U.S. SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C.
20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
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)
0-256111
(Commission
File Number)
1062 Calle Negocio, Suite D, San Clemente, California 92673
(Address of principal executive offices)
Issuer's telephone number (949) 940-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
As of November 9, 2006, the issuer had 247,233,787 shares of common stock
outstanding.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
This Report on Form 10-QSB contains a number of forward-looking statements
that reflect management's current views and expectations with respect to our
business, strategies, products, future results and events and financial
performance. All statements made in this Report other than statements of
historical fact, including statements that address operating performance, events
or developments that management expects or anticipates will or may occur in the
future, including statements related to distributor channels, volume growth,
revenues, profitability, new products, acquisitions, adequacy of funds from
operations, statements expressing general optimism about future operating
results and non-historical information, are forward-looking statements. In
particular, the words "believe," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE,"
"MAY," "WILL," variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as
well as those expressed in, anticipated or implied by these forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this Report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below in
"MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION," as well as those
discussed elsewhere in this Report, and the risks discussed in our most recently
filed Annual Report on Form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors that may affect our business.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following quarterly financial statements have not been reviewed by
any independent certified public accountant, as required by law. The Company
plans to engage new independent certified public accountants, and will cause
such new accountants to review such financial statements.
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
BALANCE SHEETS
September 30, December 31,
2006 2005
(unaudited) (audited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 1,085
Prepaids and deposits 2,616,127 27,413
Assets of discontinued operations -- 60,872
------------ ------------
Total current assets 2,616,127 89,370
Property and equipment, net 47,978 76,833
Goodwill 6,000,000 1,225,000
Deferred debt costs 377,073 426,857
License agreements, net 217,088 74,809
Patents, net 71,260 78,347
------------ ------------
Total assets $ 9,329,526 $ 1,971,216
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 893,215 $ 940,364
Convertible debenture, net 3,725,739 3,589,071
Accrued penalties on debentures 3,265,664 1,518,524
Accrued interest 2,460,367 1,307,085
Warrant derivative liability 102,951 102,951
Accrued settlement agreement 54,863 54,863
Accrued expenses 1,617,198 915,801
Royalty payable 49,027 49,027
Notes payable to related parties 1,223,982 780,232
Notes payable 10,000 10,000
Customer deposits -- 427
Income taxes payable 800 800
Liabilities of discontinued operations -- 563,436
------------ ------------
Total current liabilities 13,403,806 9,832,581
Series A convertible preferred stock, 450,000 shares issued and outstanding at
September 30, 2006 and December 31, 2005, net of unamortized discount of
$375,000 and $656,250, respectively (redemption value $4,500,000)
1,161,654 880,404
Series B convertible preferred stock, 100,000 shares issued and outstanding at
September 30, 2006 and December 31, 2005
1,500,000 1,500,000
Series C convertible preferred stock, 100,000 shares issued and outstanding at
September 30, 2006 2,800,000 --
Series D convertible preferred stock, 100,000 shares issued and outstanding at
September 30, 2006 2,800,000 --
------------ ------------
Total liabilities 21,665,460 12,212,985
Shareholders' deficit:
Common stock, 750,000,000 shares authorized, $.001 par value, 244,791,682
shares issued and outstanding at September 30, 2006, and 56,379,756
shares issued and outstanding at December 31, 2005
244,792 56,380
Additional paid in capital 34,381,396 30,950,353
Accumulated deficit (46,962,122) (41,248,502)
------------ ------------
Shareholders' deficit (12,335,934) (10,241,769)
Total liabilities and shareholders' deficit $ 9,329,526 $ 1,971,216
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 586,398 304,922 2,110,844 1,200,128
Research and development -- 9,663 116 38,863
Depreciation and amortization 58,738 11,243 103,663 29,951
------------ ------------ ------------ ------------
Total operating expenses 645,136 325,828 2,214,623 1,268,942
------------ ------------ ------------ ------------
Loss from operations (645,136) (325,828) (2,214,623) (1,268,942)
Other income (expense):
Interest and penalties expense (991,641) (231,848) (2,939,611) (569,217)
Interest expense - beneficial conversion -- -- -- (3,311,088)
Amortization of debt discount and debt issuance fees (91,861) (104,172) (277,336) (763,769)
Gain on sale of securities -- -- -- 73,659
Interest cost of preferred stock accretion (93,750) (93,750) (281,250) (281,250)
Other income, net -- 27,930 -- 39,262
------------ ------------ ------------ ------------
Total other expense or income (1,177,252) (401,840) (3,498,197) (4,812,403)
------------ ------------ ------------ ------------
Loss from continuing operations before provision for taxes (1,822,388) (727,668) (5,712,820) (6,081,345)
Provision for income taxes -- -- 800 1,000
------------ ------------ ------------ ------------
Loss from continuing operations (1,822,388) (727,668) (5,713,620) (6,082,345)
Discontinued operations:
Loss from discontinued operations -- (2,724,147) -- (4,323,495)
------------ ------------ ------------ ------------
Net loss (1,822,388) (3,451,815) (5,713,620) (10,405,840)
============ ============ ============ ============
Net loss per common share - basic and diluted:
Continuing operations (0.01) (0.02) (0.03) (0.19)
Discontinued operations -- (0.07) -- (0.13)
------------ ------------ ------------ ------------
Total loss per common share (0.01) (0.09) (0.03) (0.32)
============ ============ ============ ============
Basic and diluted weighted average number of common
shares outstanding 244,484,411 36,468,868 196,113,697 32,295,455
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
ADVANCED REFRACTIVE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------ ------------
Cash flows from operating activities:
Net loss ($ 5,713,620) ($10,405,840)
Less: Net loss from discontinued operations -- 4,323,495
------------ ------------
Net loss from continuing operations (5,713,620) (6,082,345)
Adjustments to reconcile net loss from continuing operations to net cash used by
operating activities:
Operating activities of discontinued operations (502,564) (3,728,309)
Depreciation and amortization 43,663 227,178
Debt discount amortization 242,201 763,769
Accretion of beneficial conversion on preferred shares 281,250 281,250
Adjustment for beneficial conversion for debt -- 3,311,088
Common stock issued for services 15,000 587,555
Common stock issued for services -- 2,259
Warrants repricing in connection with debt guarantee -- 15,769
Gain on marketable securities -- (70,040)
Changes in assets and liabilities:
Prepaid expenses 924,857 171,863
Deferred debt costs 35,135 --
Accounts payable (47,149) 1,106,587
Accrued penalties on debentures 1,747,140 --
Customer deposits (427) (48,771)
Accrued interest 1,153,282 340,879
Royalties payable -- 30,000
Accrued settlement agreement -- (11,539)
Other accrued expense 701,397 524,130
------------ ------------
Net cash flow used by operating activities (1,119,835) (2,578,677)
Cash flows from investing activities:
Cash received in acquisition 675,000 --
Purchase of property and equipment -- (30,230)
------------ ------------
Net cash provided by investing activities 675,000 (30,230)
Cash flows from financing activities:
Advance from related party 568,750 --
Repayment of advances from related parties (125,000) (65,528)
Repayment of secured and convertible debentures -- (2,550,000)
Proceeds from convertible debt -- 4,540,500
Proceeds from sale of marketable securities -- 661,020
------------ ------------
Net cash provided by financing activities 443,750 2,585,992
Net increase (decrease) in cash (1,085) (22,915)
Cash, beginning of period 1,085 22,946
------------ ------------
Cash end of period -- 31
============ ============
Supplemental disclosure of cash flow information:
Interest paid 20,922 171,129
Taxes paid -- --
Debenture costs and fees -- 179,500
Non-cash investing and financing transactions:
Common stock issued in connection with convertible debenture 169,000 507,613
Warrants issued in connection with convertible debentures -- 2,046,330
Warrants issued in connection with debt guarantee -- 15,769
3
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.
