As filed with the Securities and Exchange Commission on February 21, 2006
Registration No. 333-120449
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 6 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Advanced Refractive Technologies, Inc.
(Name of small business issuer in its charter)
Delaware 3841 33-0838660
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of corporation or organization) Classification Code Number) Identification
Number)
1062 Calle Negocio, Suite D, San Clemente, California 92673
(949) 940-1300
(Address and telephone number of registrant's principal executive offices)
Laurence M. Schreiber
1062 Calle Negocio, Suite D, San Clemente, California 92673
Ph. (949) 940-1300
Fax:(949) 940-1301
(Name, address and telephone number of agent for service)
Copy of all communications to:
Robert J. Zepfel
Haddan & Zepfel LLP
500 Newport Center Drive, Suite 580
Newport Beach, CA 92660
(949) 706-6000
Fax: (949) 706-6060
Approximate date of commencement of proposed sale to the public: as soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462 (b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box: [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Amount to Be Proposed Maximum Proposed Maximum Amount of
Class of Registered Offering Price Aggregate Registration
Securities to Per Share (1) Offering Price Fee
Be Registered (1)
--------------------------------------------------------------------------------
Common Stock 96,769,436 $ .02 $1,935,389 Previously Paid
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities, and it is not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated February , 2006
PROSPECTUS
96,769,436 SHARES
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
COMMON STOCK
This prospectus relates to the resale by certain selling stockholders of up
to 96,769,436 shares of Common Stock of Advanced Refractive Technologies, Inc.,
including shares currently outstanding, shares underlying warrants and shares
underlying convertible debentures. The selling stockholders may sell the shares
at fixed prices, prevailing market prices at the time of sale, varying prices
determined at the time of sale or at negotiated prices. We will not receive any
proceeds form the resale of shares of common stock by the selling stockholders.
We may receive proceeds from the exercise of warrants held by the selling
stockholders, if and to the extent they are exercised.
Our Common Stock trades on the over-the-counter bulletin board under the
symbol "ARFR.OB." The last reported sales price for our common stock on February
15, 2006 was $0.018 per share.
Investment in the shares offered by this prospectus involves a high degree
of risk. You may lose your entire investment. Consider carefully the "risk
factors" beginning on page 4 of this prospectus, before investing.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU
OTHERWISE.
The date of this prospectus is _________, 2006.
The information in this prospectus is not complete and may be changed
without notice. The selling stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, and the
selling stockholders are not soliciting offers to buy these securities, in any
state where the offer or sale of these securities is not permitted.
You should rely only on the information contained in this prospectus. We
have not, and the selling stockholders have not, authorized anyone to provide
you with different information. If anyone provides you with different
information, you should not rely on it. The selling stockholders are not making
an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
Table of Contents
Page
----
Prospectus Summary 3
Summary Historical Financial Information 4
Risk Factors 4
Use of Proceeds 9
Nature of Trading Market 9
Dividend Policy 10
Capitalization 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Plan of Operations 24
Business 25
Legal Proceedings 32
Management 33
Executive Compensation 35
Security Ownership of Certain Beneficial Owners and Management 36
Certain Relationships and Related Transactions 38
Description of Securities 43
Shares Eligible for Resale 43
Selling Stockholders 44
Plan of Distribution 46
Legal Matters 47
Experts 47
Where You Can Find Additional Information 47
Financial Statements 48
2
PROSPECTUS SUMMARY
This following is a summary of the information in this Prospectus. You
should read the entire prospectus carefully, including the more detailed
information regarding our company, the risks of purchasing our common stock
discussed under "risk factors," and our financial statements and the
accompanying notes.
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
Advanced Refractive Technologies, Inc. ("ART" or "the Company") was
incorporated in California on February 2, 1996 as "VisiJet, Inc.", a wholly
owned subsidiary of SurgiJet, Inc. In May 1999, the Company was spun off from
SurgiJet through a distribution of common stock to its shareholders. In February
2003, the Company completed a merger agreement with Ponte Nossa Acquisition
Corp., a Delaware corporation incorporated in 1997 ("PNAC"), and became a wholly
owned subsidiary of PNAC. Since this transaction resulted in the shareholders of
VisiJet, Inc. acquiring a majority of the outstanding shares of PNAC, for
financial reporting purposes the business combination was accounted for as a
recapitalization of PNAC (a reverse acquisition with the Company as the
accounting acquirer). Subsequently, the Company changed its name to Advanced
Refractive Technologies, Inc.
The Company is an early-stage medical device company focused on the
development of ophthalmic surgery products for use in the laser eye surgery and
cataract surgery markets. During 2004 and 2005 the Company marketed and sold
certain products under an exclusive license agreement with Gebauer
Medizintechnik GmbH, of Neuhausen Germany ("Gebauer"). However, following
disputes between the parties, the license agreement was terminated by mutual
agreement. All of the Company's operating revenues have come from sales of
products under this Agreement. Accordingly, as of the date of this Prospectus,
the Company has no products on the market and no source of operating revenues.
THE OFFERING
Shares Offered by Selling Up to 96,769,436 shares held or that may be
Stockholders acquired by selling stockholders upon the
exercise of outstanding warrants and
conversion of outstanding debt.
Use of Proceeds We will not receive any proceeds from the
sale of shares of common stock being offered
by the selling stockholders. We will,
however, incur all costs associated with
this registration statement and prospectus.
We may receive proceeds from the exercise of
warrants and conversion of outstanding debt,
if and to the extent they are exercised or
converted.
Risk Factors An investment in our common stock involves
a high degree of risk and could result in a
loss of your entire investment.
Shares Outstanding As of December 31, 2005, there were
55,975,308 shares of Common Stock
outstanding. If all outstanding convertible
securities were converted, and all
outstanding warrants and stock options were
exercised, the total number of outstanding
shares of Common Stock would be 226,848,118.
OTC Symbol ARFR.OB
OFFICES
Our offices are located at 1062 Calle Negocio, Suite D, San Clemente,
California 92673. Our telephone number is (949)940-1300 and our website is:
www.advancedrefractive.com. The information on our website is not part of this
prospectus.
3
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information is derived from
the consolidated financial statements of the Company. The information should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included herein.
For the Fiscal Years Ended For the Nine Months Ended
December 31, September 30,
2004 2003 2005 2004
Operating Data
Revenue $ 1,725,435 $ -- $ 715,075 $ 1,037,537
Net income (loss) (11,816,780) $ (4,959,152) (11,062,884) (8,420,653)
Net loss per share (.45) $ (0.27) (.32) (.32)
Weighted average
shares outstanding 26,688,583 18,606,352 32,295,455 26,069,227
Balance Sheet Data:
Current assets 1,637,930 $ 124,628 $ 529,201 $ 1,061,398
Total assets 3,467,741 $ 326,312 697,986 2,997,365
Current liabilities 5,292,038 $ 2,112,373 8,248,418 5,811,843
Total liabilities 7,131,043 $ 2,216,975 9,035,072 6,506,015
Stockholders' equity
(deficiency) (3,663,303) $ (1,890,663) (8,337,086) (3,508,650)
RISK FACTORS
Following is a description of all material risk factors related to the
Company's business and an investment in the Company's common stock. Please
consider these risk factors together with the other information presented in
this prospectus, including the financial statements and the notes thereto,
before investing in our common stock. The trading price of our common stock
could decline due to any of the following risks, and you might lose all or part
of your investment.
WE ARE AN EARLY-STAGE BUSINESS WITH A LIMITED OPERATING HISTORY, AND AS A
RESULT, MAKING AN EVALUATION OF OUR BUSINESS PROSPECTS MAY BE DIFFICULT.
We are an early-stage company with limited prior business operations
and operating revenues. We do not currently have any products on the market, and
all revenues to date have come from operations that have since been
discontinued. You should be aware of the increased risks, uncertainties,
difficulties and expenses we face, and that because of our limited operating
history, you may not have adequate information on which you can base an
evaluation of our business and prospects.
OUR FINANCIAL STATEMENTS INCLUDE A GOING CONCERN OPINION FROM OUR OUTSIDE
AUDITORS WHICH RAISES DOUBT AS TO OUR ABILITY TO STAY IN BUSINESS AND MAY LIMIT
OUR ABILITY TO RAISE REQUIRED FUNDING.
The Company received a going concern opinion on its financial
statements for the fiscal years ended December 31, 2004 and 2003. Our auditors
have stated that due to our lack of profitability and our negative working
capital, there is "substantial doubt" about our ability to continue as a going
concern. The going concern opinion from our auditors represents a strong warning
regarding our financial condition and ability to stay in business. In addition,
the going concern opinion may limit our ability to obtain the financing required
to stay in business, in which case you could lose your entire investment.
4
IF WE ARE UNABLE TO GENERATE REVENUES IN THE FUTURE, WE MAY NOT BE ABLE TO
CONTINUE OUR BUSINESS.
We are an early-stage company and, prior to May 2004, had not generated
any revenues from operations. Although we generated revenues in 2004 and 2005,
the products we carried were sold under a licensing arrangement, which has since
been terminated. We do not currently have any products on the market or any
source of revenues. We cannot assure our stockholders that our proposed business
plans, as described in this prospectus, will materialize or prove successful, or
that revenues generated through the sale of potential products currently under
development will be sufficient to result in profitable operations. If we cannot
operate profitably our business may fail and you could lose your entire
investment.
WE ARE IN DEFAULT UNDER OUR OUTSTANDING CONVERTIBLE DEBENTURES, AND HAVE
VIOLATED OUR OBLIGATION TO REGISTER THE RESALE OF THE SHARES ISSUABLE UPON
CONVERSION.
We are in default of our payment obligations under our Convertible
Debentures, so the holders could bring collection actions at any time. In
addition, we have failed to register the Common Stock issuable upon conversion
of these obligations within the time frame required, exposing us to penalties.
Through September 30, 2005, such penalties totaled $938, 294, and continue to
accrue.
WE WILL BE DEPENDENT ON THIRD PARTIES FOR THE MANUFACTURING AND SUPPLY OF ANY
PRODUCTS WE ARE ABLE TO DEVELOP. IF WE ARE UNABLE TO OBTAIN PRODUCTS ON A TIMELY
BASIS, WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR
BUSINESS MAY FAIL.
We do not intend to engage in the direct manufacture of products, and
plan to outsource the production of any products we introduce to the market. If,
once we begin to sell products, we are unable to obtain products from suppliers
on a timely basis, we will be unable to fulfill sales orders as planned and we
will not be able to generate sufficient revenues to achieve or maintain
profitable operations. If we cannot operate profitably you could lose your
entire investment.
GOVERNMENT CLEARANCE IS REQUIRED IN ORDER FOR US TO MARKET OUR PRODUCTS. IF WE
ARE UNABLE TO OBTAIN REQUIRED CLEARANCE ON A TIMELY BASIS, WE MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR
BUSINESS MAY FAIL.
Our products will be considered to be medical devices, and as such will
require clearance from the United States Food and Drug Administration ("FDA")
for sales in the United States and from comparable regulatory agencies in other
markets. Our ability to obtain timely regulatory clearance for sales of products
under development is dependent on our ability to obtain adequate financing, on
the successful completion of remaining product development and testing, and on
the satisfactory review and approval by regulatory agencies of required
marketing clearance submissions. If these approvals are not obtained, or are
significantly delayed, we may be unable to generate revenues from product sales
necessary for us to achieve or maintain profitable operations. If we cannot
operate profitably our business may fail.
WE HAVE LIMITED FINANCIAL RESOURCES AND ARE DEPENDENT ON RAISING ADDITIONAL
CAPITAL IN ORDER TO SUCCESSFULLY LAUNCH OUR PRODUCTS AND TO BEGIN GENERATING
REVENUES FROM PRODUCT SALES. IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL, OUR
BUSINESS MAY FAIL.
Because we have limited financial resources and no current source of
operating revenues, we need to secure additional funding in order to
successfully launch our products, and to fund operating losses until such time
as we can generate enough revenue to sustain our business. If we are unable to
obtain adequate additional funding, we may not be able to generate sufficient
revenues to achieve profitability. If we cannot operate profitably our business
may fail.
WE MAY HAVE VIOLATED THE REGISTRATION REQUIREMENTS OF THE FEDERAL SECURITIES
LAWS IN CONNECTION WITH THE SALES OF CERTAIN SECURITIES, AND THE PURCHASERS OF
THE SECURITIES MAY HAVE A RIGHT TO RESCIND THE TRANSACTIONS AND DEMAND THE
RETURN OF THEIR CAPITAL INVESTED
5
We sold substantial amounts of securities in private transactions since
the original filing of this Registration Statement in November of 2004. However,
because this Registration Statement was pending at the time, we could be
considered to have engaged in a "general solicitation," which would preclude
reliance on the exemptions from registration provided by Section 4(2) of the
Securities Act and Regulation D thereunder. Accordingly, the sales of securities
after the date of filing of this Registration Statement may have been in
violation of the Securities Act of 1933, as amended. If so, we could be subject
to claims for damages by the purchasers of the securities, claims for rescission
of the transactions and return of all funds received, and regulatory proceedings
by the Securities and Exchange Commission or other regulatory agencies. Also,
persons who purchased the securities from the original purchasers may also be
entitled to rescission rights. The transactions affected include the sale or
restructuring of more than $8 million in securities. The original purchase price
of these securities far exceeds their current market value. However, no
purchaser of the securities has sought rescission of the transactions or
asserted any claims against us. If the purchasers of these securities are
entitled to rescission of the transactions, we could be required to pay them the
full purchase price, plus interest and attorneys' fees. These amounts far
outstrip our liquid assets, and such claims, if asserted and successful, could
require us to file bankruptcy. In addition, we could be subject to regulatory
proceedings by the Securities and Exchange Commission or other regulatory
agencies, which could, among other sanctions, require us to make a rescission
offer to the purchasers of the securities.
A DEFAULT IN THE COMPANY'S OBLIGATIONS TO CREDITORS COULD CAUSE A FORECLOSURE ON
OUR ASSETS, WHICH WOULD IMPAIR OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The Company has issued security interests in its assets to various
creditors. Should we be unable to meet our obligations to these creditors, they
would be entitled to foreclose on our assets. If this were to happen we would be
unable to continue our business.
RAISING ADDITIONAL CAPITAL MAY CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS
AND MAY RESULT IN INCREASED LOSSES OR REDUCED EARNINGS, WHICH MAY RESULT IN A
DECREASE IN THE MARKET PRICE OF OUR COMMON STOCK.
To secure additional financing, we may have to sell additional stock or
borrow money. Selling additional stock, either privately or publicly, will
dilute the equity interests of our stockholders. If we borrow more money, we
will incur interest expenses which will negatively impact our operating results,
and may also be subject to restrictions in the debt agreement that limit our
operating flexibility. Dilution of existing stockholders and additional interest
expense may result in a lower stock price.
WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT.
For the fiscal years ended December 31, 2003 and 2004 and for the nine
months ended September 30, 2005 we incurred net losses of $4,959,152,
$11,816,780, and $11,062,884, respectively, and as of September 30, 2005 our
accumulated deficit was $34,030,883. We expect to continue to incur significant
operating, marketing and research and development expenses to support
anticipated operations. We cannot be certain whether we will ever earn a
significant amount of revenues to achieve and maintain profitability. If we
cannot operate profitably our business could fail.
IF OUR RESEARCH AND DEVELOPMENT EFFORTS DO NOT RESULT IN PRODUCTS THAT RECEIVE
CLEARANCE FOR SALE OR THAT ARE SUCCESSFUL IN THE MARKETPLACE, WE MAY NOT BE ABLE
TO GENERATE SUFFICIENT REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS.
Our waterjet based technologies are in the development stage and
further development and testing is required before they can be submitted for
marketing clearance from the FDA and appropriate foreign regulatory agencies.
Furthermore, even if required marketing clearance is received, our products may
not be successful in the marketplace and may not be able to generate sufficient
revenues to achieve or maintain profitability.
WE ARE DOING BUSINESS IN AN INDUSTRY THAT IS VERY COMPETITIVE. IF WE ARE UNABLE
TO COMPETE SUCCESSFULLY, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE TO
ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR BUSINESS MAY FAIL.
6
The ophthalmic surgical device industry is very competitive. Our future
success depends on our ability to compete effectively with other manufacturers
and marketers of ophthalmic surgical devices. We may have difficulty competing
with larger, established surgical device companies that have:
* substantially greater financial, technical and marketing
resources;
* larger customer bases;
* better name recognition;
* related product offerings; and
* larger marketing areas.
Companies such as Bausch & Lomb, Advanced Medical Optics, Intralase,
VISX, Alcon, LaserSight, and Nidek are major international providers of
ophthalmic surgical devices relating to LASIK and cataract surgery. These
companies represent a wide array of devices and products, technologies and
approaches. Most of these companies have more resources than we do and,
therefore, a greater opportunity to develop comparable products and bring those
products to market more efficiently than we. If we are not able to compete
effectively with current and future competitors, we will not be able to generate
sufficient revenue to achieve or maintain profitability.
OUR PRODUCTS MAY NOT ACHIEVE ACCEPTANCE IN THE MARKETPLACE OR MAY BECOME
OBSOLETE BASED ON NEW TECHNOLOGY OR CHANGES IN THE MARKETPLACE. IF OUR PRODUCTS
DO NOT ACHIEVE OR MAINTAIN ACCEPTANCE, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT
REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR BUSINESS MAY FAIL.
The demand for our products will be based upon the existence of markets
for the technology and products and the markets for products of others, which
may utilize our technology. The extent to which we may gain a share of our
intended markets will depend, in part, upon the cost effectiveness and
performance of our technology and products when compared to alternative
technologies, which may be conventional or heretofore unknown. If the technology
or products of other companies provide more cost-effective alternatives or
otherwise outperform our technology or products, the demand for our technology
or products may not be strong enough to generate sufficient revenue to achieve
or maintain profitability. If we cannot operate profitably our business may fail
and you could lose your entire investment.
OUR DEVELOPMENT EFFORTS WITH RESPECT TO WATERJET BASED PRODUCTS ARE HIGHLY
DEPENDENT ON OUR PROPRIETARY INTELLECTUAL PROPERTY RIGHTS. FAILURE TO PROTECT
OUR RIGHTS COULD SIGNIFICANTLY IMPAIR OUR BUSINESS AND ENFORCING OUR RIGHTS MAY
CAUSE US TO INCUR SUBSTANTIAL EXPENSE.
Proprietary rights are critically important to us. We currently have
exclusive licenses to thirteen U.S. patents and three foreign patents for our
waterjet technology and we intend to aggressively pursue additional patent
protection for our technologies as we continue to develop them. Although we will
seek to defend our licenses and to protect our other proprietary rights, our
actions may be inadequate to protect our patents and other proprietary rights
from infringement by others, or to prevent others from claiming infringement of
their patents and other proprietary rights.
Policing unauthorized use of our technology is difficult, and some
foreign laws do not provide the same level of protection as U.S. laws.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or patents that we may obtain, or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources, and may
result in decreased earnings and a decline of our stock price.
THE CONVERSION OF CONVERTIBLE SECURITIES WILL RESULT IN A SIGNIFICANT INCREASE
IN THE NUMBER OF OUTSTANDING SHARES, WHICH MAY RESULT IN A DECREASE IN THE
MARKET PRICE OF OUR COMMON STOCK.
A significant amount of our debt and equity securities is convertible
into common stock. If all outstanding convertible securities were converted, and
all outstanding warrants and stock options were exercised, the total number of
outstanding shares of Common Stock would be 226,848,118. Conversion of such
securities into common stock would result in significant dilution to our
existing shareholders, which could result in a decrease in the market price of
our stock.
7
THE REGISTRATION OF PREVIOUSLY RESTRICTED SHARES AND SHARES UNDERLYING WARRANTS,
CONVERTIBLE DEBENTURES AND CONVERTIBLE PREFERRED STOCK MAY CAUSE OUR STOCK PRICE
TO DECLINE
The resale by the selling stockholders of their previously restricted
shares, including any shares issuable upon the exercise of convertible
securities, will increase the number of our publicly traded shares, which could
depress the market price of our common stock. The issuance of shares upon the
exercise of convertible securities will dilute the percentage of our shares held
by existing stockholders and could also cause our stock price to decline. The
conversion price of our outstanding convertible debentures has been reduced from
$.35 per share to $.095 per share due to antidilution adjustments.
OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK THAT YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE
PRICE THAT YOU PAY FOR THE SHARES.
Because of the limited trading market for our common stock, and because
of the possible price volatility, you may not be able to sell your shares of
common stock when you desire to do so. Between January 2003 and January 10, 2006
our common stock was sold and purchased at prices that ranged from a high of
$2.41 to a low of $0.01 per share. The inability to sell your shares in a
rapidly declining market may substantially increase your risk of loss because of
such illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.
The price of our stock that will prevail in the market after this
offering may be higher or lower than the price you pay. Certain factors, some of
which are beyond our control, that may cause our share price to fluctuate
significantly include, but are not limited to, the following:
* results of our initial product introduction and sales efforts;
* our ability to obtain timely clearance for marketing in the United
States from the U.S. FDA
* variations in our quarterly operating results;
* our ability to complete the research and development of our
technologies;
* the development of a market for our products;
* changes in market valuations of similar companies;
* announcement by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
* loss of a major customer or failure to complete significant
transactions;
* additions or departures of key personnel; and
* fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the
Over-the-Counter Bulletin Board and technology stocks in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations are unrelated or disproportionate to the operating performance of
the underlying company. These market and industry factors may cause a material
decline in our stock price regardless of the progress we make with respect to
our product development and marketing efforts and our operating performance.
THE "PENNY STOCK RULE" COULD MAKE IT DIFFICULT FOR BROKERS AND DEALERS TO TRADE
IN OUR STOCK, WHICH COULD CAUSE THE MARKET FOR OUR STOCK TO BE LESS LIQUID,
WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of our
shares;
* receive the purchaser's written consent to the transaction prior
to the purchase; and
* deliver to a prospective purchaser of our stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
8
Consequently, penny stock rules may restrict the ability of broker-
dealers to trade and/or maintain a market in our common stock. Also, prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"plans," "potential," "projects," "continuing," "ongoing," "expects,"
"management believes," "we believe," "we intend" and similar expressions. These
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed for the reasons
described in this prospectus. You should not place undue reliance on these
forward-looking statements.
You should be aware that our actual results could differ materially
from those contained in the forward-looking statements due to a number of
factors such as:
* continued development of our technology;
* dependence on key personnel;
* competitive factors;
* the operation of our business; and
* general economic conditions.
The forward-looking statements speak only as of the date on which they
are made, and, except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our actual results to differ materially from those
contained in any forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of common
stock being offered by the selling stockholders. We will, however, incur all
costs associated with this registration statement and prospectus. We may receive
proceeds from the exercise of warrants and conversion of outstanding debt, if
and to the extent they are exercised or converted.
NATURE OF TRADING MARKET
Our stock is quoted on the OTC Bulletin Board under the symbol
"ARFR.OB." The following table sets forth, for the fiscal quarters indicated,
the high and low closing prices for shares of our Common Stock for the periods
noted, as reported by the National Daily Quotation Service and the
Over-the-Counter Bulletin Board.
Quarter Ended High Low
------------- ---- ---
2004:
First Quarter $ 1.39 $ 0.99
Second Quarter $ 1.10 $ 0.57
Third Quarter $ 0.84 $ 0.49
Fourth Quarter $ 0.57 $ 0.39
2005:
First Quarter: $ 0.57 $ 0.30
Second Quarter: $ 0.40 $ 0.06
Third Quarter $ 0.07 $ 0.02
Fourth Quarter $ 0.03 $ 0.01
2006:
First Quarter (through January 12, 2006) $ 0.02 $ 0.01
On January 12, 2006, the closing price as reported by the OTC Bulletin
Board was $0.02, and there were 220 shareholders of record.
9
DIVIDEND POLICY
We have never paid cash dividends and have no plans to do so in the
foreseeable future. Our future dividend policy will be determined by our Board
of Directors and will depend upon a number of factors, including our financial
condition and performance, our cash needs and expansion plans, income tax
consequences, and the restrictions that applicable laws and our credit
arrangements then impose.
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2005. You should read this information in conjunction with our financial
statements and the accompanying notes, and the other financial information
appearing elsewhere in this prospectus.
Long-term debt $ 0
=============
Series A Convertible Preferred Stock,
450,000 shares issued and outstanding,
net of unamortized discount of $750,000
(redemption value $4,500,000) $ 786,654
Stockholders' deficit:
Series A Preferred Stock, 10,000,000 shares
authorized, 450,000 shares issued
and outstanding, $4,500,000 current
redemption value as noted above
Common stock, $.001 par value
Authorized, 750,000,000 shares
Issued and outstanding,
48,336,827 shares $ 48,337
Additional paid-in capital 25,654,460
Accumulated deficit (34,030,883)
-------------
Total Stockholders' Deficit $ (8,337,086)
=============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying financial
statements, and should be read in conjunction with such financial statements and
notes thereto.
Certain information included herein contains forward-looking statements
that involve risks and uncertainties within the meaning of Sections 27A of the
Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934.
These sections provide that the safe harbor for forward looking statements does
not apply to statements made in initial public offerings. The words, such as
"may," "would," "could," "anticipate," "estimate," "plans," "potential,"
"projects," "continuing," "ongoing," "expects," "believe," "intend" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places in this Form SB-2 and
include all statements that are not statements of historical fact regarding
intent, belief or current expectations of the Company, our directors or our
officers, with respect to, among other things: (i) our liquidity and capital
resources; (ii) our financing opportunities and plans; (iii) our continued
development of our technology; (iv) market and other trends affecting our future
financial condition; (v) our growth and operating strategy.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception; (ii)
any material inability to successfully develop our products; (iii) any adverse
effect or limitations caused by government regulations; (iv) any adverse effect
on our ability to obtain acceptable financing; (v) competitive factors; and (vi)
other risks including those identified in our other filings with the Securities
and Exchange Commission.
10
CORPORATE HISTORY
Advanced Refractive Technologies, Inc. (the "COMPANY" or "ART"),
formerly known as Ponte Nossa Acquisition Corp ("PNAC")), is a Delaware
corporation engaged in the research and development of surgical equipment for
use in the field of ophthalmology based on proprietary waterjet technology.
The Company was incorporated in California on February 2, 1996 as a
wholly owned subsidiary of SurgiJet, Inc ("SURGIJET"), a developer of waterjet
technology for a variety of medical and dental applications. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
On February 11, 2003 the Company completed a merger with PNAC, a
Delaware corporation incorporated in 1997. Pursuant to the merger agreement
between VisiJet and PNAC (the "MERGER AGREEMENT"), the Company merged into PNAC.
Since this transaction resulted in the shareholders of VisiJet acquiring a
majority of the outstanding shares of PNAC, for financial reporting purposes the
business combination was accounted for as a recapitalization of PNAC (a reverse
acquisition with the Company as the accounting acquirer). Subsequently, PNAC
changed its name to VisiJet, Inc.
During the February 2005 Board of Directors' meeting, the directors
agreed to change the name from VisiJet, Inc. to "ADVANCED REFRACTIVE
TECHNOLOGIES". A Certificate of Amendment to the Articles of Incorporation
effecting the name change was filed with the Delaware Secretary of State on July
5, 2005.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the Financial
Statements. At this stage of our development, these policies primarily address
matters of revenue and expense recognition. The Company has consistently applied
these policies in all material respects.
OVERVIEW
In May 2004, the Company initiated sales of the LasiTome and EpiLift
systems, both of which were obtained pursuant to a license agreement with
Gebauer Medizintechnik GmbH. Both systems may be used in the LASIK vision
correction surgical procedure to expose the cornea prior to application of the
excimer laser for reshaping of the cornea. The LasiTome is a mechanical device
used for cutting a corneal flap, the methodology used in traditional LASIK
procedures. The EpiLift system provides the LASIK surgeon with an alternative
methodology for exposing the cornea in which the epithelium, or top layer of the
eye, is separated in an intact sheet of tissue, and then returned to its
original position for healing following the application of the laser.
Initial sales of the EpiLift and LasiTome systems were in Europe and
certain countries in which the products had received required regulatory
clearance for marketing. Marketing of the EpiLift System in the United States
began in September 2004, following receipt of 510(K) clearance for marketing
from the United States Food and Drug Administration ("FDA"). Revenues from both
the EpiLift and LasiTome Systems were generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
In October 2005, the Company terminated the license agreement with
Gebauer and discontinued sales of the LasiTome and EpiLift systems. Under the
terms of the termination agreement, inventory was returned to Gebauer and unpaid
invoices canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement. In accordance with the terms of the
settlement, finished goods inventory of $1,916,215 was returned to Gebauer and
related Gebauer unpaid invoices for the inventory, totaling $846,781, were
cancelled. In addition, the net capitalized value of the distribution agreement
of $1,464,078 was impaired and charged to operating expense. These amounts were
recorded during the three months ended September 30, 2005, and the net effect of
the settlement upon the financial statements is as follows:
11
Finished goods inventory write off $ 1,916,215
Less: liability to Gebauer (846,781)
-------------
Charge to Cost of Goods Sold $ 1,069,434
-------------
Operating expense - Impairment of capitalized distribution
agreement 1,464,078
-------------
$ 2,533,512
=============
Demonstration and clinical units of $211,343 and $164,385,
respectively, were excluded from the settlement agreement and included in
inventory at September 30, 2005. On October 12, 2005, all of the units were sold
to CooperVision International for $395,732. The sale eliminates all inventory
balances and was recorded during October 2005 when the sale was completed.
As a result of termination of the Gebauer agreement, we currently have
no products on the market and no source of operating revenues. Also, s a result
of the termination, we laid off our entire sales force of four direct sales
representatives, plus our sales manager. Two additional internal administrative
managers and one administrative assistant were also laid off, leaving only
individuals directly responsible for product development and administration on
staff.
The Company has two ophthalmic surgery products under development
utilizing proprietary waterjet technology. The first is Pulsatome, a device
designed for removal of cataracts using a pulsating stream of saline solution.
The second is Hydrokeratome, a device that uses a high-pressure micro beam of
water to cut a corneal flap during LASIK surgery. Both of these products require
the successful completion of development and testing and receipt of 510(K)
clearance from FDA prior to market introduction.
The primary markets to be addressed by our products are refractive
surgery and cataract surgery, both of which are strong and continuing to grow.
The refractive surgery market has benefited from an increased demand for laser
vision corrective surgery due to the overall increased acceptance by consumers,
as well as from technological advances that have led to better results and fewer
complications. Cataract surgery is the most frequently performed surgical
procedure, with over 14 million surgeries performed worldwide. As the
development of cataracts is often associated with aging, we expect the demand
for cataract surgery to continue to increase. We believe that our products, when
completed and available for sale, will address important needs in each of these
markets.
There are numerous factors that could affect our ability to achieve
revenues, including but not limited to:
o Our obtaining adequate financing to support debt obligations
and working capital requirements
o Successful completion of our product development efforts and
receipt of 510(k) marketing clearance with respect to
Pulsatome and Hydrokeratome.
o Market acceptance of our products
o Competition
o Technological advancement
o Overall economic conditions
The Company is actively pursuing additional financing, and in this
regard is in discussions with several parties related to potential financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, or to complete its on-going product development
efforts. As such, our ability to secure additional financing on a timely basis
is critical to our ability to stay in business and to pursue planned operational
activities.
12
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2005 Compared To Nine Months September 30, 2004
-------------------------------------------------------------------------------
SALES AND COST OF SALES
The Company reported sales revenues for the nine months ending June 30,
2005 and 2004 of $715,075 and $1,037,537, respectively. We marketed these
products in the United States through a direct sales force consisting of four
employees and five independent sales representatives. Internationally, these
products were sold through independent distributors in each market. Products
sold were the EpiLift System, sold in the United States and certain foreign
markets, and a Combination LasiTome/EpiLift system, sold only in foreign
markets. In conjunction with the systems, 'disposables,' were also sold
consisting of Epi-separators, Lasik blades and vacuum tubing sets that are used
on a per procedure basis. Additional components of the system were sold
separately, such as handpieces, Epi and Lasik heads, suction rings, etc. In
October 2005, we terminated the distribution agreement and discontinued sale of
the systems and associated disposables.
Cost of goods sold for the nine months ending September 30, 2005 and
2004 was $1,476,463 and $483,234, respectively. For 2005, expenses of $1,069,434
are related to inventory losses on the termination of the distribution
agreement. Gross profit (loss) for the nine months ending September 30, 2005 and
2004 was $(761,388) and $554,303, respectively. The gross profit was lower than
normal resulting from the inventory loss, mix of product sold, and higher
fulfillment and shipping costs.
OPERATING EXPENSES
Operating expenses during the nine months ended September 30, 2005 and
2004, decreased to $4,826,971 from $7,006,940 in 2004 as a result of the
following activity:
2005 2004
---------- ----------
General and Administrative $3,187,259 $6,415,545
Research and Development 175,634 591,395
Impairment of Distribution Agreement 1,464,079 --
---------- ----------
Total Operating Expenses $4,826,971 $7,006,940
========== ==========
The decrease in general and administrative expenses during 2005 from
the same period in 2004 was due primarily to approximately $2.3 million of
non-cash expenses recorded in connection with the issuance of a total of
2,475,000 shares of common stock during the period as payment for consulting
services and in connection with dispute/litigation settlements, and non-cash
expenses of $546,403 recorded in connection with the re-pricing of warrants
during the second quarter.
The decrease in research and development expenses in the 2005 period
was due primarily to limited working capital availability during the period.
The impairment of the distribution agreement resulted from the
write-off of the remaining net capitalized balance of the distribution
agreement.
OTHER INCOME AND EXPENSE
Other expenses during the nine months ended September 30, 2005 and
2004, include interest expense of $1,500,169 and $1,063,414, and non-cash
expenses of $763,769 and $903,802, respectively, related to the amortization of
debt discount during the period, and $3,311,088 of non-cash interest expense for
2005. The non-cash interest expense was recorded based on the intrinsic value of
the beneficial conversion feature of convertible debt entered into during the
first quarter of 2005. Interest expense in the 2005 period increased due to an
increase in total debt outstanding and accrual of $938,294 for liquidated
interest damages on the outstanding debentures
Also included in results of operations in 2005 were other income and
non-recurring gains of $26,842 and $73,659, respectively. The other income was
from a refund of taxes paid in prior periods. The realized gain was the result
of the sale of marketable securities over the stated value. The Company sold the
securities valued at $590,980 for gross proceeds of $664,639. Fees associated
with the transactions of $3,619 were recorded as expenses for the period
providing a net realized gain of $70,040.
13
PREFERRED STOCK ACCRETIONS
In the fourth quarter of 2004, the Company recorded a preferred stock
discount and a corresponding amount to additional paid in capital of $1,125,000.
The recorded discount resulted from the beneficial conversion that was
recognized as an undeclared dividend and will be accreted over three years or
the life of the agreement. This dividend will be reflected in the statement of
operations below the "NET LOSS" line as a component of "NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS". As a result, an accretion of the discount of $281,250 was
recorded during the current period providing a balance of the preferred discount
of $750,000 at September 30, 2005.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
As a result of the above revenues and expenses, the net loss for the
nine months ended September 30, 2005 and 2004 was $11,344,134 and $8,420,653,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the second quarter of 2004, we did not have any products for
sale, and had not generated any revenue from sales or other operating
activities. As such, our principal source of liquidity has been the private
placement of equity securities and the issuance of notes payable and convertible
debt. Based on our history of losses and negative working capital balance, our
financial statements for the year ended December 31, 2004 included a going
concern opinion from our outside auditors, which stated there "IS SUBSTANTIAL
DOUBT" about our ability to continue operating as a going concern.
During the nine months ended September 30, 2005, the Company raised net
proceeds totaling $5,201,520. From the issuance of convertible debentures, the
Company raised $4,540,500 net of $179,500 of related costs, and $661,020 net of
$3,619 of related costs, from the sale of marketable securities.
