UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2005
VisiJet, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 0-256111 33-0838660
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
1062 Calle Negocio, Suite D
San Clemente, Ca., 92673
(Address of principal executive offices)
Issuer's telephone number, including area code:
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 (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 May 5, 2005 there were 29,993,440 shares of the registrant's Common Stock
outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 2005 and December 31, 2004 ............. 3
Statements of Operations for the Three Months ended
March 31, 2005 and 2004 ......................................... 4
Statements of Cash Flows for the Three Months ended March
31, 2005 and 2004 ................................................ 5
Notes to Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation ......... 24
Item 3. Controls and Procedures ........................................... 27
PART II. OTHER INFORMATION ................................................. 27
Item 1. Legal Proceedings ................................................. 27
Item 2. Changes in Securities ............................................. 27
Item 6. Exhibits and Reports on Form 8-K .................................. 28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
Visijet, Inc.
Balance Sheet
March 31, December 31,
2005 2004
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,952 $ 22,946
Marketable securities -- 590,980
Accounts receivable 162,504 180,145
Inventory 2,289,021 634,430
Prepaid expenses 31,738 209,429
------------ ------------
Total current assets 2,494,215 1,637,930
Property and equipment, net 79,073 87,798
Distribution agreement, net 1,559,148 1,654,218
Patents and trademarks, net 85,433 87,795
------------ ------------
Total assets $ 4,217,869 $ 3,467,741
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 1,292,178 889,992
Customer deposits 17,103 49,198
Compensation settlement agreement - current portion 54,864 66,402
Accrued interest 225,819 277,785
Accrued expenses 814,598 1,043,516
Royalty payable 30,000 15,000
Notes payable to related parties 795,613 847,660
Notes payable 10,000 10,000
Convertible debenture debt, net -- 897,655
Secured debenture debt, net -- 1,194,830
------------ ------------
Total current liabilities 3,240,175 5,292,038
Convertible debenture debt - long term , net 3,446,635 1,333,601
Series A convertible preferred stock, 450,000 shares issued and
outstanding at March 31, 2005 and December 31, 2004, net of
unamortized discount of $937,500, (redemption value $4,500,000) 599,154 505,404
------------ ------------
Total liabilities 7,285,964 7,131,043
------------ ------------
Shareholders' deficit:
Preferred A stock, 10,000,000 shares authorized, 450,000 shares
issued and outstanding at March 31, 2005 and December 31 2004,
$4,500,000 current redemption value as noted above -- --
Common stock, 100,000,000 shares authorized, $.001 par value,
29,806,628 shares issued and outstanding at March 31, 2005, and
28,909,662 shares issued and outstanding at December 31, 2004 29,807 28,910
Additional paid in capital 24,962,943 19,786,546
Accumulated comprehensive loss -- (792,009)
Accumulated deficit (28,060,845) (22,686,749)
------------ ------------
Shareholders' deficit (3,068,095) (3,663,302)
------------ ------------
Total liabilities and shareholders' deficit $ 4,217,869 $ 3,467,741
============ ============
The accompanying notes are an integral part of these financial statements
3
Visijet, Inc.
Statements of Operations
(unaudited)
Three months ended
March 31, 2005 March 31, 2004
---------------- ----------------
Sales $ 324,164 $ --
Cost of Goods Sold 198,717 --
---------------- ----------------
Gross Profit 125,447 --
---------------- ----------------
Operating expenses:
General and administrative expenses 1,361,306 1,035,297
Research and development expenses 104,987 246,485
---------------- ----------------
Total operating expenses 1,466,293 1,281,782
---------------- ----------------
Loss from operations (1,340,846) (1,281,782)
Other income (expense):
Amortization of debt discount (549,873) (30,966)
Interest expense (159,473) (25,672)
Interest expense -beneficial conversion (3,311,088) --
Other income 7,298 --
Realized gain on securities 73,659 --
---------------- ----------------
Total other expense (3,939,477) (56,638)
---------------- ----------------
Loss before provision for taxes (5,280,323) (1,338,420)
Provision for income taxes -- 800
---------------- ----------------
Net loss (5,280,323) (1,339,220)
================ ================
Preferred stock dividends and accretions (93,750) --
---------------- ----------------
Net loss available to common shareholders $ (5,374,073) $ (1,339,220)
================ ================
Net loss per common share - basic and diluted $ (0.18) $ (0.06)
================ ================
Basic and diluted weighted average
number of common shares outstanding 29,287,450 22,115,328
================ ================
The accompanying notes are an integral part of these financial statements
4
Visijet, Inc.
