As filed with the Securities and Exchange Commission on February 7, 2003
REGISTRATION NO. 333-86138
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 5
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CELL ROBOTICS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
<Table>
Colorado 5049-05 84-1153295
(State or other jurisdiction of (Primary Standard Industrial Classification Code Number) (IRS Employer Identification Number)
incorporation or organization)
</Table>
Cell Robotics International, Inc.
2715 Broadbent Parkway N.E.
Albuquerque, New Mexico 87107
(505) 343-1131
(Address and telephone number of principal executive offices)
Gary Oppedahl, President and CEO
Cell Robotics International, Inc.
2715 Broadbent Parkway N.E.
Albuquerque, New Mexico 87107
(505) 343-1131
(Name, address, including zip code, and telephone number of agent for
service of process)
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Approximate date of proposed sale to the public: From time to time after the
date this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share(1) 684,685(1) $ 0.555 $ 380,000 $ 35(17)
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Common Stock, par value $.004 per share, issuable
upon exercise of Warrant(2) 28,500(2) $ 0.67 $ 19,095 $ 2(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrants(3) 150,000(3) $ 1.125 $ 168,750 $ 16(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share(4) 424,208(4) $ 0.555 $ 235,435 $ 22(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrant(5) 84,842(5) $ 0.90 $ 76,358 $ 7(17)
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Common Stock, par value $.004 per share, issuable
upon exercise of Warrants(6) 225,000(6) $ 0.37 $ 83,250 $ 8(17)
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Common Stock, par value $.004 per share(7) 738,270(7) $ 0.58 $ 428,197 $ 39(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrants(8) 131,481(8) $ 0.87 $ 114,388 $ 11(17)
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Common Stock, par value $.004 per share(9) 3,086,204(9) $ 0.48 $ 1,481,378 $ 136(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrants(10) 771,551(10) $ 0.7125 $ 549,730 $ 51(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share(11) 1,250,000(11) $ 0.48 $ 600,000 $ 55(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrants(12) 250,000(12) $ 0.70 $ 175,000 $ 16(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share(13) 111,111(13) $ 0.48 $ 53,333 $ 5(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrant(14) 22,222(14) $ 0.70 $ 15,555 $ 1(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share, issuable
upon exercise of Warrant(15) 30,000(15) $ 2.40 $ 72,000 $ 7(17)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.004 per share(16) 15,000(16) $ 0.48 $ 7,200 $ 1(17)
====================================================================================================================================
</Table>
(1) Represents shares of our common stock issued to Oton M. Tisch upon
conversion of a convertible note issued by us.
(2) Represents shares of our common stock issuable upon exercise of warrant
issued to the holder of the convertible note. The warrant has an exercise
price of $0.67 per share and may be exercised until August 2, 2004.
(3) Represents shares of our common stock issuable upon exercise of a warrants
issued to Oton M. Tisch, Ronald K. Lohrding, Raymond Radosevich, Haemedic
LLC and Humagen Fertility Diagnostics, Inc. as partial consideration for
the issuance of promissory notes. The warrants have an exercise price of
$1.125 per share and may be exercised until January 31, 2004.
(4) Represents shares of our common stock issued to William S. Hayman in
connection with a private placement completed in January 2002.
(5) Represents shares of our common stock issuable upon exercise of a warrant
issued to William S. Hayman in connection with a private placement
completed in January 2002. The warrant has an exercise price of $0.90 per
share and may be exercised until January 25, 2007.
(6) Represents shares of our common stock issuable upon exercise of warrants
issued to Becton, Dickinson and Company. The warrants have an exercise
price of $0.37 per share and may be exercised until November 2006.
(7) Represents shares of our common stock held by Dr. Ron Lohrding and shares
of our common stock issued in a May 2002 private placement to Oton M.
Tisch, Leof Strand and Clark Aamodt.
(8) Represents shares of our common stock issuable upon exercise of warrants
issued to Oton M. Tisch, Leof Strand and Clark Aamodt. The warrants have an
exercise price of $0.87 per share and may be exercised until May 17, 2007.
(9) Represents shares of our common stock issued in connection with the
November 2002 conversion of certain outstanding loans made by Mr. Tisch.
(10) Represents shares of our common stock issuable upon exercise of a warrant
issued to Oton M. Tisch in connection with the November 2002 conversion of
certain outstanding loans made by Mr. Tisch. The warrants have an exercise
price of $0.7125 per share and may be exercised until November 13, 2007.
(11) Represents shares of our common stock issued to Frederick A. Voight in
connection with a private placement.
(12) Represents shares of our common stock issuable upon exercise of a warrant
issued to Frederick A. Voight in connection with a private placement
completed in November 2002. The warrant has an exercise price of $0.70 per
share and may be exercised until November 22, 2007.
(13) Represents shares of our common stock issued to Paul Bardacke in connection
with a private placement completed in December 2002.
(14) Represents shares of our common stock issuable upon exercise of a warrant
issued to Paul Bardacke in connection with a private placement completed in
December 2002. The warrant has an exercise price of $0.70 per share and may
be exercised until December 2, 2007.
(15) Represents shares of our common stock issuable upon exercise of a warrant
issued to Paul Bardacke in connection with a private placement completed in
December 2002. The warrant has an exercise price of $2.40 per share and may
be exercised until December 2, 2007.
(16) Represents shares of our common stock issued to Leof Strand for consulting
services rendered.
(17) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2003
PROSPECTUS
CELL ROBOTICS INTERNATIONAL, INC.
8,003,074 SHARES OF COMMON STOCK
This offering relates to the resale of an aggregate of 8,003,074 shares of our
common stock by persons who are referred to in this prospectus as selling
securityholders. The shares offered by this prospectus include 1,693,596 shares
issuable by us in the future if warrants held by the selling securityholders are
exercised.
We will not receive any proceeds from the resale of these shares by the selling
securityholders. However, we could receive proceeds of up to $1,274,126 if and
when all warrants held by the selling securityholders are exercised.
The selling securityholders may sell the shares of common stock from time to
time in public or private transactions occurring on or off the OTC Bulletin
Board, in negotiated transactions or otherwise.
Our common stock is quoted on the OTC Bulletin Board under the trading symbol
"CRII." On January 17, 2003, the closing bid price per share of our common stock
was $0.34.