During the first nine months of 2005, the Company utilized $2,578,677
to fund operating activities and $2,615,528 in financing activities.
As of February 15, 2006, our cash balance is $3,000. Subject to
availability of funding, we expect operating expenses, and related cash
requirements, to increase during the next twelve months in connection with
anticipated sales and marketing and product development activities.
We may be subject to claims from purchasers of our securities for
rescission of those purchases, or for damages. We sold substantial amounts of
securities in private transactions since the original filing of this
Registration Statement in November of 2004. However, because this Registration
Statement was pending at the time, we could be considered to have engaged in a
"general solicitation," which would preclude reliance on the exemptions from
registration provided by Section 4(2) of the Securities Act and Regulation D
thereunder. Accordingly, the sales of securities after the date of filing of
this Registration Statement may have been in violation of the Securities Act of
1933, as amended. If so, we could be subject to claims for damages by the
purchasers of the securities, claims for rescission of the transactions and
return of all funds received, and regulatory proceedings by the Securities and
Exchange Commission or other regulatory agencies. Also, persons who purchased
the securities from the original purchasers may also be entitled to rescission
rights. The transactions affected include the sale or restructuring of more than
$8 million in securities, and the original purchase price of these securities
far exceeds their current market value. However, no purchaser of the securities
has sought rescission of the transactions or asserted any claims against us. If
the purchasers of these securities are entitled to rescission of the
transactions, we could be required to pay them the full purchase price, plus
interest and attorneys' fees. These amounts far outstrip our liquid assets, and
such claims, if asserted and successful, could require the Company to file
bankruptcy. In addition, we could be subject to regulatory proceedings by the
Securities and Exchange Commission or other regulatory agencies, which could,
among other sanctions, require us to make a rescission offer to the purchasers
of the securities.
14
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
The company reported a net loss for fiscal year 2004 of $11,910,530
compared to $4,959,152 for fiscal year 2003. The loss for fiscal 2004 contains
several large non- cash transactions totaling $7,318,007. The amount for
non-cash activities that occurred during 2004 was for beneficial conversion
interest, debt discount amortization, debt guarantee expense and common stock
issued for services. See financial footnotes for more details. Fiscal year 2003
contained $ 788,500 of similar non-cash transactions. This represents a loss per
common share of $(.45) for the year ended December 31, 2004 on basic and diluted
shares outstanding of 26,688,583, as compared to a loss per common share of
$(.27) on basic and diluted shares outstanding of 18,606,352 for the year ended
December 31, 2003.
REVENUE AND COST OF GOODS SOLD
The Company reported sales revenues for the years ending December 31,
2004 and 2003 of $1,725,435 and $0.00, respectively. The sales were comprised of
domestic sales of $419,810 and international sales of $1,305,625. During the
period ART marketed its products in the United States through a direct sales
force consisting of four employees and eight independent sales representatives.
Internationally, our products were sold through independent distributors in each
market. Products sold were the EpiLift System, sold in the United States and
certain foreign markets, or a Combination LasiTome/EpiLift system, sold only in
foreign markets. In conjunction with the systems, 'disposables,' were sold
comprised of Epi-separators, Lasik blades and vacuum tubing sets that are used
on a per procedure basis. Additional components of the system were sold
separately, such as handpieces, Epi and Lasik heads, suction rings, etc.
A detailed breakout of sales is provided in the chart below:
Domestic International
Units Amount Units Amount
----- ------ ----- ------
Units sold to Doctors 7 $ 398,650 22 $ 836,576
Units sold to Distributors 5 112,500
Disposables sold:
Epi-separators (boxes of 10) 25 11,470 375 216,312
Lasik Blades (boxes of 10) -- -- 206 85,938
Vacuum Tubing (boxes of 5) 14 492 266 7,858
Other Components 20 9,198 36 50,463
Sales Allowances and Credits (4,022)
---------- -----------
$ 419,810 $1,305,625
Cost of goods sold in 2004 was $787,397, resulting in a gross profit of
$938,038 or 54.4%. The costs are comprised mostly of product, fulfillment and
shipping costs.
Prior to the completion of the product licensing agreement, the Company
did not have any products for sale, and accordingly had no similar sales
revenues or cost of sales activity in the comparable 2003 period.
OPERATING EXPENSES:
The significantly larger loss in 2004 resulted from increased operating
expenses, as shown below:
2004 2003
Operating Expenses
General and Administrative $8,737,724 $3,736,604
Research and Development 695,100 1,256,259
---------- ----------
$9,432,824 $4,992,863
========== ==========
15
The increase in general and administrative expenses in the 2004 period
is due primarily to the inclusion of $3,277,173 of non-cash expenses recorded in
connection with the issuance of common stock, warrants and options during the
period as payment for consulting services and in connection with
dispute/litigation settlements, and non-cash expenses of $546,403 recorded in
connection with the re-pricing of warrants during the second quarter. In
addition, general and administrative expenses increased during 2004 due to
salaries and wages increase of $804,802, amortization expenses related to
patents and distribution agreements and debt fees of $540,401 and sales and
marketing expenses of $197,258 and increased insurance expenses of $160,575.
Included in the 2003 general and administrative expenses are non-recurring
expenses for legal, accounting and settlement expenses of approximately $788,500
that were incurred in connection with the finalization of the Merger Agreement
in February 2003.
Research and development expenses decreased to $695,100 in 2004 from
$1,256,259 in 2003. The decrease in research and development expenses fiscal
year 2004 is due primarily to limited working capital availability during the
period, and to a reallocation of resources from research and development to
sales and marketing as a result of the initiation of product sales during the
second quarter of 2004.
OTHER INCOME AND EXPENSE
Other expense during fiscal year 2004 increased to $3,321,194, and
includes interest expense of $392,251 and non-cash expenses of $1,278,841
related to the amortization of debt discount during the period as well as
$1,671,550 of non-cash interest expense recorded based on the intrinsic value of
the beneficial conversion feature of convertible debt entered into during the
second, third and fourth quarters of 2004. Interest expense in the 2004 period
increased from $56,247 for fiscal year 2003 due to an increase in total debt
outstanding during 2004. There was no comparable debt discount amortization
expense in the 2003 period.
Also included in results of operations in 2004 and 2003 were
non-recurring gains of $21,448 and $90,303, respectively. The 2004 gain resulted
from re-negotiation of the amount owed to an outside contractor, which had
resulted in the Company withholding payment until a resolution was reached. The
remaining amount due on the contract was $71,448. The Company and the contractor
reached an agreement reducing the amount owed to $50,000, with a first payment
of $20,000 due on December 1, 2004 and subsequent payments of $10,000 to be made
monthly until paid in full with interest accruing on the unpaid balance at 1.5 %
per month. At December 31, 2004 $30,000 was still outstanding and accrued
interest totaled $78. This obligation was paid in full on March 10, 2005.
The 2003 gain was recorded based on the restructuring of debt owed to
SurgiJet that occurred in connection with the Merger Agreement, and which
resulted in a decrease in the total amount owed of $90,303.
PREFERRED STOCK ACCRETIONS
In the fourth quarter of 2004, the Company recorded a preferred stock
discount and a corresponding amount to additional paid in capital of $1,125,000.
The recorded discount resulted from the beneficial conversion that is recognized
as an undeclared dividend and is accreted over the three year life of the
agreement. This dividend is reflected in the statement of operations below the
`Net loss" line as a component of `Net loss applicable to common shareholders'.
As a result, an accretion of the discount of $93,750 was recorded providing a
balance of the preferred discount of $1,031,250 at December 31, 2004. For more
information on this transaction, please review Note 11 of Notes to Financial
Statements.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
As a result of the revenues and expenses referred to above, the net
loss for the fiscal year ended December 31, 2004 increased to $11,910,530,
compared to $4,959,152 during fiscal year 2003.
16
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
The Company had no sales revenues to report for the years ending
December 31, 2003 and 2002. The net loss for fiscal year 2003 was $4,959,152,
compared to $1,226,676 for fiscal year 2002. This represents a loss per common
share of $(.27) for the year ended December 31, 2003 on basic and diluted shares
outstanding of 18,606,352, as compared to a loss per common share of $(.16) on
basic and diluted shares outstanding of 7,811,809 for the year ended December
31, 2002.
The significantly larger loss in 2003 resulted from increased operating
expenses, as shown below:
2003 2002
Operating Expenses
General and Administrative $3,736,604 $ 751,717
Research and Development 1,256,259 294,736
---------- ----------
$4,992,863 $1,046,453
========== ==========
General and administrative expenses increased to $3,736,604 in 2003
from $751,717 in 2002. Included in the 2003 general and administrative expenses
are non-recurring expenses of approximately $788,500 that were incurred in
connection with the finalization of the Merger Agreement in February 2003. Also
contributing to the increased general and administrative expenses in 2003 were
increases in salaries and wages due to staff additions, increased legal and
accounting fees associated with becoming a public company, increased rent
expense incurred in connection with additional space requirements, increased
royalty expenses related to licensed technology, and increased corporate travel.
Research and development expenses increased to $1,256,259 in 2003 from
$294,736 in 2002. The increase is primarily due to the resumption of activities
related to the development of the Company's ophthalmic surgery products in 2003,
based on the completion of the Merger Agreement and associated financing, that
had been deferred during 2002 due to the lack of funding.
Also included in results of operations in 2003 was a non-recurring gain
of $90,303 recorded based on the restructuring of debt owed to SurgiJet that
occurred in connection with the Merger Agreement, and which resulted in a
decrease in the total amount owed of $90,303.
Interest expense decreased to $56,247 in 2003 from $131,319 in 2002.
The decrease is primarily due to the reduction in notes payable that occurred in
2003 as a result of the completion of the Merger Agreement.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the second quarter of 2004, we did not have any products for
sale, and had not generated any revenue from sales or other operating
activities. As such, our principal source of liquidity has been the private
placement of equity securities and the issuance of notes payable and convertible
debt. Based on our history of losses and negative working capital balance, our
financial statements for the year ended December 31, 2004 included a going
concern opinion from our outside auditors, which stated there "is substantial
doubt" about our ability to continue operating as a going concern.
FINANCING ACTIVITY:
As described in more detail below, the Company raised net proceeds
totaling $5,489,589 during fiscal year 2004 through private placements of debt
and equity securities. Of this total, $3,845,375 came from the issuance of
convertible debentures, net of $429,625 of related costs, $1,109,688 came from
the issuance of secured subordinated debenture agreements, net of $132,500 of
related costs and $526,500 resulted from equity private placements, net of
related costs of $58,500.
During the first nine months of 2005, the Company raised net proceeds
totaling $5,201,520. From the issuance of convertible debentures, the Company
raised $4,540,500 net of $179,500 of related costs, and $661,020 net of $3,619
of related costs, from the sale of marketable securities.
During the first nine months of 2005, the Company utilized $2,578,677
to fund operating activities and $30,230 in investing activities.
17
PRIVATE EQUITY PLACEMENTS:
Between January 2004 and May 2004 the Company raised gross proceeds of
$585,000 through the private placement of 585,000 shares of common stock to
twelve (12) individual investors, and realized net proceeds of $526,500 after
subtracting related placement agent fees totaling $58,500. In addition to the
common stock, the investors received 5-year warrants to purchase an aggregate of
585,000 shares of common stock at an exercise price of $2.25 per share.
SECURED DEBENTURES:
FEBRUARY 2004 SECURED DEBENTURE
In February 2004, the Company entered into secured debenture agreements
with an aggregate principal balance of $500,000, and received net proceeds of
$447,500 after subtracting related placement agent fees and legal expenses
totaling $52,500.
The debentures bear interest at an annual rate of 24%, which is payable
monthly beginning April 1, 2004. In addition, the debenture holders received
warrants to purchase 250,000 shares of the Company's common stock, exercisable
through March 1, 2009, at an exercise price of $1.10 per share.
The principal balance of the debentures is due and payable on the
earlier of (i) thirty (30) days from the date the Registration Statement is
declared effective by the Securities and Exchange Commission, provided that a
specified affiliate of the investors has not defaulted in its obligation to
purchase shares of the Company's common stock, or (ii) twelve (12) months from
the date the Registration Statement is declared effective, or (iii) eighteen
(18) months from the date of the debenture agreement. The debentures are secured
by all accounts and equipment of the Company, now owned, existing or hereafter
acquired.
In October 2004, the Company received a notice of default from the
holders of an aggregate of $400,000 of these debentures due to the non-timely
payment of interest that was owed under the debenture agreements. Subsequent to
the receipt of notice, the Company made the required interest payments and the
Company was in discussions regarding a resolution of the events of default. In
October 2004, the Company and the debenture holders agreed to reduce the
exercise price of the original warrants issued to purchase 250,000 shares of
common stock in connection with this transaction to $0.75 per share, and to
issue a total of additional warrants to purchase 125,000 shares at an exercise
price of $0.75 per share. The parties agree that this would cure all defaults to
date.
In January 2005, the Company repaid the entire $500,000 outstanding
principal balance and the secured debenture agreement was cancelled.
During the period ending March 31, 2005, the Company recorded total
interest expense of $63,718 in connection with the debenture debt, of which
$55,170 resulted from the non-cash amortization of debt discount and $8,548
related to interest accrued during the period on the outstanding principal
balance.
MAY 2004 SECURED DEBENTURE
In May 2004, the Company entered into a secured debenture agreement
with HIT Credit Union with a principal balance of $750,000, and received net
proceeds of $662,188 after subtracting related placement agent fees and expenses
totaling $80,000 and prepaid interest totaling $7,812. The principal balance of
the debenture was due and payable on July 5, 2004, and the debentures bear
interest at an annual rate of 15%, which is payable monthly beginning June 1,
2004. In addition, the debenture holder received a warrant to purchase 500,000
shares of the Company's common stock, exercisable through May 6, 2009, at an
exercise price of $0.90 per share. The debenture is secured by 750,000 shares of
the Company's common stock that were issued by the Company as collateral under
this agreement.
The Company did not repay the principal on the scheduled maturity date
of July 5, 2004, and such failure to pay constitutes a default under the
obligation. In October 2004 the debenture holder entered into a forbearance
agreement with the holders of convertible debentures entered into in June and
July 2004 with an aggregate principal amount of $2,000,000, pursuant to which
the debenture holder agreed not to take any action with respect to the
non-payment of the $750,000 principal balance until the earlier of (i) February
2, 2005 and (ii) the date of notice of default from the convertible debenture
holders to the Company. In January 2005, the Company repaid the entire $750,000
outstanding principal balance, plus accrued interest totaling $6,744, and the
750,000 shares of the Company's common stock held as collateral on the debt were
returned and the secured debenture agreement was cancelled.
18
CONVERTIBLE DEBENTURES:
MAY 2004 CONVERTIBLE DEBENTURE
In May 2004, the Company entered into convertible debenture agreements
with Platinum Long Term Growth and Rock II, LLC with principal balances of
$550,000 and $250,000, respectively. After subtracting related placement agent
fees and expenses totaling $105,000, net proceeds to the Company from the
aggregate of the $800,000 principal balance were $695,000. The debentures bear
interest at an annual rate of 10%, which is due and payable on the maturity
date. In addition, the debenture holders received an aggregate of 533,333
warrants to purchase shares of the Company's common stock, exercisable through
May 6, 2009 at an exercise price of $0.90 per share.
The principal balance of these debentures was due and payable on the
earlier of (i) one hundred and five (105) days from the issue date, or (ii) ten
(10) business days from the date the Company's Registration Statement is
declared effective by the Securities and Exchange Commission. As the
Registration Statement was not filed prior to 105 days from the issue date, the
principal balance and accrued interest became due and payable on August 19,
2004. The debentures were secured by an aggregate of 800,000 shares of the
Company's common stock borrowed by the Company pursuant to a security lending
agreement between the Company and a third party. Under certain circumstances,
the outstanding principal of the debentures may be converted into shares of the
Company's common stock based on an initial conversion price of $0.90, subject to
adjustment as defined in the agreement.
The Company was not in compliance with terms of these debenture
agreements due to the non-payment of the principal balance by the scheduled
maturity date in August 2004, and due to its failure to file a Registration
Statement with the Securities and Exchange Commission covering warrants issued
to debenture holders pursuant to the debenture agreement as required by the
registration rights agreement entered into between the Company and the debenture
holders. The failure to pay the principal balance when due and to file the
Registration Statement on a timely basis were events of defaults under the
agreements. In connection with discussions with the debenture holders regarding
a resolution of the events of default, in October 2004, the Company agreed to
reduce the exercise price of the original 533,333 warrants issued from $0.90 to
$0.40 per share, and to issue a total of 533,333 additional warrants, also at an
exercise price of $0.40 per share.
In January 2005, the company paid this debt in full by paying one
lender principal of $550,000 and entering into an agreement with the lender
providing for the sale of collateral shares in lieu of the interest payment of
$34,000. The remaining 469,000 common stock collateral shares were returned to
the Company. The Company issued 81,000 shares of common stock to replace the
collateral shares used to satisfy the interest on the debt. The second lender
accepted payment of $150,000 principal and $8,000 interest for a total of
$158,000. The lender agreed to accept the 250,000 collateral shares as
compensation for the remaining $100,000 principal. The company will issue
250,000 common stock shares to replace the collateral shares used to satisfy the
remaining debt principal balance. Additional warrants of 533,332 were issued in
lieu of penalties and the Company recorded an increase to long term discount
amortization of $145,563 during the first quarter of 2005. As a result of these
activities, these note obligations have been satisfied in full.
During the period ending March 31, 2005, the Company recorded total
interest expense of $124,621 in connection with the debenture debt, of which
$116,621 resulted from the non-cash amortization of debt discount and $8,000
related to interest on the outstanding principal balance that was accrued and
paid during the period.
JUNE 2004 CONVERTIBLE DEBENTURES
In June 2004, the Company entered into convertible debenture agreements
with Bushido Capital Master Fund, L.P. ("Bushido"), and Bridges & Pipes, LLC
("Bridges & Pipes"), with principal balances of $600,000 and $400,000,
respectively. After subtracting related placement agent fees and expenses
totaling $120,000, net proceeds to the Company from the aggregate of the
$1,000,000 principal balance were $880,000.
19
Pursuant to the June 2004 agreements, the debentures bear interest at
an annual rate of 8%, which is payable quarterly beginning December 31, 2004,
and the principal balance of the debentures was due and payable on June 24,
2006. In addition, the debenture holders received an aggregate of 150,000 shares
of the company's common stock, and an aggregate of 750,000 warrants to purchase
shares of the Company's common stock, exercisable through June 24, 2009, at an
exercise price of $1.50 per share, provided however that the exercise price with
respect to an aggregate of 500,000 of the warrants is reduced to $0.60 per share
during the period from the date of issuance through the date twelve (12) months
after the Securities and Exchange Commission declares effective a registration
statement registering the resale of shares underlying the warrants. The
debentures were secured by an aggregate of 350,000 shares of the Company's
common stock issued by the Company, and the outstanding principal of the
debentures was convertible, subject to redemption rights of the Company, into
shares of the Company's common stock based on an initial conversion price of
$0.50, subject to adjustment as defined in the agreement.
Each holder of these convertible debentures may, at any time, convert
any or all of any outstanding unpaid balance, including unpaid interest, into
Common Stock of the Company. The "initial" conversion price is the price at
which the holders may convert prior to any adjustments due to the effects of
certain potentially dilutive events. For purposes of these Agreements, the
initial conversion price is $.35.
Such a conversion price may change based on a formula contained in the
Convertible Debentures in which the number of shares of Common Stock to be
issued upon each conversion of the Debenture shall be equal to the Conversion
Amount divided by the Conversion Price. The Conversion Amount is defined as sum
of the principal amount of the Debenture to be converted, plus accrued and
unpaid interest, plus Default Interest, if any. The Conversion Price is defined
as $.35, subject to adjustments should certain events occur which might prove
dilutive. These events that would cause such an adjustment include a merger or
consolidation, stock dividends or splits, and certain issuances of Common Stock
or derivatives at a conversion or exercise price less than the exercise price.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement.
In October 2004 the Company received a waiver of the non-compliance in
connection with an amendment to the debenture agreements, pursuant to which the
maturity dates of the debentures were extended to June 24, 2014, the exercise
price of the original 750,000 warrants issued in connection with these
convertible debenture agreements was reduced to $0.40 per share, the debenture
holders received an additional 250,000 warrants at an exercise price of $0.40
per share, and the initial conversion price of the debt was reduced to $0.35. In
addition, in connection with this amendment, the Company released the 350,000
shares of common stock that was being held as collateral, to the note holders to
satisfy the debt default.
In January 2005 the amended debenture agreements with Bushido and
Bridges & Pipes were replaced with new convertible debenture agreements in order
to conform the terms of these agreements to the terms of new convertible
debenture agreements to an aggregate principal balance of $7,695,000 entered
into in January 2005, as described below. Under the replacement agreements, the
maturity dates of the debentures were extended to January 14, 2015, and other
principal terms (i.e. interest rate, conversion price, warrants issued and
warrant exercise price) remained the same as in the amended October agreements
described above. This is discussed in more detail in Note 18, Subsequent Events.
20
JULY 2004 CONVERTIBLE DEBENTURE
In July 2004, the Company entered into a convertible debenture
agreement with Libertyview Special Opportunities Fund, L.P. ("Libertyview"),
with a principal balance of $1,000,000, and received net proceeds of $896,125
after subtracting related placement agent fees and expenses totaling $103,875.
Pursuant to the July 2004 agreement, the note bears interest, at an annual rate
of 8%, which is due and payable quarterly beginning on October 31, 2004, and the
principal balance of the note, plus any accrued and unpaid interest, was due and
payable on July 23, 2014, provided however, that on or after July 31, 2007 the
Company, at the option of the note holder, may have been obligated to repurchase
the note at a price equal to 100% of the outstanding principal and interest. In
addition, the debenture holders received warrants to purchase 750,000 shares of
the Company's common stock, exercisable through July 23, 2011, at an exercise
price of $1.00 per share. In addition, the outstanding principal of the
debentures was convertible into shares of the Company's common stock, at the
option of the note holder, based on an initial conversion price of $0.54 per
share, subject to adjustment as defined in the agreement.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement.
In October 2004 the Company received a waiver of the non-compliance in
connection with an amendment to the debenture agreement pursuant to which the
exercise price of the original 750,000 warrants issued in connection with the
convertible debenture agreement was reduced to $0.40 per share, the debenture
holder received an additional 250,000 warrants at an exercise price of $0.40 per
share and the initial conversion price of the debt was reduced to $0.35.
In January 2005 the amended debenture agreement with Libertyview was
replaced with a new convertible debenture agreement in order to conform the
terms of the agreement to the terms of new convertible debenture agreements
entered into in January 2005 to an aggregate principal balance of $7,695,000, as
described below. Under the replacement agreement, the maturity dates of the
debenture was extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price)
remained the same as in the October amended October agreement described above.
This is discussed in more detail in Note 18, Subsequent Events.
OCTOBER 2004 CONVERTIBLE DEBENTURE
In October 2004, the Company entered into convertible debenture
agreements with four private lenders with an aggregate principal balance of
$850,000, and received net proceeds of $788,000 after subtracting related
placement agent fees and expenses totaling $62,000. The notes bear interest, at
an annual rate of 8%, which is due and payable quarterly beginning on December
31, 2004. The principal balance of the note, plus any accrued and unpaid
interest is due and payable on October 6, 2014, provided however, that on or
after October 6, 2007, the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. The outstanding principal of the debentures may be
converted into shares of the Company's common stock, at the option of the note
holder, based on an initial conversion price of $0.35 per share, subject to
adjustment as defined in the agreement. In addition, the note holders received
warrants to purchase 850,000 shares of the Company's common stock, exercisable
through October 6, 2009 at an exercise price of $0.40 per share.
In January 2005 the October debenture agreements with Libertyview
Special Opportunities Fund, L.P., Gamma Opportunity Capital Partners, LP,
Bridges & Pipes, LLC, and Little Gem Life Sciences Fund, LP, were replaced with
new convertible debenture agreements in order to conform the terms of the
October agreements to the terms of new convertible debenture agreements entered
into in January 2005 with an aggregate principal balance of $7,695,000, as
described below. Under the replacement agreements, the maturity dates of the
debentures were extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price)
remained the same as in the October agreements described above.
21
DECEMBER 2004 BRIDGE LOAN
In December 2004 the Company entered into a bridge loan agreement with
Alpha Capital Aktiengesellschaft ("Alpha") with a principal balance of $500,000,
and received net proceeds of $469,000 after subtracting related placement agent
fees and expenses totaling $31,000. The debenture was due and payable on January
27, 2005, and was convertible into shares of the Company's common stock, at the
option of the note holder, based on an conversion price equal to 80% of the
closing bid price of the Company's common stock on the date of conversion, in
the event that the debenture was not repaid on the scheduled maturity date, or
in the event of a default under the agreement. In connection with the debenture,
Alpha received 142,857 shares of the Company's common stock, and 5-year warrants
to purchase 1,250,000 shares of the Company's common stock at an exercise price
of $0.40 per share.
In January 2005, the Company repaid the entire $500,000 outstanding
principal balance, and the debenture agreement was cancelled.
DECEMBER 2004 CONVERTIBLE DEBENTURE
Also in December, the Company received $125,000 as a subscription from
Greenwich Growth Fund, Ltd., for a convertible debenture agreement that was
included in the convertible debenture agreements closed in January 2005, as
described in paragraphs below on subsequent funding.
SUMMARY OF OBLIGATIONS
The following summarizes our contractual obligations, commercial
commitments and off-balance sheet arrangements at September 30, 2005 and the
effect such obligations could have on our liquidity and cash flow in future
periods:
Less Than 1 - 3 3 - 5 Over 5
1 Year Years Years Years Total
---------- ---------- ---------- ---------- ----------
Convertible debenture debt $3,426,676 $ -- $ -- $2,975,000 $3,426,676
Notes Payable (1) 837,132 -- -- -- 837,132
Compensation Settlement Agreements 54,863 -- -- -- 54,863
Minimum Royalty Obligations (2) 84,000 168,000 168,000 501,000 921,000
Lease Commitments 76,956 153,912 19,200 -- 230,868
---------- ---------- ---------- ---------- ----------
Total $4,479,627 $ 321,912 $ 168,000 $ 501,000 $5,470,539
========== ========== ========== ========== ==========
Our ability to secure additional financing on a timely basis is
critical to our ability to stay in business and to pursue planned operational
activities. The Company believes that actions presently being taken to raise
additional financing, to market products with which near-term operating revenues
and to complete the development of, and bring to market its other ophthalmic
surgical products, will provide capital to satisfy contractual obligations and
to ultimately generate sufficient revenue to support its operations and become
profitable. However, there can be no assurance that any such actions will be
successfully completed, or that such actions will provide sufficient capital
and/or cash flow to permit the Company to stay in business realize its plans.
BORROWED SHARES
In connection with collateral requirements of convertible debenture
agreements with HIT Credit Union, Platinum Long Term Growth Fund and Rock II,
LLC, the Company borrowed a total of 1,550,000 shares of its outstanding common
stock from Taika Investments, Inc. ("Taika") pursuant to a Securities Lending
Agreement between the Company and Taika. In accordance with the terms of this
agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and was obligated to return any borrowed shares by November 30,
2004. In January, the Company received a one-year extension, to November 30,
2005, of the date by which any borrowed shares must be returned. In the event of
default, the Company has agreed to file a Registration Statement and to return
any shares, within 72 hours, which had not previously been returned by the due
date. As of December 31, 2004 the Company had borrowed a total of 1,550,000
shares pursuant to this agreement, and the Company had accrued interest expense
totaling $41,935.
22
As noted above, the transactions required the Company to post its own
shares as collateral. However, since it is unclear under Delaware law that a
corporation can issue shares under these circumstances, the Company arranged to
borrow the shares from an existing shareholder in order to post the shares as
collateral.
In January 2005, HIT Credit Union returned 750,000 of the borrowed
shares.
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The following chart depicts the changes in the accumulated
comprehensive income/(loss) for periods ending December 31, 2004 and 2003:
2004 2003
---- ----
Change in Accumulated Comprehensive Income/(Loss)
Unrealized loss from marketable securities (792,009) --
========== ==========
Total Accumulated Comprehensive Income/(Loss) (792,009) --
The loss was incurred as a result of the write down of the Marketable
Securities to market on December 31, 2004. Refer to Note 11 - Preferred Stock
section for more detail on this transaction.
FUNDING ENTERED INTO SUBSEQUENT TO DECEMBER 31, 2004
In January 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc. and a group of investment funds with an
aggregate principal balance of $4,845,000, and received net proceeds of
$4,569,500, after subtracting related placement agent fees and expenses totaling
$275,500. The notes bear interest, at an annual rate of 8%, which is due and
payable quarterly beginning March 31, 2005. The principal balance of the note,
plus any accrued and unpaid interest is due and payable on January 14, 2015,
provided however, that on or after January 14, 2008 the Company, at the option
of the note holder, may be obligated to repurchase the note at a price equal to
100% of the outstanding principal and interest. The outstanding principal of the
debentures may be converted into shares of the Company's common stock, at the
option of the note holder, based on the adjusted conversion price of $0.095 per
share, subject to adjustment as defined in the agreement. In addition, the note
holders received warrants to purchase 4,845,000 shares of the Company's common
stock, exercisable through January 14, 2010. These warrants are also exercisable
at $.095 per share.
In January 2005 the October debenture agreements with Libertyview
Special Opportunities Fund, L.P., Gamma Opportunity Capital Partners, LP,
Bridges & Pipes, LLC, and Little Gem Life Sciences Fund, LP, were replaced with
a new convertible debenture agreement, to conform the terms of the October
agreements to the terms of new convertible debenture agreements entered into in
January 2005 with an aggregate principal balance of $7,695,000. Under the
replacement agreements, the maturity dates of the debentures were extended to
January 14, 2015, and other principal terms (i.e. interest rate, conversion
price, warrants issued and warrant exercise price) remained the same as in the
October agreements described above.
PREFERRED STOCK
In October 2004 the Company issued 450,000 shares of Series A
Convertible Preferred Stock ("Series A Shares") to Langley Park Investments,
PLC, a United Kingdom corporation ("Langley"). The Company issued the Series A
Shares in exchange for 2,477,974 newly issued Ordinary Shares of Langley, with
an agreed initial value of (pound)1.00 (pound) per share. The commission payable
in conjunction with the sale was 10% of the issued shares, or 247,797 shares,
leaving 2,230,177 shares available to ART. Consummation of the transaction was
subject to admission of the Langley shares to the London Stock Exchange ("LSE"),
which occurred on September 30, 2004 and the initiation of trading on the LSE,
which began on October 8, 2004. The value of these shares to ART on October 8
was $1,382,989 net of commission of $153,665. On December 31, 2004, the shares
were valued at $590,980.
In accordance with the agreement with Langley, the Company may sell the
shares received by it in the open market on the LSE at any time. During the
first quarter of 2005, the Company sold a portion of the shares, as follows:
23
Sales of Langley Shares
Date of Sale # of Shares Sold Gross Proceeds Fees Net Proceeds
------------ ---------------- -------------- ---- -------------
1/12/05 500,000 $ 135,531.50 $ 736.11 $ 134,795.39
2/24/05 500,000 158,120.00 849.13 157,270.87
3/4/05 500,000 158,416.50 851.16 157,564.34
3/11/05 100,000 30,872.00 214.18 30,657.82
3/24/05 630,177 181,698.93 968.08 180,730.85
---------- ------------- --------- -------------
Total 2,230,177 $ 664,638.93 $3,618.66 $ 661,020.27
========== ============= ========= =============
PLAN OF OPERATIONS
GENERAL
In 2004 we began to transition from a research and development
organization to a product marketing and distribution company as a result of the
initiation of sales of our EpiLift and LasiTome product lines outside the United
States, for which we acquired world-wide marketing and distribution rights
through a licensing agreement finalized in the second quarter of the year.
However, the licensing agreement was terminated in October of 2005, and we
currently have no products for sale. During the next twelve months our efforts
will be aimed at replacing the licensing agreement so that we can market similar
products. Also, we will continue product development efforts and regulatory
compliance efforts with respect to the Hydrokeratome and PulsaTome.
SALES AND MARKETING ACTIVITY
Sales and marketing activities relating to our products under
development will be dependent on progress achieved in the remaining required
development, testing and regulatory activities. If we are able to conclude a
licensing agreement with respect to Epi-Lasik products to replace that product
line, our marketing activities during the next twelve months will be devoted to
those products.
PROPERTY, PLANT AND EQUIPMENT
RESEARCH AND PRODUCT DEVELOPMENT AND TESTING:
During the first half of 2005 the Company expended approximately
$10,000 in establishing a clean room in the Company's new offices, to support
future research and development operations.
The Company is exploring other potential products relating to its
business, including a device that would quantify the properties of the human
lens which could be used by ophthalmologists to determine the degree of cataract
development in patients, and a pharmaceutical product for the treatment of
macular degeneration.
In order to support our planned research and product development
activities, we anticipate the following capital expenditures during 2006:
Machine shop equipment $ 60,000
Laboratory equipment 150,000
Animal study 110,000
Quality assurance and testing equipment 30,000
Engineering and product testing software 50,000
-----------
Total research, product development and testing $ 400,000
===========
During 2006 we plan to further develop both the Pulsatome and
HydroKeratome. The emphasis will be more heavily weighted to the Pulsatome,
because of its greater potential in the cataract surgery market. We plan to
complete three Pulsatome prototypes during the first half of 2006, and to
commence animal studies immediately thereafter. This animal study will be
conducted at the University of Utah under the direction of Randall Olsen, M.D.
We estimate that an FDA submission will be filed under FDA rule 510k in the
middle of the third quarter. The HydroKeratome will be developed as resources
and funding permits, so that potential marketing might be possible in late 2007.
Reliability testing and product life testing will be the focus of the
HydroKeratome studies.
24
EMPLOYEE ADDITIONS
To support projected company growth and increased emphasis on sales,
marketing, distribution and customer training/support, we anticipate hiring a
total of 2 new employees during the next twelve months. Annualized incremental
expenses related to salaries and benefits for the new employees to be hired
during this period are estimated to be approximately $300,000, and we expect to
hire the majority of these new employees during the second and third quarters of
2006.
NEW EMPLOYEE BREAKDOWN:
Headcount
Department Additions
---------- ---------
Accounting and administration 1
Quality Assurance 1
-----
Total 2
=====
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE PLANS AND RESULTS
Planned activities discussed above with respect to anticipated
expenditures for sales and marketing, additions of property, plant and equipment
and employees are contingent on our obtaining sufficient funding, as well as on
the success of our final product development and commercialization efforts
related to our internally developed products.
In addition, see "Risk Factors."
BUSINESS
COMPANY BACKGROUND AND SUMMARY
ART is a medical device company focused on the marketing and
development of ophthalmic surgery products for use in the laser eye surgery and
cataract surgery markets. The Company was incorporated on February 2, 1996, as a
wholly owned subsidiary of SurgiJet, Inc. to develop and distribute medical
products based on patented waterjet-based technology licensed from SurgiJet. In
May 1999, the Company was spun off from SurgiJet through a distribution of
common stock to its shareholders, after which SurgiJet had no remaining
ownership interest in the Company.
In December 2002 the Company entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into the Company. The
merger was consummated on February 11, 2003, and immediately thereafter,
VisiJet, Inc. was merged into Ponte Nossa Acquisition Corp., and the surviving
company's name was changed to "VisiJet, Inc.". It was subsequently changed to
"Advanced Refractive Technologies, Inc."
In April 2004, ART entered into an exclusive license agreement with
Gebauer Medizintechnik GmbH, of Neuhausen Germany ("Gebauer"), pursuant to which
we acquired worldwide marketing, sales and distribution rights for Gebauer's
LASIK and Epi-LASIK products. In May 2004, we began marketing these products in
Europe and certain other foreign countries, where the products have received
regulatory clearance for sale, and began generating revenue from product sales
during the second quarter of 2004. In September 2004, we began marketing the
Epi-Lasik product in the United States, following receipt of clearance for
marketing from the U.S. Food and Drug Administration.
