UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDED
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2004
VisiJet, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 0-256111 33-0838660
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
192 Technology Drive, Suite Q
Irvine, California 92618
(Address of principal executive offices)
Issuer's telephone number, including area code:
949-450-1660
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of November 11, 2004 there were 28,677,520 shares of the
registrant's Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 2004 and December 31, 2003 . . . . 3
Statements of Operations for the Three Months and Nine Months
ended September 30, 2004 and 2003 . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the Nine Months ended September
30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 23
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 27
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . 28
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 28
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VisiJet, Inc.
Balance Sheets
September 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,342 $ 35,879
Accounts receivable 332,105 --
Inventory 317,003 --
Prepaid expenses 395,948 68,749
Prepaid royalty 2,000 20,000
------------- -------------
Total current assets 1,061,398 124,628
Property and equipment, net 96,522 104,440
Distribution agreement, net 1,749,288 --
Patents and trademarks, net 90,157 97,244
------------- -------------
Total assets $ 2,997,365 $ 326,312
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 1,096,197 $ 679,885
Customer deposits 16,720 --
Compensation settlement agreement - current portion 68,562 86,708
Accrued interest 183,061 109,232
Accrued expenses 1,018,181 481,106
Royalty payable 45,000 60,000
Notes payable to related parties 877,660 681,442
Notes payable 10,000 14,000
Convertible debenture debt, net 1,330,513 --
Secured debenture debt, net 1,165,949 --
------------- -------------
Total current liabilities 5,811,843 2,112,373
Compensation settlement agreement, net of current portion -- 17,458
Notes payable to related parties, net of current portion -- 87,144
Convertible debenture debt - long term , net 694,172 --
------------- -------------
Total liabilities 6,506,015 2,216,975
------------- -------------
Shareholders' deficit:
Common stock, 50,000,000 shares authorized, $.001 par value,
27,879,663 shares issued and outstanding at September 30, 2004, and 21,691,163
shares issued and outstanding at
December 31, 2003 27,880 21,691
Preferred stock, 10,000,000 shares authorized, $.001 par value,
no shares outstanding at September 30, 2004 or at December 31, 2003 -- --
Additional paid in capital 15,660,343 7,845,365
Common stock subscriptions -- 1,018,500
Accumulated deficit (19,196,873) (10,776,219)
------------ ------------
Shareholders' deficit (3,508,650) (1,890,663)
------------ ------------
Total liabilities and shareholders' deficit $ 2,997,365 $ 326,312
============= =============
The accompanying notes are an integral part of these financial statements.
3
VisiJet, Inc.
Statements of Operations
(Unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Sales - International $ 982,567 $ -- $ 1,037,537 $ --
Cost of Goods Sold 456,400 -- 483,234 --
------------- ------------- ------------- -------------
Gross Profit 526,167 -- 554,303 --
------------- ------------- ------------- -------------
Operating expenses:
General and administrative expenses 1,400,569 680,639 6,415,545 2,054,912
Research and development expenses 182,414 559,098 591,395 876,878
------------- ------------- ------------- -------------
Total operating expenses 1,582,983 1,239,737 7,006,940 2,931,790
------------- ------------- ------------- -------------
Loss from operations (1,056,816) (1,239,737) (6,452,637) (2,931,790)
Other income (expense):
Interest income -- -- -- 455
Amortization of debt discount (328,670) -- (903,802) --
Interest expense (388,515) (5,944) (1,063,414) (45,058)
Gain on debt restructure -- 90,303 -- 90,303
------------- ------------- ------------- -------------
Total other expense (717,185) 84,359 (1,967,216) 45,700
------------- ------------- ------------- -------------
Loss before provision for taxes (1,774,001) (1,155,378) (8,419,853) (2,886,090)
Provision for Income taxes -- -- 800 --
------------- ------------- ------------- -------------
Net loss $ (1,774,001) $ (1,155,378) $ (8,420,653) $ (2,886,090)
============= ============= ============= =============
Net loss per common share - basic and diluted $ (0.06) $ (0.06) $ (0.32) $ (0.15)
============= ============= ============= =============
Basic and diluted weighted average
number of common shares outstanding 29,429,663 20,468,856 26,069,227 18,707,993
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
4
VisiJet, Inc.
Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
2004 2003
---- ----
Cash flows from operating activities
Net loss $(8,420,653) $(2,886,090)
Adjustment to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 182,728 13,992
Debt discount amortization 903,802 --
Interest expense associated with the beneficial
conversion of convertible debt 821,139 --
Common stock, options, warrants issued for services 2,894,335 1,201
Fee paid for guarantee 546,403 --
Gain from debt restructure -- (90,303)
Changes in assets and liabilities:
Accounts receivable (332,105) --
Prepaid expenses (309,199) (104,667)
Inventory (317,003) --
Accounts payable 416,311 528,254
Customer deposits 16,720 --
Compensation settlement agreement (35,604) (102,085)
Royalties payable (15,000) (15,000)
Other accrued expenses 537,074 --
Accrued interest 161,952 36,922
------------ ------------
Net cash used by operating activities (2,949,100) (2,617,776)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (15,611) (65,433)
Purchase of distribution agreement (1,188,900) --
------------ ------------
Net cash used in investing activities (1,204,511) (65,433)
------------ ------------
Cash flows from financing activities:
Advance from related party 229,361 231,725
Repayment of advances from related parties (200,600) (166,156)
Repayment of notes payable (4,000) 30,013
Proceeds from secured debenture 1,109,688 --
Proceeds form convertible debt 2,471,125 --
Proceeds from private placements 526,500 2,641,881
Cash acquired in reverse merger -- 30,693
Interest converted to equity in connection with merger -- 33,997
------------ ------------
Net cash provided by financing activities 4,132,074 2,802,153
------------ ------------
Net increase/(decrease)in cash (21,537) 118,944
Cash, beginning of period 35,879 960
------------ ------------
Cash, end of period $ 14,342 $ 119,904
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 90,214 $ --
Taxes paid 800 1,600
Debenture costs and fees 534,190
Non-cash transactions
Reclass of interest to current liability 80,313
Warrants issued in connection with secured debenture 1,195,290
Common Stock issued in connection with secured debenture 106,350
Common Stock issued as collateral 1,100
The accompanying notes are an integral part of these financial statements
5
VISIJET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-QSB, press releases and certain information provided
periodically in writing or orally by our officers or our agents contain
forward-looking statements that involve risks and uncertainties within the
meaning of Sections 27A of the Securities Act, as amended; Section 21E of the
Securities Exchange Act of 1934; and the Private Securities Litigation Reform
Act of 1995. The words, such as "may," "would," "could," "anticipate,"
"estimate," "plans," "potential," "projects," "continuing," "ongoing,"
"expects," "believe," "intend" and similar expressions and variations thereof
are intended to identify forward-looking statements. These statements appear in
a number of places in this Form 10-QSB and include all statements that are not
statements of historical fact regarding intent, belief or current expectations
of the Company, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources; (ii) our financing
opportunities and plans; (iii) our continued development of our technology;
(iv)market and other trends affecting our future financial condition; (v) our
growth and operating strategy.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception; (ii)
any material inability to successfully develop our products; (iii) any adverse
effect or limitations caused by government regulations; (iv) any adverse effect
on our ability to obtain acceptable financing; (v) competitive factors; and (vi)
other risks including those identified in our other filings with the Securities
and Exchange Commission. The Company undertakes no obligation to update or
revise the forward-looking statements made in this Form 10-QSB to reflect events
or circumstances after the date of this Form 10-QSB or to reflect the occurrence
of unanticipated events.