INVESTING IN OUR SECURITIES INVOLVES RISKS. YOU SHOULD PURCHASE OUR SECURITIES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2003.
TABLE OF CONTENTS
<Table>
SUMMARY.........................................................................................................................2
The Company.....................................................................................................................2
How to Contact Us...............................................................................................................3
The Offerings...................................................................................................................3
Summary Financial Data..........................................................................................................4
RISK FACTORS....................................................................................................................5
Risks Related to Our Business and Industry......................................................................................5
Risks Related to Our Securities and This Offering..............................................................................12
FORWARD-LOOKING STATEMENTS.....................................................................................................14
USE OF PROCEEDS................................................................................................................15
MARKET PRICE INFORMATION AND DIVIDENDS.........................................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................16
Liquidity and Capital Resources................................................................................................16
Results of Operations--Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001...........................................................................................................20
Results of Operations--Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001...........................................................................................................20
Results of Operations--Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000...............................21
Results of Operations--Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999...............................22
Expected Product Sales--Year and Three Months Ended December 31, 2002 Compared to the Year and
Three Months Ended December 31, 2001.........................................................................................23
Critical Accounting Policies...................................................................................................23
RECENT DEVELOPMENTS............................................................................................................23
BUSINESS.......................................................................................................................24
Overview.......................................................................................................................24
Business Strategy..............................................................................................................24
Products ......................................................................................................................25
Laser-Based Medical Devices--The Lasette.......................................................................................25
Laser-Based Medical Devices--The UltraLight Laser..............................................................................30
Scientific Research Instruments--The Cell Robotics Workstation.................................................................31
Continuing Interest in the IVF Workstation.....................................................................................32
Competition....................................................................................................................33
Intellectual Property..........................................................................................................33
Research and Development.......................................................................................................34
Government Regulation; Product Approval Process................................................................................35
Employees......................................................................................................................36
Facilities.....................................................................................................................37
Legal Proceedings..............................................................................................................37
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES................................................................................37
EXECUTIVE COMPENSATION.........................................................................................................39
Summary Compensation Table.....................................................................................................39
Employment Agreement...........................................................................................................39
Stock Incentive Plan...........................................................................................................39
Option Grants..................................................................................................................40
Option Exercises and Option Values.............................................................................................40
Board Structure................................................................................................................40
Director Compensation..........................................................................................................40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................................41
INDEMNIFICATION................................................................................................................43
DESCRIPTION OF SECURITIES TO BE REGISTERED.....................................................................................44
Common Stock...................................................................................................................44
Preferred Stock................................................................................................................44
SELLING SECURITYHOLDERS........................................................................................................45
PLAN OF DISTRIBUTION...........................................................................................................47
Selling Securityholders' Securities............................................................................................47
LEGAL MATTERS..................................................................................................................47
EXPERTS........................................................................................................................47
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................................................48
WHERE YOU CAN FIND MORE INFORMATION............................................................................................48
INDEX TO FINANCIAL STATEMENTS...................................................................................................1
</Table>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information that is different from
what is contained in this prospectus. The delivery of this prospectus shall not,
under any circumstances, create any implication that there has been no change in
the affairs of the company since the date of this prospectus.
SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary is not complete and does not contain all of the information that you
should consider before deciding to invest in our securities. We urge you to read
this entire prospectus carefully, including the "Risk Factors" section and the
consolidated financial statements and related notes included elsewhere in this
prospectus. As used in this prospectus, the words "we," "us," "our" and "the
company" refer to Cell Robotics International, Inc. and its subsidiary, Cell
Robotics, Inc. Lasette(R), Personal Lasette(TM), Professional Lasette(TM),
Lasette Plus(TM), Infant Lasette(TM), LaserTweezers(R), LasorScissors(TM),
CellSelector(TM) and Smart Stage(TM) are trademarks of the company used in this
prospectus. This prospectus also includes trademarks of other companies.
THE COMPANY
We manufacture, market and sell a laser-based medical device and a scientific
research instrument. Our product lines consist of a laser-based medical device,
which uses a laser to draw a blood sample to allow diabetics to measure their
glucose levels, and the laser-based research workstation marketed under the name
Cell Robotics Workstation. We are also developing a proprietary medical laser
for aesthetic or skin rejuvenation applications, which we call the UltraLight
Laser.
Our primary focus is distributing and selling our laser-based medical device to
the clinical and diabetes care markets, namely diabetic consumers, hospitals,
clinics and doctors' offices. We previously marketed two laser-based medical
devices, the Personal Lasette and the Professional Lasette. The Personal Lasette
was marketed for home use, while the Professional Lasette was targeted for
clinical applications. In the third quarter of 2000, we made a strategic
decision to discontinue marketing the Professional Lasette and completed
modifications to the Personal Lasette so that it could be used for either home
or clinical use. In this prospectus, we sometimes refer to the Personal Lasette
as the "Lasette." The primary difference between the Lasette used in these home
and clinical environments is that a different disposable lens shield is attached
to the product for clinical applications than that attached for home use. We
believe that focusing on a single product line will reduce direct costs
associated with manufacturing the Lasette and promote brand awareness of the
Lasette. We currently market the Lasette under the "Lasette Plus" name.
The Lasette is a compact, lightweight, portable laser skin perforator that
allows diabetics to perform capillary blood sampling with little pain and
residual soreness. The Lasette is the only alternative to the steel lancet or
needle that has been approved by the Food and Drug Administration, or the FDA,
that allows diabetics to sample their blood for glucose testing so they can
determine their subsequent insulin injections. The Lasette has also been cleared
by the FDA for all blood screening test applications for home and clinical
settings. The FDA clearance allows us to commercially market the Lasette in the
United States to diabetics for home and clinical use. The Lasette has also
received the European Community's CE Mark. The CE Mark certification permits us
to market the Lasette in countries comprising the European Union.
We also believe the following trends in blood sampling will provide us with
unique opportunities:
o an increasing demand for less painful alternatives for
capillary blood sampling;
o an increasing desire to eliminate cross-contamination from
accidental needle or lancet sticks in hospitals and clinics to
address continued public health concerns and, in U.S. markets,
to comply with bloodborne pathogen standards of the
Occupational Safety and Health Administration, or OSHA,
including the standards of OSHA required by the Needlestick
Safety and Prevention Act, or the Needlestick Safety Act;
o a growing number of diagnosed diabetics seeking better insulin
control; and
o a growing understanding of the need to provide testing methods
for needle-phobic individuals.
