UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 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)
As of August 13, 2004 there were 30,179,663 shares of the registrant's
Common Stock outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at June 30, 2004 and December 31, 2003.............. 3
Statements of Operations for the Three Months and Six Months
ended June 30, 2004 and 2003 and the period February 2, 1996
(inception) to June 30, 2004..................................... 4
Statements of Cash Flows for the Six Months ended June 30, 2004
and 2003 and the period February 2, 1996 (inceptions) to
June 30, 2004.................................................... 5
Notes to Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 22
Item 3. Controls and Procedures............................................ 28
PART II. OTHER INFORMATION.................................................. 28
Item 1. Legal Proceedings.................................................. 28
Item 2. Changes in Securities.............................................. 29
Item 3. Defaults Upon Senior Securities.................................... 29
Item 6. Exhibits and Reports on Form 8-K................................... 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Visijet, Inc.
(A development stage company)
Balance Sheets
June 30, December 31,
2004 2003
(Unaudited) (Audited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 59,863 $ 35,879
Inventory 179,984 --
Prepaid expenses 83,409 68,749
Prepaid royalty 8,000 20,000
------------- -------------
Total current assets 331,256 124,628
Property and equipment, net 120,815 104,440
Distribution agreement 1,844,358 --
Patents and trademarks, net 92,520 97,244
------------- -------------
Total assets $ 2,388,949 $ 326,312
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable 851,994 679,885
Compensation settlement agreement - current portion 93,748 86,708
Accrued interest 159,928 109,232
Accrued expenses 670,425 481,106
Royalty payable 30,000 60,000
Notes payable to related parties 824,892 681,442
Notes payable - current portion 14,000 14,000
Convertible debenture debt, net 1,090,993 --
Secured debenture debt, net 1,081,158 --
------------- -------------
Total current liabilities 4,817,138 2,112,373
Compensation settlement agreement, net of current portion -- 17,458
Notes payable to related parties, net of current portion -- 87,144
------------- -------------
Total liabilities 4,817,138 2,216,975
------------- -------------
Shareholders' deficit:
Common stock, 50,000,000 shares authorized, $.001 par value,
30,179,663 shares issued and outstanding at June 30, 2004, and
21,691,163 shares issued and outstanding at December 31, 2003 30,180 21,691
Preferred stock, 10,000,000 shares authorized, $.001 par value,
no shares outstanding at June 30, 2004 and no shares authorized
or issued at December 31, 2003 -- --
Additional paid in capital 14,386,216 7,845,365
Common stock subscriptions -- 1,018,500
Deficit accumulated during development stage (16,844,585) (10,776,219)
------------- -------------
Shareholders' deficit (2,428,189) (1,890,663)
------------- -------------
Total liabilities and shareholders' deficit $ 2,388,949 $ 326,312
============= =============
The accompanying notes are an integral part of these financial statements
3
Visijet, Inc.
(A development stage company)
Statements of Operations
(Unaudited)
For the period
Three months Three months Six months Six months February 2, 1996
ended ended ended ended (inception) to
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 June 30, 2004
------------- ------------- ------------- ------------- -------------
Sales - International $ 54,970 -- $ 54,970 -- $ 54,970
Cost of Goods Sold 26,834 -- 26,834 -- 26,834
------------- ------------- ------------- ------------- -------------
Gross Profit 28,136 -- 28,136 -- 28,136
Operating expenses:
General and administrative expenses 3,979,679 671,065 5,014,976 1,374,272 10,583,712
Research and development expenses 162,496 214,273 408,981 317,780 5,266,990
------------- ------------- ------------- ------------- -------------
Total operating expenses 4,142,175 885,338 5,423,957 1,692,052 15,850,702
------------- ------------- ------------- ------------- -------------
Loss from operations (4,114,039) (885,338) (5,395,821) (1,692,052) (15,822,566)
Other income (expense):
Interest income -- 361 -- 455 455
Interest expense (615,107) (17,037) (671,745) (39,114) (1,035,990)
Gain on debt restructure -- -- -- -- 90,303
Loss on judgment (21,483)
Loss on disposal of assets -- -- -- -- (48,104)
------------- ------------- ------------- ------------- -------------
Total other expense (615,107) (16,676) (671,745) (38,659) (1,014,819)
------------- ------------- ------------- ------------- -------------
Loss before provision for taxes (4,729,146) (902,014) (6,067,566) (1,730,711) (16,837,385)
Provision for Income taxes -- -- 800 -- 7,200
------------- ------------- ------------- ------------- -------------
Net loss $ (4,729,146) $ (902,014) $ (6,068,366) $ (1,730,711) $(16,844,585)
============= ============= ============= ============= =============
Net loss per common share - basic and diluted $ (0.18) $ (0.05) $ (0.25) $ (0.09) $ (2.14)
============= ============= ============= ============= =============
Basic and diluted weighted average
number of common shares outstanding 26,625,762 19,533,294 24,370,545 19,533,294 7,882,996
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
Visijet, Inc.
