U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2006
Commission file number 0-25611
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 0-256111 33-0838660
(State or other jurisdiction of (Commission (I.R.S.
incorporation or organization) File Number) Employer I.D. No.)
1062 Calle Negocio, Suite D, San Clemente, California 92673
(Address of principal executive offices)
Issuer's telephone number (949) 940-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
As of August 8, 2006, the issuer had 244,469,073 shares of common stock
outstanding.
Advanced Refractive Technologies, Inc.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS.................................................. 3
STATEMENTS OF OPERATIONS........................................ 4
STATEMENTS OF CASH FLOWS........................................ 5
NOTES TO FINANCIAL STATEMENTS................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION...... 26
ITEM 3. LEGAL PROCEEDINGS................................................ 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 27
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 27
PART II. OTHER INFORMATION
2
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
BALANCE SHEETS
June 30, December 31,
2006 2005
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 286 $ 1,085
Prepaids and deposits 2,966,425 27,413
Assets of discontinued operations -- 60,872
------------ ------------
Total current assets 2,966,711 89,370
Property and equipment, net 56,045 76,833
Goodwill 6,000,000 1,225,000
Deferred debt costs 395,650 426,857
License agreements, net 220,397 74,809
Patents, net 73,622 78,347
------------ ------------
Total assets $ 9,712,425 $ 1,971,216
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 811,511 $ 940,364
Convertible debenture, net 3,665,196 3,589,071
Accrued penalties on debentures 2,682,344 1,518,524
Accrued interest 2,072,982 1,307,085
Warrant derivative liability 102,951 102,951
Accrued settlement agreement 54,863 54,863
Accrued expenses 1,587,152 915,801
Royalty payable 49,027 49,027
Notes payable to related parties 1,033,982 780,232
Notes payable 10,000 10,000
Customer deposits -- 427
Income taxes payable 800 800
Liabilities of discontinued operations -- 563,436
------------ ------------
Total current liabilities 12,070,808 9,832,581
Series A convertible preferred stock, 450,000 shares issued and outstanding
at June 30, 2006 and December 31, 2005, net of unamortized discount of
$468,750 and $656,250, respectively (redemption value $4,500,000) 1,067,904 880,404
Series B convertible preferred stock, 100,000 shares issued and outstanding
at June 30, 2006 and December 31, 2005 1,500,000 1,500,000
Series C convertible preferred stock, 100,000 shares issued and outstanding
at June 30, 2006 2,800,000 --
Series D convertible preferred stock, 100,000 shares issued and outstanding
at June 30, 2006 2,800,000 --
------------ ------------
Total liabilities 20,238,712 12,212,985
Shareholders' deficit:
Common stock, 750,000,000 shares authorized, $.001 par value, 244,469,073
shares issued and outstanding at June 30, 2006, and 56,379,756 shares
issued and outstanding at December 31, 2005 244,469 56,380
Additional paid in capital 34,368,978 30,950,353
Accumulated deficit (45,139,734) (41,248,502)
------------ ------------
Shareholders' deficit (10,526,287) (10,241,769)
Total liabilities and shareholders' deficit $ 9,712,425 $ 1,971,216
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Three months ended Six months ended Six months ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Operating expenses:
General and administrative $ 837,215 $ 375,451 $ 1,524,447 $ 895,206
Research and development 56 10,666 116 29,200
Depreciation and amortization 30,241 9,984 44,924 18,708
------------- ------------- ------------- -------------
Total operating expenses 867,512 396,101 1,569,487 943,114
Loss from operations (867,512) (396,101) (1,569,487) (943,114)
Other income (expense):
Interest and penalties expense (1,137,163) (176,468) (1,947,970) (337,369)
Interest expense - beneficial conversion -- -- -- (3,311,088)
Amortization of debt discount and debt
issuance fees (92,436) (109,724) (185,475) (659,597)
Gain on sale of securities -- -- -- 73,659
Interest cost of preferred stock accretion (93,750) (93,750) (187,500) (187,500)
Other income, net -- 4,034 -- 11,332
------------- ------------- ------------- -------------
Total other expense or income (1,323,349) (375,908) (2,320,945) (4,410,563)
Loss from continuing operations before provision
for taxes (2,190,861) (772,009) (3,890,432) (5,353,677)
Provision for income taxes -- 1,000 800 1,000
Loss from continuing operations (2,190,861) (773,009) (3,891,232) (5,354,677)
Discontinued operations:
Loss from discontinued operations -- (806,943) -- (1,599,348)
Net loss (2,190,861) (1,579,952) (3,891,232) (6,954,025)
============= ============= ============= =============
Net loss per common share - basic and diluted:
