby Pulse Systems, LLC agreed to redeem all of its preferred units over a two-year period for an aggregate redemption price of $3.9 million, which consists $1.75 million that was paid on or around June 18, 2010, 22 monthly installments of $40,000 starting August 31, 2010, and a final payment of $1.36 million due in June 2012. On August 30, 2011, St. George Investments purchased the preferred stock held by Pulse Corporation in Pulse Systems, LLC. The obligations of Pulse Systems under the redemption agreement are subordinate to its obligations under the Loan Agreement and Pledge Agreement. Under the Redemption Agreement, Pulse Systems was obligated to redeem its preferred units from St. George by making the remaining redemption payments in the amount of $40,000 each month through May 2012 and a final payment of $1.36 million in June 2012. On January 1, 2012, Pulse Systems was in default, and remains in default, of the Redemption Agreement. As a result, the $0.83 million reduction from the amount outstanding at June 18, 2010 was reinstated. In addition, 14% return on the preferred amount began from the default date of January 1, 2012. The redeemable preferred units were recorded in the June 30, 2013 and 2012 consolidated balance sheets at a value of approximately $2.9 million and $2.5 million, respectively. The $0.4 million and $0.9 million impact of the default of the Redemption Agreement has been reflected in the years ended June 30, 2013 and 2012 consolidated statements of operations.
Capital markets have experienced a significant period of dislocation and instability, which has had and could continue to have a negative impact on the availability and cost of capital.
The general disruption in the U.S. capital markets has impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole. These conditions could persist for a prolonged period of time or worsen in the future. Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. The resulting lack of available credit, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity. In addition, the cost of debt financing, and other important financing terms, may be materially adversely impacted by these market conditions.
Credit market developments may reduce availability under our credit agreement.
Due to the volatile state of the credit markets during the past few years, there is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lender(s) fail to honor their legal commitments under our credit facility, it could be difficult in the current environment to replace our credit facility on similar terms. Although we believe that our operating cash flow, access to capital markets and existing credit facilities will give us the ability to satisfy our liquidity needs for at least the next 12 months, the failure of any of the lenders under our credit facility may impact our ability to finance our operating or investing activities.
Pulse and UAHC are subject to a number of restrictive debt covenants which may restrict our business and financing activities.
Our credit facility contains restrictive debt covenants that, among other things, restrict Pulse’s and/or UAHC’s ability to:
· borrow money;
· pay dividends and make distributions;
· make certain investments;
· repurchase stock;
· use assets as security in other transactions;
· create liens;
· enter into affiliate transactions;
· merge or consolidate; and
· transfer and sell assets.
In addition, our credit facility also requires us to maintain certain financial tests. These restrictive covenants may limit our ability to expand or to pursue our business strategies. Furthermore, any indebtedness that we incur in the future may contain similar or more restrictive covenants. Our ability to comply with the restrictions contained in our credit facility may be affected by changes in our business condition or results of operations, adverse regulatory developments or other events beyond our control. The failure to comply with these restrictions has resulted in a default under our credit facility or any other subsequent financing agreement, which in turn, caused our debt to which a cross-acceleration or cross-default provision applies to become immediately due and payable. We cannot assure you that we would be able to repay the accelerated debt. In addition, a default gives our lenders the right to terminate any commitments that they had made to provide us with additional funds.
Risks Relating to Our Common Stock
Shareholders will likely incur additional dilution as a result of our financing activities.
Other than tax distributions that we receive from our subsidiary Pulse Systems, LLC, the current credit facility requires Pulse System, LLC to retain all of its free cash flow instead of making distributions to the Company. As a result, we do not receive from Pulse Systems, which is our only operating subsidiary, sufficient cash for our operating expenses and debt obligations. To pay these expenses and obligations, the Company will likely require additional equity or debt financing, which will potentially further dilute the equity stakes of the Company’s existing shareholders. The most likely source of these future financings will be our affiliates, including our President and Chief Executive Officer and members of our Board of Directors.
Our largest shareholder may use its influence to take actions not supported by our minority shareholders.
Mr. Fife, who is our largest beneficial shareholder, owning (through his affiliates) 53% of the outstanding shares of our common stock, has the ability to have a significant influence on the election of our Board of Directors and the outcome of corporate actions requiring shareholder approval, including dividend policy, mergers, share capital increases, going-private transactions, the sale of Pulse Systems, LLC, and other extraordinary transactions. The investment time horizon and financial incentives for Mr. Fife may differ from those of other shareholders. For example, as a result of a previous transaction with the Company, Mr. Fife’s affiliates have the right to put all of their shares of the Company’s common stock to the Company at $1.26 per share at any time between October 1, 2013 and March 30, 2014. (See “MD&A - Liquidity and Capital Resources - Source of Liquidity.”)
In addition, on June 18, 2010, Pulse Systems Corporation and Pulse Systems, LLC entered into a Redemption Agreement, whereby Pulse Systems, LLC agreed to redeem all of its preferred units over a two-year period. On August 30, 2011, St. George Investments, LLC, an affiliate of Mr. Fife, entered into a Securities Purchase Agreement with Pulse Systems Corporation whereby St. George Investments, LLC purchased all of the unredeemed preferred units of Pulse Systems, LLC. On January 1, 2012, Pulse Systems was in default, and remains in default, of the Redemption Agreement. This default under the Redemption Agreement resulted in an additional liability to the Company of $826,000 for the benefit of Mr. Fife’s affiliates, plus the accrual of dividends for the benefit of Mr. Fife’s affiliates at the rate of 14% on the preferred units of Pulse Systems, LLC owned by Mr. Fife’s affiliates, as of the date of default. (See “Risk Factors - Risks Relating to Financing Activities.”)
As a result of his influence on our business, Mr. Fife could prevent us from making certain decisions or taking certain actions that would protect the interests of our other shareholders. For example, Mr. Fife’s concentration of ownership may delay or prevent a change of control of the Company, even if this change of control may benefit other shareholders generally. Similarly, Mr. Fife could propose financing terms to supply needed cash to the Company that would be highly dilutive to the other shareholders, in the absence of any other competing credible financing offers. These and other factors related to Mr. Fife’s holding of a significant percentage of our shares may reduce the liquidity of our shares and their attractiveness to investors.
Our common stock may continue to be volatile and could decline substantially.
The trading price of our common stock has been, and may continue to be, volatile. From July 1, 2012 to June 30, 2013, the trading price of our stock has ranged from $0.00 to $0.07. We believe this volatility is due to, among other things, recent financial performance, current expectations of our future financial performance, delisting from the Nasdaq Capital Market and the volatility of the stock market in general.
In particular, with respect to our new operations, there has been significant volatility in the market price and trading volume of securities of companies operating in the medical device industry, which has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including:
· actual or anticipated fluctuations in our operating results;
· our announcements or our competitors’ announcements regarding new products, significant contracts, acquisitions, divestitures or strategic investments;
· loss of any of our key management or technical personnel;
· conditions affecting medical device manufacturers or the medical device industry generally;
· product liability lawsuits against us or our customers;
· clinical trial results with respect to our customers’ medical devices;
· changes in our growth rates or our competitors’ growth rates;
· developments regarding our proprietary rights, or those of our competitors;
· FDA and international actions with respect to the government regulation of medical devices and third-party reimbursement practices;
· public concern as to the safety of our products;
· changes in health care policy in the United States and internationally;
· conditions in the financial markets in general or changes in general economic conditions;
· our liquidity needs and constraints and our ability to raise additional capital;
· changes in stock market analyst recommendations regarding our common stock, other comparable companies or the medical device industry generally, or lack of analyst coverage of our common stock;
· sales of our common stock by our executive officers, directors and five percent stockholders or stock issuances by the Company;
· changes in accounting standards, policies, guidance, interpretations or principles; and
· announcement of financial restatements.
Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operation and financial condition.
There is a limited trading volume for our common stock on the OTCQB.
Our common stock, which currently trades on the OTCQB Marketplace, does not have substantial trading volume. As a result, relatively small trades of our common stock may have a significant impact on the price of our common stock and, therefore, may contribute to the price volatility of our common stock. Because of the limited trading volume in our common stock and the price volatility of our common stock, you may be unable to sell your shares of common stock when you desire or at the price you desire. Moreover, the inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss.
Our articles of incorporation, our bylaws and Michigan law contain provisions that could discourage another company from acquiring us and may prevent attempts by our shareholders to replace or remove our current management.
Provisions of Michigan corporation law, our articles of incorporation and our bylaws may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace or remove our board of directors. These provisions include:
· providing for a classified board of directors with staggered terms;
· requiring super majority stockholder voting to effect certain amendments to our articles of incorporation and bylaws;
· eliminating the ability of shareholders to call special meetings of shareholders;
· establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings;
· permitting the board of directors to amend, alter or repeal the bylaws;
· limiting the ability of shareholders to act by written consent;
· limiting the ability of shareholders to remove directors; and
· authorizing of the board of directors to issue, without stockholder approval, shares of one or more series of preferred stock with such terms as the board of directors may determine and shares of our common stock.
Our common stock may be subject to “penny stock” rules, which make it more difficult for you to dispose of your shares.
Our common stock may be subject to the rules promulgated under the Securities Exchange Act of 1934 relating to “penny stocks.” These rules require brokers who sell securities that are subject to the rules, and who sell to persons other than established customers and institutional accredited investors, to complete required documentation, make suitability inquiries of investors and provide investors with information concerning the risks of trading in the security. These requirements would make it more difficult to buy or sell our common stock in the open market and therefore reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock.
We do not anticipate paying any cash dividends.
We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business plan; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.
We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our stockholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we will seek to sell additional equity or debt securities or increase the size of our credit facility. The sale of additional equity securities would result in additional dilution to our stockholders.
ITEM 2.
ITEM 2. PROPERTIES
The principal offices of the Company are located at 303 East Wacker Drive, Suite 1200, Chicago, Illinois, where it shares approximately 1,000 square feet of office space with Chicago Venture Partners LP, an affiliate of John M. Fife, the Company’s Chairman, President and Chief Executive Officer. Pulse leases approximately 18,000 square feet of office and manufacturing space in Concord, California. The Company believes that its current facilities provide sufficient space suitable for all of its activities and sufficient other space will be available on reasonable terms, if needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As part of the 2004 purchase of Pulse Systems by Chicago Venture Partners, Grayson Beck and John Gill signed non-compete agreements for eight years ending on June 1, 2012 (California law governing). As part of the June 18, 2010 sale of Pulse Systems LLC to UAHC and the pre-payment of a portion of the preferred stock held by Pulse Corp; Grayson Beck and John Gill extended the 2004 non-compete by one year to 2013. Additionally, as part of the June 18, 2010 sale of the Pulse LLC membership interest to UAHC, (Michigan law governing), Vince Barletta, Demian Backs and Pulse Corp signed new five year non-compete agreements ending June 17, 2015.
On July 29, 2013, Pulse filed a lawsuit against Aduro Laser (“Aduro”), Grayson Beck (“Beck”), Demian Backs (Back’s), and Vince Barletta and obtained a Temporary Restraining Order against misappropriation, transfer, or use of Pulse's confidential information. The Order also required a thorough evidence preservation process whereby Aduro's computer systems and Backs's and Beck's personal computers were forensically preserved and imaged.