In February of 2006 the Company acquired all of the stock of Ocular Therapeutics
Inc. (OThI), a wholly owned subsidiary of UTEK Corp. OThI owns technology
licensed from Motility Inc. OThI holds the exclusive license to a patented
technology for a small protein therapeutic (LD22-4) for the treatment of the wet
form of age related macular degeneration. Because LD22-4 directly targets a
fundamental requirement for the proliferation of blood vessels, i.e. cell
migration, we believe that its mode of action is distinct from other drugs that
are on the market or that are in development by other biotechnology or
pharmaceutical companies. Consideration paid by the Company was 100,000 series C
convertible preferred shares of the Company. The shares are not convertible
until after the first anniversary of the agreement. The preferred shares shall
convert into $2,800,000 worth of common shares of the Company. Additional
consideration was a warrant to purchase 1,400,000 shares of the Company at 50%
of the conversion price.
The acquisitions were recorded under the purchase method of accounting, and the
purchase prices were allocated based on the fair value of the assets acquired
and the liabilities assumed. In accordance with generally accepted accounting
principals, costs allocated to the licenses were capitalized and will be
amortized over its estimated useful life. The goodwill recorded as a result of
the acquisitions is not amortized, but is included in the Company's review of
goodwill for impairment.
4
BASIS OF PRESENTATION
The accompanying financial statements are unaudited and do not include certain
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments, consisting only of normal recurring
adjustments considered necessary to present fairly the Company's financial
position and results of operations, have been included. These interim financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005. Results for interim periods are not necessarily
indicative of trends or of results for a full year.
GOING CONCERN
The accompanying consolidated financial statements have been prepared using the
going concern basis of accounting, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
During the nine months ended September 30, 2006, the Company incurred net losses
of approximately $5,714,000 and the Company's current liabilities exceeded its
current assets by approximately $ 10.8 million. The Company's future capital
requirements will depend on many factors, including but not limited to the
Company's ability to successfully market and generate operating revenue through
product sales, its ability to finalize development and successfully market its
waterjet technology, its on-going operational expenses and overall product
development costs, including the cost of clinical trials, and competing
technological and market developments.
To address the going concern issue, the Company has continued to raise operating
capital through private placements of debt and equity securities, and is
currently in discussions with several parties regarding additional financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, to market the recently licensed products or to complete
its on-going product development efforts. As such, our ability to secure
additional financing on a timely basis is critical to our ability to stay in
business and to pursue planned operational activities.
While the Company believes that the additional financing arrangements will be
completed, there can be no assurance that new financing will be completed or
that the proceeds from new financing will be sufficient for the Company to meet
its contractual obligations and on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from sales are recognized when the earnings process was complete, as
evidenced by an agreement with the customer, transfer of title and acceptance, a
firm price and probable collection. Revenues for 2005 and 2004 were entirely
from operations now discontinued, as described above. The Company will adhere to
this process of revenue recognition in the future as new products become
available for sale.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Certain
corporate overhead expenses, such as professional fees, salaries, rent and
travel are allocated to research and development based on estimates made by
management.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts receivable and records an allowance for
doubtful accounts based on a specific identification basis of those accounts
that they consider to be uncollectible. As of September 30, 2006, the allowance
for doubtful accounts was $68,658.
INVENTORY
Inventory was valued at lower of cost or market. Reserves for obsolescence or
slow moving inventory were recorded when such conditions were identified. The
Company held no inventory at September 30, 2006, and inventory that was held at
December 31, 2005 has been reclassified to Assets of Discontinued Operations.
ADVERTISING
Advertising costs incurred and charged to expense during the first quarter of
2005 were reclassified to Expense of Discontinued Operations for the period. No
advertising expenses were incurred during the nine months ended September 30,
2006.
5
MARKETABLE SECURITIES
Investments in available-for-sale securities are accounted for in accordance
with Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("FAS") 115 "Accounting for Certain Investments in Debt and
Equity Securities". Per FAS 115, the securities are stated at their fair market
value and any difference between cost and market value is recorded as an
unrealized gain or loss classified as a separate component of stockholders'
equity - accumulated other comprehensive income.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
In accordance to FASB Statement of Financial Accounting Standards ("SFAS") 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity", financial instruments with a mandatory redemption
rights are to be recorded as liabilities unless the redemption is to occur upon
the liquidation or termination of the issuer. SFAS 150 also specifies that a
financial instrument that embodies a conditional obligation is based solely or
predominantly on variations inversely related to changes in the fair value of
the issuer's equity shares. Based on these characteristics, the Company has
recorded the Preferred Series A shares as a long term liability on the balance
sheet. See Note 11, Preferred Series A Shares.