To capitalize on these opportunities, we introduced the Lasette and intend to
position the company as a leader in the development of technologically-advanced
medical devices that offer more effective, safer and less painful solutions than
conventional procedures.
2
The UltraLight Laser is being developed under an oral agreement with Sandstone
Medical Technologies, LLC, a private company located in Homewood, Alabama. The
UltraLight Laser is a proprietary medical laser for aesthetic or skin
rejuvenation applications commonly known as laser skin photo rejuvenation. This
product takes advantage of a small compact laser cavity designed to produce an
affordable aesthetic medical laser that can be used by dermatologists, plastic
surgeons, spas and physicians to rejuvenate and revitalize the skin. The
characteristic shallow penetration of the Ebrium:YAG energy into the skin also
allows precise removal of tissue without heating adjacent tissue and also
permits the treatment of delicate skin on and around the neck, eyes and hands,
as well as darker pigmented skin. We received FDA clearance of the UltraLight
Laser in September 2002. We are in the process of obtaining certain domestic and
international manufacturing clearances for this product, such as Underwriters
Laboratories, Canadian Standards Association and CE certifications. According to
the American Academy of Cosmetic Surgery, over 300,000 people had some type of
aesthetic laser procedure in the year 2000. We believe that demand for this
procedure will continue to expand as "baby boomers" age and desire to retain a
more youthful appearance. We shipped the first 10 evaluation units of the
UltraLight Laser in December 2002. The evaluation units were furnished for
marketing research and demonstration purposes. We expect to begin commercial
shipments of the UltraLight Laser in the first quarter of 2003 after the
manufacturing clearances have been obtained.
Our scientific research instrument consists of the Cell Robotics Workstation.
The Cell Robotics Workstation allows scientists to use a laser to manipulate
objects in micro-space, upgrading the microscope to an interactive
micro-laboratory. The Cell Robotics Workstation enhances the usefulness and
importance of the conventional laboratory microscope as a tool in medical,
biological and genetic applications in the life sciences. Scientists can use the
technology for cell separation, cell-to-cell interaction, micro-dissection and
intercellular manipulation of living cells. A modified version of the Cell
Robotics Workstation, known as the LS300 Pro Workstation, allows pathologists
and researchers to automatically cut out cells of interest from biopsy and
retrieve those cells for DNA and RNA analysis. Third parties currently use the
Cell Robotics Workstation for cancer, immunology, neurobiology, assisted
reproductive techniques and genome research. The principal market for the Cell
Robotics Workstation is the scientific research market, consisting of colleges,
universities, research laboratories, biotechnology and pharmaceutical companies
and commercial laboratories conducting biological research. The Cell Robotics
Workstation has received the European Community's CE Mark. It is not subject to
FDA regulatory clearances. While we intend to focus on the development,
distribution and sale of laser-based medical devices, we will continue to
promote and market the Cell Robotics Workstation through direct sales, dealers,
representatives and distribution arrangements.
HOW TO CONTACT US
Our principal offices are located at 2715 Broadbent Parkway N.E., Albuquerque,
New Mexico 87107. Our telephone number is (505) 343-1131.
THE OFFERINGS
This prospectus relates to multiple offerings by the selling securityholders
identified in this prospectus under the section entitled "Selling
Securityholders." See also "Description of Securities to be Registered." The
offerings by the selling securityholders under this prospectus consist of the
resale by 11 selling securityholders of 8,003,074 shares of our common stock. Of
these shares, the shares offered by this prospectus that are issuable by us in
the future include 1,693,596 shares of our common stock if and when warrants
held by the selling securityholders are exercised.
If all of the selling securityholders exercise their common stock purchase
warrants, then we will receive proceeds of $1,274,126. We will not receive any
proceeds from the resale of our common stock offered by the selling
securityholders.
The exercise prices of these common stock purchase warrants range between $0.37
and $2.40 per share. On January 17, 2003, the closing bid price of our common
stock was $0.34. For any warrant with an exercise price that exceeds the trading
price of our common stock, it is unlikely that the warrant will be exercised
unless the trading price of our common stock is above its exercise price.
Whether or not our common stock trades at a price above the exercise price of
these securities, we cannot assure you that any of our securityholders will
exercise any of the common stock purchase warrants.
3
SUMMARY FINANCIAL DATA
<Table>
<Caption>
UNAUDITED
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YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
2001 2000 2002 2001
------------ ------------ ------------ ------------
Statement of Operations:
Total revenues $ 1,599,044 $ 1,007,063 $ 976,330 $ 1,141,276
Operating expenses $ 2,758,080 $ 3,404,166 $ 1,570,810 $ 2,119,010
Net loss applicable to common
shareholders $ (2,723,844) $ (5,036,182) $ (1,524,232) $ (1,989,762)
Basic and diluted net loss applicable to
common shareholders per common share $ (0.27) $ (0.54) $ (0.14) $ (0.20)
Shares used in computing basic and
diluted loss per share 9,984,989 9,286,128 10,748,007 9,980,203
</Table>
4
RISK FACTORS
An investment in our securities is very speculative and involves a high degree
of risk. You should carefully consider the following risk factors, along with
the other matters referred to in this prospectus, before you decide to buy our
securities. If you decide to buy our securities, you should be able to afford a
complete loss of your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE MUST OBTAIN ADDITIONAL FINANCING IN ORDER TO CONTINUE OUR OPERATIONS AND
REPAY EXISTING INDEBTEDNESS. ADDITIONALLY, OUR INDEPENDENT ACCOUNTANTS HAVE
REPORTED THAT WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN IF WE DO NOT
OBTAIN ADDITIONAL FINANCING OR ACHIEVE PROFITABILITY. We anticipate that our
existing current working capital and expected cash flow from operating
activities will only be sufficient to allow us to meet operational obligations
through February 28, 2003, assuming the repayment of approximately $115,000 of
our current outstanding indebtedness for borrowed money is not demanded before
that date. As of September 30, 2002, our net working capital was a deficit
$1,635,077 and our total cash and cash equivalents was less than $4,000. We
expect to experience operating losses and negative cash flow for the foreseeable
future. Therefore, we do not have sufficient cash to sustain those operating
losses without additional financing. We presently need financing to repay our
current indebtedness, including payment of our notes in the aggregate principal
amount of approximately $175,000 of which approximately $115,000 is currently
due. In addition to debt service requirements, we will require cash to fund our
operations. Based on our current operations, we estimate that our cash needs
will be approximately $150,000 each month for the foreseeable future and will be
a total of approximately $900,000 from January 1 through June 30, 2003. Our
operating requirements depend upon several factors, including the rate of market
acceptance of our products, particularly the Lasette, our level of expenditures
for manufacturing, marketing and selling our products, costs associated with our
staffing and other factors. We have been funding our operating requirements with
proceeds from small private placements of our equity securities and indebtedness
for borrowed money, particularly with financings with Mr. Oton Tisch, one of our
directors, and sales of our products. However, these sources of capital have
only been adequate to meet our short-term needs. We need to secure one or more
additional financings sufficient to fund our operations on a long-term basis.