On August 19, 2013, UAHC filed a separate lawsuit against Backs and Barletta (signatories to the 2010 UAHC transaction) in Michigan federal court alleging breach of their contractual agreements to keep confidential information and to not compete for Pulse's customers.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since July 12, 2010, our common stock is quoted under the symbol “UAHC” on the OTCQB Marketplace, which is a market tier for over-the-counter-traded U.S. companies that are registered and reporting with the Securities and Exchange Commission (“SEC”) or a U.S. banking or insurance regulator. The Company’s common stock was previously listed under the symbol “UAHC” on the NASDAQ Capital Market.
The table below sets forth for the common stock the range of the high and low sales prices per share on the OTCQB for each quarter in the past two fiscal years.
As of September 23, 2012, the high and low bid quotations on the OTCQB were $0.10 and $0.13 per share, respectively. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown or commission and may not represent actual transactions.
As of September 23, 2012, there were approximately 93 shareholders of record of the Company. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers and other persons or entities.
The Company has not paid any cash dividends on its common stock since its initial public offering in fiscal 1991 and does not anticipate paying such dividends in the foreseeable future.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs concerning future events, including statements regarding future plans and strategy for our business, earnings and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs. We caution that although forward-looking statements reflect our good faith beliefs and reasonable judgment based upon current information, these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, because of risks, uncertainties, and factors including, but not limited, to: changes in the medical device and healthcare industry; the ongoing impacts of the U.S. recession; the continuing impacts of the global credit and financial crisis; and other changes in general economic conditions. Other risks and uncertainties are detailed from time to time in reports filed with or furnished to the SEC, and in particular those set forth under “Risk Factors” in Part 1 Item 1A in this annual report on Form 10-K. Given such uncertainties, you should not place undue reliance on any such forward-looking statements. Except as required by law, we may not update these forward-looking statements, even if new information becomes available in the future.
Overview
This section discusses the Company's results of operations, financial position and liquidity. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this annual report on Form 10-K.
History
From November 1993 to June 2009, the Company’s indirect, wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc. (“UAHC-TN”), was a managed care organization in the TennCare program, a State of Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. On April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed care services as a TennCare contractor when its TennCare contract expired on June 30, 2009. UAHC-TN’s TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. However, revenue under this contract was only earned through October 31, 2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare Advantage qualified organization (the “Medicare contract”) pursuant to a contract with the Centers for Medicare & Medicaid Services (“CMS”). The contract authorized UAHC-TN to serve members enrolled in both the Tennessee Medicaid and Medicare programs, commonly referred to as “dual-eligibles,” specifically to offer a Special Needs Plan (“SNP”) to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan. The Company did not seek renewal of the Medicare contract, which expired December 31, 2009. The Company wound down the Medicare business during calendar 2010, and substantially ended its activity on December 31, 2010.
The discontinuance of the TennCare and Medicare contracts have had a material adverse effect on the Company’s operations, earnings, financial condition and cash flows in fiscal 2010 .
Acquisition of Pulse Systems, LLC
On June 18, 2010, the Company entered into a Securities Purchase Agreement and a Warrant Purchase Agreement to acquire 100% of the outstanding common units and warrants to purchase common units of Pulse. See Note 6 to the Notes to the Consolidated Financial Statements for additional discussion of the purchase terms.
Review of Consolidated Results of Operations - Fiscal 2013 Compared to Fiscal 2012
Total operating revenues increased $1.7 million or 25% to $8.5 million for the fiscal year ended June 30, 2013 compared to $6.8 million for the fiscal year ended June 30, 2012. The increase in operating revenue was primarily due to increased in customer orders.
Total operating expenses increased by $0.8 million or 12% to $7.5 million for the fiscal year ended June 30, 2013 compared to $6.7 million for the prior fiscal year. The increase in total operating expenses was primarily the result of the increase in operating revenues.
Cost of contract manufacturing services increased $1.0 million or 25% to $4.9 million for the fiscal year ended June 30, 2013 compared to $3.9 million for the fiscal year ended June 30, 2012. The increase in cost of contract manufacturing services was primarily due to increase in revenues.
General and administrative expenses were $2.7 million for the fiscal year ended June 30, 2013, as compared with $2.8 million for the prior fiscal year, a decrease of $0.1 million. The decrease was principally due to reduced corporate overhead costs, including salaries and legal fees.
Income from continuing operations before income taxes was $0.5 million for the fiscal year ended June 30, 2013 compared to loss from continuing operations before income taxes of $1.9 million for the fiscal year ended June 30, 2012.
Income tax expense was $43,000 for the fiscal year ended June 30, 2013 compared to income tax expense of $31,000 for the prior fiscal year. The Company's effective tax rate for the fiscal year ended June 30, 2013 differs from the statutory rate primarily due to the change in the valuation allowance. The Company established its deferred tax asset valuation allowance due to uncertainties in its expected utilization.
Income from discontinued operations before income taxes was $104,000 or $0.01 per basic share for the year ended June 30, 2013, compared to income from discontinued operations before income taxes of $53,000, or $0.00 per basic share for the fiscal year ended June 30, 2012. Income from discontinued operations was primarily due to claim refunds received during fiscal 2013. As described in Note 12 to the Consolidated Financial Statements, the Medicare operations were reclassified to discontinued operations.
Net income was $537,000, or $0.05 per basic share, for the fiscal year ended June 30, 2013 compared to net loss of $1.9 million, or (0.16) per basic share, for the fiscal year ended June 30, 2012.
Review of Consolidated Results of Operations - Fiscal 2012 Compared to Fiscal 2011
Total operating revenues decreased $1.6 million to $6.8 million for the fiscal year ended June 30, 2012 compared to $8.4 million for the fiscal year ended June 30, 2011. The decrease in operating revenue was due to decrease in customer orders.
Total operating expenses decreased by $3.1 million or 32% to $6.7 million for the fiscal year ended June 30, 2012 compared to $9.8 million for the prior fiscal year. The decrease in total operating expenses was primarily the result of the decrease in operating revenues.
Cost of contract manufacturing services decreased $0.5 million to $3.9 million for the fiscal year ended June 30, 2012 compared to $4.4 million for the fiscal year ended June 30, 2011. The decrease in cost of contract manufacturing services was primarily due to decrease in revenues.
General and administrative expenses were $2.8 million for the fiscal year ended June 30, 2012, as compared with $5.2 million for the prior fiscal year, a decrease of $2.4 million. The decrease was principally due to reduced corporate overhead costs, including salaries and legal fees.
Loss from continuing operations before income taxes was $1.9 million for the fiscal year ended June 30, 2012 compared to loss from continuing operations before income taxes of $7.5 million for the fiscal year ended June 30, 2011. The decrease in loss from continuing operations before income taxes of $5.6 million, or $0.47 per basic share, is principally due to reduced general and administrative expense offset by the decrease in operating revenues.
Income tax expense was $31,000 for the fiscal year ended June 30, 2012 compared to income tax expense of $16,000 for the prior fiscal year. The Company's effective tax rate for the fiscal year ended June 30, 2012 differs from the statutory rate primarily due to the change in the valuation allowance. The Company increased its deferred tax asset valuation allowance due to uncertainties in its expected utilization.
Income from discontinued operations before income taxes was $53,000, or $0.00 per basic share for the year ended June 30, 2012, compared to income from discontinued operations before income taxes of $396,000, or $0.04 per basic share for the fiscal year ended June 30, 2011. Income from discontinued operations was primarily due to claim refunds received during fiscal 2012. As described in Note 12 to the Consolidated Financial Statements, the Medicare operations were reclassified to discontinued operations.
Net loss was $1.9 million, or $(0.16) per basic share, for the fiscal year ended June 30, 2012 compared to net loss of $7.1 million, or $(0.73) per basic share, for the fiscal year ended June 30, 2011, a decrease in the net loss of $5.2 million or $0.57 per basic share.
Liquidity and Capital Resources
Capital resources, which for us are primarily cash from operations and the Pulse debt facility, are required to maintain our current operations and to fund planned capital spending and other commitments and contingencies. The Company's ability to maintain adequate amounts of cash to meet its future cash needs depends on a number of factors, particularly including controlling corporate overhead costs. Market conditions may continue to limit our sources of funds for these activities and our ability to refinance our debt obligations at their present interest rates and other terms. The Company expects that it will require additional capital within the next 6 months. Absent access to sources of external financial support, including accommodations and financing from affiliates, the Company expects to be at or below minimum levels of cash necessary to operate the business during fiscal 2014. The Company is exploring additional debt or equity financing and other accommodations, including from affiliates such as members of its board of directors. Any such equity financing may result in significant dilution of the Company’s existing shareholders.
The Company had a working capital deficiency of $8.4 million. The Company’s management and auditors have concluded that these factors raise substantial doubt as to the Company’s ability to continue as a going concern. The consolidated financial statements accompanying this report do not include any adjustments relating to the recoverability of recorded assets, or amounts and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
In order to provide the Company with the ability to continue its operations, the Company’s Management has instituted cost savings actions to reduce corporate overhead. To the extent we need to finance our debt or other obligations, or fund capital expenditures or acquisitions, we will need to access the capital markets by, for example, issuing securities in private placements or private investments in public equities ("PIPE") offerings. These financings will probably be highly dilutive to existing shareholders. Market and economic conditions may continue to limit our sources of funds for these activities and our ability to finance our debts or other obligations. We may seek financing from members of our Board of Directors, including Mr. Fife, and their affiliates. We may have no alternatives other than to seek and accept additional financing from Mr. Fife’s affiliates. In addition, the Company has liquidated portions of its art collection and is actively pursuing the liquidation of its remaining works to raise cash.
Following its acquisition by the Company, Pulse Systems remains party to the Loan and Security Agreement, as amended (the “Loan Agreement”), with Fifth Third Bank, which related to a revolving loan and a term loan. The revolving loan and term loan are secured by a lien on all of the assets of Pulse Systems. Under the Loan Agreement, the maximum loan amount under the revolving loan is $0.5 million and $2.0 million under the term loan with a maturity date of January 31, 2014. The Loan Agreement requires $167,667 quarterly principal payments due through December 31, 2013 and a final balloon payment of $1,000,000 on January 31, 2014.
The Loan Agreement contains financial covenants. On May 29, 2013, the Company reported to Fifth Third that the Company had failed to meet a financial covenant against capital expenditures in excess of $200,000 for the period between July 1, 2012, through June 30, 2013, and that such failure had continued for more than 30 days. Pulse System’s failure to cure its breach, continuing for a period of more than 30 days, of the Loan Agreement thus constituted an Event of Default under the Note. Management has not been able to obtain a waiver of this covenant default from the lender.
In addition, UAHC has pledged its membership interests in Pulse Systems to Fifth Third as additional security for the loans, as set forth in the Membership Interest Pledge Agreement (the “Pledge Agreement”). The Pledge Agreement generally restricts the payments of dividends or distributions on, and redemptions of, UAHC common stock, except as permitted under the Standstill Agreement, as amended.
At June 30, 2013, the Company had (i) cash and cash equivalents of $70,000, compared to $215,000 at June 30, 2012; (ii) negative working capital of ($8.4) million, compared to negative working capital of ($10.2) million at June 30, 2012; and (iii) a current assets-to-current liabilities ratio of 0.19 to 1 at June 30, 2013, compared to 0.12 to 1 at June 30, 2012.