EVALUATION OF BENEFICIAL CONVERSION FEATURE IN DEBENTURES
In accordance with Emerging Issues Task Force ("EITF") Issue 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjusted Conversion Rights", as amended by EITF 00-27, we must evaluate the
potential effect of any beneficial conversion in terms related to convertible
instruments such as convertible debt or convertible preferred stock. Valuation
of the benefit is determined based upon various factors including the valuation
of equity instruments, such as warrants that may have been issued with
convertible instruments, conversion terms, and the value of the instruments to
which the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the partially
subjective nature of the valuation techniques.
WARRANT DERIVATIVE LIABILITY
The Company accounts for warrants issued in connection with financing
arrangements in accordance with Emerging Issues Task Force ("EITF") Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock ("EITF 00-19"). Pursuant to EITF
00-19, an evaluation of specifically identified conditions is made to determine
whether the fair value of warrants issued is required be classified as a
derivative liability. The fair value of warrants classified as derivative
liabilities is adjusted for changes in fair value at each reporting period, and
the corresponding non-cash gain or loss is recorded in current period earnings.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS 130, "Reporting of Comprehensive
Income", which established the standards for the display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from the
issuance of shares of stock and distributions to shareholders.
FOREIGN CURRENCY TRANSACTIONS
The Company uses the U.S. dollar as the reporting and functional currency for
its financial statements. Transaction gains and losses are the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Transactions that are denominated in other currencies are
recorded using the exchange rate in effect on the date of the transaction.
Transaction adjustments arising from such are re-measured and included in the
determination of net (loss) income.
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.
6
Under the accounting provisions of SFAS No. 123, as amended by SFAS No. 148, the
Company's pro forma net loss and loss per share for the three months and nine
months ended September 30, 2006 and 2005 would have been as follows:
For the Three Months Ended For the Six Months Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------- ------------- -------------
As reported $ (1,822,388) $ (3,451,815) $ (5,713,620) $ (10,405,840)
SFAS No. 123 effect (27,898) (65,984) (83,694) (197,953)
------------- ------------- ------------- -------------
Pro forma net loss $ (1,850,286) $ (3,517,799) $ (5,797,314) $ (10,603,793)
============= ============= ============= =============
Loss per share:
As reported $ (0.01) $ (0.09) $ (0.03) $ (0.32)
============= ============= ============= =============
Pro forma $ (0.01) $ (0.10) $ (0.03) $ (0.33)
============= ============= ============= =============
Basic and diluted weighted
average shares outstanding 244,484,411 36,468,868 196,113,697 32,295,455
============= ============= ============= =============
The Company issued no additional options to employees or directors during the
nine months ended September 30, 2006.
DEPRECIATION
Depreciation of property and equipment is computed using the straight-line
method over estimated useful lives ranging from three to seven years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
GOODWILL
Statement of Financial Accounting Standards 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill be tested for impairment on an
annual basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value. These events or circumstances could include a significant
change in the business climate, legal factors, operating performance indicators,
competition, or disposition of a business operation. Application of the goodwill
impairment test requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business and the useful life over which cash
flows will occur. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or goodwill impairment.
Based on Management's annual assessment, last completed as of December 31, 2005,
no impairment of goodwill/intangible assets was considered necessary.
OTHER INTANGIBLE ASSETS
Management performs impairment testing annually and more frequently if factors
and circumstances indicate an impairment may have occurred. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. Management has performed its impairment testing and believes that no
impairments existed as of December 31, 2005.
Included in other assets are license agreements and patents. License agreements
are amortized over the life of the agreement and patents are amortized over 20
years.
7
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Based on Management's annual assessment, most recently made as of December
31, 2005, no impairment of goodwill/intangible assets was considered necessary.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No.128,"EARNINGS
PER SHARE," and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 98. Accordingly, basic loss per share is computed using the
weighted average number of common shares and diluted loss per share are computed
based on the weighted average number of common shares and all common equivalent
shares outstanding during the period in which they are dilutive. Common
equivalent shares consist of shares issuable upon the exercise of stock options,
using the treasury stock method, or warrants; common equivalent shares are
excluded from the calculation if their effect is anti-dilutive.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statement of the prior
year in order to conform to the current quarter presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The statement
amends Accounting Research Bulletin ("ARB") No. 43, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. ARB No 43 previously stated that these costs
must be "so abnormal as to require treatment as current-period charges." SFAS
No. 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of `so abnormal.' The statement is
effective for inventory costs incurred during the fiscal years beginning after
June 15, 2005, with earlier application permitted for fiscal years beginning
after the issue date of the statement. The adoption of SFAS No. 151 is not
expected to have any significant impact on the Company's current financial
condition or results of operations.
In December 2004, the FASB revised SFAS No. 123 ("SFAS No. 123R")," Accounting
for Stock Based Compensation." The revision establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments
for goods or services, particularly transactions in which an entity obtains
employees services in share-based payment transactions. The revised statement
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The cost is to be recognized over the period during which the
employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or reporting beginning after December 15, 2005 for
small business issuers, with early adoption encouraged. The Company is currently
evaluating the effect of this standard on their operations.
NOTE 3 - BUSINESS COMBINATION
The Company acquired licenses for new technology in November 2005, February 2006
and April 2006 in return for the issuance of 100,000 shares of Class B
Convertible Preferred Stock, 100,000 shares of Class C Convertible Preferred
Stock and 100,000 shares of Class D Convertible Preferred Stock, respectively.
These shares cannot be converted for a period of one year from the date of
acquisition. The Company valued the assets and related goodwill acquired through
these acquisitions in accordance with "Business Combinations" ("FAS 141"). As of
September 30, 2006, no revenues have been generated by these acquisitions.