(A development stage company)
Statements of Cash Flows
(Unaudited)
For the period
February 2, 1996
Six months ended June 30, (inception) to
2004 2003 June 30, 2004
------------- ------------- -------------
Cash flows from operating activities
Net loss $ (6,068,366) $ (1,730,711) $(16,844,585)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 76,614 7,995 388,925
Debt discount amortization 575,133 33,997 575,133
Loss from disposal of fixed assets -- -- 48,104
Common stock, options, warrants issued for services 2,649,954 75,000 3,105,422
Fee for borrowed collateral 546,403 -- 546,403
Gain from debt restructure -- -- (90,303)
Changes in assets and liabilities: -- -- --
Prepaid expenses (2,660) (41,436) (91,409)
Change in inventory (179,984) -- (179,984)
Accounts payable 172,109 (85,910) 851,994
Compensation settlement agreement (10,418) (56,336) 93,748
Royalties payable (30,000) 30,000 30,000
Foreign exchange effect on notes payable -- -- 3,121
Other accrued expenses 189,319 -- 670,425
Accrued interest 58,509 39,114 259,390
------------- ------------- -------------
Net cash used by operating activities (2,023,387) (1,728,287) (10,633,616)
------------- ------------- -------------
Cash flows from investing activities
Acquisition of property and equipment (31,222) (67,104) (493,321)
Acquistion of patents -- -- (100,000)
Purchase of distribution agreement (1,188,900) -- (1,188,900)
------------- ------------- -------------
Net cash used in investing activities (1,220,122) (67,104) (1,782,221)
------------- ------------- -------------
Cash flows from financing activities
Advance from related party 256,305 128,009 2,131,173
Repayment of advances from related parties (200,000) (71,988) (412,620)
Proceeds from notes payable -- 143,740 143,740
Repayment of notes payable -- (65,740) (129,740)
Proceeds from secured debentures 1,109,688 -- 1,109,688
Proceeds form convertible debentures 1,575,000 -- 1,575,000
Proceeds from private placements-net 526,500 1,741,000 5,535,681
Proceeds from issuance and conversion of preferred stock, net -- -- 2,458,088
Cash acquired in reverse merger -- -- 30,693
Interest converted to equity in connection with merger -- -- 33,997
------------- ------------- -------------
Net cash provided by financing activities 3,267,493 1,875,021 12,475,700
------------- ------------- -------------
Net increase / (decrease) in cash 23,984 79,630 59,863
Cash, beginning of period 35,879 960 --
------------- ------------- -------------
Cash, end of period $ 59,863 $ 80,590 $ 59,863
============= ============= =============
Supplemental disclosures of cash flow information
Interest paid $ 45,916 $ -- $ --
Taxes paid 800 1,600 7,200
Debenture costs and fees paid 357,500 -- --
Non-cash transactions
Warrants issued in connection with secured debentures 988,983
Common Stock issued in connection with secured debentures 106,500
Common Stock issued in connection with distribution agreement 712,500
Common Stock issued as collateral 3,400
The accompanying notes are an integral part of these financial statements
5
VISIJET, INC.
(A DEVELOPMENT STAGE COMPANY)
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 development-stage
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's efforts have been principally devoted to
organizational activities, raising capital and research and development.
The Company was incorporated on February 2, 1996, as a wholly owned
subsidiary of SurgiJet, Inc. to develop and distribute medical products based on
patented waterjet-based technology licensed from SurgiJet. In May 1999, the
Company was spun off from SurgiJet through a distribution of common stock to its
shareholders, after which SurgiJet had no remaining ownership interest in the
Company.
In December 2002 VisiJet entered into a merger agreement with Ponte
Nossa Acquisition Corp., a Delaware corporation ("the Merger") that had been
incorporated as a blank check company in 1997. The agreement called for the
merger of the two companies into a single company through the merger of an
acquisition subsidiary, VisiJet Acquisition Corporation, into VisiJet. The
merger was consummated on February 11, 2003, and immediately thereafter, VisiJet
was merged into Ponte Nossa Acquisition Corp., and the surviving company's name
was changed to "VisiJet, Inc."
6
NATURE OF OPERATIONS (Continued)
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. The
licensed products are approved for marketing in Europe and certain other
countries, and during the second quarter of 2004, an application for marketing
approval in the United States was filed with the U.S. Food and Drug
Administration.
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 six months ended June 30, 2004, the Company incurred
net losses of $4,729,146 and $6,068,366, respectively, and as of June 30, 2004,
the Company's current liabilities exceeded its current assets by approximately
$4.5 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.
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.
7
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.
STOCK-BASED COMPENSATION
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, under which compensation
expense, if any, is generally based on the difference between the exercise price
of an option, or the amount paid for the award and the market price or fair
value of the underlying common stock at the date of the award. Stock-based
compensation arrangements involving non-employees are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," under which such arrangements are accounted for based
on the fair value of the option or award. The Company adopted the disclosure
requirements of SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE," an amendment of SFAS No. 123 as of January 1, 2003,
which require certain disclosures about stock-based employee compensation plans
in an entity's accounting policy note. The adoption of SFAS No. 148 did not have
a material impact on these consolidated financial statements and the disclosure
requirements are included below.
On November 10, 2003, the Board of Directors adopted the VisiJet, Inc.
2003 Stock Option Plan. The Option Plan provides for the grant of incentive and
non-qualified stock options to selected employees, the grant of non-qualified
options to selected consultants and to directors and advisory board members. The
Option Plan is administered by the Compensation Committee of the Board of
Directors and authorizes the grant of options for 3,000,000 shares. The
Compensation Committee determines the individual employees and consultants who
participate under the Plan, the terms and conditions of options, the option
price, the vesting schedule of options and other terms and conditions of the
options granted pursuant thereto.
During the second quarter of 2004, no new options were granted by the
Company, and options to purchase a total of 20,000 shares were forfeited and
cancelled.
8
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of June 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 June 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 9.37 1.10 390,000 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%.