Continuing operations (0.01) (0.02) (0.02) (0.18)
Discontinued operations -- (0.03) -- (0.05)
Total loss per common share (0.01) (0.05) (0.02) (0.23)
Basic and diluted weighted average number of
common hares outstanding $ 239,675,886 $ 30,138,679 $ 170,846,211 $ 30,174,163
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Six months ended Six months ended
June 30, 2006 June 30, 2005
------------- -------------
Cash flows from operating activities:
Net loss $(3,891,232) $(6,954,025)
Less: Net loss from discontinued operations -- 1,599,348
Net loss from continuing operations (3,891,232) (5,354,677)
Adjustments to reconcile net loss from continuing
operations to net cash used by operating activities:
Operating activities of discontinued operations
(502,564) (1,763,485)
Depreciation and amortization 29,925 213,572
Debt discount amortization 154,268 659,597
Accretion of beneficial conversion on preferred shares
187,500 187,500
Adjustment for beneficial conversion for debt -- 3,311,088
Common stock issued for services 15,000 407,526
Warrants repricing in connection with debt guarantee
-- 15,769
Gain on marketable securities -- (70,040)
Loss on warrant derivative liability -- --
Changes in assets and liabilities:
Prepaid expenses 574,559 166,708
Deferred debt costs 31,207 --
Inventory -- (1,692,851)
Accounts payable (128,853) 960,579
Accrued penalties on debentures 1,163,820 --
Customer deposits (427) (32,095)
Accrued interest 765,897 117,089
Royalties payable -- 30,000
Accrued settlement agreement -- (11,539)
Other accrued expense 671,351 278,751
Net cash flow used by operating activities (929,549) (2,576,508)
Cash flows from investing activities:
Cash received in acquisition 675,000 --
Purchase of property and equipment -- (30,230)
Net cash provided by investing activities 675,000 (30,230)
Cash flows from financing activities:
Advance from related party 378,750 --
Repayment of advances from related parties (125,000) (67,428)
Repayment of secured and convertible debentures -- (2,550,000)
Proceeds from convertible debt -- 4,540,500
Proceeds from sale of marketable securities -- 661,020
Net cash provided by financing activities 253,750 2,584,092
Net increase (decrease) in cash (799) (22,646)
Cash, beginning of period 1,085 22,946
Cash end of period 286 300
Supplemental disclosure of cash flow information:
Interest paid 17,296 216,058
Taxes paid -- --
Debenture costs and fees -- 179,500
Non-cash investing and financing transactions:
Common stock issued in connection with convertible debenture 139,000 507,613
Warrants issued in connection with convertible debentures -- 2,046,330
Warrants issued in connection with debt guarantee
-- 15,769
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
HISTORY OF THE COMPANY
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 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
were canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement. As a result, we currently have no products
for sale and no sources of revenue.
The Company has two ophthalmic surgery products under development utilizing
proprietary waterjet technology. The first is Accupulse, 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.
In November 2005, the Company acquired all the outstanding stock of OptiMetrix
Technologies, Inc.(OTI). OTI has an exclusive license to a patented technology
that takes the application of fiber-optic, OMA based instrumentation as an in
vivo diagnostic tool for the human ocular lens.
6
In February of 2006 the Company acquired all of the stock of Ocular Therapeutics
Inc. (OThI), a wholly owned subsidiary of UTEK Inc. OThI owns technology
licensed from Motility Inc. OThI holds the exclusive license to a patented
technology for a small protein therapeutic (LD22-4) for the treatment of the wet
form of age related macular degeneration. Because LD22-4 directly targets a
fundamental requirement for the proliferation of blood vessels, i.e. cell
migration, we believe that its mode of action is distinct from other drugs that
are on the market or that are in development by other biotechnology or
pharmaceutical companies. Consideration paid by the Company was 100,000 series C
convertible preferred shares of the Company. The shares are not convertible
until after the first anniversary of the agreement. The preferred shares shall
convert into $2,800,000 worth of common shares of the Company. Additional
consideration was a warrant to purchase 1,400,000 shares of the Company at 50%
of the conversion price.
The acquisitions were recorded under the purchase method of accounting, and the
purchase prices were allocated based on the fair value of the assets acquired
and the liabilities assumed. In accordance with generally accepted accounting
principles, costs allocated to the licenses were capitalized and will be
amortized over their respective useful lives. The goodwill recorded as a result
of the acquisitions is not amortized, but is included in the Company's review of
goodwill for impairment.