Statements of Cash Flows
(unaudited)
Three months ended
March 31, 2005 March 31, 2004
--------------- ---------------
Cash flows from operating activities
Net loss $ (5,374,073) $ (1,339,220)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 106,157 9,786
Debt discount amortization 549,873 30,966
Accretion of beneficial conversion on preferred shares 93,750 --
Adjustment for beneficial conversion for debt 3,311,088 --
Common stock, options, warrants issued for services 138,369 217,822
Gain on marketable securities, net (70,040) --
Changes in assets and liabilities:
Accounts receivable 17,641 --
Prepaid expenses 177,691 733
Inventory (1,654,591) --
Accounts payable 402,186 35,804
Customer deposits (32,095) --
Compensation settlement agreement (11,539) (10,417)
Royalties payable 15,000 (45,000)
Other accrued expenses (228,919) 166,610
Accrued interest (51,965) 25,672
--------------- ---------------
Net cash used by operating activities (2,611,467) (907,244)
--------------- ---------------
Cash flows from investing activities
Acquisition of property and equipment -- --
Purchase of distribution agreement -- --
--------------- ---------------
Net cash used in investing activities -- --
--------------- ---------------
Cash flows from financing activities
Advance from related party -- 865
Repayment of advances from related parties (52,047) --
Repayment of secured and convertible debentures (2,550,000) --
Proceeds from secured debenture -- 447,500
Proceeds from convertible debt 4,540,500 --
Proceeds from private placements-net -- 423,000
Proceeds from sales of marketable securities 661,020 --
--------------- ---------------
Net cash provided by financing activities 2,599,473 871,365
--------------- ---------------
Net decrease in cash (11,994) (35,879)
Cash, beginning of period 22,946 35,879
--------------- ---------------
Cash, end of period $ 10,952 $ --
=============== ===============
Supplemental disclosures of cash flow information
Interest paid $ 211,438 $ --
Taxes paid -- 800
Debenture costs and fees 179,500 52,500
Non-cash transactions
Warrants issued in connection with secured debenture -- 178,168
Warrants issued in connection with convertible debentures 2,046,330 --
Common stock issued in connection with convertible debenture 507,613 --
The accompanying notes are an integral part of these financial statements
5
VISIJET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-QSB, 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 in this Form 10-QSB 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-QSB to reflect
events or circumstances after the date of this Form 10-QSB 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 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.
6
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.
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.
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 period ending March 31, 2005, the Company incurred net
losses of $5,374,073. 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.
7
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
DEVELOPMENT 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 March 31, 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 March 31, 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.
8
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 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.
On November 10, 2003, the Board of Directors adopted the VisiJet, 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.
As of March 31, 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 regarding stock options
outstanding at March 31, 2005:
Number of Weighted 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 March 31, 2005 2,265,000 $ 0.72 550,000
9
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
ended March 31, 2005 and 2004 would have been as follows:
March 31, 2005 March 31, 2004
-------------- --------------
Net Loss:
As reported $ (5,374,073) $ (1,339,220)
SFAS No. 123 effect (65,985) (84,499)
-------------- ---------------
Pro forma net loss $ (5,440,058) $ (1,423,719)
============== ===============
Loss per share:
As reported $ (0.18) $ (0.06)
============== ===============
Pro forma $ (0.19) $ (0.06)
============== ===============
Basic and diluted weighted
average shares outstanding 29,287,450 22,115,328
============== ===============
The following table summarizes information about stock options
outstanding at March 31, 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 8.62 $1.10 370,000 $1.10
$0.40 1,225,000 9.56 $0.40 220,000 $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.
10
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.
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 March 31,2005 and
December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Completed units and
disposable supplies $ 1,901,848 $ 265,197
Demonstration units 211,348 193,408
Clinical Units 175,825 175,825
-------------- -----------------
$ 2,289,021 $ 634,430
============== =================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2005 and
December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Computer and test equipment $ 98,196 $ 98,196
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
-------------- -----------------
178,703 178,703
Less: accumulated depreciation (99,630) (90,905)
-------------- -----------------
$ 79,073 $ 87,798
============== =================
Depreciation expense for the three months ended March 31, 2005 and
March 31, 2004 was $8,725 and $7,424, respectively.
11
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.