Net cash provided by operating activities was $0.9 million in fiscal 2013 compared to net cash provided by operating activities of $0.5 million in fiscal 2012. Cash used in investing activities of $0.7 million was due to the purchase of equipment. Net cash used in financing activities was $0.4 million was primarily due to debt payments of $2.8 million offset by additional debt borrowings of $2.5 million. The net decrease in total cash flow was $0.2 million for the fiscal year ended June 30, 2013, compared to a net decrease in cash flow of $1.3 million for the prior fiscal year.
The Company has incurred an obligation to St. George Investments, LLC (“St. George”) and The Dove Foundation pursuant to a put right whereby St. George and The Dove Foundation may put their holdings in Company stock back to the Company at a price of $1.26 per share, payable by the Company, pursuant to the Voting and Standstill Agreement dated March 19, 2010, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 22, 2010. If St. George and The Dove Foundation were to exercise their put rights with respect to all of their shares of Company stock owned as of June 30, 2013, then the costs to the Company would be $10,916,319 and $3,123,095, respectively. The put exercise period runs from October 1, 2013, through March 30, 2014. St. George is an Illinois limited liability company that is controlled by Mr. John M. Fife, who is our Chairman, Chief Executive Officer and President. For further details, see Note 16 to the Financial Statements accompanying this report.
The Company’s wholly owned subsidiary Pulse Systems LLC was obligated under the Redemption Agreement with the holder of its preferred units to redeem the preferred units by making monthly payments in the amount of $40,000 through May 2012 and a final payment of $1,360,000 in June 2012. Pulse Systems was dependent on funds from the Company to make these redemption payments. Failure to make any of the redemption payments would result in the increase of the redemption price for its preferred units by $0.83 million and a 14% per annum cumulative (but not compounded) return on the aggregate amounts of the unredeemed preferred units plus the $0.83 million commencing on the date of default. Pulse Systems Corporation agreed to the redemption of its preferred units over a two-year period, commencing with a cash payment made at closing of $1.75 million. On August 30, 2011, St. George Investments, a related party, purchased the preferred stock held by Pulse Corporation in Pulse Systems, LLC. The obligations of Pulse Systems under the redemption agreement are subordinate to its obligations under the Loan Agreement and Pledge Agreement.
On January 1, 2012, Pulse Systems was in default, and remains in default, of the Redemption Agreement. As a result, the $0.83 million reduction from the amount outstanding at June 18, 2010 was reinstated. In addition, 14% interest on the preferred amount began from the default date of January 1, 2012. The redeemable preferred units were recorded in the June 30, 2013 and 2012 consolidated balance sheets at a value of approximately $2.9 million and $2.5 million, respectively. The $0.4 million and $0.9 million impact of the default of the Redemption Agreement has been reflected in the years ended June 30, 2013 and 2012 consolidated statements of operations.
On September 28, 2011, the Company issued a promissory note (the "Promissory Note") to St. George in the principal amount of $400,000, in exchange for a loan in the amount of $400,000 by St. George to the Company.
On December 9, 2011, the Company issued a Promissory Note (the “Second Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $300,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes.
On February 9, 2012, the Company issued a Promissory Note (the “Third Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $350,000 made by St. George to the Company.
On May 16, 2012, the Company issued a Promissory Note (the “Fourth Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $75,000 made by St. George to the Company.
On August 14, 2012, the Company issued a Promissory Note (the "Fifth Promissory Note") in favor of St. George, in exchange for a loan in the amount of $370,000 made by St. George to the Company. Loan proceeds from the Fifth Promissory Note were transferred by the Company to Pulse.
On October 10, 2012, the Company issued a Promissory Note (the "Sixth Promissory Note") in favor of St. George in exchange for a loan in the amount of $50,000 made by St. George to the Company.
See Note 10 to the financial statements for additional discussion of the Promissory Notes discussed above.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the Report of the Independent Registered Public Accounting Firm thereon are filed pursuant to this Item 8 and are included in this report in Item 15 at page of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 27, 2012, the Audit Committee of the Board of Directors of the Company approved the dismissal of UHY LLP (“UHY”) as our independent auditor.
Through UHY’s dismissal on January 27, 2012, there was: (i) no disagreement with UHY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of UHY, would have caused UHY to make reference to the subject matter of the disagreement in connection with its report, and (ii) no reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
Engagement of New Independent Registered Public Accounting Firm
Concurrent with the decision to dismiss UHY as our independent auditor, the Company appointed Bravos & Associates CPAs (“Bravos”) as our independent auditor.
Through the date hereof, neither the Company nor anyone acting on its behalf consulted Bravos with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company or oral advice was provided that Bravos concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or a reportable event as described in Item 304(a)(1)(iv) or (v), respectively, of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2013. This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. However all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as June 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on such assessment, management believes that the Company maintained effective internal control over financial reporting as of June 30, 2013 based on those criteria.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the year ended June 30, 2013 that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
On June 25, 2013, St. George elected to convert $24,208.80 of the outstanding balance of the Fifth Promissory Note at the conversion price of $0.004323 per share, whereupon the Company issued 5,600,000 shares of its Common Stock to St. George.
On June 25, 2013, Dove elected to convert $3,782.62 of the outstanding balance of the Sixth Promissory Note at the conversion price of $0.004323 per share, whereupon the Company issued 875,000 shares of its Common Stock to Dove.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information with respect to the directors and executive offices of the Company as of September 23, 2013. Under the Company’s Amended and Restated Amended and Restated Bylaws, at least three of the Company’s directors must not be officers or employees of the Company or its subsidiaries.
*Term extended until the 2013 Shareholders' Meeting.
John M. Fife has served as the President and Chief Executive Officer of the Company since November 2010 and Chairman of the Board since October 2010. Mr. Fife has served as President of Chicago Venture Management, Inc. since 1998. CVM, Inc. is the manager of Chicago Venture Management, LLC, which is the general partner of Chicago Venture Partners, L.P., a private equity fund based in Chicago, Illinois. Mr. Fife also has served as President and Chief Executive Officer of ISP Holdings, Inc., an internet service provider formed in June 2001 and MStar.net, LLC, since 2010 and the President of Utah Resources International, Inc., a Utah-based real estate and oil & gas investment company, since 1996. Mr. Fife also has served as Chairman of Typenex Medical, LLC, a manufacturer of bands for patient identification in connection with blood transfusions, since 2004 and a board member of Strategix Performance, Inc., since 2004, all of which are portfolio companies of Chicago Venture Partners, L.P. Mr. Fife holds an MBA from Harvard Business School.
William C. Brooks has served as a director of the Company since 1997. He previously served as Chairman of our Board of Directors from January 1998 until November 2008 and as the Company’s President and Chief Executive Officer from November 22, 2002 to November 3, 2010. He is currently the Chairman and Chief Executive Officer of BPI Communications, LLC. He retired as a Vice President of General Motors Corporation, Inc. in 1997. He is a retired Air Force Officer, and was Assistant Secretary of the U.S. Department of Labor from July 1989 to December 1990. He served as a member of the U.S. Social Security Advisory Board from February 1996 to January 1998.
Scott Leece is currently the General Manager of Typenex Medical LLC, a privately-held medical device company, which is controlled by Mr. Fife. Mr. Leece has been with Typenex since April 2008. Prior to his time at Typenex, he spent seven years at Cardinal Health in various roles in both marketing management and R&D. Mr. Leece graduated from the University of Illinois-Champaign with a B.S. in Chemical Engineering in 1998 and from the Kellogg School of Management with an MBA in 2005.
Karl Fife has served as a director since 2011. He has been the Chief Technology Officer of Chicago Venture Partners, L.P., a venture capital fund with a broad range of investments in medical devices, software, manufacturing and public equity markets since 2002. Karl Fife served as a member of the board of directors of UAHC’s subsidiary Pulse Systems.
Tom A. Goss has served as a director since 2000. He previously served as Chairman from November 2008 to October 2010 and served as Vice Chairman from November 2001 to November 2008. He has been Chairman of Goss LLC, an insurance agency, since November 2000. He also has been Chairman of The Goss Group, Inc., an insurance products and services company, since November 2000, and earlier was a Partner/Advisor of that company since March 1997. He was Chairman of Goss Steel & Processing LLC, a steel processing center, from April 2003 until 2005, when the company was sold. He served as Director of Athletics for The University of Michigan from September 1997 to April 2000.
Emmett S. Moten, Jr. has served as a director since 1988. Mr. Moten has been the President of Moten Group, a real estate development and consulting firm. From July 1988 to October 1996, he was Vice President of Development for Little Caesar Enterprises, Inc., a national fast food franchise company and the Detroit Tiger’s Ball Club. Prior to assuming that position, Mr. Moten was Director of the Community & Economic Development Department of the City of Detroit for almost ten years.
Mr. Bellucci has served as a director since 2010. He has served as the President and Chief Executive Officer of Pulse Systems since August 2007 and Secretary of Pulse Systems since August 2010. From August 2005 to July 2007, Mr. Bellucci served as Vice President of Manufacturing and then Vice President of Manufacturing and International of Alphatec Holdings (Nasdaq: ATEC) and its subsidiary Alphatec Spine, Inc., a medical device company that designs, develops, manufactures and markets products for the surgical treatment of spine disorders. From May 2003 to April 2005, he served as Senior Vice President of Operations for Digirad Corporation (Nasdaq: DRAD), a publicly-held developer and manufacturer of solid-state gamma cameras for nuclear cardiology and general nuclear medicine applications. Mr. Bellucci holds a bachelor of science degree in engineering from Brown University and an MBA from Stanford Graduate School of Business.
Ronald E. Hall, Sr. has served as a director since 2001. Mr. Hall has been President, Chief Executive Officer and majority owner of Bridgewater Interiors, LLC in Detroit, Michigan since November 1998. Bridgewater Interiors is a major supplier of seating and overhead systems to the automotive industry. He is also the President/CEO of Renaissance Capital Alliance, an equipment leasing company and he is the Chairman/CEO of New Center Stamping, an automotive service parts stamping facility. From 1992 to October 1998, Mr. Hall served as President of the Michigan Minority Business Development Council, a privately funded, nonprofit, business development organization.
Richard M. Brown, D.O. has served as a director since 2001. Dr. Brown founded Park Medical Centers in 1961. He is a practicing physician and has been President of Park Family Health Care in Detroit, Michigan since 1995. During his career, he has also served as Chief of Staff of the following hospitals in Michigan: Michigan Health Center, Detroit Central Hospital, Botsford General Hospital and Zeiger Osteopathic Hospital. Dr. Brown has been a delegate to the American Osteopathic Association since 1989 and to the Michigan Association of Osteopathic Physicians and Surgeons since 1986. He is a past Board member of the Barbara Ann Karmanos Cancer Institute and the University of Osteopathic Medicine and Health Services in Des Moines, Iowa.
John T. Woolley has served as a Director of the Company since 2012. Mr. Woolley is a consultant with The Boston Consulting Group in Chicago, Illinois since 2011. He also co-founded Un Futoro Seguro in 2006. Mr. Woolley holds a Bachelors of Arts in Economics and Public Policy and a Masters of Business Administration from Stanford University Graduate School of Business.
