SEC Company Response from PAINCARE HOLDINGS INC (CIK 0001003472) — Nov 16, 2005
PAINCARE HOLDINGS INC (CIK 0001003472)
Date: Nov. 16, 2005 · CIK: 0001003472 · Accession: 0001193125-05-227762
AI Filing Summary & Sentiment
File numbers found in text: 001-14160
Referenced dates: October 27, 2005
Letter
450 Fifth Street, N.W. Washington, D.C. 20549 File No. 001-14160
Re: PainCare Holdings, Inc. Form 10-KSB for Fiscal year Ended December 31, 2004,
Dear Mr. Rosenberg:
I am writing in response to your response letter dated October 27, 2005 regarding the above referenced filing. Please find our responses outlined below.
Significant Accounting Policies & Estimates:
1) “Refer to your response to our comment 1a. Please tell us, in disclosure type format, what factors are considered in determining your contractual allowance estimate. It appears based on your response that you are focusing on a collection rate, as opposed to an allowance against revenues recorded. Please clarify the use of the fee schedule discussed in your response to comment 2 as it relates to estimating your contractual allowance.”
Management estimates allowances for contractual adjustments and uncollectible amounts on accounts receivable based upon historical experience and other factors, including evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. These contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by government sponsored health care programs (Medicare) and insurance companies for such services.
2) “Please tell us your basis for using cash receipts as a factor in determining revenues and the accounting literature you are using to support your basis”
We do not use cash receipts as a basis for recording revenue. We record revenue based on gross charges less contractual allowances. The cash receipts figure is used to insure that the amount
recorded as revenue is in line with the cash actually received. This way all changes to the historical collection rate are made on a month to month basis. The accounts receivable balance reflects the expected receipt of the gross charges for the month. We believe this method to be the most conservative because accounts receivable are stated at their net realizable value.
3) “With regards to your response to our comment 1c, it appears that you have provided a year-to-year analysis regarding the change in contractual adjustments as opposed to the change in prior period contractual adjustment that was recorded along with the current period contractual adjustment. Please revise your response in disclosure-type format to quantify and provide the amount of changes in the prior period contractual adjustment that were made in the current year.”
The table below outlines the changes in prior period contractual adjustments recorded, along with the current period contractual allowance.
Charge offs during the year for 2002 acquisitions
(6,235,868 )
—
Charge offs during the year for 2003 acquisitions
(1,434,370 )
(7,122,810 )
Charge offs during the year for 2004 acquisitions
—
(12,143,682 )
Change in estimates
505,870
(233,615 )
Total Charge offs
(7,164,368 )
(19,500,107 )
4) “Please clarify for us why the acquisitions had such a significant impact on your estimates for contractual adjustments and quantify the impact related to the acquisitions for each period presented. Clarify if the change in contractual adjustments relating to the acquisitions was for the current year contractual adjustment or for the prior period contractual adjustment.”
The table below quantifies the impact acquisitions had on the contractual allowance for each period presented.
Prior period contractual allowance (January 1)
6,539,650
10,211,695
Charge offs during the year
(7,164,368 )
(19,500,107 )
Contractual allowances for practices acquired during the year
752,449
9,737,958
Contractual allowances for practices during the year
10,083,963
28,319,093
Current period contractual allowance (December 31)
10,211,694
28,768,639
5) “Refer to your response to our comment 1d. Please tell us why you believe a 1% change in the estimated contractual allowance is a reasonable likely sensitivity analysis. We believe a reasonably likely scenario should be disclosed. Please revise or clarify your response.”
The average historical change in the estimated contractual allowance is approximately 1.8%. Based on the historical change, we believe a 1% change is a reasonably likely sensitivity analysis. Therefore, a change of 1% in the estimated allowance causes a change in net revenue of approximately $107,632 for 2003 and $292,018 for 2004.
6) “To enhance our understanding of your methodology for recording revenues and receivables, please provide un journal entries with regards to recording your revenue, accounts receivable, contractual allowance and allowance for bad debt using an example of when patient services are provided. Include subsequent journal entries for when payments are received. Address the application of the formula presented in your response to our comment 1a.”
