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 September 30, 2005
Advanced Refractive Technologies, 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
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of December 21, 2005 , the issuer had 55,975,308 shares of common
stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Advanced Refractive Technologies, Inc.
Balance Sheet
September 30, December 31,
2005 2004
(unaudited) (audited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 31 $ 22,946
Marketable securities -- 590,980
Accounts receivable 115,876 180,145
Inventory 375,728 634,430
Prepaid expenses 37,566 209,429
------------ ------------
Total current assets 529,201 1,637,930
Property and equipment, net 88,076 87,798
Distribution agreement, net -- 1,654,218
Patents and trademarks, net 80,709 87,795
------------ ------------
Total assets $ 697,986 $ 3,467,741
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 1,149,798 889,992
Customer deposits 427 49,198
Compensation settlement agreement - current portion 54,863 66,402
Accrued interest 618,664 277,785
Accrued expenses 1,222,564 1,043,516
Royalty payable 45,000 15,000
Notes payable to related parties 782,132 847,660
Notes payable 10,000 10,000
Convertible debenture debt, net 3,426,676 897,655
Secured debenture debt, net -- 1,194,830
------------ ------------
Total current liabilities 7,310,124 5,292,038
Convertible debenture debt - long term , net -- 1,333,601
Series A convertible preferred stock, 450,000 shares issued and
outstanding at September 30, 2005 and December 31, 2004, net of
unamortized discount of $750,000, (redemption value $4,500,000) 786,654 505,404
------------ ------------
Total liabilities 8,096,778 7,131,043
------------ ------------
Shareholders' deficit:
Preferred A stock, 10,000,000 shares authorized, 450,000 shares issued
and outstanding at September 30, 2005 and December 31 2004,
$4,500,000 current redemption value as noted above -- --
Common stock, 750,000,000 shares authorized, $.001 par value,
48,336,827 shares issued and outstanding at September 30, 2005, and
28,909,662 shares issued and outstanding at December 31, 2004 48,337 28,910
Additional paid in capital 25,645,460 19,786,546
Accumulated comprehensive loss -- (792,009)
Accumulated deficit (33,092,589) (22,686,749)
------------ ------------
Shareholders' deficit (7,398,792) (3,663,302)
------------ ------------
Total liabilities and shareholders' deficit $ 697,986 $ 3,467,741
============ ============
The accompanying notes are an integral part of these financial statements
3
Advanced Refractive Technologies, Inc.
Statements of Operations
(unaudited)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales $ 92,601 $ 982,567 $ 715,075 1,037,537
Cost of Goods Sold 35,726 456,400 407,029 483,234
------------ ------------ ------------ ------------
Gross Profit 56,875 526,167 308,046 554,303
------------ ------------ ------------ ------------
Operating expenses:
General and administrative expenses 569,072 1,400,569 3,187,259 6,415,545
Research and development expenses -- 182,414 175,634 591,395
------------ ------------ ------------ ------------
Total operating expenses 569,072 1,582,983 3,362,893 7,006,940
------------ ------------ ------------ ------------
Loss from operations (512,197) (1,056,816) (3,054,847) (6,452,637)
Other income (expense):
Amortization of debt discount (104,172) (328,670) (763,769) (903,802)
Interest expense (228,728) (388,515) (561,875) (1,063,414)
Interest expense -beneficial conversion -- -- (3,311,088)
Loss on settlement of distribution agreement (2,533,512) -- (2,533,512)
Other income 19,544 -- 26,842
Realized gain on securities -- -- 73,659 --
------------ ------------ ------------ ------------
Total other expense (2,846,868) (717,185) (7,069,743) (1,967,216)
------------ ------------ ------------ ------------
Loss before provision for taxes (3,359,065) (1,774,001) (10,124,590) (8,419,853)
Provision for income taxes (1,000) -- -- 800
------------ ------------ ------------ ------------
Net loss (3,358,065) (1,774,001) (10,124,590) (8,420,653)
============ ============ ============ ============
Preferred stock dividends and accretions (93,750) -- (281,250) --
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (3,451,815) $ (1,774,001) $(10,405,840) $ (8,420,653)
============ ============ ============ ============
Net loss per common share - basic and diluted $ (0.09) $ (0.06) $ (0.32) $ (0.32)
============ ============ ============ ============
Basic and diluted weighted average
number of common shares outstanding 36,468,868 29,429,663 32,295,455 26,069,227
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
Advanced Refractive Technologies, Inc.