HISTORY AND MERGER
VisiJet, Inc. ("VisiJet", or "the Company") is a medical device company
focused on the marketing and development of ophthalmic surgery products for use
in the laser eye surgery and cataract surgery markets. Through June 30, 2004,
the Company was in the development stage, as its efforts had been principally
devoted to organizational activities, raising capital and research and
development. However, based on operating revenues generated by the Company in
the third quarter of 2004, the Company is no longer considered to be in the
development stage.
The Company was incorporated on February 2, 1996, as a wholly owned
subsidiary of SurgiJet, Inc. to develop and distribute medical products based on
patented waterjet-based technology licensed from SurgiJet. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
6
NATURE OF OPERATIONS (Continued)
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 May 2004, the Company entered into a Manufacturing, Supply and
Distribution Agreement with a German company pursuant to which the Company
acquired exclusive worldwide distribution, sales and marketing rights for
ophthalmic surgical products used in LASIK refractive surgery procedures. In May
2004, the Company began marketing these products in Europe and certain other
foreign countries, where the products have received regulatory approval for
sale. In September 2004 the Company began marketing in the United States
following receipt of approval for marketing from the U.S. Food and Drug
Administration. In addition, the Company is conducting research and development
on additional ophthalmic surgery products based on applications of its
proprietary waterjet technology.
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, 2003. Results for interim periods
are not necessarily indicative of trends or of results for a full year.
GOING CONCERN
The accompanying unaudited 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. As more fully discussed in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003, the Company's audited financial
statements included a "going concern" qualification from its independent
auditors due to the Company's losses accumulated during the development stage
and lack of working capital.
For the three and nine months ended September 30, 2004, the Company
incurred net losses of $1,531,149 and $7,599,515, respectively, and as of
September 30, 2004, the Company's current liabilities exceeded its current
assets by approximately $4.7 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. In addition, during the second quarter of 2004, the Company
initiated sales of ophthalmic surgery products acquired through an exclusive
worldwide marketing and distribution license agreement that was finalized in May
2004. The Company expects that revenue and cash flow from sales of these
products will contribute significantly to its future operating results and
working capital requirements.
7
NATURE OF OPERATIONS (Continued)
While the Company believes that the additional financing arrangements
will be completed, and that near-term operating revenues and cash flow will be
generated from the recently completed license agreement, there can be no
assurance that new financing will be completed or that the proceeds from new
financing received by the Company and/or that revenues generated from product
sales will be sufficient for the Company to meet its contractual obligations and
on-going operating expenses.
The accompanying consolidated financial statements do not include any
adjustments that might result from the resolution of these matters.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from product sales relates to sales of ophthalmic surgical
products pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004. Revenue from such sales is recognized when the earnings
process is complete, as evidenced by an agreement with the customer, transfer of
title and acceptance, a firm price and probable collection.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Certain corporate overhead expenses, such as professional fees, salaries, rent
and travel are allocated to research and development based on estimates made by
management.
INVENTORY
Inventory is valued at lower of cost or market. Reserves for
obsolescence or slow moving inventory are recorded when such conditions are
identified. As of September 30, 2004 no such reserves were considered necessary.
ACCOUNTS RECEIVABLE
The Company regularly reviews accounts and records an allowance for
doubtful accounts based on a specific identification basis of those accounts
that they consider to be uncollectible. As of September 30, 2004, no allowance
for doubtful accounts was considered necessary.
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
8
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
on the fair value of the option or award. The Company adopted the disclosure
requirements of SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE," an amendment of SFAS No. 123 as of January 1, 2003,
which require certain disclosures about stock-based employee compensation plans
in an entity's accounting policy note. The adoption of SFAS No. 148 did not have
a material impact on these consolidated financial statements and the disclosure
requirements are included below.
On November 10, 2003, the Board of Directors adopted the VisiJet, Inc.
2003 Stock Option Plan. The Option Plan provides for the grant of incentive and
non-qualified stock options to selected employees, the grant of non-qualified
options to selected consultants and to directors and advisory board members. The
Option Plan is administered by the Compensation Committee of the Board of
Directors and authorizes the grant of options for 3,000,000 shares. The
Compensation Committee determines the individual employees and consultants who
participate under the Plan, the terms and conditions of options, the option
price, the vesting schedule of options and other terms and conditions of the
options granted pursuant thereto.
During the third quarter of 2004, no new options were granted by the
Company, and as of September 30, 2004, a total of 1,145,000 options to purchase
shares of the Company's common stock were outstanding pursuant to the 2003 Plan.
The following table summarizes information about stock options
outstanding at September 30, 2004:
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Life in Exercise Number Exercise
Price Outstanding Years Price Exercisable Price
----- ----------- ----- ----- ----------- -----
1.10 1,145,000 9.12 1.10 370,000 1.10
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) and income (loss) per share as if compensation cost
for the Company's stock option issuances had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following assumptions used for grants in fiscal
2003: dividend yield of zero percent, risk-free interest rate of 3.29%, expected
life of five years, and expected volatility of 83.82%.
9
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and nine
months ended September 30, 2004 and 2003, would have been as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net Loss $ (1,531,148) $ (1,155,378) $ (7,599,514) $ (2,886,090)
As reported
SFAS No. 123 effect (84,499) -- (253,498) --
------------- ------------- ------------- -------------
Pro forma net loss $ (1,615,647) $ (1,155,378) $ (7,853,012) $ (2,886,090)
Loss per share, basic and diluted
As reported $ (0.05) $ (0.06) $ (0.29) $ (0.15)
============= ============= ============= =============
Pro forma $ (0.05) $ (0.06) $ (0.30) $ (0.15)
============= ============= ============= =============
Basic and diluted weighted
average common shares
Outstanding 29,429,663 20,468,856 26,069,227 18,707,993
============= ============= ============= =============
DEPRECIATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three to seven
years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
10
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
NOTE 3 - INVENTORY
Inventory includes finished goods of ophthalmic surgical products
purchased pursuant to the Manufacturing, Supply and Distribution Agreement
completed in May 2004, and consists of the following at September 30, 2004 and
December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Completed units and disposable
supplies $ 164,121 $ -
Demonstration units 152,882 -
-------------- --------------
$ 317,003 $ -
============== ==============
11
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2004
and December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Computer and test equipment $ 98,195 $ 82,584
Furniture and fixtures 33,505 33,505
Trade show equipment 47,002 47,002
-------------- --------------
178,702 163,091
Less: Accumulated depreciation (82,180) (58,651)
-------------- --------------
$ 96,522 $ 104,440
============== ==============
Depreciation expense for the three and nine months ended September 30,
2004, was $8,682 and $23,529, respectively.