Journal entry #1
Debit
Credit
Accounts Receivable
1,500
Revenue
1,500
To record the Patient service revenue billed to third party
Journal entry #2
Debit
Credit
Revenue
Contractual allowance (A/R)
To record the contractual allowance based on historical collection rates. Assume 50%.
Journal entry #3
Debit
Credit
Cash
Accounts Receivable
Bad Debt expense
To record the cash received from the third party payor and record the bad debt expense that reflects the difference in the actual collection rate.
Journal entry #4
Cash
Patient portion of accounts receivable
To record the amount due from and paid by the patient
Journal entry #5
Bad debt expense
Patient portion of accounts receivable
To record the bad debt expense
7) “Please refer to your response to our comment 1e. Please tell us why the weighted average allowance for credit losses and contractual adjustments is so high (i.e. 52.6% and 51.8% at 12/31/03 and 12/31/04, respectively). Based on the table provided, you have provided an allowance for 2004 for all amounts over 60 days old and some amounts in the 31-60 day aging bracket.”
The reason the weighted average allowance for credit losses and contractual adjustments is so high is because Medicare and other third party payors typically pay a fraction of our gross charges. Each segment (i.e. current, 31-60 etc.) has some amount that is uncollectible due to this difference. The segments less than 90 days have a higher percentage of collectible amounts than those over 90 but each segment has some portion that is uncollectible. For example, in our previously described journal entries in response #6 we outline the effect on accounts receivable at each stage. Typically our payments are received from 60 to 90 days in arrears from billing. Any balance due from the patient or other tertiary insurer is in the greater than 90 day’s receivable segment. The bad debt expense is not written off until either the patient portion or tertiary insurance payments are made. These entries cause our greater than 90 day’s segment to have a higher uncollectible amount than those less than 90 days. Each segment is not reported at net realizable value, but the total amount is recorded at net realizable value.
Liquidity & Capital Resources:
8) “Refer to your response to our comment 2. Please clarify in disclosure-type format what steps are taken after receiving the initial payment from the payor with regards to any remaining balance (i.e. pursue collection of remaining balance from patient or secondary insurance, as applicable, etc.).
Any remaining balance after receiving the initial payment from the payor is applied to a secondary insurer, if applicable. If no secondary insurer is applicable the balance is applied to the patient and a bill is submitted. After approximately 120 days if no payment is received it is turned over to a collection company and written off the books.
Convertible Debt:
9) “Refer to your response to our comment 4. Tell us how you determined fair value (i.e. Black Scholes). You state in your response that you applied APB 14 in accounting for the debentures and warrants however we did not see any amount recorded to APIC related to the warrants. Please advise.”
The fair value of the warrants were estimated to be zero because the warrants were so far out of the money at the time of issuance and the underlying shares were not registered and were therefore subject to Rule 144 reducing the warrants marketability. The following table details the warrants before repricing on October 15, 2004.
Warrant Holder
Grant Date
No. Warrant Shares
Exercise Price
Market Price on Grant Date
Midsummer Investments
12/18/2003
315,829
$ 2.73
$ 2.41
Midsummer Investments
12/18/2003
315,829
$ 2.85
$ 2.41
Islandia, L.P.
12/18/2003
315,829
$ 2.73
$ 2.41
Islandia, L.P.
12/18/2003
315,829
$ 2.85
$ 2.41
Laurus Master Fund
2/24/2004
200,000
$ 4.24
$ 3.23
Laurus Master Fund
2/24/2004
150,000
$ 4.58
$ 3.23
Laurus Master Fund
2/24/2004
100,000
$ 4.92
$ 3.23
Laurus Master Fund
3/22/2004
233,000
$ 3.60
$ 2.88
Laurus Master Fund
3/22/2004
183,000
$ 3.89
$ 2.88
Laurus Master Fund
3/22/2004
134,000
$ 4.18
$ 2.88
Laurus Master Fund
7/7/2004
82,500
$ 3.60
$ 3.15
Laurus Master Fund
7/1/2004
82,500
$ 3.76
$ 3.15
Midsummer Investments
7/1/2004
82,500
$ 3.60
$ 3.15
Midsummer Investments
7/1/2004
82,500
$ 3.76
$ 3.15
The following table details the warrants after repricing on October 15, 2004:
Warrant Holder
Grant Date
Repriced Date
No. Warrant Shares
Adjusted Exercise Price
Market Price on Repriced Date
Midsummer Investments
12/18/2003
10/15/2004
315,829
$ 1.90
$ 1.90
Midsummer Investments
12/18/2003
10/15/2004
315,829
$ 1.90
$ 1.90
Islandia, L.P.