Therefore, we intend to continue to seek to raise equity or debt financing.
Although we have had discussions with potential investors, we have not been able
to obtain sufficient long-term financing on acceptable terms as of the date of
this prospectus. No assurance can be given that we will be able to obtain any
additional financing on favorable terms, if at all. If our operating
requirements vary materially from those currently planned, we may require more
financing than currently anticipated. Borrowing money may involve pledging some
or all of our assets. Raising additional funds by issuing common stock or other
types of equity securities would further dilute our existing shareholders. If we
cannot obtain additional financing in a timely manner, we will not be able to
continue our operations. In addition, we have received a report from our
independent auditors covering our fiscal years ended December 31, 2001 and 2000
financial statements. The report contains an explanatory paragraph that states
that our recurring losses and negative cash flows from operations raise
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
WE HAVE A HISTORY OF LOSSES, AND EXPECT TO INCUR LOSSES IN THE FUTURE. IF WE DO
NOT ACHIEVE PROFITABILITY, OUR FINANCIAL CONDITION AND THE PRICE OF OUR COMMON
STOCK WILL SUFFER. To date, we have generated only limited revenues from the
sale of our products and have been unable to profitably market our products. We
incurred net losses applicable to common shareholders of $1,524,232 and
$1,989,762 for the nine-month periods ended September 30, 2002 and 2001,
respectively, and net losses of $2,723,844 and $5,036,182 in 2001 and 2000,
respectively. Revenues from the sale of our products were $976,330 and
$1,007,453 for the nine-month periods ended September 30, 2002 and 2001,
respectively and were $1,461,447 and $992,710 for the years ended December 31,
2001 and 2000, respectively. We expect to experience operating losses and
negative cash flow for the foreseeable future. We do not have sufficient cash to
sustain continuing operating losses without additional financing. Even if we are
able to obtain additional financing to allow us to continue operations and repay
indebtedness, we will still need to generate significant revenues and improve
our gross margins to fund anticipated manufacturing and marketing costs and to
achieve and maintain profitability. We cannot assure you that we will ever
generate sufficient revenues to achieve profitability, which will have a
negative impact on the price of our common stock. If we do achieve
profitability, we cannot assure you that we will be able to sustain or increase
profitability in the future.
5
IT IS DIFFICULT TO PREDICT WHETHER RECENTLY INTRODUCED PRODUCTS, OR PRODUCTS
THAT WE MAY DEVELOP IN THE FUTURE, WILL GAIN MARKET ACCEPTANCE OR PROFITABILITY.
We develop and market innovative technologies, in particular the Personal
Lasette, which was introduced in December 1999, and the Cell Robotics
Workstation. We are also developing the UltraLight Laser, which we expect to
begin commercial shipments of in the first quarter of 2003 after the
manufacturing clearances have been obtained. Demand for and market acceptance of
these products, as well as future products that we may develop, are subject to a
high level of uncertainty and risk. The risks associated with the introduction
of innovative technologies such as ours include the following, among others:
o the possibility that the cost of the product may not be
covered by private insurance;
o the difficulty in predicting the medical laser product's
future growth rate;
o our current and future products may have features which render
them uneconomical, either to manufacture or to market;
o the demand for our products may fail to develop or develop
slower than expected or our products may not achieve or
sustain market acceptance;
o the prices at which our products are accepted by purchasers
may be too low, which may prevent us from operating
profitably;
o third parties may manufacture and market a product superior in
performance and price; and
o the possibility that any proposed product, or enhancement to
existing products, may fail to receive necessary regulatory
clearances.
We cannot assure you that we will be successful in addressing the risks
described above. For example, currently, the cost of the Lasette does not
qualify as a reimbursable expense under most health insurance programs and we
cannot predict when, if ever, the Lasette may be covered by such third-party
payors. Additionally, total revenues from sales of the Personal Lasette since
its introduction through September 30, 2002 were $1,164,362. We are unable to
estimate whether the demand for the Lasette will achieve market acceptance. Our
failure to address these risks could have a negative impact on our business,
operating results and financial condition.
WE HAVE LIMITED EXPERIENCE IN MARKETING, DISTRIBUTING AND SELLING LASER-BASED
MEDICAL AND RESEARCH PRODUCTS, WHICH MAY DELAY OUR ABILITY TO SUCCESSFULLY BRING
OUR PRODUCTS TO MARKET. OUR FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS WOULD
ALSO INHIBIT OUR ABILITY TO GROW. We have limited experience marketing,
distributing and selling our products. To successfully market, distribute and
sell our current or future products, we must build a more extensive marketing
sales force and distribution network. Alternatively, we can enter into
arrangements with third parties to market, distribute and sell our products. We
cannot assure you that we will be able to successfully develop such a network or
that we will enter into acceptable agreements with third parties to provide our
products. As of the date of this prospectus, the Lasette for clinical use is
distributed through several regional distributors within and outside the United
States, while the Lasette for home use is sold through distributors and directly
to customers. Our Cell Robotics Workstation is currently marketed and sold
through direct sales, dealers, representatives and distributors. Meiwa Shoji
Company Ltd., our exclusive distributor of the Cell Robotics Workstation in
Japan, accounted for 33% of our product sales in 2001 and 17% of our product
sales for the nine month period ended September 30, 2002. However, since January
2002, Meiwa Shoji has no obligation to further promote or purchase the Cell
Robotics Workstation. Its appointment as distributor can be terminated by either
party on 90 days' notice. C.A. Continental, Inc., our former exclusive United
States based distributor of the Lasette in China, also accounted for 18% of our
product sales in 2001. We terminated our relationship with C.A. Continental in
June 2002 as a result of certain defaults by C.A. Continental under our
agreement. For the nine months ending September 30, 2002, California Caltech,
Inc., our exclusive United States based distributor of the Lasette in China
since July 2002, has accounted for approximately 19% of our product sales. As of
the date of this prospectus, no other single customer or distributor accounts
for more than ten percent of our sales. We will distribute the UltraLight Laser
in North America through our exclusive distributor, Sandstone Medical
Technologies, LLC. We plan to rely on a network of distributors for sales of the
UltraLight Laser in other jurisdictions; however, to date we have not entered
into distribution relationships covering territories outside North America.