After disputes arose between us and Gebauer, in October of 2005 we
entered into an agreement with Gebauer terminating the license agreement, and we
sold our remaining inventory of products to CooperVision International Holding
Company, LP. As a result, we currently have no products for sale and we have no
source of revenues. We are in discussions with BioVision AG, a Swiss company, to
license its FDA approved product, the Visitome 20-10 microkeratome. In its
present form, this product can perform LASIK surgeries in the conventional way.
This product is now being modified, by BioVision, so that it can perform the
epi-LASIK procedure, generally similar to the Gebauer device. This will require
an additional FDA approval under rule 510(k), which will require funding from
BioVision or a potential partner to complete the regulatory procedures.
Accordingly, additional financing will be required to complete an agreement with
BioVision and gain final FDA approval for marketing these products in the United
States. We currently have no commitments for such financing.
25
In addition, we are engaged in the research and development of
ophthalmic surgery products based upon applications of our proprietary waterjet
technology, designed to result in faster, safer and more efficacious laser eye
and cataract surgery. To date, these efforts have been focused on bringing to
market two products, with different applications and markets.
First is the Pulsatome(R), which utilizes waterjet technology to remove
the cataractous human crystalline lens in the eye during cataract surgery.
Second is the HydroKeratome(R), a device that utilizes waterjet technology to
cut the corneal flap immediately prior to applying an excimer laser in laser eye
surgery to correct myopia, hyperopia and astigmatism.
MARKETS
THE REFRACTIVE SURGERY MARKET
Our products assist in surgical procedures relating to the cornea. The
cornea is the clear window that provides most of the focusing power of the
vision system of the eye, as well as allowing light into the eye. The anterior
surface of the cornea is covered with a thin layer called the epithelium. The
epithelium is covered with a liquid tear film.
Physicians generally treat vision disorders by prescribing eyeglasses
or contact lenses or through ophthalmic surgery, all of which compensate for or
correct the vision error. The principal surgical techniques available to treat
vision disorders are radial keratotomy ("RK"), Photo Refractive Keratectomy
("PRK")/LASIK and Refractive Lamellar Keratoplasty ("RLK"). In RK, PRK/LASIK and
RLK, the object of the surgery is to change the shape of the anterior corneal
surface and to eliminate or reduce refractive error. An additional objective is
to minimize lens aberrations to improve visual acuity, which is not possible
with eyeglasses or contact lenses.
The refractive surgery market in its current form began in late 1995
when the FDA approved the first excimer laser for PRK. Before 1995 refractive
surgery was conducted by various manual, non-laser techniques, the most popular
of which was RK. In RK, the surgeon uses a diamond knife to make radial
incisions in the cornea to flatten it. This technique, and others like it, is
highly dependent on the surgeon's skill, and often produces mixed results.
By contrast, in PRK utilizing the excimer laser, the
computer-controlled laser is programmed to remove the specified amount of
corneal tissue with precision, delivering a consistent outcome. In spite of its
inherent accuracy and predictability, PRK was not widely accepted by patients,
because it uses the laser to burn away the most sensitive top layers of the
cornea. Patients undergoing PRK often experienced considerable pain, and were
left with a persistent cloudiness of the cornea for days or weeks. PRK generally
met the clinical expectations of the surgeon, but failed to satisfy the
patient's desire for comfort and rapid recovery. For this and other reasons, PRK
failed to attain broad market acceptance.
In late 1996 many ophthalmic surgeons started utilizing a new
procedure, Laser In Situ Keratomileusis ("LASIK"), which addressed many of the
negative aspects of PRK from the patient's standpoint, while preserving the
accuracy of PRK. LASIK utilizes a microkeratome, which is a mechanically driven
razor to create a flap in the surface of the cornea. After creation of the flap,
the excimer laser is used on the exposed internal tissue, called the stroma,
underneath the flap. The excimer laser emits ultraviolet light in very short,
high-energy pulses and ablates part of the corneal surface according to a
prescribed spatial pattern, changing the curvature of the anterior corneal
surface. The laser removes a predetermined amount of tissue to achieve the
desired correction, and the hinged flap is reset as closely as possible to its
original position, where it adheres to the underlying stroma. The adherence
increases over a period of many months. The patient's vision is significantly
improved within minutes of surgery.
Because the laser energy is used on the less sensitive inner tissue of
the cornea, the patient experiences very little pain after surgery and there is
generally no clouding of the corneal surface. The patient is usually able to
return to normal function the next day with immediate vision improvement.
Recently, a new refractive surgery technique, referred to as Epi-LASIK,
was introduced. The Epi-LASIK procedure utilizes an automated device to
mechanically separate the epithelium, or outer layer of the cornea, in a sheath,
approximately 30 microns thick. This is in contrast to cutting into the cornea
using a microkeratome blade and creating a flap, from 120 - 180 microns thick,
as is done in the traditional LASIK procedure. Once the epithelium has been
separated, the curvature of the corneal surface is changed to predetermined
specifications using an excimer laser. Following the laser procedure, the
epithelium sheath is then returned to its original position.
26
THE CATARACT SURGERY MARKET
Currently, the majority of cataract surgical procedures are performed
using an ultrasonic phacoemulsifier device. The phaco, as it is commonly called,
utilizes an ultrasonic generator which vibrates the tip of the phaco hand piece
40,000 times per second. When the tip is introduced into the eye and placed in
contact with the cataractous lens, the lens is gradually reduced to smaller
pieces until it can be aspirated out of the eye.
THE COMPANY'S PRODUCTS
WATERJET TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT
Waterjet technology is an established method for precision cutting of
materials in a variety of industrial applications. It uses the principle of
pressurizing water to extremely high levels, and allowing the water to escape in
a controlled manner through a very small opening, or orifice. Water jets use the
high pressure beam of water exiting the orifice to cut various materials,
including tile, wood, plastic, metal, and stone. In general, industrial
applications of waterjet technology are used in place of a laser or other device
when the "cut" needs to be quicker, cleaner, and with minimum distortion and
temperature increase.
The Company holds an exclusive license with respect to the ophthalmic
applications of a series of U.S. and foreign patents relating to the waterjet
technology. The technology uses a pneumatic-hydraulic pressure intensifier to
produce a collimated high pressure water beam that is approximately the diameter
of a human hair. This self-cleaning, eversharp "hydro-laser" can cut through
tissue at 12mm (.5 inch) per second. The hydraulics are controlled by an
embedded central processing unit with displays, gauges, controls, aspiration and
irrigation fluidics familiar to ophthalmic surgeons.
ART is currently developing two ophthalmic surgical products utilizing
its proprietary waterjet technology. The first is Pulsatome(R), a device that
uses pulsed waterjet technology to remove cataracts, and the second is
Hydrokeratome(R), a device that uses a high-pressure micro beam of water to cut
a corneal flap during LASIK surgery. Although our waterjet based products under
development have different applications, they share certain basic
characteristics. Each of the waterjet products consists of a modular console
with an intensifier and a hand piece. The modular unit is attached to a delivery
tube, which is in turn attached to a hand piece. The hand piece delivers the
water jet to the tissue and its integral aspirator removes any debris tissue and
water through a disposable tube that returns to the console.
PULSATOME(R) CATARACT EMULSIFIER. The Pulsatome(R) Cataract Emulsifier
is an emulsification device designed for the quick and safe removal of the
cataractous human crystalline lens in the eye, a necessary procedure before
installing a new intraocular lens ("IOL"). The device creates a pulsating stream
of saline solution, and the impact from the pulsating fluid emulsifies the
cataractous human lens and breaks the lens into small pieces. The Pulsatome
simultaneously aspirates the emulsified tissue and removes it from the interior
of the eye.
The Pulsatome requires minimal technical skill, as it functions like a
hydraulic eraser or paint brush. No sculpting or lens elevation or rotation is
necessary. The balanced irrigation/aspiration fluidics complement the embedded
CPU controlled micro pulses. The foot switch initiates the mode activity
selected by surgeon for the balanced and ergonomically shaped hand piece.
Based on the experience of our management team and consultants in the
ophthalmic industry, we believe that the waterjet platform of the Pulsatome will
be easier to learn to use and will require less skill than that required by
current ultrasound phaco emulsification devices. The Company also expects that
Pulsatome and its disposable package will be priced in the low range of current
ultrasound devices, which will make it attractive in underdeveloped markets, and
also attractive in the U.S. and other nations where cost containment is
critical.
Assuming successful completion of the remaining development milestones
listed below, we anticipate obtaining clearance for marketing, and market
introduction of Pulsatome in the 2nd quarter of 2007. Of course, there can be no
assurance that the Company will receive FDA clearance for this or any other
product. We anticipate the cost of the remaining development work outlined to be
approximately $400,000.
27
Projected
Milestone Description Completion Date
--------------------- ---------------
Completion of animal testing 2nd Quarter 2006
Preparation and submission of 510(k) application 3rd Quarter 2006
Receipt of 510(k) clearance from US FDA 1st Quarter 2007
Market introduction 2nd Quarter 2007
HYDROKERATOME(R) CORNEAL CUTTING DEVICE. The HydroKeratome(R) is a
corneal cutting device for use in the LASIK procedure. The HydroKeratome works
by using a high-pressure micro beam of water to force a blunt dissection of
tissue in the path of the water beam. The HydroKeratome uses an embedded CPU
controlled pneumatic-hydraulic pressure intensifier to make the corneal flap.
The suction ring and applanation plate on the hand piece allow holding the eye
centered while the corneal flap is cut underneath the applanation plate. The
water jet traverses perpendicular to the visual axis, driven by a precision
miniature Swiss motor with gear box and encoder. A foot switch controls the
start of the transverse water jet motion, and the travel distance pre-programmed
by the surgeon stops the travel and shuts off the water jet beam. Approximate
travel time is one-half second. The HydroKeratome is designed to address many of
the problems that are common with mechanical "blade" microkeratomes, such as
poor visualization, inconsistent thickness of flaps, hazing, loose flaps, off
center cuts, and lashes caught in gears.
Assuming successful completion of the remaining development milestones
listed below, we anticipate obtaining clearance for marketing in the 4th quarter
of 2007, and to initiate sales of Hydrokeratome in the second quarter of 2008.
We anticipate the cost of the remaining development work outlined to be
approximately $100,000.
Projected
Milestone Description Completion Date
--------------------- ---------------
Completion of animal testing 1st Quarter 2007
Confirmation of device consistency 1st Quarter 2007
Preparation and submission of 510(k) application 2nd Quarter 2007
Receipt of 510(k) clearance from U.S. FDA 4th Quarter 2007
Market introduction 2nd Quarter 2008
Development activities for both Pulsatome and Hydrokeratome indicated
above are subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, our ability to obtain sufficient
funding on a timely basis, unanticipated failure of required testing activities,
unexpected delays in completion of milestones and inability to obtain, or delays
in obtaining, required marketing clearance from the U.S. FDA.
COMPETITION
Our Hydrokeratome product, if successfully developed and cleared for
marketing, will provide an additional alternative for creating a corneal flap,
using a high-pressure micro beam of water, instead of a metal blade, to expose
the corneal tissue prior to the application of the excimer laser.
Our Pulsatome product, if successfully developed and cleared for
marketing, will compete in the cataract emulsification market.
COMPETITION IN CREATING THE CORNEAL FLAP
EPI-LASIK COMPANIES - Epi-LASIK devices were first introduced to the
marketplace in 2004, and have not yet captured a significant share of the
corneal flap market. Currently, we are aware of only one company, Norwood Abbey,
with an Epi-LASIK product on the market. In addition, we are aware of two other
Epi-LASIK products under development using similar technology that may become
competition in the future if development efforts are completed and regulatory
clearance is received.
MICROKERATOME COMPANIES - The corneal flap market is currently
dominated by microkeratome devices which maintain approximately 89% of the total
market. There are a number of companies that manufacture and or supply
microkeratomes including Bausch & Lomb, Moria, Advanced Medical Optics and
Nidek. All of these companies have significantly greater financial resources,
greater name recognition, larger product offerings and customer bases and longer
operating histories than ART.
28
LASER COMPANIES - We are aware of one company, Intralase, that has
developed and markets a device for creating a corneal flap utilizing laser
technology that has captured approximately 11% of the total market.
Our Hydrokeratome product is being developed to provide an alternative
to the traditional microkeratome method of creating a corneal flap, through the
use of high-pressure waterjet technology. We believe that if successfully
developed, the Hydrokeratome will be able to compete in the microkeratome market
as it is being designed to address many of the potential problems associated
with the traditional medal blade microkeratomes, such as poor visualization,
inconsistent thickness of flaps, hazing, loose flaps, off center cuts, and
lashes caught in gears.
COMPETITION IN THE CATARACT EMULSIFICATION MARKET
The primary instrument currently used for cataract removal surgery is
the ultrasonic phacoemulsifier. There are a number of companies that
manufacturer and or supply ultrasound phaco emulsification devices including
Alcon, Bausch & Lomb and Advanced Medical Optics. All of these companies have
significantly greater financial resources, greater name recognition, larger
product offerings and customer bases and longer operating histories than ART.
Our Pulsatome product under development represents an alternative
approach for the removal of cataracts using high-pressure pulsating waterjet
technology instead of ultrasound. We are aware of only one company, Alcon, that
has a device on the market that uses pulsed waterjet technology to remove
cataracts. The Alcon waterjet technology is incorporated in a combined device
that also includes phaco ultrasound capabilities. Based on the experience of our
management team and consultants in the ophthalmic industry, we believe that the
Pulsatome, if successfully developed, will be easier to use, and will be most
cost effective, and as a result will be able to compete effectively with, and
gain market share from, traditional phaco ultrasound devices. In addition, we
believe that the Pulsatome will compete effectively with the Alcon waterjet
technology as the Pulsatome is being designed to effectively remove a wider
range of cataracts, on a stand-alone basis, and therefore will be priced below
the combined Alcon unit.
COMPETITION FROM NEW TECHNOLOGIES
The medical device industry for ophthalmologic surgery products is
highly competitive. Many other companies are engaged in research and development
activities, and many of these have substantially greater financial, technical
and human resources than ART. As such, they may be better equipped to develop,
manufacture and market their technologies. Accordingly, we also face competition
in the future from new products and technologies that may provide safer and more
cost effective alternatives to our products, or that may render our products
obsolete.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on completion of final
product development and testing and securing of regulatory approval for our two
internally developed products, Hydrokeratome and Pulsatome. During the fiscal
years ended December 31, 2003 and 2004 and for the three months ending March 31,
2005, we spent approximately $1,256,259, $695,100 and $104,987, respectively, on
research and development activities.
MANUFACTURING
We plan to outsource manufacturing for our internally developed
products to an ISO 9001 approved local contract manufacturing facility. This
contractor will purchase and stock parts, assemble, test and burn-in units, and
will stock finished goods and ship as required from a bonded warehouse.
GOVERNMENT REGULATION
UNITED STATES. ART's products are medical devices. As such, we are
subject to the relevant provisions and regulations of the Federal Food, Drug and
Cosmetic Act, under which the United States Food and Drug Administration ("FDA")
regulates the manufacture, labeling, distribution, and promotion of medical
devices in the United States. The Act provides that, unless exempted by
regulation, medical devices may not be commercially distributed in the United
States unless they have been approved or cleared by the FDA for marketing. There
are two review procedures by which medical devices can receive such approval or
clearance. Some products may qualify for clearance under a 510(k) notification.
Under the 510(k) procedure, the manufacturer submits to the FDA a pre-market
notification that it intends to begin marketing its product. The notification
must demonstrate that the product is substantially equivalent to another legally
marketed product (i.e., it has the same intended use, is as safe and effective,
and does not raise different questions of safety and effectiveness than does a
legally marketed device).
29
A successful 510(k) notification results in the issuance of a letter
from the FDA in which the FDA acknowledges the substantial equivalence of the
reviewed device to a legally marketed device and clears the reviewed device for
marketing.
FDA STATUS OF CURRENT PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
HydroKeratome - We have received successful 510(k) notification with
respect to our initial filing for the HydroKeratome, and have filed a 510(k)
submission with the FDA for upgrades to the product. Before commencement of
marketing the HydroKeratome, we must obtain 510(k) approval from the FDA for the
product enhancements. We are currently addressing issues raised by the FDA in
our product enhancement submission for HydroKeratome, and hope to file our
response during the first quarter of 2006.
Pulsatome - Based on successful completion of required product
development and testing issues, we anticipate filing a 510(k) application for
marketing clearance of Pulsatome in the first quarter of 2006.
In addition to laws and regulations enforced by the FDA, our products
may also be subject to labeling laws and regulations enforced by the United
States Federal Trade Commission ("FTC"). Any additional requirements related to
FTC laws and regulations will be addressed and monitored by the Company's
Regulatory Affairs department, although we do not expect that any such laws
and/or regulations will have a significant impact on our products.
OTHER COUNTRIES. Regulatory requirements in other countries with
respect to marketing of medical device products vary widely.
DISTRIBUTION METHODS
We plan to market our products in the United States through a direct
sales force consisting of a small number of employees and independent sales
representatives. Our sales force will consist of personnel with extensive
experience in sales of devices and other ophthalmic products to refractive
surgeons. Our sales and marketing efforts our focused on the following
strategies and activities:
o DRIVE PRODUCT AWARENESS - Increase awareness of products
through advertising, exhibiting at major industry meetings and
conferences and developing relationships with leading
refractive surgery centers and key industry opinion leaders.
o IDENTIFICATION OF PROSPECTS AND FOLLOW-UP ON PHYSICIAN LEADS -
Identify prospective customers, initiate contact and follow-up
on physician leads through phone calls, email, distribution of
product literature and videos and direct contact as
appropriate.
o VISIT PHYSICIANS - Meet with interested physicians for face to
face follow-up, pig eye demonstrations and live surgical
demonstrations as appropriate.
o CLOSE SALE, TRAINING AND SUPPORT - Complete sale, arrange
third-party lease financing as appropriate, ensure proper
post-sale training and customer service.
We plan to distribute our products internationally through a series of
agreements with distribution companies in major countries that handle other
American and European manufactured ophthalmic products, and that are familiar
with applicable local government rules and regulations, as well as with the
customer base and key ophthalmic surgeons in the region. To date, we have
distribution arrangements in major international markets, including the
following:
Country Distributor
------- -----------
France Anteis S.A.
Italy NewTech SpA
Spain Wavelight/Tetramedics
United Kingdom Kestrel Ophthalmics
Greece Medicare Ltd.
Switzerland Mediconsult AG
Japan Japan Focus Co., Ltd.
30
Although specifics vary based on countries and territories covered, our
international distribution agreements generally provide for a specified term and
exclusive territory, fixed sales prices from ART to the distributor and minimum
purchase quantity requirements for the distributor.
Distribution of our products in countries other than the United States
may be subject to regulation in those countries. In some countries, the
regulations governing such distribution are less burdensome than in the United
States, and we may pursue marketing our products in such countries prior to
receiving permission to market from the FDA in the United States. We will
endeavor to obtain the necessary government approvals in those foreign countries
where we decide to manufacture, market and sell our products.
PATENTS AND TRADEMARKS
Most of the technology utilized by the Company in products under
development is covered by patents owned by SurgiJet, Inc., a developer of
waterjet technology for a variety of medical and dental applications, and our
former parent company. We have been granted an exclusive worldwide license to
these patents for ophthalmological applications for the life of the patents. The
license agreements with SurgiJet include twelve issued U.S. patents and four
issued international patents. ART also has the exclusive licenses to certain
non-patented technology developed by SurgiJet related to ophthalmic
applications, and holds exclusive licenses for certain registered trademarks,
including VisiJet(R), HydroKeratome(R), and Pulsatome(R). The Company intends to
protect its development work by means of licensing additional patents and
trademarks as necessary and to protect its own inventions with additional patent
applications.
Under the terms of the license agreements with SurgiJet, Inc., entered
into October 23, 1998, we are obligated to pay a royalty of 7% of revenues
received from sales of the products utilizing licensed patents and technology,
up to $400 million of revenues over the course of the Agreements, and 5% of
revenues thereafter. The license agreements with SurgiJet also provide for a
minimum royalty of $60,000 per year. To date, the Company has paid a total of
$180,000 in minimum royalty payments to SurgiJet, and, as of September 30, 2004
$45,000 in minimum royalty payments were accrued.
On September 17, 2003, we entered into a license agreement with Robert
M. Campbell, Jr., M.D., pursuant to which the Company obtained exclusive
worldwide rights for all medical applications for a patented technology invented
by Dr. Campbell that provides for the sterile flow of fluid through a surgical
water jet apparatus. The license agreement provides for a royalty of 6% on
revenues from products utilizing licensed technology and is subject to a minimum
royalty of $24,000 per year. To date, $24,000 in minimum royalty payments have
been made, and as of September 30, 2004 $50,000 of the license fee balance owed
was due and payable.
Following is a listing of patents licensed by the Company:
PATENT NUMBER DATE ISSUED EXPIRATION DATE NAME
------------- ------------- --------------- -------------------------------
5,037,431 Aug. 6, 1991 Nov. 3, 2009 Surgical Lance Apparatus
5,322,504 June 21, 1994 May 7, 2012 Method and Apparatus for Tissue
Excision and Removal by Fluid
Jet
5,562,692 Oct. 8, 1996 Oct. 8, 2013 Fluid Jet Surgical Cutting Tool
5,591,184 Jan. 7, 1997 Oct. 13, 2014 Fluid Jet Surgical Cutting
Instrument
5,643,299 July 1, 1997 Jan. 16, 2016 Hydrojet Apparatus for
Refractive Surgery
5,674,226 Oct. 7, 1997 May 7, 2012 Method and Apparatus for Tissue
Excision and Removal by Fluid
Jet
5,735,815 April 7, 1998 July 26, 2013 Method of Using Fluid Jet
Surgical Cutting Tool
31
5,853,384 Dec. 29, 1998 Dec. 29, 2015 Fluid Jet Surgical Cutting Tool
and Aspiration Device
5,865,790 Feb. 2, 1999 July 26, 2013 Method and Apparatus for Thermal
Phacoemulsification by Fluid
Throttling
6,143,011 Nov. 7, 2000 April 13, 2018 HydroKeratome for Refractive
Surgery
6,312,440 Nov. 6, 2001 April 13, 2018 Fluid Jet Keratome Apparatus and
Method for Refractive Surgery
6,440,103 Aug. 27, 2002 March 17, 2019 Method and Apparatus for Thermal
Emulsification
636345 Feb. 1, 1995 July 18, 2014 Method and Apparatus for Tissue
Excision and Removal by Fluid
Jet (Australia)
677061 Nov. 4, 1997 July 14, 2014 Fluid Jet Surgical Cutting Tool
(Australia)
WO98/36717 Aug. 27, 1998 Aug. 27, 2015 Hydrojet Apparatus for
Refractive Surgery (PCT)
A 61 B 17/32 May 5, 1999 May 5, 2016 Chirurgische Flussigstrahl
Schneidvorrichtung (Germany)
5,620,414 April 15, 1997 April 15,2014 Apparatus and Method for
Effecting Surgical Incision
Through Use of a Fluid Jet
EMPLOYEES
As of December 31, 2005 we employ 8 persons full time. Of these
employees, three are in corporate management and legal affairs, one is in
research and product development, two are in sales and marketing and one is in
customer relations. None of our employees are covered by collective bargaining
agreements and we believe that our relationship with our employees is good. Any
future increase in the number of employees will depend upon the growth of our
business, the successful commercialization of our products and on our obtaining
sufficient funding.
DESCRIPTION OF PROPERTY
We lease an office, research and warehouse facility of approximately
6,500 square feet in San Clemente, California for a monthly rent of $6,413. The
lease expires in February 2008. We believe these facilities will be sufficient
to house our operations for the foreseeable future.
LEGAL PROCEEDINGS
We are currently engaged in the following legal proceedings:
The Company is a defendant in Steven J. Baldwin vs. VisiJet, Inc., et
al, a case pending in San Francisco County Superior Court, filed on February 9,
2004(Case NO. 04- 428696). The Plaintiff alleges that the Company failed to
compensate him for services performed, prior to the merger with PNAC, pursuant
to a consulting agreement and is seeking monetary damages in the approximate
amount of $450,000. The case is currently in a preliminary stage.
In October 2004, the Company and SurgiJet, Inc., its former parent
company, entered into a settlement agreement covering all previously outstanding
litigation between the two companies, as well as with SurgiJet's principal
owners and its subsidiary, DentaJet. In accordance with the settlement
agreement, the Company agreed to pay a total of $579,774, plus accrued interest
at an annual rate of 7.5% from August 31, 2004, as full settlement of previously
disputed notes payable to SurgiJet and DentaJet and related accrued interest. In
addition, the Company agreed to pay a previously disputed note payable to a
shareholder of the Company, who is also a principal owner of SurgiJet, in the
amount of $19,000 plus accrued interest at an annual rate of 10% from December
31, 2002. In addition, the Company agreed to issue 75,000 shares of its Common
Stock to SurgiJet, granted SurgiJet a security interest in all of its assets and
32
agreed to provide SurgiJet with a stipulated judgment, which can only be filed
by SurgiJet upon an event of default which remains uncured following 10 days
after receipt of written notice of such default. Payments on all obligations due
pursuant to the settlement agreement are payable in monthly installments
commencing December 1, 2004. The first payment was in the amount of $30,000, and
thereafter monthly payments are $20,000 through December 2005, and $25,000 from
January 1, 2006 until the obligations are paid in full. In accordance with the
settlement agreement, SurgiJet and its principals agreed to waive, subject to
completion and final report from an independent accounting firm, claims for
additional monies owed to them, and to dismiss their cross-complaint against the
Company, its directors and certain of its officers seeking additional monetary
damages and rescission of the Merger Agreement.
The Company is a defendant in Allante Art Group, Inc. et al v. VisiJet,
Inc. et al, a case pending in Orange County Superior Court, filed on July 30,
2003 (Case No. 03CC09678). The Plaintiff, an executive search firm, is seeking
damages of $114,500 from the Company and a former employee of the plaintiff. The
complaint alleges that the former employee misappropriated customer lists and
names in connection with the placement of employees with the Company. The case
is in a preliminary stage.
The Company is the plaintiff in Advanced Refractive Technologies, Inc.
v. Hennessey, et al, an action we filed in the Ontario Superior Court of Justice
against certain individuals who agreed to purchase approximately five million
shares of our Common Stock. In the action, we are seeking damages from the
defendants for failure to honor the agreement to purchase stock in the Company.
The case is currently in the discovery stage.
In connection with the litigation,the Company issued ten million shares
of its Common Stock to its attorneys in Canada as collateral to secure payment
of legal fees. Under the pledge arrangement, once the legal fees are paid, the
shares are to be returned to the Company, at which time they will be canceled
and restored to the status of authorized but unissued shares.
MANAGEMENT
The officers and directors of ART are as follows:
Director
Name Age Position Since
---- --- -------- -----
Richard H. Keates, M.D.(1)(2) 73 Chairman of the Board 2003
of Directors
Randal A. Bailey 61 President, Chief Executive 2003
Officer and a Director
Laurence M. Schreiber 64 Chief Operating Officer, 2003
Secretary, Treasurer and
a Director
Adam Krupp(1)(2) 42 Director 2003
Norman Schwartz(1)(2) 62 Director 2003
(1) Member of the Executive Committee
(2) Member of the Audit Committee
Dr. Keates has been Chairman of the Board of Directors since February
2003. He is an ophthalmologist, consultant, and professor, and has been a
Professor of Ophthalmology at New York Medical College since 1997. Dr. Keates
has served on various boards of directors, including Frigitronics (NYSE), Med
Chem (NYSE), Autonomous Technologies (NASDAQ) and Chiron Vision. Dr. Keates has
consulted for leading health care companies including IO Lab, Alcon, and Bausch
& Lomb. He is a founding partner of Intelligent Biocides, and has published over
100 articles in ophthalmology. Among his many faculty appointments, Dr. Keates
has been a professor at Ohio State University, Professor and Chairman of the
Ophthalmology Department at the University of California, Irvine. He is the
President of the New York Introcular Lens Society and recently completed his
term as the President of the New York Keratorefractive Society. Dr. Keates
graduated from the University of Pennsylvania and from the Jefferson Medical
College. He completed his Ophthalmology training at Harvard Basic Sciences in
Ophthalmology and The Manhattan Eye, Ear & Throat Hospital.
33
Mr. Bailey has served as President since February 2003, and was
appointed to the Board of Directors in September 2003. Between 1995 and 2003 he
had been affiliated with the Company's predecessors in an executive management
capacity. He has more than twenty-five years experience in management roles at
both medical device and pharmaceutical companies. From 1991 to 1995, Mr. Bailey
was the leader of the sales organization of Pharmacia Ophthalmics, Inc. Between
1989 and 1991, Mr. Bailey was the Vice President of Sales and Marketing for
Novoste, Inc. (NASDAQ) a start up cardiovascular company. Mr. Bailey was a
co-founder and Vice President of Sales and Marketing for Chiron Vision, Inc.,
which was acquired by Bausch & Lomb in 1997. Chiron Vision, now Bausch & Lomb
Surgical, is a leader in the manufacturing and sales of ophthalmic devices
worldwide. From 1980 to 1986 Mr. Bailey was the initial Vice President of Sales
and Marketing for Allergan Medical Optics, Inc.
Mr. Schreiber has served as Chief Operating Officer, Secretary and
Treasurer since February 2003, and was appointed to the Board of Directors in
September 2003. Prior to February 2003, Mr. Schreiber was an executive officer
and a member of the Board of Directors of Ponte Nossa Acquisition Corporation,
where he played an integral role in the merger between Ponte Nossa and the
Company that was finalized in February 2003. Prior to joining Ponte Nossa in
2001, he founded Diversified International, a multilevel marketing system, and
served as Chief Executive Officer of Learn America, a multimedia productions
company combining advanced computer technology and educational systems. Mr.
Schreiber also served as President and a director of Philibus Systems, a private
educational system, and was President of Advanced Nutritional Associates, which
distributed health care products in the United Kingdom and Europe. He has
developed an independent sales distribution system for Herbalife, and pioneered
markets in the United Kingdom, Spain and Israel.
Mr. Krupp has over eighteen years of business experience with emerging
growth companies. He is currently a Managing Director and a member of the
Executive Committee of CS Technology, Inc, a New York based technology
consulting firm. Prior to joining CS Technology, Inc., Mr. Krupp spent ten years
in the real estate industry working for several organizations in development,
construction, and leasing. Mr. Krupp holds a B.A. from the University of
Michigan and an M.S. from New York University.
Mr. Schwartz has been a member of the board of directors since February
2003, and has served as ART's contract and legal coordinator since March 2003.
Mr. Schwartz has over thirty years of experience in providing legal and
financial advice to individuals and companies. He has acted as Chief Financial
Officer and president of several companies, both public and private, including
Acubid International, Ameritrust, and Farm Energy Corp. He served on the Board
of International Acuvision Systems, a public company that developed and patented
vision Training equipment. He is an active member of the Arizona Bar
Association. Mr. Schwartz graduated from Arizona State University, completed his
JD at the University Of Arizona, and received his LLM in taxation from New York
University.
Directors hold office until a successor is elected and qualified or
until their earlier resignation in the manner provided in the Bylaws.
Scientific Advisor
Richard Lindstrom, M.D. is the Chief Ophthalmic Consultant to the
Company, and is in charge of assisting and advising us in connection with
product development in the ophthalmic surgical arena. After serving as Clinical
Professor of Ophthalmology at the University of Minnesota from 1980 to 1990, Dr.
Lindstrom entered private practice and now directs an outpatient clinic adjacent
to the Phillips Eye Institute in Minneapolis. He conceptualized the Phillips Eye
Institute Center for Teaching and Research, a state-of-the-art ophthalmic
research and surgical skills education facility, where he currently serves as
Medical Director. Dr. Lindstrom plays an active role in the teaching program at
the Phillips Eye Institute and at the University of Minnesota Hospital. He also
serves as an Associate Director of the Minnesota Lions Eye Bank. Dr. Lindstrom
holds 27 patents in ophthalmology in intraocular lens implant technology,
corneal preservation, irrigation solutions, viscoelastic solutions, intracorneal
lenses, and associated surgical instruments. Dr. Lindstrom serves on the editing
board of a variety of medical journals, including Journal of Cataract and
Refractive Surgery, Ophthalmic Surgery, European Journal of Implant and
Refractive Surgery, Implants in Ophthalmology, Ocular Surgery News,
Ophthalmology Times, and Journal Review of Ophthalmology. He is Chief Medical
Advisor to Laser Vision Centers and Vision 21 Centers.
34
EXECUTIVE COMPENSATION
The following table summarizes the annual compensation paid to our
named executive officers during the three years ended December 31, 2004:
Long Term Compensation
----------------------------------
Annual Compensation Awards
-------------------------------------- ----------------------------------
Other Annual Securities
Salary Bonus Compensation Restricted Underlying All Other
Name and Principal Position Year ($) ($) ($) Stock Awards Options Compensation
------------------------------ ---------- ------------ --------- --------------- ----------------- ---------------- ---------------
Randal A. Bailey, 2004 172,500 200,000 45,305
President and Chief 2003 165,000 - 6,800 -- 200,000 62,500
Executive Officer (1)(2) 2002 -- - -- -- -- --
Laurence M. Schreiber, 2004 225,000 200,000
Chief Operating Officer, 2003 97,000 - 22,500 -- 200,000 --
Treasurer, Secretary (2)(3) 2002 -- - -- -- -- --
Larry Hood, 2004 129,375 75,000
Director of Research and 2003 122,500 - -- -- 75,000 83,333
Development, Chief Engineer 2002 -- - -- -- -- --
(1)(2)
-----------
(1) During 2003, the Company issued 164,319 shares of common stock, and
issued a two year promissory note in the amount of $150,000 to Mr.
Bailey and 46,948 shares of common stock, and issued a one year
promissory note in the amount of $100,000 to Mr. Hood in satisfaction
of an aggregate of $700,000 of unpaid compensation accrued between 1999
and 2002. Amounts noted as All Other Compensation represent respective
payments made by the Company pursuant to these promissory notes.
(2) Messrs. Bailey, Schreiber, and Hood became President and CEO, Chief
Operating Officer, Director. of Research & Development respectively, on
March 1, 2003 and earned consulting income from January to February
2003. Amounts noted as Other Annual Compensation represent respective
consulting fees paid in 2003 prior to March 1, 2003. Messrs. Bailey,
Schreiber and Hood did not receive any compensation from the Company in
2002.
(3) Mr. Schreiber's salary for 2004 includes back pay of $85,000 that was
accrued under the merger agreement in the amount $5,000 per month until
July of 2004.
Stock Options
On November 10, 2003, the Board of Directors adopted the 2003 Stock
Option Plan. The Option Plan provides for the grant of incentive and
non-qualified stock options to selected employees, the grant of non-qualified
options to selected consultants and to directors and advisory board members. The
Option Plan is administered by the Compensation Committee of the Board of
Directors and authorizes the grant of options for 3,000,000 shares. The
Compensation Committee determines the individual employees and consultants who
participate under the Plan, the terms and conditions of options, the option
price, the vesting schedule of options and other terms and conditions of the
options granted pursuant thereto.
As of December 31, 2004, a total of 2,460,000 options to purchase
shares of our common stock were outstanding pursuant to the 2003 Option Plan.
35
In June 2005, the shareholders adopted the 2005 Stock Option Plan. The
Option Plan provides for the grant of incentive and non-qualified stock options
to selected employees, the grant of non-qualified options to selected
consultants and to directors and advisory board members. The Option Plan is
administered by the Compensation Committee of the Board of Directors and
authorizes the grant of options for 5,000,000 shares. The Compensation Committee
determines the individual employees and consultants who participate under the
Plan, the terms and conditions of options, the option price, the vesting
schedule of options and other terms and conditions of the options granted
pursuant thereto.