12/18/2003
10/15/2004
315,829
$ 1.90
$ 1.90
Islandia, L.P.
12/18/2003
10/15/2004
315,829
$ 1.90
$ 1.90
Laurus Master Fund
2/24/2004
10/15/2004
200,000
$ 3.12
$ 1.90
Laurus Master Fund
2/24/2004
10/15/2004
150,000
$ 3.12
$ 1.90
Laurus Master Fund
2/24/2004
10/15/2004
100,000
$ 3.12
$ 1.90
Laurus Master Fund
3/22/2004
10/15/2004
233,000
$ 2.70
$ 1.90
Laurus Master Fund
3/22/2004
10/15/2004
183,000
$ 2.70
$ 1.90
Laurus Master Fund
3/22/2004
10/15/2004
134,000
$ 2.70
$ 1.90
Laurus Master Fund
7/1/2004
10/15/2004
82,500
$ 2.92
$ 1.90
Laurus Master Fund
7/1/2004
10/15/2004
82,500
$ 2.92
$ 1.90
Midsummer
7/1/2004
10/15/2004
82,500
$ 1.90
$ 1.90
Midsummer
7/1/2004
10/15/2004
82,500
$ 1.90
$ 1.90
Additional information for convertible debentures:
Midsummer/Islandia (12/17/2003):
On December 18, 2003, we completed a private placement offering of $10 million in 7.5% Convertible Debentures to two institutional investors, Midsummer Investments Ltd. and Islandia L. P. The Debentures are due December 2006 and are convertible into shares of common stock at a fixed price of $2.6121 per share. Interest on the Debentures is payable in quarterly installments commencing in March 2004 in cash or stock, at our election. The investors also received warrants to purchase 1,273,316 shares of common stock. The warrants have a term of four years
and are exercisable as follows: 631,658 shares at $2.730905 per share and 631,658 warrants at $2.84964 per share. ‘The debentures and the warrants have full ratchet anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures and the exercise price of the warrants, such conversion and exercise prices are automatically reduced to the lower price, which was $1.90.’
Laurus (2/24/04)
On March 2, 2004, we completed a $5 million private placement with Laurus Master Fund, Ltd., a private equity fund based in New York City. The financing consisted of $5 million principal amount of a secured convertible term note and warrants to purchase 450,000 shares of Common Stock. The warrants have an exercise price of $4.24 per share for the first 200,000 shares, $4.58 per share for next 150,000 shares and $4.92 per share for the remaining shares. The warrants are exercisable until February 27, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of the Company’s common stock exceeds certain benchmarks. The initial interest rate on the note is 6%. The note is convertible into shares of common stock at a price of $3.39 per share (subject to adjustment), which share price is equal to 105% of the average closing price during the ten trading days prior to closing. The Company may require that the holder of the note convert its outstanding Note into common stock under specified circumstances. The principal amount of the note is repayable in monthly installments, commencing as of June 1, 2004, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000 and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. Interest on the note is payable monthly and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. ‘The note is subject to weighted average anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the notes, such conversion price is automatically reduced by an amount that takes into account the amount of dilution caused by the lower priced securities. The note’s adjusted price is $3.12.’