Statements of Cash Flows
(unaudited)
Nine months ended
September 30, September 30,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $(10,405,840) $ (8,420,653)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 227,178 182,728
Debt discount amortization 529,906 903,802
Accretion of beneficial conversion on preferred shares 281,250 829,139
Adjustment for beneficial conversion for debt 3,311,088 --
Adjustment for distribution agreement write off 2,518,967
Common stock, options, warrants issued for services 823,677 2,894,335
Warrants repricing in connection with debt guarantee 15,769 546,403
Gain on marketable securities, net (70,040) --
Changes in assets and liabilities:
Accounts receivable 64,269 (332,105)
Prepaid expenses 171,863 (309,199)
Inventory (1,657,513) (317,003)
Accounts payable 1,121,132 416,311
Customer deposits (48,771) 16,720
Compensation settlement agreement (11,539) (35,604)
Royalties payable 30,000 (15,000)
Other accrued expenses 179,048 537,074
Accrued interest 340,879 161,952
------------ ------------
Net cash used by operating activities (2,578,677) (2,941,100)
------------ ------------
Cash flows from investing activities
Acquisition of property and equipment (30,230) (15,611)
Purchase of distribution agreement -- (1,188,900)
------------ ------------
Net cash used in investing activities (30,230) (1,204,511)
------------ ------------
Cash flows from financing activities
Advance from related party -- 229,361
Repayment of advances from related parties (65,528) (200,600)
Repayment of secured and convertible debentures (2,550,000) --
Repayment of notes payable -- (4,000)
Proceeds from secured debenture -- 1,109,688
Proceeds from convertible debt 4,540,500 2,471,125
Proceeds from private placements-net -- 526,500
Proceeds from sales of marketable securities 661,020 --
------------ ------------
Net cash provided by financing activities 2,585,992 4,132,074
------------ ------------
Net decrease in cash (22,915) (13,537)
Cash, beginning of period 22,946 35,879
------------ ------------
Cash, end of period $ 31 $ 22,342
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 171,129 $ 90,214
Taxes paid -- 800
Debenture costs and fees 179,500 534,190
Non-cash transactions
Warrants issued in connection with secured debenture -- 1,195,290
Warrants issued in connection with convertible debentures 2,046,330 --
Warrants issued in connection with debt guarantee 15,769 546,403
Common stock issued in connection with convertible debenture 507,613 --
Common stock issued in connection with secured debenture 106,350
Common stock issued as collateral 1,100
Reclass of interest to current liability 80,313
The accompanying notes are an integral part of these financial statements
5
ADVANCED REFRACTIVE TECHNOLOGIES, 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
Advanced Refractive Technologies, Inc. ("ART", or "the Company") is a
medical device company focused on the marketing and development of ophthalmic
surgery products for use in the laser eye surgery and cataract surgery markets.
Through June 30, 2004, the Company was in the development stage, as its efforts
had been principally devoted to organizational activities, raising capital and
research and development. However, based on operating revenues generated by the
Company in the third quarter of 2004, the Company is no longer considered to be
in the development stage.
The Company was incorporated on February 2, 1996, as VisiJet, Inc., a
wholly owned subsidiary of SurgiJet, Inc. to develop and distribute medical
products based on patented waterjet-based technology licensed from SurgiJet. In
May 1999, the Company was spun off from SurgiJet through a distribution of
common stock to its shareholders, after which SurgiJet had no remaining
ownership interest in the Company.
In December 2002 VisiJet entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into VisiJet. The
merger was consummated on February 11, 2003, and immediately thereafter, VisiJet
was merged into Ponte Nossa Acquisition Corp., and the surviving company's name
was changed to "VisiJet, Inc."
In April 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company pursuant to which the Company
acquired exclusive worldwide distribution, sales and marketing rights for
ophthalmic surgical products used in LASIK refractive surgery procedures.
6
In May 2004, the Company initiated sales of the LasiTome and EpiLift
systems, both of which were obtained pursuant to a license agreement with
Gebauer Medizintechnik GmbH (Gebauer). Both systems may be used in the LASIK
vision correction surgical procedure to expose the cornea prior to application
of the excimer laser for reshaping of the cornea. The LasiTome is a mechanical
device used for cutting a corneal flap, the methodology used in traditional
LASIK procedures. The EpiLift system provides the LASIK surgeon with an
alternative methodology for exposing the cornea in which the epithelium, or top
layer of the eye, is separated in an intact sheet of tissue, and then returned
to its original position for healing following the application of the laser.
Initial sales of the EpiLift and LasiTome systems were in Europe and
certain countries in which the products had received required regulatory
clearance for marketing. Marketing of the EpiLift System in the United States
began in September 2004, following receipt of 510(K) clearance for marketing
from the United States Food and Drug Administration ("FDA"). Revenues from both
the EpiLift and LasiTome Systems are generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
In October 2005, the Company terminated the license agreement with
Gebauer and discontinued sales of the LasiTome and EpiLift systems. Under the
terms of the termination agreement, inventory was returned to Gebauer and unpaid
invoices canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement.
The Company also has two ophthalmic surgery products under development
utilizing proprietary waterjet technology. The first is Pulsatome, a device
designed for removal of cataracts using a pulsating stream of saline solution.
The second is Hydrokeratome, a device that uses a high-pressure micro beam of
water to cut a corneal flap during LASIK surgery. Both of these products require
the successful completion of development and testing and receipt of 510(K)
clearance from FDA prior to market introduction.
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.
7
GOING CONCERN
The accompanying consolidated financial statements have been prepared
using the going concern basis of accounting, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
For the year ended December 31, 2004, the Company's audited financial statements
included a "going concern" qualification from its independent auditors due to
the Company's losses accumulated during the development stage and lack of
working capital.
During the nine months ending September 30, 2005, the Company incurred
net losses of $10,405,840. The Company's future capital requirements will depend
on many factors, including but not limited to the Company's ability to
successfully market and generate operating revenue through product sales, its
ability to finalize development and successfully market its waterjet technology,
its on-going operational expenses and overall product development costs,
including the cost of clinical trials, and competing technological and market
developments.
To address the going concern issue, the Company has continued to raise
operating capital through private placements of debt and equity securities, and
is currently in discussions with several parties regarding additional financing
arrangements. 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.