NOTE 5 - 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. The total capitalized amount is being amortized on a
straight-line basis over the term of the agreement.
During 2003, the Company entered into a patent license agreement with
the inventor of a patented technology through which the Company obtained
exclusive worldwide rights for all medical applications for the technology that
provides for the sterile flow of fluid through a surgical water jet apparatus.
The purchase price of the license has been capitalized and is being amortized on
a straight-line basis over the remaining life of the patent. The license
agreement provides for royalty payments based on the sale of products utilizing
licensed technology and for minimum annual royalty payments.
Distribution and Patent agreements consist of the following at
September 30, 2004 and December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Distribution agreements $ 1,901,400 $ --
Patent agreements 100,000 100,000
Less: accumulated amortization (161,955) (2,756)
------------ ------------
$ 1,839,445 $ 97,244
============ ============
12
DISTRIBUTION AND PATENT AGREEMENTS (Continued)
Amortization expense for the three and nine months ended September 30,
2004 was $97,433 and $159,199, respectively. In connection with these
agreements, the Company expects to record the following amortization expense
over the next five years:
Fiscal Year Ended Amortization Total
------------------------------ -------------------
12/31/04 97,432
12/31/05 389,729
12/31/06 389,729
12/31/07 389,729
12/31/08 389,729
12/31/09 137,822
-------------------
Total 1,794,170
===================
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2004 and
December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Payroll and related taxes $ 463,010 $ 55,191
Consulting fees 270,000 135,000
Litigation settlement fees 201,117 170,066
Other accruals 84,054 120,849
-------------- --------------
$ 1,018,181 $ 481,106
============== ==============
NOTE 7 - SECURED DEBENTURES
In February 2004, the Company entered into bridge financing agreements
with five investors pursuant to which the Company issued a total of $500,000 of
secured subordinated debentures 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.
The debenture debt was recorded net of discounts totaling $230,668
recorded in connection with the $52,500 of loan fees and expenses, and $178,168,
based on a Black-Scholes model valuation, related to the 250,000 warrants issued
13
SECURED DEBENTURES (Continued)
to debenture holders. During the nine months ended September 30, 2004, the
Company recorded total interest expense of $206,616 in connection with the
debenture debt, of which $146,616 resulted from the non-cash amortization of
debt discount and $60,000 related to interest accrued during the period on the
outstanding principal balance. Of the interest accrued, $49,700 was paid during
the period, and $10,300 was payable as of September 30, 2004. In October 2004,
the Company received a notice of default from the holders of an aggregate of
$400,000 of these debentures due to the non-timely payment of interest that was
owed under the debenture agreements. Subsequent to the receipt of notice, the
Company made the required interest payments and the Company is in discussions
with the debenture holders regarding a resolution of this matter.
In May 2004, the Company entered into an agreement with an
institutional lender pursuant to which the Company issued a total of $750,000 of
secured subordinated debentures and received net proceeds of $662,188 after
subtracting related placement agent fees and expenses totaling $80,000 and
prepaid interest totaling $7,812.
The principal balance of the debentures was due and payable on July 5,
2004, and the debentures bear interest at an annual rate of 15%, which is
payable monthly beginning June 1, 2004. In addition, the debenture holder
received a warrant to purchase 500,000 shares of the Company's common stock,
exercisable through May 6, 2009, at an exercise price of $0.90 per share.
The debentures are secured by an aggregate of 1,500,000 shares of the
Company's common stock, of which 750,000 shares were issued by the Company and
750,000 shares were borrowed by the Company pursuant to a security lending
agreement between the Company and a third party.
The debenture debt was recorded net of discounts totaling $319,807
recorded in connection with the $80,000 of loan fees and expenses, and $239,807,
based on a Black-Scholes model valuation, related to the 500,000 warrants issued
to the debenture holder. During the nine months ended September 30, 2004, the
Company recorded total interest expense of $365,120 in connection with the
debenture debt, of which $319,807 resulted from the non-cash amortization of
debt discount and $45,313 related to interest accrued during the period on the
outstanding principal balance. Of the interest accrued, $35,938 was paid during
the period, and $9,375 was payable as of September 30, 2004. The Company did not
repay the principal on the scheduled maturity date of July 5, 2004, and such
failure to pay constitutes a default under the obligation. In October 2004 the
debenture holder entered into a forbearance agreement with the holders of
convertible debentures entered into in June and July 2004 with an aggregate
principal amount of $2,000,000, pursuant to which the debenture holder agreed
not to take any action with respect to the non-payment of the $750,000 principal
balance until the earlier of (i) February 2, 2005 and (ii) the date of notice of
default from the convertible debenture holders to the Company.
As of September 30, 2004 and December 31, 2003, secured debenture debt
balance consists of the following:
Sept. 30, 2004 December 31, 2003
-------------- -----------------
Secured subordinated debenture $ 1,250,000 $ --
Secured debenture discount ( 84,051) --
-------------- ---------------
Secured debenture debt $ 1,165,949 $ --
============== ================
14
Note 8 - CONVERTIBLE DEBENTURES
In May 2004, the Company entered into convertible debenture agreements
with two private lenders with an aggregate principal balance of $800,000, and
received net proceeds of $695,000 after subtracting related placement agent fees
and expenses totaling $105,000.
The debentures bear interest at an annual rate of 10%, which is due and
payable on the maturity date. In addition, the debenture holders received an
aggregate of 533,000 warrants to purchase shares of the Company's common stock,
exercisable through May 6, 2009 at an exercise price of $0.90 per share.
The principal balance of the debentures is due and payable on the
earlier of (i) one hundred and five (105) days from the issue date, or (ii) ten
(10) business days from the date the Company's Registration Statement is
declared effective by the Securities and Exchange Commission.
The debentures are secured by an aggregate of 800,000 shares of the
Company's common stock borrowed by the Company pursuant to a security lending
agreement between the Company and a third party. Under certain circumstances,
the outstanding principal of the debentures may be converted into shares of the
Company's common stock based on an initial conversion price of $0.90, (which was
equal to the market price of the Company's common stock on the commitment date),
subject to adjustment as defined in the agreement.