Robert T. Sullivan has served as Chief Financial Officer and Treasurer of the Company since November 2010. Mr. Sullivan became Secretary of the Company in September 2011. Mr. Sullivan has been Chief Financial Officer of Pulse Systems, LLC since 2010. Mr. Sullivan has been the Chief Financial Officer of Chicago Venture Partners, L.P. since 2002. Previously, Mr. Sullivan held a number of finance-related positions, including Treasurer at Evangelical Health Systems (now Advocate Health). Mr. Sullivan holds a bachelor degree from Roosevelt University in Chicago and an Masters of Business Administration from the University of Chicago.
Committees of the Board
The Board has delegated various responsibilities and authority to Board committees and each committee regularly reports on its activities to the Board. Each committee, except the Executive Committee, has regularly scheduled meetings. Each committee operates under a written charter approved by the Board, which is reviewed annually by the respective committees and the Board.
The table below sets forth the membership in fiscal 2013 (and as of the date hereof):
Finance and Audit Committee. The Finance and Audit Committee has been established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Finance and Audit Committee has the sole authority and responsibility to appoint, determine the compensation of, evaluate and, when appropriate, replace the Company’s independent registered public accounting firm. The Finance and Audit Committee also assist the Board of Directors in fulfilling its oversight responsibilities relating to the integrity of the financial statements, the compliance with certain legal and regulatory requirements, risk management, the qualifications and the adequacy of accounting and internal control systems.
Compensation Committee. The Compensation Committee administers the executive compensation program of the Company. The Committee’s responsibilities include recommending and overseeing compensation and benefit plans and policies, approving equity grants and otherwise administering share-based plans, and reviewing annually all compensation decisions relating to the Company’s executive officers.
Governance Committee. The Governance Committee is responsible for identifying and nominating individuals qualified to serve as Board members, recommending directors for each Board committee and overseeing corporate governance policies.
Director Compensation
The compensation program for non-employee directors is intended to encourage directors to continue Board service, to further align the interests of the Board and shareholders and to attract new directors with outstanding qualifications. Directors who are employees of the Company do not receive any additional compensation for Board service. All directors are reimbursed for expenses reasonably incurred in connection with Board service. There was no compensation paid to directors during fiscal 2013.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Waivers from or amendments to the Code of Business Conduct and Ethics, if any, will be made by the Board of Directors and will be publicly disclosed in the Corporate Governance section of our website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation earned by the named executive officers during the years shown below.
Narrative Disclosure of Summary Compensation Table
Compensation for key executives is determined by the Compensation Committee. Salaries, bonuses and other compensation of key executives generally are based upon a subjective analysis of profitability, revenue growth, return on equity and market share. The Compensation Committee believes that compensation of key executives should be sufficient to attract and retain highly qualified personnel and also provide meaningful incentives for measurable superior performance.
Outstanding Equity Awards at June 30, 2013
Mr. Fife, Mr. Sullivan and Mr. Bellucci do not have any outstanding option awards as of such date. There are no unvested or unearned stock awards held by named executive officers as of June 30, 2013.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of the common stock as of September 23, 2013 with respect to (i) each director, nominee and named executive officer, (ii) all of the directors, nominees and executive officers as a group, and (iii) to the Company’s knowledge, each beneficial owner of more than 5% of the outstanding common stock (including their respective address). Unless otherwise indicated, each owner (1) holds such shares directly and (2) has sole voting and investment powers with respect to the shares listed below. The percentage of common stock owned is based on 18,292,766 shares of common stock outstanding as of September 23, 2013.
* Less than 1%
1) Includes the following number of shares of common stock subject to options exercisable within 60 days of September 23, 2013: Mr. Brooks, 198,500; Mr. Goss, 101,000; Dr. Brown, 116,000; Mr. Hall, 116,000; and Mr. Moten, 101,000.
2) Based on Schedule 13D/A filed with the SEC on July 9, 2013 by John M. Fife, Fife Trading, Inc., St. George Investments, LLC, Chicago Venture Partners, L.P., Chicago Venture Management, L.L.C. and CVM, Inc. Mr. Fife may be deemed to beneficially own, in the aggregate, 9,732,304 shares. Fife Trading, Inc and St. George Investments, LLC has shared voting power and shared dispositive power with regard to 8,663,745 shares. Chicago Venture Partners, L.P., Chicago Venture Management, L.L.C. and CVM, Inc. have shared voting power and shared dispositive power with regard to 1,068,559 shares. John M. Fife is the president of CVM, Inc., which is the manager of Chicago Venture Management, L.L.C. Chicago Venture Management, L.L.C. is the general partner of Chicago Venture Partners, L.P., a private equity fund based in Chicago, Illinois. Mr. Fife is also the President of Fife Trading, Inc., which is the manager of St. George Investments, LLC. John M. Fife beneficially owns approximately 53% of the Company’s common stock.
3) Includes 364,858 shares held indirectly, as trustee of the Richard M. Brown, D.O. Revocable Trust u/a/d 1/18/74.
4) Based on Schedule 13D filed with the SEC on July 9, 2013 by The Dove Foundation relating to shares sold by St. George Investments, LLC to The Dove Foundation.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Review of Related Person Transactions
The Board of Directors has adopted a written Related Party Transactions policy. In general, it is the Board’s policy to avoid related-party transactions. If a “Related Party Transaction” is offered that appears to be in the Company’s best interests, then the policy provides a process to review and approve the transaction. Under this policy, a Related Party Transaction will be consummated or will continue only if:
• the Finance and Audit Committee approves or ratifies the transaction and the transaction is on terms comparable to, or more beneficial to the Company than, those that could be obtained in arm’s length dealings with an unrelated third party; or
• the transaction is approved by disinterested members of the Board of Directors; or
• the transaction involves compensation approved by the Compensation Committee.
For purposes of this policy, “Related Party” has the same meaning as “related person” under Item 404 of Regulation S-K promulgated by the SEC, and includes:
• any directors or executive officers;
• any person who is known to the Company to be the beneficial owner of more than 5% of any class of voting securities; and
• any immediate family member of the Company’s directors or executive officers or a person known to the Company to be a more than 5% shareholder.
For purposes of this policy, a “Related Party Transaction” is a transaction in which the Company is a participant and in which any “Related Party” had or will have a direct or indirect material interest (including any transactions requiring disclosure under Item 404 of Regulation S-K), other than:
• transactions available to all salaried employees generally; and
• transactions involving less than $5,000 when aggregated with all similar transactions.
Management will present to the Finance and Audit Committee for approval by the next regularly scheduled Finance and Audit Committee meeting any Related Party Transactions proposed to be entered into by us, including the proposed aggregate value of such transactions, if applicable, or Related Party Transactions may preliminarily be entered into by management subject to ratification by the Finance and Audit Committee. The Finance and Audit Committee will review and approve or disapprove such transactions, and at each subsequent regularly-scheduled Finance and Audit Committee meeting, management will update the Finance and Audit Committee as to any material change to the approved transactions. If such transactions are not ratified, management must make all reasonable efforts to cancel or annul the transaction.
The policy also covers opportunities that are presented to an executive officer or director that may be available to us, either directly or by referral. Before the executive officer or director may consummate such an opportunity, it must be presented to the Board of Directors for consideration.
The policy also requires that all Related Party Transactions be disclosed in the Company’s filings with the SEC to the extent required by the SEC’s rules, and that they be disclosed to the Finance and Audit Committee and, if material, to the full Board of Directors.
Related Person Transactions Since July 1, 2012
On August 14, 2012, the Company issued a Promissory Note (the "Fifth Promissory Note") in favor of St. George, in exchange for a loan in the amount of $370,000 made by St. George to the Company. Loan proceeds from the Fifth Promissory Note were transferred by the Company to Pulse.
On October 10, 2012, the Company issued a Promissory Note (the "Sixth Promissory Note") in favor of St. George in exchange for a loan in the amount of $50,000 made by St. George to the Company.
On January 10, 2013, the Company entered into a Fourth Amendment to Voting and Standstill Agreement (the "Fourth Amendment") with St. George and Dove. The Fourth Amendment further amends the Voting and Standstill Agreement dated March 19, 2010, between the Company and St. George, which was previously amended by (i) the Amendment to Voting and Standstill Agreement dated June 7, 2010, (ii) the Agreement to Join the Voting and Standstill Agreement by Dove dated June 7, 2010, (iii) the Acknowledgment and Waiver of Certain Provisions of the Voting and Standstill Agreement dated June 18, 2010, (iv) the Second Amendment to Voting and Standstill Agreement dated November 3, 2011, and (v) the Third Amendment to Voting and Standstill Agreement dated May 15, 2012 (as so amended, the "Voting and Standstill Agreement"). In connection with the Fourth Amendment, St. George and Dove have agreed to forbear on exercising their rights to cause the Company to purchase their respective shares of the Company's common stock, and the Company has agreed to postpone the "Put Commencement Date" (as defined in the Voting and Standstill Agreement) until October 1, 2013. As a result, the "Put Exercise Period" (as defined in the Voting and Standstill Agreement) will end on March 30, 2014.
On June 25, 2013, St. George elected to convert $24,208.80 of the outstanding balance of the Note at the conversion price of $0.004323 per share, whereupon the Company issued 5,600,000 shares of Common Stock to St. George.
On June 25, 2013, Dove elected to convert $3,782.62 of the outstanding balance of the Sixth Promissory Note at the conversion price of $0.004323 per share, whereupon the Company issued 875,000 shares of its Common Stock to Dove.
For further details regarding related-person transactions, see Note 8 to the Financial Statements accompanying this report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Dismissal of Previous Independent Registered Public Accounting Firm
On January 27, 2012, the Audit Committee of the Board of Directors of the Company approved the dismissal of UHY LLP (“UHY”) as our independent auditor.
Through UHY’s dismissal on January 27, 2012, there was: (i) no disagreement with UHY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of UHY, would have caused UHY to make reference to the subject matter of the disagreement in connection with its report, and (ii) no reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
Engagement of New Independent Registered Public Accounting Firm
On January 27, 2012, the Company appointed Bravos & Associates (“Bravos”) as our independent auditor.
Through the date hereof, neither the Company nor anyone acting on its behalf consulted Bravos with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company or oral advice was provided that Bravos concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or a reportable event as described in Item 304(a)(1)(iv) or (v), respectively, of Regulation S-K.
Pre-Approval Policies and Procedures for Audit and Non-Audit Services
The Finance and Audit Committee’s charter affirms its responsibility to approve in advance audit and non-audit services to be performed by our independent registered public accounting firm. In accordance with Section 10A(i) of the Exchange Act, before UHY LLP and or Bravos was engaged by us to render audit or non-audit services, the engagement is approved by our Finance and Audit Committee. All of the audit-related, tax and other services described in the table above were approved by the Finance and Audit Committee pursuant to Rule 2-01c (7) of Regulation S-X.
Fees of the Independent Registered Public Accounting Firm
The following table sets forth the fees the Company was billed for audit and other services provided by UHY LLP in fiscal 2012 and audit services provided by Bravos in fiscal 2013 and 2012. All of such services were approved in conformity with the pre-approval policies and procedures described above. The Finance and Audit Committee, based on its reviews and discussions with management and UHY LLP and Bravos noted above, determined that the provision of these services was compatible with maintaining UHY LLP’s and Bravos' independence.
