U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT No. 2 to
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005
Commission file number 0-25611
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 33-0838660
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1062 Calle Negocio, Suite D, San Clemente, California 92673
(Address of principal executive offices)
Issuer's telephone number (949) 940-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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 [ ] No [X].
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The registrant's revenues for fiscal year 2005 were $0.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1.9 million (based on 60,188,698 shares held by
non-affiliates and a closing share price of $0.031 per share on June 2, 2006).
As of June 2, 2006, the number of shares outstanding of the registrant's Common
Stock was 240,064,625.
PART I
FORWARD LOOKING STATEMENTS
This Form 10-KSB, 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-KSB and include all statements that are not
statements of historical fact regarding intent, belief or current expectations
of the Company, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources; (ii) our financing
opportunities and plans; (iii) our continued development of our technology; (iv)
market and other trends affecting our future financial condition; (v) our growth
and operating strategy.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception; (ii)
any material inability to successfully develop our products; (iii) any adverse
effect or limitations caused by government regulations; (iv) any adverse effect
on our ability to obtain acceptable financing; (v) competitive factors; and (vi)
other risks including those identified in our other filings with the Securities
and Exchange Commission. The Company undertakes no obligation to publicly update
or revise the forward looking statements made in this Form 10-KSB to reflect
events or circumstances after the date of this Form 10-KSB or to reflect the
occurrence of unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND AND SUMMARY
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.
The Company was incorporated on February 2, 1996, as a wholly owned subsidiary
of SurgiJet, Inc. to develop and distribute medical products based on patented
waterjet-based technology licensed from SurgiJet. In May 1999, the Company was
spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
In December 2002 the Company entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into the Company. The
merger was consummated on February 11, 2003, and immediately thereafter,
VisiJet, Inc. was merged into Ponte Nossa Acquisition Corp., and the surviving
company's name was changed to "VisiJet, Inc.". It was subsequently changed to
"Advanced Refractive Technologies, Inc."
In April 2004, we entered into an exclusive license agreement with Gebauer
Medizintechnik GmbH, of Neuhausen Germany ("Gebauer"), pursuant to which we
acquired worldwide marketing, sales and distribution rights for Gebauer's LASIK
and Epi-LASIK products. In May 2004, we began marketing these products in Europe
and certain other foreign countries, where the products have received regulatory
clearance for sale, and began generating revenue from product sales during the
second quarter of 2004. In September 2004, ART began marketing the Epi-Lasik
product in the United States, following receipt of clearance for marketing from
the U.S. Food and Drug Administration.
After disputes arose with Gebauer, in October of 2005 we entered into an
agreement with Gebauer terminating the license agreement, and sold our remaining
inventory of products to CooperVision International Holding Company, LP. As a
result, we currently have no products for sale and we have no source of
revenues. We are in discussions with BioVision AG, a Swiss company, to license
its FDA approved product, the Visitome 20-10 microkeratome. In its present form,
this product can be used to perform LASIK surgery in the conventional way;
however, the product is in the process of being modified, by BioVision, so that
it can perform the epi-LASIK procedure, generally similar to the Gebauer device.
These modifications will require an additional FDA approval under rule 510(k),
which will require funding from BioVision or a potential partner to complete the
regulatory procedures. Accordingly, additional financing will be required to
complete an agreement with BioVision and gain final FDA approval for marketing
these products in the United States. We currently have no commitments for such
financing.
In addition, we are engaged in the research and development of ophthalmic
surgery products based upon applications of our proprietary waterjet technology,
designed to result in faster, safer and more efficacious laser eye and cataract
surgery. To date, these efforts have been focused on bringing to market two
products, with different applications and markets.
First is the Accupulse(R), which utilizes waterjet technology to remove the
cataractous human crystalline lens in the eye during cataract surgery. Second is
the HydroKeratome(R), a device that utilizes waterjet technology to cut the
corneal flap immediately prior to applying an excimer laser in laser eye surgery
to correct myopia, hyperopia and astigmatism.
We have also acquired the worldwide license rights to a cataract detection
device and have started preliminary research and development on this product.
Please refer to the Research and Development section of this document for
additional information on this transaction.
MARKETS
THE REFRACTIVE SURGERY MARKET
Our products assist in surgical procedures relating to the cornea. The
cornea is the clear window that provides most of the focusing power of the
vision system of the eye, as well as allowing light into the eye. The anterior
surface of the cornea is covered with a thin layer called the epithelium. The
epithelium is covered with a liquid tear film.
Physicians generally treat vision disorders by prescribing eyeglasses or
contact lenses or through ophthalmic surgery, all of which compensate for or
correct the vision error. The principal surgical techniques available to treat
vision disorders are radial keratotomy ("RK"), Photo Refractive Keratectomy
("PRK")/LASIK and Refractive Lamellar Keratoplasty ("RLK"). In RK, PRK/LASIK and
RLK, the object of the surgery is to change the shape of the anterior corneal
surface and to eliminate or reduce refractive error. An additional objective is
to minimize lens aberrations to improve visual acuity, which is not possible
with eyeglasses or contact lenses.
The refractive surgery market in its current form began in late 1995 when
the FDA approved the first excimer laser for PRK. Before 1995 refractive surgery
was conducted by various manual, non-laser techniques, the most popular of which
was RK. In RK, the surgeon uses a diamond knife to make radial incisions in the
cornea to flatten it. This technique, and others like it, is highly dependent on
the surgeon's skill, and often produces mixed results.
By contrast, in PRK utilizing the excimer laser, the computer-controlled
laser is programmed to remove the specified amount of corneal tissue with
precision, delivering a consistent outcome. In spite of its inherent accuracy
and predictability, PRK was not widely accepted by patients, because it uses the
laser to burn away the most sensitive top layers of the cornea. Patients
undergoing PRK often experienced considerable pain, and were left with a
persistent cloudiness of the cornea for days or weeks. PRK generally met the
clinical expectations of the surgeon, but failed to satisfy the patient's desire
for comfort and rapid recovery. For this and other reasons, PRK failed to attain
broad market acceptance.
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In late 1996 many ophthalmic surgeons started utilizing a new procedure,
Laser In Situ Keratomileusis ("LASIK"), which addressed many of the negative
aspects of PRK from the patient's standpoint, while preserving the accuracy of
PRK. LASIK utilizes a microkeratome, which is a mechanically driven razor to
create a flap in the surface of the cornea. After creation of the flap, the
excimer laser is used on the exposed internal tissue, called the stroma,
underneath the flap. The excimer laser emits ultraviolet light in very short,
high-energy pulses and ablates part of the corneal surface according to a
prescribed spatial pattern, changing the curvature of the anterior corneal
surface. The laser removes a predetermined amount of tissue to achieve the
desired correction, and the hinged flap is reset as closely as possible to its
original position, where it adheres to the underlying stroma. The adherence
increases over a period of many months. The patient's vision is significantly
improved within minutes of surgery.
Because the laser energy is used on the less sensitive inner tissue of the
cornea, the patient experiences very little pain after surgery and there is
generally no clouding of the corneal surface. The patient is usually able to
return to normal function the next day with immediate vision improvement.
Recently, a new refractive surgery technique, referred to as Epi-LASIK, was
introduced. The Epi-LASIK procedure utilizes an automated device to mechanically
separate the epithelium, or outer layer of the cornea, in a sheath,
approximately 30 microns thick. This is in contrast to cutting into the cornea
using a microkeratome blade and creating a flap, from 120 - 180 microns thick,
as is done in the traditional LASIK procedure. Once the epithelium has been
separated, the curvature of the corneal surface is changed to predetermined
specifications using an excimer laser. Following the laser procedure, the
epithelium sheath is then returned to its original position.
THE CATARACT SURGERY MARKET
Currently, the majority of cataract surgical procedures are performed using
an ultrasonic phacoemulsifier device. The phaco, as it is commonly called,
utilizes an ultrasonic generator which vibrates the tip of the phaco hand piece
40,000 times per second. When the tip is introduced into the eye and placed in
contact with the cataractous lens, the lens is gradually reduced to smaller
pieces until it can be aspirated out of the eye.
PRODUCTS
WATERJET TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT
Waterjet technology is an established method for precision cutting of
materials in a variety of industrial applications. It uses the principle of
pressurizing water to extremely high levels, and allowing the water to escape in
a controlled manner through a very small opening, or orifice. Water jets use the
high pressure beam of water exiting the orifice to cut various materials,
including tile, wood, plastic, metal, and stone. In general, industrial
applications of waterjet technology are used in place of a laser or other device
when the "cut" needs to be quicker, cleaner, and with minimum distortion and
temperature increase.
The technology uses a pneumatic-hydraulic pressure intensifier to
produce a collimated high pressure water beam that is approximately the diameter
of a human hair. This self-cleaning, eversharp "hydro-laser" can cut through
tissue at 12mm (.5 inch) per second. The hydraulics are controlled by an
embedded central processing unit with displays, gauges, controls, aspiration and
irrigation fluidics familiar to ophthalmic surgeons.
ART is currently developing two ophthalmic surgical products utilizing its
proprietary waterjet technology. The first is Accupulse(R), a device that uses
pulsed waterjet technology to remove cataracts, and the second is
Hydrokeratome(R), a device that uses a high-pressure micro beam of water to cut
a corneal flap during LASIK surgery. Although our waterjet based products under
development have different applications, they share certain basic
characteristics. Each of the waterjet products consists of a modular console
with an intensifier and a hand piece. The modular unit is attached to a delivery
tube, which is in turn attached to a hand piece. The hand piece delivers the
water jet to the tissue and its integral aspirator removes any debris tissue and
water through a disposable tube that returns to the console.
ACCUPULSE(R) CATARACT EMULSIFIER. The Accupulse(R) Cataract Emulsifier is
an emulsification device designed for the quick and safe removal of the
cataractous human crystalline lens in the eye, a necessary procedure before
installing a new intraocular lens ("IOL"). The device creates a pulsating stream
of saline solution, and the impact from the pulsating fluid emulsifies the
cataractous human lens and breaks the lens into small pieces. The Accupulse
simultaneously aspirates the emulsified tissue and removes it from the interior
of the eye.
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The Accupulse requires minimal technical skill, as it functions like a
hydraulic eraser or paint brush. No sculpting or lens elevation or rotation is
necessary. The balanced irrigation/aspiration fluidics complement the embedded
CPU controlled micro pulses. The foot switch initiates the mode activity
selected by surgeon for the balanced and ergonomically shaped hand piece.
Based on the experience of our management team and consultants in the
ophthalmic industry, we believe that the waterjet platform of the Accupulse will
be easier to learn to use and will require less skill than that required by
current ultrasound phaco emulsification devices. The Company also expects that
Accupulse and its disposable package will be priced in the low range of current
ultrasound devices, which will make it attractive in underdeveloped markets, and
also attractive in the U.S. and other nations where cost containment is
critical.
HYDROKERATOME(R) CORNEAL CUTTING DEVICE. The HydroKeratome(R) is a corneal
cutting device for use in the LASIK procedure. The HydroKeratome works by using
a high-pressure micro beam of water to force a blunt dissection of tissue in the
path of the water beam. The HydroKeratome uses an embedded CPU controlled
pneumatic-hydraulic pressure intensifier to make the corneal flap. The suction
ring and applanation plate on the hand piece allow holding the eye centered
while the corneal flap is cut underneath the applanation plate. The water jet
traverses perpendicular to the visual axis, driven by a precision miniature
Swiss motor with gear box and encoder. A foot switch controls the start of the
transverse water jet motion, and the travel distance pre-programmed by the
surgeon stops the travel and shuts off the water jet beam. Approximate travel
time is one-half second. The HydroKeratome is designed to address many of the
problems that are common with mechanical "blade" microkeratomes, such as poor
visualization, inconsistent thickness of flaps, hazing, loose flaps, off center
cuts, and lashes caught in gears.
Development activities for both Accupulse and Hydrokeratome are subject to
significant risks and uncertainties. These risks and uncertainties include, but
are not limited to, our ability to obtain sufficient funding on a timely basis,
unanticipated failure of required testing activities, unexpected delays in
completion of milestones and inability to obtain, or delays in obtaining,
required marketing clearance from the U.S. FDA.
COMPETITION
Our Hydrokeratome product, if successfully developed and cleared for
marketing, will provide an additional alternative for creating a corneal flap,
using a high-pressure micro beam of water, instead of a metal blade, to expose
the corneal tissue prior to the application of the excimer laser.
Our Accupulse product, if successfully developed and cleared for marketing,
will compete in the cataract emulsification market.
COMPETITION IN CREATING THE CORNEAL FLAP
EPI-LASIK COMPANIES - Epi-LASIK devices were first introduced to the
marketplace in 2004, and have not yet captured a significant share of the
corneal flap market. Currently, we are aware of only one company, Norwood Abbey,
with an Epi-LASIK product on the market. In addition, we are aware of two other
Epi-LASIK products under development using similar technology that may become
competition in the future if development efforts are completed and regulatory
clearance is received.
MICROKERATOME COMPANIES - The corneal flap market is currently dominated by
microkeratome devices which maintain approximately 89% of the total market.
There are a number of companies that manufacture and or supply microkeratomes
including Bausch & Lomb, Moria, Advanced Medical Optics and Nidek. All of these
companies have significantly greater financial resources, greater name
recognition, larger product offerings and customer bases and longer operating
histories than ART.
LASER COMPANIES - We are aware of one company, Intralase, that has
developed and markets a device for creating a corneal flap utilizing laser
technology that has captured approximately 11% of the total market.
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COMPETITION FROM NEW TECHNOLOGIES
The medical device industry for ophthalmologic surgery products is highly
competitive. Many other companies are engaged in research and development
activities, and many of these have substantially greater financial, technical
and human resources than ART. As such, they may be better equipped to develop,
manufacture and market their technologies. Accordingly, we also face competition
in the future from new products and technologies that may provide safer and more
cost effective alternatives to our products, or that may render our products
obsolete.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on completion of final
product development and testing and securing of regulatory approval for our two
internally developed products, Hydrokeratome and Accupulse. During the fiscal
years ended December 31, 2005 and 2004 we spent approximately $103,088 and
$416,203, respectively, on research and development activities.
In December 2005 the Company acquired OptiMetrix Technologies, Inc. (OTI),
a wholly owned subsidiary of UTEK Corporation (UTEK). OTI owns technology
licensed from Los Alamos National Laboratory (LANL), operated by the University
of California for the National Security Administration of the U.S. Department of
Energy. The technology is designed to determine optical aging, optical metrics
and the presence of cataracts and other optical diseases. The Company plans to
conduct the necessary research and development of these technologies to bring
the product to market during the first quarter of 2008.
Consideration to UTEK was 100,000 shares of Series B convertible stock in
the Company, of which 2,000 shares went to the original developer of the
technology.
In addition, the Company is commencing research and development on a
cataract detection device.