The debenture debt was recorded net of discounts totaling $360,793
recorded in connection with the $105,000 of loan fees and expenses, and
$255,793, based on a Black-Scholes model valuation, related to the 533,000
warrants issued to debenture holders.
During the nine months ended September 30, 2004, the Company recorded
total interest expense of $393,012 in connection with the debenture debt, of
which $360,793 resulted from the non-cash amortization of debt discount and
$32,219 related to interest accrued during the period on the outstanding
principal balance.
In connection with these debentures, the Company entered into a
registration rights agreement with the debenture holders covering 533,333 shares
of common stock underlying the warrants issued in connection with these
debentures. Pursuant to this agreement, the Company was obligated to file a
Registration Statement with the Securities and Exchange within 30 days of the
closing of the transaction.
The Company was not in compliance with terms of these debenture
agreements due to the non-payment of the principal balance by the scheduled
maturity date in August 2004, and due to its failure to file a Registration
Statement with the Securities and Exchange Commission covering warrants issued
to debenture holders pursuant to the debenture agreement by June 6, 2004, as
required by the registration rights agreement entered into between the Company
and the debenture holders in connection with the debenture agreement. The
failure to pay the principal balance when due and to file the Registration
Statement on a timely basis are events of defaults under the agreement. The
Company is in discussions with the debenture holders regarding a resolution of
these matters.
In June 2004, the Company entered into convertible debenture agreements
with two private lenders with an aggregate principal balance of $1,000,000, and
received net proceeds of $880,000 after subtracting related placement agent fees
and expenses totaling $120,000. The principal balance of the debentures is due
and payable on June 24, 2006.
The debentures bear interest at an annual rate of 8%, which is payable
quarterly beginning December 31, 2004. In addition, the debenture holders
received an aggregate of 150,000 shares of the company's common stock, and an
aggregate of 750,000 warrants to purchase shares of the Company's common stock,
15
CONVERTIBLE DEBENTURES (Continued)
exercisable through June 24, 2009, at an exercise price of $1.50 per share,
provided however that the exercise price with respect to an aggregate of 500,000
of the warrants is reduced to $0.60 per share during the period from the date of
issuance through the date twelve (12) months after the Securities and Exchange
Commission declares effective a registration statement registering the resale of
shares underlying the warrants.
The debenture debt was recorded net of discounts totaling $541,714
recorded in connection with the $120,000 of loan fees and expenses, $106,500
recorded based on the fair market value of the common stock on the date of
issuance and $315,214, based on a Black-Scholes model valuation, related to the
533,000 warrants issued to debenture holders.
The debentures are secured by an aggregate of 350,000 shares of the
Company's common stock issued by the Company, and the outstanding principal of
the debentures may be converted, subject to redemption rights of the Company,
into shares of the Company's common stock based on an initial conversion price
of $0.50, subject to adjustment as defined in the agreement.
The market price of the Company's common stock on the date of issuance
of the debentures was $0.71 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the entire discount
recorded, $578,286, was recognized as non-cash interest expense during the
second quarter of 2004.
During the three months ended September 30, 2004, the Company recorded
total interest expense of $89,194 in connection with the debenture debt, of
which $67,714 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 $21,480 resulted from interest accrued during the period on the
outstanding principal balance.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement. As discussed in more detail in Note 16,
in October 2004 and November 2004 the Company received a waiver of the
non-compliance in connection with an amendment to the debenture agreements and
an extension of the required Registration Statement filing date deadline to
November 15, 2004.
In July 2004, the Company entered into convertible note agreements with
a private lender with an aggregate principal balance of $1,000,000, and received
net proceeds of $896,125 after subtracting related placement agent fees and
expenses totaling $103,875. The note bears interest, at an annual rate of 8%,
which is due and payable quarterly beginning on October 31, 2004. In addition,
the debenture holders received warrants to purchase 750,000 shares of the
Company's common stock, exercisable through July 23, 2011, at an exercise price
of $1.00 per share.
The principal balance of the note, plus any accrued and unpaid
interest, is due and payable on July 23, 2014, provided however, that on or
after July 31, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. The outstanding principal of the debentures may be
converted into shares of the Company's common stock, at the option of the note
holder, based on an initial conversion price of $0.54 per share, subject to
adjustment as defined in the agreement.
The debenture debt was recorded net of discounts totaling $310,182
recorded in connection with the $103,875 of loan fees and expenses $206,307,
based on a Black-Scholes model valuation, related to the 750,000 warrants issued
to debenture holders.
16
CONVERTIBLE DEBENTURES (Continued)
The market price of the Company's common stock on the date of issuance
of the debentures was $0.57 per share. In accordance with EITF 98-5, as amended
by EITF 00-27, because the debentures were sold at an effective conversion price
less than the market value of the underlying components of the security, a
beneficial conversion to the holders of the debentures occurred. Accordingly,
the Company recorded a discount to the principal of the debenture and a
corresponding amount to common stock additional paid in capital. The recorded
discount resulting from the beneficial conversion is recognized as non-cash
interest expense from the date of issuance to the earliest date on which the
debt is convertible by note holders. Since the debt was convertible, at the
option of the note holders, at any time following issuance, the entire discount
recorded was recognized as non-cash interest expense during the second quarter
of 2004.
During the three months ended September 30, 2004, the Company recorded
total interest expense of $262,540 in connection with the debenture debt. Of
this total, $242,853 resulted from non-cash amortization of the discount
recorded in connection with the beneficial conversion, $4,354 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 $15,333 resulted
from interest accrued during the period on the outstanding principal balance.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders related to the warrants
and shares underlying the conversion feature of the debentures that required the
Company to file a Registration Statement with the Securities and Exchange within
30 days of the closing of the transaction. Due to the Company's failure to file
the Registration Statement within 30 days, the Company was not in compliance
with this requirement of the agreement. As discussed in more detail in Note 16,
in October 2004 and November 2004 the Company received a waiver of the
non-compliance in connection with an amendment to the debentures agreements and
an extension of the required Registration Statement filing date deadline to
November 15, 2004.
As of September 30, 2004 and December 31, 2003, convertible debenture
debt balances consists of the following:
Current:
September 30, 2004 December 31, 2003
------------------ -----------------
Convertible debenture $ 1,800,000 $ --
Convertible debenture discount (469,487) --
-------------- ---------------
Convertible debenture - net $ 1,330,513 $ --
============== ===============
Long Term:
September 30, 2004 December 31, 2003
------------------ -----------------
Convertible debenture $ 1,000,000 $ --
Convertible debenture discount (305,828) --
-------------- ---------------
Convertible debenture - net $ 694,172 $ --
============== ===============
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC. AND RELATED PARTIES
In October 1998, the Company issued a demand promissory note in the
amount of $400,000, plus interest at a variable rate, based on the prime rate to
of SurgiJet, Inc. ("SurgiJet"), VisiJet's former parent company. In connection
with the Merger Agreement, an amendment to the note agreement was executed in
February, 2003 under which the accrual of additional interest was halted, and
scheduled principal and interest payments were established.