Although we intend to pursue marketing and distribution relationships for our
products, particularly the Lasette for clinical use and the UltraLight Laser, we
6
cannot make any assurances that any discussions or negotiations with third
parties regarding the marketing or distribution of our products will be
successful. If we maintain our own marketing, distribution and sales
capabilities, we will compete against other companies with experienced and
well-funded marketing, distribution and sales operations. Alternatively, if we
enter into a marketing arrangement with a third party, we will likely have to
pay a sales commission or discount the retail price of our products. Further,
our revenues would depend on the efforts of third parties. If we are unable to
develop a plan to market, distribute and sell our products, we may be unable to
successfully bring them to market. We cannot assure you that we will be able to
recruit and retain marketing personnel with the required skills or that we will
be able to enter into the strategic relationships needed to effectively market
and distribute our products.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL AND OTHER ADVISORS. Medical device companies of our size must retain
key scientific, technical, managerial, marketing and financial personnel as well
as attract and retain additional highly qualified personnel for these areas in
order to successfully operate and grow their businesses. Our key employees and
advisors include, among others, Gary Oppedahl, Paul Johnson and Oton Tisch. Mr.
Oppedahl is our Chief Executive Officer, President and a director and Mr.
Johnson is our Chief Financial Officer, Chief Operating Officer, Secretary and a
director. Mr. Tisch is the Chairman of the Board and assists the company
concerning our international marketing and sales efforts through a consulting
relationship. We face intense competition for qualified personnel in these
areas, and we cannot assure you that we will be able to attract and retain
qualified personnel. If we lose our key personnel or advisors, or are unable to
hire and retain additional qualified personnel in the future, our business,
financial condition and operating results could be adversely affected. Our key
employees, including Mr. Oppedahl and Mr. Johnson, may voluntarily terminate
their employment with us at any time.
WE DO NOT HAVE A BROAD RANGE OF PRODUCTS TO SELL, AND IF DEMAND FOR THESE
PRODUCTS DECLINES OR FAILS TO DEVELOP, OUR REVENUES WILL BE ADVERSELY AFFECTED.
Since selling the IVF Workstation and associated technology to Hamilton Thorne
Research in May 2000, our exclusive product lines consist of the Lasette and the
Cell Robotics Workstation. We also expect to begin commercial shipments of the
UltraLight Laser in the first quarter of 2003 after certain manufacturing
clearances have been obtained. Our primary focus is distributing and selling the
Lasette, a laser skin perforator that replaces the steel lancets or needles
diabetics primarily use. There is an inherent risk in not having a broad base of
products in development, because we will not have alternate sources of revenue
if we are not successful with our current lines. We cannot assure you that we
will be able to profitably sell this narrow line of products. The failure of the
Lasette would have a material adverse affect on our revenues and the future of
our business.
CLAIMS BY OTHERS THAT OUR PRODUCTS INFRINGE THEIR PATENTS OR OTHER INTELLECTUAL
PROPERTY RIGHTS COULD PREVENT US FROM MANUFACTURING AND SELLING SOME OF OUR
PRODUCTS OR REQUIRE US TO INCUR SUBSTANTIAL COSTS FROM LITIGATION OR DEVELOPMENT
OF NON-INFRINGING TECHNOLOGY. Our industry has been characterized by frequent
litigation regarding patent and other intellectual property rights. Patent
applications are maintained in secrecy in the United States until such patents
are issued and are maintained in secrecy for a period of time outside the United
States. Accordingly, we can conduct only limited searches to determine whether
our technology infringes any patents or patent applications of others. Any
claims of patent infringement would be time-consuming, and could:
o result in costly litigation;
o divert our technical and management personnel;
o cause product shipment delays;
o require us to develop non-infringing technology; or
o require us to enter into royalty or licensing agreements.
An adverse ruling in any infringement proceeding could subject us to significant
liability or require us to seek licenses or similar arrangements from third
parties. Although patent and intellectual property disputes in the medical and
research device industry have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
often require the payment of ongoing royalties, which could hurt our gross
margins. In addition, we cannot assure you that the necessary licenses would be
available to us
7
on satisfactory terms, or that we could redesign our products or processes to
avoid infringement, if necessary. Accordingly, an adverse determination in a
judicial or administrative proceeding, or the failure to obtain necessary
licenses, could prevent us from manufacturing and selling some of our products,
which could materially adversely affect our business, results of operations and
financial condition.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, INCLUDING OUR PATENTS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO DEVELOP, MANUFACTURE AND SELL OUR
PRODUCTS. Our success will depend, in part, upon our ability to develop superior
products that we can market at competitive prices. Our ability to do this will
depend, in part, on our ability to protect and defend our intellectual property
rights and the competitive advantages those rights offer. We rely primarily on
patent, trade secret, copyright and trademark laws, confidentiality procedures
and other intellectual property protection methods to protect our proprietary
technology. Despite the precautions we have taken, unauthorized parties may
attempt to engineer, reverse engineer, copy or obtain and use our products and
other proprietary information. Misappropriations of our intellectual property
could adversely affect our business, results of operations and financial
condition.