While the Company believes that the additional financing arrangements
will be completed, there can be no assurance that new financing will be
completed or that the proceeds from new financing will be sufficient for the
Company to meet its contractual obligations and on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE COMPANY
Advanced Refractive Technologies, Inc. as described in the merger and
history segment above, was in the development stage through December 31, 2003.
The year 2004 is the first year during which the Company is considered an
operating company and is no longer in the development stage.
REVENUE RECOGNITION
Revenue from product sales relates to sales of ophthalmic surgical
products pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004. Revenue from such sales is recognized when the earnings
process is complete, as evidenced by an agreement with the customer, transfer of
title and acceptance, a firm price and probable collection.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Certain corporate overhead expenses, such as professional fees, salaries, rent
and travel are allocated to research and development based on estimates made by
management.
INVENTORY
Inventory is valued at lower of cost or market. Reserves for
obsolescence or slow moving inventory are recorded when such conditions are
identified. As of September 30, 2005 no such reserves were considered necessary.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts and records an allowance for
doubtful accounts based on a specific identification basis of those accounts
that they consider to be uncollectible. As of September 30, 2005, no allowance
for doubtful accounts was considered necessary.
8
MARKETABLE SECURITIES
Investments in available-for-sale securities are accounted for in
accordance with Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("FAS") 115 "Accounting for Certain Investments
in Debt and Equity Securities". In accordance with FAS 115, the securities are
stated at their fair market value and any difference between cost and market
value is recorded as an unrealized gain or loss classified as a separate
component of stockholders' equity - accumulated other comprehensive income.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
In accordance to FASB Statement of Financial Accounting Standards
("SFAS") 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity", financial instruments with mandatory redemption
rights are to be recorded as liabilities unless the redemption is to occur upon
the liquidation or termination of the issuer. SFAS 150 also specifies that a
financial instrument that embodies a conditional obligation is based solely or
predominantly on variations inversely related to changes in the fair value of
the issuer's equity shares. Based on these characteristics, the Company has
recorded the Preferred Series A shares as a long term liability on the balance
sheet. See Note 12, Preferred Series A Shares.
EVALUATION OF BENEFICIAL CONVERSION FEATURE IN DEBENTURES
In accordance with Emerging Issues Task Force ("EITF") Issue 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjusted Conversion Rights", as amended by EITF 00-27, we must
evaluate the potential effect of any beneficial conversion in terms related to
convertible instruments such as convertible debt or convertible preferred stock.
Valuation of the benefit is determined based upon various factors including the
valuation of equity instruments, such as warrants that may have been issued with
convertible instruments, conversion terms, and the value of the instruments to
which the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the partially
subjective nature of the valuation techniques.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS 130, "Reporting of
Comprehensive Income", which established the standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders. The Company recorded a comprehensive loss that was incurred as a
result of the write down to market of the marketable securities on December 31,
2004. Please review Notes 11 and 12 for more detail on this transaction.
FOREIGN CURRENCY TRANSACTIONS
The Company uses the U.S. dollar as the reporting and functional
currency for its financial statements. Transaction gains and losses are the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. Transactions that are denominated in other
currencies are recorded using the exchange rate in effect on the date of the
transaction. Transaction adjustments arising from such are re-measured and
included in the determination of net (loss) income.
STOCK-BASED COMPENSATION
As of September 30, 2005, a total of 2,265,000 options to purchase
shares of the Company's common stock were outstanding pursuant to the 2003 Plan.
The following table summarizes information regarding stock options
outstanding at September 30, 2005:
Weighted
Number of Average Exercisable
Shares Exercise Price Shares
------ -------------- ------
Outstanding at December 31, 2004 2,470,000 $ 0.73 550,000
Granted -- -- --
Forfeited (145,000) 0.40 --
Forfeited (60,000) 1.10 --
Outstanding at September 30, 2005 2,265,000 $ 0.72 550,000
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
and nine months ended September 30, 2005 and 2004 would have been as follows:
For the Three Months Ended For the Nine Months Ended
September 30 September 30
----------------------------- ---------------- ----------------- ---------------- ---------------
2005 2004 2005 2004
----------------------------- ---------------- ----------------- ---------------- ---------------
Net loss as reported (3,451,815) (1,774,001) (10,405,840) (8,420,653)
----------------------------- ---------------- ----------------- ---------------- ---------------
SFAS No. 123 effect (65,984) (84,499) (197,953) (253,498)
----------------------------- ---------------- ----------------- ---------------- ---------------
Pro forma net loss (3,517,799) (1,858,500) (10,603,794) (8,674,151)
----------------------------- ---------------- ----------------- ---------------- ---------------
Loss per share, basic and (.09) (0.06) (0.32) (0.32)
diluted as reported
----------------------------- ---------------- ----------------- ---------------- ---------------
Pro forma (.10) (0.06) (0.33) (0.32)
----------------------------- ---------------- ----------------- ---------------- ---------------
Basic and diluted weighed 36,468,868 29,429,663 32,295,455 26,069,227
average shares outstanding
----------------------------- ---------------- ----------------- ---------------- ---------------
The following table summarizes information regarding stock options
outstanding at September 30, 2005:
Weighted
Number of Average Exercisable
Shares Exercise Price Shares
------ -------------- ------
Outstanding at December 31, 2004 2,470,000 $ 0.73 550,000
Granted -- -- --
Forfeited (145,000) 0.40 --
Forfeited (60,000) 1.10 --
Outstanding at September 30, 2005 2,265,000 $ 0.72 550,000
DEPRECIATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three to seven
years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
10
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS
No.128,"EARNINGS PER SHARE," and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 98. Accordingly, basic loss per share is
computed using the weighted average number of common shares and diluted loss per
share are computed based on the weighted average number of common shares and all
common equivalent shares outstanding during the period in which they are
dilutive. Common equivalent shares consist of shares issuable upon the exercise
of stock options, using the treasury stock method, or warrants; common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements of
the prior year in order to conform to current year's presentation.