Distribution and patent agreements consist of the following at March
31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Distribution agreements $ 1,901,400 $ 1,901,400
Patent agreements 100,000 100,000
Less: accumulated amortization (356,819) (259,387)
-------------- -----------------
$ 1,644,581 $ 1,742,013
============== =================
Amortization expense for the three months ended March 31, 2005 and
March 31, 2004 was $97,432 and $2,362, 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
------------------- ----------------------
12/31/05 292,297
12/31/06 389,729
12/31/07 389,729
12/31/08 389,729
12/31/09 183,097
------------------- ----------------------
Total 1,644,581
======================
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following at March 31, 2005 and
December 31 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Payroll and related taxes $ 147,101 $ 336,695
Consulting fees 420,000 375,000
Litigation settlement fees 129,669 209,669
Other accruals 117,828 122,152
-------------- -----------------
$ 814,598 $ 1,043,516
============== =================
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.
12
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 agreements 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
$348,347. 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.
In January 26, 2005, the Company paid the principal balance of $500,000
and the secured debenture agreement was cancelled. The accrued interest of
$8,548 remains outstanding as of March 31, 2005.
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.
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 $6,774, 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.
13
As of March 31, 2005 and December 31, 2004, secured debenture debt
balance consists of the following:
March 31, 2005 December 31, 2004
-------------- -----------------
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.
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 June 6, 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.
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 that 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.
In January 2005, the company paid this debt in full by paying one
lender principal of $550,000 and entered 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 sell the 250,000 collateral shares as
14
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 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.
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. 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.
15
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.
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc., ("the Renn agreement") and a group of
investment funds, several of which were already holders of securities issued by
the Company, under which the Investors purchased $7,695,500 in principal amount
of convertible debentures from the Registrant. As a result, this loan and its
associated discount have been rolled into the Renn agreement. The Renn agreement
is discussed in more detail below.
As of the period ending March 31, 2005, accrued interest of $44,222 had
been paid completing the interest obligation on the original notes.
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.
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 14,
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.
16
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.
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc., ("the Renn agreement") and a group of
investment funds, several of which were already holders of securities issued by
the Company, under which the Investors purchased $7,695,500 in principal amount
of convertible debentures from the Registrant. As a result, this loan and its
associated discount have been rolled into the Renn agreement. The Renn agreement
is discussed in more detail below.
During the period ending March 31, 2005, the company paid accrued
interest of $28,889 satisfying the interest requirement on the original note.
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.
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 750,000 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.
17
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc., ("the Renn agreement") and a group of
investment funds, several of which were already holders of securities issued by
the Company, under which the Investors purchased $7,695,000 in principal amount
of convertible debentures from the Registrant. As a result, this loan and its
associated discount have been rolled into the Renn agreement. The Renn agreement
is discussed in more detail below.
During the period ending March 31, 2005, the company paid accrued
interest of $16,355 satisfying the interest requirement on the original note.
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. The remaining debt
discount of $285,724 was amortized as non-cash interest expense. Alpha has
participated in the Renn financing contributing $350,000 of debt principal. All
warrants and stock associated with this transaction are included in the Renn
Financing discussion below.
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.
18
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc., ("the Renn agreement") and a group of
investment funds, several of which were already holders of securities issued by
the Company, under which the Investors purchased $7,695,000 in principal amount
of convertible debentures from the Registrant. As a result, this loan and its
associated discount have been rolled into the Renn agreement. The Renn agreement
is discussed in more detail below.
JANUARY 2005 CONVERTIBLE DEBENTURE
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 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
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 the period ending March 31, 2005, the Company recorded total
interest expense of $220,538 in connection with the debenture debt. Of this
total, $92,358 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 $128,180 resulted from interest accrued during the period on the
outstanding principal balance. As of March 31, 2005, the balance on the accrued
interest was $118,871.
19
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.
As of March 31, 2005 and December 31, 2004 , convertible debenture debt
balances consists of the following:
Current:
March 31, 2005 December 31, 2004
--------------- -----------------
Convertible debenture $ -- $ 1,300,000
Convertible debenture discount -- (402,345)
--------------- -----------------
Convertible debenture - net $ -- $ 897,655
=============== =================
Long Term:
--------------- -----------------
Convertible debenture $ 7,695,000 $ 2,975,000
Convertible debenture discount (4,248,365) (1,641,399)
--------------- -----------------
Convertible debenture - net $ 3,446,635 $ 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"), 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 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
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 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 Note 14, 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 have
been adjusted to reflect the agreed upon amounts, and as a result, the balances
at March 31, 2005 and December 31, 2004 are as follows:
March 31, 2005 December 31, 2004
Principal Interest Principal Interest
------------ ------------ ------------ ------------
SurgiJet $ 510,623 $ 3,148 $ 549,774 $ 14,347
DentaJet -- -- -- --
Lance Doherty 19,000 $ 6,910 19,000 6,293
Rex Doherty -- -- -- --
------------ ------------ ------------ ------------
Total $ 529,623 $ 10,058 $ 568,774 $ 20,640
============ ============ ============ ============
During the period ending March 31, 2005, the Company paid $39,151 and
$20,849 of principal and interest, respectively.