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 six
months ended June 30, 2004, 2003 and from inception to date, would have been as
follows:
For the Three Months For the Six Months For the Period
Ended June 30, Ended June 30, Febrary 2,
--------------------------------------------------------------- 1996
(inception)
2004 2003 2004 2003 June 30, 2004
------------ ------------ ------------ ------------ ------------
Net Loss
As reported (4,729,146) (902,014) (6,068,366) (1,730,711) (16,844,585)
SFAS No. 123 effect (84,499) -- (168,999) -- (477,723)
------------ ------------ ------------ ------------ ------------
Pro forma net loss (4,813,645) (902,014) (6,237,365) (1,730,711) (17,322,308)
Loss per share, basic and diluted
As reported (0.18) (0.05) (0.25) (0.09) (2.14)
============ ============ ============ ============ ============
Pro forma (0.18) (0.05) (0.26) (0.09) (2.20)
============ ============ ============ ============ ============
Basic and diluted weighted
average common shares outstanding 26,625,762 19,533,294 24,370,545 19,533,294 7,882,996
============ ============ ============ ============ ============
DEPRECIATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three to seven
years.
9
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No.
128,"EARNINGS PER SHARE," and Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 98. Accordingly, basic loss per share is
computed using the weighted average number of common shares and diluted loss per
share are computed based on the weighted average number of common shares and all
common equivalent shares outstanding during the period in which they are
dilutive. Common equivalent shares consist of shares issuable upon the exercise
of stock options, using the treasury stock method, or warrants; common
equivalent shares are excluded from the calculation if their effect is
anti-dilutive.
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 and for the period February 2, 1996 (inception) to June 30, 2004
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.
10
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2004 and
December 31, 2003:
June 30, 2004 December 31, 2003
------------- -------------
Computer and test equipment $ 98,197 $ 82,584
Furniture and fixtures 33,505 33,505
Trade show equipment 62,613 47,002
------------- -------------
194,313 163,091
Less: Accumulated depreciation (73,498) (58,651)
------------- -------------
$ 120,815 $ 104,440
============= =============
Depreciation expense for the six months ended June 30, 2004, and for
the period from February 2, 1996 (inception) to June 30, 2004 was $14,847 and
$324,402, respectively.
NOTE 4 - 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 licensed products are approved for marketing in Europe and
certain other countries, and during the second quarter of 2004, an application
for marketing approval in the United States was filed with the U.S. Food and
Drug Administration.
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 June 30,
2004 and December 31, 2003:
June 30, 2004 December 31, 2003
------------- -------------
Distribution agreements $ 1,901,400 $ --
Patent agreements 100,000 100,000
Less: accumulated amortization (64,522) (2,756)
------------- -------------
$ 1,936,878 $ 97,244
============= ==============
11
DISTRIBUTION AND PATENT AGREEMENTS (Continued)
Amortization expense for the six months ended June 30, 2004 and for the
period from February 2, 1996 (inception) to June 30, 2004 was $61,766 and
$64,522, 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
----------------- ------------------
12/31/04 194,864
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 1,891,602
==================
NOTE 5 - 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 Company is obligated to file a Registration Statement covering the
shares issued, as well as the shares issuable upon conversion of the debentures.
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
to debenture holders. During the six months ended June 30, 2004, the Company
recorded total interest expense of $118,475 in connection with the debenture
debt, of which $88,475 resulted from the non-cash amortization of debt discount
and $30,000 related to interest accrued during the periods on the outstanding
principal balance. Of the interest accrued, $27,000 was paid during the period,
and $3,000 was payable as of June 30, 2004.
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.
12
SECURED DEBENTURES (Continued)
The principal balance of the debentures is 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 (See Note 14). 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 six months ended June 30, 2004, the Company
recorded total interest expense of $310,345 in connection with the debenture
debt, of which $293,157 resulted from the non-cash amortization of debt discount
and $ 17,188 related to interest accrued, and paid during the period on the
outstanding principal balance.
As of June 30, 2004 and December 31, 2003, secured debenture debt
balance consists of the following:
June 30, 2004 December 31, 2003
------------- -------------
Secured subordinated debenture $ 1,250,000 $ --
Secured debenture discount (168,842) --
------------- -------------
Secured debenture debt $ 1,081,158 $ --
============= =============
Note 6 - CONVERTIBLE DEBENTURES
In May 2004, the Company entered into convertible debenture agreements
with two institutional 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, 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 six months ended June 30, 2004,
the Company recorded total interest expense of $201,042 in connection with the
debenture debt, of which $188,987 resulted from the non-cash amortization of
debt discount and $12,055 related to interest accrued during the periods on the
outstanding principal balance.
13
CONVERTIBLE DEBENTURES (Continued)
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. As of June 6, 2004 the Company had not completed the filing of the
Registration Statement as required by the registration rights agreement, and
accordingly, the Company is currently in default of its obligations to timely
file the Registration Statement.
In June 2004, the Company entered into convertible debenture agreements
with two institutional lenders with an aggregate principal balance of
$1,000,000, and received net proceeds of $880,000 after subtracting related
placement agent fees and expenses totaling $120,000. The principal balance of
the debentures is due and payable on June 24, 2006.
The debentures bear interest at an annual rate of 8%, which is payable
quarterly beginning December 31, 2004. In addition, the debenture holders
received an aggregate of 150,000 shares of the company's common stock, and an
aggregate of 750,000 warrants to purchase shares of the Company's common stock,
exercisable through June 24, 2009, at an exercise price of $1.50 per share,
provided however that the exercise price with respect to an aggregate of 500,000
of the warrants is reduced to $0.60 per share during the period from the date of
issuance through the date twelve (12) months after the Securities and Exchange
Commission declares effective a registration statement registering the resale of
shares underlying the warrants.
The 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 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. During the three months ended June
30, 2004, the Company recorded total interest expense of $5,829 in connection
with the debenture debt, of which $4,514 resulted from the non-cash amortization
of debt discount and $1,315 related to interest accrued during the periods on
the outstanding principal balance.