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.
11
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 June 30, 2005 and
December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Completed units and disposable supplies $ -- $ 265,197
Demonstration units 211,343 193,408
Clinical Units 164,385 175,825
------------ ------------
$ 375,728 $ 634,430
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2005
and December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Computer and test equipment $ 98,196 $ 98,196
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
Leasehold improvements 30,229 --
------------ ------------
208,932 178,703
Less: accumulated depreciation (120,856) (90,905)
------------ ------------
$ 88,076 $ 87,798
============ ============
Depreciation expense for the nine months ended September 30, 2005 and
2004 was $29,951 and $23,529, respectively.
NOTE 5 - DISTRIBUTION AND PATENT AGREEMENTS
During 2003, the Company entered into a patent license agreement with
the inventor of a patented technology through which the Company obtained
exclusive worldwide rights for all medical applications for the technology that
provides for the sterile flow of fluid through a surgical water jet apparatus.
The purchase price of the license has been capitalized and is being amortized on
a straight-line basis over the remaining life of the patent. The license
agreement provides for royalty payments based on the sale of products utilizing
licensed technology and for minimum annual royalty payments.
In May 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company ("licensor") pursuant to which the
Company acquired exclusive worldwide distribution, sales and marketing rights
for certain ophthalmic surgical products used in LASIK refractive surgery
procedures.
The Company capitalized a total of $1,901,400 in connection with this
agreement based on non-refundable cash license fee paid, plus the fair market
value of 750,000 shares of common stock issued to the licensor, as consideration
under the agreement. The total capitalized amount is being amortized on a
straight-line basis over the term of the agreement.
In October 2005, the Company terminated the distribution agreement and
expensed the remaining capitalized balance during the quarter ending September
30, 2005.
12
Distribution and patent agreements consist of the following at
September 30, 2005 and December 31, 2004:
September 30, December 31,
2005 2004
------------ ------------
Distribution agreements $ -- $ 1,901,400
Patent agreements 100,000 100,000
Less: accumulated amortization (19,291) (259,387)
------------ ------------
$ 80,709 $ 1,742,013
============ ============
Amortization expense for the three months ended September 30, 2004 was
$97,433.
In connection with the patent agreements, the Company expects to record
the following amortization expense over the next five years:
Fiscal Year Ended Amortization Total
----------------- ------------------
12/31/05 9,449
12/31/06 9,449
12/31/07 9,449
12/31/08 9,449
12/31/09 9,449
-------------------
Total 47,245
====================
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2005 and
December 31 2004:
September 30, December 31,
2005 2004
------------ ------------
Payroll and related taxes $ 586,383 $ 336,695
Consulting fees 482,273 375,000
Litigation settlement fees 129,669 209,669
Other accruals 24,239 122,152
------------ ------------
$ 1,222,564 $ 1,043,516
============ ============
Note 7 - CONVERTIBLE DEBENTURES
On January 14, 2005, the Company entered into convertible debenture
agreements with Renn Capital Group, Inc. and a group of investment funds,
several of which were already holders of securities issued by the Company, under
which the Investors could purchase up to $8,195,500 in principal amount of
convertible debentures from the Registrant. The Convertible Debentures are
convertible into Common Stock of the Company at a rate of $.35 per share,
subject to anti-dilution adjustments. The final purchase price consisted of cash
of $4,720,000 and the exchange of $2,975,000 in previously issued convertible
debentures or an aggregate total of $7,695,000.
In connection with the transaction the Registrant also issued to the
Investors warrants to purchase 8,967,855 shares of common Stock and canceling
1,595,238 of previously issued warrants associated with the October Security
Agreement, or a net of 7,372,617 warrants, at an exercise price of $.40 per
share. The warrants expire on the fifth anniversary of the date of issuance.
Pursuant to an Amended and Restated Security Agreement, the Company
granted the Investors a security interest in substantially all the assets of the
Company. The Amended and Restated Security Agreement replaces the Security
Agreement entered into October 14, 2004 between the Company and certain of the
investors. Also, pursuant to an Amended and Restated Registration Rights
Agreement, the Company granted the Investors certain registration rights with
respect to the shares of Common Stock issued in the transaction as well as the
shares of Common Stock issuable upon conversion of the Convertible Debentures
and upon exercise of the Warrants. The Amended and Restated Registration Rights
Agreement replaces the Registration Rights Agreement entered into on October 5,
2004 between the Company and certain of the investors.
13
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 June 24, 2005, the Company revised the effective conversion
price for the debentures and any and all warrants in the January 2005 financing
transaction at a price of $.095 per share. The price was above the closing stock
price thus no additional beneficial conversion was recorded.
During the nine months ending September 30, 2005, the Company recorded
total interest expense of $728,999 in connection with the debenture debt. Of
this total, $306,254 resulted from the non-cash amortization of debt discount
recorded in connection with loan fees and the value of stock and warrants issued
to note holders, and $422,746 resulted from interest accrued during the period
on the outstanding principal balance. As of September 30, 2005, the balance on
the accrued interest was $423,156.