During 2002, the Company entered into a promissory note in the amount
of $91,000 plus interest at the rate of 10% per annum with DentaJet, Inc.
("DentaJet"), a Company then related through common shareholders. During 2002
and 2003, the Company borrowed an additional $72,000 from, and made payments
totaling $27,482, to DentaJet, resulting in an outstanding principal balance of
$135,518 at December 31, 2003
During 2002, the Company entered into a promissory note with Lance
Doherty, a principal of SurgiJet and shareholder of the Company, for a principal
sum of $19,000 plus interest at the rate of 10% per annum. At December 31, 2003
the outstanding principal balance of this note was $19,000. At December 31, 2003
the outstanding principal balance of this note was $19,000.
17
NOTES PAYABLE - RELATED PARTIES (Continued)
During 2002, the Company recorded a liability of $2,967 related to
expenses paid by Rex Doherty, a principal of SurgiJet and shareholder of the
Company. At December 31, 2003 the outstanding liability balance was $2,967.
During 2003 the Company initiated litigation against SurgiJet,
challenging the validity of the SurgiJet Note, as well as other notes and
liabilities to DentaJet, Lance Doherty and Rex Doherty.
As discussed in more fully Note 11, 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 September 30, 2004 and December 31, 2003 are as follows:
September 30, 2004 December 31, 2003
Principal Interest Principal Interest
---------------------------------------------------------------------------
SurgiJet $ 579,774 $ 3,574 $ 360,976 $ 43,676
DentaJet - - 135,518 24,745
Lance Doherty 19,000 3,775 19,000 3,920
Rex Doherty - - 2,967 298
---------------------------------------------------------------------------
Total $ 598,774 $ 7,349 $ 518,461 $ 72,639
===========================================================================
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 nine months ended September 30, 2004, net activity resulted in an
increase to the outstanding principal of $28,761 and $17,257 of interest expense
related to this note. As of September 30, 2004 the outstanding principal and
accrued interest payable on this note were $278,886 and $45,791, respectively.
18
NOTE 10 - COMMITMENTS
LICENSE AGREEMENTS
Under the terms of the technology license agreements with SurgiJet, the
Company is obligated to pay a royalty of 7% of revenues received from sales of
the products, up to $400 million of revenues over the course of the agreements,
and 5% of revenues thereafter. The license agreements with SurgiJet also provide
for a minimum royalty of $60,000 per year that may be used as a credit toward
payment of future royalties due on product sales.
Under the terms of the patent license agreement entered into during
2003, the Company is obligated to pay a royalty of 6% of net sales of products
utilizing the licensed patent technology. The license agreement also provides
for a minimum royalty of $24,000 per year that may be used as a credit toward
payment of future royalties due on product sales.
Under the terms of the Manufacturing, Supply and Distribution Agreement
entered into in May 2004, the Company is obligated to purchase specified minimum
monthly and annual quantities of licensed products from the Licensor. There are
no royalties on product sales due or payable by the Company under this
agreement.
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
During the third quarter of 2004, the Company cancelled 2,300,000
shares of common stock that had been issued during the second quarter as
collateral under a pending debt agreement. The cancellation of these shares was
recorded as a reversal of the reduction to Additional Paid in Capital based on
the par value of shares issued that was recorded when the shares were originally
issued.
WARRANT ACTIVITY
During the third quarter of 2004, the Company issued 5-year warrants to
purchase an aggregate of 832,500 shares of its common stock at an average
exercise price of $0.72 per share and 7-year warrants to purchase an aggregate
of 825,000 shares of its common stock at an average exercise price of $1.00 per
share.
In connection with warrants issued during this period, the Company
recorded debt discount totaling $206,307 related to 750,000 warrants issued in
connection with convertible debenture agreements completed during the quarter,
professional fees totaling $231,228 related to an aggregate of 850,000 warrants
issued as commissions on debenture and Preferred Stock agreements completed
during the quarter and professional fees totaling $ 13,153 related to an
aggregate of 57,500 warrants issued for consulting services. All amounts
recorded in connection with these warrants were based on the fair value of the
warrants issued using a Black-Scholes model valuation.
The following table summarizes the number of outstanding common stock
warrants as of September 30, 2004:
Weighted Average
Number Exercise Price
----------- ------------
Outstanding at December 31, 2003 12,102,480 $ 2.53
Granted 825,000 1.87
Forfeited -- --
Exercised -- --
----------- ------------
Outstanding at March 31, 2004 12,927,480 $ 2.49
Granted 2,080,833 1.00
Forfeited -- --
Exercised -- --
---------- ------------
Outstanding at June 30, 2004 15,008,313 $ 1.87
Granted 1,657,500 0.86
Forfeited -- --
Exercised -- --
---------- ------------
Outstanding at September 30, 2004 16,665,813 $ 1.77
19
NOTE 12 - 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, 2004 and December 31, 2003, the
aggregate balances on these notes were $68,563 and $104,166, respectively and
the respective accrued interest payable balances were $8,999 and $6,330.
NOTE 13 - CONTINGENCIES
In October 2004, the Company and SurgiJet, its former parent company
entered into a settlement agreement covering all previously outstanding
litigation between the two companies, as well as with SurgiJet's principal
owners and its subsidiary, DentaJet.
In accordance with the settlement agreement, the Company, agreed to pay
a total of $579,774, plus accrued interest at an annual rate of 7.5% from August
31, 2004 ($3,574 through September, 30, 2004), as full settlement of previously
disputed notes payable to SurgiJet and DentaJet and related accrued interest
which the Company was carrying on its books in the aggregate amount of $580,718.
In addition, the Company agreed to pay a previously disputed note payable to a
shareholder of the Company, who is also a principal owner of SurgiJet, $19,000
plus accrued interest at an annual rate of 10% from December 31, 2002 ($3,775
through September 30, 2004), which the Company was carrying on its books in the
aggregate amount of $24,678.
In addition, the Company agreed to issue 75,000 shares of its Common
Stock to SurgiJet, granted SurgiJet a security interest in all of its assets and
agreed to provide SurgiJet with a stipulated judgment, which can only be filed
by SurgiJet upon an event of default which remains uncured following 10 days
after receipt of written notice of such default.
Payments on all obligations due pursuant to the settlement agreement
will be made in monthly installments commencing December 1, 2004. The first
payment is in the amount of $30,000, thereafter monthly payments are $20,000
through December 2005, and $25,000 from January 1, 2006 until the obligations
are paid in full.
In accordance with the settlement agreement, SurgiJet and its
principals agreed to waive, subject to completion and final report from an
independent accounting firm, claims for additional monies owed to them, and to
drop their cross-complaint against the Company, its directors and certain of its
officers seeking additional monetary damages and rescission of the Merger
Agreement.