In connection with these debentures, the Company entered into a
Registration Rights Agreement with the debenture holders covering 500,000 shares
of common stock, 750,000 shares of common stock underlying the warrants and
2,000,000 shares of common stock underlying the conversion provision included in
the debenture agreements. Pursuant to this agreement, the Company is obligated
to file a Registration Statement with the Securities and Exchange within 30 days
of the closing of the transaction (See Note 14).
14
CONVERTIBLE DEBENTURES (Continued)
As of June 30, 2004 and December 31, 2003, convertible debenture debt
balance consists of the following:
June 30, 2004 December 31, 2003
------------- -------------
Secured subordinated debenture $ 1,800,000 $ --
Secured debenture discount (709,007) --
------------- -------------
Secured debenture debt $ 1,090,993 $ --
============= =============
NOTE 7 - NOTES PAYABLE - RELATED PARTIES
SURGIJET, INC.
On October 23, 1998, the Company issued a demand promissory note in the
amount of $400,000 in favor of SurgiJet, Inc., a company then related through
common shareholders. Interest accrued on the unpaid principal at a variable
interest rate based on the prime rate totaled $139,955 on February 11, 2003. In
connection with the Merger Agreement, an amendment to the note was executed on
February 11, 2003 under which the accrued interest was reduced to $49,652, the
accrual of additional interest was halted, and scheduled principal and interest
payments were established. Under the amended note, the first payment of $30,000
was due on February 11, 2003 with equal monthly installments of $15,000,
including interest due on the first of each month, and all outstanding principal
and interest was due and payable upon successful completion of the Company's
2002 financial statements. As a result of the amendment, the Company recorded a
$90,303 gain during the third quarter of 2003 based on the difference between
the total accrued interest expense included on the amended note and the total
interest of $139,955 previously accrued. During 2003 payments totaling $45,000
were made by the Company. As discussed more fully in Note 11, the validity of
the underlying note, as well as the amended note, is disputed by the Company,
and is a subject of on-going litigation between the Company and SurgiJet.
Pending the outcome of the litigation, the Company ceased making scheduled
payments on this note. As of June 30, 2004 and December 31, 2003, the
outstanding principal balances and accrued interest payable balances on this
note were $360,976 and $43,676, respectively. At June 30, 2004 the entire
principal balance of the note is reflected as a current liability, and as of
December 31, 2003, $273,832 of the principal balance is reflected as a current
liability and $87,144 was reflected as long term debt.
DENTAJET, INC.
During 2002, the Company entered into a promissory note for a principal
sum 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 and June 30, 2004. During the six months ended
June 30, 2004 the Company recorded $8,046 of interest expense related to this
note, and as of June 30, 2004 and December 31, 2003 accrued interest payable on
this note totaled $32,790 and $24,745, respectively.
Pursuant to the Merger Agreement, the loan was due and payable upon
successful completion of an independent audit of the Company's 2002 financial
statements. However, as discussed more fully at Note 11, the validity of this
note is being disputed by the Company, and is a subject of on-going litigation
between the Company and SurgiJet.
15
NOTES PAYABLE - RELATED PARTIES (Continued)
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 six months ended June 30, 2004, net activity resulted in an increase
to the outstanding principal of $15,865, and $11,219 of additional interest was
accrued. As of June 30, 2004 the outstanding principal and accrued interest
payable on this note were $265,990 and $39,752, respectively.
SHAREHOLDERS
During 2002, the Company entered into a promissory note with Lance
Doherty, a shareholder of the Company, for a principal sum of $19,000 plus
interest at the rate of 10% per annum. As of June 30, 2004 and December 31, 2003
the outstanding principal balance of this note was $19,000. During the six
months ended June 30, 2004 $1,151 of additional interest was accrued, and as of
June 30, 2004 accrued interest payable totaled $5,071. Pursuant to the Merger
Agreement, this note was due and payable upon successful completion of an
independent audit of the Company's 2002 financial statements. However, as
discussed more fully at Note 11, the validity of this note is being disputed by
the Company, and is a subject of on-going litigation between the Company and Mr.
Doherty.
NOTE 8 - 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.
16
NOTE 9 - SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ACTIVITY
During the second quarter of 2004, the Company issued a total of
7,490,000 shares of common stock. Of this total, 115,000 shares were issued in
connection with private equity placements, 600,000 shares were issued from
common stock subscriptions received in 2003, 2,400,000 shares were issued as
compensation for consulting services, 750,000 shares were issued in connection
with a product licensing agreement, 75,000 shares were issued pursuant to
litigation settlement agreements, and 150,000 shares were issued pursuant to a
securities purchase agreement entered into in connection with one of the secured
debt agreements completed during the quarter.
In connection with the issuance of these shares, the Company recorded
expenses of $2,280,000 related to the shares issued for consulting services and
$59,250 related to the shares issued pursuant to litigation settlements. In
addition, 712,500 was capitalized in connection with the shares issued in
connection with the product license agreement and $106,500 was recorded as debt
discount related to the shares issued pursuant to the securities purchase
agreement. All amounts recorded in connection with the issuance of these shares
were based on the fair value of the stock on the date of issuance.
In addition, during the second quarter of 2004, the Company issued an
aggregate of 3,400,000 shares of common stock as collateral under completed and
pending debt agreements. The issuance of these shares was recorded as reductions
to Additional Paid in Capital based on the par value of shares issued.
WARRANT ACTIVITY
During the second quarter of 2004, the Company issued 5-year warrants
to purchase an aggregate of 2,080,833 shares of its common stock. Of this total,
an aggregate of 1,903,333 warrants were issued in connection with secured
debenture agreements completed during the quarter at exercise prices ranging
from $0.60 to $1.50 (see Note 5), 110,000 warrants were issued in connection
with private equity placements at an exercise price of $2.25 per share, 37,500
warrants were issued at an exercise price of $2.25 per share for services
provided to the company and 30,000 warrants were issued at an exercise price of
$1.00 in connection with a working capital advance made to the Company.