CONVERTIBLE DEBENTURE AGREEMENTS - AMENDMENTS
In January 2005, in connection with the Convertible Debenture
Agreements entered into in October 2004, the Company agreed to modify certain
terms and conditions included in convertible debenture agreements with an
aggregate principal balance of $2,850,000 entered into in June, July and October
2004. The amended debenture agreements with Bushido and Bridges & Pipes were
replaced with new convertible debenture agreements in order to conform the terms
of these agreements to the terms of new convertible debenture agreements with an
aggregate principal balance of $7,695,000 entered into in January 2005, as
described above. Under the replacement agreements, the maturity dates of the
debentures were extended to January 14, 2015, and other principal terms (i.e.
interest rate, conversion price, warrants issued and warrant exercise price) are
the same as in the amended agreements described above.
During the 3 months ending September 30, 2005, debentures with a
principal balance of $506,000 were tendered for conversion to common stock of
the Company under the conversion terms of the agreement.
14
As of September 30, 2005 and December 31, 2004, convertible debenture
debt balances consists of the following:
Current:
September 30, December 31,
2005 2004
------------ ------------
Convertible debenture $ 7,189,000 $ 1,300,000
Convertible debenture discount (3,762,324) (402,345)
------------ ------------
Convertible debenture - net $ 3,426,676 $ 897,655
============ ============
Long Term:
September 30, December 31,
2005 2004
------------ ------------
Convertible debenture $ -- $ 2,975,000
Convertible debenture discount -- (1,641,399)
------------ ------------
Convertible debenture - net $ -- $ 1,333,601
============ ============
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
In October 1998, the Company issued a demand promissory note in the
amount of $400,000, plus interest at a variable rate, based on the prime rate to
of SurgiJet, Inc. ("SurgiJet"), VisiJet's former parent company. In connection
with the Merger Agreement, an amendment to the note agreement was executed in
February 2003 under which the accrual of additional interest was halted, and
scheduled principal and interest payments were established.
During 2002, the Company entered into a promissory note with Lance
Doherty, a principal of SurgiJet and shareholder of the Company, for a principal
sum of $19,000 plus interest at the rate of 10% per annum. At September 30, 2005
the outstanding principal balance of this note was $19,000.
During 2003 the Company initiated litigation against SurgiJet,
challenging the validity of the SurgiJet Note, as well as other notes and
liabilities to DentaJet, Lance Doherty and Rex Doherty.
The parties to the litigation entered into a settlement agreement
pursuant to which revised note payable amounts and payment schedules were agreed
upon. Based on this agreement, outstanding principal and accrued interest
balances related to these notes have been adjusted to reflect the agreed upon
amounts, and as a result, the balances at September 30, 2005 and December 31,
2004 are as follows:
September 30, 2005 December 31, 2004
Principal Interest Principal Interest
--------- --------- --------- ---------
SurgiJet $ 495,242 $ 17,807 $ 549,774 $ 14,347
Lance Doherty 19,000 8,225 19,000 6,293
--------- --------- --------- ---------
Total $ 514,242 $ 26,032 $ 568,774 $ 20,640
========= ========= ========= =========
During the period ending September 30, 2005, the Company paid $54,532
and $25,468 of principal and interest, respectively.
FINANCIAL ENTREPRENEURS, INC. ("FEI")
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between PNAC and FEI, a
significant shareholder of the Company, during 2002. The note bears interest at
an annual rate of 7.5%, and matures on April 3, 2009. Upon consummation of the
merger in February 2003, the outstanding principal and accrued interest payable
balances were $206,649 and $11,462, respectively. 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
September 30, 2005, the outstanding principal and accrued interest payable on
this note were $265,990 and $69,976, respectively.
15
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
In October 2005, the Company increased the authorized shares to
750,000,000 from 100,000,000.
During the first nine months of 2005, the Company issued a total of
19,427,165 shares of common stock, of which 1,039,370 common stock shares were
issued in conjunction with the January financing. The value of the common stock
on the date of issue was $0.54 resulting in the recording a long term debenture
discount of $561,260. The Company cancelled 134,118 of common shares that were
issued in connection with previous financing reducing the debenture discount by
$53,647. Common stock shares, totaling 750,000 shares that were borrowed and
used as collateral in 2004 were returned. The Company issued 331,000 common
stock shares to replace the remaining borrowed shares that were used by lenders
to satisfy principal and interest payments. The company issued 13,178,427 free
trading shares as compensation for services resulting in the recording of
$439,156 of expenses. The Company also cancelled 89,286 shares of common stock
that were issued for services associated with debt financing recording a
decrease in expenses of $36,631. During the three months ended September 30,
2005, the Company issued 5,350,173 share of common stock resulting from the
election to convert debentures with a principal balance of $506,000.
WARRANT ACTIVITY
During the first nine months of 2005, the Company issued 5-year
warrants to purchase an aggregate of 7,372,617 shares of its common stock at an
average exercise price of $0.40 per share.
In connection with warrants issued during this period, the Company
recorded debt discount totaling $2,012,211 related to warrants issued in
connection with convertible debenture agreements completed during this quarter
and prior year financing. All amounts recorded in connection with these warrants
were based on the fair value of the warrants issued using a Black-Scholes model
valuation.
The Company cancelled 829,295 warrants originally issued to purchase
common stock at $5.00 per share and replaced them with warrants issued to
purchase common stock at $0.70 per share. This resulted in a debt guarantee
expense of $15,769.