Laurus (3/22/04)
On March 22, 2004, we completed a second $5 million private placement with Laurus, consisting of $5 million principal amount of a secured convertible term note and warrants to purchase 550,000 shares of Common Stock. The warrants have an exercise price of $3.60 per share for the first 233,000 shares, $3.89 per share for next 183,000 shares and $4.18 per share for the remaining shares. The warrants are exercisable until March 22, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of the Company’s common stock exceeds certain benchmarks. The initial interest rate on the note is 6%. The note is convertible into shares of common stock at a price of $2.88 per share (subject to adjustment), which share price is equal to the average closing price during the ten trading days prior to closing. The Company may require that the holder of the note convert its outstanding note into common stock under specified circumstances. The principal amount of the note is repayable in monthly installments, commencing as of July 1, 2004, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000 and may be paid, at the Company’s option, in cash or, subject to certain conditions,
additional shares of common stock. Interest on the note is payable monthly and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. ‘The note is subject to weighted average anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or e
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CORRESP 1 filename1.htm Correspondence Letter November 16, 2005 Mr. Jim B. Rosenberg Senior Assistant Chief Accountant U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: PainCare Holdings, Inc. Form 10-KSB for Fiscal year Ended December 31, 2004, File No. 001-14160 Dear Mr. Rosenberg: I am writing in response to your response letter dated October 27, 2005 regarding the above referenced filing. Please find our responses outlined below. Significant Accounting Policies & Estimates: 1) “Refer to your response to our comment 1a. Please tell us, in disclosure type format, what factors are considered in determining your contractual allowance estimate. It appears based on your response that you are focusing on a collection rate, as opposed to an allowance against revenues recorded. Please clarify the use of the fee schedule discussed in your response to comment 2 as it relates to estimating your contractual allowance.” Management estimates allowances for contractual adjustments and uncollectible amounts on accounts receivable based upon historical experience and other factors, including evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. These contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by government sponsored health care programs (Medicare) and insurance companies for such services. 2) “Please tell us your basis for using cash receipts as a factor in determining revenues and the accounting literature you are using to support your basis” We do not use cash receipts as a basis for recording revenue. We record revenue based on gross charges less contractual allowances. The cash receipts figure is used to insure that the amount recorded as revenue is in line with the cash actually received. This way all changes to the historical collection rate are made on a month to month basis. The accounts receivable balance reflects the expected receipt of the gross charges for the month. We believe this method to be the most conservative because accounts receivable are stated at their net realizable value. 3) “With regards to your response to our comment 1c, it appears that you have provided a year-to-year analysis regarding the change in contractual adjustments as opposed to the change in prior period contractual adjustment that was recorded along with the current period contractual adjustment. Please revise your response in disclosure-type format to quantify and provide the amount of changes in the prior period contractual adjustment that were made in the current year.” The table below outlines the changes in prior period contractual adjustments recorded, along with the current period contractual allowance. 2003 2004 Charge offs during the year for 2002 acquisitions (6,235,868 ) — Charge offs during the year for 2003 acquisitions (1,434,370 ) (7,122,810 ) Charge offs during the year for 2004 acquisitions — (12,143,682 ) Change in estimates 505,870 (233,615 ) Total Charge offs (7,164,368 ) (19,500,107 ) 4) “Please clarify for us why the acquisitions had such a significant impact on your estimates for contractual adjustments and quantify the impact related to the acquisitions for each period presented. Clarify if the change in contractual adjustments relating to the acquisitions was for the current year contractual adjustment or for the prior period contractual adjustment.” The table below quantifies the impact acquisitions had on the contractual allowance for each period presented. 