Audit Fees. Audit fees include services rendering in reviewing quarterly financial information and auditing our annual consolidated financial statements for fiscal 2013.
Tax Fees. Tax fees relate to preparation of the federal, state and local income tax returns with supporting schedules.
UHY LLP leases all its personnel, who work under the control of UHY LLP partners, from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) & (2) The financial statements listed in the accompanying Index to Consolidated Financial Statements at page are filed as part of this Form 10-K report.
(3) The Exhibit Index lists the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-K report. The Exhibit Index is hereby incorporated by reference into this Item 15.
(b) The list of exhibits filed with this report is set forth in response to Item 15(a)(3).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED AMERICAN HEALTHCARE CORPORATION (Registrant)
Dated: October 15, 2013
/s/ John M. Fife
John M. Fife
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, each as of October 15, 2013.
Signature
Capacity
/s/ JOHN M. FIFE
Chairman, President and Chief Executive Officer
John M. Fife
(Principal Executive Officer)
/s/ ROBERT T. SULLIVAN
Chief Financial Officer, Secretary and Treasurer
Robert T. Sullivan
(Principal Financial Officer and Principal Accounting Officer)
/s/ EMMETT S. MOTEN, JR.
Director
Emmett S. Moten, Jr.
/s/ WILLIAM C. BROOKS
Director
William C. Brooks
/s/ TOM A. GOSS
Director
Tom A. Goss
/s/ RICHARD M. BROWN, D.O.
Director
Richard M. Brown, D.O.
/s/ KARL FIFE
Director
Karl Fife
/s/ RONALD E. HALL, SR.
Director
Ronald E. Hall, Sr.
/s/ HERBERT J. BELLUCCI
Director
Herbert J. Bellucci
/s/ SCOTT LEECE
Director
Scott Leece
/s/ John T. Woolley
Director
John T. Woolley
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Bravos & Associates
Certified Public Accountants
324 Ridgewood Drive
Bloomingdale, Illinois 60108
(630) 893 - 6753
Fax (630) 893-7296 Email: Bravostw@Comcast.net
Report of Independent Registered Public Accounting Firm
Board of Directors
United American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of United American Healthcare Corporation and Subsidiaries as of June 30, 2013 and 2012, and the related consolidated statements of operations, shareholders' equity and comprehensive loss, and cash flows for the years ended June 30, 2013 and 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United American Healthcare Corporation and Subsidiaries as of June 30, 2013 and 2012, and the results of their operations and their cash flows for the years ended June 30, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company had a working capital deficiency of $8.4 million. As discussed in Note 2 to the consolidated financial statements, the Company’s liabilities and working capital raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters are also discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Bravos & Associates, CPA’s
Bloomingdale, Illinois
September 20, 2013
United American Healthcare Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to the consolidated financial statements.
United American Healthcare Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
United American Healthcare Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE LOSS
(in thousands)
See accompanying notes to the consolidated financial statements.
United American Healthcare Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to the consolidated financial statements.
NOTE 1 - DESCRIPTION OF BUSINESS
United American Healthcare Corporation (the “Company” or “UAHC”) was incorporated in Michigan on December 1, 1983 and commenced operations in May 1985.
From November 1993 to June 2009, the Company’s indirect, wholly owned subsidiary, UAHC Health Plan of Tennessee, Inc. (“UAHC-TN”), was a managed care organization in the TennCare program, a State of Tennessee program that provided medical benefits to Medicaid and working uninsured recipients. On April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed care services as a TennCare contractor when its TennCare contract expired on June 30, 2009. UAHC-TN’s TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009. However, revenue under this contract was only earned through October 31, 2008.
From January 2007 to December 2009, UAHC-TN served as a Medicare Advantage qualified organization (the “Medicare contract”) pursuant to a contract with the Centers for Medicare & Medicaid Services (“CMS”). The contract authorized UAHC-TN to serve members enrolled in both the Tennessee Medicaid and Medicare programs, commonly referred to as “dual-eligibles,” specifically to offer a Special Needs Plan (“SNP”) to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan. The Company did not seek renewal of the Medicare contract, which expired December 31, 2009. The Company wound down the Medicare business and as of December 31, 2010, virtually all of the Tennessee operations had ceased.
On June 18, 2010, UAHC acquired Pulse Systems, LLC (referred to as “Pulse Systems” or “Pulse” or “Pulse Sellers”) for consideration with a fair value of $8.6 million. With the acquisition of Pulse Systems, LLC on June 18, 2010, UAHC now provides contract manufacturing services to the medical device industry, with a focus on precision laser-cutting capabilities and the processing of thin-wall tubular metal components, sub-assemblies and implants, primarily in the cardiovascular market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation. The consolidated financial statements include the accounts of United American Healthcare Corporation, its wholly owned subsidiary, United American of Tennessee, Inc. (“UA-TN”) and its wholly owned subsidiary Pulse Systems, LLC. UAHC Health Plan of Tennessee, Inc. (formerly called OmniCare Health Plan, Inc.) (“UAHC-TN”) is a wholly owned subsidiary of UA-TN. All significant intercompany transactions and balances have been eliminated in consolidation.
b. Use of Estimates. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates as more information becomes available and any such difference could be significant.
c. Cash and Cash Equivalents. The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.
d. Accounts Receivable - Trade, Net. Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. The Company determines the allowance for doubtful accounts by identifying trouble accounts and by using historical experience applied to an aging of accounts. The Company also determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was $41,000 as of June 30, 2013 and 2012, respectively.
e. Property and Equipment. Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures and improvements, which add significantly to the productive capacity or extend the useful life of an asset, are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives of the major classes of property and equipment are as follows: furniture and fixtures - 5 years; equipment - 7 years; and computer software - 3 to 5 years. Leasehold improvements are included in furniture and fixtures and are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life. The Company uses accelerated methods for income tax purposes.
f. Goodwill. Goodwill resulting from business acquisitions is carried at cost. The carrying amount of goodwill is tested for impairment at least annually at the reporting unit level, as defined, and will only be reduced if it is found to be impaired or is associated with assets sold or otherwise disposed of. There were no goodwill impairment charges recorded during fiscal years 2013, 2012 and 2011.
As a result of the acquisition of Pulse, the Company recorded goodwill of $10.4 million on June 18, 2010. At June 30, 2010, goodwill was adjusted to $10.1 million to reflect the change in fair value of common stock payable at June 30, 2010. At September 30, 2010, goodwill was decreased by $161,000 to reflect the change in fair value of common stock issued to the Pulse shareholders and increased by $301,000 to record the deferred tax effect of the issuance of the common stock as part of the acquisition.
As the valuation of all assets acquired was finalized in early fiscal 2011, a retroactive adjustment resulted to other intangible assets and goodwill. The retroactive adjustment of the valuation did not materially impact net income, retained earnings or earnings per share for any period presented. See Note 6 below for additional discussion of the Pulse transaction. The roll forward of goodwill is as follows (in thousands):
1) Management Companies: United American Healthcare Corporation, United American of Tennessee, Inc.
2) Pulse Systems: Provider of Contract Manufacturing Services to the medical device industry.
g. Long-Lived Assets. Long-lived assets are reviewed by the Company for events or changes in circumstances which would indicate that the carrying value may not be recoverable. In making this determination, the Company considers a number of factors, including estimated future undiscounted cash flows associated with long-lived assets, current and historical operating and cash flow results and other economic factors. When any such impairment exists, the related assets are written down to fair value. Based upon its most recent analysis, the Company believes that long-lived assets are not impaired.
h. Revenue Recognition. Contract manufacturing service revenue is recognized when title to the product transfers, no remaining performance obligations exist, the terms of the sale are fixed and collection is probable, which generally occurs at shipment.
i. Income Taxes. Deferred income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce the deferred tax assets and liabilities to the amount expected to be realized. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible for the period.
j. Earnings (Loss) Per Share. Basic net loss per share excluding dilution has been computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share is computed the same as basic except that the denominator also includes shares issuable upon assumed exercise of stock options and warrants. For the years ended June 30, 2012 and 2011, the Company had outstanding stock options and warrants which were not included in the computation of net loss per share because the shares would be anti-dilutive due to the net loss each period.
k. Segment Information. The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Financial information is reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments.
l. Inventories. Inventories are valued at the lower of cost, on a first-in, first- out method, or market. Work in process and finished goods include materials, labor and allocated overhead.
Inventories consist of the following at June 30, 2013 and 2012, (in thousands):
m. Other Intangibles. Intangible assets are amortized over their estimated useful lives using the straight-line method.
The following is a summary of intangible assets subject to amortization as of June 30, 2013 and 2012, including the retroactive adjustments for final valuation of such intangible assets (in thousands):
Amortization expense was $433,000 for fiscal year 2013 and 2012, respectively. Amortization expense for the next five fiscal years is as follows (in thousands):
n. Shipping and Handling. Shipping and handling costs are included in cost of goods sold.
o. Reclassifications. Certain items in the prior periods consolidated financial statements have been reclassified to conform to the June 30, 2013 presentation.
p. Going Concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company had a working capital deficiency of $8.4 million. As a result, the Company could go into default on certain long-term debt arrangements or on the redeemable preferred units of Pulse Systems, LLC. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability of recorded assets, or amounts and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern. In order to provide the Company with the ability to continue its operations:, the Company’s Management has instituted cost savings actions to reduce corporate overhead. To the extent the Company needs to finance its debts or other obligations, or fund capital expenditures or acquisitions, the Company will need to access the capital markets by, for example, issuing securities in private placements or private investments in public equities ("PIPE") offerings.
NOTE 3 - FAIR VALUE
To prioritize the inputs the Company uses in measuring fair value, the Company applies a three-tier fair value hierarchy. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, reflects management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Determining which hierarchical level an asset or liability falls within requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value on a recurring basis in the Consolidated Balance Sheet as of June 30, 2013 and 2012:
The Company uses an interest swap to manage the risk associated with its floating long-term notes payable. As interest rates change, the differential paid or received is recognized in interest expense for the period. In addition, the change in fair value of the swaps is recognized as interest expense or income during each reporting period. The fair value of the interest rate swap was determined to be $6,000 using inputs other than quoted prices in active markets. The fixed interest rate of the interest rate swap is 4.78%. The Company has not designated this interest rate swap for hedge accounting.
As of June 30, 2013, the aggregate notional amount of the swap agreement was $0.9 million, which will mature on March 31, 2014. The notional amount of the swap will decrease by $0.3 million each quarter. The Company is exposed to credit loss in the event of nonperformance by the counterpart to the interest rate swap agreement. The interest rate swap is classified within level 2 of the fair market measurements. The total gain included in earnings attributable to the change in fair value of the interest rate swap was $25,182 and $30,690 for the years ended June 30, 2013 and 2012, respectively.
NOTE 4 - CONCENTRATION OF RISK
Pulse Systems provided contract manufacturing services to 106 medical device customers, with approximately 61% of revenue arising from customers located in the San Francisco Bay Area. For the twelve-months ended June 30, 2013 Pulse’s two largest customers accounted for approximately 57% of its total revenue and the ten largest customers accounted for 81% of Pulse’s total revenue. Pulse was acquired late in fiscal 2010.
