PATENT, CONTINGENT NOTE PAYABLE AND CONTINGENT COMPENSATION | 6 Months Ended | 12 Months Ended |
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Jun. 30, 2011 | Dec. 31, 2010 | |
| PATENT, CONTINGENT NOTE PAYABLE AND CONTINGENT COMPENSATION |
8. PATENT, CONTINGENT NOTE PAYABLE AND CONTINGENT
COMPENSATION
On
September 10, 2009, ASRI purchased a patent for a needle
destruction device known as the Disintegrator® (including
trademarks for the Disintegrator®, Disintegrator Plus®
and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard” or the
“Seller”), in exchange for 250,000,000 shares of the
Company’s common stock (1,250,000 shares after consideration
of the 200-to-1 reverse stock split) and assumption of a contingent
note payable up to $1,200,000. Accordingly, the Company
recorded the patent at $2,652,272 equivalent to the trading value
of common stock at the closing bid price on September 10, 2009, in
the amount of $1,875,000 and the discounted amount of a $1,200,000
assumed contingent note payable in the amount of
$777,272. On December 31, 2010, the Company recorded a
patent impairment charge of $1,749,664 to write-down the carrying
value of the patent to $639,138, representing the present value of
expected future cash flows over the remaining life of the
patent. For the six months ended June 30, 2011 and 2010,
amortization expense amounted to $27,991 and $105,388,
respectively. As of June 30, 2011, the carrying value of
the patent was $611,147.
The
assumed $1.2 million, non-interest bearing, contingent note is
payable to a party related to the Seller in two installments upon
reaching certain targets. The first installment of
$600,000 is payable upon the Company reaching $6,000,000 in
combined new capital and revenue from sales of the Disintegrator
Plus® and certain other products introduced by the Seller
within two (now three) years of September 10, 2009. The
second installment of $600,000 is payable upon the Company reaching
an additional $4,000,000 of combined new capital and revenue within
two years of the due date of the first installment. At
the Company’s option, the first and second installments may
each be paid over 12 months after achievement of the respective
combined capital and revenue targets. As it is probable
that the Company will reach the combined capital and revenue
targets within four (now five) years, the $1.2 million note
obligation has been recognized at a discount. Subsequent
changes to the Company’s estimate of the amount due on this
contingent note payable will be recorded in the Company’s
financial statements when known. During the six months
ended June 30, 2011 and 2010, the Company recognized $40,727 and
$72,104 of interest expense related to amortization of this
contingent note payable, respectively, raising the balance of the
contingent note payable to $1,006,271 as of June 30,
2011.
Simultaneous
with the patent acquisition, the Company agreed to hire an
executive and majority owner of the Seller to assist with
operations, sales and marketing, and entered into a ten year
employment agreement with the executive (See Note 11 –
Commitments and Contingencies), and retain the Seller for
production, engineering and quality control services. In
consideration for entering into the employment agreement and other
agreements with the Seller, the Company agreed to issue up to
250,000,000 warrants (1,250,000 warrants after consideration of the
200-to-1 reverse stock split) and pay up to $200,000 as a cash
bonus, both contingent upon future sales of the Disintegrator®
and certain other products, to the executive and majority owner of
the Seller. Management determined that the contingent
warrants and contingent bonus payable qualified for treatment as
contingent compensation for accounting
purposes. Subsequent changes to the Company’s
estimate of the total amount of compensation due will be recorded
in the Company’s financial statements when
known.
As
it is probable that the Company will reach $7.0 million in sales
over the next three (now four) years, the Company currently
anticipates the issuance of 100,000,000 warrants (500,000 warrants
after consideration of the 200-to-1 reverse stock split), which
were determined to have a fair value of $759,925 as of September
10, 2009. In accordance with ASC No. 718-10,
Compensation
– Stock Compensation, the Company is recording monthly
compensation expense for the fair value of the warrants
payable. For the six months ended June 30, 2011
and 2010, the Company recorded $80,478 and $126,654, respectively,
as compensation expense with an offset to additional paid in
capital. Since inception, total charges to compensation
expense for this contingent compensation have amounted to
$411,187. The Company will adjust the total amount of
recorded compensation expense as recorded in the consolidated
financial statements upon the occurrence of an event which would
indicate a change to the level of the achievable
sales.
As
it is probable that the Company will reach $7.0 million in sales
over three (now four) years, the Seller is entitled to a $100,000
cash bonus, which was deemed to have a present value of $64,066 on
September 10, 2009. The Company is accruing monthly
compensation expense for the anticipated full amount of the bonus
payable on a straight-line basis over the three (now four) year
period that the services are to be performed. During the
six months ended June 30, 2011 and 2010, the Company recognized
$10,590 and $16,667, respectively, as compensation expense related
to this liability for contingent compensation, raising the balance
to $54,109 as of June 30, 2011.