8
NOTE 4 - DISCONTINUED OPERATIONS
In April 2004, ART entered into an exclusive license agreement with Gebauer
Medizintechnik GmbH, of Neuhausen Germany ("Gebauer"), pursuant to which we
acquired worldwide marketing, sales and distribution rights for Gebauer's LASIK
and Epi-LASIK products. In May 2004, ART began marketing these products in
Europe and certain other foreign countries, where the products have received
regulatory clearance for sale, and began generating revenue from product sales
during the second quarter of 2004
After disputes arose with Gebauer, in October of 2005 ART entered into an
agreement with Gebauer terminating the license agreement, and the Company sold
its remaining inventory of products to CooperVision International Holding
Company, LP. As a result, the Company has no products for sale and has no source
of revenues. Summary operating results of discontinued operations for the three
and nine months ended September 30, 2006 and 2005, respectively, were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------ ----------- ------------ -----------
Sales, net $ -- $ 92,601 $ -- $ 715,075
Cost of goods sold -- (35,726) -- (407,029)
General and administrative -- (2,781,022) -- (4,631,541)
------------ ----------- ------------ -----------
Operating gain (loss) $ -- $(2,724,147) $ -- $(4,323,495)
============ =========== ============ ===========
Assets of the discontinued operations were comprised of the following at
September 30, 2006 and December 31, 2005:
2006 2005
------------ ------------
Accounts receivable, net of allowance $ -- $ 60,872
============ ============
Liabilities of the discontinued operations were comprised of the following at
September 30, 2006 and December 31, 2005:
2006 2005
------------ ------------
Accounts payable $ -- $ 219,154
Accrued liabilities -- 344,282
------------ ------------
$ -- $ 563,436
============ ============
NOTE 5 - INVENTORY
During 2005, the Company sold its remaining inventory related to the
discontinued Gebauer product business totaling $375,732, and no inventory was
held at September 30, 2006 or December 31, 2005.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2006 and
December 31, 2005:
September 30, December 31,
2006 2005
------------ ------------
Computer and test equipment $ 98,196 $ 98,196
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
Leasehold improvements 30,229 30,229
------------ ------------
208,932 208,932
Less: Accumulated depreciation (160,954) (132,099)
------------ ------------
$ 47,978 $ 76,833
============ ============
Depreciation expense for the nine months ended September 30, 2006 and 2005, was
$28,855 and $29,951, respectively.
9
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 during
2005 as part of discontinued operations.
In November 2005, the Company acquired the stock of OptiMetrix Technologies,
Inc., a company formed for the sole purpose of obtaining the exclusive license
to a patented technology for the detection of cataract formations. The purchase
was effectuated with 100,000 shares of Series B Convertible Preferred Stock,
convertible after one year into shares of the Company's Common Stock worth
$1,500,000, valued at the market price at the time of conversion. The Company
made an evaluation of this purchase in accordance with the guidelines of SFAS
141, and recorded the new license agreement at $75,000. The Company also
received cash of $200,000 and recorded goodwill of $1,225,000. The goodwill was
deemed not to be impaired at December 31, 2005.
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OThI), a wholly owned subsidiary of UTEK Corp. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. Because LD22-4 directly
targets a fundamental requirement for the proliferation of blood vessels, i.e.
cell migration, the Company believes that its mode of action is distinct from
other drugs that are on the market or that are in development by other
biotechnology or pharmaceutical companies. The purchase was effectuated with
100,000 shares of Series C Convertible Preferred Stock, convertible after one
year into shares of the Company's Common Stock worth $2,800,000, valued at the
market price at the time of conversion. Additional consideration was a warrant
to purchase 1,400,000 shares of the Company at an exercise price equal to 50% of
the conversion price.
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Corp. AGTI owns
technology licensed from the University of Arizona. ART has acquired the
worldwide exclusive license to a patent pending technology developed by W.
Daniel Stamer, Ph.D., Associate head for Vision Research and Associate Professor
of Ophthalmology and Vision Science, and Ronald Heinmark Ph.D., Head of Surgical
Research and Professor of surgery at the University of Arizona. The invention is
a novel strategy for reducing pressure build-up in the eye using specific
monoclonal antibodies. When completed, this non-surgical treatment of glaucoma
will be able to be administered to patients with all stages of glaucoma. It
reduces intraocular pressure, and thus may slow the damage to the retinal cells.
Patients might require only biannual treatment on an outpatient basis during
routine check-ups, and potentially may no longer need to have eye drops or risky
surgeries. This method my be an effective alternative to available drugs, and it
is currently anticipated that visual acuity would not be adversely affected
after treatment. Applications may include glaucoma treatment and adjuvant
therapy with common eye surgeries such as cataract removal. The glaucoma market
is the largest pharmaceutical market in ophthalmology, as it is a chronic
problem that currently cannot ever truly be cured, only treated and controlled.
Patients who commence glaucoma treatments remain on the medication for the
duration of their lives.
The purchase was effectuated with 100,000 shares of Series D Convertible
Preferred Stock, convertible after one year into shares of the Company's Common
Stock worth $2,800,000, valued at the market price at the time of conversion.
Additional consideration was a warrant to purchase 1,400,000 shares of Common
Stock of the Company at an exercise price equal to 50% of the conversion price.
Distribution, Patent and License agreements consisted of the following at
September 30, 2006 and December 31, 2005:
September 30, December 31,
2006 2005
------------ ------------
Patent agreements 100,000 100,000
License Agreement 225,000 75,000
Less: accumulated amortization (36,652) (21,844)
------------ ------------
$ 288,348 $ 153,156
============ ============
The unamortized distribution agreement with Gebauer was charged to expense
during 2005.
10
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2006 and December 31,
2005:
September 30, December 31,
2006 2005
------------ ------------
Payroll and related taxes $ 784,163 $ 142,763
Litigation settlement fees 129,669 129,669
Other accruals 703,366 643,369
------------ ------------
$ 1,617,198 $ 915,801
============ ============
Portions of the accrued expenses have been reclassified to current liabilities
related to discontinued operations for 2006 and 2005.
NOTE 8 - CONVERTIBLE DEBENTURES
JANUARY 2005 CONVERTIBLE DEBENTURES
On January 14, 2005, the Company entered into convertible debenture agreements
with Renn Capital Group, Inc. and a group of investment funds, several of which
were already holders of securities issued by the Company, under which the
Investors could purchase up to $8,195,500 in principal amount of convertible
debentures from the Company. The Convertible Debentures are convertible into
Common Stock of the Company at a rate of $.35 per share, subject to
anti-dilution adjustments. The final purchase price consisted of cash of
$4,720,000 and the exchange of $2,975,000 in previously issued convertible
debentures or an aggregate total of $7,695,000.
In connection with the transaction the Company also issued to the Investors
warrants to purchase 8,967,855 shares of common Stock and canceling 1,595,238 of
previously issued warrants associated with the October Security Agreement, or a
net of 7,372,617 warrants, at an exercise price of $.40 per share. The warrants
expire on the fifth anniversary of the date of issuance.
Pursuant to an Amended and Restated Security Agreement, the Company granted the
Investors a security interest in substantially all the assets of the Company.
The Amended and Restated Security Agreement replaces the Security Agreement
entered into October 14, 2004 between the Company and certain of the investors.