2003 2004 Prior period contractual allowance (January 1) 6,539,650 10,211,695 Charge offs during the year (7,164,368 ) (19,500,107 ) Contractual allowances for practices acquired during the year 752,449 9,737,958 Contractual allowances for practices during the year 10,083,963 28,319,093 Current period contractual allowance (December 31) 10,211,694 28,768,639 5) “Refer to your response to our comment 1d. Please tell us why you believe a 1% change in the estimated contractual allowance is a reasonable likely sensitivity analysis. We believe a reasonably likely scenario should be disclosed. Please revise or clarify your response.” The average historical change in the estimated contractual allowance is approximately 1.8%. Based on the historical change, we believe a 1% change is a reasonably likely sensitivity analysis. Therefore, a change of 1% in the estimated allowance causes a change in net revenue of approximately $107,632 for 2003 and $292,018 for 2004. 6) “To enhance our understanding of your methodology for recording revenues and receivables, please provide un journal entries with regards to recording your revenue, accounts receivable, contractual allowance and allowance for bad debt using an example of when patient services are provided. Include subsequent journal entries for when payments are received. Address the application of the formula presented in your response to our comment 1a.” Journal entry #1 Debit Credit Accounts Receivable 1,500 Revenue 1,500 To record the Patient service revenue billed to third party Journal entry #2 Debit Credit Revenue 750 Contractual allowance (A/R) 750 To record the contractual allowance based on historical collection rates. Assume 50%. Journal entry #3 Debit Credit Cash 700 Accounts Receivable 750 Bad Debt expense 50 To record the cash received from the third party payor and record the bad debt expense that reflects the difference in the actual collection rate. Journal entry #4 Cash 30 Patient portion of accounts receivable 30 To record the amount due from and paid by the patient Journal entry #5 Bad debt expense 20 Patient portion of accounts receivable 20 To record the bad debt expense 7) “Please refer to your response to our comment 1e. Please tell us why the weighted average allowance for credit losses and contractual adjustments is so high (i.e. 52.6% and 51.8% at 12/31/03 and 12/31/04, respectively). Based on the table provided, you have provided an allowance for 2004 for all amounts over 60 days old and some amounts in the 31-60 day aging bracket.” The reason the weighted average allowance for credit losses and contractual adjustments is so high is because Medicare and other third party payors typically pay a fraction of our gross charges. Each segment (i.e. current, 31-60 etc.) has some amount that is uncollectible due to this difference. The segments less than 90 days have a higher percentage of collectible amounts than those over 90 but each segment has some portion that is uncollectible. For example, in our previously described journal entries in response #6 we outline the effect on accounts receivable at each stage. Typically our payments are received from 60 to 90 days in arrears from billing. Any balance due from the patient or other tertiary insurer is in the greater than 90 day’s receivable segment. The bad debt expense is not written off until either the patient portion or tertiary insurance payments are made. These entries cause our greater than 90 day’s segment to have a higher uncollectible amount than those less than 90 days. Each segment is not reported at net realizable value, but the total amount is recorded at net realizable value. Liquidity & Capital Resources: 8) “Refer to your response to our comment 2. Please clarify in disclosure-type format what steps are taken after receiving the initial payment from the payor with regards to any remaining balance (i.e. pursue collection of remaining balance from patient or secondary insurance, as applicable, etc.). Any remaining balance after receiving the initial payment from the payor is applied to a secondary insurer, if applicable. If no secondary insurer is applicable the balance is applied to the patient and a bill is submitted. After approximately 120 days if no payment is received it is turned over to a collection company and written off the books. Convertible Debt: 9) “Refer to your response to our comment 4. Tell us how you determined fair value (i.e. Black Scholes). You state in your response that you applied APB 14 in accounting for the debentures and warrants however we did not see any amount recorded to APIC related to the warrants. Please advise.” The fair value of the warrants were estimated to be zero because the warrants were so far out of the money at the time of issuance and the underlying shares were not registered and were therefore subject to Rule 144 reducing the warrants marketability. The following table details the warrants before repricing on October 15, 2004. Warrant Holder Grant Date No. Warrant Shares Exercise Price Market Price on Grant Date Midsummer Investments 12/18/2003 315,829 $ 2.73 $ 2.41 Midsummer Investments 12/18/2003 315,829 $ 2.85 $ 2.41 Islandia, L.P. 12/18/2003 315,829 $ 2.73 $ 2.41 Islandia, L.P. 12/18/2003 315,829 $ 2.85 $ 2.41 Laurus Master Fund 2/24/2004 200,000 $ 4.24 $ 3.23 Laurus Master Fund 2/24/2004 150,000 $ 4.58 $ 3.23 Laurus Master Fund 2/24/2004 100,000 $ 4.92 $ 3.23 Laurus Master Fund 3/22/2004 233,000 $ 3.60 $ 2.88 Laurus Master Fund 3/22/2004 183,000 $ 3.89 $ 2.88 Laurus Master Fund 3/22/2004 134,000 $ 4.18 $ 2.88 Laurus Master Fund 7/7/2004 