The Company from time to time may maintain cash balances with financial institutions in excess of federally insured limits. Management has deemed this as a normal business risk.
NOTE 5 - PROPERTY AND EQUIPMENT, NET
Property and equipment at each June 30 consists of the following (in thousands):
Depreciation expense for each of the years ended June 30, 2013 and, 2012 was $338,000, $285,000, respectively.
NOTE 6 - ACQUISITION
On June 18, 2010, the Company entered into a Securities Purchase Agreement and a Warrant Purchase Agreement to acquire 100% of the outstanding common units and warrants to purchase common units of Pulse. The consideration paid to acquire the common units and warrants of Pulse totaled approximately $9.46 million, which consisted of (a) cash paid at closing of $3.40 million, (b) a non-interest bearing note payable of $1.75 million (secured by a subordinated pledge of all the common units of Pulse), (c) 1,608,039 shares of UAHC common stock determined based on an initial value of $1.6 million, (d) an estimated purchase price adjustment of $210,364 based on targeted levels of net working capital, cash and debt of Pulse at the acquisition date (e) and the funding of $2.5 million for certain obligations of Pulse as discussed below. The shares of UAHC common stock were issued on July 12, 2010, upon approval by the Company’s board of directors on July 7, 2010 and, therefore, were revalued at June 30, 2010. The shares of UAHC common stock had a fair value of $1.05 million as of June 30, 2010, which has been recorded as accrued purchase price at that date, and a fair value of $884,000 on July 12, 2010, the date the shares were issued and recorded. The Company also assumed Pulse’s term loan to a bank of $4.25 million, after making a payment at closing as discussed below.
In connection with the acquisition of the Pulse common units, Pulse entered into a redemption agreement with the holders of its preferred units to redeem the preferred units for $3.99 million. Pulse allowed to redeem the preferred units only if UAHC makes additional cash equity contributions to Pulse in an amount necessary to fully fund each such redemption. UAHC funded an initial payment of $1.75 million to the preferred unitholders on June 18, 2010. Pulse has agreed to redeem the remaining preferred units over a two-year period ending in June 2012. Finally, as an additional condition of closing, UAHC funded a $750,000 payment toward Pulse’s outstanding term loan with a bank and pledged all of the common units of Pulse to the bank as additional security for the remaining $4.25 million outstanding under the loan. The initial payment of $1.75 million to the preferred unitholders and the $750,000 payment to the bank by UAHC are considered additional consideration for the acquisition of Pulse. The funding of the remaining redemption payments totaling $2.24 million and the assumption of Pulse’s revolving and term loans are not included in the $9.46 million purchase price listed above.
During the three months ended September 30, 2010, the Company finalized its valuation of all assets acquired, primarily related to long-lived tangible and intangible assets and restated the balance sheet at June 30, 2010 to reflect the final purchase price allocation.
A summary of the final purchase price allocation for the acquisition of the Company is as follows (in thousands):
The fair value of the consideration paid for the acquisition of the net assets was as follows (in thousands):
The financial information in the table below summarizes the combined results of operations of UAHC and Pulse, on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented. Such pro forma financial information is based on the historical financial statements of UAHC and Pulse. This pro forma financial information is based on estimates and assumptions, which have been made solely for purposes of developing such pro forma information, including, without limitation, purchase accounting adjustments.
NOTE 7 - INCOME TAXES
The Company recognizes the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company had no unrecognized tax benefits as of June 30, 2013 and 2012. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of June 30, 2013. The Company has no interest or penalties relating to income taxes recognized in the consolidated statement of operations for the years ended June 30, 2013 and 2012 or in the consolidated balance sheet as of June 30, 2013 and 2012. The Company’s tax returns for fiscal 2009 and later remain subject to examination by the Internal Revenue Service and the respective states.
The components of income tax expense (benefit) from continuing operations for each year ended June 30 are as follows (in thousands):
A reconciliation of the provision for income taxes from continuing operations for each year ended June 30 is as follows (in thousands):
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As a result of losses in recent years, management believes that the realization of deferred tax assets does not meet the more likely than not threshold for recognition.
Components of the Company’s deferred tax assets and liabilities at each year ended June 30 are as follows (in thousands):
As of June 30, 2013, the net operating loss carry forward for federal income tax purposes was approximately $25.5 million and expires beginning 2023.
NOTE 8 - RELATED PARTY TRANSACTIONS
Convertible Note
On May 18, 2011, the Company issued a Convertible Promissory Note (the “Convertible Note”) in favor of St. George Investments, LLC (“St. George”), an affiliate of John M. Fife, the Company’s Chairman, President and Chief Executive Officer. On that date, St. George had 19.23% beneficial ownership of the Company. See Note 10 “Notes Payable” for additional discussion of the Convertible Note.
On September 28, 2011, the Company issued a Promissory Note (the “Promissory Note”) to St. George, an affiliate of John M. Fife, who is the Company’s Chairman, President and Chief Executive Officer, in exchange for a loan in the amount of $400,000 made by St. George to the Company. See Note 10 “Notes Payable” for additional discussion of the Promissory Note.
December 9, 2011, the Company issued a Promissory Note (the “Second Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $300,000 made by St. George to the Company. See Note 10 “Notes Payable” for additional discussion of the Second Promissory Note.
On February 9, 2012, the Company issued a Promissory Note (the “Third Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $350,000 made by St. George to the Company. See Note10 “Notes Payable” for additional discussion of the Third Promissory Note.
On May 16, 2012, the Company issued a Promissory Note (the "Fourth Promissory Note") in favor of St. George in exchange for a loan in the amount of $75,000 made by St. George to the Company. See Note 10 “Notes Payable” for additional discussion of the Fourth Promissory Note.
On August 14, 2012, the Company issued a Promissory Note (the "Fifth Promissory Note") in favor of St. George in exchange for a loan in the amount of $370,000 made by St. George to the Company. See Note 6 "Notes Payable" for additional discussion of the Fifth Promissory Note.
On October 10, 2012, the Company issued a Promissory Note (the "Sixth Promissory Note") in favor of St. George in exchange for a loan in the amount of $50,000 made by St. George to the Company. See Note 6 "Notes Payable" for additional discussion of the Sixth Promissory Note.
On June 25 2013, the Company issued 5,600,000 to St. George, at a price of $0.004323 per share, representing $24,208.80 of the outstanding balance of the Fifth Promissory Note. In addition, the Company issued 875,000 shares of its common shares to Dove Foundation, a related party, in lieu of cash, at a price of $0.004323 per share, representing $3,782.63 of the outstanding balance of the Sixth Promissory Note. See Note 6 "Notes Payable" for additional discussion.
Reimbursement Agreement
On June 23, 2011, the Company entered into a Reimbursement Agreement and Mutual Release (the “Reimbursement Agreement”) with various parties (collectively, the “Parties”), including Strategic Turnaround Equity Partners, L.P. (Cayman), a Cayman Islands limited partnership (“STEP”), Bruce R. Galloway (“Galloway”), St. George Investments, LLC, an Illinois limited liability company (“St. George”), John M. Fife (“Fife”), and several of their respective affiliates. St. George is controlled by Mr. John M. Fife, who is the Company’s Chairman, CEO and President.
Under the Reimbursement Agreement, the Parties agreed to dismiss the litigation between them in the U.S. District Court for the Eastern District of Michigan, the Circuit Court for Wayne County, Michigan, and the Michigan Court of Appeals, as well as to release each other from liability in connection with any issue related to the litigation, in exchange for payments of $5,000 by each of the Company and St. George to STEP (for a total of $10,000). The Parties filed a Joint Stipulation of Dismissal on June 27, 2011.
As part of the Reimbursement Agreement and as further consideration for the releases, STEP, its principals and affiliates, including Galloway, agreed that for 20 years they would not (i) purchase any shares of common stock of the Company (“Common Stock”), (ii) take any insurgent action against the Company, engage in any type of proxy challenge, tender offer, acquisition or battle for corporate control with respect to the Company, (iii) initiate any lawsuit or governmental proceeding against the Company, its affiliates or any of their respective directors, officers, employees or agents, or (iv) take any action that would encourage any of the foregoing.
In addition, under the Reimbursement Agreement, each of the Company and St. George agreed to reimburse STEP in the amount of $225,409 (for a total of $450,819) for expenses incurred by STEP, Galloway and their affiliates in connection with the proxy contest for the election of directors to the Company’s Board of Directors (the “Board”) in 2010. St. George paid $225,409 in cash on June 27, 2011. The payment of $225,409 by the Company was payable from the proceeds of the sale of artwork owned by the Company. Additionally, the Company’s payment obligation was due and payable upon the occurrence of the earlier of (i) the Company’s receipt of at least $225,409 from an escrow held in the State of Tennessee, (ii) a refinancing of the Company’s credit facility with Fifth Third Bank dated March 31, 2009, as amended June 30, 2011, or (iii) June 12, 2012. The Company was unable to make the payment as required. As of June 30, 2013, the obligation is recorded in accrued expenses on the Consolidated Balance Sheet.
In connection with the Reimbursement Agreement, Galloway resigned from the Board, on June 23, 2011.
In addition, in connection with the Reimbursement Agreement, on June 24, 2011, St. George purchased 774,151 shares of the Common Stock owned by STEP, Galloway and their affiliates at a price of $0.20112 per share for a total purchase price of $155,697 (the “Stock Purchase”). Finally, pursuant to the Waiver Agreement dated June 23, 2011, between St. George, the Company, STEP, Galloway and others, STEP, Galloway and their affiliates agreed to sell in the open market within 30 days all of their shares of the Company’s common stock that were not purchased by St. George. After this 30-day period, STEP, its principals and affiliates, including Galloway, will own no Common Stock and are prohibited from owning Common Stock for 20 years in the future.
On November 14, 2012, the Company entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with various parties (collectively, the “Parties”), including Strategic Turnaround Equity Partners, L.P. (Cayman), a Cayman Islands limited partnership (“STEP”), Bruce R. Galloway (“Galloway”), St. George Investments, LLC, an Illinois limited liability company (“St. George”), John M. Fife (“Fife”), and several of their respective affiliates. St. George is controlled by Mr. John M. Fife, who is the Company’s Chairman, CEO and President. Under the Settlement Agreement, the Company paid $125,410 to STEP on November 14, 2012. The Company also agreed to assign to STEP the rights to the sale proceeds of certain artwork with a value of $58,500, of which the first installment and second installment totaling $22,500 were paid on November 14, 2012. The Company also assigned to STEP the right to receive an aggregate amount of up to $41,500 in net proceeds from the sale of certain other artwork or from the release of money from an escrow account maintained with the State of Tennessee, whichever occurs first. In exchange for these payments and assignments, which total $225,410, STEP, Galloway and their affiliates have released UAHC from making the $225,410 payment required under the Reimbursement Agreement.
Standstill Agreement
On March 19, 2010, the Company and St. George Investments, LLC (“St. George”), which on that date was a 23.13% owner of the Company, entered into a Voting and Standstill Agreement (the “Standstill Agreement”). See Note 16 for additional discussion of the Standstill Agreement.
On January 10, 2013, registrant United American Healthcare Corporation (the "Company") entered into a Fourth Amendment to Voting and Standstill Agreement (the "Fourth Amendment") with St. George Investments, LLC, an Illinois limited liability company ("St. George"), and The Dove Foundation, an Illinois trust ("Dove").