The following table summarizes the number of outstanding common stock
warrants as of September 30, 2005:
Weighted Average Exercise
Number Price
----------- --------
Outstanding at December 31, 2004 20,832,718 $ 1.64
Granted 7,372,617 0.40
Forfeited -- --
Exercised -- --
----------- --------
Outstanding at March 31, 2005 28,205,335 $ 1.16
Granted 829,295 0.70
Forfeited (829,295) 5.00
Exercised -- --
----------- --------
Outstanding at June 30, 2005 28,205,335 $ 1.04
Granted -- --
Forfeited -- --
Exercised -- --
----------- --------
Outstanding at September 30, 2005 28,205,335 $ 1.04
=========== ========
16
The following table summarizes additional information with respect to
outstanding common stock warrants at September 30, 2005:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ----------- ------------------- -----------
$0.40 13,906,188 53 13,906,188
$0.62 700,000 48 700,000
$0.65 20,000 45 20,000
$0.70 829,295 28 829,295
$0.75 375,000 51 375,000
$.090 86,667 39 86,667
$1.00 6,326,480 32 6,326,480
$1.23 45,000 28 45,000
$1.50 30,000 13 30,000
$2.25 4,441,000 36 4,441,000
$2.50 505,000 25 505,000
$3.00 50,000 28 50,000
$5.00 890,705 28 890,705
----------- -----------
28,205,335 28,205,335
=========== ===========
NOTE 10 - SERIES A PREFERRED SHARES
In August 2004, the Company entered into an agreement with Langley Park
Investments PLC ("Langley"), a corporation organized under the laws of England
and Wales, in which the Company issued convertible preferred stock in exchange
for "ordinary" shares of Langley stock. In October 2004, the Company issued
450,000 shares of Series A Convertible Preferred Stock ("Series A shares"), with
a stated value of $10 per share and a redemption value of $4,500,000, to Langley
in exchange for 2,477,974 newly issued ordinary shares of Langley with an
initial agreed upon value of L (pound) 1.00 per share. The Company was charged a
commission in conjunction with the sale equal to 10% of the Langley shares
leaving 2,230,177 shares available to the Company. Consummation of the
transaction was subject to admission of the Langley shares to the London Stock
Exchange ("LSE"), which occurred on September 30, 2004 and the initiation of
trading on the LSE that began on October 8, 2004. The Series A shares were
recorded at a total value of $1,536,653 based on the fair value of the Langley
shares on October 8, 2004. On December 31, 2004, the market value of the shares
decreased to $590,980. As the Company has classified the shares as an
available-for-sale marketable security, the Company recorded an unrealized loss
of $792,009, as an accumulated comprehensive loss which is a separate component
of equity.
In accordance to SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", financial
instruments with mandatory redemption rights are to be recorded as liabilities
unless the redemption is to occur upon the liquidation or termination of the
issuer. SFAS 150 also specifies that a financial instrument that embodies a
conditional obligation that is based on settlement by the issuance of a variable
number of the issuer's equity shares associated with a fixed monetary amount is
required to be classified as a liability. Based on characteristics of the
agreement as described above, the Company has recorded the Preferred Series A
shares as a long term liability on the balance sheet.
During the first quarter of 2005, the Company sold all of the Langley
shares, receiving gross proceeds of $664,639. Fees associated with these
transactions totaled $3,619 providing a net realized gain of $70,040. Also, a
reclassification of the other comprehensive income was recorded against
additional paid in capital.
NOTE 11 - SETTLEMENT AGREEMENTS AND LOAN PAYABLE
In November 2002, the Company entered into settlement agreements with
an officer and an employee related to accrued but unpaid fees for consulting
services rendered by them prior to the consummation of the Merger in the
aggregate of $700,000. Under the agreements a total of $450,000 was converted
into 211,267 shares of the Company's common stock, during 2003, based upon the
closing price on the effective date the Merger Agreement. The balance owed of
$250,000 was converted into two notes payable that bear interest at an annual
rate of 3.5% and provide for the principal to be paid over equal installments
for the duration of the loans. At September 30, 2005 the aggregate balance on
the note was $54,863 and the respective accrued interest payable balance was
$11,876.
17
NOTE 12 - RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2005, the Company recorded
$22,500 of consulting fees and expenses to a corporation owned by a director of
the Company. As of September 30, 2005, $36,850 related to this agreement was
included in accounts payable.
During 2003, the Company entered a consulting agreement with a
corporation controlled by two shareholders, each of whom own beneficially in
excess of 5% of the outstanding shares of the Company's common stock. Pursuant
to this agreement, entered into in April 2003, the consultants are entitled to
receive a monthly fee of $15,000 through March 2005, provided however that
payment of accrued fees is not payable by the Company until such time as the
Company has a minimum cash balance of $2.5 million. At September 30, 2005, a
total of $360,000 in fees recorded pursuant to this agreement is included in
accrued expenses.
In January 2004, the Company entered into a new consulting agreement
with Richard H. Keates, M.D., a director of the Company, increasing the monthly
retainer to $15,000 per month plus reimbursement of business expenses incurred.
Through September 30, 2005, consulting fees and related expenses totaling
$90,000 and $15,757, respectively, were recorded pursuant to this agreement, of
which $61,093 is included in accounts payable at September 30, 2005.