Also, pursuant to an Amended and Restated Registration Rights Agreement, the
Company granted the Investors certain registration rights with respect to the
shares of Common Stock issued in the transaction as well as the shares of Common
Stock issuable upon conversion of the Convertible Debentures and upon exercise
of the Warrants. The Amended and Restated Registration Rights Agreement replaces
the Registration Rights Agreement entered into on October 5, 2004 between the
Company and certain of the investors.
The Company received funding from the above financing with an aggregate
principal balance of $4,720,000, and received net proceeds of $4,540,500, after
subtracting related placement agent fees and expenses totaling $179,500. The
notes bear interest, at an annual rate of 8%, which is due and payable quarterly
beginning March 31, 2005. The principal balance of the note, plus any accrued
and unpaid interest is due and payable on January 14, 2015, provided however,
that on or after January 14, 2008 the Company, at the option of the note holder,
may be obligated to repurchase the note at a price equal to 100% of the
outstanding principal and interest. The outstanding principal of the debentures
may be converted into shares of the Company's common stock, at the option of the
note holder, based on an initial conversion price of $0.35 per share, subject to
adjustment as defined in the agreement. In addition, the note holders received
warrants to purchase 4,720,000 shares of the Company's common stock, exercisable
through January 14, 2010 at an exercise price of $0.40 per share.
The debenture debt was recorded net of discounts totaling $2,752,971 recorded in
connection with the $179,500 of loan fees, expenses of $1,288,231, based on a
Black-Scholes model valuation, related to the 4,720,000 warrants issued to
debenture holders and $561,260, based on the closing price of our common stock
on February 15, 2005 of $0.54, for 1,039,370 shares of common stock issued for
commission fees and warrants issued for commission of $723,980, based on a
Black-Scholes model valuation, related to the 2,652,617 additional warrants
issued for commissions and fees.
The market price of the Company's common stock on the date of issuance of the
debentures was $0.50 per share. In accordance with EITF 98-5, as amended by EITF
00-27, because the debentures were sold at an effective conversion price less
than the market value of the underlying components of the security, a beneficial
conversion to the holders of the debentures occurred. Accordingly, the Company
recorded a discount to the principal of the debenture and a corresponding amount
to common stock additional paid in capital. The recorded discount resulting from
the beneficial conversion is recognized as non-cash interest expense from the
date of issuance to the earliest date on which the debt is convertible by note
holders. Since the debt was convertible, at the option of the note holders, at
any time following issuance, the discount of $3,311,088 will be recorded as
non-cash interest expense during the first quarter of 2005.
11
On June 24, 2005, the Company revised the effective conversion price for the
debentures and any and all warrants in the January 2005 financing transaction at
a price of $.095 per share. The price was above the closing stock price thus no
additional beneficial conversion was recorded.
During the year ended December 31, 2005, the Company recorded total interest
expense of $956,233 in connection with the debenture debt. Of this total,
$405,238 resulted from the non-cash amortization of debt discount recorded in
connection with loan fees and the value of stock and warrants issued to note
holders, and $557,983 resulted from interest accrued during the period on the
outstanding principal balance. As of December 31, 2005, the balance on the
accrued interest was $558,394.
Convertible Price and Warrant Terms Modifications
In January 2005, in connection with the Convertible Debenture Agreements entered
into in October 2004, the Company agreed to modify certain terms and conditions
included in convertible debenture agreements with an aggregate principal balance
of $2,850,000 entered into in June, July and October 2004. The amended debenture
agreements with Bushido and Bridges & Pipes were replaced with new convertible
debenture agreements in order to conform the terms of these agreements to the
terms of new convertible debenture agreements with an aggregate principal
balance of $7,695,000 entered into in January 2005, as described above. Under
the replacement agreements, the maturity dates of the debentures were extended
to January 14, 2015, and other principal terms (i.e. interest rate, conversion
price, warrants issued and warrant exercise price) are the same as in the
amended agreements described above.
During 2005 debentures with a principal balance of $1,108,000 were tendered for
conversion to common stock of the Company under the conversion terms of the
agreement.
On June 14, 2005, convertible debentures with an aggregate outstanding principal
balance of $7,695,000, and certain warrant agreements, were amended to change
the conversion price and exercise price from $0.35 and $0.40 per share,
respectively to $0.095. In addition, the term of the warrants was extended to
January 14, 2010. The Company determined that the modification of terms met the
requirements of EITF Issue 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," of an exchange of debt with substantially
different terms and accordingly has deemed the debt to be extinguished as of
June 14, 2005, and replaced with new debt on that date.
At the time of the amendment and recording the extinguishment of the original
Notes, the Company recorded a corresponding entry to record a new note at its
principal balance as of June 14, 2005 of $7,695,000, and further recorded
entries to record discounts related to the fair value of the warrants and
beneficial conversion features totaling $3,669,956. The recorded debt discount
will be amortized as non-cash interest expense over the remaining term of the
debt. At September 30, 2006, the remaining debt discount balance was $2,692,261
and the outstanding principal balance on the Notes was $6,418,000.
As of September 30, 2006 and December 31, 2005, convertible debenture debt
balances consists of the following:
Current:
September 30, December 31,
2006 2005
------------ ------------
Convertible debenture $ 6,418,000 $ 6,587,000
Convertible debenture discount (2,692,261) (2,997,929)
------------ ------------
Convertible debenture - net $ 3,725,739 $ 3,589,071
============ ============
At September 30, 2006, the Company is in default of their convertible note
agreements for failure of timely payment of accrued interest balances.
Accordingly, its convertible notes with maturity dates greater than one year
from the balance sheet date are classified as current liabilities as of
September 30, 2006.
Note 9 - Derivative Liabilities
Evaluation of criteria under EITF Issue No. 00-19, "Accounting for Derivative
Financial Instrument Indexed to, and Potentially Settled in, a Company's Own
Stock" at December 13, 2005, resulted in the determination that the Company's
outstanding warrants should be reclassified as a derivative liability as of June
30, 2005. In accordance with EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked to market each reporting period,
with a corresponding non-cash gain or loss reflected in the current period.
12
At December 13, 2005, the fair market value of the derivative liabilities was
determined to be $94,829 using a Black-Scholes model valuation with the
following assumptions, expected dividend yield of zero, expected stock price
volatility of 120.64%, risk free interest rate of 4.35% and a remaining
contractual life between one and five years. The aggregate fair value of the
warrant derivative liability at December 31, 2005 was determined to be $102,951.