In February 2004, the Company was served a summons which named the
Company as one of several defendants in an action filed by an individual seeking
damages of approximately $450,000 based on claims including breach of contract,
promissory fraud and negligent misrepresentation related to activities that
occurred, and involving owners and management of the Company, prior to the
effective date of the Merger Agreement. The Company denies any involvement in
the activities included in the allegations, and does not anticipate the
necessity to defend this action.
20
NOTE 14 - RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 2004 the Company
recorded $17,250 and $62,250, respectively, of consulting fees to a corporation
owned by a director of the Company. As of September 30, 2004, $6,500 related to
this agreement was included in accounts payable.
During the three and nine months ended September 30, 2004 the Company
recorded $45,000 and $135,000, respectively of consulting fees and expenses of
$2,291 and $17,395, respectively, in connection with this agreement. As of
September 30, 2004, $28,509 related to this agreement was included in accounts
payable.
During the three and nine months ended September 30, 2004 the Company
recorded $45,000 and $135,000, respectively, of consulting fees in connection
with an agreement with a corporation controlled by two shareholders, each of
whom own beneficially in excess of 5% of the outstanding shares of the Company's
common stock. Pursuant to this agreement, entered into in April 2003, the
Corporation is entitled to receive a monthly fee of $15,000, provided however
that payment of accrued fees is not payable by the Company until such time as
the Company has a minimum cash balance of $2.5 million. At September 30, 2004 a
total of $270,000 in fees recorded pursuant to this agreement is included in
accrued expenses.
During the three and nine months ended September 30, 2004 the Company
reimbursed a corporation controlled by an individual who beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company for travel
expenses related to business of the Company totaling $5,626 and $15,592,
respectively. As of September 30, 2004, $656 of these expenses was included in
accounts payable.
NOTE 15 - Security Lending Agreement
In April 2004, the Company and a corporation that beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company entered
into an agreement pursuant to which the corporation agreed to make available 3
million shares of the Company's common stock, for use by the Company as
collateral in subsequent financing transactions. In accordance with the terms of
this agreement, the Company is obligated to pay interest on the value of shares
borrowed (assuming a value of $1.00 per share) based on the LIBOR rate plus 50
basis points, and must return the borrowed shares by November 30, 2004. In the
event of default, the Company has agreed to file a Registration Statement and to
return any shares, within 72 hours, that had not previously been returned by the
due date. As of September 30, 2004 the Company had borrowed a total of 800,000
shares pursuant to this agreement, and the Company had accrued interest expense
totaling $25,725.
NOTE 16 - SUBSEQUENT EVENTS
CONVERTIBLE DEBENTURE AGREEMENTS
In October 2004, the Company entered into convertible debenture
agreements with four private lenders with an aggregate principal balance of
$850,000, and received net proceeds of $788,000 after subtracting related
placement agent fees and expenses totaling $62,000. The notes bear interest, at
an annual rate of 8%, which is due and payable quarterly beginning on December
31, 2004. The principal balance of the note, plus any accrued and unpaid
interest is due and payable on October 6, 2014, provided however, that on or
after October 6, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. In addition, the note holders received warrants to
purchase 850,000 shares of the Company's common stock, exercisable through
October 6, 2009 at an exercise price of $0.40 per share.
21
CONVERTIBLE DEBENTURE AGREEMENTS - AMENDMENTS
In connection with the Convertible Debenture Agreements entered into in
October 2004, the Company agreed to modify certain terms and conditions included
in convertible debenture agreements with an aggregate principal balance of
$2,000,000 entered into in June and July 2004. The modifications included a
reduction in the exercise prices of an aggregate of 1,500,000 previously issued
warrants to $0.40 per share, a reduction of the initial conversion price of
these debentures to $0.35 per share, the issuance of warrants to purchase
500,000 shares at an exercise price of $0.40 per share and the issuance of
261,428 shares of common stock as full payment of accrued liquidated damages. As
a result of these modifications, the debenture holders agreed to waive all
events of default and non-compliance under the covenants of those agreements,
and to extend the required Registration Statement filing date deadline to
November 1, 2004, and in November 2004, the filing date deadline was further
extended to November 15, 2004.
PREFERRED STOCK
In October 2004, the Company consummated the sale of 450,000 shares of
Series A Convertible Preferred Stock ("Series A Shares") to a corporation
organized under the laws of England and Wales pursuant to a Convertible
Preferred Stock Purchase Agreement (the "Stock Purchase Agreement"). Under the
Stock Purchase Agreement, the Company agreed to sell the Series A Shares to the
corporation in return for the corporation issuing to the Company 2,477,974 of
its Ordinary Shares. Consummation of the transaction was subject to admission of
the corporation's 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 7, 2004. In accordance with the Stock Purchase Agreement, the Company
may sell the shares received by it in the open market on the LSE at any time.
The Series A Shares are non-voting, except as required by Delaware law,
and the holders of the Series A Shares are not entitled to receive any
dividends. The Series A Shares, which have a "stated value" for purposes of
conversion and redemption of $10.00 per share, are convertible at any time 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
Series A Shares being converted by the conversion price then in effect, which is
to be the lesser of $0.609 (the "Fixed Conversion Price"), or eighty percent
(80%) of the lowest closing bid price of the Common Stock in the ten (10)
trading days preceding the date of conversion, but in no event less than 30
percent (30%) of the Fixed Conversion Price. However, the corporation may not
convert to the extent that conversion would result in owning more than 4.99% of
the outstanding Common Stock of the Company. The conversion price is subject to
further adjustment based on anti-dilution provisions that require an adjustment
to the conversion price based on certain events, including the issuance of
common stock or convertible securities at a price per share below market value,
stock dividends and combinations and certain distributions to shareholders. Any
shares not previously converted will be automatically converted at the
expiration of the three year period. The Series A Shares carry a liquidation
preference equal to the stated value. If the Company defaults under certain
covenants in the Certificate of Designation, the holder of the Series A Shares
may compel redemption at the stated value.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 contain forward-looking statements
that involve risks and uncertainties within the meaning of Sections 27A of the
Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934;
and the Private Securities Litigation Reform Act of 1995. Readers are referred
to the cautionary statement at the beginning of this report, which addresses
forward-looking statements made by the Company.
CORPORATE HISTORY
VisiJet (the "Company" or "VisiJet"), formerly known as Ponte Nossa
Acquisition Corp ("PNAC")), is a Delaware corporation engaged in the research
and development of surgical equipment for use in the field of ophthalmology
based on proprietary waterjet technology.