82,500 $ 3.60 $ 3.15 Laurus Master Fund 7/1/2004 82,500 $ 3.76 $ 3.15 Midsummer Investments 7/1/2004 82,500 $ 3.60 $ 3.15 Midsummer Investments 7/1/2004 82,500 $ 3.76 $ 3.15 The following table details the warrants after repricing on October 15, 2004: Warrant Holder Grant Date Repriced Date No. Warrant Shares Adjusted Exercise Price Market Price on Repriced Date Midsummer Investments 12/18/2003 10/15/2004 315,829 $ 1.90 $ 1.90 Midsummer Investments 12/18/2003 10/15/2004 315,829 $ 1.90 $ 1.90 Islandia, L.P. 12/18/2003 10/15/2004 315,829 $ 1.90 $ 1.90 Islandia, L.P. 12/18/2003 10/15/2004 315,829 $ 1.90 $ 1.90 Laurus Master Fund 2/24/2004 10/15/2004 200,000 $ 3.12 $ 1.90 Laurus Master Fund 2/24/2004 10/15/2004 150,000 $ 3.12 $ 1.90 Laurus Master Fund 2/24/2004 10/15/2004 100,000 $ 3.12 $ 1.90 Laurus Master Fund 3/22/2004 10/15/2004 233,000 $ 2.70 $ 1.90 Laurus Master Fund 3/22/2004 10/15/2004 183,000 $ 2.70 $ 1.90 Laurus Master Fund 3/22/2004 10/15/2004 134,000 $ 2.70 $ 1.90 Laurus Master Fund 7/1/2004 10/15/2004 82,500 $ 2.92 $ 1.90 Laurus Master Fund 7/1/2004 10/15/2004 82,500 $ 2.92 $ 1.90 Midsummer 7/1/2004 10/15/2004 82,500 $ 1.90 $ 1.90 Midsummer 7/1/2004 10/15/2004 82,500 $ 1.90 $ 1.90 Additional information for convertible debentures: Midsummer/Islandia (12/17/2003): On December 18, 2003, we completed a private placement offering of $10 million in 7.5% Convertible Debentures to two institutional investors, Midsummer Investments Ltd. and Islandia L. P. The Debentures are due December 2006 and are convertible into shares of common stock at a fixed price of $2.6121 per share. Interest on the Debentures is payable in quarterly installments commencing in March 2004 in cash or stock, at our election. The investors also received warrants to purchase 1,273,316 shares of common stock. The warrants have a term of four years and are exercisable as follows: 631,658 shares at $2.730905 per share and 631,658 warrants at $2.84964 per share. ‘The debentures and the warrants have full ratchet anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures and the exercise price of the warrants, such conversion and exercise prices are automatically reduced to the lower price, which was $1.90.’ Laurus (2/24/04) On March 2, 2004, we completed a $5 million private placement with Laurus Master Fund, Ltd., a private equity fund based in New York City. The financing consisted of $5 million principal amount of a secured convertible term note and warrants to purchase 450,000 shares of Common Stock. The warrants have an exercise price of $4.24 per share for the first 200,000 shares, $4.58 per share for next 150,000 shares and $4.92 per share for the remaining shares. The warrants are exercisable until February 27, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of the Company’s common stock exceeds certain benchmarks. The initial interest rate on the note is 6%. The note is convertible into shares of common stock at a price of $3.39 per share (subject to adjustment), which share price is equal to 105% of the average closing price during the ten trading days prior to closing. The Company may require that the holder of the note convert its outstanding Note into common stock under specified circumstances. The principal amount of the note is repayable in monthly installments, commencing as of June 1, 2004, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000 and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. Interest on the note is payable monthly and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. ‘The note is subject to weighted average anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the notes, such conversion price is automatically reduced by an amount that takes into account the amount of dilution caused by the lower priced securities. The note’s adjusted price is $3.12.’ Laurus (3/22/04) On March 22, 2004, we completed a second $5 million private placement with Laurus, consisting of $5 million principal amount of a secured convertible term note and warrants to purchase 550,000 shares of Common Stock. The warrants have an exercise price of $3.60 per share for the first 233,000 shares, $3.89 per share for next 183,000 shares and $4.18 per share for the remaining shares. The warrants are exercisable until March 22, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of the Company’s common stock exceeds certain benchmarks. The initial interest rate on the note is 6%. The note is convertible into shares of common stock at a price of $2.88 per share (subject to adjustment), which share price is equal to the average closing price during the ten trading days prior to closing. The Company may require that the holder of the note convert its outstanding note into common stock under specified circumstances. The principal amount of the note is repayable in monthly installments, commencing as of July 1, 2004, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000 and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. Interest on the note is payable monthly and may be paid, at the Company’s option, in cash or, subject to certain conditions, additional shares of common stock. ‘The note is subject to weighted average anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or e