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, 2005. 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.
During the six months ended June 30, 2006, the Company incurred net losses of
approximately $3,891,000 and the Company's current liabilities exceed its
current assets by approximately $9.1 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. 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.
7
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from sales are recognized when the earnings process was complete, as
evidenced by an agreement with the customer, transfer of title and acceptance, a
firm price and probable collection. Revenues for 2005 and 2004 were entirely
from operations now discontinued, as described above. The Company will adhere to
this process of revenue recognition in the future as new products become
available for sale.
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.
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 June 30, 2006,the allowance for
doubtful accounts was $130,660.
INVENTORY
Inventory was valued at lower of cost or market. Reserves for obsolescence or
slow moving inventory were recorded when such conditions were identified. The
Company held no inventory at June 30, 2006, and inventory that was held at
December 31, 2005 has been reclassified to Assets of Discontinued Operations.
ADVERTISING
Advertising costs incurred and charged to expense during the first quarter of
2005 were reclassified to Expense of Discontinued Operations for the period. No
advertising expenses were incurred during the six months ended June 30, 2006.
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.
8
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 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.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). Pursuant to EITF
00-19, an evaluation of specifically identified conditions is made to determine
whether the fair value of warrants issued is required be classified as a
derivative liability. The fair value of warrants classified as derivative
liabilities is adjusted for changes in fair value at each reporting period, and
the corresponding non-cash gain or loss is recorded in current period earnings.
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.
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.
9
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.
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 six
months ended June 30, 2006 and 2005 would have been as follows:
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
As reported $ (2,190,861) $ (1,579,952) $ (3,891,232) $ (6,954,025)
SFAS No. 123 effect (27,898) (65,984) (55,796) (131,969)
------------- ------------- ------------- -------------
Pro forma net loss $ (2,218,759) $ (1,645,936) $ (3,947,028) $ (7,085,994)
============= ============= ============= =============
Loss per share:
As reported $ (0.01) $ (0.05) $ (0.02) $ (0.23)
============= ============= ============= =============
Pro forma $ (0.01) $ (0.05) $ (0.02) $ (0.23)
============= ============= ============= =============
Basic and diluted weighted
average shares outstanding 239,675,886 30,138,679 170,846,211 30,174,163
============= ============= ============= =============
The Company issued no additional options to employees of directors during the
six months ended June 30, 2006.
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.
10
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
GOODWILL
Statement of Financial Accounting Standards 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill be tested for impairment on an
annual basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value. These events or circumstances could include a significant
change in the business climate, legal factors, operating performance indicators,
competition, or disposition of a business operation. Application of the goodwill
impairment test requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business and the useful life over which cash
flows will occur. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment.
Based on Management's annual assessment, last completed as of December 31,2005,
no impairment of goodwill/intangible assets was considered necessary.
OTHER INTANGIBLE ASSETS
Management performs impairment testing annually and more frequently if factors
and circumstances indicate an impairment may have occurred. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. Management has performed its impairment testing and believes that no
impairments existed as of December 31, 2005.
Included in other assets are license agreements and patents. License agreements
are amortized over the life of the agreement and patents are amortized over 20
years.
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. Based on Management's annual assessment, most recently made as of December
31, 2005, no impairment of goodwill/intangible assets was considered necessary.
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.
11
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 the current quarter presentation.
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 - Business Combination
The Company acquired licenses for new technology in November 2005, February 2006
and April 2006 in return for the issuance of 100,000 shares of Class B Preferred
Stock, 100,000 shares of Class C Preferred Stock and 100,000 shares of Class D
Preferred Stock, respectively. These shares cannot be converted for a period of
one year from the date of acquisition. The Company valued the assets and related
goodwill acquired through these acquisitions in accordance with "Business
Combinations" ("FAS 141"). As of June 30, 2006, no revenues have been generated
by these acquisitions.