The Company was incorporated in California on February 2, 1996 as a
wholly owned subsidiary of SurgiJet, Inc ("SurgiJet"), a developer of waterjet
technology for a variety of medical and dental applications. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
On February 11, 2003 the Company completed a merger with PNAC, a
Delaware corporation incorporated in 1997. Pursuant to the merger agreement
between VisiJet and PNAC (the "Merger Agreement"), the Company merged into PNAC.
Since this transaction resulted in the shareholders of VisiJet acquiring a
majority of the outstanding shares of PNAC, for financial reporting purposes the
business combination was accounted for as a recapitalization of PNAC (a reverse
acquisition with the Company as the accounting acquirer). Subsequently, PNAC
changed its name to VisiJet, Inc.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Notes to the Financial
Statements. At this stage of our development, these policies primarily address
matters of revenue and expense recognition. The Company has consistently applied
these policies in all material respects.
OVERVIEW
Prior to the third quarter of 2004, the Company was in the development
stage, as our efforts had been principally devoted to organizational activities,
raising capital and research and development efforts related to our proprietary
waterjet based ophthalmic surgery products.
In May 2004, the Company entered into an exclusive license agreement
with a German corporation, pursuant to which the Company acquired worldwide
marketing, sales and distribution rights for that corporation's LASIK and
Epi-Lasik products, and immediately began marketing these products in Europe and
certain other foreign countries, where the products have received regulatory
approval for sale. In September 2004 the Company began marketing the Epi-Lasik
products in the United States following receipt of approval for marketing from
the U.S. Food and Drug Administration.
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Based on our history of losses and negative working capital balance,
our financial statements for the year ended December 31, 2003 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.
The Company is actively pursuing additional financing, and in this
regard is in discussions with several parties related to potential financing
arrangements. However, the Company does not currently have sufficient cash or
working capital available to continue to fund operations, to meet its
contractual obligations, to market the recently licensed products or to complete
its on-going product development efforts. As such, our ability to secure
additional financing on a timely basis, is critical to our ability to stay in
business and to pursue planned operational activities.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004 Compared To Three Months Ended September
30, 2003
SALES AND COST OF SALES
International sales totaled $982,567 and represent revenues recognized
based on sales during the third quarter of 2004 of ophthalmic surgery products
acquired through a licensing agreement completed in May 2004. Cost of sales
during the same period totaling $456,400 represent related product costs
associated with these revenues. No sales were recorded during the third quarter
of 2004 in the United States as marketing approval for the licensed products in
the U.S. was not approved until. Prior to the completion of the product
licensing agreement, the Company did not have any products for sale, and
accordingly had no similar sales revenues or cost of sales activity in the
comparable 2003 period.
OPERATING EXPENSES
Operating expenses during the three months ended September 30, 2004
increased to $1,582,983 from $1,239,737 in 2003 as a result of the following
activity:
2004 2003
------------ ----------
General and Administrative $ 1,400,569 $ 680,639
Research and Development 182,414 559,098
------------ ------------
Total Operating Expenses $ 1,582,983 $ 1,239,737
The increase in general and administrative expenses in the 2004 period
is due primarily to increases in professional fees and consulting, salaries and
wages, amortization expenses related to patents and distribution agreements and
sales and marketing expenses during 2004.
The decrease in research and development expenses in the 2004 period is
due primarily to limited working capital availability during the period, and to
a reallocation of resources from research and development to sales and marketing
as a result of the initiation of product sales during the second quarter of
2004.
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OTHER INCOME AND EXPENSE
Other expenses during the three months ended September 30, 2004
increased to $717,185 and includes interest expense of $145,662 and non-cash
expenses of $328,670 related to the amortization of debt discount during the
period, and $242,853 of non-cash interest expense recorded based on the
intrinsic value of the beneficial conversion feature of convertible debt entered
into during the third quarter of 2004.. Interest expensed in the 2004 period
increased from $5,944 in the three months ended September 30, 2003 due to an
increase in total debt outstanding during 2004, and there was no comparable debt
discount amortization expense in the 2003 period.
NET LOSS
As a result of the above revenues and expenses, the net loss for the
three months ended September 30, 2004 increased to $1,774,001, compared to
$1,155,378 during the comparable 2003 period.
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30,
2003
SALES AND COST OF SALES
International sales totaled $1,037,537 and represent revenues
recognized based on sales during the second and third quarter of 2004 of
ophthalmic surgery products acquired through a licensing agreement completed in
May 2004. Cost of sales during the same period totaling $483,234 represent
related product costs associated with these revenues. No sales were recorded
during the nine months ended September 30 2004 in the United States as marketing
approval for the licensed products in the U.S. was not obtained until the middle
of September 2004. Prior to the completion of the product licensing agreement,
the Company did not have any products for sale, and accordingly had no similar
sales revenues or cost of sales activity in the comparable 2003 period.
OPERATING EXPENSES
Operating expenses during the nine months ended September 30, 2004
increased to $7,006,940 from $2,931,790 in 2003 as a result of the following
activity:
2004 2003
------------ ----------
General and Administrative $ 6,415,545 $ 2,054,912
Research and Development 591,395 876,878
------------ ------------
Total Operating Expenses $ 7,006,939 $ 2,931,790
The increase in general and administrative expenses in the 2004 period
is due primarily to the inclusion of $2.9 million of non-cash expenses recorded
in connection with the issuance of common stock, warrants and options during the
period as payment for consulting services and in connection with
dispute/litigation settlements, and non-cash expenses of $546,403 recorded in
connection with the re-pricing of warrants during the second quarter. In
addition, general and administrative expenses during 2004 increased due to
increases in professional fees and consulting, salaries and wages, amortization
expenses related to patents and distribution agreements and sales and marketing
expenses.
The decrease in research and development expenses in the nine months
ended September 30, 2004 period is due primarily to due to limited working
capital availability during the period, and to a reallocation of resources from
research and development to sales and marketing as a result of the initiation of
product sales during the second quarter of 2004.
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OTHER INCOME AND EXPENSE
Other expenses during the nine months ended September 30, 2004
increased to $1,967,216 and includes interest expense of $242,275 and non-cash
expenses of $903,802 related to the amortization of debt discount during the
period, and $821,139 of non-cash interest expense recorded based on the
intrinsic value of the beneficial conversion feature of convertible debt entered
into during the third quarter of 2004.. Interest expensed in 2004 period
increased from $45,058 in the first nine months of 2003 due to an increase in
total debt outstanding during 2004, and there was no comparable debt discount
amortization expense in the 2003 period.
NET LOSS
As a result of the above revenues and expenses, the net loss for the
nine months ended September 30, 2004 increased to $8,420,653 compared to
$2,886,090 during the comparable 2003 period.