MANUFACTURING
We plan to outsource manufacturing for our internally developed products to
an ISO 9001 approved local contract manufacturing facility. This contractor will
purchase and stock parts, assemble, test and burn-in units, and will stock
finished goods and ship as required from a bonded warehouse.
GOVERNMENT REGULATION
ART's products are medical devices. As such, we are subject to the relevant
provisions and regulations of the Federal Food, Drug and Cosmetic Act, under
which the United States Food and Drug Administration ("FDA") regulates the
manufacture, labeling, distribution, and promotion of medical devices in the
United States. The Act provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA for marketing. There are two review
procedures by which medical devices can receive such approval or clearance. Some
products may qualify for clearance under a 510(k) notification. Under the 510(k)
procedure, the manufacturer submits to the FDA a pre-market notification that it
intends to begin marketing its product. The notification must demonstrate that
the product is substantially equivalent to another legally marketed product
(i.e., it has the same intended use, is as safe and effective, and does not
raise different questions of safety and effectiveness than does a legally
marketed device).
A successful 510(k) notification results in the issuance of a letter from
the FDA in which the FDA acknowledges the substantial equivalence of the
reviewed device to a legally marketed device and clears the reviewed device for
marketing.
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FDA STATUS OF CURRENT PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
HydroKeratome - We have received successful 510(k) notification with
respect to our initial filing for the HydroKeratome, and have filed a 510(k)
submission with the FDA for upgrades to the product. Before commencement of
marketing the HydroKeratome, we must obtain 510(k) approval from the FDA for the
product enhancements. We are currently addressing issues raised by the FDA in
our product enhancement submission for HydroKeratome, and hope to file our
response during the first quarter of 2008.
Accupulse - Based on successful completion of required product development
and testing issues, we anticipate filing a 510(k) application for marketing
clearance of Accupulse in the first quarter of 2007.
In addition to laws and regulations enforced by the FDA, our products may
also be subject to labeling laws and regulations enforced by the United States
Federal Trade Commission ("FTC"). Any additional requirements related to FTC
laws and regulations will be addressed and monitored by the Company's Regulatory
Affairs department, although we do not expect that any such laws and/or
regulations will have a significant impact on our products.
MARKETING
We plan to distribute our products internationally through a series of
agreements with distribution companies in major countries that handle other
American and European manufactured ophthalmic products, and that are familiar
with applicable local government rules and regulations, as well as with the
customer base and key ophthalmic surgeons in the region.
Although specifics vary based on countries and territories covered, our
international distribution agreements generally provide for a specified term and
exclusive territory, fixed sales prices from ART to the distributor and minimum
purchase quantity requirements for the distributor.
Distribution of our products in countries other than the United States may
be subject to regulation in those countries. In some countries, the regulations
governing such distribution are less burdensome than in the United States, and
we may pursue marketing our products in such countries prior to receiving
permission to market from the FDA in the United States. We will endeavor to
obtain the necessary government approvals in those foreign countries where we
decide to manufacture, market and sell our products.
PATENTS AND TRADEMARKS
On September 17, 2003, we entered into a license agreement with Robert M.
Campbell, Jr., M.D., pursuant to which the Company obtained exclusive worldwide
rights for all medical applications for a patented technology invented by Dr.
Campbell that provides for the sterile flow of fluid through a surgical water
jet apparatus. The license agreement provides for a royalty of 6% on revenues
from products utilizing licensed technology and is subject to a minimum royalty
of $24,000 per year.
EMPLOYEES
As of December 31, 2005 we employ 6 persons full time. Of these employees,
three are in corporate management and legal affairs, and one each in research,
product development, customer relations and accounting. None of our employees
are covered by collective bargaining agreements and we believe that our
relationship with our employees is good. Any future increase in the number of
employees will depend upon the growth of our business, the successful
commercialization of our products and on our obtaining sufficient funding.
RISK FACTORS
ART IS AN EARLY-STAGE BUSINESS WITH A LIMITED OPERATING HISTORY, AND AS A
RESULT, MAKING AN EVALUATION OF ITS BUSINESS PROSPECTS MAY BE DIFFICULT.
We are an early-stage company with limited prior business operations and
operating revenues. We do not currently have any products on the market, and all
revenues to date have come from operations that have since been discontinued.
You should be aware of the increased risks, uncertainties, difficulties and
expenses we face, and that because of our limited operating history, you may not
have adequate information on which you can base an evaluation of our business
and prospects.
6
OUR FINANCIAL STATEMENTS INCLUDE A GOING CONCERN OPINION FROM OUR OUTSIDE
AUDITORS WHICH RAISES DOUBT AS TO OUR ABILITY TO STAY IN BUSINESS AND MAY LIMIT
OUR ABILITY TO RAISE REQUIRED FUNDING.
The Company received a going concern opinion on its financial statements
for the fiscal years ended December 31, 2005, 2004 and 2003. Our auditors have
stated that due to our lack of profitability and our negative working capital,
there is "substantial doubt" about our ability to continue as a going concern.
The going concern opinion from our auditors represents a strong warning
regarding our financial condition and ability to stay in business. In addition,
the going concern opinion may limit our ability to obtain the financing required
to stay in business, in which case you could lose your entire investment.
IF WE ARE UNABLE TO GENERATE REVENUES IN THE FUTURE, WE MAY NOT BE ABLE TO
CONTINUE OUR BUSINESS.
We are an early-stage company and, prior to May 2004, had not generated any
revenues from operations. Although we generated revenues in 2004 and 2005, the
products we carried were sold under a licensing arrangement, which has since
been terminated. We do not currently have any products on the market or any
source of revenues. We cannot assure our stockholders that our proposed business
plans, as described in this prospectus, will materialize or prove successful, or
that revenues generated through the sale of potential products currently under
development will be sufficient to result in profitable operations. If we cannot
operate profitably our business may fail and you could lose your entire
investment.
WE ARE IN DEFAULT UNDER OUR OUTSTANDING CONVERTIBLE DEBENTURES, AND HAVE
VIOLATED OUR OBLIGATION TO REGISTER THE RESALE OF THE SHARES ISSUABLE UPON
CONVERSION.
We are in default of our payment obligations under certain Convertible
Debentures, so the holders could bring collection actions at any time. In
addition, we have failed to register the Common Stock issuable upon conversion
of these obligations within the time frame required, exposing us to penalties.
Through December 31, 2005, such penalties totaled $1,518,524, and continue to
accrue.
WE WILL BE DEPENDENT ON THIRD PARTIES FOR THE MANUFACTURING AND SUPPLY OF ANY
PRODUCTS WE ARE ABLE TO DEVELOP. IF WE ARE UNABLE TO OBTAIN PRODUCTS ON A TIMELY
BASIS, WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR
BUSINESS MAY FAIL.
We do not intend to engage in the direct manufacture of products, and plan
to outsource the production of any products we introduce to the market. If, once
we begin to sell products, we are unable to obtain products from suppliers on a
timely basis, we will be unable to fulfill sales orders as planned and we will
not be able to generate sufficient revenues to achieve or maintain profitable
operations. If we cannot operate profitably you could lose your entire
investment.
GOVERNMENT CLEARANCE IS REQUIRED IN ORDER FOR US TO MARKET OUR PRODUCTS. IF WE
ARE UNABLE TO OBTAIN REQUIRED CLEARANCE ON A TIMELY BASIS, WE MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR
BUSINESS MAY FAIL.
Our products will be considered to be medical devices, and as such will
require clearance from the United States Food and Drug Administration ("FDA")
for sales in the United States and from comparable regulatory agencies in other
markets. Our ability to obtain timely regulatory clearance for sales of products
under development is dependent on our ability to obtain adequate financing, on
the successful completion of remaining product development and testing, and on
the satisfactory review and approval by regulatory agencies of required
marketing clearance submissions. If these approvals are not obtained, or are
significantly delayed, we may be unable to generate revenues from product sales
necessary for us to achieve or maintain profitable operations. If we cannot
operate profitably our business may fail.
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WE HAVE LIMITED FINANCIAL RESOURCES AND ARE DEPENDENT ON RAISING ADDITIONAL
CAPITAL IN ORDER TO SUCCESSFULLY LAUNCH OUR PRODUCTS AND TO BEGIN GENERATING
REVENUES FROM PRODUCT SALES. IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL, OUR
BUSINESS MAY FAIL.
Because we have limited financial resources and no current source of
operating revenues, we need to secure additional funding in order to
successfully launch our products, and to fund operating losses until such time
as we can generate enough revenue to sustain our business. If we are unable to
obtain adequate additional funding, we may not be able to generate sufficient
revenues to achieve profitability. If we cannot operate profitably our business
may fail.
WE MAY HAVE VIOLATED THE REGISTRATION REQUIREMENTS OF THE FEDERAL SECURITIES
LAWS IN CONNECTION WITH THE SALES OF CERTAIN SECURITIES, AND THE PURCHASERS OF
THE SECURITIES MAY HAVE A RIGHT TO RESCIND THE TRANSACTIONS AND DEMAND THE
RETURN OF THEIR CAPITAL INVESTED
We sold substantial amounts of securities in private transactions while a
Registration Statement filed with the Securities and Exchange Commission was
pending. We could be considered to have engaged in a "general solicitation,"
which would preclude reliance on the exemptions from registration provided by
Section 4(2) of the Securities Act and Regulation D thereunder. Accordingly, the
sales of securities after the date of filing of this Registration Statement may
have been in violation of the Securities Act of 1933, as amended. If so, we
could be subject to claims for damages by the purchasers of the securities,
claims for rescission of the transactions and return of all funds received, and
regulatory proceedings by the Securities and Exchange Commission or other
regulatory agencies. Also, persons who purchased the securities from the
original purchasers may also be entitled to rescission rights. The transactions
affected include the sale or restructuring of more than $8 million in
securities. The original purchase price of these securities far exceeds their
current market value. However, no purchaser of the securities has sought
rescission of the transactions or asserted any claims against us. If the
purchasers of these securities are entitled to rescission of the transactions,
we could be required to pay them the full purchase price, plus interest and
attorneys' fees. These amounts far outstrip our liquid assets, and such claims,
if asserted and successful, could require us to file bankruptcy. In addition, we
could be subject to regulatory proceedings by the Securities and Exchange
Commission or other regulatory agencies, which could, among other sanctions,
require us to make a rescission offer to the purchasers of the securities.
A DEFAULT IN THE COMPANY'S OBLIGATIONS TO CREDITORS COULD CAUSE A FORECLOSURE ON
OUR ASSETS, WHICH WOULD IMPAIR OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The Company has issued security interests in its assets to various
creditors. Should we be unable to meet our obligations to these creditors, they
would be entitled to foreclose on our assets. If this were to happen we would be
unable to continue our business.
RAISING ADDITIONAL CAPITAL MAY CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS
AND MAY RESULT IN INCREASED LOSSES OR REDUCED EARNINGS, WHICH MAY RESULT IN A
DECREASE IN THE MARKET PRICE OF OUR COMMON STOCK.
To secure additional financing, we may have to sell additional stock or
borrow money. Selling additional stock, either privately or publicly, will
dilute the equity interests of our stockholders. If we borrow more money, we
will incur interest expenses which will negatively impact our operating results,
and may also be subject to restrictions in the debt agreement that limit our
operating flexibility. Dilution of existing stockholders and additional interest
expense may result in a lower stock price.
WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT.
For the fiscal years ended December 31, 2005 and 2004 we incurred net
losses of $18,561,753 and $11,910,530, respectively. We expect to continue to
incur significant operating, marketing and research and development expenses to
support anticipated operations. We cannot be certain whether we will ever earn a
significant amount of revenues to achieve and maintain profitability. If we
cannot operate profitably our business could fail.
8
IF OUR RESEARCH AND DEVELOPMENT EFFORTS DO NOT RESULT IN PRODUCTS THAT RECEIVE
CLEARANCE FOR SALE OR THAT ARE SUCCESSFUL IN THE MARKETPLACE, WE MAY NOT BE ABLE
TO GENERATE SUFFICIENT REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS.
Our waterjet based technologies are in the development stage and further
development and testing is required before they can be submitted for marketing
clearance from the FDA and appropriate foreign regulatory agencies. Furthermore,
even if required marketing clearance is received, our products may not be
successful in the marketplace and may not be able to generate sufficient
revenues to achieve or maintain profitability.
WE ARE DOING BUSINESS IN AN INDUSTRY THAT IS VERY COMPETITIVE. IF WE ARE UNABLE
TO COMPETE SUCCESSFULLY, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE TO
ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR BUSINESS MAY FAIL.
The ophthalmic surgical device industry is very competitive. Our future
success depends on our ability to compete effectively with other manufacturers
and marketers of ophthalmic surgical devices. We may have difficulty competing
with larger, established surgical device companies that have:
* substantially greater financial, technical and marketing resources;
* larger customer bases;
* better name recognition;
* related product offerings; and
* larger marketing areas.
Companies such as Bausch & Lomb, Advanced Medical Optics, Intralase, VISX,
Alcon, LaserSight, and Nidek are major international providers of ophthalmic
surgical devices relating to LASIK and cataract surgery. These companies
represent a wide array of devices and products, technologies and approaches.
Most of these companies have more resources than we do and, therefore, a greater
opportunity to develop comparable products and bring those products to market
more efficiently than we. If we are not able to compete effectively with current
and future competitors, we will not be able to generate sufficient revenue to
achieve or maintain profitability.
OUR PRODUCTS MAY NOT ACHIEVE ACCEPTANCE IN THE MARKETPLACE OR MAY BECOME
OBSOLETE BASED ON NEW TECHNOLOGY OR CHANGES IN THE MARKETPLACE. IF OUR PRODUCTS
DO NOT ACHIEVE OR MAINTAIN ACCEPTANCE, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT
REVENUE TO ACHIEVE OR MAINTAIN PROFITABLE OPERATIONS AND OUR BUSINESS MAY FAIL.
The demand for our products will be based upon the existence of markets for
the technology and products and the markets for products of others, which may
utilize our technology. The extent to which we may gain a share of our intended
markets will depend, in part, upon the cost effectiveness and performance of our
technology and products when compared to alternative technologies, which may be
conventional or heretofore unknown. If the technology or products of other
companies provide more cost-effective alternatives or otherwise outperform our
technology or products, the demand for our technology or products may not be
strong enough to generate sufficient revenue to achieve or maintain
profitability. If we cannot operate profitably our business may fail and you
could lose your entire investment.
OUR DEVELOPMENT EFFORTS WITH RESPECT TO WATERJET BASED PRODUCTS ARE HIGHLY
DEPENDENT ON OUR PROPRIETARY INTELLECTUAL PROPERTY RIGHTS. FAILURE TO PROTECT
OUR RIGHTS COULD SIGNIFICANTLY IMPAIR OUR BUSINESS AND ENFORCING OUR RIGHTS MAY
CAUSE US TO INCUR SUBSTANTIAL EXPENSE.