Based on this change in fair value, the Company has recorded a non-cash loss
during the year ended December 31, 2005 of $8,122 and a corresponding increase
in the warrant derivative liability.
NOTE 10 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
The balances of notes payable to related parties at September 30, 2006 and
December 31, 2005 are as follows:
September 30, 2006 December 31, 2005
Principal Interest Principal Interest
--------------------------------------------------------
SurgiJet $ 495,242 $ 59,509 $ 495,242 $ 27,439
Lance Doherty 19,000 11,039 19,000 8,894
--------------------------------------------------------
Total $ 514,242 $ 70,548 $ 514,242 $ 36,333
=========== ========= ========= =========
FINANCIAL ENTREPRENEURS, INC. ("FEI")
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between PNAC and FEI, a
significant shareholder of the Company, during 2002. The note bears interest at
an annual rate of 7.5%, and matures on April 3, 2009. Upon consummation of the
merger in February 2003, the outstanding principal and accrued interest payable
balances were $206,649 and $11,462, respectively. During 2003, the Company added
net borrowings of $43,476 to the note, and accrued additional interest expense
of $17,072, resulting in an outstanding principal balance and accrued interest
payable balances at December 31, 2003 of $250,125 and $28,534, respectively.
During the fiscal year ending December 31, 2004, net activity resulted in an
increase to the outstanding principal of $28,761 and $23,329 of interest expense
related to this note. As of December 31, 2004 the outstanding principal and
accrued interest payable on this note were $278,886 and $51,863, respectively.
In March 2005, the Company received a demand from FEI for the payment in full of
the note. This is not a demand note and the Company is currently in negations
for resolution in this matter and believes there will be an amicable resolution.
NOTE 11 - COMMITMENTS
LICENSE AGREEMENTS
Under the terms of the patent license agreement entered into during 2003, the
Company is obligated to pay a royalty of 6% of net sales of products utilizing
the licensed patent technology. The license agreement also provides for a
minimum royalty of $24,000 per year that may be used as a credit toward payment
of future royalties due on product sales.
The Company acquired. all the stock of OptiMetrix Technologies, Inc. (OTI),
which owns the worldwide licensing rights for certain technology, from UTEK
Corp. The Company is required to pay royalties of three percent (3%) for
equipment, five percent (5%) for disposables and services of net sales,
excluding customary discounts and sales to the U.S. Government. In addition the
Company is required to pay an annual license payable in advance on March 31 of
each calendar year as follows:
YEAR ANNUAL LICENSE FEE
---- ------------------
2006 --
2007 $10,000
2008 20,000
2009 20,000
2010 40,000
2011 70,000
2012 and thereafter 100,000
Annual fees for any year will be credited against any royalties owed during that
year.
13
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 OTI must produce product for evaluation by June 2007
o OTI must record a first commercial sale to a non-related company by
September 2008.
o OTI must achieve sales of $1,000,000 by June 2009
o OTI must maintain annual sales of at least one million thereafter.
If OTI fails to meet any of these milestones the license may be terminated or
converted to a non-exclusive license.
The Company has entered into a consulting agreement with the inventor of the
technology, Dr. Irving Bigio, in order to help implement the technology. The
payment to Dr. Bigio was 2,000 shares of Series B Preferred Stock, in exchange
for his 2% ownership in OTI.
In February of 2006, the Company acquired all of the outstanding stock of Ocular
Therapeutics Inc. ("OTHI"). OThI holds a license to certain patented technology
owned by Motility Inc., relating to a small protein therapeutic (LD22-4) for the
treatment of the wet form of age related macular degeneration. Because LD22-4
directly targets a fundamental requirement for the proliferation of blood
vessels, i.e. cell migration, the Company believes that its mode of action is
distinct from other drugs on the market or in development by other biotechnology
or pharmaceutical companies. The purchase was effectuated with 100,000 shares of
Series C Convertible Preferred Stock, convertible after one year into shares of
the Company's Common Stock worth $2,800,000, valued at the market price at the
time of conversion. Additional consideration for the acquisition was the
issuance of a warrant to purchase 1,400,000 shares of Common Stock of the
Company, exercisable at 50% of the conversion price.
OThI must meet certain due diligence 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
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Corp. AGTI owns
technology licensed from the University of Arizona. ART has acquired the
worldwide exclusive license to a patent pending technology developed by W.
Daniel Stamer, Ph.D., Associate head for Vision Research and Associate Professor
of Ophthalmology and Vision Science, and Ronald Heinmark Ph.D., Head of Surgical
Research and Professor of surgery at the University of Arizona. The invention is
a novel strategy for reducing pressure build-up in the eye using specific
monoclonal antibodies. When completed, this non-surgical treatment of glaucoma
will be able to be administered to patients with all stages of glaucoma. It
reduces intraocular pressure, and thus may slow the damage to the retinal cells.
Patients might require only biannual treatment on an outpatient basis during
routine check-ups, and potentially may no longer need to have eye drops or risky
surgeries. This method may be an effective alternative to available drugs, and
it is currently anticipated that visual acuity would not be adversely affected
after treatment. Applications may include glaucoma treatment and adjuvant
therapy with common eye surgeries such as cataract removal. The glaucoma market
is the largest pharmaceutical market in ophthalmology, as it is a chronic
problem that currently cannot ever truly be cured, only treated and controlled.
Patients who commence glaucoma treatments remain on the medication for the
duration of their lives.
The purchase was effectuated with 100,000 shares of Series D Convertible
Preferred Stock, convertible after one year into shares of the Company's Common
Stock worth $2,800,000, valued at the market price at the time of conversion.
Additional consideration was a warrant to purchase 1,400,000 shares of Common
Stock of the Company at an exercise price equal to 50% of the conversion price.
AGTI is required to pay royalties and meet certain milestones as follows:
o It must pay a five percent (5%) royalty on annual net sales of $200
million or less
o It must pay a royalty of six percent (6%) on annual net sales in excess
of $200 million.
14
o On the first anniversary of the first commercial sale of licensed
product by AGTI, its affiliates or sublicensees, annual minimum royalty
payments will be as listed below, and are fully creditable against
royalties paid in that calendar year.
Year Minimum Royalty Payment
---------------------------------------------------------------
1st & 2nd Anniversary $ 50,000
3rd & 4th Anniversary $ 60,000
5th Anniversary $ 70,000
6th and each subsequent Anniversary $200,000
Annual license maintenance fees are as follows:
$25,000 on the third anniversary
$30,000 per year on the fourth and fifth anniversary,
increasing an additional $5,000 in each subsequent year prior
to the first commercial sale of licensed product. Each year's
annual license maintenance fees are credited against any other
payment due that calendar year (excluding patent costs).