NOTE 13 - SECURITY LENDING AGREEMENT
In April 2004, the Company and a corporation that beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company entered
into an agreement pursuant to which the corporation agreed to make available 3
million free-trading shares of the Company's common stock, for use by the
Company as collateral in subsequent financing transactions. In accordance with
the terms of this agreement, the Company is obligated to pay interest on the
value of shares borrowed (assuming a value of $1.00 per share) based on the
LIBOR rate plus 50 basis points, and must return the borrowed shares by November
30, 2004. In the event of default, the Company has agreed to file a Registration
Statement and to return any shares that had not previously been returned by the
due date.
In May 2004, the Company borrowed a total of 1,550,000 shares of the
outstanding common stock in connection with collateral requirements of
convertible agreements entered into during that period. In January 2005, the
Company received a one-year extension, to November 30, 2005, for the date by
which any borrowed shares must be returned.
As of September 30, 2005, the Company had returned all borrowed shares
pursuant to this agreement, and had accrued interest expense totaling $26,430.
NOTE 14 - SUBSEQUENT EVENTS
On October 13, 2005, the Company entered into a settlement agreement
with Gebauer Medizintechnik GmbH ("Gebauer") in which the parties mutually
released each other from any liability. In addition, the parties agreed that the
Manufacturing Supply and Distribution Agreement previously entered into by the
parties on April 27, 2004 was terminated, and that there were no further
obligations by either party under that Agreement. In accordance with the terms
of the settlement, finished goods inventory of $1,916,215, accounts payable to
Gebauer of $846,781 and the net capitalized value of the distribution agreement
of $1,464,078 were written off during the three months ending September 30,
2005. The net effect of the settlement resulted in a net loss of $2,533,512 as
follows:
Finished goods inventory write off $ 1,916,215
Less: liability to Gebauer (846,781)
Impairment of capitalized distribution agreement 1,464,078
-------------
$ 2,533,512
=============
18
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
Advanced Refractive Technologies, Inc. (the "Company" or "ART"),
formerly known as Ponte Nossa Acquisition Corp ("PNAC")), is a Delaware
corporation engaged in the research and development of surgical equipment for
use in the field of ophthalmology based on proprietary waterjet technology.
The Company was incorporated in California on February 2, 1996 as a
wholly owned subsidiary of SurgiJet, Inc ("SurgiJet"), a developer of waterjet
technology for a variety of medical and dental applications. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
On February 11, 2003 the Company completed a merger with PNAC, a
Delaware corporation incorporated in 1997. Pursuant to the merger agreement
between VisiJet and PNAC (the "Merger Agreement"), the Company merged into PNAC.
Since this transaction resulted in the shareholders of VisiJet acquiring a
majority of the outstanding shares of PNAC, for financial reporting purposes the
business combination was accounted for as a recapitalization of PNAC (a reverse
acquisition with the Company as the accounting acquirer). Subsequently, PNAC
changed its name to VisiJet, Inc.
During the February 2005 Board of Directors' meeting, the directors
agreed to change the name from VisiJet, Inc. to "Advanced Refractive
Technologies". A Certificate of Amendment to the Articles of Incorporation
effecting the name change was filed with the Delaware Secretary of State on July
5, 2005.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Notes to the Financial
Statements. At this stage of our development, these policies primarily address
matters of revenue and expense recognition. The Company has consistently applied
these policies in all material respects.
OVERVIEW
In May 2004, the Company initiated sales of the LasiTome and EpiLift
systems, both of which were obtained pursuant to a license agreement with
Gebauer Medizintechnik GmbH. Both systems may be used in the LASIK vision
correction surgical procedure to expose the cornea prior to application of the
excimer laser for reshaping of the cornea. The LasiTome is a mechanical device
used for cutting a corneal flap, the methodology used in traditional LASIK
procedures. The EpiLift system provides the LASIK surgeon with an alternative
methodology for exposing the cornea in which the epithelium, or top layer of the
eye, is separated in an intact sheet of tissue, and then returned to its
original position for healing following the application of the laser.
Initial sales of the EpiLift and LasiTome systems were in Europe and
certain countries in which the products had received required regulatory
clearance for marketing. Marketing of the EpiLift System in the United States
began in September 2004, following receipt of 510(K) clearance for marketing
from the United States Food and Drug Administration ("FDA"). Revenues from both
the EpiLift and LasiTome Systems are generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
In October 2005, the Company terminated the license agreement with
Gebauer and discontinued sales of the LasiTome and EpiLift systems. Under the
terms of the termination agreement, inventory was returned to Gebauer and unpaid
invoices canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement.
19
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 September 30, 2005 Compared To Three Months September 30,
2004
SALES AND COST OF SALES
The Company reported sales revenues for the quarters ending September
30, 2005 and 2004 of $92,601 and $982,567, respectively. ART 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.
Cost of goods sold for the quarters ending September 30, 2005 and 2004
was $35,726 and $456,400, respectively. Gross profit for the quarters ending
September 30, 2005 and 2004 was $56,875 and $526,167, respectively.
OPERATING EXPENSES
Operating expenses during the three months ended September 30, 2005 and
2004, decreased in 2005 to $569,072 from $1,582,983 as a result of the following
activity:
2005 2004
---------- ----------
General and Administrative $ 569,072 $1,400,569
Research and Development -- 182,414
---------- ----------
Total Operating Expenses $ 569,072 $1,582,983
========== ==========
20
The decrease in general and administrative expenses during 2005 from
the same period in 2004 was due primarily due to scale backs the company made
associated with the terminated Distribution Agreement.