On
March 9, 2011, the Company’s Board of Directors agreed to
extend the deadlines for meeting the measurement dates for
determining the triggers for the $1.2 million contingent note to
Safeguard and the warrants and cash bonus payable to the executive,
for one year. The first installment on the $1.2 million
contingent note of $600,000 is now payable upon the Company
reaching $6,000,000 in combined new capital and revenue from sales
of the Disintegrator Plus® and certain other products
introduced by the Seller on or before September 10,
2012. The measurement date for issuance of up to
250,000,000 warrants (1,250,000 warrants after consideration of the
200-to-1 reverse stock split) and payment of up to $200,000 as a
cash bonus to the executive and majority owner of Safeguard, both
contingent upon future sales of the Disintegrator® and certain
other products, has now been extended to four years, or September
10, 2013. These extensions are currently not expected to
affect the total amount of the Company’s accrual for such
note and compensation obligations. Effective January 1,
2011, the Company extended the period over which the contingent
note and compensation obligations are being amortized.
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7. PATENT, CONTINGENT NOTE PAYABLE AND CONTINGENT
COMPENSATION
On
September 10, 2009, ASRI purchased a patent for a needle
destruction device known as the Disintegrator® (including
trademarks for the Disintegrator®, Disintegrator Plus®
and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard” or the
“Seller”) in exchange for 250,000,000 shares of the
Company’s common stock and assumption of a contingent note
payable up to $1,200,000. The Company evaluated the
acquisition to determine whether the purchase of the patent,
trademarks and other assets constituted the acquisition of a
business in accordance with ASC 805, Business Combinations
and the definition of a business per rules promulgated by the
SEC. After application of the various criteria,
management determined that this acquisition was in substance the
purchase of an asset. While the Company acquired certain
spare part inventory on hand, rights to distribution, intellectual
property (including the patent and trademarks) and other assets,
management determined that only the patent for the
Disintegrator® had value. Accordingly, the Company
recorded the patent at $2,652,272 equivalent to the trading value
of the 250,000,000 shares of common stock at the closing bid price
on September 10, 2009 in the amount of $1,875,000 and the
discounted amount of a $1,200,000 assumed contingent note payable
in the amount of $777,272.
At
December 31, 2010, the Company determined that, due to capital
constraints and other factors, cash flows from the
Disintegrator® would not be realized and therefore the value
of the patent was impaired. On December 31, 2010, the
Company recorded a patent impairment charge of $1,749,664 to
write-down the carrying value of the patent to $639,138
representing the present value of expected future cash flows over
the remaining life of the patent. The Company continues
to estimate that market demand for the Disintegrator® patent
will exceed the patent life expiring in May 2022, and therefore
will amortize the adjusted value of the patent over the remaining
patent life. Should the Company’s estimate of
market demand change, the Company will adjust its patent
amortization schedule accordingly. For the years ended December 31,
2010 and 2009, amortization expense amounted to $210,776 and
$52,694, respectively.
The
assumed $1.2 million, non-interest bearing, contingent note is
payable to a party related to the Seller in two installments upon
reaching certain targets. The first installment of
$600,000 is payable upon the Company reaching $6,000,000 in
combined new capital and revenue from sales of the Disintegrator
Plus® and certain other products introduced by the Seller
within two years of September 10, 2009. As discussed
below, on March 9, 2011, the measurement date was extended by one
year. The second installment of $600,000 is payable upon
the Company reaching an additional $4,000,000 of combined new
capital and revenue within two years of the due date of the first
installment. At the Company’s option, the first
and second installments may each be paid over 12 months after
achievement of the respective combined capital and revenue
targets. As management believes it is probable that the
Company will reach the combined capital and revenue targets within
four years, the $1.2 million note obligation has been recognized at
a discount. The first installment of the note was
discounted at 16% from the end of a two year period and the second
installment was discounted at 16% from the end of a four year
period, resulting in a present value of
$777,272. Subsequent changes to the Company’s
estimate of the amount due on this contingent note payable will be
recorded in the Company’s consolidated financial
statements. During the years ended December 31, 2010 and
2009, the Company recognized $144,207 and $44,064, respectively, of
interest expense related to amortization of the discount for the
contingent note payable. At December 31, 2010, the net
balance of the contingent note payable was $965,543.