9
Proprietary rights are critically important to us. We currently have
exclusive licenses to thirteen U.S. patents and three foreign patents for our
waterjet technology and we intend to aggressively pursue additional patent
protection for our technologies as we continue to develop them. Although we will
seek to defend our licenses and to protect our other proprietary rights, our
actions may be inadequate to protect our patents and other proprietary rights
from infringement by others, or to prevent others from claiming infringement of
their patents and other proprietary rights.
Policing unauthorized use of our technology is difficult, and some foreign
laws do not provide the same level of protection as U.S. laws. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or patents that we may obtain, or to determine the validity
and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources, and may result in decreased
earnings and a decline of our stock price.
OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK THAT YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE
PRICE THAT YOU PAY FOR THE SHARES.
Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. Between January 2003 and May 2006 our common
stock was sold and purchased at prices that ranged from a high of $2.41 to a low
of below $0.01 per share. The inability to sell your shares in a rapidly
declining market may substantially increase your risk of loss because of such
illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.
The price of our stock that will prevail in the market after this offering
may be higher or lower than the price you pay. Certain factors, some of which
are beyond our control, that may cause our share price to fluctuate
significantly include, but are not limited to, the following:
* results of our initial product introduction and sales efforts;
* our ability to obtain timely clearance for marketing in the United
States from the U.S. FDA
* variations in our quarterly operating results;
* our ability to complete the research and development of our
technologies;
* the development of a market for our products;
* changes in market valuations of similar companies;
* announcement by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
* loss of a major customer or failure to complete significant
transactions;
* additions or departures of key personnel; and
* fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the
Over-the-Counter Bulletin Board and technology stocks in particular, have
experienced extreme price and volume fluctuations. In some cases, these
fluctuations are unrelated or disproportionate to the operating performance of
the underlying company. These market and industry factors may cause a material
decline in our stock price regardless of the progress we make with respect to
our product development and marketing efforts and our operating performance.
THE "PENNY STOCK RULE" COULD MAKE IT DIFFICULT FOR BROKERS AND DEALERS TO TRADE
IN OUR STOCK, WHICH COULD CAUSE THE MARKET FOR OUR STOCK TO BE LESS LIQUID,
WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.
10
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of our shares;
* receive the purchaser's written consent to the transaction prior to
the purchase; and
* deliver to a prospective purchaser of our stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of broker- dealers
to trade and/or maintain a market in our common stock. Also, prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an office, research and warehouse facility of
approximately 6,500 square feet in San Clemente, California for a monthly rent
of $6,413. The lease expires in February 2008.
ITEM 3. LEGAL PROCEEDINGS
ART is currently engaged in the following legal proceedings:
ART is a defendant in Steven J. Baldwin vs. VisiJet, Inc. et al, a case
pending in San Francisco County Superior Court, filed on February 9, 2004(Case
NO. 04-428696). The Plaintiff alleges that the Company failed to compensate him
for services performed, prior to the merger with PNAC, pursuant to a consulting
agreement and is seeking monetary damages in the approximate amount of $450,000.
The case is currently in a preliminary stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The primary market for the Company's common stock has been the Nasdaq OTC
Bulletin Board, where it trades under the symbol "ARFR". The following table
sets forth the high and low closing prices for shares of our Common Stock for
the periods noted, as reported by the National Daily Quotation Service and the
Over-the-Counter Bulletin Board.
High Low
FY 2005
-------
Fourth Quarter .035 .007
Third Quarter .070 .026
Second Quarter .040 .035
First Quarter .580 .300
FY 2004
-------
Fourth Quarter 0.57 0.39
Third Quarter 0.84 0.49
Second Quarter 1.12 0.57
First Quarter 1.39 0.99
11
Quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
On June 2, 2006, the closing price as reported by the OTC Bulletin Board
was $0.031. As of June 2, 2006, there were 240,064,625 shares of common stock
outstanding, held by 224 record holders and approximately 830 beneficial
holders.
On June 6, 2006, due to its failure to file this document in a timely
manner, NASDAQ determined that the Company's securities were not eligible for
continued quotation on the OTCBB. Consequently since June 6, 2006 the Company's
securities may only be traded pursuant to pink sheet listings. Upon the filing
of this document the Company intends to apply to be re-listed.
The Company has never declared or paid cash dividends on its Common Stock
and currently does not anticipate paying cash dividends in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying financial
statements, and should be read in conjunction with such financial statements and
notes thereto.
Certain information included herein contains forward-looking statements
that involve risks and uncertainties within the meaning of Sections 27A of the
Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934.
These sections provide that the safe harbor for forward looking statements does
not apply to statements made in initial public offerings. The words, such as
"may," "would," "could," "anticipate," "estimate," "plans," "potential,"
"projects," "continuing," "ongoing," "expects," "believe," "intend" and similar
expressions and variations thereof are intended to identify forward-looking
statements. These statements appear in a number of places in this Form 10 KSB
and include all statements that are not statements of historical fact regarding
intent, belief or current expectations of the Company, our directors or our
officers, with respect to, among other things: (i) our liquidity and capital
resources; (ii) our financing opportunities and plans; (iii) our continued
development of our technology; ( iv) market and other trends affecting our
future financial condition; (v) our growth and operating strategy.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception; (ii)
any material inability to successfully develop our products; (iii) any adverse
effect or limitations caused by government regulations; (iv) any adverse effect
on our ability to obtain acceptable financing; (v) competitive factors; and (vi)
other risks including those identified in our other filings with the Securities
and Exchange Commission.
CORPORATE HISTORY
Advanced Refractive Technologies, Inc. (the "Company" or "ART") 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.
12
The Company was originally 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, the
Company changed its name to Advanced Refractive Technologies, Inc.
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. The timing of revenue recognition and
the amount of revenue actually recognized depends upon a variety of factors,
including the specific terms of each arrangement and the nature of our
deliverables and obligations. Determination of the appropriate amount of revenue
recognized involves judgments and estimates that we believe are reasonable, but
it is possible that actual results may differ from our estimates.
OVERVIEW
In May 2004, the Company initiated sales of the LasiTome and EpiLift
systems, both of which were obtained pursuant to a license agreement with
Gebauer Medizintechnik GmbH. Both systems may be used in the LASIK vision
correction surgical procedure to expose the cornea prior to application of the
excimer laser for reshaping of the cornea. The LasiTome is a mechanical device
used for cutting a corneal flap, the methodology used in traditional LASIK
procedures. The EpiLift system provides the LASIK surgeon with an alternative
methodology for exposing the cornea in which the epithelium, or top layer of the
eye, is separated in an intact sheet of tissue, and then returned to its
original position for healing following the application of the laser.
Initial sales of the EpiLift and LasiTome systems were in Europe and
certain countries in which the products had received required regulatory
clearance for marketing. Marketing of the EpiLift System in the United States
began in September 2004, following receipt of 510(K) clearance for marketing
from the United States Food and Drug Administration ("FDA"). Revenues from both
the EpiLift and LasiTome Systems were generated through both the initial sale of
the respective devices and accessories and through recurring sales of disposable
separators or blades.
In October 2005, the Company terminated the license agreement with Gebauer
and discontinued sales of the LasiTome and EpiLift systems. Under the terms of
the termination agreement, inventory was returned to Gebauer and unpaid invoices
canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement. In accordance with the terms of the
settlement, finished goods inventory of $1,916,215 was returned to Gebauer and
related Gebauer unpaid invoices for the inventory, totaling $846,781, were
cancelled. In addition, the net capitalized value of the distribution agreement
of $1,464,078 was impaired and charged to operating expense. These amounts were
recorded during the three months ended September 30, 2005, and the net effect of
the settlement upon the financial statements is as follows:
13
Finished goods inventory write off $ 1,916,215
Less: liability to Gebauer (846,781)
-----------
Charge to Cost of Goods Sold $ 1,069,434
-----------
Operating expense - Impairment of capitalized
distribution agreement $ 1,464,078
-----------
$ 2,533,512
==+========
Demonstration and clinical units of $211,343 and $164,385, respectively,
were excluded from the settlement agreement and included in inventory at
September 30, 2005. On October 12, 2005, all of the units were sold to
CooperVision International for $375,732. The sale eliminates all inventory
balances and was recorded during October 2005 when the sale was completed.
As a result of termination of the Gebauer agreement, we currently have no
products on the market and no source of operating revenues. Also, as a result of
the termination, we laid off our entire sales force of four direct sales
representatives, plus our sales manager. Two additional internal administrative
managers and one administrative assistant were also laid off, leaving only
individuals directly responsible for product development and administration on
staff.
The Company has two ophthalmic surgery products under development utilizing
proprietary waterjet technology. The first is Accupulse, a device designed for
removal of cataracts using a pulsating stream of saline solution. The second is
Hydrokeratome, a device that uses a high-pressure micro beam of water to cut a
corneal flap during LASIK surgery. Both of these products require the successful
completion of development and testing and receipt of 510(K) clearance from FDA
prior to market introduction.
The primary markets to be addressed by our products are refractive surgery
and cataract surgery, both of which are strong and continuing to grow. The
refractive surgery market has benefited from an increased demand for laser
vision corrective surgery due to the overall increased acceptance by consumers,
as well as from technological advances that have led to better results and fewer
complications. Cataract surgery is the most frequently performed surgical
procedure, with over 14 million surgeries performed worldwide. As the
development of cataracts is often associated with aging, we expect the demand
for cataract surgery to continue to increase. We believe that our products, when
completed and available for sale, will address important needs in each of these
markets.
There are numerous factors that could affect our ability to achieve
revenues, including but not limited to:
o Our obtaining adequate financing to support debt obligations and
working capital requirements
o Successful completion of our product development efforts and receipt
of 510(k) marketing clearance with respect to Accupulse and
Hydrokeratome.
o Market acceptance of our products
o Competition
o Technological advancement
o Overall economic conditions
The Company is actively pursuing additional financing, and in this regard
is in discussions with several parties related to potential financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, or to complete its on-going product development
efforts. As such, our ability to secure additional financing on a timely basis
is critical to our ability to stay in business and to pursue planned operational
activities.
14
RESULTS OF OPERATIONS
FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004
SALES AND COST OF SALES
Due to the discontinuance of the EpiLift and LasiTome product lines during
2005, the Company reported no revenues from continuing operations for either of
the years ended December 31, 2005 or 2004. The losses from discontinued
operations of $4,273,298 and $4,229,346 during 2005 and 2004 respectively,
reflect the costs and expenses associated with those operations, less revenues
generated by them.
General and administrative expenses relating to continuing operations
declined by $1,489,711, from $3,281,455 in 2004 to $1,791,744 in 2005,
reflecting the effect of a reduction in personnel in 2005, as well as the
discontinuance of the EpiLift and LasiTome product lines. Also, research and
development expense decreased by $516,899, from $695,100 in 2004 to $178,201,
reflecting the change in direction as well as the lack of funds to finance
research and development activities in 2005.
OTHER INCOME AND EXPENSE
ART incurred penalties and interest expense of $2,792,582 during 2005, as a
result of defaults under its outstanding Convertible Debentures. Interest
expense during 2004 totaled $392,251. Also, non-cash interest expense arising
out of the beneficial conversion aspect of its Convertible Debentures totaled
$7,491,743 during 2005, compared to $1,671,550 in 2004. This expense was
recorded based on the intrinsic value of the beneficial conversion feature of
convertible debt entered into during 2004 and 2005.
NET LOSS APPLICABLE TO COMMON SHARES
The combined effect of all these items was to increase the net loss by
$6,651,223, from $11,910,530 in 2004 to $18,561,753 in 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, our cash and cash equivalents totaled $1,085. 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, 2005 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.
Subject to availability of funding, we expect operating expenses, and
related cash requirements, to increase during 2006 in connection with
anticipated sales and marketing and product development activities.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements following Item 14 of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Treasurer, referred to in this context
as certifying officers, are responsible for the establishing and maintaining our
disclosure controls and procedures. Such officers have concluded (based on the
evaluation conducted of our disclosure controls and procedures, as such term is
defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
15
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report, that our disclosure controls and procedures are not effective to ensure
that information required to be disclosed by us in this report is accumulated
and communicated to our management as appropriate, to allow timely decisions
regarding required disclosure. The certifying officers also have indicated that
there were no significant changes in our internal controls or other factors that
could significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and directors of ART are as follows:
Director
Name Age Position Since
---- --- -------- -----
Richard H. Keates, M.D.(1)(2) 72 Chairman of the Board 2003
of Directors
Randal A. Bailey 62 President, Chief Executive 2003
Officer and a Director
Laurence M. Schreiber 64 Chief Operating Officer, 2003
Secretary, Treasurer and
a Director
Norman Schwartz(1)(2) 62 Director 2003
(1) Member of the Executive Committee
(2) Member of the Audit Committee
Dr. Keates has been Chairman of the Board of Directors since February 2003.
He is an ophthalmologist, consultant, and professor, and has been a Professor of
Ophthalmology at New York Medical College since 1997. Dr. Keates has served on
various boards of directors, including Frigitronics (NYSE), Med Chem (NYSE),
Autonomous Technologies (NASDAQ) and Chiron Vision. Dr. Keates has consulted for
leading health care companies including IO Lab, Alcon, and Bausch & Lomb. He is
a founding partner of Intelligent Biocides, and has published over 100 articles
in ophthalmology. Among his many faculty appointments, Dr. Keates has been a
professor at Ohio State University, Professor and Chairman of the Ophthalmology
Department at the University of California, Irvine. He is the President of the
New York Introcular Lens Society and recently completed his term as the
President of the New York Keratorefractive Society. Dr. Keates graduated from
the University of Pennsylvania and from the Jefferson Medical College. He
completed his Ophthalmology training at Harvard Basic Sciences in Ophthalmology
and The Manhattan Eye, Ear & Throat Hospital.
16
Mr. Bailey has served as President of Advanced Refractive Technologies,
Inc. (formerly VisiJet) since February 2003, and was appointed to the Board of
Directors in September 2003. Between 1995 and 2003 he had been affiliated with
Advanced Refractive Technologies' predecessors in an executive management
capacity. He has more than twenty-five years experience in management roles at
both medical device and pharmaceutical companies. From 1991 to 1995, Mr. Bailey
was the leader of the sales organization of Pharmacia Ophthalmics, Inc. Between
1989 and 1991, Mr. Bailey was the Vice President of Sales and Marketing for
Novoste, Inc. (NASDAQ) a start up cardiovascular company. Mr. Bailey was a
co-founder and Vice President of Sales and Marketing for Chiron Vision, Inc.,
which was acquired by Bausch & Lomb in 1997. Chiron Vision, now Bausch & Lomb
Surgical, is a leader in the manufacturing and sales of ophthalmic devices
worldwide. From 1980 to 1986 Mr. Bailey was the initial Vice President of Sales
and Marketing for Allergan Medical Optics, Inc.