20
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 the three months ended
March 31, 2005, net activity resulted in a decrease to the outstanding principal
of $12,896 and a $5,813 increase to interest expense related to this note. As of
March 31, 2005, the outstanding principal and accrued interest payable on this
note were $265,990 and $57,675, respectively.
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.
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. There are
no royalties on product sales due or payable by the Company under this
agreement.
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
In January 2005, the Company increased the authorized shares to
100,000,000 from 50,000,000.
During the first quarter of 2005, the Company issued 1,039,370 common
stock shares 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 1,219,000 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
500,000 free trading shares as compensation for services resulting in the
recording of $175,000 of expense. 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.
WARRANT ACTIVITY
During the first quarter 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 following table summarizes the number of outstanding common stock
warrants as of March 31, 2005:
Weighted Average
Number Exercise 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
21
The following table summarizes additional information with respect to
outstanding common stock warrants at March 31, 2005:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ------------ ----------------------- -----------
$ 0.40 13,906,188 59 13,906,188
$ 0.62 700,000 54 700,000
$ 0.65 20,000 51 20,000
$ 0.75 375,000 57 375,000
$ .090 86,667 45 86,667
$ 1.00 6,326,480 38 6,326,480
$ 1.23 45,000 34 45,000
$ 1.50 30,000 19 30,000
$ 2.25 4,441,000 42 4,441,000
$ 2.50 505,000 31 505,000
$ 3.00 50,000 34 50,000
$ 5.00 1,720,000 34 1,720,000
---------- ----------
28,205,335 28,205,335
========== ==========
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The following chart depicts the changes in the accumulated comprehensive income
for periods ending March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
--------------- -----------------
Change in Accumulated Comprehensive Income(Loss)
Unrealized loss from marketable securities $ (792,009) $ (792,009)
Reclassification of adjustment from sale
of all held 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. All of the marketable securities were
sold in the first quarter of 2005, and the Company recorded a reclassification
adjustment of the other comprehensive income against additional paid in capital.
NOTE 12 - 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 describe above, the Company has recorded the Preferred Series A
shares as a long term liability on the balance sheet.
22
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 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 bears 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 March 31, 2005 the aggregate balance on the
note was $54,864 and the respective accrued interest payable balance was
$10,720.
NOTE 14 - CONTINGENCIES
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 that 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 shall be in the amount of $30,000, thereafter monthly payments shall be
$20,000 through December 2005, $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 15 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2005, the Company recorded
$23,750 and $496, respectively, of consulting fees and expenses to a corporation
owned by a director of the Company. As of March 31, 2005, $3,750 related to this
agreement was included in accounts payable.
During the three months ended March 31, 2005, the Company recorded
$45,000 of consulting fees in connection with an 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, 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 March 31, 2005, a total of $360,000 in fees recorded
pursuant to this agreement is included in accrued expenses.
During the three months ended March 31, 2005, the Company reimbursed a
corporation controlled by an individual who beneficially owns in excess of 5% of
the outstanding shares of common stock of the Company for travel expenses
related to business of the Company totaling $12,896.
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 March 31, 2005, consulting fees and related expenses totaling $45,000
and $7,168, respectively, were recorded pursuant to this agreement, of which
$9,685 is included in accounts payable at March 31, 2005.
23
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 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 March 31, 2005, the Company had returned all borrowed shares
pursuant to this agreement, and had accrued interest expense totaling $ 10,396.
NOTE 17 - SUBSEQUENT EVENTS
As of April 11, 2005 the Company is doing business as "Advanced
Refractive Technologies." The fictitious name change has been submitted to
Orange County Clerk and is pending approval by the stockholders. The Company
believes the new name more closely reflects current and future product offerings
by the company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management's discussion and analysis of certain
significant factors that 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 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. Readers are referred
to the cautionary statement at the beginning of this report, which addresses
forward-looking statements made by the Company.
CORPORATE HISTORY
VisiJet (the "Company" or "VisiJet"), 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 "Fictitious Business Name Statement" was filed with Orange
County on April 11, 2005. Pending shareholder approval, the Company is currently
conducting business as "VisiJet, Inc. dba Advanced Refractive Technologies".