The following table summarizes information concerning stock options
granted during the fiscal year ended December 31, 2004 to the named executive
officers:
Percent of
Total
Number of options/SARs
Securities granted
underlying to Exercise
options/SARs employees or base
granted in fiscal price Expiration
Name (#) year ($/Sh) date
--------------------------------------------------------------------------------
Randal A. Bailey 200,000 17.17% $1.10 November 10, 2013
Randal A. Bailey 200,000 14.60% $0.40 October 20, 2014
Laurence M. Schreiber 200,000 17.17% $1.10 November 10, 2013
Laurence M. Schreiber 200,000 14.60% $0.40 October 20, 2014
No named executive officer exercised options in the fiscal year ended December
31, 2004. The following table presents the number and values of exercisable and
unexercisable options as of December 31, 2004:
Number of
securities Value of
underlying unexercised in-
unexercised the-money
options/SARS at options/SARs at
FY-end (#) FY-end ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------------------------------------------------------------
Randal A. Bailey 50,000/350,000 $0/$0
Laurence M. Schreiber 50,000/350,000 $0/$0
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below lists the beneficial ownership of our common stock, as
of December 31, 2005, by each person known by us to be the beneficial owner of
more than 5% of our common stock, by each of our directors and officers, and by
all of our directors and officers as a group.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned(1)(2) of Class
-------------------------------------------------------------------------------
Renaissance Capital (5) 28,815,789(3) 33.98%
8080 N. Central Expressway
Suite 210-LB 59
Dallas, Texas 75206
Liberty View Special (6) 16,713,157(3) 23.11%
Opportunities Fund
111 River Street, Suite 1000
Hoboken, NJ 07030
Solmon Rothbart Goodman LLP 10,000,000(4) 17.86%
375 University Avenue
Suite 701
Toronto, On M5G 2J5 Canada
Lance Doherty 4,335,006(3) 7.74%
9342 Jeronimo Road
Irvine, CA 92618
Bushido Capital Master Fund LP(7) 6,915,789(3) 10.99%
275 Seventh Avenue, Suite 2000
New York, NY 10022
36
David E. Eisenberg Trust (8) 2,950,000(3) 5.0%
520 Madison, 38th Floor
New York, NY 10022
Corsair Capital (9) 8,644,737(3) 13.38%
350 Madison Ave., 9th Floor
New York, New York, 10017
Bridges & Pipes LLC (10) 6,339,474(3) 10.17%
830 #rd Avenue, 14th Floor
New York, NY 10022
Alpha Capital Aktiengesellschaft(11) 4,034,211(3) 6.72%
Pradafant 7
Furstentums 9490
Vaduz Liechtentstein
Roaring Fork Capital Management (12) 7,492,105(3) 11.8%
8400 E. Prentice Ave, Suite 745
Greenwood Village, Co 80111
Randal A. Bailey ** 520,501(3) .93%
1062 Calle Negocio, Suite D
San Clemente, California 92673
Richard H. Keates, M.D.** 425,000(3) .75%
20 Sutton Place South
New York, NY 10022
Laurence Schreiber** 253,622(3) *
1062 Calle Negocio, Suite D
San Clemente, California 92673
Norman Schwartz** 128,562(3) *
1062 Calle Negocio, Suite D
San Clemente, California 92673
Adam Krupp** 50,000(3) *
535 Eighth Avenue, 14th Floor
New York, NY 10018
All directors and executive
officers as a group (5 persons) 1,377,685(3) 2.46%
* Denotes less than one percent ** Denotes Member of the Board of Directors.
(1) Except as set forth, the persons named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
(2) Applicable percentage of ownership is based on 55,975,308 shares outstanding
as of December 31, 2005, together with applicable warrants, options and
convertible debt for such stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting and investment power
with respect to shares. Shares subject to options, warrants and convertible debt
currently exercisable/convertible or exercisable/convertible within 60 days
after December 31, 2005 are included in the number of shares beneficially owned
and are deemed outstanding for purposes of computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other stockholder.
(3) Includes shares issuable upon exercise of currently exercisable options or
warrants, or conversion of debt.
(4)Held as collateral for payment of legal fees
(5) Controlled by Robert Pearson. The number of shares set forth includes
shares held by Renaissance US Growth Investment Fund, BFS US Special
Opportunities Fund and Renaissance Capital Growth and Income Fund, all of which
are controlled by Robert Pearson
(6) Controlled by Ryan Hay
(7) Controlled by Louis Rabman
(8) Controlled by David E. Eisenberg
(9) Controlled by Jay Petschek
(10) Controlled by David Fuchs
(11) Controlled by Konrad Ackerman
(12) Controlled by Gene McCulley
37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Financial Entrepreneurs Incorporated ("FEI"), which at the time
beneficially owned in excess of 5% of the outstanding shares of common stock of
the Company, has funded certain expenditures of the Company. In April 2002, the
Company issued a Promissory Note to FEI for amounts loaned to the Company,
bearing an interest rate of 7.5% per annum. On December 31, 2003, the amount due
to related parties in the Company's balance sheet amounted to $278,659,
including accrued interest of $28,534.
In February 2003, FEI converted a promissory note held by it into
378,997 shares of Common Stock, at a conversion rate of $1.00 per share. Also in
February of 2003, pursuant to an agreement entered into in connection with the
merger, FEI cancelled 7,957,000 shares of Company Common Stock owned by it, and
the Company issued FEI a five year warrant to purchase 1,543,000 shares of
Common Stock at an initial exercise price of $5.00 per share.
During 2003, the Company paid finders' fees totaling $52,500 to FEI in
connection with amounts raised through private equity placements by the Company.
In addition, during 2003 the Company recorded consulting expenses totaling
$75,000 to FEI that were added to an outstanding note payable, and reimbursed it
for travel expenses related to business of the Company totaling $19,279.
During 2004, FEI loaned the Company $229,361, of which $200,600 was
paid creating a balance at December 31, 2004 of $330,749 including accrued
interest of $51,863. The Company paid finders fees of $15,000 and reimbursed
travel expenses of $15,593 to FEI of which $656 was included in accounts payable
at December 31, 2004. In March 2005, the Company received a notice from FEI for
the payment in full of the note. This is not a demand note and the Company is
currently in negotiations for resolution of this matter and believes there will
be an amicable resolution.
In June 2004, the Company and FEI entered into an agreement pursuant to
which the corporation agreed to loan the Company shares of the Company's common
stock owned by the corporation for use by the Company as collateral in
subsequent financing transactions. In return, the Company agreed to reduce the
exercise price of 1,543,000 warrants previously issued to the corporation from
$5.00 per share to $1.00 per share. In connection with the warrant re-pricing
the Company recorded a non-cash expense of $546,403 during the second quarter
based on a Black-Scholes model valuation. As of December 31, 2004 all shares
borrowed by the Company from the corporation pursuant to this agreement had been
returned to the corporation.
In February of 2003, the Company issued 164,319 shares of Common Stock
to Randal A. Bailey, its President and Chief Executive Officer, in cancellation
of $350,000 of unpaid salary. The Company also issued Mr. Bailey a two year
promissory note for $150,000 in satisfaction of unpaid salary. The note bears
interest at a rate of 3.5% per annum, and calls for twenty-four equal monthly
installments. As of December 31, 2004, the current amount due to Mr. Bailey was
$48,415, including $7,012 of accrued interest.
In February 2003, the Company issued five-year warrants to purchase
25,000 shares of its Common Stock at an exercise price of $3.00 per share, each
to Laurence Schreiber, a director and officer of the Company, and to Thomas F.
DiMele, a former officer of the Company, pursuant to an agreement entered into
in connection with the merger.
During 2003, the Company began making consulting payments of $2,500 per
month to a corporation controlled by Norman Schwartz, a director of the Company.
In June of 2003, the payments were increased to $5,000 per month. Through
December 31, 2003 consulting fees and related expenses totaling $41,250 and
$2,604, respectively, were expensed, of which $2,500 is included in accounts
payable at December 31, 2003. In addition, in September 2003, the Company issued
150,000 shares of common stock to the corporation for services provided by in
connection with the finalization of the Merger Agreement. In connection with the
issuance of these shares, the Company recorded consulting expenses of $225,000,
based on the fair market value of the common stock at the date of issuance.
Subsequent to the issuance of these shares, beneficial ownership with respect to
100,000 of the shares was transferred to Laurence Schreiber, a director and
officer of the Company.
During August 2004, the company increased the monthly payments to
Norman Schwartz's company to $6,500 per month up from $5,000. As a result, total
consulting fees and related expenses paid during 2004 were $66,750 and $4,051,
respectively, of which $4,763 was included in Accounts Payable at December 31,
2004. On March 1, 2005, the company signed a two year contract with Norman
Schwartz's company increasing the monthly fee to $7,500 per month.
38
In February 2003, the Company entered into a consulting agreement with
Richard Keates, M.D., a director of the Company. Pursuant to this agreement, Dr.
Keates receives a monthly retainer of $5,000, plus a fee of $1,500 per day for
consulting work performed. Through December 31, 2003 consulting fees and related
expenses totaling $118,000 and $24,581, respectively, were recorded pursuant to
this agreement, of which $14,721 is included in accounts payable at December 31,
2003.
In January 2004, the Company revised the contract with Dr. Keates
increasing his monthly consulting fees to $15,000 and reimbursement of related
business expenses. Through December 31, 2004, consulting fees and related
expenses totaling $180,000 and $26,784, respectively, were recorded pursuant to
this agreement, of which $30,398 is included in accounts payable at December 31,
2004.
In February 2003, the Company paid consulting fees in the amount of
$110,000 to a corporation controlled by Peter Lewis and David Eisenberg, two
shareholders, each of whom owned beneficially in excess of 5% of the outstanding
shares of common stock of the Company, related to services provided in
connection with the finalization of the Merger Agreement. In April 2003, the
Company entered into a consulting agreement with this corporation, pursuant to
which it is entitled to receive a monthly fee of $15,000; however, payment of
accrued fees is not due until such time as the Company has a minimum cash
balance of $2.5 million. During 2003, the Company recorded finders' fee expenses
totaling $30,000 for amounts earned by Peter Lewis and the corporation in
connection with private equity placements by the Company. Of the total finders'
fees earned, $15,000 was paid during 2003 and $15,000 is included in accrued
expenses at December 31, 2003. Through December 31, 2004 a total of $315,000 in
fees has been expensed and accrued pursuant to this agreement.
In July 2003, Richard H. Keates, M.D., a director of the Company,
purchased 100,000 shares of the Company's common stock in a private placement of
equity securities for $100,000. In connection with this investment, Dr. Keates
also received 100,000 5-year warrants to purchase common stock at an exercise
price of $2.25.
In November 2003, directors Richard H. Keates, M.D., Norman Schwartz,
and Adam Krupp were granted 200,000, 75,000 and 25,000 10-year options,
respectively, to purchase shares of the company's common stock at an exercise
price of $1.10. In October 2004, directors Richard H. Keates, M.D., Norman
Schwartz, and Adam Krupp were granted 200,000, 100,000 and 25,000 10-year
options, respectively, to purchase shares of the company's common stock at an
exercise price of $0.40.
In February of 2003, pursuant to an agreement entered into in
connection with the merger between Ponte Nossa Acquisition Corp. and VisiJet,
Inc., FEI cancelled 7,957,000 shares of Common Stock owned by it, and the
Company issued FEI a five year warrant to purchase 1,543,000 shares of Common
Stock at an exercise price of $5.00 per share.
During 2003, and through September 30, 2004, the Company paid finders
fees totaling $52,500 and $15,000, respectively, to FEI in connection with
amounts raised through private equity placements by the Company. In addition
during 2003, the Company recorded consulting expenses totaling $75,000 to FEI,
that were added to an outstanding note payable with the corporation, and
reimbursed the corporation for travel expenses related to business of the
Company totaling $19,279.
In February 2003, the Company issued five-year warrants to purchase
25,000 shares of its Common Stock at an exercise price of $3.00 per share, to
Laurence Schreiber, a director and officer of the Company, pursuant to an
agreement entered into in connection with the merger.
In March of 2003, we began making consulting payments of $2,500 per
month to M & N Consulting, a corporation owned by Norman Schwartz, a director of
the Company, for consulting services provided by Mr. Schwartz. In June of 2003,
the payments were increased to $5,000 per month. Through December 31, 2003
consulting fees and related expenses totaling $41,250 and $2,604, respectively,
were expensed pursuant to this arrangement, of which $2,500 is included in
accounts payable at December 31, 2003. During the nine months ended September
30, 2004 the Company recorded $47,250 in consulting fees pursuant to this
agreement, and as of September 30, 2004 $6,500 related to this agreement was
included in accounts payable. In addition, in September 2003, the Company issued
150,000 shares of Common Stock to M & N Consulting for services provided by Mr.
Schwartz in connection with the finalization of the merger with Ponte Nossa. In
39
connection with the issuance of these shares, the Company recorded consulting
expenses of $225,000, based on the fair market value of the common stock at the
date of issuance. Subsequent to the issuance of these shares, beneficial
ownership with respect to 100,000 shares was transferred by M & N Consulting to
Laurence Schreiber, Secretary/Chief Financial Officer and a Director.
In February of 2003, we entered into a consulting agreement with
Richard H. Keates, M.D., a director. Pursuant to this agreement, Dr. Keates
receives a monthly retainer of $5,000 per month plus a fee of $1,500 per day for
consulting work performed. Through December 31, 2003 consulting fees and related
expenses totaling $118,000 and $24,581, respectively, were recorded pursuant to
this agreement, of which $14,721 is included in accounts payable at December 31,
2003. In January 2004, the agreement was modified to provide for a Monthly
retainer of $15,000, and to eliminate the per diem rate. During the nine months
ended September 30, 2004 the Company recorded $135,000 of consulting fees in
connection with this agreement.
In February 2003, the Company paid consulting fees in the amount of
$110,000 to a corporation controlled by Peter Lewis and David Eisenberg, two
shareholders, each of whom own beneficially in excess of 5% of the outstanding
shares of common stock of the Company, related to services provided in
connection with the finalization of the Merger Agreement. In April 2003, the
Company entered into a consulting agreement with this corporation pursuant to
which, the Corporation is entitled to receive a monthly fee of $15,000, provided
however that payment of accrued fees is not payable by the Company until such
time as the Company has a minimum cash balance of $2.5 million. Pursuant to this
agreement, $135,000 in consulting fees were recorded during both 2003, and for
the nine months ended September 30, 2004, and as of September 30, 2004 a total
of $270,000 was included in accrued liabilities. During 2003, the Company
recorded finders fee expenses totaling $30,000 for amounts earned by Peter Lewis
and the corporation, in connection with private equity placements by the
Company. Of the total finders fees earned, $15,000 was paid during 2003, and
$15,000 is included in accrued expenses.
In July 2003, Richard H. Keates, M.D., a director, purchased 100,000
shares of the Company's common stock in a private placement of equity securities
for $100,000. In connection with this investment, Dr. Keates also received
100,000 5-year warrants to purchase common stock at an exercise price of $2.25.
In November 2003 and October 2004, directors received options to
purchase shares of the company's common stock as follows:
Grant Date November 10, 2003 October 20, 2004
---------- ----------------- ----------------
Exercise Price $1.10 $0.40
Director Options Options
-------- ------- -------
Laurence Schreiber 200,000 200,000
Randal Bailey 200,000 200,000
Richard H. Keates, M.D. 200,000 200,000
Norman Schwartz 75,000 100,000
Adam Krupp 25,000 25,000
In April 2004, the Company and FEI entered into an agreement pursuant
to which FEI loaned the Company shares owned by FEI, for use by the Company as
collateral in subsequent financing transactions. In return, the Company agreed
to reduce the exercise price of 1,543,000 warrants previously issued to FEI from
$5.00 per share to $1.00 per share. In connection with the warrant re-pricing
the Company recorded a non-cash expense of $546,403 during the second quarter
based on a Black-Scholes model valuation.
In April 2004, the Company and Taika Investments, Inc. a corporation
that beneficially owned in excess of 5% of the outstanding shares of Common
Stock of the Company, entered into an agreement pursuant to which Taika agreed
to make available 3 million shares of the Company's common stock, for use by the
Company in subsequent financing transactions. In accordance with the terms of
this agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and must return the borrowed shares by November 30, 2004. In
January, the Company received a one-year extension, to November 30, 2005, of the
date by which any borrowed shares must be returned. In the event of default, the
Company has agreed to file a Registration Statement and to return any shares,
within 72 hours, that had not previously been returned by the due date. As of
September 30, 2004 the Company had borrowed a total of 800,000 shares pursuant
to this agreement, and the Company had accrued interest expense totaling
$25,725.
40
In May 2004 the Company received a working capital advance in the
amount of $200,000 from an individual related to the controlling stockholder of
FEI, and in June 2004, the advance was repaid.
In October 1998 the Company and SurgiJet, Inc., the former parent
company of its predecessor, and an entity controlled by Lance Doherty, who
beneficially owns in excess of 5% of the outstanding shares of common stock of
the Company, entered into a patent license agreement. This agreement, amended in
November 2002, requires the Company to pay a royalty of 7% of revenues received
from sales of the products utilizing licensed patents and technology, up to $400
million of revenues over the course of the Agreements, and 5% of revenues
thereafter. The agreement provides for a minimum royalty of $60,000 per year. To
date, the Company has paid a total of $180,000 in minimum royalty payments to
SurgiJet, and, as of September 30, 2004 $45,000 in minimum royalty payments were
accrued.
Also, in November 2004, the Company and SurgiJet entered into a
litigation settlement agreement pursuant to which the parties agreed to settle
all previously outstanding litigation between the two companies, as well as with
SurgiJet's principal owners and its subsidiary, DentaJet. In accordance with the
settlement agreement, the Company, agreed to pay a total of $579,774, plus
accrued interest at an annual rate of 7.5% from August 31, 2004, as full
settlement of previously disputed notes payable to SurgiJet and DentaJet and
related accrued interest which the Company was carrying on its books in the
aggregate amount of $580,718. In addition, the Company agreed to pay a
previously disputed note payable to Lance Doherty in the amount of $19,000 plus
accrued interest at an annual rate of 10% from December 31, 2002, which the
Company was carrying on its books in the aggregate amount of $24,678. In
addition, the Company agreed to issue 75,000 shares of its Common Stock to
SurgiJet, granted SurgiJet a security interest in all of its assets and agreed
to provide SurgiJet with a stipulated judgment, which can only be filed by
SurgiJet upon an event of default which remains uncured following 10 days after
receipt of written notice of such default. Payments on all obligations due
pursuant to the settlement agreement will be made in monthly installments
commencing December 1, 2004. The first payment was in the amount of $30,000, and
thereafter monthly payments are $20,000 through December 2005, and $25,000 from
January 1, 2006 until the obligations are paid in full.
In June 2004, the Company entered into convertible debenture agreements
with Bushido Capital Master Fund, L.P. ("Bushido"), and Bridges & Pipes, LLC
("Bridges & Pipes"), with principal balances of $600,000 and $400,000,
respectively. After subtracting related placement agent fees and expenses
totaling $120,000, net proceeds to the Company from the aggregate of the
$1,000,000 principal balance were $880,000.
Pursuant to the June 2004 agreements, the debentures bear interest at
an annual rate of 8%, which is payable quarterly beginning December 31, 2004,
and the principal balance of the debentures was due and payable on June 24,
2006. In addition, the debenture holders received an aggregate of 150,000 shares
of the company's common stock, and an aggregate of 750,000 warrants to purchase
shares of the Company's common stock, exercisable through June 24, 2009, at an
exercise price of $1.50 per share, provided however that the exercise price with
respect to an aggregate of 500,000 of the warrants is reduced to $0.60 per share
during the period from the date of issuance through the date twelve (12) months
after the Securities and Exchange Commission declares effective a registration
statement registering the resale of shares underlying the warrants. The
debentures were secured by an aggregate of 350,000 shares of the Company's
common stock issued by the Company, and the outstanding principal of the
debentures was convertible, subject to redemption rights of the Company, into
shares of the Company's common stock based on an initial conversion price of
$0.50, subject to adjustment as defined in the agreement.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement.
In October 2004 the Company received a waiver of the non-compliance in
connection with an amendment to the debenture agreements pursuant to which the
maturity dates of the debentures were extended to June 24, 2014, the exercise
price of the original 750,000 warrants issued in connection with these
convertible debenture agreements was reduced to $0.40 per share, the debenture
holders received an additional 250,000 warrants at an exercise price of $0.40
per share and the initial conversion price of the debt was reduced to $0.35. In
addition, in connection with this amendment, the Company released the 350,000
shares of common stock that was being held as collateral, to the note holders.
41
In January 2005 the amended debenture agreements with Bushido and
Bridges & Pipes were replaced with new convertible debenture agreements in order
to conform the terms of these agreements to the terms of new convertible
debenture agreements with an aggregate principal balance of $4,845,000 entered
into in January 2005, as described below. Under the replacement agreements, the
maturity dates of the debentures were extended to January 14, 2015, and other
principal terms (i.e. interest rate, conversion price, warrants issued and
warrant exercise price) remained the same as in the amended October agreements
described above.
In July 2004, the Company entered into a convertible debenture
agreement with Libertyview Special Opportunities Fund, L.P. ("Libertyview"),
with a principal balance of $1,000,000, and received net proceeds of $896,125
after subtracting related placement agent fees and expenses totaling $103,875.
Pursuant to the July 2004 agreement, the note bears interest, at an annual rate
of 8%, which is due and payable quarterly beginning on October 31, 2004, and the
principal balance of the note, plus any accrued and unpaid interest, was due and
payable on July 23, 2014, provided however, that on or after July 31, 2007 the
Company, at the option of the note holder, may have been obligated to repurchase
the note at a price equal to 100% of the outstanding principal and interest. In
addition, the debenture holders received warrants to purchase 750,000 shares of
the Company's common stock, exercisable through July 23, 2011, at an exercise
price of $1.00 per share. In addition, the outstanding principal of the
debentures was convertible into shares of the Company's common stock, at the
option of the note holder, based on an initial conversion price of $0.54 per
share, subject to adjustment as defined in the agreement.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement.
In October 2004 the Company received a waiver of the non-compliance in
connection with an amendment to the debenture agreement pursuant to which the
exercise price of the original 750,000 warrants issued in connection with the
convertible debenture agreement was reduced to $0.40 per share, the debenture
holder received an additional 250,000 warrants at an exercise price of $0.40 per
share and the initial conversion price of the debt was reduced to $0.35.
In January 2005 the amended debenture agreement with Libertyview was
replaced with a new convertible debenture agreement in order to conform the
terms of the agreement to the terms of new convertible debenture agreements
entered into in January 2005 with an aggregate principal balance of $4,845,000,
as described below. Under the replacement agreement, the maturity dates of the
debenture was extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price)
remained the same as in the October amended October agreement described above.
In December 2004 the Company entered into a debenture agreement with
Alpha Capital Aktiengesellschaft ("Alpha") with a principal balance of $500,000.
The debenture was due and payable on January 27, 2005, and was convertible into
shares of the Company's common stock, at the option of the note holder, based on
a conversion price equal to 80% of the closing bid price of the Company's common
stock on the date of conversion, in the event that the debenture was not repaid
on the scheduled maturity date, or in the event of a default under the
agreement. In connection with the debenture, Alpha received 142,857 shares of
the Company's common stock, and 5-year warrants to purchase 1,250,000 shares of
the Company's common stock at an exercise price of $0.40 per share. In January
2005, the Company repaid the entire $500,000 outstanding principal balance, and
the debenture agreement was cancelled.
In January 2005, the Company entered into convertible debenture
agreements with Renaissance Capital ("Renaissance"), Roaring Fork Capital SBIC
("Roaring Fork") and Alpha with principal balances of $2,500,000, $650,000 and
$350,000, respectively. The notes bear interest, at an annual rate of 8%, which
is due and payable quarterly beginning March 31, 2005. The principal balance of
the notes, plus any accrued and unpaid interest is due and payable on January
14, 2015, provided however, that on or after January 14, 2008 the Company, at
the option of the note holder, may be obligated to repurchase the note at a
price equal to 100% of the outstanding principal and interest. The outstanding
principal of the debentures may be converted into shares of the Company's common
stock, at the option of the note holder, based on an initial conversion price of
$0.35 per share, subject to adjustment as defined in the agreement. In addition,
Renaissance received warrants to purchase 2,500,000 shares of the Company's
common stock, Roaring Fork received warrants to purchase 650,000 shares of the
Company's common stock and Alpha received warrants to purchase 350,000 shares of
the Company's common stock, all of which are exercisable through January 14,
2010 at an exercise price of $0.40 per share. Alpha also received 15,714 shares
of the Company's stock as a commission.
During 2005 the Company issued ten million shares of its Common Stock to Solmon
Rothbart Goodman, LLP, a law firm in Toronto, Canada, as collateral to secure
payment of legal fees for an action brought by the Company arising out of an
agreement to purchase Common Stock from the Company. Under the pledge
arrangement, once the legal fees are paid, the shares are to be returned to the
Company, at which time they will be canceled and restored to the status of
authorized but unissued shares.
42
DESCRIPTION OF SECURITIES
The following summary is a description of our common stock and certain
provisions of our Certificate of Incorporation, Bylaws and Delaware law.
GENERAL
Our authorized capital consists of 750,000,000 shares of common stock,
par value $.001 per share and 10,000,000 shares of preferred stock, par value
$.001 per share.
Common Stock
As of December 31, 2005 we had 55,975,308 shares of Common Stock
outstanding. Each share is entitled to one vote at all meetings of our
stockholders. All shares of our common stock are equal to each other with
respect to liquidation rights and dividend rights. There are no preemptive
rights to purchase any additional shares of our common stock. In the event of
our liquidation, dissolution or winding up, holders of our common stock will be
entitled to receive, on a pro rata basis, all of our assets remaining after
satisfaction of all liabilities and preferences of outstanding preferred stock,
if any. Neither our Certificate of Incorporation nor our Bylaws contain any
provisions which limit or restrict the ability of another person to take over
our company. If all outstanding convertible securities were converted, and all
outstanding warrants and stock options were exercised, the total number of
outstanding shares of Common Stock would be 226,848,118.
Preferred Stock
SERIES A CONVERTIBLE PREFERRED
We have 450,000 shares of Series A Convertible Preferred Stock ("Series
A Preferred Stock") outstanding. The Preferred Stock was issued with an
aggregate stated value of $4,500,000 and is nonvoting, except as required by
Delaware law. The holders of the Series A Preferred Stock are not entitled to
receive any dividends, and the Series A Preferred Stock is convertible, at any
time at the holder's option, for a period of three years from the date of
issuance, into shares of our Common Stock. The number of shares of Common Stock
to be issued upon conversion is determined by dividing the stated value being
converted by the conversion price then in effect. The conversion price of the
Series A Preferred Stock is the lower of (i) $0.609 per share and (ii) eighty
percent of the lowest closing bid price of the Common Stock in the ten trading
days preceding the date of conversion, but in no event less than $.18 per share.
The conversion price is subject to further adjustment based on anti-dilution
provisions. Any shares not previously converted are automatically converted at
the expiration of the three year period
OPTIONS
As of December 31, 2005, we had outstanding options to purchase an
aggregate of 2,265,000 shares of our Common Stock pursuant to our 2003 Stock
Option Plan and 2005 Stock Option Plan. These options are held by directors,
officers, key employees and consultants.
TRANSFER AGENT
The transfer agent for our common stock is Nevada Agency and Trust
Company, Reno, Nevada.
SHARES ELIGIBLE FOR RESALE
Future sales of a substantial number of shares of our common stock in
the public market could adversely affect market prices prevailing from time to
time. Under the terms of this offering, the shares of common stock offered may
be resold without restriction or further registration under the Securities Act
of 1933, except that any shares purchased by our "affiliates," as that term is
defined under the Securities Act, may generally only be sold in compliance with
Rule 144 under the Securities Act.
Certain shares of our outstanding common stock were issued and sold by
us in private transactions in reliance upon exemptions from registration under
the Securities Act and have not been registered for resale. Additional shares
may be issued pursuant to outstanding warrants and options. Such shares may be
sold only pursuant to an effective registration statement filed by us or an
applicable exemption, including the exemption contained in Rule 144 promulgated
under the Securities Act.
43
In general, under Rule 144 as currently in effect, a stockholder,
including one of our affiliates, may sell shares of common stock after at least
one year has elapsed since such shares were acquired from us or our affiliate.
The number of shares of common stock which may be sold within any three-month
period is limited to the greater of: (i) one percent of our then outstanding
common stock, or (ii) the average weekly trading volume in our common stock
during the four calendar weeks preceding the date on which notice of such sale
was filed under Rule 144. Certain other requirements of Rule 144 concerning
availability of public information, manner of sale and notice of sale must also
be satisfied. In addition, a stockholder who is not our affiliate, who has not
been our affiliate for 90 days prior to the sale, and who has beneficially owned
shares acquired from us or our affiliate for over two years may resell the
shares of common stock without compliance with many of the foregoing
requirements under Rule 144.
SELLING STOCKHOLDERS
The shares are being offered by certain selling stockholders. To our
knowledge, except as shown in the table below, none of the selling shareholders
are broker-dealers, or affiliates of broker-dealers. The selling stockholders
may offer and sell up to 96,769,436 shares now owned by them or issuable to them
upon the exercise of warrants and conversion of debt. In the case of shares
issuable upon conversion of outstanding convertible debentures, the number of
shares has been determined by dividing the principal amount of the convertible
debentures by the initial conversion price. In the case of shares issuable upon
exercise of warrants, the number of shares has been determined by using the
number of shares issuable upon exercise of the warrants.
The selling stockholders may from time to time offer and sell any or
all of the shares that are registered under this prospectus. Because the selling
stockholders are not obligated to sell their shares, and because the selling
stockholders may also acquire publicly traded shares of our common stock, we
cannot estimate how many shares the selling stockholders will own after the
offering.
All expenses incurred with respect to the registration of the shares
will be borne by us, but we will not be obligated to pay any underwriting fees,
discounts, commissions or other expenses incurred by the selling stockholders in
connection with the sale of their shares.
The following table sets forth, with respect to the selling
stockholders (i) the number of shares of common stock beneficially owned as of
December 31, 2005 and prior to the offering contemplated hereby, (ii) the
maximum number of shares of common stock which may be sold by the selling
stockholder under this prospectus, and (iii) the number of shares of common
stock which will be owned after the offering by the selling stockholder:
Prior to Offering After Offering (1)
-------------------------- --------------------------
Shares
Name Shares Percent Offered Shares Percent
---- ------ ------- ------- ------ -------
LibertyView Special Opportunities* (2) 16,713,157 23.11% 16,713,157 - 0.00%
Renaissance US Growth Investment (3) 11,526,315 17.00% 11,526,315 - 0.00%
BFS US Special Opportunities (3) 11,526,315 17.00% 11,526,315 - 0.00%
Alpha Capital (4) 4,034,211 6.72% 4,034,211 - 0.00%
Bushido Capital (5) 6,915,789 10.99% 6,915,789 - 0.00%
Roaring Fork Capital SBIC, LP (6) 7,492,105 11.45% 7,492,105 - 0.00%
Bridges & Pipes LLC (7) 6,339,474 10.66% 6,339,474 - 0.00%
Corsair Capital Partners (8) 7,319,211 11.42% 7,319,211 - 0.00%
Ronald P. Russo, Jr. 2,188,456 3.90 2,188,456 - 0.00%
Renaissance Capital Growth & Income (3) 5,763,158 10.72% 5,763,158 - 0.00%
Gamma Opportunity Capital Partners (9) 3,457,895 5.72% 3,457,895 - 0.00%
Republic Aggressive Growth (10) 2,535,789 3.98% 2,535,789 - 0.00%
Little Gem Life Sciences Fund, LLC (11) 2,305,263 2.81% 2,305,263 - 0.00%
Platinum Long Term Growth LLC (12) 733,332 1.31% 733,332 - 0.00%
HIT Credit Union (13) 500,000 * 500,000 - 0.00%
Greenwich Growth Fund Ltd. (14) 1,440,789 2.5% 1,440,789 - 0.00%
Mallos Living Trust (15) 450,000 *% 450,000 - 0.00%
Corsair Capital Investors (8) 1,037,368 1.8% 1,037,368 - 0.00%
Rock II, LLC (16) 333,334 * 333,334 - 0.00%
Paradigm Media Ventures (17) 300,000 * 300,000 - 0.00%
US Euro Securities, Inc.* (18) 243,162 * 243,162 - 0.00%
Marshalarts, LLC (19) 200,000 * 200,000 - 0.00%
44
Stephen & Kathleen Guarino 187,500 * 187,500 - 0.00%
Cethron Property Management Inc. (20) 175,000 * 175,000 - 0.00%
Westcap Securities* (21) 150,000 * 150,000 - 0.00%
Brandon D. Cohen 110,000 * 110,000 - 0.00%
Zorina Bennett 100,000 * 100,000 - 0.00%
Transcontinental Financial Resources (22) 100,000 * 100,000 - 0.00%
Mark Wheeler 100,000 * 100,000 - 0.00%
Mark M. Wheeler IRA 100,000 * 100,000 - 0.00%
John P. Dempsey 100,000 * 100,000 - 0.00%
Elizabeth Wheeler 100,000 * 100,000 - 0.00%
Charles Blair 100,000 * 100,000 - 0.00%
Charles Pierce IRA 100,000 * 100,000 - 0.00%
Corsair Capital Partners 100 (8) 288,158 * 288158 - 0.00%
Sattinwood Inc. (23) 80,000 * 80,000 - 0.00%
N. J. Olivieri 75,000 * 75,000 - 0.00%
George Haralampoudis 56,155 * 56,155 - 0.00%
Sanford Porter Family Trust 50,000 * 50,000 - 0.00%
Roman Feldman Y Irina Krym 50,000 * 50,000 - 0.00%
Richard Payne & Sherry Payne 50,000 * 50,000 - 0.00%
Richard L. Tuch 50,000 * 50,000 - 0.00%
One Six Partners (24) 50,000 * 50,000 - 0.00%
Olen C. Wilson 50,000 * 50,000 - 0.00%
Jon Bolker 50,000 * 50,000 - 0.00%
James V. May 50,000 * 50,000 - 0.00%
J. Charles Pierce 50,000 * 50,000 - 0.00%
Goren Brothers LP (25) 50,000 * 50,000 - 0.00%
Douglas G. May 50,000 * 50,000 - 0.00%
Brooke Niemi 50,000 * 50,000 - 0.00%
Alan Gray 50,000 * 50,000 - 0.00%
Michael Hamblett 50,000 * 50,000 - 0.00%
Martin A. Benowitz 37,500 * 37,500 - 0.00%
Timothy Roberts 37,500 * 37,500 - 0.00%
SBI USA, LLC (13) 37,500 * 37,500 - 0.00%
Phoenix Capital, Inc.(26) 37,500 * 37,500 - 0.00%
Alan Stone & Co., Ltd.(27) 27,000 * 27,000 - 0.00%
Zach Alcyone & Anne Alcyone 25,000 * 25,000 - 0.00%
Vladimir Lieberman 25,000 * 25,000 - 0.00%
Van S. Bohne 25,000 * 25,000 - 0.00%
Vallery Dubovikov 25,000 * 25,000 - 0.00%
Steven Efman 25,000 * 25,000 - 0.00%
Roslyn Pinkus and Frank Pinkus 25,000 * 25,000 - 0.00%
Robert M. Campbell Jr. 25,000 * 25,000 - 0.00%
Richard Monka 25,000 * 25,000 - 0.00%
Mikhail Nemets 25,000 * 25,000 - 0.00%
Michael Bergman 25,000 * 25,000 - 0.00%
Marvin Schwartz 25,000 * 25,000 - 0.00%
Hoa Le Duong 25,000 * 25,000 - 0.00%
Fred Efman 25,000 * 25,000 - 0.00%
Felix Aronsky 25,000 * 25,000 - 0.00%
Daniela Brabner-Smith 25,000 * 25,000 - 0.00%
Alexander Onik 25,000 * 25,000 - 0.00%
Starboard Capital* (28) 25,000 * 25,000 - 0.00%
Anthony Spatacco 25,000 * 25,000 - 0.00%
David Bench 20,000 * 20,000 - 0.00%
Robert F Krull 12,500 * 12,500 - 0.00%
A. Weinfeld 9,600 * 9,600 - 0.00%
Tafkid, LLC (29) 9,000 * 9,000 - 0.00%
Rand Brenner 9,000 * 9,000 - 0.00%
M. Smith 8,000 * 8,000 - 0.00%
L. Goulson 8,000 * 8,000 - 0.00%
K. Katz 8,000 * 8,000 - 0.00%
S. Weinfeld 6,400 * 6,400 - 0.00%
Michael Cimaron 45,000 * 45,000 - 0.00%
Jay Standish 30,000 * 30,000 - 0.00%
----------
* Denotes entity that is a broker-dealer or an affiliate of broker-dealer.