The Fourth Amendment further amends the Voting and Standstill Agreement dated March 19, 2010, between the Company and St. George, which was previously amended by (i) the Amendment to Voting and Standstill Agreement dated June 7, 2010, (ii) the Agreement to Join the Voting and Standstill Agreement by Dove dated June 7, 2010, (iii) the Acknowledgment and Waiver of Certain Provisions of the Voting and Standstill Agreement dated June 18, 2010, (iv) the Second Amendment to Voting and Standstill Agreement dated November 3, 2011, and (v) the Third Amendment to Voting and Standstill Agreement dated May 15, 2012 (as so amended, the "Voting and Standstill Agreement").
In connection with the Fourth Amendment, St. George and Dove have agreed to forbear on exercising their rights to cause the Company to purchase their respective shares of the Company's common stock, and the Company has agreed to postpone the "Put Commencement Date" (as defined in the Voting and Standstill Agreement) until October 1, 2013. As a result, the "Put Exercise Period" (as defined in the Voting and Standstill Agreement) will end on March 30, 2014.
Management Services Agreement
The Company paid $131,000 and $160,000 for fiscal 2013 and 2012, respectively, to Wacker Services, Inc. an affiliate Company, for consulting services and reimbursements for rent, insurance and utilities of shared office space.
NOTE 9 - BENEFITS, OPTION PLANS, WARRANTS AND SHARE BASED COMPENSATION
The Company offers a 401(k) retirement and savings plan that covers substantially all of its Pulse employees. Under this plan, the Company matches 100% of an employee’s contribution up to 3% of the employee’s salary, then 50% of an employee’s contribution on the next 2% of the employee’s salary. The Company offered a 401(k) retirement and savings plan that covered substantially all of its Michigan and Tennessee employees, which terminated on November 15, 2011. Expenses related to the 401(k) plans were $68,865 and $64,255 for the fiscal years ended June 30, 2013and 2012, respectively.
The Company’s Board of Directors did not received stock awards for 2013 and 2012. On August 6, 1998, the Company's Board of Directors adopted the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan was approved by the Company's shareholders on November 12, 1998. The Company reserved an aggregate of 500,000 common shares for issuance upon exercise of options under the 1998 Plan. On November 14, 2003 the Company’s shareholders approved an increase in the number of common shares reserved for issuance pursuant to the exercise of options granted under the amended plan from 500,000 to 1,000,000 shares, and extended the termination date of the plan by five years to August 6, 2013. On November 5, 2004 the Company’s shareholders approved an increase in the number of common shares reserved for issuance pursuant to the exercise of options granted under the amended plan from 1,000,000 to 1,500,000 shares.
Information regarding the stock options outstanding at June 30, 2013 and 2012, are as follows (shares in thousands):
Options for 255,792 common shares were available for grant under the amended and restated 1998 Plan at the end of fiscal 2012.
In accordance with GAAP, the Company records compensation cost relating to share-based payment transactions in the financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. There was no stock option expense in 2013. The Company recorded stock option expense of $23,000 for fiscal, respectively.
The options have terms of 10.0 years and typically vest quarterly over 3 or 4 years. As of June 30, 2013, there is no future compensation expense to be related to these options. There were no grants in fiscal 2013 and 2012, and there were no exercises in fiscal 2013 and 2012.
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following assumptions used for previous grants, depending on the date of issuance:
NOTE 10 - NOTES PAYABLE
The Company’s long-term borrowings consist of the following at June 30, 2013 and 2012 (in thousands):
Following its acquisition by the Company, Pulse Systems remains party to the Loan and Security Agreement, as amended (the “Loan Agreement”), with Fifth Third Bank, which currently relates to a revolving loan not to exceed $0.5 million, of which $0.3 million outstanding as of June 30, 2013. There were no amounts outstanding as of June 30, 2012. In addition, a $2.0 million term loan, with a remaining balance of $1.3 million as of June 30, 2013 and $2.4 million as of June 30, 2012. The revolving loan matures January 31, 2014 and bears interest at LIBOR plus 3.75%. The term loan interest is payable monthly and as of June 30, 2013 is calculated based on LIBOR plus 4.00%, with $167,667 quarterly principal payments due through December 31, 2013 and a final balloon payment of $1,000,000 on January 31, 2014. The term loan effective interest rate is 4.19% as of June 30, 2013. The revolving loan and term loan are secured by a lien on all of the assets of Pulse Systems.
The Loan Agreement contains financial covenants. On May 29, 2013, the Company reported to Fifth Third that the Company had failed to meet a financial covenant against capital expenditures in excess of $200,000 for the period between July 1, 2012, through June 20, 2013, and that such failure had continued for more than 30 days. Pulse System’s failure to cure its breach, continuing for a period of more than 30 days, of the Loan Agreement thus constituted an Event of Default under the Note. Management has not been able to obtain a waiver of this covenant default from the lender.
In addition, UAHC has pledged its membership interests in Pulse Systems to Fifth Third as additional security for the loans, as set forth in the Membership Interest Pledge Agreement (the “Pledge Agreement”). The Pledge Agreement generally restricts the payments of dividends or distributions on, and redemptions of, UAHC common stock, except as permitted under the Standstill Agreement, as amended. See Note 16 for additional discussion of the Standstill Agreement.
On September 28, 2011, the Company issued a Promissory Note (the “Promissory Note”) to St. George, an affiliate of John M. Fife, who is the Company’s Chairman, President and Chief Executive Officer, in exchange for a loan in the amount of $400,000 made by St. George to the Company. The Company used the proceeds of the loan for working capital purposes. Interest on the Promissory Note accrued at an annual rate of 10%. Principal and interest payments were due at the maturity date of December 31, 2014, or if the Company were to sell substantially all of its assets before then. However, the Company can pay, without penalty, the Convertible Note before maturity. In the case of default, St. George can convert all or part of the principal amount and the unpaid interest into newly issued shares of the Company’s common stock. The initial conversion price was $0.0447 per share.
On December 9, 2011, the Company issued a Promissory Note (the “Second Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $300,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Second Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Second Promissory Note are due until the Second Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Second Promissory Note), the holder of the Second Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Second Promissory Note into newly issued shares of common stock of the Company at an initial conversion price of $0.0226 per share.
On February 9, 2012, the Company issued a Promissory Note (the “Third Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $350,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Third Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Third Promissory Note are due until the Third Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Third Promissory Note), the holder of the Third Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Third Promissory Note into newly issued shares of common stock of the Company at an initial conversion price of $0.01903 per share.
On May 16, 2012, the Company issued a Promissory Note (the “Fourth Promissory Note”) in favor of St. George, in exchange for a loan in the amount of $75,000 made by St. George to the Company. The Company will use the proceeds of the loan for working capital purposes. Interest on the Fourth Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Fourth Promissory Note are due until the Fourth Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Fourth Promissory Note), the holder of the Fourth Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Fourth Promissory Note into newly issued shares of common stock of the Company at an initial conversion price of $0.01793 per share.
On August 14, 2012, The First, Second, Third and Fourth Promissory Notes were amended to make the indebtedness evidenced by each Promissory Note secured by a) all the assets of the Company, and b) all of the Company's ownership interest in Pulse pursuant to the terms of the St. George Pledge Agreement.
On August 14, 2012, the Company issued a Promissory Note (the "Fifth Promissory Note") in favor of St. George, in exchange for a loan in the amount of $370,000 made by St. George to the Company. Loan proceeds from the Fifth Promissory Note were transferred by the Company to Pulse. The initial conversion price of the Fifth Promissory Note is $0.010277667. As required by the Purchase Agreement, Pulse entered into that certain Security Agreement by and between Pulse and St George dated August 14, 2012 ("Pulse Security Agreement'), thereby securing the Fifth Promissory Note and the Prior Promissory Notes with all of the assets of Pulse. Pulse also unconditionally guaranteed repayment of and the Fifth Promissory Note Prior Notes by executing that certain Guaranty dated August 14, 2012, in favor of St George ("Pulse Guaranty").
On October 10, 2012, the Company issued a Promissory Note (the "Sixth Promissory Note") in favor of St. George, a related party, in exchange for a loan in the amount of $50,000 made by St. George to the Company. The Company used the proceeds of the loan for working capital purposes. Interest on the Sixth Promissory Note accrues at an annual rate of 10%. No payments of principal or interest on the Sixth Promissory Note are due until the Sixth Promissory Note matures, which is on the earlier of (a) December 31, 2014, or (b) the date of (i) the sale of all or substantially all of the assets of the Company or Pulse Systems, (ii) the merger of the Company or Pulse Systems, LLC, or (iii) the sale of all or substantially all of the equity of the Company or Pulse Systems, LLC. Only upon an event of default (as defined in the Sixth Promissory Note), the holder of the Sixth Promissory Note may elect to convert all or any part of the outstanding principal of, and the accrued but unpaid interest on, the Sixth Promissory Note into newly issued shares of common stock of the Company. The conversion price is $0.004323 per share.
If the Company issues any convertible security with a conversion price lower than that of the promissory notes issued by the Company to St. George, discussed above, the conversion prices for those promissory notes automatically reduces to the lower conversion price. Accordingly, the conversion price for each of the promissory notes is $0.004323 per share of the Company’s common stock, which is the conversion price of the most recent promissory note. If the Company were to default on the promissory notes, and if St. George were then to elect to convert the $1,545,000 aggregate principal amount the promissory notes, the Company would be obligated to issue to St. George 357,638,880 shares of common stock. This number of shares exceeds the number of the Company’s authorized shares of common stock that are available to be issued. An issuance of all of the Company’s remaining authorized but unissued shares of common stock to St. George would be highly dilutive to the other holders of the Company’s common stock.
The Company and St George entered into that certain Pledge and Security Agreement dated August 14, 2012 ("St George Pledge Agreement"), thereby providing that the Fifth Promissory Note is secured by all of the Company's ownership interests in its subsidiary, Pulse. The Fifth Promissory Note is also secured by all of the assets of the Company pursuant to that certain Security Agreement between the Company and St George dated August 14, 2012 ("St George Security Agreement"). St George required Pulse to guarantee repayment of the Fifth promissory Note and the Prior Notes, and to secure all such indebtedness by all of the assets of Pulse. As such, Fifth Third Bank and St George entered into that certain Subordination Agreement dated August 17, 2012 ("Subordination Agreement"), thereby indicating that Fifth Third Bank was in a first lien position, and St George was in a subordinate lien position. St George was also required to execute that certain Membership Interest Pledge Agreement dated August 17, 2012, in favor of Fifth Third, thereby pledging to Fifth Third all of its preferred units in Pulse ("Preferred Unit Pledge Agreement").
As stated above, the Company failed to meet a financial covenant against capital expenditures in excess of $200,000 for the period between July 1, 2012 through June 20, 2013. As a result of St. George’s exercise its remedy upon the occurrence of a default event, on June 25 2013, the Company issued 5,600,000 to St. George, at a price of $0.004323 per share, representing $24,208.80 of the outstanding balance of the Fifth Promissory Note. In addition, the Company issued 875,000 shares of its common shares to Dove Foundation in lieu of cash, at a price of $0.004323 per share, representing $3,782.63 of the outstanding balance of the Sixth Promissory Note.