During this period, the Company recorded debt discount totaling
$810,815 and professional fees totaling $64,238 related to warrants issued in
connection with the debenture agreements, professional fees totaling $17,032
related to warrants issued in connection with the working capital advance and
consulting expense in the amount of $11,612 in connection with the warrants
issued for 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 June 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
============ ============
SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
The following table summarizes additional information with respect to
outstanding common stock warrants at June 30, 2004:
Number Weighted Average Life Number
Exercise Price Outstanding Remaining in Months Exercisable
-------------- ------------ --------------------- -----------
$0.60 500,000 60 500,000
$0.90 1,153,333 58 1,153,333
$1.00 6,101,480 43 5,101,480
$1.10 250,000 56 250,000
$1.23 45,000 49 45,000
$1.50 280,000 56 280,000
$2.25 4,403,500 49 4,403,500
$2.50 505,000 40 505,000
$3.00 50,000 43 50,000
$5.00 1,720,000 43 1,720,000
------------ -----------
15,008,313 14,008,313
============ ===========
NOTE 10 - 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 June 30, 2004 and December 31, 2003, the
aggregate balances on these notes were $93,749 and $104,166, respectively and
the respective accrued interest payable balances were $8,125 and $6,330.
NOTE 11 - CONTINGENCIES
During 2003, the Company initiated litigation against SurgiJet, Inc.,
its former parent company, and certain directors, officers and shareholders of
SurgiJet. The action was initially filed by the Company for a judicial
determination that a $400,000 Promissory Note issued by the Company and payable
to SurgiJet ("SurgiJet Note"), prior to the completion of the Merger Agreement,
is not enforceable, and for recovery of payments previously made on the note.
Subsequently, the Company challenged the validity of other notes payable carried
on the Company's books at the effective date of the Merger Agreement, including
notes to DentaJet, Lance Doherty (former President of VisiJet and beneficial
owner of more than 5% of its outstanding Common Stock) and Rex Doherty.
SurgiJet and its principals filed a cross-action against the Company,
and its directors and certain officers, seeking damages of approximately
$800,000, rescission of the Merger Agreement, other specified damages, interest
and attorney's fees. In the cross-complaint, SurgiJet and its principals allege
breach of the Merger Agreement between the Company and SurgiJet, breach of the
Assumption of Liabilities Agreement (including Notes Payable to DentaJet, Lance
Doherty and Rex Doherty) entered into in connection with the Merger Agreement,
and breach of the SurgiJet Note, along with fraud and unfair business practices.
18
CONTINGENCIES (Continued)
The Company believes the allegations to the cross-complaint are wholly
without merit and plans to vigorously pursue its claims and contest the
cross-complaint.
The Company is also a defendant in a breach of contract claim from an
outside provider of accounting services for work performed for the Company prior
to the effective date of the Merger Agreement, for $43,500, plus interest. The
Company has denied the allegations of the complaint and is vigorously contesting
the action. The Company has filed a Cross Complaint alleging professional
negligence, breach of contract, breach of covenant of good faith and fair
dealing and aiding and abetting breach of fiduciary duty.
In January 2004, the Company was served a summons which named the
Company and certain of its officers as defendants in an action filed by a
corporation claiming it was owed fees related to professional employment
placement services in the approximate amount of $114,500. The Company denies the
allegations of the complaint and plans to vigorously contest the action.
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.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the three and six months ended June 30, 2004 the Company
recorded $15,000 and $30,000, respectively, of consulting fees to a corporation
owned by a director of the Company. As of June 30, 2004, $2,500 related to this
agreement was included in accounts payable.
In January 2004, the retainer due under a consulting agreement between
the Company and a director was increased from $5,000 to $15,000 per month.
During the three and six months ended June 30, 2004 the Company recorded $45,000
and $90,000, respectively of consulting fees and expenses of $6,221 and $8,753,
respectively, in connection with this agreement. As of June 30, 2004, $85,104
related to this agreement was included in accounts payable.
During the three and six months ended June 30, 2004 the Company
recorded $45,000 and $90,000, 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 June 30, 2004 a total
of $225,000 in fees recorded pursuant to this agreement is included in accrued
expenses.
During the three months ended March 31, 2004 the Company recorded
finders' fee expenses in the amount of $15,000, to a corporation controlled by
an individual who beneficially owns in excess of 5% of the outstanding shares of
common stock of the Company. In addition, during the three and six months ended
June 30, 2004 the Company reimbursed the corporation for travel expenses related
to business of the Company totaling $5,600 and $9,937, respectively. As of June
30, 2004, all amounts accrued related to finders' fees and expenses had been
paid.
19
RELATED PARTY TRANSACTIONS (Continued)
During the second quarter of 2004, the Company and the same corporation
entered into an agreement pursuant to which the corporation agreed to loan the
Company shares of the Company's common stock owned by the corporation for use by
the Company as collateral in subsequent financing transactions. In return, the
Company agreed to reduce the exercise price of 1,543,000 warrants previously
issued to the corporation from $5.00 per share to $1.00 per share. In connection
with the warrant re-pricing the Company recorded a non-cash expense of $546,403
during the second quarter based based on a Black-Scholes model valuation. As of
June 30, 2004 all shares borrowed by the Company from the corporation pursuant
to this agreement had been returned to the corporation.
In May 2004 the Company received a working capital advance in the
amount of $200,000 from an individual related to the controlling stockholder of
the same corporation, and in June 2004, the advance was repaid.