12
NOTE 4 - DISCONTINUED OPERATIONS
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, ART 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
After disputes arose with Gebauer, in October of 2005 ART entered into an
agreement with Gebauer terminating the license agreement, and the Company sold
its remaining inventory of products to CooperVision International Holding
Company, LP. As a result, the Company has no products for sale and has no source
of revenues. Summary operating results of discontinued operations for the three
months ended March 31, 2006 and 2005, respectively, were as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Sales, net $ -- $ 297,419 $ -- $ 621,584
Cost of goods sold -- (182,273) -- (380,505)
General and administrative -- (922,089) -- (1,840,427)
----------- ----------- ----------- -----------
Operating gain (loss) $ -- $ (806,943) $ -- $(1,599,348)
=========== =========== =========== ===========
Assets of the discontinued operations were comprised of the following at June
30, 2006 and December 31, 2005:
2006 2005
------------ -----------
Accounts receivable, net of allowance $ -- $ 60,872
============ ===========
Liabilities of the discontinued operations were comprised of the following at
June 30, 2006 and December 31, 2005:
2006 2005
------------ -----------
Accounts payable $ -- $ 219,154
Accrued liabilities -- 344,282
------------ ------------
$ -- $ 563,436
============ ============
NOTE 5 - INVENTORY
During 2005, the Company sold its remaining inventory related to the
discontinued Gebauer product business totaling $375,732, and no inventory was
held at June 30, 2006 or December 31, 2005.
13
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2006 and December
31, 2005:
December 31,
June 30, 2006 2005
------------- -------------
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 30,229
------------- -------------
208,932 208,932
Less: Accumulated depreciation (152,887) (132,099)
------------- -------------
$ 56,045 $ 76,833
============= =============
Depreciation expense for the six months ended June 30, 2006 and 2005, was
$20,788 and $18,708, respectively.
NOTE 7 - 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. In October 2005, the Company terminated the distribution
agreement and expensed the remaining capitalized balance of $1,654,218 during
2005 as part of discontinued operations.
In November 2005, the Company acquired the stock of OptiMetrix Technologies,
Inc., a company formed for the sole purpose of obtaining the exclusive license
to a patented technology for the detection of cataract formations. The purchase
was effectuated with 100,000 shares of Class B Preferred Stock, convertible
after one year into the Company's common shares totaling $1,500,000, valued at
the market price at the time of conversion. The Company made an evaluation of
this purchase in accordance with the guidelines of SFAS 141, and recorded the
new license agreement at $75,000. The Company also received cash of $200,000 and
recorded Goodwill of $1,225,000. The goodwill was deemed not to be impaired at
December 31, 2005.
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OThI), a wholly owned subsidiary of UTEK Inc. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. Because LD22-4 directly
targets a fundamental requirement for the proliferation of blood vessels, i.e.
cell migration, the Company believes that its mode of action is distinct from
other drugs that are on the market or that are in development by other
biotechnology or pharmaceutical companies. Consideration paid by the Company was
100,000 shares of Class C Preferred Stock of the Company. The shares are not
convertible until the first anniversary of the agreement. The preferred shares
shall convert into $2,800,000 worth of common shares of the Company. Additional
consideration was a warrant to purchase 1,400,000 shares of the Company at 50%
of the conversion price.
14
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Inc. AGTI owns
technology licensed from the University of Arizona. ART has acquired the
worldwide exclusive license to a patent pending technology developed by W.
Daniel Stamer, Ph.D., Associate head for Vision Research and Associate Professor
of Ophthalmology and Vision Science, and Ronald Heinmark Ph.D., Head of Surgical
Research and Professor of surgery at the University of Arizona. The invention is
a novel strategy for reducing pressure build-up in the eye using specific
monoclonal antibodies. When completed, this non-surgical treatment of glaucoma
will be able to be administered to patients with all stages of glaucoma. It
reduces intraocular pressure, and thus may slow the damage to the retinal cells.
Patients might require only biannual treatment on an outpatient basis during
routine check-ups, and potentially may no longer need to have eye drops or risky
surgeries. This method my be an effective alternative to available drugs, and it
is currently anticipated that visual acuity would not be adversely affected
after treatment. Applications may include glaucoma treatment and adjuvant
therapy with common eye surgeries such as cataract removal. The glaucoma market
is the largest pharmaceutical market in ophthalmology, as it is a chronic
problem that currently cannot ever truly be cured, only treated and controlled.
Patients who commence glaucoma treatments remain on the medication for the
duration of their lives.
The consideration paid by the Company was 100,000 shares of Series D Preferred
Stock of the Company. The shares are not convertible until the first anniversary
of the agreement. The preferred shares are convertible into $2,800,000 worth of
shares of Common Stock of the Company. Additional consideration was a warrant to
purchase 1,400,000 shares of Common Stock of the Company at an exercise price
equal to 50% of the conversion price.