Simultaneous
with the patent acquisition, the Company agreed to hire an
executive who was the majority owner of the Seller to assist with
operations, sales and marketing, and entered into a ten year
employment agreement with the executive (See Note
12 Commitments and Contingencies), and retain the Seller
for production, engineering and quality control
services. In consideration for entering into the
employment agreement and other agreements with the Seller, the
Company agreed to issue up to 250,000,000 warrants and pay up to
$200,000 as a cash bonus, both contingent upon future sales of the
Disintegrator® and certain other products over three years, to
the executive and majority owner of the Seller. (As
discussed below, on March 9, 2011, the measurement date was
extended by one year.) Management determined that the
contingent warrants and contingent bonus payable qualified for
treatment as contingent compensation for accounting
purposes. The Company determined that the aggregate fair
value of the contingent warrants and contingent bonus was $823,991
at the acquisition date. The fair value of the
contingent compensation was obtained by determining the likelihood
that the contingency would be realized within the applicable time
period and applying the Black-Scholes pricing model to the warrants
and a discount to present value for the
bonus. Subsequent changes to the Company’s
estimate of the total amount of compensation due will be recorded
in the Company’s consolidated financial
statements.
The
Company agreed to issue Safeguard 50,000,000 warrants to purchase
an equivalent number of shares of common stock immediately upon the
collection of $2.0 million in revenue from sales of the
Disintegrator Plus® and certain other products. The
exercise price is equal to the closing bid price of the common
shares on August 11, 2009, or $.002 per share. Further,
the Company agreed to issue the Seller up to 200,000,000 additional
warrants, in 50,000,000 tranches, immediately upon collection of an
additional $5.0 million, $10.0 million, $15.0 million and $20.0
million in revenue from sales of the Disintegrator Plus® and
certain other products introduced by the executive and majority
owner of the Seller with an exercise price equal to the lesser of
the closing bid price on the day prior to achieving the revenue
target or the exercise price of the immediately preceding
tranche. Further, after three (now four) years, the
Company agreed to pay a one-time cash bonus to the executive and
majority owner of the Seller of up to $200,000 based on revenue
generated from sales of the Disintegrator Plus® and certain
other products. The target levels for achievement of the
cash bonus are as follows: $50,000 for $2.0 million of sales,
$100,000 for $5.0 million of sales, $150,000 for $10.0 million of
sales, and $200,000 for $20.0 million of sales. The
warrant revenue targets for each tranche must be met, and the bonus
is payable, within three years (now four years) of September 10,
2009.
The
Company has determined that it is probable the Company will reach
$7.0 million in sales over the three (now four) year period from
September 10, 2009 through September 10, 2012 (now September 10,
2013). Therefore, the Company currently anticipates the
issuance of 100,000,000 warrants, which were determined to have a
fair value of $759,925 as of September 10, 2009. In
accordance with ASC No. 718-10, Compensation – Stock
Compensation, the Company is recording monthly compensation
expense for the fair value of the warrants payable over the initial
three year period. For the years ended December 31, 2010
and 2009, the Company recorded $253,308 and $77,400 as compensation
expense with an offset to additional paid in capital,
respectively. From inception through December 31, 2010,
total charges to compensation expense for this contingent
compensation have amounted to $330,708. As of December
31, 2010, the Company has not reached the first target level of
$2.0 million of additional sales. The Company will
adjust the total amount of warrant compensation as recorded in the
consolidated financial statements upon the occurrence of an event
which would indicate a change to the estimate of the level of
achievable sales.
The
Company has determined that it is probable that the Company will
reach $7.0 million in sales over three (now four) year period from
September 10, 2009 through September 10, 2012 (now September 10,
2013). Therefore, the Seller is expected to be entitled
to a $100,000 cash bonus, which was deemed to have a fair value of
$64,066 on September 10, 2009. The Company is accruing
monthly compensation expense for the anticipated full amount of the
bonus payable on a straight-line basis over the initial three year
period that the services are to be performed. During
years ended December 31, 2010 and 2009, the Company recognized
$33,333 and $10,186, respectively, as compensation expense related
to this liability for contingent compensation. As of
December 31, 2010, the total amount recorded as a liability for
contingent compensation is $43,519. As of December 31,
2010, the Company has not reached the first target level of $2.0
million of additional sales. The Company will adjust the
total amount of bonus compensation payable as recorded in the
consolidated financial statements upon the occurrence of an event
which would indicate a change to the estimate of the level of
achievable sales.
On
March 9, 2011, the Company’s Board of Directors agreed to
extend the deadlines for meeting the measurement dates for
determining the triggers for the $1.2 million contingent note and
the warrants and cash bonus payable to an executive for one
year. The first installment on the $1.2 million
contingent note of $600,000 is now payable upon the Company
reaching $6,000,000 in combined new capital and revenue from sales
of the Disintegrator Plus® and certain other products
introduced by the Seller on or before September 10,
2012. The measurement date for issuance of up to
250,000,000 warrants and payment of up to $200,000 as a cash bonus
to the executive and majority owner of the Seller, both contingent
upon future sales of the Disintegrator® and certain other
products, has now been extended to four years, or September 10,
2013. These extensions are currently not expected to
affect the total amount of the Company’s accrual for such
note and compensation obligations.
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