Selling shareholders that are broker-dealers or are affiliated with
broker-dealers are underwriters within the meaning of the Securities Act of
1933, as amended.
(1) For purposes of this table, we have assumed that the Selling Stockholders
will sell in this offering all shares offered.
(2) Controlled by Ryan Hay. Includes shares underlying $1,450,000
principal balance of convertible debt.
45
(3) Controlled by Robert Pearson. Includes shares underlying an
aggregate $2,500,000 principal balance of convertible debt
(4) Controlled by Konrad Ackerman. Includes shares underlying
$350,000 principal balance of convertible debt
(5) Controlled by Louis Rabman. Includes shares underlying $600,000
principal balance of convertible debt.
(6) Controlled by Gene McCully. Includes shares underlying $650,000
principal balance of convertible debt
(7) Controlled by David Fuchs. Includes shares underlying $550,000
principal balance of convertible debt
(8) Controlled by Jay Petschek. Includes shares underlying an
aggregate $750,000 principal balance of convertible debt
(9) Controlled by Jonathon P. Knight. Includes shares underlying
$300,000 principal balance of convertible debt
(10) Controlled by Matt Drillman. Includes shares underlying $220,000
principal balance of convertible debt
(11) Controlled by Jeffrey Benison. Includes shares underlying $200,000
principal balance of convertible debt
(12) Controlled by Mark Nordlitch
(13) Controlled by Shelly Singhal
(14) Controlled by Evan Schemenauer. Includes shares underlying $125,000
principal balance of convertible debt
(15) Controlled by C. Thomas Mallos and Barbara K. Mallos, trustees.
(16) Controlled by Mike Grady
(17) Controlled by George Haralampoudis
(18) Controlled by Ronald P. Russo, Jr.
(19) Controlled by Dana Marshall Cook
(20) Controlled by Robert I. Adatto
(21) Controlled by Thomas Rubin
(22) Controlled by Kenneth Rubinstein
(23) Controlled by Yosef Ram
(24) Controlled by Robert Gopen
(25) Controlled by James G. Goren and Alexander M. Goren
(26) Controlled by Roger Tischenor
(27) Controlled by Alan Stone
(28) Controlled by Anthony Spatacco
(29) Controlled by Antony Gordon
PLAN OF DISTRIBUTION
GENERAL
Shares of common stock offered through this prospectus may be sold from
time to time directly by the selling stockholders or, alternatively, through
underwriters, broker-dealers or agents. If the shares are sold through
underwriters, broker-dealers or agents, the selling stockholders will be
responsible for underwriting discounts or commissions or agents' commissions.
Shares may be sold in one or more transactions at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices. Sales may be effected in transactions (which may
involve block transactions) (i) in the over-the-counter market, (ii) on any
securities exchange or quotation service on which the shares may be listed or
quoted at the time of sale, (iii) in transactions otherwise than in the
over-the- counter market or on such exchanges or services, or (iv) through the
writing of options. In connection with sales of shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the shares in the course of hedging positions
they assume. The selling stockholders may also sell our common stock short and
deliver shares to close out short positions, or loan or pledge shares to
broker-dealers that in turn may sell such securities.
The selling stockholders will act independently from us in making
decisions with respect to the manner, timing, price and size of each sale. The
selling stockholders may sell the shares in any manner permitted by law,
including one or more of the following:
* a block trade in which a broker-dealer engaged by a selling stockholder
will attempt to sell the Shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
* an over-the-counter distribution in accordance with the rules of the
OTC Bulletin Board;
46
* ordinary brokerage transactions in which the broker solicits
purchasers; and
* privately negotiated transactions.
In the event that the sale of any shares covered by this prospectus
qualifies for an exemption from the registration requirements of the Securities
Act, such shares may be sold pursuant to that exemption rather than pursuant to
this prospectus.
USE OF UNDERWRITERS, BROKERS, DEALERS OR AGENTS
If the selling stockholders effect sales of shares through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). Any brokers,
dealers or agents that participate in the distribution of the shares may be
deemed to be underwriters, and any profit on the sale of common stock by them
and any discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
If a selling stockholder sells shares through an underwriter, broker,
dealer or agent, it may agree to indemnify such underwriter, broker, dealer or
agent against certain liabilities arising from such sale, including liabilities
arising under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Haddan & Zepfel LLP, Newport Beach, California.
EXPERTS
The financial statements of the Company as of and for the years ended
December 31, 2004 and 2003, appearing in this prospectus, have been audited by
Peterson & Co., LLP, Certified Public Accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
ART files current, quarterly and annual reports with the SEC on forms
8-K, 10-QSB and 10-KSB. ART has filed with the SEC under the Securities Act of
1933 a registration statement on Form SB-2 with respect to the shares being
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement, certain items of which are
omitted in accordance with the rules and regulations of the SEC. The omitted
information may be inspected and copied at the Public Reference Room maintained
by the SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549. You can
obtain information about operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at HTTP://WWW.SEC.GOV. Copies of
such material can be obtained from the public reference section of the SEC at
prescribed rates. Statements contained in this prospectus as to the contents of
any contract or other document filed as an exhibit to the registration statement
are not necessarily complete and in each instance reference is made to the copy
of the document filed as an exhibit to the registration statement, each
statement made in this prospectus relating to such documents being qualified in
all respect by such reference.
For further information with respect to ART and the securities being
offered hereby, reference is hereby made to the registration statement,
including the exhibits thereto and the financial statements, notes, and
schedules filed as a part thereof.
47
VISIJET, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
INDEX
-----
Page
----
Independent Auditor's Report 49
Balance Sheets, December 31, 2004 and 2003 50
Statements of Operations for the years ended December 31, 2004
and 2003 for the period February 2, 1996 (inception) to
December 31, 2004 51
Statements of Changes in Stockholders' Deficit for the years ended
December 31, 2004 and 2003 52
Statements of Cash Flows for the years ended December 31, 2004
and 2003 and for the period February 2, 1996 (inception) to
December 31, 2004 53
Notes to Financial Statements, December 31, 2004 54
Balance Sheet, September 30, 2005 (unaudited) 77
Unaudited Statements of Operations for the Three Months and
Nine Months Ended September 30, 2005 and 2004 78
Unaudited Statements of Cash Flows for the Nine Months
Ended September 30, 2005 79
Notes to Unaudited Financial Statements 80
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
VisiJet, Inc.
We have audited the accompanying balance sheets of VisiJet, Inc. as of
December 31, 2004 and 2003, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the 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 included 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of VisiJet, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PETERSON & CO., LLP
San Diego, California
March 31, 2005
49
VisiJet, Inc.
Balance Sheet
December 31, December 31,
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,946 $ 35,879
Marketable securities 590,980 --
Accounts receivable 180,145 --
Inventory 634,430 --
Prepaid expenses 209,429 68,749
Prepaid royalty -- 20,000
-------------------------------------
Total current assets 1,637,930 124,628
Property and equipment, net 87,798 104,440
Distribution agreement 1,654,218 --
Patents and trademarks, net 87,795 97,244
-------------------------------------
Total assets $ 3,467,741 $ 326,312
=====================================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable 889,992 679,885
Customer deposits 49,198 --
Compensation settlement agreement - current portion 66,402 86,708
Accrued interest 277,785 109,232
Accrued expenses 1,043,516 481,106
Royalty payable 15,000 60,000
Notes payable to related parties 847,660 681,442
Notes payable 10,000 14,000
Convertible debenture debt, net 897,655 --
Secured debenture debt, net 1,194,830 --
-------------------------------------
Total current liabilities 5,292,038 2,112,373
Compensation settlement agreement, net of current portion -- 17,458
Notes payable to related parties, net of current portion -- 87,144
Convertible debenture debt - long term, net 1,333,601 --
Series A convertible preferred stock, 450,000 shares issued
and outstanding at December 31, 2004, net of unamortized
discount of $1,031,250 (redemption value $4,500,000)
no shares issued or outstanding at December 31, 2003 505,404 --
-------------------------------------
Total liabilities 7,131,043 2,216,975
-------------------------------------
Shareholders' deficit:
Preferred stock, $.001 par value; 10,000,000 shares authorized; 450,000
issued and outstanding at December 31, 2004 included in Series A
convertible preferred stock above. No shares issued or outstanding
at December 31, 2003 -- --
Common stock, 50,000,000 shares authorized, $.001 par value,
28,909,662 shares issued and outstanding at December 31, 2004,
and 21,691,163 shares issued and outstanding at December 31, 2003 28,910 21,691
Additional paid in capital 19,786,546 7,845,365
Common stock subscriptions -- 1,018,500
Accumulated comprehensive loss (792,009) --
Accumulated deficit (22,686,749) (10,776,219)
-------------------------------------
Shareholders' deficit (3,663,303) (1,890,663)
-------------------------------------
Total liabilities and shareholders' deficit $ 3,467,741 $ 326,312
=====================================
The accompanying notes are an integral part of these financial statements
50
VisiJet, Inc.
Statements of Operations
Twelve months ended
December 31, 2004 December 31, 2003
----------------- -----------------
Sales - International $ 1,725,435 $ --
Cost of Goods Sold 787,397 --
-------------------------------------
Gross Profit 938,038 --
-------------------------------------
Operating expenses:
General and administrative expenses 8,737,724 3,736,604
Research and development expenses 695,100 1,256,259
-------------------------------------
Total operating expenses 9,432,824 4,992,863
-------------------------------------
Loss from operations (8,494,786) (4,992,863)
Other income (expense):
Interest income -- 455
Amortization of debt discount (1,278,841) --
Interest expense (392,251) (56,247)
Beneficial conversion (1,671,550) --
Gain on debt restructure 21,448 90,303
-------------------------------------
Total other expense (3,321,194) 34,511
-------------------------------------
Loss before provision for taxes (11,815,980) (4,958,352)
Provision for Income taxes 800 800
-------------------------------------
Net loss (11,816,780) (4,959,152)
-------------------------------------
Preferred stock dividends and accretions (93,750) --
-------------------------------------
Net loss available to common shareholders $ (11,910,530) (4,959,152)
=====================================
Net loss per common share - basic and diluted $ (0.45) $ (0.27)
=====================================
Basic and diluted weighted average
number of common shares outstanding 26,688,583 18,606,352
=====================================
The accompanying notes are an integral part of these financial statements
51
VisiJet, Inc.
Consolidated Statement of Shareholders' Equity and Comprehensive Income
Preferred A Stock Common Stock Additional
------------------------------------------------- Common Stock Paid In
Shares Amount Shares Amount Subscriptions Capital
------------------------------------------------------------------------------
Balance,
December 31, 2002 504,252 $ 2,458,088 7,997,735 $ 615,248 -- --
==============================================================================
Common stock issued for
consideration of
merger, net of shares
cancelled -- -- 6,084,000 6,084 -- $ 8,058
Common stock issued in
connection with
private placement and
debt conversion -- -- 3,528,481 3,528 -- 1,130,152
Common stock issued upon
conversion of
preferred shares (504,252) (2,458,088) 826,530 (606,424) -- 3,064,512
Common stock issued in
connection with debt
conversion -- -- 378,997 379 -- 378,618
Common stock issued in
connection with
settlement agreements -- -- 211,267 211 -- 449,789
Common stock issued for
services -- -- 60,069 60 -- 1,141
Common stock canceled -- -- (204,409) (204) -- 204
Common stock issued in
connection with post-
merger private
placements -- -- 2,712,500 2,712 -- 2,689,778
Costs of private
placements -- -- -- -- -- (228,700)
Common stock given for
services -- -- 150,000 150 -- 224,850
Common stock
subscriptions -- -- -- -- $ 1,018,500 --
Merger shares
reconciliation -- -- (54,007) (54) -- 54
Warrants issued for
services -- -- -- -- -- 33,483
Options issued for
services -- -- -- -- -- 93,427
Net Loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance,
December 31, 2003 -- $ -- 21,691,163 $ 21,691 $ 1,018,500 $ 7,845,366
==============================================================================
Common stock issued in
connection with
private placements -- -- 585,000 585 -- 584,415
Costs of private
placements -- -- -- -- -- (58,500)
Common stock given for
services -- -- 2,730,000 2,730 -- 2,509,370
Common stock
subscriptions -- -- 998,500 999 (1,018,500) 1,017,501
Common stock issued for
distribution agreement -- -- 750,000 750 -- 711,750
Common stock issued with
debt agreements and
collateral -- -- 1,303,571 1,304 -- 266,090
Common stock issued with
debt default and
penalties -- -- 611,428 611 -- 378,603
Common stock issued with
litigation settlements -- -- 240,000 240 -- 125,010
Warrants issued with
secured and
convertible debt -- -- -- -- -- 1,679,379
Warrants issued for debt
modification -- -- -- -- -- 866,017
Warrants issued for debt
guarantee -- -- -- -- -- 546,403
Warrants issued for
services -- -- -- -- -- 205,903
Warrants issued for
commissions -- -- -- -- -- 282,183
Adjustment for
beneficial conversion
- convertible debt -- -- -- -- -- 1,671,550
Adjustment for
beneficial conversion
- preferred stock -- -- -- -- -- 1,125,000
Accumulated
Comprehensive
Adjustment -- -- -- -- -- --
Stock Option Expense -- -- -- -- -- 30,506
Net Loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance,
December 31, 2004 -- $ -- 28,909,662 $ 28,910 $ -- $ 19,786,546
==============================================================================
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these financial statements
52a
VisiJet, Inc.
Consolidated Statement of Shareholders' Equity and Comprehensive Income
(CONTINUED)
Net
Other Shareholders'
Comprehensive Accumulated Equity
Loss Deficit (Deficit)
------------------------------------------
------------------------------------------
Balance,
December 31, 2002 $ -- $ (5,817,067) $ (2,743,731)
==========================================
Common stock issued for
consideration of
merger, net of shares
cancelled -- -- 14,142
Common stock issued in
connection with
private placement and
debt conversion -- -- 1,133,680
Common stock issued upon
conversion of
preferred shares -- -- --
Common stock issued in
connection with debt
conversion -- -- 378,997
Common stock issued in
connection with
settlement agreements -- -- 450,000
Common stock issued for
services -- -- 1,201
Common stock canceled -- -- --
Common stock issued in
connection with post-
merger private
placements -- -- 2,692,490
Costs of private
placements -- -- (228,700)
Common stock given for
services -- -- 225,000
Common stock
subscriptions -- -- 1,018,500
Merger shares
reconciliation -- -- --
Warrants issued for
services -- -- 33,483
Options issued for
services -- -- 93,427
Net Loss -- (4,959,152) (4,959,152)
------------------------------------------
Balance,
December 31, 2003 $ -- $(10,776,219) $ (1,890,663)
==========================================
Common stock issued in
connection with
private placements -- -- 585,000
Costs of private
placements -- -- (58,500)
Common stock given for
services -- -- 2,512,100
Common stock
subscriptions -- -- --
Common stock issued for
distribution agreement -- -- 712,500
Common stock issued with
debt agreements and
collateral -- -- 267,394
Common stock issued with
debt default and
penalties -- -- 379,214
Common stock issued with
litigation settlements -- -- 125,250
Warrants issued with
secured and
convertible debt -- -- 1,679,379
Warrants issued for debt
modification -- -- 866,017
Warrants issued for debt
guarantee -- -- 546,403
Warrants issued for
services -- -- 205,903
Warrants issued for
commissions -- -- 282,183
Adjustment for
beneficial conversion
- convertible debt -- -- 1,671,550
Adjustment for
beneficial conversion
- preferred stock -- -- 1,125,000
Accumulated
Comprehensive
Adjustment (792,009) -- (792,009)
Stock Option Expense -- -- 30,506
Net Loss -- (11,910,530) (11,910,530)
------------------------------------------
Balance,
December 31, 2004 $ (792,009) $(22,686,749) $ (3,663,303)
==========================================
The accompanying notes are an integral part of these financial statements
52b
VisiJet, Inc.
Statements of Cash Flows
December 31,
2004 2003
---- ----
Cash flows from operating activities
Net loss $(11,910,530) $ (4,959,152)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 288,885 23,949
Debt discount amortization 1,533,996 --
Accretion of beneficial conversion on preferred shares 93,750 --
Adjustment for beneficial conversion for debt 1,671,550 --
Commission from preferred shares conversion 153,665 --
Common stock, options, warrants issued for services 3,277,173 353,111
Warrant repricing for debt guarantee 546,403 --
Gain from debt restructure (21,448) (90,303)
Changes in assets and liabilities:
Accounts receivable (180,145) --
Prepaid expenses (120,680) (88,749)
Change in inventory (634,430) --
Accounts payable 210,107 482,900
Customer deposits 49,198 --
Compensation settlement agreement (37,764) (145,834)
Royalties payable (45,000) --
Other accrued expenses 583,847 353,758
Accrued interest 243,412 40,044
------------------------------
Net cash used by operating activities (4,298,011) (4,030,276)
------------------------------
Cash flows from investing activities
Acquisition of property and equipment (15,611) (78,190)
Purchase of distribution agreement (1,188,900) (100,000)
------------------------------
Net cash used in investing activities (1,204,511) (178,190)
------------------------------
Cash flows from financing activities
Advance from related party 272,626 337,543
Repayment of advances from related parties (260,600) (185,138)
Repayment of notes payable (4,000) (20,000)
Proceeds from secured debenture 1,109,688 --
Proceeds from convertible debt 3,845,375 --
Proceeds from private placements-net 526,500 3,027,790
Cash acquired in reverse merger -- 30,693
Common stock subscriptions -- 1,018,500
Interest converted to equity in connection with merger -- 33,997
------------------------------
Net cash provided by financing activities 5,489,589 4,243,385
------------------------------
Net increase / (decrease) in cash (12,933) 34,919
Cash, beginning of period 35,879 960
------------------------------
Cash, end of period $ 22,946 $ 35,879
==============================
Supplemental disclosures of cash flow information
Interest paid $ 170,287 $ --
Taxes paid 800 1,600
Debenture costs and fees 562,125
Non-cash transactions
Reclass of interest to current liability 67,048
Warrants issued in connection with secured debenture 417,975
Warrants issued in connection with convertible debentures 1,264,302
Warrants issued for debt modification 866,017
Common stock issued in connection with convertible debenture 267,393
Common Stock issued debt default and penalties 248,150
Conversion of Debt to Equity 1,398,667
Conversion of Series A preferred stock to common stock 550,000
Conversion of Series B preferred stock to common stock 1,908,088
Fair value of net liabilities assumed at date of reverse merger 189,458
The accompanying notes are an integral part of these financial statements
53
VISIJET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
FORWARD LOOKING STATEMENTS
Press releases and certain information provided periodically in writing
or orally by our officers or our agents contain forward-looking statements that
involve risks and uncertainties within the meaning of Sections 27A of the
Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934;
and the Private Securities Litigation Reform Act of 1995. The words, such as
"may," "would," "could," "anticipate," "estimate," "plans," "potential,"
"projects," "continuing," "ongoing," "expects," "believe," "intend" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places and include all
statements that are not statements of historical fact regarding intent, belief
or current expectations of the Company, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) our continued development of our
technology; (iv)market and other trends affecting our future financial
condition; (v) our growth and operating strategy.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception; (ii)
any material inability to successfully develop our products; (iii) any adverse
effect or limitations caused by government regulations; (iv) any adverse effect
on our ability to obtain acceptable financing; (v) competitive factors; and (vi)
other risks including those identified in our other filings with the Securities
and Exchange Commission. The Company undertakes no obligation to update or
revise the forward-looking statements made in this Registration Statement to
reflect events or circumstances after the date of this Registration Statement or
to reflect the occurrence of unanticipated events.
HISTORY AND MERGER
VisiJet, Inc. ("VisiJet", or "the Company") is a medical device company
focused on the marketing and development of ophthalmic surgery products for use
in the laser eye surgery and cataract surgery markets. Through June 30, 2004,
the Company was in the development stage, as its efforts had been principally
devoted to organizational activities, raising capital and research and
development. However, based on operating revenues generated by the Company in
the third quarter of 2004, the Company is no longer considered to be in the
development stage.
The Company was incorporated on February 2, 1996, as a wholly owned
subsidiary of SurgiJet, Inc. to develop and distribute medical products based on
patented waterjet-based technology licensed from SurgiJet. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
In December 2002 VisiJet entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into VisiJet. The
merger was consummated on February 11, 2003, and immediately thereafter, VisiJet
was merged into Ponte Nossa Acquisition Corp., and the surviving company's name
was changed to "VisiJet, Inc."
In April 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company pursuant to which the Company
acquired exclusive worldwide distribution, sales and marketing rights for
ophthalmic surgical products used in LASIK refractive surgery procedures. In May
2004, the Company began marketing these products in Europe and certain other
foreign countries, where the products have received regulatory approval for
sale. In September 2004 the Company began marketing in the United States
following receipt of approval for marketing from the U.S. Food and Drug
Administration. In addition, the Company is conducting research and development
on additional ophthalmic surgery products based on applications of its
proprietary waterjet technology.
54
GOING CONCERN
The accompanying consolidated financial statements have been prepared
using the going concern basis of accounting, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
For the year ended December 31, 2003, the Company's audited financial statements
included a "going concern" qualification from its independent auditors due to
the Company's losses accumulated during the development stage and lack of
working capital.
For the fiscal year 2004, the Company incurred net losses of
$11,910,530 and the Company's current liabilities exceeded its current assets by
approximately $3.65 million. The Company's future capital requirements will
depend on many factors, including but not limited to the Company's ability to
successfully market and generate operating revenue through product sales, its
ability to finalize development and successfully market its waterjet technology,
its on-going operational expenses and overall product development costs,
including the cost of clinical trials, and competing technological and market
developments.
To address the going concern issue, the Company has continued to raise
operating capital through private placements of debt and equity securities, and
is currently in discussions with several parties regarding additional financing
arrangements. In addition, during the second quarter of 2004, the Company
initiated sales of ophthalmic surgery products acquired through an exclusive
worldwide marketing and distribution license agreement that was finalized in May
2004. The Company expects that revenue and cash flow from sales of these
products will contribute significantly to its future operating results and
working capital requirements.
While the Company believes that the additional financing arrangements
will be completed, and that near-term operating revenues and cash flow will be
generated from the recently completed license agreement, there can be no
assurance that new financing will be completed or that the proceeds from new
financing received by the Company and/or that revenues generated from product
sales will be sufficient for the Company to meet its contractual obligations and
on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELPOMENT STAGE COMPANY
VisiJet Inc. as described in the merger and history segment above, was
in the development stage through December 31, 2003. The year 2004 is the first
year during which the Company is considered an operating company and is no
longer in the development stage.
REVENUE RECOGNITION
Revenue from product sales relates to sales of ophthalmic surgical
products pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004. Revenue from such sales is recognized when the earnings
process is complete, as evidenced by an agreement with the customer, transfer of
title and acceptance, a firm price and probable collection.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Certain corporate overhead expenses, such as professional fees, salaries, rent
and travel are allocated to research and development based on estimates made by
management.
INVENTORY
Inventory is valued at lower of cost or market. Reserves for
obsolescence or slow moving inventory are recorded when such conditions are
identified. As of December 31, 2004 no such reserves were considered necessary.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts receivable and records an
allowance for doubtful accounts based on a specific identification basis of
those accounts that they consider to be uncollectible. As of December 31, 2004,
no allowance for doubtful accounts was considered necessary.
55
MARKETABLE SECURITIES
Investments in available-for-sale securities are accounted for in
accordance with Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("FAS") 115 "Accounting for Certain Investments
in Debt and Equity Securities". Per FAS 115, the securities are stated at their
fair market value and any difference between cost and market value is recorded
as an unrealized gain or loss classified as a separate component of
stockholders' equity - accumulated other comprehensive income.
CLASSIFICATION OF FINANCIAL INSTURMENTS
In accordance to FASB Statement of Financial Accounting Standards
("SFAS") 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity", financial instruments with a mandatory
redemption rights are to be recorded as liabilities unless the redemption is to
occur upon the liquidation or termination of the issuer. SFAS 150 also specifies
that a financial instrument that embodies a conditional obligation is based
solely or predominantly on variations inversely related to changes in the fair
value of the issuer's equity shares. Based on these characteristics, the Company
has recorded the Preferred Series A shares as a long term liability on the
balance sheet. See Note 11, Preferred Series A Shares.
EVALUATION OF BENEFICIAL CONVERSION FEATURE IN DEBENTURES
In accordance with Emerging Issues Task Force ("EITF") Issue 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjusted Conversion Rights", as amended by EITF 00-27, we must
evaluate the potential effect of any beneficial conversion in terms related to
convertible instruments such as convertible debt or convertible preferred stock.
Valuation of the benefit is determined based upon various factors including the
valuation of equity instruments, such as warrants that may have been issued with
convertible instruments, conversion terms, and the value of the instruments to
which the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the partially
subjective nature of the valuation techniques.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS 130, "Reporting of
Comprehensive Income", which established the standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders. The Company recorded a comprehensive loss that was incurred as a
result of the write down to market of the marketable securities on December 31,
2004. Please review Notes 11 and Note 12 for more detail on this transaction.
FOREIGN CURRENCY TRANSACTIONS
The Company uses the U.S. dollar as the reporting and functional
currency for its financial statements. Transaction gains and losses are the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. Transactions that are denominated in other
currencies are recorded using the exchange rate in effect on the date of the
transaction. Transaction adjustments arising from such are re-measured and
included in the determination of net (loss) income.
STOCK-BASED COMPENSATION
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, under which compensation
expense, if any, is generally based on the difference between the exercise price
of an option, or the amount paid for the award and the market price or fair
value of the underlying common stock at the date of the award. Stock-based
compensation arrangements involving non-employees are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," under which such arrangements are accounted for based
on the fair value of the option or award. The Company adopted the disclosure
requirements of SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE," an amendment of SFAS No. 123 as of January 1, 2003,
which require certain disclosures about stock-based employee compensation plans
in an entity's accounting policy note. The adoption of SFAS No. 148 did not have
a material impact on these consolidated financial statements and the disclosure
requirements are included below.
56
On November 10, 2003, the Board of Directors adopted the Advanced
Refractive Technologies, Inc. 2003 Stock Option Plan. The Option Plan provides
for the grant of incentive and non-qualified stock options to selected
employees, the grant of non-qualified options to selected consultants and to
directors and advisory board members. The Option Plan is administered by the
Compensation Committee of the Board of Directors and authorizes the grant of
options for 3,000,000 shares. The Compensation Committee determines the
individual employees and consultants who participate under the Plan, the terms
and conditions of options, the option price, the vesting schedule of options and
other terms and conditions of the options granted pursuant thereto.
During fiscal year 2003, the Company issued 125,000 stock options to
consultants to purchase the Company's common stock in exchange for services
rendered. The Company has accounted for these issuances in accordance with SFAS
No. 123 and has recorded an expense of $93,427 representing the fair value of
the options using a Black-Scholes option-pricing model. The options are
exercisable at a price of $1.10 per share and have a term of 10 years.
Also during fiscal year 2003, the Company issued options to employees
and directors to purchase 1,040,000 shares of its common stock, at an exercise
price of $1.10. All options granted during the period have a term of ten years
and were issued at an exercise price equal to the market value of the underlying
stock at the date of grant. As of December 31, 2004 a total of 1,100,000 options
to purchase shares of the Company's common stock were outstanding pursuant to
the 2003 Plan.
During fiscal year 2004, the Company issued 180,000 stock options to
consultants to purchase the Company's common stock in exchange for services
rendered. The Company has accounted for these issuances in accordance with SFAS
No. 123 and has recorded an expense of $30,506 representing the fair value of
the options using a Black-Scholes option-pricing model. The options are
exercisable at a price of $0.40 per share and have a term of 10 years.
During fiscal year 2004, the Company issued options to employees and
directors to purchase 1,190,000 shares of its common stock, at an exercise price
of $0.40. All options granted during the period have a term of ten years and
were issued at an exercise price equal to the market value of the underlying
stock at the date of grant. As of December 31, 2004 a total of 2,470,000 options
to purchase shares of the Company's common stock were outstanding pursuant to
the 2003 Plan.
A summary of changes in common stock options during 2004 and 2003
follows:
Number of Weighted Average Exercisable
Shares Exercise Price Shares
-----------------------------------------
Outstanding at December 31, 2002 -- -- --
Granted 1,165,000 $ 1.10 390,000
Forfeited -- -- --
Cancelled -- -- --
Outstanding at December 31, 2003 1,165,000 $ 1.10 390,000
Granted 1,370,000 $ 0.40 180,000
Forfeited (45,000) 1.10 --
Cancelled (20,000) 1.10 (20,000)
Outstanding at December 31, 2004 2,470,000 $ 0.73 550,000
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) and income (loss) per share as if compensation cost
for the Company's stock option issuances had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following assumptions used for grants in fiscal
years ending 2003 and 2004:
Assumptions used for Black-Scholes option pricing model: 2004 2003
Dividend yield 0.00% 0.00%
Risk free interest rate, 5 year 3.35% 3.29%
Expected Life 5 yrs 5 yrs
Volatility 43.14% 83.82%
57
Under the accounting provisions of SFAS No. 123, as amended by SFAS No.
148, the Company's pro forma net loss and loss per share for the years ended
December 31, 2004 and 2003 would have been as follows:
2004 2003
Net Loss:
As reported $(11,910,530) $ (4,959,152)
SFAS No. 123 effect (340,667) (308,724)
------------- -------------
Pro forma net loss $(12,251,197) $ (5,267,876)
============= =============
Loss per share:
As reported $ (0.45) $ (0.27)
============= =============
Pro forma $ (0.46) $ (0.28)
============= =============
Basic and diluted weighted
average shares outstanding 26,688,583 18,606,352
============= =============
The following table summarizes information about stock options
outstanding at December 31, 2004:
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Life in Exercise Number Exercise
Price Outstanding Years Price Exercisable Price
----- ----------- ----- ----- ----------- -----
$1.10 1,100,000 8.87 $1.10 370,000 $1.10
$0.40 1,370,000 9.81 $0.40 180,000 $0.40
DEPRECIATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three to seven
years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS
No.128,"EARNINGS PER SHARE," and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 98. Accordingly, basic loss per share is
computed using the weighted average number of common shares and diluted loss per
share are computed based on the weighted average number of common shares and all
common equivalent shares outstanding during the period in which they are
dilutive. Common equivalent shares consist of shares issuable upon the exercise
of stock options, using the treasury stock method, or warrants; common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive.
58
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statement of
the prior year in order to conform to current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB revised SFAS No. 123 ("SFAS No. 123R"),"
Accounting for Stock Based Compensation." The revision establishes standards for
the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transactions in which an entity
obtains employees services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or reporting beginning after December 15, 2005 for
small business issuers, with early adoption encouraged. The Company is currently
evaluating the effect of this standard on their operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
SFAS 150 specifies that financial instruments with mandatory redemption rights
are to be recorded as liabilities unless the redemption is to occur upon the
liquidation or termination of the issuer. SFAS 150 also specifies that a
financial instrument that embodies a conditional obligation that is based on
settlement by the issuance of a variable number of the issuer's equity shares
associated with a fixed monetary amount is required to be classified as a
liability. The Company's Preferred Series A shares have been classified as a
long term liability on the balance sheet.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The
statement amends Accounting Research Bulletin ("ARB") No. 43, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. ARB No 43 previously
stated that these costs must be "so abnormal as to require treatment as
current-period charges." SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of `so
abnormal.' The statement is effective for inventory costs incurred during the
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
NOTE 3 - INVENTORY
Inventory includes finished goods of ophthalmic surgical products
purchased pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004, and consists of the following at December 31, 2004 and
2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Completed units and disposable
supplies $ 265,197 $ -
Demonstration units 193,408
Clinical Units 175,825 -
-------------- --------------
$ 634,430 $ -
============== ==============
59
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2004
and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Computer and test equipment $ 98,196 $ 82,584
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
-------------- --------------
178,703 163,091
Less: Accumulated depreciation (90,905) (58,651)
-------------- --------------
$ 87,798 $ 104,440
============== ==============
Depreciation expense for the fiscal years ended December 31, 2004 and
2003, was $32,254 and $21,193, respectively.
NOTE 5 - DISTRIBUTION AND PATENT AGREEMENTS
In May 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company ("licensor") pursuant to which the
Company acquired exclusive worldwide distribution, sales and marketing rights
for certain ophthalmic surgical products used in LASIK refractive surgery
procedures.
The Company capitalized a total of $1,901,400 in connection with this
agreement based on non-refundable cash license fee paid, plus the fair market
value of 750,000 shares of common stock issued to the licensor, as consideration
under the agreement. The total capitalized amount is being amortized on a
straight-line basis over the term of the agreement.
During 2003, the Company entered into a patent license agreement with
the inventor of a patented technology through which the Company obtained
exclusive worldwide rights for all medical applications for the technology that
provides for the sterile flow of fluid through a surgical water jet apparatus.
The purchase price of the license has been capitalized and is being amortized on
a straight-line basis over the remaining life of the patent. The license
agreement provides for royalty payments based on the sale of products utilizing
licensed technology and for minimum annual royalty payments.
Distribution and Patent agreements consist of the following at December
31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Distribution agreements $ 1,901,400 $ --
Patent agreements 100,000 100,000
Less: accumulated amortization (259,387) (2,756)
------------ ------------
$ 1,742,013 $ 97,244
============ ============
Amortization expense for the fiscal years ending December 31, 2004 and
2003, was $256,631 and $2,756, respectively. In connection with these
agreements, the Company expects to record the following amortization expense
over the next five years:
Fiscal Year Ended Amortization Total
----------------- ------------------
12/31/05 $ 389,729
12/31/06 389,729
12/31/07 389,729
12/31/08 389,729
12/31/09 183,097
-----------
Total $ 1,742,013
===========
60
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2004 and
2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Payroll and related taxes $ 336,695 $ 55,191
Consulting fees 375,000 135,000
Litigation settlement fees 209,669 170,066
Other accruals 122,152 120,849
-------------- --------------
$ 1,043,516 $ 481,106
============== ==============
NOTE 7 - SECURED DEBENTURES
FEBRUARY 2004 SECURED DEBENTURE
In February 2004, the Company entered into secured debenture agreements
with an aggregate principal balance of $500,000, and received net proceeds of
$447,500 after subtracting related placement agent fees and legal expenses
totaling $52,500.
The debentures bear interest at an annual rate of 24%, which is payable
monthly beginning April 1, 2004. In addition, the debenture holders received
warrants to purchase 250,000 shares of the Company's common stock, exercisable
through March 1, 2009, at an exercise price of $1.10 per share.
The principal balance of the debentures is due and payable on the
earlier of (i) thirty (30) days from the date the Registration Statement is
declared effective by the Securities and Exchange Commission, provided that a
specified affiliate of the investors has not defaulted in its obligation to
purchase shares of the Company's common stock, or (ii) twelve (12) months from
the date the Registration Statement is declared effective, or (iii) eighteen
(18) months from the date of the debenture agreement. The debentures are secured
by all accounts and equipment of the Company, now owned, existing or hereafter
acquired.