Distribution, Patent and License agreements consisted of the following at June
30, 2006 and December 31, 2005:
June 30, 2006 December 31, 2005
----------------- -----------------
Patent agreements 100,000 100,000
License Agreement 225,000 75,000
Less: accumulated amortization (30,981) (21,844)
----------------- -----------------
$ 294,019 $ 153,156
================= =================
The unamortized distribution agreement with Gebauer was charged to expense
during 2005.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 2006 and December 31,
2005:
June 30, 2006 December 31, 2005
---------------- -----------------
Payroll and related taxes $ 769,117 $ 142,763
Litigation settlement fees 129,669 129,669
Other accruals 688,366 643,369
---------------- ----------------
$ 1,587,152 $ 915,801
================ ================
Portions of the accrued expenses have been reclassified to current liabilities
related to discontinued operations for 2006 and 2005.
15
NOTE 9 - CONVERTIBLE DEBENTURES
JANUARY 2005 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 Company. 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 Company 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 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.
16
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, the discount of $3,311,088 will be recorded as
non-cash interest expense during the first quarter of 2005.
On June 24, 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.
During the year ended December 31, 2005, the Company recorded total interest
expense of $956,233 in connection with the debenture debt. Of this total,
$405,238 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 $557,983 resulted from interest accrued during the period on the
outstanding principal balance. As of December 31, 2005, the balance on the
accrued interest was $558,394.
Convertible Price and Warrant Terms Modifications
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 2005 debentures with a principal balance of $1,108,000 were tendered for
conversion to common stock of the Company under the conversion terms of the
agreement.
On June 14, 2005, convertible debentures with an aggregate outstanding principal
balance of $7,695,000, and certain warrant agreements, were amended to change
the conversion price and exercise price from $0.35 and $0.40 per share,
respectively to $0.095. In addition, the term of the warrants was extended to
January 14, 2010. The Company determined that the modification of terms met the
requirements of EITF Issue 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," of an exchange of debt with substantially
different terms and accordingly has deemed the debt to be extinguished as of
June 14, 2005, and replaced with new debt on that date.
At the time of the amendment and recording the extinguishment of the original
Notes, the Company recorded a corresponding entry to record a new note at its
principal balance as of June 14, 2005 of $7,695,000, and further recorded
entries to record discounts related to the fair value of the warrants and
beneficial conversion features totaling $3,669,956. The recorded debt discount
will be amortized as non-cash interest expense over the remaining term of the
debt. At June 30, 2006, the remaining debt discount balance was $2,782,804 and
the outstanding principal balance on the Notes was $6,448,000.
17
As of June 30, 2006 and December 31, 2005, convertible debenture debt balances
consists of the following:
Current:
June 30, 2006 December 31, 2005
--------------- -----------------
Convertible debenture $ 6,448,000 $ 6,587,000
Convertible debenture discount (2,782,804) (2,997,929)
--------------- ---------------
Convertible debenture - net $ 3,665,196 $ 3,589,071
=============== ===============
At June 30, 2006, the Company is in default of their convertible note agreements
for failure of timely payment of accrued interest balances. Accordingly, its
convertible notes with maturity dates greater than one year from the balance
sheet date are classified as current liabilities as of March 31, 2006.
Note 10 - Derivative Liabilities
Evaluation of criteria under EITF Issue No. 00-19, "Accounting for Derivative
Financial Instrument Indexed to, and Potentially Settled in, a Company's Own
Stock" at December 13, 2005, resulted in the determination that the Company's
outstanding warrants should be reclassified as a derivative liability as of June
30, 2005. In accordance with EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked to market each reporting period,
with a corresponding non-cash gain or loss reflected in the current period.
At December 13, 2005, the fair market value of the derivative liabilities was
determined to be $94,829 using a Black-Scholes model valuation with the
following assumptions, expected dividend yield of zero, expected stock price
volatility of 120.64%, risk free interest rate of 4.35% and a remaining
contractual life between one and five years. The aggregate fair value of the
warrant derivative liability at December 31, 2005 was determined to be $102,951.
Based on this change in fair value, the Company has recorded a non-cash loss
during the year ended December 31, 2005 of $8,122 and a corresponding increase
in the warrant derivative liability.
NOTE 11 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
The balances of notes payable to related parties at June 30, 2006 and December
31, 2005 are as follows:
June 30, 2006 December 31, 2005
Principal Interest Principal Interest
--------------------------------------------------------
SurgiJet $ 495,242 $ 49,299 $ 495,242 $ 27,439
Lance Doherty 19,000 10,306 19,000 8,894
--------------------------------------------------------
Total $ 514,242 $ 59,605 $ 514,242 $ 36,333
=========== ========= ========= =========
18
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 demand 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 12 - COMMITMENTS
LICENSE AGREEMENTS
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.