OUR SUCCESS DEPENDS IN PART ON ENHANCING OUR CURRENT PRODUCTS AND DEVELOPING NEW
PRODUCTS; HOWEVER, WE CANNOT ASSURE YOU THAT THOSE PRODUCTS WILL BE DEVELOPED
WITHOUT MATERIAL DELAYS, BE CLEARED FOR SALE BY REGULATORS OR BE ACCEPTED IN THE
MARKET. In order to be successful, we will need to continue to enhance our
existing products and develop new products. Enhanced and new products may
require a significant investment, including preclinical and clinical testing,
before we can sell them in the marketplace. From time to time, we may also
experience engineering or manufacturing delays or setbacks in the development of
our products. For example, in 2000, we implemented design improvements to the
Lasette to increase the efficiency of the laser beam profile and to limit the
effect extreme temperatures had on the Lasette's functionality. Although to date
we have not experienced any material engineering or manufacturing delays in
enhancing our current products or developing new products, we cannot assure you
that we will be able to successfully address problems that may arise during the
development and commercialization process. In addition, we cannot assure you
that any of our new products or enhancements to existing products can or will:
o be successfully developed;
o prove to be safe and effective in clinical trials;
o meet applicable regulatory standards;
o be capable of being manufactured in commercial quantities at a
reasonable cost;
o be marketed successfully; or
o achieve market acceptance.
Our failure to successfully and timely complete, obtain regulatory approvals or
achieve commercial acceptance with respect to any of our new products or
improvements to our existing products could materially adversely affect our
business, financial condition and results of operations.
We are in the process of developing two new products, the UltraLight Laser and
the Infant Lasette. Both products require FDA clearance. Further, we will be
required to obtain certain regulatory clearances for the UltraLight Laser,
including safety testing for electrical emissions and power regulation testing
as required by Underwriters Laboratories and Canadian Standards Association and
various regulatory body notifications, such as with the International Standards
Organization, or ISO, and in connection with the European Community's CE
certification. We received FDA clearance for the UltraLight Laser in September
2002. We are in the process of obtaining the requisite domestic and
international manufacturing clearances for this product. On September 30, 2002,
we commenced our clinical trials of the Infant Lasette. After completing the
requisite tests in the clinical trials, we will submit the Infant Lasette for
FDA clearance. We anticipate that we will be able to make our submission to the
FDA in March 2003. We further anticipate that the FDA clearance will take at
least three months following this submission. However, there can be no
assurances that we will obtain all necessary clearances in a timely manner, if
at all. Our failure to obtain the necessary regulatory clearances will prevent
us from marketing and selling the UltraLight Laser and the Infant Lasette.
8
OUR INDUSTRY IS HEAVILY REGULATED, AND STRINGENT ONGOING REGULATION AND
INSPECTION OF OUR PRODUCTS COULD LEAD TO DELAYS IN THEIR MANUFACTURE, MARKETING
AND SALE. United States government agencies and comparable agencies in countries
outside the United States regulate the testing, manufacture, labeling,
distribution, marketing and advertising of our products and our ongoing research
and development activities. While the Lasette and the UltraLight Laser have
received all necessary FDA clearances and the Lasette has received the European
Community's CE Mark, their manufacture and marketing will be subject to ongoing
regulation. We are subject to inspection and market surveillance by the FDA and
the European Community for compliance with good manufacturing practices and
other requirements, which include testing, design, quality control and
documentation procedures. The FDA conducts periodic audits of the Lasette and
the UltraLight Laser, which, among other things, will review our compliance with
a variety of regulatory requirements. However, we have not been notified as to
when an audit may be conducted. In order to manufacture and sell the Lasette
under the CE Mark, we must also pass annual ISO maintenance audits, as well as
comprehensive ISO audits every three years. We are currently ISO compliant. Our
next ISO audit is scheduled to be conducted in January 2003. OSHA also regulates
our manufacturing activities. The UltraLight Laser and other products also
require manufacturing clearances, such as Underwriters Laboratories and CE
certifications. While we have historically been in compliance with all FDA, CE
Mark, ISO, OSHA and other requirements, there can be no assurance that we will
continue to do so in the future. Our failure to meet FDA, CE Mark, ISO, OSHA or
other requirements could bar us from further marketing the Lasette and the
UltraLight Laser in the United States and in other markets, which would have a
material adverse affect on our business. Additionally, if the FDA finds through
an FDA audit or otherwise that we have failed to comply with the FDA regulatory
requirements, the agency could institute a wide variety of actions, including a
public warning letter or other stronger remedies, including monetary fines,
injunctions, recall or seizure of our products, operating restrictions, shutdown
of production, withdrawal of previously granted approvals or criminal
prosecution.
WE MAY BE REQUIRED TO OBTAIN ADDITIONAL REGULATORY CLEARANCES FOR ANY NEW
PRODUCTS OR IMPROVEMENTS TO EXISTING PRODUCTS AND WE MUST OBTAIN REGULATORY
APPROVALS IN SOME FOREIGN JURISDICTIONS TO MARKET OUR PRODUCTS ABROAD. OUR
FAILURE TO OBTAIN NECESSARY REGULATORY CLEARANCES OR APPROVALS COULD ADVERSELY
AFFECT OUR ABILITY TO MARKET AND SELL OUR PRODUCTS. We have received all
necessary FDA clearances to commercially market the Lasette and the UltraLight
Laser in the United States. Further, we have obtained CE Mark certification of
the Lasette, which allows us to commercially market the Lasette for home and
clinical use in countries comprising the European Union. However, comparable
government agencies in a number of other foreign countries require lengthy and
detailed clinical testing and other compliance procedures before they permit the
introduction of enhancements to the Lasette and new medical laser products in
the marketplace. The cost of complying with these regulations is significant and
time consuming. These applications may require the completion of preclinical and
clinical studies and disclosure of information relating to manufacturing and
controls.
Any additional new products we may develop, or any modifications we make to our
products in the future may require regulatory approval. The time required for
completing testing and obtaining additional approvals is uncertain, and FDA, CE
Mark and similar clearances may never be obtained for new products or
applications. We may encounter delays or rejections based upon changes in FDA or
European Community policy during the period of product development. We may also
encounter delays with similar agencies in other markets. Even if the FDA, the
European Community or comparable agencies grant clearance for our future
products, it may limit the indicated uses for which our products or applications
may be marketed.