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.
24
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 are generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
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.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
SALES AND COST OF SALES
The Company reported sales revenues for the quarters ending March 31,
2005 and 2004 of $324,164 and $0.00, respectively. The sales during the current
period were comprised of domestic sales of $92,470 and international sales of
$231,694. VisiJet markets its products in the United States through a direct
sales force consisting of four employees and five independent sales
representatives. Internationally, our products are sold through independent
distributors in each market. Products sold are the EpiLift System, sold in the
United States and certain foreign markets, or a Combination Lasitome/EpiLift
system, currently sold only in foreign markets. In conjunction with the systems,
`disposables,' are 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 are sold separately, such as handpieces, Epi and Lasik heads,
suction rings, etc.
25
Cost of goods sold in 2005 was $198,717, resulting in a gross profit of
$125,447 or 38.7%. The gross profit was lower than normal resulting from the mix
of product sold, higher 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 2004 period.
OPERATING EXPENSES
Operating expenses during the three months ended March 31, 2005 and
2004, increased to $1,466,293 from $1,281,782 in 2005 as a result of the
following activity:
2005 2004
------------ ------------
General and Administrative $ 1,361,306 $ 1,035,297
Research and Development 104,987 246,485
------------ ------------
Total Operating Expenses $ 1,466,293 $ 1,281,782
The increase in general and administrative expenses in the 2005 period
was due primarily to increases in professional and consulting fees, product
insurance, amortization expenses related to patents and distribution agreements,
and sales and marketing expenses during 2005.
The decrease in research and development expenses in the 2005 period
was due primarily to limited working capital availability during the period, and
to a reallocation of resources from research and development to sales and
marketing.
OTHER INCOME AND EXPENSE
Other expenses during the three months ended March 31, 2005, include
interest expense of $159,473 and non-cash expenses of $549,873 related to the
amortization of debt discount during the period, and $3,311,088 of non-cash
interest expense. 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 from $25,672 for the 2004 period due to an increase in total debt
outstanding during 2005. The non-cash expenses related to the amortization of
debt discount increased from $30,966 for the same period in 2004.
Also included in results of operations in 2005 were other income and
non-recurring gains of $7,298 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.
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 $93,750 was
recorded during the current period providing a balance of the preferred discount
of $937,500 at March 31, 2005.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
As a result of the above revenues and expenses, the net loss for the
three months ended March 31, 2005 increased to $5,374,073 compared to $1,339,220
during the same period in 2004.
Subject to the availability of cash and working capital, we expect
sales revenue, and related cost of sales to increase significantly during the
remainder of 2005. In addition, expenses related to sales and marketing and
research and development activities are expected to increase during the
remainder of 2005 as we continue to ramp up our sales and marketing activities
related to recently licensed products, and as we move toward completion of
product development and regulatory compliance efforts and the ultimate product
introduction with respect to the Company's other products under development.
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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 first three 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 three months of 2005, the Company utilized $2,611,467
to fund operating activities and $2,599,473 in investing activities.
Subject to availability of funding, we expect operating expenses, and
related cash requirements, to increase during 2005 in connection with
anticipated increased sales and marketing and product development activities.
ITEM 3. CONTROLS AND PROCEDURES
At the end of the period covered by this Form 10-QSB, the Company's
management, including its Chief Executive Officer and its Treasurer, conducted
an evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive Officer and the
Treasurer determined that such controls and procedures are effective to ensure
that information relating to the Company required to be disclosed in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. There have been no
changes in the Company's internal controls over financial reporting that were
identified during the evaluation that occurred during the Company's last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VisiJet is a defendant in Steven J. Baldwin v. VisiJet, Inc. et al, a
case pending in San Francisco Superior Court, filed on February 9, 2004 (Case
No. 04- 428696). The Plaintiff is alleging 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.
To the best of the Company's knowledge and belief, there are no other
material legal proceedings pending or threatened against the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 for 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In January 2005 the holders of a majority of the outstanding shares of
the Company's Common Stock, acting by written consent, approved an increase in
the authorized Common Stock of the Company from 50 million shares to 100 million
shares.
ITEM 6. EXHIBITS
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Treasurer (principal financial officer)
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certificate of Treasurer (principal financial officer)
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
REPORTS ON FORM 8-K
(None)
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.
VisiJet, Inc.,
a Delaware corporation
By: /s/ Laurence Schreiber
----------------------------------
Laurence Schreiber, Secretary,
Treasurer, Chief Operating Officer
Date: May 18, 2005
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