For the first licensed product based on monoclonal antibodies, whether
for therapeutic use in glaucoma, cataract or other ophthalmic disease,
and for the first licensed product based on peptides, whether for
therapeutic use in glaucoma, cataract or other ophthalmic disease, AGTI
is to pay milestone payments, as follows:
o Initiation of Phase I: $50,000
o Initiation of Phase II: $100,000
o Initiation of Phase III: $250,000
o U.S. FDA marketing approval $750,000
NOTE 12 - SERIES B PREFERRED SHARES
In December 2005 the Company acquired OptiMetrix Technologies, Inc. (OTI), a
wholly owned subsidiary of UTEK Corp (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 shares of Series B
Convertible Preferred Stock. These shares can be converted after a period of one
year from the date of acquisition in December 2005. They will be convertible
into common shares of the Company valued at $1,500,000, based on the 10 day
closing stock price average at the time of conversion. Additionally, UTEK
received a warrant for 750,000 shares of common stock exercisable at 50% of the
convertible shares.
The Company received $200,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $1,225,000.
NOTE 13 - SERIES C PREFERRED SHARES
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OThI), a wholly owned subsidiary of UTEK Corp. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. The purchase was
effectuated with 100,000 shares of Series C Convertible Preferred Stock,
convertible after one year into shares of the Company's Common Stock worth
$2,800,000, valued at the market price at the time of conversion. Additional
consideration was a warrant to purchase 1,400,000 shares of the Company at an
exercise price equal to 50% of the conversion price.
The Company received $325,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $2,400,000.
NOTE 14 - SERIES D PREFERRED SHARES
In April of 2006, the Company acquired all of the stock of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Corp. AGTI owns
technology licensed from the University of Arizona. AGTI holds the exclusive
license to a patented pending technology for a drug for the treatment of the
glaucoma. The purchase was effectuated with 100,000 shares of Series D
Convertible Preferred Stock, convertible after one year into shares of the
Company's Common Stock worth $2,800,000, valued at the market price at the time
of conversion. Additional consideration was a warrant to purchase 1,400,000
shares of the Company at an exercise price equal to 50% of the conversion price.
The Company received $350,000 cash as part of the acquisition, and in accordance
with FAS 141, recorded the acquired licenses at $75,000 and goodwill in the
amount of $2,375,000.
15
NOTE 15 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
ISSUANCE OF COMMON STOCK ON CONVERSION OF DEBENTURES
During the period January 25, 2006 through September 27, 2006 the Company issued
1,778,946 shares of stock pursuant to the terms of convertible debentures.
ISSUANCE OF COMMON STOCK FOR SERVICES
During the period January 19, 2006 through March 24, 2006 the Company issued
179,623,160 shares of common stock for services rendered to the Company.
DELISTING BY NASDAQ
On June 6, 2006, due to its failure to file Form 10K-SB for the year ending
December 31, 2005 in a timely manner, NASDAQ determined that the Company's
securities were not eligible for continued quotation on the OTCBB. On August 10,
2006, the Company, after fulfilling the filing requirements for both the year
end of December 31, 2005 and the quarter ending March 31, 2006, by filing its
10K-SB and 10Q-SB, the Company has again become eligible for quotation on the
OTCBB.
WARRANT ACTIVITY
In February of 2006, the Company acquired all the shares of Ocular Therapeutics
Inc. (OThI), a wholly owned subsidiary of UTEK Corp. Consideration paid by the
Company was 100,000 shares of Series C Convertible Preferred Stock of the
Company. As additional consideration, a warrant to purchase 1,400,000 shares of
the Company's Common Stock, exercisable at 50% of the Preferred Stock conversion
price, will be issued at the time of conversion.
In April of 2006, the Company acquired all the shares of Advanced Glaucoma
Technologies, Inc. (AGTI), a wholly owned subsidiary of UTEK Corp. Consideration
paid by the Company was 100,000 shares of Series D Convertible Preferred Stock
of the Company. As additional consideration, a warrant to purchase 1,400,000
shares of the Company's Common Stock, exercisable at 50% of the Preferred Stock
conversion price will be issued at the time of conversion.
Tables summarizing the number of the Company's outstanding common stock warrants
and additional warrant information are included in the Company's 10-KSB filed
for the year ended December 31, 2005.
BORROWED SHARES
In connection with collateral requirements of convertible debenture agreements
with HIT Credit Union, Platinum Long Term Growth Fund and Rock II, LLC, the
Company borrowed a total of 3,000,000 shares of its outstanding common stock
from Taika Investments, Inc. ("Taika") pursuant to a Securities Lending
Agreement between the Company and Taika. In accordance with the terms of this
agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and was obligated to return any borrowed shares by November 30,
2004. In January 2005, the Company received a one-year extension, to November
30, 2005 and in November, 2005 the Company received another one-year extension
to November 30, 2006, of the date by which any borrowed shares must be returned.
In the event of default, the Company has agreed to file a Registration Statement
and to return any shares, within 72 hours, which had not previously been
returned by the due date. As of December 31, 2004, the Company had borrowed a
total of 1,550,000 shares pursuant to this agreement, and the Company had
accrued interest expense totaling $41,935. As of December 31, 2005, the accrued
interest balance was $106,328. As of September 30, 2006 all shares that were
borrowed are outstanding.
In January 2005, HIT Credit Union returned 750,000 of the borrowed shares.
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 September 30, 2006 and December 31, 2005, the
aggregate balance on these notes was $54,862 and $54,862 and the respective
accrued interest payable balances were $14,355 and $12,462, respectively.
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NOTE 17 - RELATED PARTY TRANSACTIONS
In connection with the Merger Agreement in 2003, the Company assumed a
promissory note during 2003 originally entered into between Ponte Nossa
Acquisition Corporation and Financial Entrepreneurs Incorporated, a significant
shareholder of the Company, during 2002. The note bears interest at an annual
rate of 7.5%, and matures on April 3, 2009. Upon consummation of the merger in
February 2003, the outstanding principal and accrued interest payable balances
were $206,649 and $11,462, respectively. As of September 30, 2006, the
outstanding principal and accrued interest payable on this note were $215,990
and $93,981, respectively.