THE GROWTH OF OUR BUSINESS COULD BE ADVERSELY AFFECTED BY REFORMS IN THE HEALTH
CARE INDUSTRY. CURRENTLY, THE COST OF THE LASETTE IS NOT COVERED BY MOST HEALTH
INSURANCE PROGRAMS, INCLUDING MEDICARE AND MEDICAID. OUR GROWTH AND BUSINESS
STRATEGY WILL BE ADVERSELY AFFECTED IF WE FAIL TO OBTAIN ADEQUATE THIRD PARTY
REIMBURSEMENT FOR THE LASETTE FOR HOME USE. Successful commercialization of the
Lasette will depend in large part on whether patients who purchase the Lasette
will be reimbursed for the expense by third-party payors. Third party payors
include private insurance plans and Medicare and other federal healthcare
programs. The United States government and third-party payors continue efforts
to contain or reduce the costs of health care, which may adversely affect our
future success. In both the United States and elsewhere, the use of elective
medical procedures by many consumers depends on such consumer's ability to be
reimbursed by third-party payors, such as government and private insurance
plans. Third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement. Some health
insurance companies have covered the consumer's costs of the Lasette if a
physician provides documentation indicating a medical necessity. However,
currently the cost of the Lasette does not qualify as a reimbursable expense
under most health insurance programs. In January 2002, the
9
Center for Medicare and Medicaid Services, or CMS, published the allowable for
our Lasette. Generally, Medicare reimburses 80% of the published allowable. In
March 2002, we were notified by CMS that they have not established a medical
criteria for our Lasette and as a result CMS will only reimburse approximately
$17 of the price of the Lasette, a minimal portion of its cost. Whether we can
obtain a higher reimbursement rate for the Lasette will depend on the
establishment of a favorable medical policy for the Lasette, which is largely
outside our control. Although we are currently working with CMS to provide input
into CMS's establishment of an appropriate medical policy so that a higher
reimbursement rate may be set, we can provide no assurance as to whether a
medical policy favorable to us will be established by CMS, when, if ever, an
adequate reimbursement rate for the Lasette will be set or the eventual amount
of reimbursement. Our failure to obtain adequate third-party coverage of the
Lasette, including sufficient Medicare coverage, will limit our ability to
successfully target the Lasette for home use to those persons that cannot
purchase the Lasette without such assistance, which would adversely affect the
growth of our business.
WE DEPEND ON A SOLE SUPPLIER FOR THE CRYSTALS USED IN THE LASETTE'S AND THE
ULTRALIGHT LASER'S ERBIUM:YAG LASER RODS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY
SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS. The Erbium:YAG laser rod we use in the Lasette and the UltraLight
Laser is made from crystals that are produced and processed from New
Technologies Engineering Center, a single supplier in Russia. To date, we have
experienced no material interruptions in the supply of our laser components.
However, our agreements with our Russian supplier have historically been
short-term in nature expiring after a specified dollar volume of rods are
purchased or a specified period of time has elapsed, which has typically been
one year or less. Although to date we have been able to maintain arrangements
for the supply of our rods from New Technologies, we cannot assure you that we
will be able to continue to do so in the future. Additionally, our source of
supply could be restricted due to events flowing from Russia's political or
economic instability, or due to the supplier's non-performance. Although we
believe alternative crystal suppliers will be available if needed, we believe
the prices of these alternative crystal suppliers would be significantly higher
than the prices we currently pay. The prices of our laser rods from our Russian
supplier may fluctuate each time we enter into a new agreement. Since January 1,
2002, the price we have negotiated for the purchase of rods from our Russian
supplier has been approximately $107 per rod. Depending upon on our purchase
volumes, we believe that the price of similar rods provided by alternative
suppliers would range between approximately $175 and $380 per rod. Therefore, we
believe we realize a significant cost savings by having our crystals
manufactured by New Technologies. We cannot assure you that will be able to
purchase rods from New Technologies at prices that will result in cost savings
to the company in the future. Additionally, if we are unable to maintain
commitments from New Technologies to supply rods or any of the above events or
other events beyond our control occur, we could lose our strategically important
source of supply for laser crystals. This would increase our manufacturing costs
and impair our competitive advantage.
THE COMPETITION IN THE LASER BIOMEDICAL PRODUCTS INDUSTRY IS INTENSE, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES AND MARKET SHARE. Our
industry is characterized by intense competition. Our competition includes
pharmaceutical and medical diagnostic equipment companies, academic
institutions, public and private research institutions and others. Many of these
companies and institutions are developing products that are being used or will
be used for the same purposes as our products. In many cases, our competitors
have substantially greater resources, research and development staffs and
facilities than we do, as well as greater experience in developing products. Our
competitors may succeed in developing products that are more effective or less
costly than our products. If these new products are developed and become widely
available and accepted, then we may be forced to reduce the price of our
products. As a result, we may not be able to sell our products at a price that
will allow us to realize a return on our investment.
Some competitors of the Lasette are marketing traditional stainless steel
lancets. Additionally, several companies are developing or have developed safety
lancets that are intended to reduce accidental needlesticks and
cross-contamination in compliance with OSHA's bloodborne pathogens standards.
These standards, as revised by the Needlestick Safety Act, require health care
facilities to select safer needle devices to reduce or eliminate accidental
needlesticks suffered by health care workers. The Lasette will compete directly
with companies that are manufacturing, marketing and distributing stainless
steel lancets and safety lancets.
Many of our competitors have more established sales and customer support
organizations than we do. In addition, many of these competitors have greater
name recognition, more extensive customer bases, better developed distribution
channels and broader product offerings than we have. These companies can
leverage their customer bases and broader product offerings and adopt aggressive
pricing policies to gain market share. Further, new technologies may render some
or all of our products non-competitive, obsolete and/or unmarketable, which
would
10
have a material adverse affect on our business. For example, competitors of the
Lasette are developing glucose-testing products based on partially invasive or
non-invasive technologies that could be an alternative to the Lasette. These
non-invasive technologies include needle implants, watches with skin patches and
non-invasive laser products that are designed to read glucose levels through the
skin. If these products or other new products that compete against the Lasette
or UltraLight Laser are approved for sale and become commercially available in
the United States or Europe in the future, they could have a material adverse
affect on sales of the Lasette and the UltraLight Laser and on our business and
financial condition.
OUR PRODUCTS MAY NOT GAIN MARKET ACCEPTANCE AND MAY NOT ACHIEVE A COMPETITIVE
POSITION IN THE MARKETPLACE. We cannot assure you that the marketplace will
accept our products. Additionally, we can make no assurances that customers will
be willing to pay more for the Lasette than for existing products. The cost of
the Lasette is significantly higher than that of the stainless steel lancets and
safety lancets. The suggested retail price of the Lasette is presently $995,
although this initial cost could be substantially less depending on the program
accepted by the customer, such as the number of units purchased or the
commitment by the customer to purchase disposable shields in the future.