NOTE 13 - Security Lending Agreement
In April 2004, the Company and a corporation that beneficially owns in
excess of 5% of the outstanding shares of common stock of the Company entered
into an agreement pursuant to which the corporation agreed to make available 3
million free-trading shares of the Company's common stock, for use by the
Company as collateral in subsequent financing transactions. In accordance with
the terms of this agreement, the Company is obligated to pay interest on the
value of shares borrowed (assuming a value of $1.00 per share) based on the
LIBOR rate plus 50 basis points, and must return the borrowed shares by November
30, 2004. In the event of default, the Company has agreed to file a Registration
Statement and to return any shares, within 72 hours, that had not previously
been returned by the due date. As of June 30, 2004 the Company had borrowed a
total of 1,550,000 shares pursuant to this agreement, and the Company had
accrued interest expense totaling $9,515.
NOTE 14 - SUBSEQUENT EVENTS
DEBENTURE AGREEMENT NON-COMPLIANCE
As of July 5, 2004 the Company had not repaid the $750,000 principal
balance of the secured debenture entered into in May 2004 as required in the
debenture agreement. Based on the Company's failure to repay the principal
balance by the scheduled maturity date the Company is currently in default under
this instrument.
As of July 24, 2004 the Company had not completed the filing of a
registration statement as required under the registration rights agreement
between the Company and the holders of $1,000,000 of convertible debentures
entered into in June 2004. Accordingly, the Company is in default of its
obligation to file the Registration Statement.
CONVERTIBLE DEBENTURE
In July 2004, the Company entered into convertible note agreements with
an institutional lender with an aggregate principal balance of $1,000,000, and
received net proceeds of $900,000 after subtracting related placement agent fees
and expenses totaling $100,000. 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.
20
SUBSEQUENT EVENTS (Continued)
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.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying financial
statements, and should be read in conjunction with such financial statements and
notes thereto.
Certain information included herein 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
The Company is in the development stage, and through the second quarter
of 2004, the Company's efforts had been principally devoted to organizational
activities, raising capital and research and development efforts related to its
proprietary waterjet based ophthalmic surgery products. Through this period, the
Company did not have any products on the market and had not received any
revenues from product sales.
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 May 2004, an application for marketing approval of the
Epi-Lasik product in the United States was filed with the U.S. Food and Drug
Administration ("FDA"). The approval and ultimate marketing of Epi-Lasik and
other products under development by the Company in the United States is
dependent upon the timing of submission, review and approval by the United
States Food and Drug Administration. If product development and regulatory
efforts are successful, we hope to begin marketing these products and generating
revenue from product sales in the U.S. during the third or fourth quarter of
2004.
22
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 June 30, 2004 Compared To Three Months Ended June 30, 2003
SALES AND COST OF SALES
International sales totaled $54,970 and represent revenues recognized
based on sales during the second quarter of 2004 of ophthalmic surgery products
acquired through a licensing agreement completed in May 2004. Cost of sales
during the same period totaling $26,834 represent related product costs
associated with these revenues. No sales were recorded during the second quarter
of 2004 in the United States as marketing approval for the licensed products in
the U.S. is still pending. 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 June 30, 2004
increased to $4,142,175 from $885,338 in 2003 as a result of the following
activity:
2004 2003
------------ -----------
General and Administrative $ 3,979,679 $ 671,065
Research and Development 162,496 214,273
------------ -----------
Total Operating Expenses $ 4,142,175 $ 885,338
============ ===========
The increase in general and administrative expenses in the 2004 period
is due primarily to the inclusion of approximately $2.3 million of non-cash
expenses recorded in connection with the issuance of a total of 2,475,000 shares
of common stock during the period as payment for consulting services and in
connection with dispute/litigation settlements, and non-cash expenses of
$546,403 recorded in connection with the re-pricing of warrants during the
second quarter. In addition, general and administrative expenses during the
second quarter of 2004 include $54,680 of non-cash expense recorded based on the
amortization of capitalized patent and licensing agreements. Also contributing
to the increase during 2004 were increases in salaries and wages of
approximately $166,000 and increases in professional fees of approximately
$51,000.
23
The decrease in research and development expenses in the 2004 period is
primarily due to the deferral of planned expenditures for outside services and
testing related to the Company's Hydrokeratome and Pulsatome products under
development, due to limited working capital availability during the period.
OTHER INCOME AND EXPENSE
Interest expense increased to $615,107 during the three months ended
June 30, 2004 from $17,037 in 2003 primarily due to the inclusion in 2004 of
approximately $544,000 of non-cash interest expense recorded in connection with
the amortization of debt discount during the period. Also contributing to the
increased interest expense during the 2004 period was an increase in total debt
outstanding as a result of debt financing transactions completed during the
first and second quarter of 2004.
NET LOSS
As a result of the above revenues and expenses, the net loss for the
three months ended June 30, 2004 increased to $4,729,146, compared to $902,014
during the comparable 2003 period.
Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003
SALES AND COST OF SALES
International sales totaled $54,970 and represent revenues recognized
based on sales during the second quarter of 2004 of ophthalmic surgery products
acquired through a licensing agreement completed in May 2004. Cost of sales
during the same period totaling $26,834 represent related product costs
associated with these revenues. No sales were recorded during the second quarter
of 2004 in the United States as marketing approval for the licensed products in
the U.S. is still pending. 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 six months ended June 30, 2004 increased
to $5,423,957 from $1,692,052 in 2003 as a result of the following activity:
2004 2003
------------ -----------
General and Administrative $ 5,014,976 $ 1,374,272
Research and Development 408,981 317,780
------------ -----------
Total Operating Expenses $ 5,423,957 $ 1,692,052
============ ============
The increase in general and administrative expenses in the 2004 period
is due primarily to the inclusion of $2.5 million of non-cash expenses recorded
in connection with the issuance of a total of 2,605,000 shares of common stock
during the period as payment for consulting services and in connection with
dispute/litigation settlements, and non-cash expenses of $546,403 recorded in
connection with the re-pricing of warrants during the second quarter. In
addition, general and administrative expenses during the second quarter of 2004
include $57,042 of non-cash expense recorded based on the amortization of
capitalized patent and licensing agreements. Also contributing to the increase
during 2004 were increases in salaries and wages of approximately $342,000 and
increases in other consulting fees of approximately $253,000.