Mr. Schreiber has served as Chief Operating Officer, Secretary and
Treasurer of Advanced Refractive Technologies since February 2003, and was
appointed to the Board of Directors in September 2003. Prior to February 2003,
Mr. Schreiber was an executive officer and a member of the Board of Directors of
Ponte Nossa Acquisition Corporation, where he played an integral role in the
merger between Ponte Nossa and Advanced Refractive Technologies that was
finalized in February 2003. Prior to joining Ponte Nossa in 2001, he founded
Diversified International, a multilevel marketing system, and served as Chief
Executive Officer of Learn America, a multimedia productions company combining
advanced computer technology and educational systems. Mr. Schreiber also served
as President and a director of Philibus Systems, a private educational system,
and was President of Advanced Nutritional Associates, which distributed health
care products in the United Kingdom and Europe. He has developed an independent
sales distribution system for Herbalife, and pioneered markets in the United
Kingdom, Spain and Israel.
Mr. Schwartz has been a member of the board of directors since February
2003, and has served as Advanced Refractive Technologies' contract and legal
coordinator since March 2003. Mr. Schwartz has over thirty years of experience
in providing legal and financial advice to individuals and companies. He has
acted as Chief Financial Officer and president of several companies, both public
and private, including Acubid International, Ameritrust, and Farm Energy Corp.
He served on the Board of International Acuvision Systems, a public company that
developed and patented vision Training equipment. He is a member of the Arizona
Bar Association. Mr. Schwartz graduated from Arizona State University, completed
his JD at the University Of Arizona, and received his LLM in taxation from New
York University.
Directors hold office until a successor is elected and qualified or until
their earlier resignation in the manner provided in the Bylaws.
SCIENTIFIC ADVISOR
Richard Lindstrom, M.D. is the Chief Ophthalmic Consultant to Advanced
Refractive Technologies, and is in charge of assisting and advising us in
connection with product development in the ophthalmic surgical arena. After
serving as Clinical Professor of Ophthalmology at the University of Minnesota
from 1980 to 1990, Dr. Lindstrom entered private practice and now directs an
outpatient clinic adjacent to the Phillips Eye Institute in Minneapolis. He
conceptualized the Phillips Eye Institute Center for Teaching and Research, a
state-of-the-art ophthalmic research and surgical skills education facility,
where he currently serves as Medical Director. Dr. Lindstrom plays an active
role in the teaching program at the Phillips Eye Institute and at the University
of Minnesota Hospital. He also serves as an Associate Director of the Minnesota
Lions Eye Bank. Dr. Lindstrom holds 27 patents in ophthalmology in intraocular
lens implant technology, corneal preservation, irrigation solutions,
viscoelastic solutions, intracorneal lenses, and associated surgical
instruments. Dr. Lindstrom serves on the editing board of a variety of medical
journals, including Journal of Cataract and Refractive Surgery, Ophthalmic
Surgery, European Journal of Implant and Refractive Surgery, Implants in
Ophthalmology, Ocular Surgery News, Ophthalmology Times, and Journal Review of
Ophthalmology. He is Chief Medical Advisor to Laser Vision Centers and Vision 21
Centers.
DIRECTORS' COMPENSATION
The members of the Board of Directors do not receive any monetary
compensation for their service as directors, but are eligible for reimbursement
of their expenses incurred in connection with attendance at Board meetings in
accordance with Company policy.
17
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities (the "10% Stockholders"), to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
Officers, directors and 10% Stockholders of the Company are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms so filed.
Based solely upon a review of filings made and other information available
to it, the Company believes that each of the Company's present Section 16
reporting persons filed all forms required of them by Section 16(a) during the
year 2005.
COMMITTEES OF THE BOARD OF DIRECTORS
Currently, the Company's Audit Committee of the Board of Directors is
comprised of two directors, as noted above. The Audit Committee held no meetings
during 2005. The Company has no Nominating Committee. and these functions are
performed by the Board of Directors.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the annual compensation paid to our named
executive officers during the three years ended December 31, 2005:
Long Term Compensation
-----------------------------------
Annual Compensation Awards
---------------------------------- ----------------------------------- -----------------
Other Annual
Compensation Restricted Securities All Other
Name and Principal Position Year Salary ($) Bonus ($) ($) Stock Awards Underlying Options Compensation
----------------------------------- ------- ---------- ---------- ------------ --------------- ------------------- -----------------
Randal A. Bailey, 2005 90,000 - -
President and Chief 2004 172,500 - - - 200,000 45,305
Executive Officer (1)(2) 2003 165,000 - 6,800 - 200,000 62,500
Laurence M. Schreiber, 2005 90,000 - - - - -
Chief Operating Officer, 2004 225,000 - - - 200,000 -
Treasurer, Secretary (2) (3) 2003 97,000 - 22,500 - 200,000 -
Larry Hood, 2005 84,375
Director of Research and 2004 129,375 - - - 75,000 -
Development, Chief Engineer (1)(2) 2003 122,500 - - - 75,000 83,333
(1) During 2003, Advanced Refractive Technologies issued 164,319 shares of
common stock, and issued a two year promissory note in the amount of $150,000 to
Mr. Bailey and 46,948 shares of common stock, and issued a one year promissory
note in the amount of $100,000 to Mr. Hood in satisfaction of an aggregate of
$700,000 of unpaid compensation accrued between 1999 and 2002. Amounts noted as
All Other Compensation represent respective payments made by the Company
pursuant to these promissory notes.
(2) Messrs. Bailey, Schreiber, and Hood became President and CEO, Chief
Operating Officer, Dir. of Research & Development respectively, on March 1, 2003
and earned consulting income from January to February 2003. Amounts noted as
Other Annual Compensation represent respective consulting fees paid in 2003
prior to March 1, 2003. Messrs. Bailey, Schreiber, and Hood did not receive any
compensation from Advanced Refractive Technologies in 2001 and 2002.
(3) Mr. Schreiber's salary for 2004 includes back pay of $85,000 that was
accrued under the merger agreement in the amount $5,000 per month until July of
2004.
18
STOCK OPTIONS
On November 10, 2003, the Board of Directors adopted the VisiJet, Inc. 2003
Stock Option Plan. The Option Plan provides for the grant of incentive and
non-qualified stock options to selected employees, the grant of non-qualified
options to selected consultants and to directors and advisory board members. The
Option Plan is administered by the Compensation Committee of the Board of
Directors and authorizes the grant of options for 3,000,000 shares. The
Compensation Committee determines the individual employees and consultants who
participate under the Plan, the terms and conditions of options, the option
price, the vesting schedule of options and other terms and conditions of the
options granted pursuant thereto.
As of December 31, 2005, a total of 1,975,000 options to purchase shares of our
common stock were outstanding pursuant to the 2003 Option Plan.
No stock options were issued during 2005.
No named executive officer exercised options in the fiscal year ended December
31, 2005. The following table presents the number and values of exercisable and
unexercisable options as of December 31, 2005:
Number of
securities Value of
underlying unexercised in-
unexercised the-money
options/SARS at options/SARs at
FY-end (#) FY-end ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------------------------------------------------------------
Randal A. Bailey 400,000 $0.00
Laurence M. Schreiber 400,000 $0.00
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below lists the beneficial ownership of our common stock, as of
May 1, 2006, by each person known by us to be the beneficial owner of more than
5% of our common stock, by each of our directors and officers, and by all of our
directors and officers as a group.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned(1)(2) of Class
-------------------------------------------------------------------------------
Florencia Mate Garabito 178,571,428 76%
6, Rue Adolphe Fischer, L-1520
Luxemburg
Randal A. Bailey ** 510,357(3) *
1062 Calle Negocio, Suite D
San Clemente, CA 92673
Richard H. Keates, M.D.** 425,000(3) *
20 Sutton Place South
New York, NY 10022
Laurence Schreiber** 243,478(3) *
1062 Calle Negocio, Suite D
San Clemente, CA 92673
Norman Schwartz** 125,664(3) *
1062 Calle Negocio, Suite D
San Clemente, CA 92673
All directors and executive
officers as a group (4 persons)
19
* Denotes less than one percent. ** Denotes Member of the Board of Directors.
(1) Except as set forth, the persons named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
(2) Applicable percentage of ownership is based on 240,064,025 shares
outstanding as of June 2, 2006, together with applicable warrants, options and
convertible debt for such stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting and investment power
with respect to shares. Shares subject to options, warrants and convertible debt
currently exercisable/convertible or exercisable/convertible within 60 days are
included in the number of shares beneficially owned and are deemed outstanding
for purposes of computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage
of any other stockholder.
(3) Includes shares issuable upon exercise of currently exercisable options or
warrants, or conversion of debt.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS
Exhibit No. Exhibit Description
----------- -------------------
2.1 Second Amended and Restated Agreement and Plan of Merger, dated
December 20, 2002 among Ponte Nossa Acquisition Corp.,
VisiJet,Inc., and VisiJet Acquisition Corporation (1)
2.2 Amendment No. 1, dated January 15, 2003, to Second Amended and
Restated Agreement and Plan of Merger (2)
3.1 Restated Certificate of Incorporation of the Company (3)
3.2 Certificate of Designation of Rights and Preferences of Series A
0% Convertible Preferred Stock (9)
3.3 Certificate of Amendment of Certificate of Incorporation (9)
3.4 Amended and Restated Bylaws (4)
20
10.1 Patent License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.2 Amendment No. 1 to Patent License Agreement, dated November 6,
2002 (3)
10.3 Technology License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.4 Amendment No. 1 to Technology License Agreement, dated 2002 (3)
10.5 Trademark License Agreement between SurgiJet, Inc. and VisiJet,
Inc., dated October 23, 1998 (4)
10.6 Amendment No. 1 to Trademark License Agreement, dated November 6,
2002 (3)
10.7 Warrant, dated February 11, 2003, issued to PCL Associates (4)
10.8 Warrant, dated February 11, 2003, issued to David E. Eisenberg
Trust (4)
10.9 Warrant, dated February 11, 2003, issued to Laurence Schreiber (4)
10.10 Warrant, dated February 11, 2003, issued to Financial
Entrepreneurs Incorporated (4)
10.11 Form of Stock Purchase Warrant Used in February 2004 Private
Placement(5)
10.12 Form of 24% Secured Subordinated Debenture Used in February 2004
Private Placement(5)
10.13 Securities Purchase Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P. and Bridges & Pipes,
LLC (6)
10.14 Form of Convertible Debenture Issued Pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.15 Form of Warrant (stepped price) issued pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.16 Form of Warrant (fixed price) issued pursuant to June 24, 2004
Stock Purchase Agreement (6)
10.17 Registration Rights Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P. and Bridges & Pipes,
LLC (6)
10.18 Pledge and Escrow Agreement, dated June 24, 2004, between the
Company, Bushido Capital Master Fund, L.P., Bridges & Pipes, LLC,
and Tarter Krinsky & Drogin LLP, as Escrow Agent (6)
10.19 Term Credit Agreement, dated May 6, 2004, between the Company and
HIT Credit Union (7)
21
10.20 Form of $750,000 Term Note, dated May 6, 2004, issued by the
Company to HIT Credit Union(7)
10.21 Security Agreement, dated May 6, 2004, between the Company and HIT
Credit Union(7)
10.22 Stock Purchase Agreement, dated May 6, 2004 between the Company,
Platinum Long Term Growth LLC and Rock II, LLC (7)
10.23 10% Convertible Debenture for $550,000,dated May 6, 2004, issued
by the Company to Platinum Long Term Growth LLC (7)
10.24 10% Convertible Debenture for $250,000,dated May 6, 2004, issued
by VisiJet, Inc., to Rock II, LLC (7)
10.25 Warrant To Purchase 366,666 Shares of Common Stock of the Company,
issued to Platinum Long Term Growth LLC (7)
10.26 Warrant To Purchase 166,667 Shares of Common Stock of the Company,
issued to Rock II, LLC (7)
10.27 Form of Registration Rights Agreement, dated May 6, 2004 between
the Company, Platinum Long Term Growth LLC and Rock II, LLC (7)
10.28 Manufacturing, Supply and Distribution Agreement, dated May 7,2004
between the Company and Gebauer Medizintechnik GmbH (7)
10.29 Securities Purchase Agreement, dated July 23, 2004 between the
Company and Libertyview Special Opportunities Fund, LP (7)
10.30 8% Convertible Note for $1,000,000, dated July 23, 2004, issued by
the Company to Libertyview Special Opportunities Fund, LP (7)
10.31 Warrant To Purchase 750,000 Shares of Common Stock of Company,
issued to Libertyview Special Opportunities Fund, LP (7)
10.32 Registration Rights Agreement, dated July 23, 2004, between the
Company and Libertyview Special Opportunities Fund, LP (7)
10.33 Convertible Preferred Stock Purchase Agreement, dated August 24,
2004 between the Company and Langley Park Investments PLC
10.34 Securities Purchase Agreement, dated October 6, 2004, between the
Company and certain investors relating to $885,000 in convertible
debentures (8)
10.35 Form of Convertible Debenture issued under October 6, 2004
Securities Purchase Agreement (8)
10.36 Form of Stock Purchase Warrant issued under October 6, 2004
Securities Purchase Agreement (8)
10.37 Registration Rights Agreement, dated October 6, 2004 between the
Company, Bushido Capital Master Fund L.P., Bridges & Pipes LLC,
Libertyview Special Opportunities Fund, LP, Gamma Opportunity
Capital Partners LP, Blue Fin Partners, Inc. and Little Gem Life
Sciences Fund, LLC (8)
22
10.38 Amendment To Securities Purchase Agreement dated October 6, 2004
between the Company, Gamma Opportunity Capital Partners L.P.,
Bridges & PIPES LLC, Libertyview Special Opportunities Fund, LP,
Blue Fin Partners, Inc. and Little Gem Life Sciences Fund, LLC (8)
10.39 Securities Purchase Amendment Agreement dated October 7, 2004,
between the Company, Bushido Capital Master Fund L.P., Bridges &
Pipes LLC, and Libertyview Special Opportunities Fund, LP (8)
10.40 Amended Convertible Debenture, dated October 7, 2004, issued to
Bridges & Pipes LLC (8)
10.41 Amended Convertible Debenture, dated October 7, 2004, issued to
Bushido Capital Master Fund LP (8)
10.42 $1,000,000 Convertible Note, dated July 23, 2004, as amended
October 6, 2004, issued to Libertyview Special Opportunities Fund,
LP (8)
10.43 Warrant to Purchase 750,000 shares, dated October 6, 2004, issued
to Libertyview Special Opportunities Fund, LP (8)
10.44 Warrant to Purchase 250,000 shares, dated October 6, 2004, issued
to Libertyview Special Opportunities Fund, LP (8)
10.45 Patent License Agreement, dated September 17, 2003, between the
Company and Robert M. Campbell, M.D. (9)
10.46 Subscription Agreement, dated December 30, 2005 between the
Company and Alpha Capital Aktiengesellschaft (9)
10.47 Form of International Distributor Agreement (9)
10.48 Form of Securities Purchase Agreement used in January 2005
Financing (9)
10.49 Form of Convertible Debenture used in January 2005 Financing (9)
10.50 Form of Stock Purchase Warrant used in January 2005 Financing(9)
10.51 Amended and Restated Registration Rights Agreement, dated January
14, 2005, between the Company and the Investors named therein(9)
10.52 Amended and Restated Security Agreement, dated January 14, 2005,
between the Company and the Investors named therein (9)
10.53 Settlement Agreement, dated October 13, 2005 between the Company
and Gebauer Medizintechnik GmbH (10)
23
10.54 Asset Purchase Agreement, dated October 12, 2005, between the
Company and CooperVision International Holding Company, LP (10)
10.55 Agreement and Plan of Acquisition, dated December 13, 2005,
between the Company, Optimetrix Technologies, Inc. and UTEK
Corporation
10.56 Workout Consulting Services Agreement, dated March 3, 2006 between
the Company and Florencia Mate Garabito
14 Code of Ethics(5)
23 Consent of Peterson & Co., LLP
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
---------------
(1) Incorporated by reference from Report on Form 8-K of the Company, filed
January 7, 2003
(2) Incorporated by reference from Report on Form 8-K of the Company, filed
February 14, 2003
(3) Incorporated by reference from Quarterly Report on Form 10-QSB of the
Company for the quarter ended June 30, 2003, filed August 15,2003
(4) Incorporated by reference from Annual Report on Form 10K-SB of the Company
for the year ended December 31, 2002, filed on April 14, 2003.