The decrease in research and development expenses in the 2005 period
was due primarily to limited working capital availability.
OTHER INCOME AND EXPENSE
Other expenses during the three months ended September 30, 2005 and
2004, include interest expense of $228,728 and $388,515, and non-cash expenses
of $104,172 and $328,670 related to the amortization of debt discount,
respectively. 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 and the first six months of 2004. The loss on
the settlement of the distribution agreement reflects the non-cash charges
associated with the termination of the distribution agreement.
NET LOSS APPLICABLE TO COMMON SHARES
As a result of the above revenues and expenses, the net loss for the
three months ended September 30, 2005, increased to $3,451,815 compared to
$1,774,001 for the same period of 2004.
Nine Months Ended September 30, 2005 Compared To Nine Months September 30, 2004
SALES AND COST OF SALES
The Company reported sales revenues for the nine months ending June 30,
2005 and 2004 of $715,075 and $1,037,537, respectively. ART 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.
Cost of goods sold for the nine months ending September 30, 2005 and
2004 was $407,029 and $483,234, respectively. Gross profit for the nine months
ending September 30, 2005 and 2004 was $308,046 and $554,303 or 43% and 53%,
respectively. The gross profit was lower than normal resulting from the mix of
product sold, higher fulfillment and shipping costs.
OPERATING EXPENSES
Operating expenses during the nine months ended September 30, 2005 and
2004, decreased to $3,362,893 from $7,006,940 in 2005 as a result of the
following activity:
2005 2004
---------- ----------
General and Administrative $3,187,259 $6,415,545
Research and Development 175,634 591,395
---------- ----------
Total Operating Expenses $3,362,893 $7,006,940
========== ==========
The decrease in general and administrative expenses during 2005 from
the same period in 2004 was due primarily to approximately $2.3 million of
non-cash expenses recorded in connection with the issuance of a total of
2,475,000 shares of common stock during the period as payment for consulting
services and in connection with dispute/litigation settlements, and non-cash
expenses of $546,403 recorded in connection with the re-pricing of warrants
during the second quarter.
The decrease in research and development expenses in the 2005 period
was due primarily to limited working capital availability during the period.
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OTHER INCOME AND EXPENSE
Other expenses during the nine months ended September 30, 2005 and
2004, include interest expense of $561,875 and $1,063,414, and non-cash expenses
of $763,769 and $903,802, respectively, related to the amortization of debt
discount during the period, and $3,311,088 of non-cash interest expense for
2005. The non-cash interest expense was recorded based on the intrinsic value of
the beneficial conversion feature of convertible debt entered into during the
first quarter of 2005. Interest expense in the 2005 period increased due to an
increase in total debt outstanding. The loss of $2,533,512 on the settlement of
the distribution agreement reflects the non-cash charge associated with the
termination of the distribution agreement.
Also included in results of operations in 2005 were other income
and non-recurring gains of $26,842 and $73,659, respectively. The other income
was from a refund of taxes paid in prior periods. The realized gain was the
result of the sale of marketable securities over the stated value. The Company
sold the securities valued at $590,980 for gross proceeds of $664,639. Fees
associated with the transactions of $3,619 were recorded as expenses for the
period providing a net realized gain of $70,040.
PREFERRED STOCK ACCRETIONS
In the fourth quarter of 2004, the Company recorded a preferred stock
discount and a corresponding amount to additional paid in capital of $1,125,000.
The recorded discount resulted from the beneficial conversion that was
recognized as an undeclared dividend and will be accreted over three years or
the life of the agreement. This dividend will be reflected in the statement of
operations below the "Net loss" line as a component of "Net loss applicable to
common shareholders". As a result, an accretion of the discount of $281,250 was
recorded during the current period providing a balance of the preferred discount
of $750,000 at September 30, 2005.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
As a result of the above revenues and expenses, the net loss for the
nine months ended September 30, 2005 and 2004 was $10,405,840 and $8,420,653,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the second quarter of 2004, we did not have any products for
sale, and had not generated any revenue from sales or other operating
activities. As such, our principal source of liquidity has been the private
placement of equity securities and the issuance of notes payable and convertible
debt. Based on our history of losses and negative working capital balance, our
financial statements for the year ended December 31, 2004 included a going
concern opinion from our outside auditors, which stated there "is substantial
doubt" about our ability to continue operating as a going concern.
During the nine months ended September 30, 2005, the Company raised net
proceeds totaling $5,201,520. From the issuance of convertible debentures, the
Company raised $4,540,500 net of $179,500 of related costs, and $661,020 net of
$3,619 of related costs, from the sale of marketable securities.
During the first nine months of 2005, the Company utilized $2,578,677
to fund operating activities and $2,615,528 in 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.
22
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.
In September of 2005 the Company issued ten million shares of Common
Stock to its attorneys in Canada as collateral to secure payment of legal fees
for an action commenced by the Company in Canada. Under the pledge arrangement,
once the legal fees are paid, the shares are to be returned to the Company, at
which time they will be canceled and restored to the status of authorized but
unissued shares. The shares are reflected as outstanding shares as of September
30, 2005.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
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
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Refractive Technologies, Inc. a Delaware corporation
By: /s/ Laurence M. Schreiber
-------------------------
Laurence M. Schreiber, Secretary, Treasurer, Chief
Operating Officer
Date: December 21, 2005
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