During 2003, the Company began making monthly consulting payments to a
corporation controlled by Norman Schwartz, a director of the Company. On March
1, 2005, the company signed a two-year contract with Norman Schwartz's company
increasing the monthly fee to $7,500 per month. Total consulting fees and
related expenses during the nine-month period ended September 30, 2006 were
$45,000 and $0, respectively, which were included in Accounts Payable at
September 30, 2006.
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 September 30, 2006 consulting fees and
related expenses totaling $135,000 and $679, respectively, were recorded
pursuant to this agreement, which were included in accrued expenses and accounts
payable at September 30, 2006, respectively.
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. In accordance with the terms of this agreement, the
Company is obligated to pay interest on the value of shares borrowed (assuming a
value of $1.00 per share) based on the LIBOR rate plus 50 basis points, and must
return the borrowed shares by November 30, 2006. In the event of default, the
Company has agreed to file a Registration Statement and to return any shares,
within 72 hours, which had not previously been returned by the due date. As of
December 31, 2004 the Company had borrowed a total of 1,550,000 shares pursuant
to this agreement, and the Company had accrued interest expense totaling $
41,935. As of December 31, 2005, the accrued interest balance was $106,328. As
of September 30, 2006 all shares that were borrowed are outstanding.
NOTE 19 - SUBSEQUENT EVENTS
ISSUANCE OF COMMON STOCK ON CONVERSION OF DEBENTURES
In October 2006, the Company issued 2,442,105 shares of common stock pursuant to
the terms of convertible debentures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This Form 10-KSB, press releases and certain information provided in our
periodically in writing or orally by our officers or our agents contain
forward-looking statements that involve risks and uncertainties within the
meaning of Sections 27A of the Securities Act, as amended; Section 21E of the
Securities Exchange Act of 1934; and the Private Securities Litigation Reform
Act of 1995. The words, such as "may," "would," "could," "anticipate,"
"estimate," "plans," "potential," "projects," "continuing," "ongoing,"
"expects," "believe," "intend" and similar expressions and variations thereof
are intended to identify forward-looking statements. These statements appear in
a number of places in this Form 10-KSB and include all statements that are not
statements of historical fact regarding intent, belief or current expectations
of the Company, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources; (ii) our financing
opportunities and plans; (iii) our continued development of our technology; (iv)
market and other trends affecting our future financial condition; (v) our growth
and operating strategy.
Investors and prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
factors that might cause such differences include, among others the following:
(i) we have incurred significant losses since our inception; (ii) any material
inability to successfully develop our products; (iii) any adverse effect or
limitations caused by government regulations; (iv) any adverse effect on our
ability to obtain acceptable financing; (v) competitive factors; and (vi) other
risks including those identified in our other filings with the Securities and
Exchange Commission. The Company undertakes no obligation to publicly update or
revise the forward looking statements made in this Form 10-KSB to reflect events
or circumstances after the date of this Form 10-KSB or to reflect the occurrence
of unanticipated events.
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OVERVIEW
The Company has two ophthalmic surgery products under development utilizing
proprietary waterjet technology. The first is Accupulse, a device designed for
removal of cataracts using a pulsating stream of saline solution. The second is
Hydrokeratome, a device that uses a high-pressure micro beam of water to cut a
corneal flap during LASIK surgery. Both of these products require the successful
completion of development and testing and receipt of 510(K) clearance from FDA
prior to market introduction.
In December 2005 the company acquired Optimetrix Technologies, Inc. (OTI), a
wholly owned subsidiary of UTEK Corp (UTEK). OTI owns technology licensed From
Los Alamos National Laboratory, operated by the University of California for the
Nuclear Security Administration of the US Department of Energy. The technology
is designed to determine optical aging, optical metrics and the presence of
cataracts and other optical diseases. The company plans to conduct the necessary
research and development of these technologies to bring the product to market
during the first quarter of 2008.
In February of 2006, the Company acquired all of the stock of Ocular
Therapeutics Inc. (OthI), a wholly owned subsidiary of UTEK Corp. OThI owns
technology licensed from Motility Inc. OThI holds the exclusive license to a
patented technology for a small protein therapeutic (LD22-4) for the treatment
of the wet form of age related macular degeneration. Because LD22-4 directly
targets a fundamental requirement for the proliferation of blood vessels, i.e.
cell migration, we believe that its mode of action is distinct from other drugs
that are on the market or that are in development by other biotechnology or
pharmaceutical companies.
The primary markets to be addressed by our products are refractive surgery and
cataract surgery, both of which are strong and continuing to grow. The
refractive surgery market has benefited from an increased demand for laser
vision corrective surgery due to the overall increased acceptance by consumers,
as well as from technological advances that have led to better results and fewer
complications. Cataract surgery is the most frequently performed surgical
procedure, with over 14 million surgeries performed worldwide. As the
development of cataracts is often associated with aging, we expect the demand
for cataract surgery to continue to increase. We believe that our products, when
completed and available for sale, will address important needs in each of these
markets.
There are numerous factors that could affect our ability to achieve revenues,
including but not limited to:
o Our obtaining adequate financing to support debt obligations and
working capital requirements
o Successful completion of our product development efforts and receipt of
510(k) marketing clearance with respect to Accupulse and Hydrokeratome.
o Market acceptance of our products
o Competition
o Technological advancement o Overall economic conditions
The Company is actively pursuing additional financing, and in this regard is in
discussions with several parties related to potential financing arrangements.
However, the Company does not currently have sufficient cash or working capital
available to continue to fund operations, to meet its contractual obligations,
or to complete its on-going product development efforts. As such, our ability to
secure additional financing on a timely basis is critical to our ability to stay
in business and to pursue planned operational activities.
ITEM 3. CONTROLS AND PROCEDURES.
At the end of the period covered by this Form 10-QSB, the Company's management,
including the Chief Executive and Chief Financial Officers, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive and Chief Financial
Officers have determined that such controls and procedures are effective to
ensure that information relating to the Company required to be disclosed in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. There have
been no changes in the Company's internal controls over financial reporting that
were identified during the evaluation that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of the Company's Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification of 's Chief Financial Officer Pursuant to Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Company's Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of the Company's Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Refractive Technologies, Inc., a Delaware corporation
By: /s/ Laurence Schreiber
--------------------------------
Laurence Schreiber, Secretary,
Treasurer, Chief Operating Officer
Date: March 26, 2007
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