(5) Incorporated by reference from Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2003, filed April 14, 2004.
(6) Incorporated by reference from Report on Form 8-K of the Company, dated
June 24, 2004, filed on
(7) Incorporated by reference from Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004, filed on August 18, 2004.
(8) Incorporated by reference from Registration Statement on Form SB-2
(Registration No. 333-120449), filed on November 12, 2004.
(9) Incorporated by reference from Amendment No. 1 to Registration Statement on
Form SB-2 (Registration No. 333-120449), filed on February 15, 2005.
(10) Incorporated by reference from Amendment No. 2 to Registration Statement on
Form SB-2 (Registration No. 333-120449), filed on June 6, 2005.
24
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Summarized below is the aggregated amount of various professional fees billed by
our principal accountants, Peterson & Co., LLP with respect to the last two
fiscal years:
2005 2004
--------- ---------
Audit fees $ 98,086 $ 105,182
Audit - related fees 1,470 14,145
Tax fees 4,040
All other fees, including tax
consultation and preparation -- --
--------- ---------
$ 99,556 $ 123,367
All audit fees were approved by our audit committee and board of directors.
Peterson & Co., LLP did not provide any non-audit services other than tax
services to the Company.
25
Advanced Refractive Technologies, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. F-1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS..................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS........................... F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS........................... F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
COMPREHENSIVE INCOME............................................ F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................... F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Advanced Refractive Technologies, Inc., Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Refractive Technologies, Inc., Inc. as of December 31, 2005 and 2004, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Refractive
Technologies, Inc., as of December 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency. These factors raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PETERSON & CO., LLP
San Diego, California
June 9, 2006
F-1
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,085 $ 22,946
Marketable securities -- 590,980
Prepaids and deposits 27,413 22,225
Assets of discontinued operations 60,872 2,655,997
------------ ------------
Total current assets 89,370 3,292,149
Property and equipment, net 76,833 87,798
Goodwill 1,225,000
License agreement, net 74,809 --
Patents and trademarks, net 78,347 87,795
Deferred debt costs 426,857 454,096
------------ ------------
Total assets $ 1,971,216 $ 3,921,837
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 940,364 513,197
Customer deposits 427 49,198
Accrued interest 1,307,085 277,785
Warrant derivative liability 102,951
Accrued settlement agreement 54,863 66,402
Accrued expenses 915,801 698,434
Income tax payable 800 800
Royalty payable 49,027 15,000
Notes payable to related parties 780,232 847,660
Notes payable 10,000 10,000
Convertible debenture debt, net 3,589,071 897,655
Accrued penalties on debentures 1,518,524 --
Secured debenture debt, net -- 1,194,830
Liabilities of discontinued operations 563,436 721,077
------------ ------------
Total current liabilities 9,832,581 5,292,038
Convertible debenture debt - long term , net -- 1,787,697
Series A convertible preferred stock, 450,000 shares authorized, issued and
outstanding at December 31, 2005 and December 31, 2004, net of
unamortized discount of $656,250 and 1,031,250, respectively
(redemption value $4,500,000) 880,404 505,404
Series B Convertible Preferred stock, 100,000 shares authorized, issued and
outstanding at December 31, 2005, no shares issued and outstanding
at December 31 2004 (redemption value $1,500,000) 1,500,000 --
------------ ------------
Total liabilities 12,212,985 7,585,139
------------ ------------
Shareholders' deficit:
Common stock, 750,000,000 shares authorized, $.001 par value,
56,379,756 shares issued and outstanding at December 31,
2005, and 28,909,662 shares issued and outstanding at
December 31, 2004 56,380 28,910
Additional paid in capital 30,950,353 19,786,546
Accumulated other comprehensive loss -- (792,009)
Accumulated deficit (41,248,502) (22,686,749)
------------ ------------
Shareholders' deficit (10,241,769) (3,663,302)
------------ ------------
Total liabilities and shareholders' deficit $ 1,971,216 $ 3,921,837
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended
December 31, December 31,
2005 2004
------------ ------------
Operating expenses:
General and administrative expenses 1,791,744 3,281,455
Research and development expenses 178,201 695,100
Depreciation and amortization 50,834 16,359
------------ ------------
Total operating expenses 2,020,779 3,992,914
------------ ------------
Loss from operations (2,020,779) (3,992,914)
Other income (expense):
Amortization of debt discount and debt issuance fees (8,413,570) (3,222,917)
Interest and penalties expense (2,792,582) (392,251)
Loss on sale of securities (714,733) --
Loss on warrant derivative liability (8,122) --
Other income - net 37,131 --
Gain on debt restructure -- 21,448
Interest cost of preferred stock accretion (375,000) (93,750)
------------ ------------
Total other expense net of other income (12,266,876) (3,687,470)
------------ ------------
Loss from continuing operations before provision for taxes (14,287,655) (7,680,384)
Provision for income taxes 800 800
------------ ------------
Loss from continuing operations (14,288,455) (7,681,184)
Discontinued operations
Loss from discontinued operations (4,273,298) (4,229,346)
------------ ------------
Net loss (18,561,753) (11,910,530)
============ ============
Net loss per common share - basic and diluted:
Continuing operations $ (0.39) $ (0.29)
Discontinued operations $ (0.12) $ (0.16)
------------ ------------
Total loss per share $ (0.51) $ (0.45)
============ ============
Basic and diluted weighted average number of
common shares outstanding 36,715,726 26,688,583
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended
December 31, December 31,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss ($18,561,753) ($11,910,530)
Less: Net loss from discontinued operations 4,273,298 4,229,346
------------ ------------
Net loss from continuing operations (14,288,455) (7,681,184)
Adjustments to reconcile net loss from continuing
operations to net cash used by operating activities:
Operating activities of discontinued operations (1,835,813) (5,451,767)
Depreciation and amortization 50,834 41,703
Debt discount amortization 8,386,331 1,533,996
Accretion of interest cost on preferred stock 375,000 93,750
Adjustment for beneficial conversion of debt -- 1,671,550
Commission from preferred shares conversion -- 153,665
Common stock issued for services 533,878 3,277,173
Common stock issued for origination fees 64,286 --
Loss on sale of securities 721,968 --
Warrant repricing for debt guarantee -- 546,403
Gain from debt restructure -- (21,448)
Loss on warrant derivative liability 8,122 --
Changes in operating assets and liabilities:
Prepaid expenses 14,812 66,524
Deferred debt costs 27,239 --
Accounts payable 427,167 (166,688)
Accrued penalties on debentures 1,518,524 --
Customer deposits (48,771) 49,198
Royalties payable 34,027 (45,000)
Accrued Settlement agreement (11,539) (37,764)
Other accrued expense 217,366 239,565
Accrued interest 1,029,300 243,412
------------ ------------
Net cash flow used in operating activities (2,775,724) (5,486,912)
Cash flows from investing activities:
Cash received in acquisition 200,000 --
Purchase of property and equipment (30,230) (15,611)
------------ ------------
Net cash provided by (used in) investing activities 169,770 (15,611)
Cash flows from financing activities:
Advance from related party -- 272,626
Repayment of advances from related parties (67,428) (260,600)
Repayment of notes payable (2,550,000) (4,000)
Proceeds from secured debenture -- 1,109,688
Proceeds from convertible debt 4,540,500 3,845,375
Proceeds from private placement - net -- 526,500
Proceeds from marketable securities 661,021 --
------------ ------------
Net cash provided by financing activities 2,584,093 5,489,589
Net decrease in cash (21,861) (12,933)
Cash, beginning of the year 22,946 35,879
------------ ------------
Cash, end of the year $ 1,085 $ 22,946
============ ============
Supplemental disclosures of cash flow information
Interest paid $ -- $ 170,287
Taxes paid -- 800
Non-cash investing and financing transactions:
Debenture costs and fees -- 562,125
Reclass of interest to current liability -- 67,048
Warrants issued in connection with secured debenture -- 417,975
Warrants issued in connection with convertible debenture 543,785 1,264,302
Warrants issued for debt modification -- 866,017
Common stock issued in connection with convertible debenture -- 267,393
Common stock issued for debt default and penalties -- 248,150
Conversion of debt to stock (1,108,000) --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
Additional
Common Stock Common Stock Paid In
Shares Amount Subscriptions Capital
------------ ------------ ------------ ------------
Balance,
December 31, 2003 21,691,163 $ 21,691 $ 1,018,500 $ 7,845,366
------------ ------------ ------------ ------------
Common stock issued in
connection with
private placements 585,000 585 -- 584,415
Costs of private
placements -- -- -- (58,500)
Common stock given for
services 2,730,000 2,730 -- 2,509,370
Common stock
subscriptions 998,500 999 (1,018,500) 1,017,501
Common stock issued for
distribution agreement 750,000 750 -- 711,750
Common stock issued with
debt agreements and
collateral 1,303,571 1,304 -- 266,090
Common stock issued with
debt default and
penalties 611,428 611 -- 378,603
Common stock issued with
litigation settlements 240,000 240 -- 125,010
Warrants issued with
secured and
convertible debt -- -- -- 1,679,379
Warrants issued for debt
modification -- -- -- 866,017
Warrants issued for debt
guarantee -- -- -- 546,403
Warrants issued for
services -- -- -- 205,903
Warrants issued for
commissions -- -- -- 282,183
Adjustment for
beneficial conversion
- convertible debt -- -- -- 1,671,550
Adjustment for
beneficial conversion
- preferred stock -- -- -- 1,125,000
Accumulated
Comprehensive
Adjustment -- -- -- --
Stock Option Expense -- -- -- 30,506
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2004 28,909,662 $ 28,910 -- $ 19,786,546
------------ ------------ ------------ ------------
Common stock given for
services 15,243,256 15,243 -- 523,913
Common stock issued with
debt agreements 1,039,370 1,039 -- 560,221
Common stock given for
origination fees 142,857 143 -- 64,143
Common stock issued for
conversion of debt 11,687,013 11,687 -- 532,098
Common stock cancelled (642,400) (642) -- (89,612)
Warrants issued with
secured and
convertible debt -- -- -- 2,012,211
Adjustment for
beneficial conversion
- convertible debt -- -- -- 6,994,351
Accumulated
Comprehensive
Adjustment -- -- -- --
Reclass of debt discount to interest -- -- -- 566,482
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2005 56,379,756 $ 56,380 $ -- $ 30,950,353
============ ============ ============ ============
(CONTINUED ON NEXT PAGE)
F-5a
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
(CONTINUED)
Other Net
Comprehensive Accumulated Shareholders'
Loss Deficit Deficit
------------ ------------ ------------
Balance,
December 31, 2003 $ -- $(10,776,219) $ (1,890,662)
------------ ------------ ------------
Common stock issued in
connection with
private placements -- -- 585,000
Costs of private
placements -- -- (58,500)
Common stock given for
services -- -- 2,512,100
Common stock
subscriptions -- -- --
Common stock issued for
distribution agreement -- -- 712,500
Common stock issued with
debt agreements and
collateral -- -- 267,394
Common stock issued with
debt default and
penalties -- -- 379,214
Common stock issued with
litigation settlements -- -- 125,250
Warrants issued with
secured and
convertible debt -- -- 1,679,379
Warrants issued for debt
modification -- -- 866,017
Warrants issued for debt
guarantee -- -- 546,403
Warrants issued for
services -- -- 205,903
Warrants issued for
commissions -- -- 282,183
Adjustment for
beneficial conversion
- convertible debt -- -- 1,671,550
Adjustment for
beneficial conversion
- preferred stock -- -- 1,125,000
Accumulated
Comprehensive
Adjustment (792,009) -- (792,009)
Stock Option Expense -- -- 30,506
Net Loss -- (11,910,530) (11,910,530)
------------ ------------ ------------
Balance,
December 31, 2004 $ (792,009) $(22,686,749) $ (3,663,302)
------------ ------------ ------------
Common stock given for
services -- -- 539,156
Common stock issued with
debt agreements -- -- 561,260
Common stock given for
origination fees -- -- 64,286
Common stock issued for
conversion of debt -- -- 543,785
Common Stock Cancelled -- -- (90,254)
Warrants issued with
secured and
convertible debt -- -- 2,012,211
Adjustment for
beneficial conversion
- convertible debt -- -- 6,994,351
Accumulated
Comprehensive
Adjustment 792,009 -- 792,009
Reclass of debt discount to interest -- 566,482
Net Loss -- (18,561,753) (18,561,753)
------------ ------------ ------------
Balance,
December 31, 2005 $ -- $(41,248,502) $(10,241,769)
============ ============ ============
F-5b
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
HISTORY of the Company
Advanced Refractive Technologies, Inc. ("ART", or "the Company") is a medical
device company focused on the marketing and development of ophthalmic surgery
products for use in the laser eye surgery and cataract surgery markets. Through
June 30, 2004, the Company was in the development stage, as its efforts had been
principally devoted to organizational activities, raising capital and research
and development. However, based on operating revenues generated by the Company
in the third quarter of 2004, the Company is no longer considered to be in the
development stage.
The Company was incorporated on February 2, 1996, as VisiJet, Inc., a wholly
owned subsidiary of SurgiJet, Inc. to develop and distribute medical products
based on patented waterjet-based technology licensed from SurgiJet. In May 1999,
the Company was spun off from SurgiJet through a distribution of common stock to
its shareholders, after which SurgiJet had no remaining ownership interest in
the Company.