24
The increase in research and development expenses in the 2004 period is
primarily due to increased expenditures during the first quarter of 2004 related
to outside services and testing on the Company's Hydrokeratome and Pulsatome
products under development.
OTHER INCOME AND EXPENSE
Interest expense increased to $671,745 during the six months ended June
30, 2004 from $39,114 in 2003 primarily due to the inclusion in 2004 of
approximately $575,000 of non-cash interest expense recorded in connection with
the amortization of debt discount during the period. Also contributing to the
increased interest expense during the 2004 period was an increase in total debt
outstanding as a result of debt financing transactions completed during the
first and second quarter of 2004.
NET LOSS
As a result of the above revenues and expenses, the net loss for the
six months ended June 30, 2004 increased to $6,068,366 compared to $1,730,711
during the comparable 2003 period.
Subject to the availability of cash and working capital, and subject to
obtaining marketing approval from the U.S. FDA, 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 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
The Company is in the development stage, and prior to the second
quarter of 2004, 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 six months of 2004, the Company raised net proceeds
totaling $3,211,188 through private placements of debt and equity securities. Of
this total, $1,575,000 came from the issuance of convertible debentures, net of
$225,000 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 $56,305 from
working capital advances from shareholders and employees.
During the first six months of 2004, the Company utilized $2,023,387 to
fund operating activities and $1,220,122 in investing activities, and as of June
30, 2004, current liabilities exceeded current assets by approximately $4.5
million. In addition, as discussed in more detail in Notes 6 and 14 to the
Financial Statements, the Company is currently in default on debenture
agreements with an aggregate principal balance of $2,550,000.
25
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 July 2004, the Company entered into convertible note agreements with
an institutional lender with an aggregate principal balance of $1,000,000, and
received net proceeds of $900,000 after subtracting related placement agent fees
and expenses totaling $100,000. The note bears interest, at an annual rate of
8%, which is due and payable quarterly beginning on October 31, 2004. 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 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.
PLAN OF OPERATIONS
FINANCING ACTIVITY
The Company is dependent on raising additional capital to stay in
business and to pursue the following planned activities. The Company is actively
pursuing additional financing, and in this regard is in discussions with several
parties related to potential financing arrangements. Completion of additional
financing on a timely basis, is critical to the future of the Company, and will
be a major focus of the activities of Company management.
SALES AND MARKETING
In May 2004, the Company entered into a license agreement with a German
Corporation ("Licensor") pursuant to which the Company acquired exclusive
worldwide distribution, sales and marketing rights for the Licensor's LASIK and
Epi-Lasik products. Both products are approved for marketing in Europe and
certain other countries, and In May 2004, an application for marketing approval
of the Epi-LASIK product in the United States was filed with the U.S. Food and
Drug Administration.
As a result of this agreement, the Company initiated sales and
marketing efforts in the international markets where the products are approved
for sale during the second quarter of 2004, and plans initiate sales and
marketing efforts in the United States during the third quarter of 2004. Planned
expenditures for sales and marketing during this period are anticipated to be
approximately $1.2 million.
26
RESEARCH AND DEVELOPMENT
The Company plans to continue its research and development efforts on
the following ophthalmic surgery products based principally on applications of
its proprietary waterjet technology. These products are designed to result in
faster, safer and more efficacious surgery in the laser eye surgery and cataract
surgery markets.
1) HydroKeratome
- a corneal cutting device that produces a bladeless flapcut
for the LASIK procedure.
2) Pulsatome
- an emulsification device for the quick and safe removal of
full range of cataract hardnesses, with a lower cost per
procedure and requiring minimal technical expertise.
3) New Products/Product Extensions
- the Company plans to continue research and development
efforts on other medical applications of its waterjet
technology, and to identify and license/acquire other
technology and/or products that offer complements and
extensions to its ophthalmic surgery product line.
The primary focus of our research and development activities during
this period will be on completing testing required to obtain final marketing
approval from the FDA with respect to our 510(K) application, and the subsequent
initiation of product sales, for HydroKeratome. In addition, our research and
development efforts will be focused on completing testing required for our
initial 510(K) application submission to the FDA with respect to our Pulsatome
product, any subsequent testing to obtain final marketing approval from the FDA,
and the subsequent initiation of product sales for Pulsatome. Planned research
and development expenditures during this period are estimated to be
approximately $1.5 million.
PROPERTY, PLANT AND EQUIPMENT
The planned research and development activities and the expansion of
marketing and administrative support will require additional expenditures for
property, plant and equipment during the next twelve months.
The following is a schedule of anticipated purchases of property and
equipment during this period:
1). Production, lab, test equipment $ 275,000
2). Computers and software 270,000
3). Facilities, furniture & fixtures 100,000
----------
Total anticipated capital expenditures: $ 645,000
==========
EMPLOYEE ADDITIONS
The Company anticipates hiring approximately 30 additional employees
during the next twelve months, resulting in additional annual salaries and wages
of approximately $1.1 million, to support anticipated company growth and the
increased emphasis on sales, marketing, distribution and customer
training/support. This estimate includes approximately $220,000 for research and
development and $870,000 for sales and marketing that are included in the
respective research and development and sales and marketing totals above.