The schedule of maturities of the long-term notes payable as of June 30, 2013 are as follows (in thousands):
Interest expense was approximately $0.5 million for fiscal years 2013 and 2012, respectively. Accrued interest as of June 30, 2013 and 2012 was $192 and $384, respectively.
NOTE 11 - LEASES
The Company leases its facilities and certain furniture and equipment under operating leases expiring at various dates through March 2015. Terms of the facility leases generally provide that the Company pay its pro rata share of all operating expenses, including insurance, property taxes and maintenance.
Rent expense for the years ended June 30, 2013 and 2012, totaled $0.3 million and $0.2 million, respectively. Minimum future lease payments under the operating leases as of June 30, 2013 are as follows (in thousands):
The Company leases equipment under various noncancelable capital leases which expire at various dates through July 2014. Lease payments totaling $9,600 are payable monthly and include interest at approximately 8 to 9 percent. The leases are collateralized by the underlying assets. Minimum future lease payments under capital leases as of June 30, 2013 are approximately $3,000 payable in fiscal year 2014. As of both June 30, 2013 and 2012, fixed assets with a cost basis of $416,816 related to these capital leases were recorded on the consolidated balance sheets.
NOTE 12 - DISCONTINUED OPERATIONS
On April 22, 2008, the Company learned that UAHC-TN would no longer be authorized to provide managed care services as a TennCare contractor when its TennCare contract expired on June 30, 2009. UAHC-TN’s TennCare members transferred to other managed care organizations on November 1, 2008, after which UAHC-TN continued to perform its remaining contractual obligations through its TennCare contract expiration date of June 30, 2009.
From January 2007 to December 2009, UAHC-TN served as a Medicare contractor with CMS. The contract authorized UAHC-TN to offer a SNP to its eligible members in Shelby County, Tennessee (including the City of Memphis), and to operate a Voluntary Medicare Prescription Drug Plan. The Company did not seek renewal of the Medicare contract, which expired December 31, 2009. The Company completed the wind down of the Medicare business during the three months ended December 31, 2010.
During fiscal year 2011, the Company recognized a liability for certain costs associated with an exit or disposal activity and measured the liability initially at its fair value in the period in which the liability was incurred. The costs recognized included employee termination benefits, lease termination and costs to relocate the Company’s facility. As of June 30, 2011, all amounts have been paid.
In connection with the discontinuance of the TennCare and CMS contracts, the Company reduced its workforce, subleased its leased Tennessee facility to a third party effective April 2009 and ending December 31, 2010, and relocated the Tennessee office. The discontinuance of the TennCare and CMS contracts has had a material adverse impact on the Company’s operations and financial statements.
For all periods presented in the consolidated statements of operations, the Company's managed care business is classified as discontinued operations. Starting December 31, 2010, the Company reclassified the managed care services of UAHC-TN to discontinued operations based on the fact that the Company had performed substantially all of its contractual obligations. The major classes of assets related to discontinued operations, were as follows (in thousands):
A summary of revenues and income (loss) from discontinued operations is a follows (in thousands):
NOTE 13 - RECENTLY ENACTED PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the effective dates. Unless otherwise discussed, Management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.
NOTE 14 - REDEEMABLE PREFERRED MEMBER UNITS
In connection with the acquisition of Pulse, Pulse Systems also entered into a Redemption Agreement, dated June 18, 2010 (the “Redemption Agreement”), with Pulse Systems Corporation, the holder of all of the outstanding preferred units in Pulse Systems. The aggregate redemption price is $3.99 million for the preferred units, including the accrued but unpaid return on such units, which reflects a $0.83 million reduction from the actual outstanding amount as of the date of the agreement. In addition, the 14% dividend rate on the preferred units is eliminated, subject to reinstatement if there is a default as explained in the next sentence. Failure to make any of the redemption payments results in the increase of the redemption price for it preferred units by $0.83 million and a 14% per annum cumulative (but not compounded) return on the aggregate amounts of the unredeemed preferred units plus the $0.83 million commencing on the date of default. Pulse Systems Corporation agreed to the redemption of its preferred units over a two-year period, commencing with a cash payment made at closing of $1.75 million. On August 30, 2011, St. George Investments purchased the preferred stock held by Pulse Corporation in Pulse Systems, LLC. The obligations of Pulse Systems under the redemption agreement are subordinate to its obligations under the Loan Agreement and Pledge Agreement.
On January 1, 2012, Pulse Systems was in default of the Redemption Agreement. As a result, the $0.83 million reduction from the amount outstanding at June 18, 2010 was reinstated. In addition, 14% return on the preferred amount began from the default date of January 1, 2012. The redeemable preferred units were recorded in the June 30, 2013 and 2012 consolidated balance sheets at a value of approximately $2.9 million and $2.5 million, respectively. The June 30, 2011 amount is net of the 12% discount. The $0.9 million impact of the default of the Redemption Agreement has been reflected in the consolidated statement of operations.
NOTE 15 - SEGMENT FINANCIAL INFORMATION
Summarized financial information for the Company’s principal continuing operations for fiscal 2013 and 2012 is as follows (in thousands):
(1) Management Companies: United American Healthcare Corporation, United American of Tennessee, Inc.
(2) Pulse Systems: Provider of Contract Manufacturing Services to the medical device industry.
NOTE 16 - COMMITMENTS & CONTINGENCIES
Standstill Agreement
On March 19, 2010, the Company and St. George, which on that date was a 23.13% beneficial owner of the Company, entered into a Voting and Standstill Agreement (the “Standstill Agreement”). St. George is an Illinois limited liability company that is controlled by Mr. John M. Fife, who is the Company’s Chairman, CEO and President. On June 7, 2010, the Company and St. George entered into an Amendment to the Voting and Standstill Agreement (the “Amendment”), and then The Dove Foundation (“Dove”) entered into a Joinder to the Voting and Standstill Agreement. On June 18, 2010, the Company, St. George and Dove entered into an Acknowledgement and Waiver of Certain Provisions in the Voting and Standstill Agreement, whereby St. George and Dove agreed that the Pulse Systems acquisition shall not be considered a “Triggering Event” under the Standstill Agreement.
Under the Standstill Agreement, St. George and Dove each have the right (the “Put”) to require the Company to purchase some or all of its shares of the Company’s common stock (“Shares”) at an exercise price of $1.26 per share.
The Company had the right (the “Call”) to purchase all of the Shares owned by St. George and Dove at an exercise price of $1.26 per Share, if the Call was exercised between July 1, 2011 and September 30, 2011. The Call expired on September 30, 2011.
Also under the Standstill Agreement, the Company agreed to maintain certain reserves of its unrestricted cash on its balance sheet, initially equal to 20% of the Company’s pro forma estimate of its 2010 fiscal year end shareholders’ equity and then equal to the Company’s actual 2010 fiscal year-end shareholders’ equity thereafter. The Company was unable to maintain such cash reserves in 2010 and entered into the Amendment, whereby St. George and Dove waived such cash reserve requirement, provided that the Company replaced such cash reserves with other collateral that is reasonably acceptable to St. George. To date, the Company has not replaced such cash reserves with other collateral. As a result, the Company has not replaced such cash reserves with other collateral. As a result, the Company is in default of the Standstill Agreement, which gave St. George and Dove the right to exercise the Put at any time. Pursuant to the Second Amendment to Voting and Standstill Agreement dated November 3, 2011, each of St. George and Dove agreed to forbear from exercising its Put Option during the then-present Put Exercise Period in exchange for the Company’s agreement to postpone the Put Commencement Date until October 1, 2012 (and either or both of St. George and Dove may exercise its Put Option during the Put Exercise Period commencing on such date), provided that the Put Commencement Date would accelerate, and either or both of St. George and Dove may elect to exercise the Put Option upon the occurrence of any one of certain events, including: 1) the Company or Pulse defaults under any loan agreement or debt instrument, including without limitation Pulse’s credit facility with Fifth Third Bank, N.A. and any promissory note made by the Company in favor of St. George (including such promissory notes dated September 28, 2011, December 9, 2011, February 9, 2012, and at any time thereafter; 2) the Company ceases to be current in its periodic reporting, or 3) ceases to be subject to periodic reporting requirements, under Section 13 of the Securities Exchange Act of 1934, as amended.
On May 15, 2012, the Company entered into the Third Amendment to Voting and Standstill Agreement (the “Third Amendment”). Pursuant to the Third Amendment, St. George and Dove agreed to forbear from exercising their Put Option during the Put Exercise Period whose commencement was accelerated to December 31, 2012, as a result of defaults by the Company under certain loan covenants in its Loan and Security Agreement with Fifth Third Bank, as further described in Note 10 to these Financial Statements. The Third Amendment also reestablished October 1, 2012, as the Put Commencement Date under the Voting and Standstill Agreement and amended the Voting and Standstill Agreement such that any further acceleration of the Put Option will be at the discretion of St. George or Dove, upon the occurrence of certain specified events.
On January 10, 2013, the Company entered into a Fourth Amendment to Voting and Standstill Agreement (the "Fourth Amendment") with St. George and Dove. The Fourth Amendment further amends the Voting and Standstill Agreement dated March 19, 2010, between the Company and St. George, which was previously amended by (i) the Amendment to Voting and Standstill Agreement dated June 7, 2010, (ii) the Agreement to Join the Voting and Standstill Agreement by Dove dated June 7, 2010, (iii) the Acknowledgment and Waiver of Certain Provisions of the Voting and Standstill Agreement dated June 18, 2010, (iv) the Second Amendment to Voting and Standstill Agreement dated November 3, 2011, and (v) the Third Amendment to Voting and Standstill Agreement dated May 15, 2012 (as so amended, the "Voting and Standstill Agreement"). In connection with the Fourth Amendment, St. George and Dove have agreed to forbear on exercising their rights to cause the Company to purchase their respective shares of the Company's common stock, and the Company has agreed to postpone the "Put Commencement Date" (as defined in the Voting and Standstill Agreement) until October 1, 2013. As a result, the "Put Exercise Period" (as defined in the Voting and Standstill Agreement) will end on March 30, 2014.
As of June 30, 2013, the put obligation is recorded at a fair value of $5,694,218 in current liabilities in the accompanying consolidated financial statements. If St. George and Dove were to exercise the Put with respect to all of their Shares, assuming that at the time of exercise St. George and Dove own the same number of Shares that they owned at June 30, 2013, then the costs to the Company would be $10,916,319 and $3,123,095, respectively.
Litigation
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business.
On July 29, 2013, Pulse filed a lawsuit against Aduro Laser (“Aduro”), Grayson Beck (“Beck”), Demian Backs (Back’s), and Vince Barletta (“Barletta”) and obtained a Temporary Restraining Order against misappropriation, transfer, or use of Pulse's confidential information. The Order also required a thorough evidence preservation process whereby Aduro's computer systems and Backs's and Beck's personal computers were forensically preserved and imaged.
On August 19, 2013, UAHC filed a separate lawsuit against Backs and Barletta (signatories to the 2010 UAHC transaction) in Michigan federal court alleging breach of their contractual agreements to keep confidential information and to not compete for Pulse System’s customers.
Too the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.
NOTE 17 - SUBSEQUENT EVENT
The Company has performed a review of events subsequent to the balance sheet date.
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EXHIBIT INDEX
** Indicates a management contract or compensatory arrangement required to be filed