In December 2002 VisiJet entered into a merger agreement with Ponte Nossa
Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into VisiJet. The
merger was consummated on February 11, 2003, and immediately thereafter, VisiJet
was merged into Ponte Nossa Acquisition Corp., and the surviving company's name
was changed to "VisiJet, Inc."
In April 2004, the Company entered into a Manufacturing, Supply and Distribution
Agreement with a German company pursuant to which the Company acquired exclusive
worldwide distribution, sales and marketing rights for ophthalmic surgical
products used in LASIK refractive surgery procedures.
In October 2005, the Company terminated the license agreement with Gebauer and
discontinued sales of the LasiTome and EpiLift systems. Under the terms of the
termination agreement, inventory was returned to Gebauer and unpaid invoices
were canceled and both parties were relieved from fulfilling any further
responsibilities under the agreement. As a result, we currently have no products
for sale and no sources of revenue.
The Company has two ophthalmic surgery products under development utilizing
proprietary waterjet technology. The first is Accupulse, a device designed for
removal of cataracts using a pulsating stream of saline solution. The second is
Hydrokeratome, a device that uses a high-pressure micro beam of water to cut a
corneal flap during LASIK surgery. Both of these products require the successful
completion of development and testing and receipt of 510(K) clearance from FDA
prior to market introduction.
In November 2005, the Company acquired all the outstanding stock of OptiMetrix
Technologies, Inc.(OTI). OTI has an exclusive license to a patented technology
that takes the application of fiber-optic, OMA based instrumentation as an in
vivo diagnostic tool for the human ocular lens.
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.
F-6
For the fiscal year 2005, the Company incurred net losses of approximately $18.6
million and through December 31, 2005 has incurred cumulative losses of
approximately $41.2 million. In addition, at December 31, 2005 the Company's
current liabilities exceeded its current assets by approximately $ 9.8 million,
and the Company had a net capital deficiency of approximately 10.2 million. The
Company's future capital requirements will depend on many factors, including but
not limited to its ability to complete development efforts and successfully
market and generate operating revenue through product sales, its ability to
finalize development and successfully market its waterjet technology, its
on-going operational expenses and overall product development costs, including
the cost of clinical trials, and competing technological and market
developments.
To address the going concern issue, the Company has continued to raise operating
capital through private placements of debt and equity securities, and is
currently in discussions with several parties regarding additional financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, to market the recently licensed products or to complete
its on-going product development efforts. As such, our ability to secure
additional financing on a timely basis is critical to our ability to stay in
business and to pursue planned operational activities.
While the Company believes that the additional financing arrangements will be
completed, there can be no assurance that new financing will be completed or
that the proceeds from new financing will be sufficient for the Company to meet
its contractual obligations and on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue during 2005 and 2004 was from sales of ophthalmic surgical products
pursuant to the Manufacturing, Supply and Distribution Agreement completed in
May 2004 and terminated in October 2005. Revenue from such sales was recognized
when the earnings process was complete, as evidenced by an agreement with the
customer, transfer of title and acceptance, a firm price and probable
collection. Revenues for 2005 and 2004 were entirely from operations now
discontinued, as described above. The Company will adhere to this process of
revenue recognition in the future as new products become available for sale.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Certain
corporate overhead expenses, such as professional fees, salaries, rent and
travel are allocated to research and development based on estimates made by
management.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts receivable and records an allowance for
doubtful accounts based on a specific identification basis of those accounts
that they consider to be uncollectible. Accounts receivable of $194,500 are
included in assets of discontinued operations and as of December 31, 2005,the
allowance for doubtful accounts was $133,660.
INVENTORY
Inventory was valued at lower of cost or market on first-in, first-out method.
Reserves for obsolescence or slow moving inventory were recorded when such
conditions were identified. Inventory that was held at December 31, 2004 has
been reclassified to Assets of Discontinued Operations.
ADVERTISING
Advertising costs are charged to expense as incurred during the years ended
December 31, 2005 and 2004. The Company incurred $14,515 and $5,453 in
advertising expenses respectively.
F-7
MARKETABLE SECURITIES
Investments in available-for-sale securities are accounted for in accordance
with Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("FAS") 115 "Accounting for Certain Investments in Debt and
Equity Securities". Per FAS 115, the securities are stated at their fair market
value and any difference between cost and market value is recorded as an
unrealized gain or loss classified as a separate component of stockholders'
equity - accumulated other comprehensive income. As of December 31, 2004, the
Company recognized an initial unrealized loss on available for sale securities
of $792,009 which was included in other comprehensive income. The loss was
recognized as of December 31, 2005 with the sale of available for sale
securities as follows:
2005
--------
Fair market value of marketable securities $590,980
Proceeds from sale (661,021)
Gross realized gain (70,041)
Reclassification of comprehensive income 792,009
--------
Net loss $721,968
========
CLASSIFICATION OF FINANCIAL INSTRUMENTS
In accordance to FASB Statement of Financial Accounting Standards ("SFAS") 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity", financial instruments with a mandatory
redemption rights are to be recorded as liabilities unless the redemption is to
occur upon the liquidation or termination of the issuer. SFAS 150 also specifies
that a financial instrument that embodies a conditional obligation is based
solely or predominantly on variations inversely related to changes in the fair
value of the issuer's equity shares. Based on these characteristics, the Company
has recorded the Preferred Series A shares as a long term liability on the
balance sheet. See Note 11, Preferred Series A Shares.
EVALUATION OF BENEFICIAL CONVERSION FEATURE IN DEBENTURES
In accordance with Emerging Issues Task Force ("EITF") Issue 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjusted Conversion Rights", as amended by EITF 00-27, we must evaluate the
potential effect of any beneficial conversion in terms related to convertible
instruments such as convertible debt or convertible preferred stock. Valuation
of the benefit is determined based upon various factors including the valuation
of equity instruments, such as warrants that may have been issued with
convertible instruments, conversion terms, and the value of the instruments to
which the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the partially
subjective nature of the valuation techniques.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). Pursuant to EITF
00-19, an evaluation of specifically identified conditions is made to determine
whether the fair value of warrants issued is required be classified as a
derivative liability. The fair value of warrants classified as derivative
liabilities is adjusted for changes in fair value at each reporting period, and
the corresponding non-cash gain or loss is recorded in current period earnings.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS 130, "Reporting of Comprehensive
Income", which established the standards for the display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from the
issuance of shares of stock and distributions to shareholders. 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 in the amount of
$792,009. As of December 31, 2005, the loss was recognized and reclassified to
the net loss on sale of the securities.
F-8
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 Advanced Refractive
Technologies, Inc. 2003 Stock Option Plan. The Option Plan provides for the
grant of incentive and non-qualified stock options to selected employees, the
grant of non-qualified options to selected consultants and to directors and
advisory board members. The Option Plan is administered by the Compensation
Committee of the Board of Directors and authorizes the grant of options for
3,000,000 shares. The Compensation Committee determines the individual employees
and consultants who participate under the Plan, the terms and conditions of
options, the option price, the vesting schedule of options and other terms and
conditions of the options granted pursuant thereto.
During fiscal year 2004, the Company issued 180,000 stock options to consultants
to purchase the Company's common stock in exchange for services rendered. The
Company has accounted for these issuances in accordance with SFAS No. 123 and
has recorded an expense of $30,506 representing the fair value of the options
using a Black-Scholes option-pricing model. The options are exercisable at a
price of $0.40 per share and have a term of 10 years.
During fiscal year 2004, the Company issued options to employees and directors
to purchase 1,190,000 shares of its common stock, at an exercise price of $0.40.
All options granted during the period have a term of ten years and were issued
at an exercise price equal to the market value of the underlying stock at the
date of grant. As of December 31, 2004 a total of 2,470,000 options to purchase
shares of the Company's common stock were outstanding pursuant to the 2003 Plan.
The Company issued no additional options to employees of directors during 2005.
A summary of changes in common stock options during 2005 and 2004 follows:
Weighted
average
Number of Exercise Exercisable
Shares Price Shares
----------------------------------------
Outstanding at December 31, 2003 1,165,000 $1.10 818,612
Granted 1,370,000 $0.40 588,889
Forfeited (45,000) $1.10 --
Cancelled (20,000) $1.10 (20,000)
----------- ----------
Outstanding at December 31, 2004 2,470,000 $0.73 1,387,501
Granted -- -- --
Forfeited (486,944) $0.61 --
Cancelled (8,056) $1.10 (8,056)
---------- ----------
Outstanding at December 31, 2005 1,975,000 $0.76 1,379,445
========== ==========
F-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 the year
ended December 31, 2004. No stock options were granted in the year ended
December 31, 2005.
Assumptions used for Black-Scholes option pricing model: 2005 2004
---- ----
Dividend Yield -- 0.00%
Risk free interest rate, 5 years -- 3.35%
Expected Life -- 5 yrs
Volatility -- 43.14%
No additional options were granted during 2005.
Under the accounting provisions of SFAS No. 123, as amended by SFAS No. 148, the
Company's pro forma net loss and loss per share for the years ended December 31,
2005 and 2004 would have been as follows:
2005 2004
---- ----
Net Loss:
As reported ($18,561,753) ($11,910,530)
SFAS No. 123 effect (225,851) (340,667)
------------ ------------
Pro forma net loss ($18,787,604) ($12,251,197)
============ ============
Loss per share:
As reported ($0.51) ($0.45)
============ ============
Pro forma ($0.51) ($0.46)
============ ============
Basic and diluted weighted
average shares outstanding 36,715,726 26,688,583
============ ============
The following table summarizes information about stock options outstanding at
December 31, 2005:
Weighted
Average Weighted
Remaining Average
Exercise Number Life in Exercise Number
Price Outstanding Years Price Exercisable
$1.10 945,000 7.87 $1.10 790,556
$0.40 1,030,000 8.81 $0.40 916,111
---------- -----------
1,975,000 1,676,667
========== ===========
F-10
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
GOODWILL
Statement of Financial accounting Standards 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), requires that goodwill be tested for impairment on an
annual basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value. These events or circumstances could include a significant
change in the business climate, legal factors, operating performance indicators,
competition, or disposition of a business operation. Application of the goodwill
impairment test requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business and the useful life over which cash
flows will occur. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment.
Based on Management's assessment as of December 31,2005, no impairment of
goodwill was considered necessary.
OTHER INTANGIBLE ASSETS
Management performs impairment testing annually and more frequently if factors
and circumstances indicate an impairment may have occurred. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. Management has performed its impairment testing and believes that no
impairments existed as of December 31, 2005.
Included in other assets are license agreements and patents. License agreements
and patents are amortized over the life of the respective agreement or patent.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Based on Management's assessment as of December 31,2005, no impairment of
intangible assets was considered necessary.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No.128,"EARNINGS
PER SHARE," and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 98. Accordingly, basic loss per share is computed using the
weighted average number of common shares and diluted loss per share are computed
based on the weighted average number of common shares and all common equivalent
shares outstanding during the period in which they are dilutive. Common
equivalent shares consist of shares issuable upon the exercise of stock options,
using the treasury stock method, or warrants; common equivalent shares are
excluded from the calculation if their effect is anti-dilutive.
F-11
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statement of the prior
year in order to conform to current year 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.
In February 2006, the financial accounting standards board ("FASB:) released
statement No.155. Accounting for certain hybrid financial instruments. ("SFAS
No.155") SFAS No. 155 is an amendment of statement No. 133, Accounting for
derivative instruments and hedging activities, and statement No. 140, Accounting
for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 155 establishes, among other items, the accounting for
certain derivative instruments embedded within other types of financial
instruments: and, eliminates a restriction on the passive derivative instruments
that a qualifying special-purpose entity may hold. Effective for the Company
beginning January 1, 2007, SFAS No. 155 is not expected to have any impact on
the Company's financial position, results of operations or cash flow.
In March 2006, the FASB released statement No. 156, Accounting for servicing of
financial assets, an amendment of FASB statement No. 140, ("SFAS No. 156"). SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized servicing
assets and liabilities in accordance with SFAS No. 140 be initially measured as
fair value, if practicable. Furthermore, this standard permits, but does not
require, fair value measurement for separately recognized servicing assets and
liabilities in subsequent reporting periods. SFAS No. 156 is also effective for
the Company beginning January 1, 2007: however, the standard is not expected to
have any impact on the Company's financial position, results of operation or
cash flow.
F-12
NOTE 3 - Business Combination
The Company acquired OTI in November 2005 in return for the issuance of 100,000
convertible preferred class B shares valued at $1,500,000. These shares cannot
be converted for a period of one year from the date of acquisition. The
acquisition was recorded under the purchase method of accounting, and the
purchase price was allocated based on the fair value of the assets acquired and
the liabilities assumed. In accordance with generally accepted accounting
principals, costs allocated to the license were capitalized and will be
amortized over its estimated useful life. The goodwill recorded as a result of
the acquisition is not amortized, but is included in the Company's review of
goodwill for impairment.
The Company allocated the consideration paid to $200,000 in cash held by OTI,
technology licenses valued at $75,000 and goodwill in the amount of $1,225,000.
As of December 31, 2005, no revenues have been generated by OTI.
NOTE 4 - DISCONTINUED OPERATIONS
In April 2004, ART entered into an exclusive license agreement with Gebauer
Medizintechnik GmbH, of Neuhausen Germany ("Gebauer"), pursuant to which we
acquired worldwide marketing, sales and distribution rights for Gebauer's LASIK
and Epi-LASIK products. In May 2004, ART began marketing these products in
Europe and certain other foreign countries, where the products have received
regulatory clearance for sale, and began generating revenue from product sales
during the second quarter of 2004
After disputes arose with Gebauer, in October of 2005 ART entered into an
agreement with Gebauer terminating the license agreement, and the Company sold
its remaining inventory of products to CooperVision International Holding
Company, LP. As a result, the Company has no products for sale and has no
source of revenues. Summary operating results of discontinued operations were as
follows:
2005 2004
---- ----
Sales, net $ 1,087,136 $ 1,725,435
Cost of goods sold (1,849,697) (738,917)
General and administrative (3,510,737) (5,215,864)
----------- -----------
Operating loss (4,273,298) (4,229,346)
=========== ===========
Assets of the discontinued operations were comprised of the following at
December 31, 2005 and 2004:
2005 2004
----------- -----------
Accounts receivable, net of allowance $ 60,872 $ 180,1455
Inventory -- 634,430
Distribution agreement, net -- 1,654,218
----------- -----------
Total Assets - Discontinued Operations $ 60,872 $ 2,655,997
=========== ===========
Liabilities of the discontinued operations were comprised of the following at
December 31, 2005 and 2004:
2005 2004
----------- -----------
Accounts payable $ -- $ 376,795
Accrued liabilities 563,436 344,282
----------- -----------
Total Liabilities - Discontinued Operations $ 563,436 $ 721,072
=========== ===========
F-13
NOTE 5 - INVENTORY
Inventory includes finished goods of ophthalmic surgical products purchased
pursuant to the Manufacturing, Supply and Distribution Agreement completed in
May 2004 and terminated in October 2005. Accordingly, inventory totaling
$634,430 has been included in assets of discontinued operations on the Company's
balance sheet at December 31, 2004.