In October 2004, the Company received a notice of default from the
holders of an aggregate of $400,000 of these debentures due to the non-timely
payment of interest that was owed under the debenture agreements. Subsequent to
the receipt of notice, the Company made the required interest payments and the
Company was in discussions regarding a resolution of the events of default. In
October 2004, the Company and the debenture holders agreed to reduce the
exercise price of the original warrants issued to purchase 250,000 shares of
common stock in connection with this transaction to $0.75 per share, and to
issue a total of additional warrants to purchase 125,000 shares at an exercise
price of $0.75 per share. The parties agree that this would cure all defaults to
date.
The debenture debt was recorded net of discounts totaling $230,668
recorded in connection with the $52,500 of loan fees and expenses, and $178,168,
based on a Black-Scholes model valuation, related to the 250,000 warrants issued
to debenture holders. In October 2004, additional debt discount of $117,679 was
recorded in connection with 125,000 additional warrants issued, based on a
Black-Scholes model valuation increasing the total discount recorded to
$348,344. During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $383,174 in connection with the debenture debt, of
which $293,174 resulted from the non-cash amortization of debt discount and
$90,000 related to interest accrued during the period on the outstanding
principal balance. As of December 31, 2004 all of the accrued interest was paid
in full.
In January 2005, the Company paid the entire $500,000 outstanding
principal balance and the secured debenture agreement was cancelled.
MAY 2004 SECURED DEBENTURE
In May 2004, the Company entered into an agreement with an
institutional lender pursuant to which the Company issued a total of $750,000 of
secured subordinated debentures and received net proceeds of $662,188 after
subtracting related placement agent fees and expenses totaling $80,000 and
prepaid interest totaling $7,812.
61
The principal balance of the debentures was due and payable on July 5,
2004, and the debentures bear interest at an annual rate of 15%, which is
payable monthly beginning June 1, 2004. In addition, the debenture holder
received a warrant to purchase 500,000 shares of the Company's common stock,
exercisable through May 6, 2009, at an exercise price of $0.90 per share.
The debentures are secured by an aggregate of 1,500,000 shares of the
Company's common stock, of which 750,000 shares were issued by the Company and
750,000 shares were borrowed by the Company pursuant to a security lending
agreement between the Company and a third party.
The debenture debt was recorded net of discounts totaling $319,807
recorded in connection with the $80,000 of loan fees and expenses, and $239,807,
based on a Black-Scholes model valuation, related to the 500,000 warrants issued
to the debenture holder. During the fiscal year ended December 31, 2004, the
Company recorded total interest expense of $362,519 in connection with the
debenture debt, of which $319,807 resulted from the non-cash amortization of
debt discount and $42,712 related to interest accrued during the period on the
outstanding principal balance. Of the interest accrued, $35,938 was paid during
the period, and $6,774 was payable as of December 31, 2004. The Company did not
repay the principal on the scheduled maturity date of July 5, 2004, and such
failure to pay constitutes a default under the obligation. In October 2004 the
debenture holder entered into a forbearance agreement with the holders of
convertible debentures entered into in June and July 2004 with an aggregate
principal amount of $2,000,000, pursuant to which the debenture holder agreed
not to take any action with respect to the non-payment of the $750,000 principal
balance until the earlier of (i) February 2, 2005 and (ii) the date of notice of
default from the convertible debenture holders to the Company.
In January 2005, the Company repaid the entire $750,000 outstanding
principal balance, plus accrued interest totaling $6,744, the 750,000 shares of
the Company's common stock held as collateral on the debt were returned and the
secured debenture agreement was cancelled.
As of December 31, 2004 and 2003, secured debenture debt balance
consists of the following:
December 31, 2004 December 31, 2003
----------------- -----------------
Secured subordinated debenture $ 1,250,000 $ --
Secured debenture discount ( 55,170) --
-------------- ---------------
Secured debenture debt $ 1,194,830 $ --
============== ================
Note 8 - CONVERTIBLE DEBENTURES
MAY 2004 CONVERTIBLE DEBENTURE
In May 2004, the Company entered into convertible debenture agreements
with two private lenders with an aggregate principal balance of $800,000, and
received net proceeds of $695,000 after subtracting related placement agent fees
and expenses totaling $105,000.
The debentures bear interest at an annual rate of 10%, which is due and
payable on the maturity date. In addition, the debenture holders received an
aggregate of 533,333 warrants to purchase shares of the Company's common stock,
exercisable through May 6, 2009 at an exercise price of $0.90 per share.
The principal balance of the debentures is due and payable on the
earlier of (i) one hundred and five (105) days from the issue date, or (ii) ten
(10) business days from the date the Company's Registration Statement is
declared effective by the Securities and Exchange Commission.
The debentures are secured by an aggregate of 800,000 shares of the
Company's common stock borrowed by the Company pursuant to a security lending
agreement between the Company and a third party. Under certain circumstances,
the outstanding principal of the debentures may be converted into shares of the
Company's common stock based on an initial conversion price of $0.90, subject to
adjustment as defined in the agreement.
The debenture debt was recorded net of discounts totaling $360,793
recorded in connection with the $105,000 of loan fees and expenses, and
$255,793, based on a Black-Scholes model valuation, related to the 533,000
warrants issued to debenture holders.
62
In connection with these debentures, the Company entered into a
registration rights agreement with the debenture holders covering 533,333 shares
of common stock underlying the warrants issued in connection with these
debentures. Pursuant to this agreement, the Company was obligated to file a
Registration Statement with the Securities and Exchange within 30 days of the
closing of the transaction.
The Company was not in compliance with terms of these debenture
agreements due to the non-payment of the principal balance by the scheduled
maturity date in August 2004, and due to its failure to file a Registration
Statement with the Securities and Exchange Commission covering warrants issued
to debenture holders pursuant to the debenture agreement by July 2004, as
required by the registration rights agreement entered into between the Company
and the debenture holders in connection with the debenture agreement. The
failure to pay the principal balance when due and to file the Registration
Statement on a timely basis are events of defaults under the agreement. The
Company is in discussions with the debenture holders regarding a resolution of
these matters.
As discussed later in this note, in October 2004, the Company agreed to
modify certain terms and conditions included in a new Convertible Debenture
Agreements which aggregated the principal balances of $2,000,000 of debentures
entered into in June and July 2004. The modifications included a reduction in
the exercise prices of an aggregate of 1,500,000 previously issued warrants to
$0.40 per share, a reduction of the initial conversion price of these debentures
to $0.35 per share. As a result of these modifications, the debenture holders
agreed to waive all events of default and non-compliance under the covenants of
those agreements, and to extend the required Registration Statement filing date
deadline to November 1, 2004, and in November 2004, the filing date deadline was
further extended to November 15, 2004.
As a result of this agreement, in October 2004, the Company issued
533,333 additional warrants at an exercise price of $0.40 per share and recorded
additional debt discount of $436,388, based on a Black-Scholes model valuation
increasing the total discount recorded to $797,181.
During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $696,930 in connection with the debenture debt, of
which $680,560 resulted from the non-cash amortization of debt discount and
$16,370 related to interest accrued during the period on the outstanding
principal balance.
JUNE 2004 CONVERTIBLE DEBENTURE
In June 2004, the Company entered into convertible debenture agreements
with two private lenders with an aggregate principal balance of $1,000,000, and
received net proceeds of $880,000 after subtracting related placement agent fees
and expenses totaling $120,000. The principal balance of the debentures is due
and payable on June 24, 2006.
The debentures bear interest at an annual rate of 8%, which is payable
quarterly beginning December 31, 2004. In addition, the debenture holders
received an aggregate of 150,000 shares of the company's common stock, and an
aggregate of 750,000 warrants to purchase shares of the Company's common stock,
exercisable through June 24, 2009, at an exercise price of $1.50 per share,
provided however that the exercise price with respect to an aggregate of 500,000
of the warrants is reduced to $0.60 per share during the period from the date of
issuance through the date twelve (12) months after the Securities and Exchange
Commission declares effective a registration statement registering the resale of
shares underlying the warrants.
The debenture debt was recorded net of discounts totaling $541,714
recorded in connection with the $120,000 of loan fees and expenses, $106,500
recorded based on the fair market value of the common stock on the date of
issuance and $315,214, based on a Black-Scholes model valuation, related to the
750,000 warrants issued to debenture holders.
The debentures are secured by an aggregate of 350,000 shares of the
Company's common stock issued by the Company, and the outstanding principal of
the debentures may be converted, subject to redemption rights of the Company,
into shares of the Company's common stock based on an initial conversion price
of $0.50, subject to adjustment as defined in the agreement.
63
The market price of the Company's common stock on the date of issuance
of the debentures was $0.71 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the entire discount
recorded, $578,286, was recognized as non-cash interest expense during the
second quarter of 2004.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement. As discussed in more detail in Note 18,
in October 2004 and November 2004 the Company received a waiver of the
non-compliance in connection with an amendment to the debenture agreements and
an extension of the required Registration Statement filing date deadline to
November 15, 2004.
As a result of this agreement, in October 2004, the Company issued
250,000 additional warrants, bringing the total warrants issued with this
financing to 1,000,000, at an exercise price of $0.40 per share and recorded
additional debt discount of $101,822, based on a Black-Scholes model valuation.
In addition, the Company was required to release the 350,000 escrowed common
stock shares as part of a letter of understanding associated with the December
30, 2004 bridge financing discussed later in this note. These shares were valued
at their issued date value on June 24, 2004 of $0.71 per share. As a result, an
additional debt discount was recorded for $248,500 in conjunction with the
$101,822 described above, bringing the total debt discount recorded against this
financing of $892,036.
During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $239,527 in connection with the debenture debt, of
which $197,884 resulted from the non-cash amortization of debt discount recorded
in connection with loan fees and the value of stock and warrants issued to note
holders, and $41,643 resulted from interest accrued during the period on the
outstanding principal balance.
JULY 2004 CONVERTIBLE DEBENTURE
In July 2004, the Company entered into convertible note agreements with
a private lender with an aggregate principal balance of $1,000,000, and received
net proceeds of $896,125 after subtracting related placement agent fees and
expenses totaling $103,875. The note bears interest, at an annual rate of 8%,
which is due and payable quarterly beginning on October 31, 2004. In addition,
the debenture holders received warrants to purchase 750,000 shares of the
Company's common stock, exercisable through July 23, 2011, at an exercise price
of $1.00 per share.
The principal balance of the note, plus any accrued and unpaid
interest, is due and payable on July 23, 2014, provided however, that on or
after July 31, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. The outstanding principal of the debentures may be
converted into shares of the Company's common stock, at the option of the note
holder, based on an initial conversion price of $0.54 per share, subject to
adjustment as defined in the agreement.
The debenture debt was recorded net of discounts totaling $310,182
recorded in connection with the $103,875 of loan fees and expenses $206,307,
based on a Black-Scholes model valuation, related to the 750,000 warrants issued
to debenture holders.
64
The market price of the Company's common stock on the date of issuance
of the debentures was $0.57 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the entire discount
recorded was recognized as non-cash interest expense during the second quarter
of 2004. Since the debt was convertible, at the option of the note holders, at
any time following issuance, the entire discount recorded, $242,540, was
recognized as non-cash interest expense during the third quarter of 2004.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement. As discussed in more detail in Note 18,
in October 2004 and November 2004 the Company received a waiver of the
non-compliance in connection with an amendment to the debentures agreements and
an extension of the required Registration Statement filing date deadline to
November 15, 2004. As a result of this agreement, in October 2004, the Company
issued 250,000 additional warrants, bringing the total warrants issued with this
financing to 1,000,000, at an exercise price of $0.40 per share and recorded
additional debt discount of $168,542, based on a Black-Scholes model valuation.
In addition, 104,285 shares of Common stock were issued as full payment for
accrued liquidated damages. The common stock was valued at the closing stock
price on date of issuance, October 8, 2004, at $0.50. The company recorded an
expense of $52,142.50 during the fourth quarter in conjunction with this stock.
Also, in conjunction with the modifications in October 2004, additional discount
resulting from the beneficial conversion is recognized as non-cash interest
expense requiring $451,330 of non-cash interest expense during the fourth
quarter of 2004.
During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $46,069 in connection with the debenture debt. Of this
total, $10,291 resulted from the non-cash amortization of debt discount recorded
in connection with loan fees and the value of stock and warrants issued to note
holders, and $35,778 resulted from interest accrued during the period on the
outstanding principal balance.
OCTOBER 2004 CONVERTIBLE DEBENTURE
In October 2004, the Company entered into convertible debenture
agreements with four private lenders with an aggregate principal balance of
$850,000, and received net proceeds of $788,000 after subtracting related
placement agent fees and expenses totaling $62,000. The notes bear interest, at
an annual rate of 8%, which is due and payable quarterly beginning on December
31, 2004. The principal balance of the note, plus any accrued and unpaid
interest is due and payable on October 6, 2014, provided however, that on or
after October 6, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. In addition, the note holders received warrants to
purchase 850,000 shares of the Company's common stock, exercisable through
October 6, 2009 at an exercise price of $0.40 per share.
Non-cash commission given with the transaction to four individuals
involved with consummating this and the subsequent Convertible Debenture
Agreement included 171,428 shares of common stock valued at the market price of
$.40 on date of issuance. The expense was recorded as part of the placement
agent fees as debt discount. Warrants were issued to an individual and
associated agency totaling 528,572 at a strike price $.40, with a three year
term. However, warrants issued prior to this financing consisting of 25,000
warrants at a strike price of $1.50 and 50,000 warrants at a strike price of
$0.60 with a five year term were canceled and replaced in the total issued
warrants of 528,572.
65
In connection with the Convertible Debenture Agreements entered into in
October 2004, the Company agreed to modify certain terms and conditions included
in convertible debenture agreements with an aggregate principal balance of
$2,000,000 entered into in June and July 2004. The modifications included a
reduction in the exercise prices of an aggregate of 1,500,000 previously issued
warrants to $0.40 per share, a reduction of the initial conversion price of
these debentures to $0.35 per share, the issuance of warrants to purchase
500,000 shares at an exercise price of $0.40 per share and the issuance of
261,428 shares of common stock as full payment of accrued liquidated damages. As
a result of these modifications, the debenture holders agreed to waive all
events of default and non-compliance under the covenants of those agreements,
and to extend the required Registration Statement filing date deadline to
November 1, 2004, and in November 2004, the filing date deadline was further
extended to November 15, 2004.
The debenture debt was recorded net of discounts totaling $460,670
recorded in connection with the $62,000 of loan fees and expenses $203,532 based
on a Black-Scholes model valuation, related to the 850,000 warrants issued to
debenture holders, $68,572 for the value of the 171,428 shares of common stock,
and $126,566 based on a Black-Scholes model valuation, related to the 528,572
warrants issued for commissions.
The market price of the Company's common stock on the date of issuance
of the debentures was $0.57 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the entire discount
recorded, $382,298, was recognized as non-cash interest expense during the
fourth quarter of 2004.
During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $26,899 in connection with the debenture debt. Of this
total, $10,877 resulted from the non-cash amortization of debt discount recorded
in connection with loan fees and the value of stock and warrants issued to note
holders, and $16,022 resulted from interest accrued during the period on the
outstanding principal balance.
DECEMBER 2004 BRIDGE LOAN
In December 2004 the Company entered into a debenture agreement with
Alpha Capital Aktiengesellschaft ("Alpha") with a principal balance of $500,000,
and received net proceeds of $469,000 after subtracting related placement agent
fees and expenses totaling $31,000. The debenture was due and payable on January
27, 2005, and was convertible into shares of the Company's common stock, at the
option of the note holder, based on an conversion price equal to 80% of the
closing bid price of the Company's common stock on the date of conversion, in
the event that the debenture was not repaid on the scheduled maturity date, or
in the event of a default under the agreement. In connection with the debenture,
Alpha received 142,857 shares of the Company's common stock, and 5-year warrants
to purchase 1,250,000 shares of the Company's common stock at an exercise price
of $0.40 per share.
The debenture debt was recorded net of discounts totaling $306,430
recorded in connection with the $31,000 of loan fees, expenses of $219,716,
based on a Black-Scholes model valuation, related to the 1,250,000 warrants
issued to debenture holder and $55,714, based on the closing price of our common
stock on December 30, 2004 of $0.39.
During the fiscal year ending December 31, 2004, the Company recorded
total interest expense of $20,816 in connection with the debenture debt. Of this
total, $20,706 resulted from the non-cash amortization of debt discount recorded
in connection with loan fees and the value of stock and warrants issued to note
holders, and $110 resulted from interest accrued during the period on the
outstanding principal balance.
In January 2005, the Company repaid the entire $500,000 outstanding
principal balance, and the debenture agreement was cancelled.
66
DECEMBER 2004 CONVERTIBLE DEBENTURE
Also in December, the Company received $125,000 as a subscription from
Greenwich Growth Fund, Ltd., for a convertible debenture agreement that was
included in the convertible debenture agreements closed in January 2005, as
described in the Subsequent Events note below. The company received net proceeds
of $117,250 after subtracting related placement agent fees and expenses totaling
$7,750. The notes bear interest, at an annual rate of 8%, which is due and
payable quarterly beginning on March 31, 2005 The principal balance of the note,
plus any accrued and unpaid interest is due and payable on January 14, 2015. In
addition, the note holder received warrants to purchase 125,000 shares of the
Company's common stock, exercisable through January 14, 2010 at an exercise
price of $0.40 per share. The outstanding principal of the debentures may be
converted into shares of the Company's common stock, at the option of the note
holder, based on an initial conversion price of $0.35 per share, subject to
adjustment as defined in the agreement.
The debenture debt was recorded net of discounts totaling $29,722
recorded in connection with the $7,750 of loan fees, expenses of $21,972, based
on a Black-Scholes model valuation, related to the 125,000 warrants issued to
debenture.
The market price of the Company's common stock on the date of issuance
of the debentures was $0.39 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the discount of
$18,847 recorded was recognized as non-cash interest expense during the fourth
quarter of 2004.
As of December 31, 2004 and 2003, convertible debenture debt balances
consists of the following:
Current:
December 31, 2004 December 31, 2003
----------------- -----------------
Convertible debenture $ 1,300,000 $ --
Convertible debenture discount (402,345) --
-------------- ---------------
Convertible debenture - net $ 897,655 $ --
============== ===============
Long Term:
December 31, 2004 December 31, 2003
----------------- -----------------
Convertible debenture $ 2,975,000 $ --
Convertible debenture discount (1,641,399) --
-------------- ---------------
Convertible debenture - net $ 1,333,601 $ --
============== ===============
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
In October 1998, the Company issued a demand promissory note in the
amount of $400,000, plus interest at a variable rate, based on the prime rate to
of SurgiJet, Inc. ("SurgiJet"), our former parent company. In connection with
the Merger Agreement, an amendment to the note agreement was executed in
February, 2003 under which the accrual of additional interest was halted, and
scheduled principal and interest payments were established.
During 2002, the Company entered into a promissory note in the amount
of $91,000 plus interest at the rate of 10% per annum with DentaJet, Inc.
("DentaJet"), a Company then related through common shareholders. During 2002
and 2003, the Company borrowed an additional $72,000 from, and made payments
totaling $27,482, to DentaJet, resulting in an outstanding principal balance of
$135,518 at December 31, 2003
67
During 2002, the Company entered into a promissory note with Lance
Doherty, a principal of SurgiJet and shareholder of the Company, for a principal
sum of $19,000 plus interest at the rate of 10% per annum. At December 31, 2003
the outstanding principal balance of this note was $19,000.
During 2002, the Company recorded a liability of $2,967 related to
expenses paid by Rex Doherty, a principal of SurgiJet and shareholder of the
Company. At December 31, 2003 the outstanding liability balance was $2,967.
During 2003 the Company initiated litigation against SurgiJet,
challenging the validity of the SurgiJet Note, as well as other notes and
liabilities to DentaJet, Lance Doherty and Rex Doherty.
As discussed in more fully in Note 13, in October 2004, the parties to
the litigation entered into a settlement agreement pursuant to which revised
note payable amounts and payment schedules were agreed upon. Based on this
agreement, outstanding principal and accrued interest balances related to these
notes as of September 30, 2004 have been adjusted to reflect the agreed upon
amounts, and as a result, the balances at December 31, 2004 and 2003 are as
follows:
December 31, 2004 December 31, 2003
Principal Interest Principal Interest
---------------------------------------------------------------------------
SurgiJet $ 549,774 $ 14,347 $ 360,976 $ 43,676
DentaJet - - 135,518 24,745
Lance Doherty 19,000 6,293 19,000 3,920
Rex Doherty - - 2,967 298
---------------------------------------------------------------------------
Total $ 568,774 $ 20,640 $ 518,461 $ 72,639
===========================================================================
FINANCIAL ENTREPRENEURS, INC. ("FEI")
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between PNAC and FEI, a
significant shareholder of the Company, during 2002. The note bears interest at
an annual rate of 7.5%, and matures on April 3, 2009. Upon consummation of the
merger in February 2003, the outstanding principal and accrued interest payable
balances were $206,649 and $11,462, respectively. During 2003, the Company added
net borrowings of $43,476 to the note, and accrued additional interest expense
of $17,072, resulting in an outstanding principal balance and accrued interest
payable balances at December 31, 2003 of $250,125 and $28,534, respectively.
During the fiscal year ending December 31, 2004, net activity resulted in an
increase to the outstanding principal of $28,761 and $23,329 of interest expense
related to this note. As of December 31, 2004 the outstanding principal and
accrued interest payable on this note were $278,886 and $51,863, respectively.
In March 2005, the Company received a notice from FEI for the payment in full of
the note. This is not a demand note and the Company is currently in negations
for resolution in this matter and believes there will be an amicable resolution.
NOTE 10 - COMMITMENTS
LICENSE AGREEMENTS
Under the terms of the technology license agreements with SurgiJet, the
Company is obligated to pay a royalty of 7% of revenues received from sales of
the products, up to $400 million of revenues over the course of the agreements,
and 5% of revenues thereafter. The license agreements with SurgiJet also provide
for a minimum royalty of $60,000 per year that may be used as a credit toward
payment of future royalties due on product sales.
Under the terms of the patent license agreement entered into during
2003, the Company is obligated to pay a royalty of 6% of net sales of products
utilizing the licensed patent technology. The license agreement also provides
for a minimum royalty of $24,000 per year that may be used as a credit toward
payment of future royalties due on product sales.
68
Under the terms of the Manufacturing, Supply and Distribution Agreement
entered into in May 2004, the Company is obligated to purchase specified minimum
monthly and annual quantities of licensed products from the Licensor. The
Company agreed to pay a one time royalty of $250,000 to our supplier in return
for a lower cost per unit during the initial length of this agreement. Payment
was completed in January 2005.
NOTE 11 - SERIES A PREFERRED SHARES
In August 2004, the Company entered into an agreement with Langley Park
Investments PLC ("Langley"), a corporation organized under the laws of England
and Wales, in which the Company issued convertible preferred stock in exchanged
for "ordinary" shares of Langley stock. In October 2004, the Company issued
450,000 shares of Series A Convertible Preferred Stock ("Series A shares"), with
a stated value of $10 per share and a redemption value of $4,500,000, to Langley
in exchange for 2,477,974 newly issued ordinary shares of Langley with an
initial agreed upon value of L(pound)1.00 (pound) per share. The Company was
charged a commission in conjunction with the sale equal to 10% of the Langley
shares leaving 2,230,177 shares available to the Company. Consummation of the
transaction was subject to admission of the Langley shares to the London Stock
Exchange ("LSE"), which occurred on September 30, 2004 and the initiation of
trading on the LSE which began on October 8, 2004. The Series A shares were
recorded at a total value of $1,536,653 based on the fair value of the Langley
shares on October 8, 2004. On December 31, 2004, the market value of the shares
decreased to $590,980. As the Company has classified the shares as an
available-for-sale marketable security, the Company recorded an unrealized loss
of $792,009, as an accumulated comprehensive loss which is a separate component
of equity. The Company recorded commission expense of $153,664 in the fourth
quarter based on the value of the commission shares.
The Series A Preferred Stock is non-voting and the shareholders are not
entitled to receive any dividends. The preferred stock is convertible at any
time for a period of three years from the date of issuance into shares of the
Company's common stock ("Common Stock"). The number of shares of common stock to
be issued upon conversion is determined by dividing the aggregate stated value
of the preferred stock by the ("Conversion Price"). The Conversion Price is
defined as the lesser of $0.609 (The "Fixed Conversion Price") or eighty percent
(80%) of the lowest closing bid price for the common stock in the ten (10)
trading days preceding the date of conversion, but in no event is it less than
30 percent (30%) of the Fixed Conversion Price. However, Langley may not convert
to the extent that conversion would result in it's owning more than 4.99% of the
outstanding common stock of the Company. The conversion price is subject to
adjustment based on anti-dilution provisions. Any shares of preferred stock not
previously converted will automatically be converted into common stock at the
end of the three year period. If the Company defaults under certain covenants,
the holders of the preferred stock may compel redemption at the stated value.
Under the Stock Purchase Agreement, Langley has a one year lock up on
the Company shares. Also, the Company may sell the Langley shares received on
the open market of the LSE at any time.
In accordance to SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", financial
instruments with mandatory redemption rights are to be recorded as liabilities
unless the redemption is to occur upon the liquidation or termination of the
issuer. SFAS 150 also specifies that a financial instrument that embodies a
conditional obligation that is based on settlement by the issuance of a variable
number of the issuer's equity shares associated with a fixed monetary amount is
required to be classified as a liability. Based on characteristics of the
agreement as describe above, the Company has recorded the Preferred Series A
shares as a long term liability on the balance sheet.
The market price of the Company's common stock on the date of
commitment was $0.48 per share. In accordance with EITF 98-5, as amended by EITF
00-27, because the effective conversion price associated with the preferred
shares is less than the market value, a beneficial conversion should be
recognized as a return to the preferred shareholders over the minimum period
from the date of issuance to the date at which the preferred shareholders can
realize that return. Since the convertible preferred stock is automatically
converted to common stock at the end of three years, (if not previously
converted), the discount should be accreted over the three year life. The
accretion of the recorded discount resulting from the beneficial conversion is
recognized as an undeclared dividend and is reflected in the income statement of
operations below the "Net loss" line as a component of "Net loss applicable to
common shareholders". Accordingly, the Company recorded a preferred stock
discount of $1,125,000. On December 31, 2004, an accretion of the discount of
$93,750 was recorded resulting in a net preferred discount of $1,031,250.
69
As discussed in more detail in Note 18 - Subsequent Events, the Company
sold the Langley shares during the first quarter of 2005 for net proceeds of
$661,020.
NOTE 12 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
During 2004, the Company recorded 585,000 shares of common stock issued
for private equity placements, 2,730,000 common stock shares for services
recording an expense for $2,512,100, 1,303,571 common stock shares associated
with $267,394 of debt discount, 750,000 common stock shares issued with May 2004
distribution agreement valued at $712,500 and capitalized for May 2004
distribution agreement, 611,428 common stock shares valued at $379,214 for debt
defaults and penalties, 240,000 common stock shares valued at $125,250 for
litigation settlements.
WARRANT ACTIVITY
During the fiscal year of 2004, the Company issued 3-year warrants to
purchase an aggregate of 633,572 shares of its common stock at an average
exercise price of $0.52 per share, 5-year warrants to purchase an aggregate of
7,946,666 shares of its common stock at an average exercise price of $0.65 per
share and 7-year warrants to purchase an aggregate of 150,000 shares of its
common stock at an average exercise price of $1.00 per share.
In connection with warrants issued during this period, the Company
recorded debt discount totaling $3,055,875 related to 6,965,238 warrants issued
in connection with convertible debenture agreements completed during the year,
professional fees totaling $282,183 related to an aggregate of 880,000 warrants
issued as commissions on debenture and Preferred Stock agreements completed
during the quarter, professional fees totaling $ 222,183, related to an
aggregate of 305,000 warrants issued for consulting services, and 580,000 shares
related to the private placements. All amounts recorded in connection with these
warrants were based on the fair value of the warrants issued using a
Black-Scholes model valuation.
The following table summarizes the number of outstanding common stock
warrants as of December 31, 2004:
Weighted Average
Number Exercise Price
----------- ------------
Outstanding at December 31, 2002 235,000 $ 2.50
Granted 11,867,480 2.53
Forfeited -- --
Exercised -- --
---------- ------------
Outstanding at December 31, 2003 12,102,480 $ 2.53
Granted 8,730,238 0.64
Forfeited -- --
Exercised -- --
---------- ------------
Outstanding at December 31, 2004 20,832,718 $ 1.45
The following table summarizes additional information with respect to
outstanding common stock warrants at December 31, 2004:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ------------ --------------------- -----------
$0.40 6,000,238 59 6,000,238
0.62 700,000 57 700,000
$0.65 20,000 54 20,000
$0.75 375,000 59 375,000
$.090 620,000 48 620,000
$1.00 6,326,480 41 6,326,480
$1.23 45,000 37 45,000
$1.50 30,000 22 30,000
$2.25 4,441,000 45 4,441,000
$2.50 505,000 34 505,000
$3.00 50,000 37 50,000
$5.00 1,720,000 37 1,720,000
------------ ------------
20,832,718 20,832,718
============ ============
70
BORROWED SHARES
In connection with collateral requirements of convertible debenture
agreements with HIT Credit Union, Platinum Long Term Growth Fund and Rock II,
LLC, the Company borrowed a total of 1,550,000 shares of its outstanding common
stock from Taika Investments, Inc. ("Taika") pursuant to a Securities Lending
Agreement between the Company and Taika. In accordance with the terms of this
agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and was obligated to return any borrowed shares by November 30,
2004. In January, the Company received a one-year extension, to November 30,
2005, of the date by which any borrowed shares must be returned. In the event of
default, the Company has agreed to file a Registration Statement and to return
any shares, within 72 hours, which had not previously been returned by the due
date. As of December 31, 2004 the Company had borrowed a total of 1,550,000
shares pursuant to this agreement, and the Company had accrued interest expense
totaling $41,935.
In January 2005, HIT Credit Union returned 750,000 of the borrowed
shares.
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The following chart depicts the changes in the accumulated comprehensive income
for periods ending December 31, 2004 and 2003:
2004 2003
---- ----
Change in Accumulated Comprehensive Income(Loss)
Unrealized loss from marketable securities (792,009) --
========== ==========
Total Accumulated Comprehensive Income/(Loss) (792,009) --
This loss was incurred as a result of the write down of the marketable
securities to market on December 31, 2004. Refer to the Preferred Series A Stock
section above for more detail on this transaction.
NOTE 13 - SETTLEMENT AGREEMENTS AND LOAN PAYABLE
In November 2002, the Company entered into settlement agreements with
an officer and an employee related to accrued but unpaid fees for consulting
services rendered by them prior to the consummation of the Merger in the
aggregate of $700,000. Under the agreements a total of $450,000 was converted
into 211,267 shares of the Company's common stock, during 2003, based upon the
closing price on the effective date the Merger Agreement. The balance owed of
$250,000 was converted into two notes payable that bear interest at an annual
rate of 3.5% and provide for the principal to be paid over equal installments
for the duration of the loans. At December 31, 2004 and 2003, the aggregate
balances on these notes were $41,403 and $104,166, respectively and the
respective accrued interest payable balances were $10,102 and $8,999.
In October 2004, the Company and SurgiJet, its former parent company
entered into a settlement agreement covering all previously outstanding
litigation between the two companies, as well as with SurgiJet's principal
owners and its subsidiary, DentaJet.
In accordance with the settlement agreement, the Company, agreed to pay
a total of $579,774, plus accrued interest at an annual rate of 7.5% from August
31, 2004 ($3,574 through September, 30, 2004), as full settlement of previously
disputed notes payable to SurgiJet and DentaJet and related accrued interest
which the Company was carrying on its books in the aggregate amount of $580,718.
In addition, the Company agreed to pay a previously disputed note payable to a
shareholder of the Company, who is also a principal owner of SurgiJet, $19,000
plus accrued interest at an annual rate of 10% from December 31, 2002 ($3,775
through September 30, 2004), which the Company was carrying on its books in the
aggregate amount of $24,678.
In addition, the Company agreed to issue 75,000 shares of its Common
Stock to SurgiJet, granted SurgiJet a security interest in all of its assets and
agreed to provide SurgiJet with a stipulated judgment, which can only be filed
by SurgiJet upon an event of default which remains uncured following 10 days
after receipt of written notice of such default.
71
Payments on all obligations due pursuant to the settlement agreement
will be made in monthly installments commencing December 1, 2004. The first
payment is in the amount of $30,000, thereafter monthly payments are $20,000
through December 2005, and $25,000 from January 1, 2006 until the obligations
are paid in full.
In accordance with the settlement agreement, SurgiJet and its
principals agreed to waive, subject to completion and final report from an
independent accounting firm, claims for additional monies owed to them, and to
drop their cross-complaint against the Company, its directors and certain of its
officers seeking additional monetary damages and rescission of the Merger
Agreement.
NOTE 14 - CONTINGENCIES
In February 2004, the Company was served a summons which named the
Company as one of several defendants in an action filed by an individual seeking
damages of approximately $450,000 based on claims including breach of contract,
promissory fraud and negligent misrepresentation related to activities that
occurred, and involving owners and management of the Company, prior to the
effective date of the Merger Agreement. The Company denies any involvement in
the activities included in the allegations, and does not anticipate the
necessity to defend this action.
NOTE 15 - RELATED PARTY TRANSACTIONS
Financial Entrepreneurs Incorporated ("FEI"), which beneficially owns
in excess of 5% of the outstanding shares of common stock of the Company, has
funded certain expenditures of the Company. In April 2002, the Company issued a
Promissory Note to FEI for amounts loaned to the Company, bearing an interest
rate of 7.5% per annum. As of December 31, 2004, current amount due to related
parties in the Company's balance sheet amounts to $330,749, including accrued
interest of $51,863.
In February 2003, FEI converted a promissory note held by it into
378,997 shares of Common Stock, at a conversion rate of $1.00 per share. Also in
February of 2003, pursuant to an agreement entered into in connection with the
merger, FEI cancelled 7,957,000 shares of Company Common Stock owned by it, and
the Company issued FEI a five year warrant to purchase 1,543,000 shares of
Common Stock at an initial exercise price of $5.00 per share. During 2003, the
Company paid finders' fees totaling $52,500 to FEI in connection with amounts
raised through private equity placements by the Company. In addition, during
2003 the Company recorded consulting expenses totaling $75,000 to FEI that were
added to an outstanding note payable, and reimbursed it for travel expenses
related to business of the Company totaling $19,279.
During 2004, FEI loaned VisiJet $229,361 of which $200,600 was paid.
Also during 2004, the Company paid finders fees of $15,000 and reimbursed travel
expenses of $15,593 to FEI of which $656 was included in accounts payable at
December 31, 2004. In March 2005, the Company received a notice of demand from
FEI for the payment in full of the note. The Company is currently in
negotiations for resolution of this matter.
In February of 2003, the Company issued 164,319 shares of Common Stock
to Randal A. Bailey, its President and Chief Executive Officer, in cancellation
of $350,000 of unpaid salary. The Company also issued Mr. Bailey a two year
promissory note for $150,000 in satisfaction of unpaid salary. The note bears
interest at a rate of 3.5% per annum, and calls for twenty-four equal monthly
installments. As of December 31, 2004, the current amount due to Mr. Bailey was
$48,415, including $7,012 of accrued interest.
In February 2003, the Company issued five-year warrants to purchase
25,000 shares of its Common Stock at an exercise price of $3.00 per share, each
to Laurence Schreiber, a director and officer of the Company, and to Thomas F.
DiMele, a former officer of the Company, pursuant to an agreement entered into
in connection with the merger.
72
During 2003, the Company began making consulting payments of $2,500 per
month to a corporation controlled by Norman Schwartz, a director of the Company.