Subject to the availability of cash and working capital, we expect
sales revenue, and related cost of sales to increase significantly during the
remainder of 2004. In addition, expenses related to sales and marketing and
research and development activities are expected to increase during the
remainder of 2004 as we continue to ramp up our sales and marketing activities
related to recently licensed products, and as we move toward completion of
product development and regulatory compliance efforts and the ultimate product
introduction with respect to the Company's other products under development.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the second quarter of 2004, the Company did not have any
products for sale, and had not generated any revenue from sales or other
operating activities. As such, our principal source of liquidity has been the
private placement of equity securities and the issuance of notes payable and
convertible debt. Based on our history of losses and negative working capital
balance, our financial statements for the year ended December 31, 2003 included
a going concern opinion from our outside auditors, which stated there "is
substantial doubt" about our ability to continue operating as a going concern.
During the first nine months of 2004, the Company raised net proceeds
totaling $4,136,074 through private placements of debt and equity securities. Of
this total, $2,471,125 came from the issuance of convertible debentures, net of
$328,875 of related costs, $1,109,688 came from the issuance of secured
subordinated debenture agreements, net of $140,312 of related costs and $526,500
resulted from equity private placements, net of related costs of $58,500. In
addition, during this period, the Company received net proceeds of $28,761 from
working capital advances from shareholders and employees.
During the first nine months of 2004, the Company utilized $2,949,100
to fund operating activities and $1,204,511 in investing activities, and as of
September 30, 2004, current liabilities exceeded current assets by approximately
$4.75 million.
Subject to availability of funding, we expect operating expenses, and
related cash requirements, to increase during 2004 in connection with
anticipated increased sales and marketing and product development activities.
In October 2004, the Company entered into convertible debenture
agreements with four private lenders with an aggregate principal balance of
$850,000, and received net proceeds of $788,000 after subtracting related
placement agent fees and expenses totaling $62,000. The notes bear interest, at
an annual rate of 8%, which is due and payable quarterly beginning on December
31, 2004. The principal balance of the note, plus any accrued and unpaid
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interest is due and payable on October 6, 2014, provided however, that on or
after October 6, 2007 the Company, at the option of the note holder, may be
obligated to repurchase the note at a price equal to 100% of the outstanding
principal and interest. In addition, the note holders received warrants to
purchase 850,000 shares of the Company's common stock, exercisable through
October 6, 2009 at an exercise price of $0.40 per share.
The Company is actively pursuing additional financing, and in this
regard is in discussions with several parties related to potential financing
arrangements. 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. The Company believes that actions presently being taken to raise
additional financing, to market products with which near-term operating revenues
and to complete the development of, and bring to market its other ophthalmic
surgical products, will provide capital to satisfy contractual obligations and
to ultimately generate sufficient revenue to support its operations and become
profitable. However, there can be no assurance that any such actions will be
successfully completed, or that such actions will provide sufficient capital
and/or cash flow to permit the Company to stay in business realize its plans.
ITEM 3. CONTROLS AND PROCEDURES
At the end of the period covered by this Form 10-QSB, the Company's
management, including its Chief Executive Officer and its Treasurer, conducted
an evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive Officer and the
Treasurer determined that such controls and procedures are effective to ensure
that information relating to the Company required to be disclosed in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. There have been no
changes in the Company's internal controls over financial reporting that were
identified during the evaluation that occurred during the Company's last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VisiJet is a defendant in Steven J. Baldwin v. VisiJet, Inc. et al, a
case pending in San Francisco Superior Court, filed on February 9, 2004 (Case
No. 04- 428696). The Plaintiff is alleging damages of approximately $450,000
based on claims including breach of contract, promissory fraud and negligent
misrepresentation related to activities that occurred, and involving owners and
management of the Company, prior to the effective date of the Merger Agreement.
The Company denies any involvement in the activities included in the
allegations, and does not anticipate the necessity to defend this action.
To the best of the Company's knowledge and belief, there are no other
material legal proceedings pending or threatened against the Company.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period the Company issued $1,000,000 in convertible
debentures to a private lender. The principal balance of the debentures is due
and payable on July 23, 2014 and the debentures bear interest at an annual rate
of 8%. In addition, the debenture holders received an aggregate of 750,000
warrants to purchase shares of the Company's common stock, exercisable through
July 23, 2011, at an exercise price of $1.00 per share.
The Company believes that the foregoing issuance was exempt from
registration under the Securities Act of 1933, as amended, by reason of Section
4(2) thereof and Regulation D thereunder.
Item 3. DEFAULT UPON SENIOR SECURITIES
In October 2004, the Company received a notice of default from the
holders of secured debentures with an aggregate outstanding principal balance of
$400,000 due to the nonpayment of interest owed under the debenture agreements.
Subsequent to the receipt of notice, the Company made the required interest
payments and the Company is in discussions with the debenture holders regarding
a resolution of this matter.
A secured debenture agreement in the amount of $750,000, entered into
in May 2004, came due on its scheduled maturity date of July 5, 2004. The
Company did not pay the obligation on the maturity date. The 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.
The Company is not in compliance with terms included in the secured
debenture agreements with an aggregate outstanding principal balance of
$800,000, entered into in May 2004, due to the nonpayment of the principal
balance by the scheduled maturity date in August 2004, and due its failure to
file a Registration Statement with the Securities and Exchange Commission
covering warrants issued to debenture holders pursuant to the debenture
agreement by June 6, 2004, as required by the registration rights agreement
entered into between the Company and the debenture holders in connection with
the debenture agreement. The failure to pay the principal balance when due and
to file the Registration Statement on a timely basis are events of defaults
under the agreement. The Company is in discussions with the debenture holders
regarding a resolution of this matter.
The Company is not currently in compliance with terms included in
the secured debenture agreements with an aggregate outstanding principal balance
of $2,000,000, entered into in June and July 2004, due to its failure to file a
Registration Statement with the Securities and Exchange Commission as required
by the registration rights agreements entered into between the Company and the
debenture holders in connection with the debenture agreement. The failure to
timely file the Registration Statement is a default under the agreement. In
October 2004 the Company received a waiver of default from the debenture
holders.
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ITEM 6. EXHIBITS
10.11* Securities Purchase Agreement, dated July 23, 2004 between
VisiJet, Inc. and Libertyview Special Opportunities Fund, LP*
10.12* 8% Convertible Note for $1,000,000, dated July 23, 2004,
issued by VisiJet, Inc., to Libertyview Special Opportunities
Fund, LP*
10.13* Warrant To Purchase 750,000 Shares of Common Stock of VISIJET,
INC., ISSUED TO Libertyview Special Opportunities Fund, LP*
10.14* Registration Rights Agreement, dated July 23, 2004, between
VisiJet, Inc., and Libertyview Special Opportunities Fund, LP*
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
*Incorporated by reference from Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004, filed on August 18, 2004.
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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.
VisiJet, Inc.,
a Delaware corporation
By: /s/ Laurence Schreiber
-------------------------------
Laurence Schreiber, Secretary,
Treasurer, Chief Operating Officer
Date: January 26, 2005
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