During 2005 the Company sold its remaining inventory related to the discontinued
Gebauer product business totaling $375,732, and no inventory was held at
December 31, 2005.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2005 and 2004:
December 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
Leasehold improvements 30,229
-------------- --------------
208,932 178,703
Less: Accumulated depreciation (132,099) (90,905)
-------------- --------------
$ 76,833 $ 87,798
============== ==============
Depreciation expense for the fiscal years ended December 31, 2005 and 2004, was
$41,194 and $32,254, respectively.
NOTE 6 - DISTRIBUTION AND PATENT AGREEMENTS
In May 2004, the Company entered into a Manufacturing, Supply and Distribution
Agreement with a German company ("licensor") pursuant to which the Company
acquired exclusive worldwide distribution, sales and marketing rights for
certain ophthalmic surgical products used in LASIK refractive surgery
procedures.
The Company capitalized a total of $1,901,400 in connection with this agreement
based on non-refundable cash license fee paid, plus the fair market value of
750,000 shares of common stock issued to the licensor, as consideration under
the agreement. In October 2005, the Company terminated the distribution
agreement and expensed the remaining capitalized balance of $1,654,218 as part
of discontinued operations as of December 31, 2005.
In November 2005 the Company acquired the stock of OptiMetrix Technologies,
Inc., a company formed for the sole purpose of obtaining the exclusive license
to a patented technology for the detection of cataract formations.
Distribution ,Patent and License agreements consisted of the following at
December 31, 2005 and 2004:
December 31,
2005 2004
----------- -----------
Patent agreements 100,000 100,000
License Agreement 75,000 --
Less: accumulated amortization (21,844) (12,205)
----------- -----------
$ 153,156 $ 87,795
=========== ===========
The distribution agreement with Gebauer in the amount of $1,901,400 and related
amortization of $247,182 was reclassified at December 31, 2004 to assets related
to discontinued operations.
Amortization expense for the fiscal years ending December 31, 2005 and 2004, was
$9,640 and $270,631, respectively. The unamortized Gebauer distribution
agreement balance of $1,654,218 was charged to expense during 2005.
F-14
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2005 and 2004:
December 31,
2005 2004
---------- ----------
Payroll and related taxes $ 142,763 60,755
Litigation settlement fees 129,669 159,669
Accrued consulting fees 325,000 235,000
Accrued professional fees 60,000 60,000
Other accruals 258,369 183,010
---------- ----------
$ 915,801 $ 698,434
========== ==========
Portions of the accrued expenses have been reclassified to current liabilities
related to discontinued operations for 2005 and 2004.
NOTE 8 - SECURED DEBENTURES
FEBRUARY 2004 SECURED DEBENTURE
In February 2004, the Company entered into secured debenture agreements with an
aggregate principal balance of $500,000, and received net proceeds of $447,500
after subtracting related placement agent fees and legal expenses totaling
$52,500.
The debentures bear interest at an annual rate of 24%, which is payable monthly
beginning April 1, 2004. In addition, the debenture holders received warrants to
purchase 250,000 shares of the Company's common stock, exercisable through March
1, 2009, at an exercise price of $1.10 per share.
The principal balance of the debentures is due and payable on the earlier of (i)
thirty (30) days from the date the Registration Statement is declared effective
by the Securities and Exchange Commission, provided that a specified affiliate
of the investors has not defaulted in its obligation to purchase shares of the
Company's common stock, or (ii) twelve (12) months from the date the
Registration Statement is declared effective, or (iii) eighteen (18) months from
the date of the debenture agreement. The debentures are secured by all accounts
and equipment of the Company, now owned, existing or hereafter acquired.
In October 2004, the Company received a notice of default from the holders of an
aggregate of $400,000 of these debentures due to the non-timely payment of
interest that was owed under the debenture agreements. In order to cure the
default, the Company made the required interest payments, and in October 2004
the Company agreed to reduce the exercise price of the original 250,000 warrants
issued to $0.75 per share, and to issue total additional warrants to purchase
125,000 shares at an exercise price of $0.75 per share.
In January 2005, the Company repaid the entire $500,000 outstanding principal
balance and the secured debenture agreement was cancelled.
F-15
MAY 2004 SECURED DEBENTURE
In May 2004, the Company entered into a secured debenture agreement with HIT
Credit Union with a principal balance of $750,000, and received net proceeds of
$662,188 after subtracting related placement agent fees and expenses totaling
$80,000 and prepaid interest totaling $7,812. The principal balance of the
debenture was due and payable on July 5, 2004, and the debentures bore interest
at an annual rate of 15%, which was payable monthly beginning June 1, 2004. In
addition, the debenture holder received a warrant to purchase 500,000 shares of
the Company's common stock, exercisable through May 6, 2009, at an exercise
price of $0.90 per share. The debenture was secured by 750,000 shares of the
Company's common stock that were issued by the Company as collateral under this
agreement.
The Company did not repay the principal on the scheduled maturity date of July
5, 2004, and such failure to pay constitutes a default under the obligation. In
October 2004 the debenture holder entered into a forbearance agreement with the
holders of convertible debentures entered into in June and July 2004 with an
aggregate principal amount of $2,000,000, pursuant to which the debenture holder
agreed not to take any action with respect to the non-payment of the $750,000
principal balance until the earlier of (i) February 2, 2005 and (ii) the date of
notice of default from the convertible debenture holders to the Company. In
January 2005, the Company repaid the entire $750,000 outstanding principal
balance, plus accrued interest totaling $6,744, and the 750,000 shares of the
Company's common stock held as collateral on the debt were returned and the
secured debenture agreement was cancelled.
NOTE 9 - CONVERTIBLE DEBENTURES
JANUARY 2005 CONVERTIBLE DEBENTURES
On January 14, 2005, the Company entered into convertible debenture agreements
with Renn Capital Group, Inc. and a group of investment funds, several of which
were already holders of securities issued by the Company, under which the
Investors could purchase up to $8,195,500 in principal amount of convertible
debentures from the Company. The Convertible Debentures are convertible into
Common Stock of the Company at a rate of $.35 per share, subject to
anti-dilution adjustments. The final purchase price consisted of cash of
$4,720,000 and the exchange of $2,975,000 in previously issued convertible
debentures or an aggregate total of $7,695,000.
In connection with the transaction the Company also issued to the Investors
warrants to purchase 8,967,855 shares of common Stock and canceling 1,595,238 of
previously issued warrants associated with the October Security Agreement, or a
net of 7,372,617 warrants, at an exercise price of $.40 per share. The warrants
expire on the fifth anniversary of the date of issuance.
Pursuant to an Amended and Restated Security Agreement, the Company granted the
Investors a security interest in substantially all the assets of the Company.
The Amended and Restated Security Agreement replaces the Security Agreement
entered into October 14, 2004 between the Company and certain of the investors.
Also, pursuant to an Amended and Restated Registration Rights Agreement, the
Company granted the Investors certain registration rights with respect to the
shares of Common Stock issued in the transaction as well as the shares of Common
Stock issuable upon conversion of the Convertible Debentures and upon exercise
of the Warrants. The Amended and Restated Registration Rights Agreement replaces
the Registration Rights Agreement entered into on October 5, 2004 between the
Company and certain of the investors.
F-16
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 was recorded as
non-cash interest expense during 2005.
On June 24, 2005, the Company revised the effective conversion price for the
debentures and any and all warrants in the January 2005 financing transaction to
a price of $.095 per share. The price was above the closing stock price thus no
additional beneficial conversion was recorded.
The Company is in default of the Amended and Restated Registration Rights
Agreement entered into with the Debenture holders due to its failure to have a
Registration Statement declared effective within 135 days of the Agreement. The
penalty provided for such failure is 3% per month of the principal balance still
owing, commencing with the 136th day. Through December 31, 2005 the Company has
accrued $1,518,524 of penalties.
During the year ended December 31, 2005, the Company recorded total
interest expense of $1,260,878 in connection with the debenture debt. Of this
total, $195,124 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 $1,065,754 resulted from interest accrued during the period
on the outstanding principal balance. As of December 31, 2005, the balance on
the accrued interest was $1,066,165.
CONVERSION PRICE AND WARRANT TERM ADJUSTMENT
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 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 year ended December 31, 2005, debentures with a principal balance of
$1,108,000 were tendered for conversion to common stock of the Company under the
conversion terms of the agreement.
F-17
On June 14, 2005, convertible debentures with an aggregate outstanding principal
balance of $7,695,000, and certain warrant agreements, were amended to change
the conversion price and exercise price from $0.35 and $0.40 per share,
respectively to $0.095. In addition, the term of the warrants was extended to
January 14, 2010. The Company determined that the modification of terms met the
requirements of EITF Issue 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," of an exchange of debt with substantially
different terms and accordingly has deemed the debt to be extinguished as of
June 14, 2005, and replaced with new debt on that date.
At the time of the amendment and recording the extinguishment of the original
Notes, the Company recorded a corresponding entry to record a new note at its
principal balance as of June 14, 2005 of $7,695,000, and further recorded
entries to record discounts related to the fair value of the warrants and
beneficial conversion features totaling $3,669,956. The recorded debt discount
will be amortized as non-cash interest expense over the remaining term of the
debt.
As of December 31, 2005 and December 31, 2004, convertible debenture debt
balances consists of the following:
Current:
December 31, December 31,
2005 2004
----------- -----------
Convertible debenture $ 6,587,000 $ 1,300,000
Convertible debenture discount (2,997,929) (402,345)
----------- -----------
Convertible debenture - net $ 3,589,071 $ 897,655
=========== ===========
Long Term:
December 31, December 31,
2005 2004
----------- -----------
Convertible debenture -- $ 2,975,000
Convertible debenture discount -- (1,641,399)
----------- -----------
Convertible debenture - net $ -- $ 1,333,601
=========== ===========
At December 31, 2005, the Company is in default of their convertible note
agreements. Accordingly, its convertible notes with maturity dates greater than
one year from the balance sheet date are classified as current liabilities as of
December 31, 2005.
NOTE 10 - DERIVATIVE LIABILITIES
In December 2005, the Company's evaluation of criteria under EITF Issue No.
00-19, "Accounting for Derivative Financial Instrument Indexed to, and
Potentially Settled in, a Company's Own Stock" resulted in the determination
that the Company's outstanding warrants should be reclassified as a derivative
liability. In accordance with EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked to market each reporting period,
with a corresponding non-cash gain or loss reflected in the current period.
The fair market value of the derivative liabilities was determined to be $94,829
using a Black Scholes model valuation with the following assumptions, expected
dividend yield of zero, expected stock price volatility of 120.64%, risk free
interest rate of 4.35% and a remaining contractual life between one and five
years. The aggregate fair value of the warrant derivative liability at December
31, 2005 was determined to be $102,951. Based on this change in fair value, the
Company has recorded a non-cash loss during the year ended December 31, 2005 of
$8,122 and a corresponding increase in the warrant derivative liability.
NOTE 11 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
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 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.
F-18
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.
In October 2004 the parties to the litigation entered into a settlement
agreement pursuant to which revised note payable amounts and payment schedules
were agreed upon. Based on this agreement, outstanding principal and accrued
interest balances related to these notes as of September 30, 2004 have been
adjusted to reflect the agreed upon amounts, and as a result, the balances at
December 31, 2005 and 2004 are as follows:
December 31, 2005 December 31, 2004
Principal Interest Principal Interest
----------------------------------------------------------
SurgiJet $ 495,242 $ 27,439 $ 549,774 $ 14,347
Lance Doherty 19,000 8,894 19,000 6,293
----------------------------------------------------------
Total $ 514,242 $ 36,333 $ 568,774 $ 20,64
==========================================================
The Company has been in default of the settlement agreement since June 2005 when
it stopped making the stipulated monthly principal payments. The other parties
to the agreement have not filed a notice of default, and the Company intends to
resume making payments if its intentions to raise working capital for operating
purposes are successful.
FINANCIAL ENTREPRENEURS, INC. ("FEI")
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between PNAC and FEI, a
significant shareholder of the Company, during 2002. The note bears interest at
an annual rate of 7.5%, and matures on April 3, 2009. Upon consummation of the
merger in February 2003, the outstanding principal and accrued interest payable
balances were $206,649 and $11,462, respectively. During 2003, the Company added
net borrowings of $43,476 to the note, and accrued additional interest expense
of $17,072, resulting in an outstanding principal balance and accrued interest
payable balances at December 31, 2003 of $250,125 and $28,534, respectively.
During the fiscal year ending December 31, 2004, net activity resulted in an
increase to the outstanding principal of $28,761 and $23,329 of interest expense
related to this note. As of December 31, 2004 the outstanding principal and
accrued interest payable on this note were $278,886 and $51,863, respectively.
In March 2005, the Company received a demand from FEI for the payment in full of
the note. This is not a demand note and the Company is currently in negotiations
for resolution in this matter and believes there will be an amicable resolution.
As of December 31, 2005, the outstanding principal and accrued interest on the
note was $265,990 and $76,259, respectively.
NOTE 12 - COMMITMENTS
LICENSE AGREEMENTS
Under the terms of a patent license agreement entered into during 2003, the
Company is obligated to pay a royalty of 6% of net sales of products utilizing
the licensed patent technology. The license agreement also provides for a
minimum royalty of $24,000 per year that may be used as a credit toward payment
of future royalties due on product sales.
The Company acquired from UTEK Corporation all the stock of OTI, which owns an
exclusive license for a patented technology. The Company is required to pay to
UTEK royalties of three percent (3%) of sales of equipment and five percent (5%)
of sales of disposables and services, excluding customary discounts and sales to
the U.S. Government. In addition the Company is required to pay an annual
license fee payable in advance on March 31 of each calendar year as follows:
F-19
YEAR ANNUAL LICENSE FEE
---- ------------------
2006 0
2007 $10,000
2008 and 2009 $20,000
2010 $40,000
2011 $70,000
2012 and thereafter $100,000
Annual fees for any year will be credited against any royalties owed during that
year.
OTI has the right to sub-license within the scope of its grant.
The Company must meet certain due diligence milestones as follows:
o An updated commercialization plan within 120 days of the execution of the
license.
o The Company must invest at least $500,000 towards development of the
technology by March 2007
o A Beta Product by June 2007
o A first commercial sale to a non-related company by September 2008.
o One Million ($1,000,000) in sales by June 2009
o Annual sales of at least one million ($1,000,000) after that.
If the Company fails to meet any of these milestones the license may be
terminated or converted to a non- exclusive license. The Company has entered
into a consulting agreement with the inventor of the technology in order to help
implement the technology.
LEASE COMMITMENTS
The Company leases an office and warehouse in San Clemente, California under an
operating lease. The original term of the lease expires March 31, 2008 and the
Company has the option to extend the term for one additional three year period.