In June of 2003, the payments were increased to $5,000 per month. Through
December 31, 2003 consulting fees and related expenses totaling $41,250 and
$2,604, respectively, were expensed, of which $2,500 is included in accounts
payable at December 31, 2003. In addition, in September 2003, the Company issued
150,000 shares of common stock to the corporation for services provided by in
connection with the finalization of the Merger Agreement. In connection with the
issuance of these shares, the Company recorded consulting expenses of $225,000,
based on the fair market value of the common stock at the date of issuance.
Subsequent to the issuance of these shares, beneficial ownership with respect to
100,000 of the shares was transferred to Laurence Schreiber, a director and
officer of the Company.
During August 2004, the company increased the monthly payments to
Norman Schwartz's company to $6,500 per month up from $5,000. As a result, total
consulting fees and related expenses paid during 2004 were $66,750 and $4,051,
respectively, of which $4,763 was included in Accounts Payable at December 31,
2004. On March 1, 2005, the company signed a two year contract with Norman
Schwartz's company increasing the monthly fee to $7,500 per month.
In February 2003, the Company entered into a consulting agreement with
Richard Keates, M.D., a director of the Company. Pursuant to this agreement, Dr.
Keates receives a monthly retainer of $5,000, plus a fee of $1,500 per day for
consulting work performed. Through December 31, 2003 consulting fees and related
expenses totaling $118,000 and $24,581, respectively, were recorded pursuant to
this agreement, of which $14,721 is included in accounts payable at December 31,
2003.
In January 2004, the Company entered into a new consulting agreement
with Richard Keates increasing the monthly retainer to $15,000 per month plus
reimbursement of Business expenses incurred. Through December 31, 2004
consulting fees and related expenses totaling $180,000 and $26,784,
respectively, were recorded pursuant to this agreement, of which $30,398 is
included in accounts payable at December 31, 2004.
In February 2003, the Company paid consulting fees in the amount of
$110,000 to a corporation controlled by Peter Lewis and David Eisenberg, two
shareholders, each of whom own beneficially in excess of 5% of the outstanding
shares of common stock of the Company, related to services provided in
connection with the finalization of the Merger Agreement. In April 2003, the
Company entered into a consulting agreement with this corporation, pursuant to
which it is entitled to receive a monthly fee of $15,000; however, payment of
accrued fees is not due until such time as the Company has a minimum cash
balance of $2.5 million. During 2003, the Company recorded finders' fee expenses
totaling $30,000 for amounts earned by Peter Lewis and the corporation in
connection with private equity placements by the Company. Of the total finders'
fees earned, $15,000 was paid during 2003 and $15,000 is included in accrued
expenses at December 31, 2003. Through December 31, 2004 a total of $315,000 in
fees has been expensed and accrued pursuant to this agreement.
In July 2003, Richard H. Keates, M.D., a director of the Company,
purchased 100,000 shares of the Company's common stock in a private placement of
equity securities for $100,000. In connection with this investment, Dr. Keates
also received 100,000 5-year warrants to purchase common stock at an exercise
price of $2.25.
In November 2003, directors Richard H. Keates, M.D., Norman Schwartz,
and Adam Krupp were granted 200,000, 75,000 and 25,000 10-year options,
respectively, to purchase shares of the company's common stock at an exercise
price of $1.10. In October 2004, directors Richard H. Keates, M.D., Norman
Schwartz and Adam Krupp were granted 200,000, 100,000 and 25,000 10-year
options, respectively, to purchase shares of the company's common stock at an
exercise price of $0.40.
73
NOTE 16 - Security Lending Agreement
In April 2004, the Company and a corporation that beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company entered
into an agreement pursuant to which the corporation agreed to make available 3
million shares of the Company's common stock, for use by the Company as
collateral in subsequent financing transactions. In accordance with the terms of
this agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and must return the borrowed shares by November 30, 2004. In the
event of default, the Company has agreed to file a Registration Statement and to
return any shares, within 72 hours, which had not previously been returned by
the due date. As of December 31, 2004 the Company had borrowed a total of
1,550,000 shares pursuant to this agreement, and the Company had accrued
interest expense totaling $ 41,935.
NOTE 17 - INCOME TAXES
The provision for income taxes consist of the following for the years
ended December 31:
2004 2003
------------ ------------
Current:
Federal $ -- $ --
State 800 800
------------ ------------
Total provision $ 800 $ 800
============ ============
The components of the net deferred income tax assets are as follows as
of December 31:
2004 2003
------------ ------------
Deferred income tax assets:
Net operating loss carry forward $ 8,924,252 4,192,639
Other temporary timing adjustments 273,128 400,764
------------ ------------
9,197,380 4,593,403
Deferred tax liability:
State taxes (641,509) (37,858)
------------ ------------
Deferred income tax asset, net before
Valuation allowance 8,555,871 4,555,818
Less: valuation allowance (8,555,871) (4,555,818)
------------ ------------
Deferred income tax asset, net $ -- $ --
============ ============
Since 1996, the company has generated federal and state net operating
losses (NOL) of approximately $20.4 million and $20.1 million, respectively. The
total carry forward amounts are available to offset future taxable income and
expire in various years beginning through 2020 and 2007, respectively. The
ability to use some or all of this carry forward is limited by future events
such as a failure to generate positive taxable income or a change in ownership
as stated under the rules of Internal Revenue Code Section 382.
The net deferred tax asset is primarily associated with its net
operating loss carryforwards, state taxes and other timing adjustments. The
Company has recorded a valuation allowance for the entire amount due to the
uncertainty surrounding the likelihood of the Company generating sufficient
taxable income in the future.
The expected income tax provision, computed based on the Company's
pre-tax income (loss) and the statutory Federal income tax rate, is reconciled
to the actual tax provision reflected in the accompanying financial statements
as follows for the years ending December 31, 2004 and 2003:
2004 2003
---- ----
Expected tax provision (benefit) at statutory rates $ (4,168,966) $ (1,735,703)
State taxes, net of Federal benefit 520 520
Meals & Entertainment 11,562 5,791
Change in valuation allowance 3,571,841 1,730,192
Amortization of beneficial conversion feature 585,043 --
------------- -------------
Totals 800 800
============= =============
74
NOTE 18 - SUBSEQUENT EVENTS
FUNDING ENTERED INTO SUBSEQUENT TO DECEMBER 31, 2004
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc. and a group of investment funds,
several of which were already holders of securities issued by the Company, under
which the Investors can purchase up to $8,195,500 in principal amount of
convertible debentures from the Registrant. The Convertible Debentures are
convertible into Common Stock of the Company at a rate of $.35 per share,
subject to anti-dilution adjustments. The purchase price consisted of cash and
the exchange of $3,475,000 in previously issued convertible debentures.
In connection with the transaction the Registrant also issued to the
Investors warrants to purchase up to 8,945,000 shares of common Stock, at an
exercise price of $.40 per share. The warrants expire on the fifth anniversary
of the date of issuance.
Pursuant to an Amended and Restated Security Agreement, the Company
granted the Investors a security interest in substantially all the assets of the
Company. The Amended and Restated Security Agreement replaces the Security
Agreement entered into October 14, 2004 between the Company and certain of the
investors. Also, pursuant to an Amended and Restated Registration Rights
Agreement, the Company granted the Investors certain registration rights with
respect to the shares of Common Stock issued in the transaction as well as the
shares of Common Stock issuable upon conversion of the Convertible Debentures
and upon exercise of the Warrants. The Amended and Restated Registration Rights
Agreement replaces the Registration Rights Agreement entered into on October 5,
2004 between the Company and certain of the investors.
The Company received funding from the above financing with an aggregate
principal balance of $4,845,000, and received net proceeds of $4,569,500, after
subtracting related placement agent fees and expenses totaling $275,500. The
notes bear interest, at an annual rate of 8%, which is due and payable quarterly
beginning March 31, 2005. The principal balance of the note, plus any accrued
and unpaid interest is due and payable on January 14, 2015, provided however,
that on or after January 14, 2008 the Company, at the option of the note holder,
may be obligated to repurchase the note at a price equal to 100% of the
outstanding principal and interest. The outstanding principal of the debentures
may be converted into shares of the Company's common stock, at the option of the
note holder, based on an initial conversion price of $0.35 per share, subject to
adjustment as defined in the agreement. In addition, the note holders received
warrants to purchase 4,845,000 shares of the Company's common stock, exercisable
through January 14, 2010 at an exercise price of $0.40 per share.
The debenture debt was recorded net of discounts totaling $2,517,962
recorded in connection with the $275,500 of loan fees, expenses of $1,483,594,
based on a Black-Scholes model valuation, related to the 4,845,000 warrants
issued to debenture holders and $474,685, based on the closing price of our
common stock on January 15, 2005 of $0.50, and warrants issued for commission of
$284,183, based on a Black-Scholes model valuation, related to the 1,234,286
additional warrants issued for commission fees.
The market price of the Company's common stock on the date of issuance
of the debentures was $0.50 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, a discount of
$3,560,023 will be recorded as non-cash interest expense during the first
quarter of 2005.
75
The funding was used to pay down debt owed to the following:
Original Date of Loan Debt Holder Principal Paid Interest Paid
--------------------- ----------- -------------- -------------
January 15,2004 SBI Et Al $ 500,000 --
May 6, 2004 HIT Credit Union $ 750,000 $ 6,744
May 6, 2004 Platinum L T Growth $ 550,000 $ 32,400*
May 6, 2004 Rock Capital LLC $ 250,000 * $ 8,000
December 31, 2004 Alpha Capital AG $ 500,000 --
------------ ---------
Total Debt Paid $ 2,550,000 $ 47,144
============ =========
* (In January 2005, Rock II, LLC agreed to exercise 250,000 warrants at a price
of $0.40 for a total of $100,000. The Company paid the note of $250,000 less the
exercise price of $100,000 plus interest of $8,000 for a total cash payment of
$158,000 satisfying the obligation to Rock II, LLC. The Company paid $550,000 to
Platinum Long Term Growth satisfying the principal balance due. Platinum Long
Term Growth agreed to exercise 81,000 warrants at a price of $0.40 or $32,400 to
satisfy the interest due.)
CONVERTIBLE DEBENTURE AGREEMENTS - AMENDMENTS
In January 2005, in connection with the Convertible Debenture
Agreements entered into in October 2004, the Company agreed to modify certain
terms and conditions included in convertible debenture agreements with an
aggregate principal balance of $2,850,000 entered into in June, July and October
2004. The amended debenture agreements with Bushido and Bridges & Pipes were
replaced with new convertible debenture agreements in order to conform the terms
of these agreements to the terms of new convertible debenture agreements with an
aggregate principal balance of $7,695,000 entered into in January 2005, as
described above. Under the replacement agreements, the maturity dates of the
debentures were extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price)
remained the same as in the amended October agreements described above.
SALE OF LANGLEY SHARES
In October 2004 the Company issued 450,000 shares of Series A
Convertible Preferred Stock ("Series A Shares") to Langley Park Investments,
PLC, a United Kingdom corporation ("Langley"). The Company issued the Series A
Shares in exchange for 2,477,974 newly issued Ordinary Shares of Langley, with
an agreed initial value of (pound)1.00 (pound) per share. Commission in
conjunction with sale was 10% of the issued shares or 247,797 shares leaving
total shares available to VisiJet of 2,230,177 shares. During the first quarter
of 2005, the Company made the following transactions with these shares:
Sales of Langley Shares
Date of Sale # of Shares Sold Gross Proceeds Fees Net Proceeds
------------ ---------------- -------------- ---- ------------
1/12/05 500,000 $ 135,531.50 $ 736.11 $ 134,795.39
2/24/05 500,000 158,120.00 849.13 157,270.87
3/4/05 500,000 158,416.50 851.16 157,564.34
3/11/05 100,000 30,872.00 214.18 30,657.82
3/24/05 630,177 181,698.93 968.08 180,730.85
--------- ------------- --------- -------------
Total 2,230,177 $ 664,638.93 $3,618.66 $ 661,020.27
========= ============= ========= =============
ISSUANCE OF COMMON STOCK FOR SERVICES
On March 1, 2005 the Company submitted an S-8 registering 500,000
common stock shares as payment for services rendered over the last two years by
Ascendiant Corporation. An expense of $100,660 will be recorded as a consulting
fee based on the value of the stock on the date of issuance.
76
Advanced Refractive Technologies, Inc.
Balance Sheet
September 30, December 31,
2005 2004
(unaudited) (audited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 31 $ 22,946
Marketable securities -- 590,980
Accounts receivable 115,876 180,145
Inventory 375,728 634,430
Prepaid expenses 37,566 209,429
------------ ------------
Total current assets 529,201 1,637,930
Property and equipment, net 88,076 87,798
Distribution agreement, net -- 1,654,218
Patents and trademarks, net 80,709 87,795
------------ ------------
Total assets $ 697,986 $ 3,467,741
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 1,149,798 889,992
Customer deposits 427 49,198
Compensation settlement agreement - current portion 54,863 66,402
Accrued interest 618,664 277,785
Accrued expenses 2,160,858 1,043,516
Royalty payable 45,000 15,000
Notes payable to related parties 782,132 847,660
Notes payable 10,000 10,000
Convertible debenture debt, net 3,426,676 897,655
Secured debenture debt, net -- 1,194,830
------------ ------------
Total current liabilities 8,248,418 5,292,038
Convertible debenture debt - long term , net -- 1,333,601
Series A convertible preferred stock, 450,000 shares issued and
outstanding at September 30, 2005 and December 31, 2004, net of
unamortized discount of $750,000, (redemption value $4,500,000) 786,654 505,404
------------ ------------
Total liabilities 9,035,072 7,131,043
------------ ------------
Shareholders' deficit:
Preferred A stock, 10,000,000 shares authorized, 450,000 shares issued
and outstanding at September 30, 2005 and December 31 2004,
$4,500,000 current redemption value as noted above -- --
Common stock, 750,000,000 shares authorized, $.001 par value,
48,336,827 shares issued and outstanding at September 30, 2005, and
28,909,662 shares issued and outstanding at December 31, 2004 48,337 28,910
Additional paid in capital 25,645,460 19,786,546
Accumulated comprehensive loss -- (792,009)
Accumulated deficit (34,030,883) (22,686,749)
------------ ------------
Shareholders' deficit (8,337,086) (3,663,302)
------------ ------------
Total liabilities and shareholders' deficit $ 697,986 $ 3,467,741
============ ============
77
Advanced Refractive Technologies, Inc.
Statements of Operations
(unaudited)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales $ 93,491 $ 982,567 $ 715,075 1,037,537
Cost of Goods Sold 1,095,958 456,400 1,476,463 483,234
------------ ------------ ------------ ------------
Gross Profit (1,002,467) 526,167 (761,388) 554,303
------------ ------------ ------------ ------------
Operating expenses:
General and administrative expenses 597,323 1,400,569 3,187,259 6,415,545
Research and development expenses -- 182,414 175,634 591,395
Impairment of distribution agreement 1,464,078 -- 1,464,078 --
------------ ------------ ------------ ------------
Total operating expenses 2,061,401 1,582,983 4,826,971 7,006,940
------------ ------------ ------------ ------------
Loss from operations (3,063,868) (1,056,816) (5,588,359) (6,452,637)
Other income (expense):
Amortization of debt discount (104,172) (328,670) (763,769) (903,802)
Interest expense (1,144,829) (388,515) (1,500,169) (1,063,414)
Interest expense -beneficial conversion -- -- (3,311,088)
Other income 15,510 -- 26,842
Realized gain on securities -- -- 73,659 --
------------ ------------ ------------ ------------
Total other expense (1,233,491) (717,185) (5,474,525) (1,967,216)
------------ ------------ ------------ ------------
Loss before provision for taxes (4,297,359) (1,774,001) (11,062,884) (8,419,853)
Provision for income taxes (1,000) -- -- 800
------------ ------------ ------------ ------------
Net loss (4,296,359) (1,774,001) (11,062,884) (8,420,653)
============ ============ ============ ============
Preferred stock dividends and accretions (93,750) -- (281,250) --
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (4,390,109) $ (1,774,001) $(11,344,134) $ (8,420,653)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.12) $ (0.06) $ (0.35) $ (0.32)
============ ============ ============ ============
Basic and diluted weighted average
number of common shares outstanding 36,468,868 29,429,663 32,295,455 26,069,227
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
78
Advanced Refractive Technologies, Inc.
Statements of Cash Flows
(unaudited)
Nine months ended
September 30, September 30,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $(11,344,134) $ (8,420,653)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 227,178 182,728
Debt discount amortization 529,906 903,802
Accretion of beneficial conversion on preferred shares 281,250 829,139
Adjustment for beneficial conversion for debt 3,311,088 --
Adjustment for distribution agreement write off 2,533,512 --
Common stock, options, warrants issued for services 821,418 2,894,335
Common stock issued for interest 2,259 --
Warrants repricing in connection with debt guarantee 15,769 546,403
Gain on marketable securities, net (70,040) --
Changes in assets and liabilities:
Accounts receivable 64,269 (332,105)
Prepaid expenses 171,863 (309,199)
Inventory (1,657,513) (317,003)
Accounts payable 1,121,132 416,311
Customer deposits (48,771) 16,720
Compensation settlement agreement (11,539) (35,604)
Royalties payable 30,000 (15,000)
Other accrued expenses 1,117,342 537,074
Accrued interest 340,879 161,952
------------ ------------
Net cash used by operating activities (2,578,677) (2,941,100)
------------ ------------
Cash flows from investing activities
Acquisition of property and equipment (30,230) (15,611)
Purchase of distribution agreement -- (1,188,900)
------------ ------------
Net cash used in investing activities (30,230) (1,204,511)
------------ ------------
Cash flows from financing activities
Advance from related party -- 229,361
Repayment of advances from related parties (65,528) (200,600)
Repayment of secured and convertible debentures (2,550,000) --
Repayment of notes payable -- (4,000)
Proceeds from secured debenture -- 1,109,688
Proceeds from convertible debt 4,540,500 2,471,125
Proceeds from private placements-net -- 526,500
Proceeds from sales of marketable securities 661,020 --
------------ ------------
Net cash provided by financing activities 2,585,992 4,132,074
------------ ------------
Net decrease in cash (22,915) (13,537)
Cash, beginning of period 22,946 35,879
------------ ------------
Cash, end of period $ 31 $ 22,342
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 171,129 $ 90,214
Taxes paid -- 800
Debenture costs and fees 179,500 534,190
Non-cash transactions
Warrants issued in connection with secured debenture -- 1,195,290
Warrants issued in connection with convertible debentures 2,046,330 --
Warrants issued in connection with debt guarantee 15,769 546,403
Common stock issued in connection with convertible debenture 507,613 --
Common stock issued in connection with secured debenture 106,350
Common stock issued as collateral 1,100
Reclass of interest to current liability 80,313
The accompanying notes are an integral part of these financial statements
79
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
HISTORY AND MERGER
Advanced Refractive Technologies, Inc. ("ART", or "the Company") is a
medical device company focused on the marketing and development of ophthalmic
surgery products for use in the laser eye surgery and cataract surgery markets.
Through June 30, 2004, the Company was in the development stage, as its efforts
had been principally devoted to organizational activities, raising capital and
research and development. However, based on operating revenues generated by the
Company in the third quarter of 2004, the Company is no longer considered to be
in the development stage.
The Company was incorporated on February 2, 1996, as VisiJet, Inc., a
wholly owned subsidiary of SurgiJet, Inc. to develop and distribute medical
products based on patented waterjet-based technology licensed from SurgiJet. In
May 1999, the Company was spun off from SurgiJet through a distribution of
common stock to its shareholders, after which SurgiJet had no remaining
ownership interest in the Company.
In December 2002 VisiJet entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into VisiJet. The
merger was consummated on February 11, 2003, and immediately thereafter, VisiJet
was merged into Ponte Nossa Acquisition Corp., and the surviving company's name
was changed to "VisiJet, Inc."
In April 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company pursuant to which the Company
acquired exclusive worldwide distribution, sales and marketing rights for
ophthalmic surgical products used in LASIK refractive surgery procedures.
In May 2004, the Company initiated sales of the LasiTome and EpiLift
systems, both of which were obtained pursuant to a license agreement with
Gebauer Medizintechnik GmbH (Gebauer). Both systems may be used in the LASIK
vision correction surgical procedure to expose the cornea prior to application
of the excimer laser for reshaping of the cornea. The LasiTome is a mechanical
device used for cutting a corneal flap, the methodology used in traditional
LASIK procedures. The EpiLift system provides the LASIK surgeon with an
alternative methodology for exposing the cornea in which the epithelium, or top
layer of the eye, is separated in an intact sheet of tissue, and then returned
to its original position for healing following the application of the laser.
Initial sales of the EpiLift and LasiTome systems were in Europe and
certain countries in which the products had received required regulatory
clearance for marketing. Marketing of the EpiLift System in the United States
began in September 2004, following receipt of 510(K) clearance for marketing
from the United States Food and Drug Administration ("FDA"). Revenues from both
the EpiLift and LasiTome Systems are generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
In October 2005, the Company terminated the license agreement with
Gebauer and discontinued sales of the LasiTome and EpiLift systems. Under the
terms of the termination agreement, inventory was returned to Gebauer and unpaid
invoices canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement.
The Company also has two ophthalmic surgery products under development
utilizing proprietary waterjet technology. The first is Pulsatome, a device
designed for removal of cataracts using a pulsating stream of saline solution.
The second is Hydrokeratome, a device that uses a high-pressure micro beam of
water to cut a corneal flap during LASIK surgery. Both of these products require
the successful completion of development and testing and receipt of 510(K)
clearance from FDA prior to market introduction.
80
The primary markets addressed by our products are refractive surgery
and cataract surgery, both of which are strong and continuing to grow. The
refractive surgery market has benefited from an increased demand for laser
vision corrective surgery due to the overall increased acceptance by consumers,
as well as from technological advances that have led to better results and fewer
complications. Cataract surgery is the most frequently performed surgical
procedure, with over 14 million surgeries performed worldwide. As the
development of cataracts is often associated with aging, we expect the demand
for cataract surgery to continue to increase. We believe that our products
address important needs in each of these markets, and that as such, we have an
opportunity to achieve significant revenue growth.
There are numerous factors that could affect our ability to achieve
this revenue growth, including but not limited to:
o Our obtaining adequate financing to support debt obligations
and working capital requirements
o Successful completion of our product development efforts and
receipt of 510(k) marketing clearance with respect to
Pulsatome and Hydrokeratome.
o Market acceptance of our products
o Competition
o Technological advancement
o Overall economic conditions
The Company is actively pursuing additional financing, and in this
regard is in discussions with several parties related to potential financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, to market the recently licensed products or to complete
its on-going product development efforts. As such, our ability to secure
additional financing on a timely basis is critical to our ability to stay in
business and to pursue planned operational activities.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited and do not include
certain information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments considered necessary to present fairly the
Company's financial position and results of operations, have been included.
These interim financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2004. Results for interim periods
are not necessarily indicative of trends or of results for a full year.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
using the going concern basis of accounting, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
For the year ended December 31, 2004, the Company's audited financial statements
included a "going concern" qualification from its independent auditors due to
the Company's losses accumulated during the development stage and lack of
working capital.
During the nine months ending September 30, 2005, the Company incurred
net losses of $10,405,840. The Company's future capital requirements will depend
on many factors, including but not limited to the Company's ability to
successfully market and generate operating revenue through product sales, its
ability to finalize development and successfully market its waterjet technology,
its on-going operational expenses and overall product development costs,
including the cost of clinical trials, and competing technological and market
developments.
To address the going concern issue, the Company has continued to raise
operating capital through private placements of debt and equity securities, and
is currently in discussions with several parties regarding additional financing
arrangements.
While the Company believes that the additional financing arrangements
will be completed, there can be no assurance that new financing will be
completed or that the proceeds from new financing will be sufficient for the
Company to meet its contractual obligations and on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
81
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE COMPANY
Advanced Refractive Technologies, Inc. as described in the merger and
history segment above, was in the development stage through December 31, 2003.
The year 2004 is the first year during which the Company is considered an
operating company and is no longer in the development stage.
REVENUE RECOGNITION
Revenue from product sales relates to sales of ophthalmic surgical
products pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004 and terminated in October 2005. Revenue from such sales is
recognized when the earnings process is complete, as evidenced by an agreement
with the customer, transfer of title and acceptance, a firm price and probable
collection.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Certain corporate overhead expenses, such as professional fees, salaries, rent
and travel are allocated to research and development based on estimates made by
management.
INVENTORY
Inventory is valued at lower of cost or market. Reserves for
obsolescence or slow moving inventory are recorded when such conditions are
identified. As of September 30, 2005 no such reserves were considered necessary.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts and records an allowance for
doubtful accounts based on a specific identification basis of those accounts
that they consider to be uncollectible. As of September 30, 2005, no allowance
for doubtful accounts was considered necessary.
MARKETABLE SECURITIES
Investments in available-for-sale securities are accounted for in
accordance with Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("FAS") 115 "Accounting for Certain Investments
in Debt and Equity Securities". In accordance with FAS 115, the securities are
stated at their fair market value and any difference between cost and market
value is recorded as an unrealized gain or loss classified as a separate
component of stockholders' equity - accumulated other comprehensive income.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
In accordance to FASB Statement of Financial Accounting Standards
("SFAS") 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity", financial instruments with mandatory redemption
rights are to be recorded as liabilities unless the redemption is to occur upon
the liquidation or termination of the issuer. SFAS 150 also specifies that a
financial instrument that embodies a conditional obligation is based solely or
predominantly on variations inversely related to changes in the fair value of
the issuer's equity shares. Based on these characteristics, the Company has
recorded the Preferred Series A shares as a long term liability on the balance
sheet. See Note 12, Preferred Series A Shares.
EVALUATION OF BENEFICIAL CONVERSION FEATURE IN DEBENTURES
In accordance with Emerging Issues Task Force ("EITF") Issue 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjusted Conversion Rights", as amended by EITF 00-27, we must
evaluate the potential effect of any beneficial conversion in terms related to
convertible instruments such as convertible debt or convertible preferred stock.
Valuation of the benefit is determined based upon various factors including the
valuation of equity instruments, such as warrants that may have been issued with
convertible instruments, conversion terms, and the value of the instruments to
which the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the partially
subjective nature of the valuation techniques.
82
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS 130, "Reporting of
Comprehensive Income", which established the standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders. The Company recorded a comprehensive loss that was incurred as a
result of the write down to market of the marketable securities on December 31,
2004. Please review Notes 11 and 12 for more detail on this transaction.
FOREIGN CURRENCY TRANSACTIONS
The Company uses the U.S. dollar as the reporting and functional
currency for its financial statements. Transaction gains and losses are the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. Transactions that are denominated in other
currencies are recorded using the exchange rate in effect on the date of the
transaction. Transaction adjustments arising from such are re-measured and
included in the determination of net (loss) income.
STOCK-BASED COMPENSATION
As of September 30, 2005, a total of 2,265,000 options to purchase
shares of the Company's common stock were outstanding pursuant to the 2003 Plan.
The following table summarizes information about stock options
outstanding at September 30, 2005:
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Life in Exercise Number Exercise
Price Outstanding Years Price Exercisable Price
----- ----------- ----- ----- ----------- -----
$1.10 1,040,000 8.12 $1.10 330,000 $1.10
$0.40 1,225,000 9.06 $0.40 220,000 $0.40
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) and income (loss) per share as if compensation cost
for the Company's stock option issuances had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following assumptions used for grants in fiscal
years ending 2005: dividend yield of zero percent, risk-free interest rate
ranging from 3.29% to 3.35%, expected life of five years, and expected
volatility ranging from 43.14% to 83.82%.
Under the accounting provisions of SFAS No. 123, as amended by SFAS No.
148, the Company's pro forma net loss and loss per share for the three months
and nine months ended September 30, 2005 and 2004 would have been as follows:
For the Three Months Ended For the Nine Months Ended
September 30 September 30
----------------------------- ---------------- ----------------- ---------------- ---------------
2005 2004 2005 2004
----------------------------- ---------------- ----------------- ---------------- ---------------
Net loss as reported (3,451,815) (1,774,001) (10,405,840) (8,420,653)
----------------------------- ---------------- ----------------- ---------------- ---------------
SFAS No. 123 effect (65,984) (84,499) (197,953) (253,498)
----------------------------- ---------------- ----------------- ---------------- ---------------
Pro forma net loss (3,517,799) (1,858,500) (10,603,794) (8,674,151)
----------------------------- ---------------- ----------------- ---------------- ---------------
Loss per share, basic and (.09) (0.06) (0.32) (0.32)
diluted as reported
----------------------------- ---------------- ----------------- ---------------- ---------------
Pro forma (.10) (0.06) (0.33) (0.32)
----------------------------- ---------------- ----------------- ---------------- ---------------
Basic and diluted weighed 36,468,868 29,429,663 32,295,455 26,069,227
average shares outstanding
----------------------------- ---------------- ----------------- ---------------- ---------------
83
The following table summarizes information regarding stock options
outstanding at September 30, 2005:
Weighted
Number of Average Exercisable
Shares Exercise Price Shares
------ -------------- ------
Outstanding at December 31, 2004 2,470,000 $ 0.73 550,000
Granted -- -- --
Forfeited (145,000) 0.40 --
Forfeited (60,000) 1.10 --
Outstanding at September 30, 2005 2,265,000 $ 0.72 550,000
DEPRECIATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three to seven
years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS
No.128,"EARNINGS PER SHARE," and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 98. Accordingly, basic loss per share is
computed using the weighted average number of common shares and diluted loss per
share are computed based on the weighted average number of common shares and all
common equivalent shares outstanding during the period in which they are
dilutive. Common equivalent shares consist of shares issuable upon the exercise
of stock options, using the treasury stock method, or warrants; common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements of
the prior year in order to conform to current year's presentation.
84
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The
statement amends Accounting Research Bulletin ("ARB") No. 43, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. ARB No 43 previously
stated that these costs must be "so abnormal as to require treatment as
current-period charges." SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of `so
abnormal.' The statement is effective for inventory costs incurred during the
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
In December 2004, the FASB revised SFAS No. 123 ("SFAS No. 123R"),"
Accounting for Stock Based Compensation." The revision establishes standards for
the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transactions in which an entity
obtains employees services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The cost is to be recognized over the period during
which the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or reporting beginning after December 15, 2005 for
small business issuers, with early adoption encouraged. The Company is currently
evaluating the effect of this standard on their operations.
NOTE 3 - INVENTORY
Inventory includes finished goods of ophthalmic surgical products
purchased pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004, and consists of the following at September 30, 2005 and
December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Completed units and disposable supplies $ -- $ 265,197
Demonstration units 211,343 193,408
Clinical Units 164,385 175,825
------------ ------------
$ 375,728 $ 634,430
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2005
and December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Computer and test equipment $ 98,196 $ 98,196
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
Leasehold improvements 30,229 --
------------ ------------
208,932 178,703
Less: accumulated depreciation (120,856) (90,905)
------------ ------------
$ 88,076 $ 87,798
============ ============
Depreciation expense for the nine months ended September 30, 2005 and
2004 was $29,951 and $23,529, respectively.
85
NOTE 5 - DISTRIBUTION AND PATENT AGREEMENTS
During 2003, the Company entered into a patent license agreement with
the inventor of a patented technology through which the Company obtained
exclusive worldwide rights for all medical applications for the technology that
provides for the sterile flow of fluid through a surgical water jet apparatus.
The purchase price of the license has been capitalized and is being amortized on
a straight-line basis over the remaining life of the patent. The license
agreement provides for royalty payments based on the sale of products utilizing
licensed technology and for minimum annual royalty payments.
In May 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company ("licensor") pursuant to which the
Company acquired exclusive worldwide distribution, sales and marketing rights
for certain ophthalmic surgical products used in LASIK refractive surgery
procedures.
The Company capitalized a total of $1,901,400 in connection with this
agreement based on non-refundable cash license fee paid, plus the fair market
value of 750,000 shares of common stock issued to the licensor, as consideration
under the agreement. The total capitalized amount is being amortized on a
straight-line basis over the term of the agreement.
In October 2005, the Company terminated the distribution agreement and
expensed in operating expenses the remaining capitalized balance during the
quarter ending September 30, 2005.
Distribution and patent agreements consist of the following at
September 30, 2005 and December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Distribution agreements $ -- $ 1,901,400
Patent agreements 100,000 100,000
Less: accumulated amortization (19,291) (259,387)
------------ ------------
$ 80,709 $ 1,742,013
============ ============
Amortization expense for the three months ended September 30, 2004 was
$97,433.
In connection with the patent agreements, the Company expects to record
the following amortization expense over the next five years:
Fiscal Year Ended Amortization Total
----------------- ------------------
12/31/05 9,449
12/31/06 9,449
12/31/07 9,449
12/31/08 9,449
12/31/09 9,449
-------------------
Total 47,245
===================
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2005 and
December 31 2004:
September 30, December 31,
2005 2004
------------ ------------
Payroll and related taxes $ 586,383 $ 336,695
Consulting fees 482,273 375,000
Litigation settlement fees 129,669 209,669
Other accruals 24,239 122,152
------------ ------------
$ 1,222,564 $ 1,043,516
============ ============
86
Note 7 - CONVERTIBLE DEBENTURES
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc. and a group of investment funds,
several of which were already holders of securities issued by the Company, under
which the Investors could purchase up to $8,195,500 in principal amount of
convertible debentures from the Registrant. The Convertible Debentures are
convertible into Common Stock of the Company at a rate of $.35 per share,
subject to anti-dilution adjustments. The final purchase price consisted of cash
of $4,720,000 and the exchange of $2,975,000 in previously issued convertible
debentures or an aggregate total of $7,695,000.
In connection with the transaction the Registrant also issued to the
Investors warrants to purchase 8,967,855 shares of common Stock and canceling
1,595,238 of previously issued warrants associated with the October Security
Agreement, or a net of 7,372,617 warrants, at an exercise price of $.40 per
share. The warrants expire on the fifth anniversary of the date of issuance.
Pursuant to an Amended and Restated Security Agreement, the Company
granted the Investors a security interest in substantially all the assets of the
Company. The Amended and Restated Security Agreement replaces the Security
Agreement entered into October 14, 2004 between the Company and certain of the
investors. Also, pursuant to an Amended and Restated Registration Rights
Agreement, the Company granted the Investors certain registration rights with
respect to the shares of Common Stock issued in the transaction as well as the
shares of Common Stock issuable upon conversion of the Convertible Debentures
and upon exercise of the Warrants. The Amended and Restated Registration Rights
Agreement replaces the Registration Rights Agreement entered into on October 5,
2004 between the Company and certain of the investors.
The company relied on exemptions from registration provided by Section
4(2) of the Securities Act and Regulation D in completing the private January
2005 debenture offering. However, because the company had a Registration
Statement pending with the SEC at the time, it could be considered to have
engaged in a "general solicitation," which would preclude reliance on the
exemptions from registration. Accordingly, the debenture offering may have been
in violation of the Securities Act of 1933, as amended. If so, the company could
be subject to claims for damages by the purchasers of the securities, claims for
rescission of the transactions and return of all funds received, and regulatory
proceedings by the Securities and Exchange Commission or other regulatory
agencies. Persons who converted debentures for company stock or who purchased
the securities from the original purchasers may also be entitled to rescission
rights. However, no purchaser of the securities has sought rescission of the
transactions or asserted any claims against us.
The Company received funding from the above financing with an aggregate
principal balance of $4,720,000, and received net proceeds of $4,540,500, after
subtracting related placement agent fees and expenses totaling $179,500. The
notes bear interest, at an annual rate of 8%, which is due and payable quarterly
beginning March 31, 2005. The principal balance of the note, plus any accrued
and unpaid interest is due and payable on January 14, 2015, provided however,
that on or after January 14, 2008 the Company, at the option of the note holder,
may be obligated to repurchase the note at a price equal to 100% of the
outstanding principal and interest. The outstanding principal of the debentures
may be converted into shares of the Company's common stock, at the option of the
note holder, based on an initial conversion price of $0.35 per share, subject to
adjustment as defined in the agreement. In addition, the note holders received
warrants to purchase 4,720,000 shares of the Company's common stock, exercisable
through January 14, 2010 at an exercise price of $0.40 per share.