The Company has acquired from UTEK Corporation all the stock of OTI, which owns
the worldwide licensing rights for the technology. The Company is required to
pay to UTEK royalties of three percent (3%) for equipment, five percent (5%) for
disposables and services of net sales, excluding customary discounts and sales
to the U.S. Government. In addition the Company is required to pay an annual
license payable in advance on March 31 of each calendar year as follows:
YEAR ANNUAL LICENSE FEE
---- ------------------
2006 --
2007 $10,000
2008 20,000
2009 20,000
2010 40,000
2011 70,000
2012 and thereafter 100,000
Annual fees for any year will be credited against any royalties owed during that
year.
OTI has the right to sub-license within the scope of its grant.
19
The Company must meet certain due diligence milestones as follows:
o An updated commercialization plan within 120 days of the execution of
the license.
o The Company must invest at least $500,000 towards development of the
technology by March 2007
o A Beta Product by June 2007
o A first commercial sale to a non-related company by September 2008.
o One Million ($1,000,000) in sales by June 2009
o Annual sales of at least one million ($1,000,000) after that.
If the Company fails to meet any of these milestones the license may be
terminated or converted to a non-exclusive license.
The Company has entered into a consulting agreement with the inventor of the
technology, Dr. Irving Bigio, in order to help implement the technology. The
payment to Dr. Bigio was 2,000 shares of Series B Preferred Stock, in exchange
for his 2% ownership in OTI.
In February of 2006, the Company acquired all of the outstanding stock of Ocular
Therapeutics Inc. ("OTI"). OTI holds a license to certain patented technology
owned by Motility Inc., relating to a small protein therapeutic (LD22-4) for the
treatment of the wet form of age related macular degeneration. Because LD22-4
directly targets a fundamental requirement for the proliferation of blood
vessels, i.e. cell migration, the Company believes that its mode of action is
distinct from other drugs on the market or in development by other biotechnology
or pharmaceutical companies. The consideration for the acquisition was 100,000
shares of Series C Preferred Stock of the Company. The shares are not
convertible until after the first anniversary of the agreement. The Series C
Preferred Stock is convertible into $2,800,000 worth of shares of Common Stock
of the Company. Additional consideration for the acquisition was the issuance of
a warrant to purchase 1,400,000 shares of Common Stock of the Company at 50% of
the conversion price.
Distribution, patent and license agreements consisted of the following at March
31, 2006 and December 31, 2005:
o Earned royalties of 7.5% on Net Sales
o Annual Minimum Royalty as follows which are fully creditable against
royalties paid during the previous 12 month period:
Year Annual Minimum Royalties
---- ------------------------
1 --
2 --
3 $10,000
4 $20,000
5 $30,000
6 and thereafter $40,000
20
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Inc. AGTI owns
technology licensed from the University of Arizona. ART has acquired the
worldwide exclusive license to a patent pending technology developed by W.
Daniel Stamer, Ph.D., Associate head for Vision Research and Associate Professor
of Ophthalmology and Vision Science, and Ronald Heinmark Ph.D., Head of Surgical
Research and Professor of surgery at the University of Arizona. The invention is
a novel strategy for reducing pressure build-up in the eye using specific
monoclonal antibodies. When completed, this non-surgical treatment of glaucoma
will be able to be administered to patients with all stages of glaucoma. It
reduces intraocular pressure, and thus may slow the damage to the retinal cells.
Patients might require only biannual treatment on an outpatient basis during
routine check-ups, and potentially may no longer need to have eye drops or risky
surgeries. This method my be an effective alternative to available drugs, and it
is currently anticipated that visual acuity would not be adversely affected
after treatment. Applications may include glaucoma treatment and adjuvant
therapy with common eye surgeries such as cataract removal. The glaucoma market
is the largest pharmaceutical market in ophthalmology, as it is a chronic
problem that currently cannot ever truly be cured, only treated and controlled.
Patients who commence glaucoma treatments remain on the medication for the
duration of their lives.
The consideration paid by the Company was 100,000 shares of Series D Preferred
Stock of the Company. The shares are not convertible until the first anniversary
of the agreement. The preferred shares are convertible into $2,800,000 worth of
shares of Common Stock of the Company. Additional consideration was a warrant to
purchase 1,400,000 shares of Common Stock of the Company at an exercise price
equal to 50% of the conversion price.