Minimum future rent payments including tenant improvements under the facility
lease are as follows:
Year ending December 31
2006 $ 76,956
2007 76,956
2008 19,239
--------
$173,151
========
Rent expense was $98,968 and $108,142 for the years ended December 31, 2005 and
2004.
The Company also leases certain property and equipment under agreements which
are classified as operating leases. Rent expense included under these leases was
$4,677 and $2,140 for the years ended December 31, 2005 and 2004.
Minimum future lease payments under these property and equipment leases are as
follows:
Year ending December 31
2006 $ 3,168
2007 3,168
2008 1,188
--------
$ 7,524
========
NOTE 13 - 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 1.00 L (pound) per share. The Company was
charged a commission in conjunction with the sale equal to 10% of the Langley
shares leaving 2,230,177 shares available to the Company. Consummation of the
transaction was subject to admission of the Langley shares to the London Stock
Exchange ("LSE"), which occurred on September 30, 2004 and the initiation of
trading on the LSE which began on October 8, 2004. The Series A shares were
recorded at a total value of $1,536,653 based on the fair value of the Langley
shares on October 8, 2004. On December 31, 2004, the market value of the shares
decreased to $590,980. As the Company classified the shares as an
available-for-sale marketable security, the Company recorded an unrealized loss
of $792,009, as an accumulated comprehensive loss which is a separate component
of equity. The Company recorded commission expense of $153,664 in the fourth
quarter based on the value of the commission shares.
The Series A Preferred Stock is non-voting and the shareholders are not entitled
to receive any dividends. The preferred stock is convertible after one year for
a period of three years from the date of issuance into shares of the Company's
common stock ("Common Stock"). The number of shares of common stock to be issued
upon conversion is determined by dividing the aggregate stated value of the
preferred stock by the ("Conversion Price"). The Conversion Price is defined as
the lesser of $0.609 (The "Fixed Conversion Price") or eighty percent (80%) of
the lowest closing bid price for the common stock in the ten (10) trading days
preceding the date of conversion, but in no event is it less than 30 percent
(30%) of the Fixed Conversion Price. However, Langley may not convert to the
extent that conversion would result in it's owning more than 4.99% of the
outstanding common stock of the Company. The conversion price is subject to
adjustment based on anti-dilution provisions. Any shares of preferred stock not
previously converted will automatically be converted into common stock at the
end of the three year period. If the Company defaults under certain covenants,
the holders of the preferred stock may compel redemption at the stated value.
In accordance with 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.
The market price of the Company's common stock on the date of commitment was
$0.48 per share. In accordance with EITF 98-5, as amended by EITF 00-27, because
the effective conversion price associated with the preferred shares is less than
the market value, a beneficial conversion should be recognized as a return to
the preferred shareholders over the minimum period from the date of issuance to
the date at which the preferred shareholders can realize that return. Since the
convertible preferred stock is automatically converted to common stock at the
end of three years, (if not previously converted), the discount should be
accreted over the three year life.
As the Preferred Series A shares are classified as a liability, the accretion of
the recorded discount resulting from the beneficial conversion is recognized as
interest expense and is reflected in the income statement of operations.
Accordingly, the Company recorded a preferred stock discount of $1,125,000. On
December 31, 2005 and 2004, accretions of the discount of $375,000 and $93,750,
respectively, were recorded resulting in a net preferred discount of $656,250 at
December 31, 2005.
Based on the price of the Company's common stock at December 31, 2005, the
number of shares issuable to settle the redemption obligation at that date
approximates 24,630,000 shares.
NOTE 14 - SERIES B PREFERRED SHARES
In December 2005 the Company acquired OptiMetrix Technologies, Inc. (OTI), a
wholly owned subsidiary of UTEK Corporation (UTEK). OTI holds technology
licensed from Los Alamos National Laboratory (LANL), operated by the University
of California for the Nuclear Security Administration of the U.S. Department of
Energy.
The consideration paid for this license was 100,000 Series B Convertible
Preferred Stock ("Series B shares"). These shares can be converted after a
period of one year from the date of acquisition in December 2005. The Series B
preferred stock is non-voting, and no dividends will be paid to the Series B
shareholders. They will be convertible into common shares of the Company valued
at $1,500,000, based on the 10 day closing stock price average at the time of
conversion. Additionally, UTEK received a warrant for 750,000 shares of the
Company's common stock. The warrant exercise price is 50% of the conversion
price of the Series B shares. Series B shares will be paid out of the assets of
the Company before all other holders of other classes of series of capital stock
of the Company. During the twelve months that Utek holds the Series B Preferred,
interest will be charged at the annual rate of 5%, compounded quarterly, payable
in cash or in kind, due at the date of conversion. If paid in kind, common
shares will be issued at the time of conversion based on the 10-day closing
average price of the Company's common stock.
In accordance with 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 B shares as a
long term liability on the balance sheet.
Based on the price of the Company's common stock at December 31, 2005, the
number of shares issuable to settle the redemption obligation at
that date approximates 100,000,000 shares.
NOTE 15 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
ISSUANCE OF COMMON STOCK FOR LOAN ORIGINATION FEES
On January 6, 2005 the Company issued 142,857 shares of common stock as an
origination fee in consideration of replacing a delinquent loan with a new loan.
ISSUANCE OF COMMON STOCK FOR SERVICES
During the period February 15, 2005 through December 14, 2005 the Company issued
5,243,256 shares of common stock for services rendered to the Company.
ISSUANCE OF COMMON STOCK PURSUANT TO A DEBT AGREEMENT
On from February 15, 2005 the Company issued 1,039,370 shares of common stock
pursuant to a debt agreement.
ISSUANCE OF COMMON STOCK ON CONVERSION OF DEBENTURES
During the period July 15, 2005 through November 23, 2005 the Company issued
11,687,013 shares of stock upon conversion of convertible debentures.
ISSUANCE OF COMMON STOCK AS COLATTERAL FOR LEGAL FEES
On September 27, 2005 the Company issued 10,000,000 shares of common stock as
collateral for legal fees.
WARRANT ACTIVITY
During 2005, the Company issued 5-year warrants to purchase an aggregate of
9,797,150 shares of its common stock at an exercise price of $0.40 per share and
subsequently adjusted the exercise price to $0.095, pursuant to the
anti-dilution provisions of the warrants.
The following table summarizes the number of outstanding common stock warrants
as of December 31, 2005:
Weighted Average
Number Exercise Price
----------- ------------
Outstanding at December 31, 2003 12,102,480 $ 2.530
Granted 8,730,238 0.640
Forfeited -- --
Exercised -- --
---------- ------------
Outstanding at December 31, 2004 20,832,718 $ 1.450
Granted 9,797,150 0.200
Exchanged (2,424,533) 2.550
Exercised -- --
---------- ------------
Outstanding at December 31, 2005 28,205,335 $ 0.960
The following table summarizes additional information with respect to
outstanding common stock warrants at December 31, 2005:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ------------ --------------------- -----------
$.095 7,367,857 54 7,367,857
$0.40 6,538,331 53 6,538,331
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
$0.90 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
============ ============
BORROWED SHARES
In connection with collateral requirements of convertible debenture agreements
with HIT Credit Union, Platinum Long Term Growth Fund and Rock II, LLC, the
Company borrowed a total of 3,000,000 shares of its outstanding common stock
from Taika Investments, Inc. ("Taika") pursuant to a Securities Lending
Agreement between the Company and Taika. In accordance with the terms of this
agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and was obligated to return any borrowed shares by November 30,
2004. In January 2005, the Company received a one-year extension, to November
30, 2005 and in November,2005 the Company received another one-year extension to
November 30, 2006, of the date by which any borrowed shares must be returned. In
the event of default, the Company has agreed to file a Registration Statement
and to return any shares, within 72 hours, which had not previously been
returned by the due date. As of December 31, 2004 the Company had borrowed a
total of 1,550,000 shares pursuant to this agreement, and the Company had
accrued interest expense totaling $41,935. As of December 31, 2005, the accrued
interest balance was $106,328.
The 3,000,000 shares that were borrowed were outstanding at December 31, 2005.
In January 2006, HIT Credit Union returned 750,000 of the borrowed shares.
ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The following chart depicts the changes in the accumulated comprehensive income
for periods ending December 31, 2005 and 2004:
2005 2004
---------- ---------
Beginning balance (792,009) --
Change in accumulated comprehensive income(loss) -- (792,009)
Amounts recognized with sale of Securities 792,009 --
---------- ---------
Total accumulated comprehensive income/(loss) -- (792,009)
========== =========
This loss was incurred as a result of the write down of the marketable
securities to market on December 31, 2004. Refer to the Preferred Series A Stock
section above for more detail on this transaction. During the year ended
December 31,2005, the loss was recognized with the sale of available for sale
securities.
NOTE 16 - SETTLEMENT AGREEMENTS AND LOAN PAYABLE
In November 2002, the Company entered into settlement agreements with an officer
and an employee related to accrued but unpaid fees for consulting services
rendered by them prior to the consummation of the Merger in the aggregate of
$700,000. Under the agreements a total of $450,000 was converted into 211,267
shares of the Company's common stock, during 2003, based upon the closing price
on the effective date the Merger Agreement. The balance owed of $250,000 was
converted into two notes payable that bear interest at an annual rate of 3.5%
and provide for the principal to be paid over equal installments for the
duration of the loans. At December 31, 2005 and 2004, the aggregate balance on
these notes was $54,863 and $66,402 and the respective accrued interest payable
balances were $12,462 and $10,102, respectively.
NOTE 17 - RELATED PARTY TRANSACTIONS
During 2003, the Company began making monthly consulting payments to a
corporation controlled by Norman Schwartz, a director of the Company. On March
1, 2005, the company signed a two year contract with Norman Schwartz's company
increasing the monthly fee to $7,500 per month. Total consulting fees and
related expenses paid during 2005 were $84,250 and $15,237, respectively, of
which $44,149 was included in accounts payable at December 31, 2005.
In January 2004, the Company entered into a revised consulting agreement With
Richard Keates providing a monthly retainer of $15,000 plus reimbursement of
business expenses incurred. Through December 31, 2005 consulting fees and
related expenses totaling $180,000 and $26,784, respectively, were recorded
pursuant to this agreement, of which $15,256 is included in accounts payable at
December 31, 2005.
In October 2004, directors Richard H. Keates, M.D., Norman Schwartz, and Adam
Krupp were granted 200,000, 100,000 and 25,000 10-year options, respectively,
to purchase shares of the company's common stock at an exercise price of $0.40.
No additional options were granted to related parties during 2005.
NOTE 18 - SECURITY LENDING AGREEMENT
In April 2004, the Company and Taika Investments entered into an agreement
pursuant to which the corporation agreed to make available 3 million
shares of the Company's common stock, for use by the Company as collateral in
subsequent financing transactions. (See Note 15.)
NOTE 19 - INCOME TAXES
The provision for income taxes consist of the following for the years ended
December 31:
2005 2004
------------ ------------
Current:
Federal $ -- $ --
State 800 800
------------ ------------
Total provision $ 800 $ 800
============ ============
The items accounting for the difference between income taxes computed at the
federal statutory rate and the provision for income taxes are as follows:
2005 2004
------ ------
Federal statutory rate 35% 35%
Increase in deferred income tax asset
valuation allowance (24%) (35%)
Warrants and beneficial conversion
feature and preferred stock accretion (17%) (6%)
State income taxes, net of federal effect 6% 6%
-----------------------
0% 0%
=======================
The components of the net deferred income tax assets are as follows as of
December 31:
2005 2004
------------ ------------
Deferred income tax assets:
Net operating loss carry forward $ 12,572,537 8,924,252
Other temporary timing adjustments 353,790 273,128
------------ ------------
12,926,327 9,197,380
Deferred tax liability:
State taxes -- (641,509)
Other temporary timing adjustments (2,565) --
------------ ------------
Deferred income tax asset, net before
Valuation allowance 12,923,762 8,555,871
Less: valuation allowance (12,923,762) (8,555,871)
------------ ------------
Deferred income tax asset, net $ -- $ --
============ ============
Since 1996, the company has generated federal and state net operating losses
(NOL) of approximately $30.9 million and $30.6 million, respectively. The total
carry forward amounts are available to offset future taxable income and expire
in various years beginning through 2020 and 2007, respectively. The ability to
use some or all of this carryforward is limited by future events such as a
failure to generate positive taxable income or a change in ownership as stated
under the rules of Internal Revenue Code Section 382.
The net deferred tax asset is primarily associated with its net operating loss
carryforwards, state taxes and other timing adjustments. The Company has
recorded a valuation allowance for the entire amount due to the uncertainty
surrounding the likelihood of the Company generating sufficient taxable income
in the future.
NOTE 20 - SUBSEQUENT EVENTS
DELISTING BY NASDAQ
On June 6, 2006, due to its failure to file this document in a timely manner,
NASDAQ determined that the Company's securities were not eligible for continued
quotation on the OTCBB. Consequently since June 6, 2006 the Company's securities
may only be traded pursuant to pink sheet listings. Upon the filing of this
document the Company intends to apply to be re-listed.
CONSULTING AGREEMENT
On March 3, 2006 the Company entered into a Workout Consulting Services
Agreement with Florencia Mate Garabito (Consultant). The contract was for a
minimum term of one year. The consultant was retained to assist the Company in
the areas of valuation, structuring, and re-structuring debt. For her services,
the Consultant was paid 178,571,420 shares of the Company's common stock.
ACQUISITION OF OCULAR THERAPEUTICS, INC. (OthI)
In February of 2006 the Company acquired all of the stock of Ocular Therapeutics
Inc. (OThI), a wholly owned subsidiary of UTEK Inc. OThI holds an exclusive
license to a patented technology for a small protein therapeutic (LD22-4)
developed for the treatment of the wet form of age related macular degeneration.
In addition to license technology, the Company acquired cash held by OthI in the
amount of $325,000 in connection with this acquisition. Consideration paid by
the Company was 100,000 Series C convertible preferred shares of the Company.
The shares are not convertible until the first anniversary of the agreement. The
Series C convertible preferred shares shall convert into $2,800,000 worth of
common shares of the Company based on the previous 10 day average closing stock
price on the day of conversion. Additional consideration consisted of a warrant
to purchase 1,400,000 shares of the Company at 50% of the conversion price. The
Company is required to pay royalties and meet certain milestones as follows:
o Earned royalties of 7.5% on Net Sales
o Annual Minimum Royalty as follows which are fully creditable against
royalties paid during the previous 12 month period:
Year Annual Minimum Royalties
---- ------------------------
1 & 2 -
3 $10,000
4 $20,000
5 $30,000
6 and thereafter $40,000
F-25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Refractive Technologies, Inc., a Delaware corporation
By: /s/ Laurence Schreiber
--------------------------------
Laurence Schreiber, Secretary,
Treasurer, Chief Operating Officer
Date: July 17, 2006