The debenture debt was recorded net of discounts totaling $2,752,971
recorded in connection with the $179,500 of loan fees, expenses of $1,288,231,
based on a Black-Scholes model valuation, related to the 4,720,000 warrants
issued to debenture holders and $561,260, based on the closing price of our
common stock on February 15, 2005 of $0.54, for 1,039,370 shares of common stock
issued for commission fees and warrants issued for commission of $723,980, based
on a Black-Scholes model valuation, related to the 2,652,617 additional warrants
issued for commissions and fees.
The market price of the Company's common stock on the date of issuance
of the debentures was $0.50 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
87
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the discount of
$3,311,088 will be recorded as non-cash interest expense during the first
quarter of 2005.
During June, 2005, the Company revised the effective conversion price
for the debentures and any and all warrants in the January 2005 financing
transaction at a price of $.095 per share. The price was above the closing stock
price thus no additional beneficial conversion was recorded.
Pursuant to the January 2005 agreement, the company was obligated to
complete certain securities registration obligations to investors. The company
was unable to fulfill these obligations by the deadline of May 29, 2005 and
under the provisions of the agreement, must pay investors liquidated damages
amounting to 3% of the principal amount of the debentures for each month until
the company completes the registration filing. As of September 30, 2005,
$938,294 has been accrued and included in Accrued Expenses.
During the nine months ending September 30, 2005, the Company recorded
total interest expense of $1,667,293 in connection with the debenture debt. Of
this total, $306,254 resulted from the non-cash amortization of debt discount
recorded in connection with loan fees and the value of stock and warrants issued
to note holders, $938,294 was from the interest penalties associated with the
above registration commitment and $422,746 resulted from interest calculated
during the period on the outstanding principal balance. As of September 30,
2005, the balance on the accrued interest was $423,156.
CONVERTIBLE DEBENTURE AGREEMENTS - AMENDMENTS
In January 2005, in connection with the Convertible Debenture
Agreements entered into in October 2004, the Company agreed to modify certain
terms and conditions included in convertible debenture agreements with an
aggregate principal balance of $2,850,000 entered into in June, July and October
2004. The amended debenture agreements with Bushido and Bridges & Pipes were
replaced with new convertible debenture agreements in order to conform the terms
of these agreements to the terms of new convertible debenture agreements with an
aggregate principal balance of $7,695,000 entered into in January 2005, as
described above. Under the replacement agreements, the maturity dates of the
debentures were extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price) are
the same as in the amended agreements described above.
During the 3 months ending September 30, 2005, debentures with a
principal balance of $506,000 were tendered for conversion to common stock of
the Company under the conversion terms of the agreement.
As of September 30, 2005 and December 31, 2004, convertible debenture
debt balances consists of the following:
Current:
September 30, December 31,
2005 2004
------------ ------------
Convertible debenture $ 7,189,000 $ 1,300,000
Convertible debenture discount (3,762,324) (402,345)
------------ ------------
Convertible debenture - net $ 3,426,676 $ 897,655
============ ============
Long Term:
September 30, December 31,
2005 2004
------------ ------------
Convertible debenture $ -- $ 2,975,000
Convertible debenture discount -- (1,641,399)
------------ ------------
Convertible debenture - net $ -- $ 1,333,601
============ ============
88
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
In October 1998, the Company issued a demand promissory note in the
amount of $400,000, plus interest at a variable rate, based on the prime rate to
of SurgiJet, Inc. ("SurgiJet"), VisiJet's former parent company. In connection
with the Merger Agreement, an amendment to the note agreement was executed in
February 2003 under which the accrual of additional interest was halted, and
scheduled principal and interest payments were established.
During 2002, the Company entered into a promissory note with Lance
Doherty, a principal of SurgiJet and shareholder of the Company, for a principal
sum of $19,000 plus interest at the rate of 10% per annum. At September 30, 2005
the outstanding principal balance of this note was $19,000.
During 2003 the Company initiated litigation against SurgiJet,
challenging the validity of the SurgiJet Note, as well as other notes and
liabilities to DentaJet, Lance Doherty and Rex Doherty.
The parties to the litigation entered into a settlement agreement
pursuant to which revised note payable amounts and payment schedules were agreed
upon. Based on this agreement, outstanding principal and accrued interest
balances related to these notes have been adjusted to reflect the agreed upon
amounts, and as a result, the balances at September 30, 2005 and December 31,
2004 are as follows:
September 30, 2005 December 31, 2004
Principal Interest Principal Interest
--------- --------- --------- ---------
SurgiJet $ 495,242 $ 17,807 $ 549,774 $ 14,347
Lance Doherty 19,000 8,225 19,000 6,293
--------- --------- --------- ---------
Total $ 514,242 $ 26,032 $ 568,774 $ 20,640
========= ========= ========= =========
During the period ending September 30, 2005, the Company paid $54,532
and $25,468 of principal and interest, respectively.
FINANCIAL ENTREPRENEURS, INC. ("FEI")
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between PNAC and FEI, a
significant shareholder of the Company, during 2002. The note bears interest at
an annual rate of 7.5%, and matures on April 3, 2009. Upon consummation of the
merger in February 2003, the outstanding principal and accrued interest payable
balances were $206,649 and $11,462, respectively. As of September 30, 2005, the
outstanding principal and accrued interest payable on this note were $265,990
and $69,976, respectively.
OFFICER LOAN
At September 30, 2005, the Company owed an officer of the Company
$1,900 pursuant to a short term loan.
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
In October 2005, the Company increased the authorized shares to
750,000,000 from 100,000,000.
During the first nine months of 2005, the Company issued a total of
19,427,165 shares of common stock, of which 1,039,370 common stock shares were
issued in conjunction with the January financing. The value of the common stock
on the date of issue was $0.54 resulting in the recording a long term debenture
discount of $561,260. The Company cancelled 134,118 of common shares that were
issued in connection with previous financing reducing the debenture discount by
$53,647. Common stock shares, totaling 750,000 shares that were borrowed and
used as collateral in 2004 were returned. The Company issued 331,000 common
stock shares to replace the remaining borrowed shares that were used by lenders
to satisfy principal and interest payments. The company issued 13,178,427 free
trading shares as compensation for services resulting in the recording of
$439,156 of expenses. The Company also cancelled 89,286 shares of common stock
that were issued for services associated with debt financing recording a
decrease in expenses of $36,631. During the three months ended September 30,
2005, the Company issued 5,350,173 share of common stock resulting from the
election to convert debentures with a principal balance of $506,000.
89
WARRANT ACTIVITY
During the first nine months of 2005, the Company issued 5-year
warrants to purchase an aggregate of 7,372,617 shares of its common stock at an
average exercise price of $0.40 per share.
In connection with warrants issued during this period, the Company
recorded debt discount totaling $2,012,211 related to warrants issued in
connection with convertible debenture agreements completed during this quarter
and prior year financing. All amounts recorded in connection with these warrants
were based on the fair value of the warrants issued using a Black-Scholes model
valuation.
The Company cancelled 829,295 warrants originally issued to purchase
common stock at $5.00 per share and replaced them with warrants issued to
purchase common stock at $0.70 per share. This resulted in a debt guarantee
expense of $15,769.
The following table summarizes the number of outstanding common stock
warrants as of September 30, 2005:
Weighted Average Exercise
Number Price
----------- --------
Outstanding at December 31, 2004 20,832,718 $ 1.64
Granted 7,372,617 0.40
Forfeited -- --
Exercised -- --
----------- --------
Outstanding at March 31, 2005 28,205,335 $ 1.16
Granted 829,295 0.70
Forfeited (829,295) 5.00
Exercised -- --
----------- --------
Outstanding at June 30, 2005 28,205,335 $ 1.04
Granted -- --
Forfeited -- --
Exercised -- --
----------- --------
Outstanding at September 30, 2005 28,205,335 $ 1.04
=========== ========
The following table summarizes additional information with respect to
outstanding common stock warrants at September 30, 2005:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ----------- ------------------- -----------
$0.40 13,906,188 53 13,906,188
$0.62 700,000 48 700,000
$0.65 20,000 45 20,000
$0.70 829,295 28 829,295
$0.75 375,000 51 375,000
$.090 86,667 39 86,667
$1.00 6,326,480 32 6,326,480
$1.23 45,000 28 45,000
$1.50 30,000 13 30,000
$2.25 4,441,000 36 4,441,000
$2.50 505,000 25 505,000
$3.00 50,000 28 50,000
$5.00 890,705 28 890,705
----------- -----------
28,205,335 28,205,335
=========== ===========
90
NOTE 10 - SERIES A PREFERRED SHARES
In August 2004, the Company entered into an agreement with Langley Park
Investments PLC ("Langley"), a corporation organized under the laws of England
and Wales, in which the Company issued convertible preferred stock in exchange
for "ordinary" shares of Langley stock. In October 2004, the Company issued
450,000 shares of Series A Convertible Preferred Stock ("Series A shares"), with
a stated value of $10 per share and a redemption value of $4,500,000, to Langley
in exchange for 2,477,974 newly issued ordinary shares of Langley with an
initial agreed upon value of L (pound) 1.00 per share. The Company was charged a
commission in conjunction with the sale equal to 10% of the Langley shares
leaving 2,230,177 shares available to the Company. Consummation of the
transaction was subject to admission of the Langley shares to the London Stock
Exchange ("LSE"), which occurred on September 30, 2004 and the initiation of
trading on the LSE that began on October 8, 2004. The Series A shares were
recorded at a total value of $1,536,653 based on the fair value of the Langley
shares on October 8, 2004. On December 31, 2004, the market value of the shares
decreased to $590,980. As the Company has classified the shares as an
available-for-sale marketable security, the Company recorded an unrealized loss
of $792,009, as an accumulated comprehensive loss which is a separate component
of equity.
In accordance to SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", financial
instruments with mandatory redemption rights are to be recorded as liabilities
unless the redemption is to occur upon the liquidation or termination of the
issuer. SFAS 150 also specifies that a financial instrument that embodies a
conditional obligation that is based on settlement by the issuance of a variable
number of the issuer's equity shares associated with a fixed monetary amount is
required to be classified as a liability. Based on characteristics of the
agreement as described above, the Company has recorded the Preferred Series A
shares as a long term liability on the balance sheet.
During the first quarter of 2005, the Company sold all of the Langley
shares, receiving gross proceeds of $664,639. Fees associated with these
transactions totaled $3,619 providing a net realized gain of $70,040. Also, a
reclassification of the other comprehensive income was recorded against
additional paid in capital.
NOTE 11 - SETTLEMENT AGREEMENTS AND LOAN PAYABLE
In November 2002, the Company entered into settlement agreements with
an officer and an employee related to accrued but unpaid fees for consulting
services rendered by them prior to the consummation of the Merger in the
aggregate of $700,000. Under the agreements a total of $450,000 was converted
into 211,267 shares of the Company's common stock, during 2003, based upon the
closing price on the effective date the Merger Agreement. The balance owed of
$250,000 was converted into two notes payable that bear interest at an annual
rate of 3.5% and provide for the principal to be paid over equal installments
for the duration of the loans. At September 30, 2005 the aggregate balance on
the note was $54,863 and the respective accrued interest payable balance was
$11,876.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2005, the Company recorded
$22,500 of consulting fees and expenses to a corporation owned by a director of
the Company. As of September 30, 2005, $36,850 related to this agreement was
included in accounts payable.
During 2003, the Company entered a consulting agreement with a
corporation controlled by two shareholders, each of whom own beneficially in
excess of 5% of the outstanding shares of the Company's common stock. Pursuant
to this agreement, entered into in April 2003, the consultants are entitled to
receive a monthly fee of $15,000 through March 2005, provided however that
payment of accrued fees is not payable by the Company until such time as the
Company has a minimum cash balance of $2.5 million. At September 30, 2005, a
total of $360,000 in fees recorded pursuant to this agreement is included in
accrued expenses.
In January 2004, the Company entered into a new consulting agreement
with Richard H. Keates, M.D., a director of the Company, increasing the monthly
retainer to $15,000 per month plus reimbursement of business expenses incurred.
Through September 30, 2005, consulting fees and related expenses totaling
$90,000 and $15,757, respectively, were recorded pursuant to this agreement, of
which $61,093 is included in accounts payable at September 30, 2005.
91
NOTE 13 - SECURITY LENDING AGREEMENT
In April 2004, the Company and a corporation that beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company entered
into an agreement pursuant to which the corporation agreed to make available 3
million free-trading shares of the Company's common stock, for use by the
Company as collateral in subsequent financing transactions. In accordance with
the terms of this agreement, the Company is obligated to pay interest on the
value of shares borrowed (assuming a value of $1.00 per share) based on the
LIBOR rate plus 50 basis points, and must return the borrowed shares by November
30, 2004. In the event of default, the Company has agreed to file a Registration
Statement and to return any shares that had not previously been returned by the
due date.
In May 2004, the Company borrowed a total of 1,550,000 shares of the
outstanding common stock in connection with collateral requirements of
convertible agreements entered into during that period. In January 2005, the
Company received a one-year extension, to November 30, 2005, for the date by
which any borrowed shares must be returned.
As of September 30, 2005, the Company had returned all borrowed shares
pursuant to this agreement, and had accrued interest expense totaling $26,430.
NOTE 14 - SUBSEQUENT EVENTS
On October 13, 2005, the Company entered into a settlement agreement
with Gebauer Medizintechnik GmbH ("Gebauer") in which the parties mutually
released each other from any liability. In addition, the parties agreed that the
Manufacturing Supply and Distribution Agreement previously entered into by the
parties on April 27, 2004 was terminated, and that there were no further
obligations by either party under that Agreement. In accordance with the terms
of the settlement, finished goods inventory of $1,916,215 was returned to
Gebauer and related unpaid invoices totaling $846,781 were cancelled, resulting
in a net charge to Cost of Goods Sold of $1,069,434. In addition, the net
capitalized value of the distribution agreement of $1,464,078 was impaired and
charged to operating expense. Amounts were recorded during the three months
ending September 30, 2005, and the net effect of the settlement upon the
financial statements is as follows:
Finished goods inventory write off $ 1,916,215
Less: liability to Gebauer (846,781)
-------------
Charge to Cost of Goods Sold $ 1,069,434
Charge to Operating expense for
Impairment of capitalized
distribution agreement 1,464,078
-------------
$ 2,533,512
=============
Demonstration and clinical units of $211,343 and $164,385,
respectively, were excluded from the settlement agreement and included in
inventory at September 30, 2005. On October 12, 2005, all of the units were sold
to CooperVision International Holding Company, LP for $395,732. The sale
eliminates all remaining inventory balances and was recorded during October 2005
when the sale was completed.
92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The certificate of incorporation and the by-laws of the registrant
provide that the registrant shall indemnify its officers, directors and certain
others to the maximum extent permitted by the General Corporation Law of the
State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware
provides in relevant part as follows:
(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative) other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interest of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
The General Corporation Law does not allow for the elimination or
limitation of liability of a director: (i) for any breach of a director's duty
of loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) arising under Section 174 thereof; or (iv) for any transaction from
which the director derived an improper personal benefit. The General Corporation
Law provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any rights to which the directors and officers may be
entitled under the corporation's bylaws, any agreement, a vote of stockholders
or otherwise.
In addition, pursuant to our certificate of incorporation and by-laws,
we shall indemnify our directors and officers against expenses (including
judgments or amounts paid in settlement) incurred in any action, civil or
criminal, to which any such person is a party by reason of any alleged act or
failure to act in his capacity as such, except as to a matter as to which such
director or officer shall have been finally adjudged not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
corporation.
II-1
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
SEC registration fee $ 3,083
Printing and duplication expenses $ 2,000
Legal fees and expenses $ 45,000
Accounting Fees $ 22,000
Miscellaneous $ 2,917
-----------
TOTAL $ 75,000
===========
Item 26. Recent Sales of Unregistered Securities.
The securities of the Company that were issued by it within the past
three years and were not registered with the SEC are described below.
In April 2002, the Company issued 300,000 shares of restricted Common
stock to an investor in consideration for the investor's cancellation of an
outstanding warrant to purchase 5,500,000 shares of the Company's Common Stock
for an exercise price of $100,000.
In May 2002, the Company issued 135,000 shares of restricted Common
Stock, and a five-year warrant to purchase an additional 135,000 shares of
Common Stock at an exercise price of $2.50 per share, to a single private
investor. The purchase price was $150,000.
In August 2002, the Company issued an additional 100,000 shares of
restricted Common Stock, and a five year warrant to purchase an additional
100,000 shares of Common Stock, at an exercise price of $2.50 per share, to a
single private investor. The purchase price was $100,000.
In February 2003 the Company issued 12,128,481 shares of Common Stock
to 217 persons upon the acquisition of its predecessor, VisiJet, Inc. through a
statutory merger. These shares were issued pursuant to a permit issued by the
California Department of Corporations after a fairness hearing. Section 3(a)(10)
of the Securities Act of 1933 provides an exemption from the requirements of the
Act for, inter alia, "any security which is issued in exchange for one or more
bona fide outstanding securities, claims or property interests, or partly in
such exchange and partly for cash, where the terms and conditions of such
issuance and exchange are approved, after a hearing upon the fairness of such
terms and conditions at which all persons to whom it is proposed to issue
securities in such exchange shall have the right to appear, ... by any State .
..... governmental authority expressly authorized by law to grant such approval."
Since the shares were issued under a permit granted by the California Department
of Corporations after such a hearing, the Company believes the transaction was
exempt from the registration requirements of the Securities Act of 1933, as
amended, by reason of Section 3(a)(10) thereof.
During 2003 the Company received gross proceeds of $4,575,000 from the
sale of 5,749,987 shares and warrants to purchase 6,249,986 shares of Common
Stock to 47 private investors.
During the first and second quarters of 2004 the Company received gross
proceeds of $585,000 from the sale of 585,000 shares and warrants to purchase
585,000 shares of Common Stock to 12 private investors.
In May 2004, the Company issued a $750,000 debenture to a group of five
private investors. The principal balance of the debenture is due and payable on
July 5, 2004, and the debenture bears interest at an annual rate of 15%. In
addition, the debenture holders received warrants to purchase 500,000 shares of
the Company's common stock, exercisable through May 6, 2009, at an exercise
price of $0.90 per share.
II-2
In May 2004, the Company issued $800,000 in convertible debentures to
two private lenders. The principal balance of the debentures is due and payable
on the earlier of (i) one hundred and five (105) days from the issue date, or
(ii) ten (10) business days from the date the Company's Registration Statement
is declared effective by the Securities and Exchange Commission. The debentures
bear interest at an annual rate of 10%, which is due and payable on the maturity
date. In addition, the debenture holders received an aggregate of 533,000
warrants to purchase shares of the Company's common stock, exercisable through
May 6, 2009 at an exercise price of $0.90 per share.
In June 2004, the Company issued $1,000,000 in convertible debentures
to two private lenders. The principal balance of the debentures is due and
payable on June 24, 2006 and the debentures bear interest at an annual rate of
8%. In addition, the debenture holders received an aggregate of 150,000 shares
of the company's common stock, and an aggregate of 750,000 warrants to purchase
shares of the Company's common stock, exercisable through June 24, 2009, at an
exercise price of $1.50 per share, provided however that the exercise price with
respect to an aggregate of 500,000 of the warrants is reduced to $0.60 per share
during the period from the date of issuance through the date twelve (12) months
after the Securities and Exchange Commission declares effective a registration
statement registering the resale of shares underlying the warrants.
In July 2004, the Company entered into convertible debentures
agreements with a private lender with an aggregate principal balance of
$1,000,000, and received net proceeds of $900,000 after subtracting related
placement agent fees and expenses totaling $100,000. The note bears interest, at
an annual rate of 8%, which is due and payable quarterly beginning on October
31, 2004. In addition, the debenture holders received warrants to purchase
750,000 shares of the Company's common stock, exercisable through July 23, 2011,
at an exercise price of $1.00 per share. The principal balance of the note, plus
any accrued and unpaid interest, is due and payable on July 23, 2014, provided
however, that on or after July 31, 2007 the Company, at the option of the note
holder, may be obligated to repurchase the note at a price equal to 100% of the
outstanding principal and interest. The outstanding principal of the debentures
may be converted into shares of the Company's common stock, at the option of the
note holder, based on an initial conversion price of $0.54 per share, subject to
adjustment as defined in the agreement.
In October 2004, the Company entered into convertible debenture
agreements with four private lenders with an aggregate principal balance of
$850,000, and received net proceeds of $788,000 after subtracting related
placement agent fees and expenses totaling $62,000. The notes bear interest, at
an annual rate of 8%, which is due and payable quarterly beginning on December
31, 2004. The principal balance of the note, plus any accrued and unpaid
interest is due and payable on October 6, 2014, provided however, that on or
after October 6, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. In addition, the note holders received warrants to
purchase 850,000 shares of the Company's common stock, exercisable through
October 6, 2009 at an exercise price of $0.40 per share. In connection with
these agreements, the Company agreed to issue a total of 500,000 additional
warrants to the holders of an aggregate of $2,000,000 of convertible debenture
agreements entered into in June and July 2004, and to reduce the initial
conversion price of these debentures to $0.35 per share.
On October 7, 2004 the Company issued 450,000 shares of Series A
Convertible Preferred Stock ("Series A Shares") to Langley Park Investments,
PLC, a United Kingdom corporation. The Company issued the Series A Shares in
exchange for 2,477,974 newly issued Ordinary Shares of Langley Park Investments,
PLC, with an agreed value of (pound)1.00 (pound) per share. While the share
certificates were issued, no Certificate of Designation establishing the rights,
privileges and preferences of the Series A Preferred Stock has been filed with
the Delaware Secretary of State as of the date of this Registration Statement.
In December 2004 the Company issued a Convertible Note for $500,000 to
Alpha Capital Aktiengesellschaft. The note was due on January 27, 2005, but the
holder had the option to exchange it for $500,000 in Convertible Debentures. In
connection with the issuance of the Convertible Note, the Company issued 142,857
shares of Common Stock, as well as a Warrant to purchase 1,250,000 shares at an
exercise price of $ .40 per share.
In January of 2005 the Company consummated a transaction with Renn
Capital Group, Inc. and a group of investment funds, under which the investment
funds purchased an aggregate of $7,695,000 in principal amount of convertible
debentures from the Registrant. The Convertible Debentures are convertible into
Common Stock of the Company at a rate of $ .35 per share, subject to
antidilution adjustments. The purchase price consisted of cash of $4,845,000 and
the exchange of $2,850,000 in previously issued convertible debentures.
II-3
In connection with the transaction the Registrant also issued to the
Investors warrants to purchase 7,695,000 shares of Common Stock, at an exercise
price of $.40 per share. Outstanding warrants to purchase 2,850,000 shares were
surrendered as part of the transaction, so the net amount of warrants issued to
the investors was 4,845,000. The warrants expire on the fifth anniversary of the
date of issuance. The Company also issued 970,714 shares of Common Stock and
warrants to purchase an additional 1,762,857 shares to a finder in connection
with the transactions.
In February of 2005 the Company issued 983,656 shares to three
individuals and one corporation for services rendered by them in connection with
restructuring the Company's convertible debt obligations. Also in February of
2005 the Company issued 55,714 shares to two of its lenders in lieu of interest.
In March 2005 the Company issued 331,000 shares to Taika Investments
under a contractual obligation. The Company was required to replace certain
collateral that had been borrowed from Taika Investments and subsequently sold
by the creditor to satisfy a debt.
Also in March 2005 the Company issued 114,733 shares to one of the
original shareholders of its predecessor, VisiJet, Inc., who had never received
shares in the initial exchange of shares.
In April of 2005 the Company issued 50,000 shares to an ophthalmologist
for conducting certain clinical studies for the Company.
In May of 2005 the Company issued 333,333 shares to UTEK Corporation
pursuant to a Strategic Alliance Agreement for technology acquisition.
Also in May of 2005 the Company issued 300,000 shares to Paradigm Media
Ventures for public relations services.
In June of 2005 the Company 2,095,094 shares as antidilution
adjustments for outstanding securities, and 100,000 shares for investor
relations services.
In July of 2005, the Company issued 1,073,684 shares of Common Stock to
Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In August of 2005, the Company issued 1,055,438 shares of Common Stock
to Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In September of 2005, the Company issued 2,578,946 shares of Common
Stock to Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In September of 2005 the Company issued 10,000,000 shares of its Common
Stock to a Canadian law firm as security for the payment of legal fees. Upon
payment of the fees, the shares are to be returned to the Company.
In October of 2005 the Company issued 3,968,419 shares of Common Stock
to Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In October of 2005 the Company issued 1,200,000 shares of Common Stock
to UTEK Corporation pursuant to a Strategic Alliance Agreement for technology
acquisition.
In October of 2005 the Company issued 118,715 shares of Common Stock to
Offshore Capital, and 20,950 shares to US Euro Securities, for consulting
services.
In November of 2005, the Company issued 1,494,736 shares of Common
Stock to Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In November of 2005, the Company issued 1,055,438 shares of Common
Stock to Liberty View Opportunities Fund LP, upon the conversion of outstanding
convertible debentures.
In November of 2005, the Company issued 204,467 shares of Common Stock
to Offshore Capital, and 36,082 shares to US Euro Securities, for consulting
services.
II-4
In December of 2005, the Company issued 326,923 shares of Common Stock
to Offshore Capital, and 57,692 shares to US Euro Securities, for consulting
services.
Except as noted above, the Company believes that each of the foregoing
transactions was exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Securities Act"), by reason of either (i) Section 4(2)
thereof, (ii) Regulation D thereunder, or Regulation S thereunder. In the case
of sales relying on the exemption provided by Section 4(2), where the purchasers
were not personally known to officer or directors of the Company, it
investigated the background of the purchasers, and had each complete
questionnaires or Subscription Agreements in which they disclosed information on
their investment background and sophistication. The great majority of these
investors were professional investment funds.
Sales of securities after the date of filing of this Registration
Statement may have been in violation of the Securities Act of 1933, as amended.
Although the Company believes these sales were exempt as private transactions,
the fact that this Registration Statement was pending at the time could mean
that the Company engaged in a "general solicitation," which would preclude
reliance on the exemptions from registration provided by Section 4(2) of the
Securities Act and Regulation D thereunder. If so, the Company could be subject
to claims for damages by the purchasers of the securities, claims for rescission
of the transactions and return of all funds received, and regulatory proceedings
by the Securities and Exchange Commission or other regulatory agencies. Also,
persons who purchased the securities from the original purchasers may also be
entitled to rescission rights. The transactions affected include the sale or
restructuring of more than $8 million in securities. The original purchase price
of these securities far exceeds their current market value. However, no
purchaser of the securities has sought rescission of the transactions or
asserted any claims against us.
Item 27. Exhibits.
Exhibit No. Exhibit Description
----------- -------------------
2.1 Second Amended and Restated Agreement and Plan of Merger, dated
December 20, 2002 among Ponte Nossa Acquisition Corp.,
VisiJet,Inc., and VisiJet Acquisition Corporation (1)
2.2 Amendment No. 1, dated January 15, 2003, to Second Amended and
Restated Agreement and Plan of Merger (2)
3.1 Restated Certificate of Incorporation of the Company (3)
3.2 Certificate of Designation of Rights and Preferences of Series A
0% Convertible Preferred Stock (8)
3.3 Certificate of Amendment of Certificate of Incorporation
3.4 Amended and Restated Bylaws (4)
5.1 Opinion of Haddan & Zepfel (8)
10.1 Patent License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.2 Amendment No. 1 to Patent License Agreement, dated November 6,
2002 (3)
10.3 Technology License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.4 Amendment No. 1 to Technology License Agreement, dated 2002 (3)
10.5 Trademark License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.6 Amendment No. 1 to Trademark License Agreement, dated November 6,
2002 (3)
II-5
10.7 Warrant, dated February 11, 2003, issued to PCL Associates (4)
10.8 Warrant, dated February 11, 2003, issued to David E. Eisenberg
Trust (4)
10.9 Warrant, dated February 11, 2003, issued to Laurence Schreiber (4)
10.10 Warrant, dated February 11, 2003, issued to Financial
Entrepreneurs Incorporated (4)
10.11 Form of Stock Purchase Warrant Used in February 2004 Private
Placement(5)
10.12 Form of 24% Secured Subordinated Debenture Used in February 2004
Private Placement(5)
10.13 Securities Purchase Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P. and Bridges & Pipes,
LLC (6)
10.14 Form of Convertible Debenture Issued Pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.15 Form of Warrant (stepped price) issued pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.16 Form of Warrant (fixed price) issued pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.17 Registration Rights Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P. and Bridges & Pipes,
LLC (6)
10.18 Pledge and Escrow Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P., Bridges & Pipes, LLC,
and Tarter Krinsky & Drogin LLP, as Escrow Agent (6)
10.19 Term Credit Agreement, dated May 6, 2004, between the Company and
HIT Credit Union (7)
10.20 Form of $750,000 Term Note, dated May 6, 2004, issued by the
Company to HIT Credit Union(7)
10.21 Security Agreement, dated May 6, 2004, between the Company and HIT
Credit Union(7)
10.22 Stock Purchase Agreement, dated May 6, 2004 between the Company,
Platinum Long Term Growth LLC and Rock II, LLC (7)
10.23 10% Convertible Debenture for $550,000,dated May 6, 2004, issued
by the Company to Platinum Long Term Growth LLC (7)
10.24 10% Convertible Debenture for $250,000,dated May 6, 2004, issued
by Advanced Refractive Technologies, Inc., to Rock II, LLC (7)
10.25 Warrant To Purchase 366,666 Shares of Common Stock of the Company,
issued to Platinum Long Term Growth LLC (7)
10.26 Warrant To Purchase 166,667 Shares of Common Stock of the Company,
issued to Rock II, LLC (7)
10.27 Form of Registration Rights Agreement, dated May 6, 2004 between
the Company, Platinum Long Term Growth LLC and Rock II, LLC (7)
10.28 Manufacturing, Supply and Distribution Agreement, dated May 7,2004
between the Company and Gebauer Medizintechnik GmbH (7)
10.29 Securities Purchase Agreement, dated July 23, 2004 between the
Company and Libertyview Special Opportunities Fund, LP (7)
10.30 8% Convertible Note for $1,000,000, dated July 23, 2004, issued by
the Company to Libertyview Special Opportunities Fund, LP (7)
10.31 Warrant To Purchase 750,000 Shares of Common Stock of Company,
issued to Libertyview Special Opportunities Fund, LP (7)
II-6
10.32 Registration Rights Agreement, dated July 23, 2004, between the
Company and Libertyview Special Opportunities Fund, LP (7)
10.33 Convertible Preferred Stock Purchase Agreement, dated August 24,
2004 between the Company and Langley Park Investments PLC (8)
10.34 Securities Purchase Agreement, dated October 6, 2004, between the
Company and certain investors relating to $885,000 in convertible
debentures (8)
10.35 Form of Convertible Debenture issued under October 6, 2004
Securities Purchase Agreement (8)
10.36 Form of Stock Purchase Warrant issued under October 6, 2004
Securities Purchase Agreement (8)
10.37 Registration Rights Agreement, dated October 6, 2004 between the
Company, Bushido Capital Master Fund L.P., Bridges & Pipes LLC,
Libertyview Special Opportunities Fund, LP, Gamma Opportunity
Capital Partners LP, Blue Fin Partners, Inc. and Little Gem Life
Sciences Fund, LLC (8)
10.38 Amendment To Securities Purchase Agreement dated October 6, 2004
between the Company, Gamma Opportunity Capital Partners L.P.,
Bridges & PIPES LLC, Libertyview Special Opportunities Fund, LP,
Blue Fin Partners, Inc. and Little Gem Life Sciences Fund, LLC (8)
10.39 Securities Purchase Amendment Agreement dated October 7, 2004,
between the Company, Bushido Capital Master Fund L.P., Bridges &
Pipes LLC, and Libertyview Special Opportunities Fund, LP (8)
10.40 Amended Convertible Debenture, dated October 7, 2004, issued to
Bridges & Pipes LLC (8)
10.41 Amended Convertible Debenture, dated October 7, 2004, issued to
Bushido Capital Master Fund LP (8)
10.42 $1,000,000 Convertible Note, dated July 23, 2004, as amended
October 6, 2004, issued to Libertyview Special Opportunities Fund,
LP (8)
10.43 Warrant to Purchase 750,000 shares, dated October 6, 2004, issued
to Libertyview Special Opportunities Fund, LP (8)
10.44 Warrant to Purchase 250,000 shares, dated October 6, 2004, issued
to Libertyview Special Opportunities Fund, LP (8)
10.45 Patent License Agreement, dated September 17, 2003, between the
Company and Robert M. Campbell, M.D. (8)
10.46 Subscription Agreement, dated December 30, 2005 between the
Company and Alpha Capital Aktiengesellschaft (8)
10.47 Form of International Distributor Agreement (8)
10.48 Form of Securities Purchase Agreement used in January 2005
Financing (8)
10.49 Form of Convertible Debenture used in January 2005 Financing (8)
10.50 Form of Stock Purchase Warrant used in January 2005 Financing(8)
10.51 Amended and Restated Registration Rights Agreement, dated January
14, 2005, between the Company and the Investors named therein(8)
10.52 Amended and Restated Security Agreement, dated January 14, 2005,
between the Company and the Investors named therein (8)
10.53 Settlement Agreement, dated October 13, 2005 between the Company
and Gebauer Medizintechnik GmbH (8)
10.54 Asset Purchase Agreement, dated October 12, 2005, between the
Company and CooperVision International Holding Company, LP (8)
14 Code of Ethics(5)
II-7
23.1 Consent of Peterson & Co. LLP, Certified Public Accountants
23.2 Consent of Haddan & Zepfel LLP (included in the opinion filed as
Exhibit 5.1)(8)
-----------------------------------------------------------------------------
(1) Incorporated by reference from Report on Form 8-K of the Company, filed
January 7, 2003
(2) Incorporated by reference from Report on Form 8-K of the Company, filed
February 14, 2003
(3) Incorporated by reference from Quarterly Report on Form 10-QSB of the
Company for the quarter ended June 30, 2003, filed August 15, 2003
(4) Incorporated by reference from Annual Report on Form 10K-SB of the Company
for the year ended December 31, 2002, filed on April 14, 2003.
(5) Incorporated by reference from Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2003, filed April 14, 2004.
(6) Incorporated by reference from Report on Form 8-K of the Company, dated
June 24, 2004, filed on
(7) Incorporated by reference from Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004, filed on August 18, 2004.
(8) Previously filed
Item 28. Undertakings.
The undersigned registrant hereby undertakes that:
(1) It will file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the Registration
Statement; notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
(2) For the purpose of determining any liability under the Securities
Act of 1933, treat each such post-effective amendment as a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time to be the initial
bona fide offering thereof; and
(3) It will remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
II-8
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Clemente, State of California, on February 21,
2006.
Advanced Refractive Technologies, Inc.
By: /s/ Randal A. Bailey
-------------------------------
Randal A. Bailey,
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Randal A. Bailey President and a Director February 21, 2006
------------------------- (Principal Executive Officer)
Randal A. Bailey
/s/ Laurence M. Schreiber COO, Corporate Secretary and a February 21, 2006
------------------------- Director (Principal Financial
Laurence M. Schreiber and Accounting Officer)
Directors:
/s/ Richard H. Keates* Chairman of the Board of Directors February 21, 2006
-------------------------
Richard H. Keates
/s/ Norman Schwartz* Director February 21, 2006
-------------------------
Norman Schwartz
/s/ Adam Krupp* Director February 21, 2006
-------------------------
Adam Krupp
* By Randal A. Bailey, Attorney-in-fact
II-10