27
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE PLANS AND RESULTS
All of the planned activities discussed above in our Plan of Operations
are contingent on our obtaining sufficient funding. In addition, activities
discussed above with respect to planned expenditures for sales and marketing,
additions of property, plant and equipment and new employees are contingent on
the success of our final product development and commercialization efforts.
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 the plaintiff and a cross-defendant in VisiJet, Inc. v.
SurgiJet, Inc., a case pending in Orange County Superior Court, filed on August
6, 2003 (Case No. 03CC02968). The Company filed the action to declare a
purported $400,000 promissory note to its former parent company unenforceable.
The defendant filed a cross claim on behalf of itself and certain of its
officers, directors and controlling shareholders seeking to rescind the Merger
Agreement between the Company and PNAC, and seeking monetary damages in the
amount of $802,038 as well as exemplary damages. The case is currently in the
discovery phase.
VisiJet is the defendant in Williams v. VisiJet, Inc. et al, a case
pending in Orange County Superior Court, filed on May 3, 2003 (Case
No.C03-01173). The Plaintiff alleges he is owed $43,500 for professional
services rendered to the Company prior to the merger with PNAC. The Company has
filed a cross claim alleging, among other things, that at least some of the
services were for the benefit of others, professional negligence and aiding and
abetting a fraud committed on the Company. The case is currently in the
discovery phase.
VisiJet is a defendant in Allante Art Group, Inc. et al v. VisiJet,
Inc. et al, a case pending in Orange County Superior Court, filed on July 30,
2003 (Case No. 03CC09678). The Plaintiff, an executive search firm, is seeking
damages of $114,500 from the Company and a former employee of the plaintiff. The
complaint alleges that the former employee misappropriated customer lists and
names in connection with the placement of employees with the Company. The case
is in a preliminary stage.
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.
28
ITEM 2. CHANGES IN SECURITIES
During the period the Company issued 115,000 shares and warrants to
purchase 115,000 shares of Common Stock to 2 private investors, for gross
proceeds of $115,000.
During the period the Company issued a $750,000 debenture to a group of
five private investors. The principal balance of the debenture is due and
payable on July 5, 2004, and the debenture bears interest at an annual rate of
15%. In addition, the debenture holders received warrants 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.
During the period the Company issued $800,000 in convertible debentures
to two institutional lenders. 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 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.
During the period the Company issued $1,000,000 in convertible
debentures to two institutional lenders. The principal balance of the debentures
is due and payable on June 24, 2006 and the debentures bear interest at an
annual rate of 8%. In addition, the debenture holders received an aggregate of
150,000 shares of the company's common stock, and an aggregate of 750,000
warrants to purchase shares of the Company's common stock, exercisable through
June 24, 2009, at an exercise price of $1.50 per share, provided however that
the exercise price with respect to an aggregate of 500,000 of the warrants is
reduced to $0.60 per share during the period from the date of issuance through
the date twelve (12) months after the Securities and Exchange Commission
declares effective a registration statement registering the resale of shares
underlying the warrants.
The Company believes that each of the foregoing issuances 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
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, but the Company is in discussions
with the debenture holder 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 $800,000, entered into in May 2004, 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 timely file the Registration Statement is a default under the
agreement. Filing of the Registration Statement by the Company is pending, and
the Company is in discussions with the debenture holder 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 $1,000,000, entered into in June 2004, 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 July
24, 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 timely file the Registration Statement is a default
under the agreement. Filing of the Registration Statement by the Company is
pending, and the Company is in discussions with the debenture holder regarding a
resolution of this matter.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 Term Credit Agreement, dated May 6, 2004, between VisiJet,
Inc. and HIT Credit Union
10.2 Form of $750,000 Term Note, dated May 6, 2004, issued by
VisiJet, Inc. to HIT Credit Union
10.3 Security Agreement, dated May 6, 2004, between VisiJet, Inc.
and HIT Credit Union
10.4 Stock Purchase Agreement, dated May 6, 2004 between VisiJet,
Inc., Platinum Long Term Growth LLC and Rock II, LLC
10.5 10% Convertible Debenture for $550,000,dated May 6, 2004,
issued by VisiJet, Inc., to Platinum Long Term Growth LLC
10.6 10% Convertible Debenture for $250,000,dated May 6, 2004,
issued by VisiJet, Inc., to Rock II, LLC
10.7 Warrant To Purchase 366,666 Shares of Common Stock of VISIJET,
INC., issued to Platinum Long Term Growth LLC
10.8 Warrant To Purchase 166,667 Shares of Common Stock of VISIJET,
INC., issued to Rock II, LLC
10.9 Form of Registration Rights Agreement, dated May 6, 2004
between VisiJet, Inc., Platinum Long Term Growth LLC and Rock
II, LLC
10.10 Manufacturing, Supply and Distribution Agreement, dated May 7,
2004 between VisiJet, Inc. and Gebauer Medizintechnik GmbH
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
10.15* Securities Purchase Agreement, dated June 24, 2004, between
Registrant, Bushido Capital Master Fund, L.P. and Bridges &
Pipes, LLC
10.16* Form of Convertible Debenture
10.17* Form of Warrant (stepped price)
10.18* Form of Warrant (fixed price)
10.19* Registration Rights Agreement, dated June 24, 2004, between
Registrant, Bushido Capital Master Fund, L.P. and Bridges &
Pipes, LLC
10.20* Pledge and Escrow Agreement, dated June 24, 2004, between
Registrant, Bushido Capital Master Fund, L.P., Bridges &
Pipes, LLC, and Tarter Krinsky & Drogin LLP, as Escrow Agent
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 Report on Form 8-K dated June 24, 2004, filed
on August 18, 2004.
REPORTS ON FORM 8-K
None
30
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: August 18, 2004
31