The Company is required to pay royalties and meet certain milestones as follows:
o Five percent (5%) royalty on annual net sales of less than or
equal to $200 million
o Six percent (6%) royalty on annual net sales in excess of $200
million.
o Upon the first anniversary of first commercial sale of
Licensed Product by AGTI, its affiliates or sublicensees,
annual minimum royalty payments shall be as listed below and
shall be fully creditable against royalties paid in that
calendar year.
Year Minimum Royalty Payment
---- -----------------------
1st & 2nd Anniversary $ 50,000
3rd & 4th Anniversary $ 60,000
5th Anniversary $ 70,000
6th and each subsequent Anniversary $ 200,000
o ANNUAL LICENSE MAINTENANCE
Annual License Maintenance fees shall be as follows:
$25,000 on the third (3rd ) anniversary of the Effective Date.
$30,000 per year on the fourth (4th) and fifth (5th)
anniversary of the Effective Date, and further increasing an
additional $5,000 in each subsequent year prior to the first
commercial sale of Licensed Product. Each year's annual
license maintenance fees shall be credited against any other
payment due that calendar year (excluding patent costs).
21
7. MILESTONE FEES:
o For first Licensed Product based on monoclonal antibody
described in Patent Rights, whether for therapeutic use in
glaucoma, cataract or other ophthalmic disease, and
o For first Licensed Product based on peptide described in
Patent Rights, whether for therapeutic use in glaucoma,
cataract or other ophthalmic disease, Licensee its affiliates
or sublicensee, shall pay University milestone payments as
follows:
o Initiation of Phase I: $50,000
o Initiation of Phase II: $100,000
o Initiation of Phase III: $250,000
o U.S. FDA marketing approval $750,000
NOTE 13 - SERIES B PREFERRED SHARES
In December 2005 the Company acquired OptiMetrix Technologies, Inc. (OTI), a
wholly owned subsidiary of UTEK Corporation (UTEK). OTI holds technology
licensed from Los Alamos National Laboratory (LANL), operated by the University
of California for the Nuclear Security Administration of the U.S. Department of
Energy.
The consideration paid for this license was 100,000 Series B Convertible
Preferred Stock ("Series B shares"). These shares can be converted after a
period of one year from the date of acquisition in December 2005. They will be
convertible into common shares of the Company valued at $1,500,000, based on the
10 day closing stock price average at the time of conversion. Additionally, UTEK
received a warrant for 750,000 shares of common stock priced at 50% of the
convertible shares. Series B shares will be paid out of the assets of the
Company before all other holders of other classes of series of capital stock of
the Company.
The Company received $200,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $1,225,000.
NOTE 14 - SERIES C PREFERRED SHARES
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OThI), a wholly owned subsidiary of UTEK Inc. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. Consideration paid by the
Company was 100,000 series C convertible preferred shares of the Company. The
shares are not convertible until the first anniversary of the agreement. The
preferred shares shall convert into $2,800,000 worth of common shares of the
Company. Additional consideration was a warrant to purchase 1,400,000 shares of
the Company at 50% of the conversion price.
The Company received $325,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $2,400,000.
22
NOTE 15 - SERIES D PREFERRED SHARES
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Inc. AGTI owns
technology licensed from the University of Arizona. AGTI holds the exclusive
license to a patented pending technology for a drug for the treatment of the
glaucoma. Consideration paid by the Company was 100,000 series D convertible
preferred shares of the Company. The shares are not convertible until the first
anniversary of the agreement. The preferred shares shall convert into $2,800,000
worth of common shares of the Company. Additional consideration was a warrant to
purchase 1,400,000 shares of the Company at 50% of the conversion price.
The Company received $350,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $2,375,000.
NOTE 16 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
ISSUANCE OF COMMON STOCK ON CONVERSION OF DEBENTURES
During the period January 25, 2006 through March 8, 2006 the Company issued
1,463,157 shares of stock pursuant to the terms of convertible debentures.
ISSUANCE OF COMMON STOCK FOR SERVICES
During the period January 19,2006 through March 24, 2006 the Company issued
179,623,160 shares of common stock for services rendered to the Company.
WARRANT ACTIVITY
In February of 2006, the Company acquired all the shares of Occular Therapeutics
Inc. (OThI), a wholly owned subsidiary of UTEK Corporation. Consideration paid
by the Company was 100,000 series C convertible preferred shares of the Company.
As additional consideration, a warrant to purchase 1,400,000 shares of the
Company's common stock at 50% of the preferred stock conversion price will be
issued at the time of preferred stock conversion.
In April of 2006, the Company acquired all the shares of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Corporation.
Consideration paid by the Company was 100,000 series D convertible preferred
shares of the Company. As additional consideration, a warrant to purchase
1,400,000 shares of the Company's common stock at 50% of the preferred stock
conversion price will be issued at the time of preferred stock conversion.
Tables summarizing the number of the Company's outstanding common stock warrants
and additional warrant information are included in the Company's 10-KSB filed
for the year ended December 31, 2005.
23
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 3,000,000 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 2005, the Company received a one-year extension, to November
30, 2005 and in November,2005 the Company received another one-year extension to
November 30, 2006, 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. As of December 31, 2005, the accrued
interest balance was $106,328. As of June 30, 2006 all shares that were borrowed
are outstanding.
In January 2005, HIT Credit Union returned 750,000 of the borrowed shares.
NOTE 17 - 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 June 30, 2006 and December 31, 2005, the aggregate
balance on these notes was $54,862 and $54,862 and the respective accrued
interest payable balances were $13,646 and $12,462, respectively.
NOTE 18 - RELATED PARTY TRANSACTIONS
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between Ponte Nosse
Acquisition Corporation and Financial Entrepreneurs Incorporated, 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 June 30, 2006, the outstanding
principal and accrued interest payable on this note were $215,990 and
$88,276,respectively.
During 2003, the Company began making monthly consulting payments to a
corporation controlled by Norman Schwartz, a director of the Company.
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. Total consulting fees
and related expenses during the six-month period ended June 30, 2006 were
$45,000 and $0, respectively, of which $45,000 was included in Accounts Payable
at June 30, 2006.
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In January 2004, the Company entered into a revised consulting agreement
With Richard Keates providing a monthly retainer of $15,000 plus reimbursement
of Business expenses incurred. Through June 30, 2006 consulting fees and related
expenses totaling $90,000 and $207, respectively, were recorded pursuant to this
agreement, of which $7,585 is included in accounts payable at June 30, 2006.
NOTE 19 - SECURITY LENDING AGREEMENT
In April 2004, the Company and Taika Investments 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, 2006. 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. As of December 31, 2005, the accrued interest balance was $106,328. As
of June 30, 2006 all shares that were borrowed are outstanding.
NOTE 20 - SUBSEQUENT EVENTS
DELISTING BY NASDAQ
On June 6, 2006, due to its failure to file Form 10-KSB for the year ending
December 31, 2005 in a timely manner, NASDAQ determined that the Company's
securities were not eligible for continued quotation on the OTCBB. On August 10,
2006, the Company, after fulfilling the filing requirements for both the year
end of December 31, 2005 and the quarter ending March 31, 2006, by filing its
10-KSB and 10-QSB, became eligible for quotation on the OTCBB.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This Form 10-KSB, press releases and certain information provided in
our 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 in this Form 10-KSB 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 publicly update
or revise the forward looking statements made in this Form 10-KSB to reflect
events or circumstances after the date of this Form 10-KSB or to reflect the
occurrence of unanticipated events.
OVERVIEW
The Company has two ophthalmic surgery products under development
utilizing proprietary waterjet technology. The first is Accupulse, 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.
In December 2005 the company acquired Optimetrix Technologies, Inc.
(OTI), a wholly owned subsidiary of UTEK Corporation (UTEK). OTI owns technology
licensed From Los Alamos National Laboratory, operated by the University of
California for the Nuclear Security Administration of the US Department of
Energy. The technology is designed to determine optical aging, optical metrics
and the presence of cataracts and other optical diseases. The company plans to
conduct the necessary research and development of these technologies to bring
the product to market during the first quarter of 2008.
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OthI), a wholly owned subsidiary of UTEK Inc. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. Because LD22-4 directly
targets a fundamental requirement for the proliferation of blood vessels, i.e.
cell migration, we believe that its mode of action is distinct from other drugs
that are on the market or that are in development by other biotechnology or
pharmaceutical companies.
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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
Accupulse 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.
ITEM 3. LEGAL PROCEEDINGS
ART is currently engaged in the following legal proceedings:
ART 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the six
months ended June 30, 2006.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 8, 2006, the closing price as reported by the OTC Bulletin
Board was $0.025. As of August 8, 2006, there were 244,469,073 shares of common
stock outstanding, held by 216 record holders and approximately 837 beneficial
holders.
The Company has never declared or paid cash dividends on its Common
Stock and currently does not anticipate paying cash dividends in the future.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Refractive Technologies, Inc.,
a Delaware corporation
By: /s/ Laurence Schreiber
----------------------------------
Laurence Schreiber, Secretary,
Treasurer, Chief Operating Officer
Date: August 14, 2006
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