Comparatively, we believe that the price of stainless steel lancets is currently
less than $0.05 per unit and the price of safety lancets is between $0.18 and
$0.52 per unit. In addition to the stainless steel lancets and safety lancets,
the Lasette will also compete directly with non-invasive procedures and products
that are currently being sold or developed by other companies. Market acceptance
will depend, in large part, upon our ability to educate potential customers,
including third-party distributors, about our products' distinctive benefits
and/or create pricing strategies that are attractive to potential customers. We
cannot assure you that we will be successful in these efforts or that our
products will gain market acceptance or be competitive.
WE DO BUSINESS INTERNATIONALLY, WHICH SUBJECTS US TO RISKS RELATED TO FOREIGN
REGULATIONS AND LAWS, DUTIES AND TARIFFS, FOREIGN INSTABILITY AND EXCHANGE
RATES, AMONG OTHER THINGS. We sell our products internationally. Sales outside
of the United States accounted for 31%, 47% and 41% of our sales of our products
in the nine months ending September 30, 2002 and the years ending 2001 and 2000,
respectively. We also purchase some of the components used in their manufacture
from an international supplier. In particular, we purchase the Erbium:YAG laser
we use in the Lasette and the UltraLight Laser from a single supplier in Russia.
The risks associated with these international activities include, but are not
limited to, the following:
o regulation of fund transfers by foreign governments and the
United States;
o foreign export and import duties and tariffs;
o unlawful counterfeiting of our products;
o political and economic instability;
o compliance by our foreign suppliers with export laws and
licenses; and
o fluctuating exchange rates.
We cannot assure you that any of the foregoing will not have a material adverse
affect on our business.
OUR LICENSE WITH LUCENT IS COSTLY, AND THERE CAN BE NO ASSURANCE THAT THE
LASERTWEEZERS PRODUCT WILL GAIN WIDE MARKET ACCEPTANCE. Our Cell Robotics
Workstation is based on our LaserTweezers, LaserScissors, CellSelector and
SmartStage technologies. The LaserTweezers application of our Cell Robotics
Workstation is based upon a non-exclusive patent license from AT&T, which was
transferred by AT&T to Lucent Technologies, Inc. Our license will expire in
January 2007, the end of the term of the licensed patent. We were in default
under this license agreement, and renegotiated its terms in 1998. Under the
renegotiated agreement, we paid Lucent $100,000 in lieu of all sums due and
owing for prior years. Additionally, we agreed to increase the royalty from five
to seven percent of the value of each product sold utilizing the patent.
Finally, the minimum annual royalties under the license have been reduced to
$35,000 per year for the term of the license. Based on these changes, we must
pay Lucent a royalty of seven percent per year with a minimum annual payment of
$35,000. Even with these changes to the license, we may not be able to increase
sales of the Cell Robotics Workstation that include the LaserTweezers
application to a level that renders use of that application in our product
economically attractive.
11
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS REPUTATION WHETHER OR NOT THEY ARE CONCLUDED IN
OUR FAVOR. The design, development, manufacture and use of our products can
involve product liability claims and associated adverse publicity. Producers of
medical products such as ours may face substantial liability for damages if
their products fail or consumers allege that their products caused harm. We
currently maintain $2,000,000 of product liability insurance, but this insurance
is expensive and difficult to obtain. We also currently maintain $10,000,000 of
umbrella insurance. We cannot assure you that we will not be subject to product
liability claims. Additionally, we cannot assure you that our current insurance
would cover any claims, or that adequate insurance will continue to be available
on acceptable terms in the future. If damages for successful product liability
claims exceed our insurance coverage limits, or if any claim or product recall
creates significant adverse publicity, then our business reputation, financial
condition and results of operations could be materially and adversely affected.
WE COULD BE ADVERSELY AFFECTED IF THE GOVERNMENT REDUCES ITS SUPPORT OF
SCIENTIFIC RESEARCH AND DEVELOPMENT. We market our Cell Robotics Workstation
principally to colleges, universities, research laboratories, biotechnology and
pharmaceutical companies and commercial laboratories engaged in scientific
research. Our present customers of the Cell Robotics Workstation include
colleges, universities, research laboratories and similar institutions. These
customers accounted for substantially all of our sales of the Cell Robotics
Workstation and 55%, 68% and 61% of our total product sales in the nine months
ending September 30, 2002 and the years ending December 31, 2001 and 2000,
respectively. Most, if not all, of these customers rely upon federal and state
funding in order to support their research activities. The ability of these
institutions to purchase our products is dependent upon receiving adequate
funding from the public sector. A reduction or withdrawal of government support
of scientific pursuits could result in a lower demand for our products, which
could adversely affect our ability to become profitable.
WE HAVE AN ORAL AGREEMENT WITH SANDSTONE MEDICAL TO DEVELOP THE ULTRALIGHT
LASER. WITHOUT A WRITTEN AGREEMENT, THERE MAY BE A GREATER POSSIBILITY OF A
DISPUTE BETWEEN THE PARTIES REGARDING ITS TERMS. IF A DISPUTE ARISES, WE MAY BE
UNABLE TO ENFORCE THE AGREEMENT ON TERMS THAT WE BELIEVED TO EXIST, WHICH COULD
ADVERSELY AFFECT THE MANUFACTURE, MARKETING AND SALE OF THE ULTRALIGHT LASER. We
have an oral agreement with Sandstone Medical Technologies, LLC to use our core
laser technology to develop the UltraLight Laser. There are risks inherent in
any oral agreement. In particular, there may be a greater possibility of a
dispute between the parties concerning the terms of the agreement. If a dispute
arises, we may be unable to enforce the agreement on terms that we believed to
exist. Such a dispute may adversely affect our ability to manufacture, market
and sell the UltraLight Laser.
RISKS RELATED TO OUR SECURITIES AND THIS OFFERING
WE MAY CONTINUE TO SELL STOCK OR OTHER SECURITIES TO RAISE MONEY. IF WE DO SO,
THESE SALES COULD SUBSTANTIALLY DILUTE YOUR INVESTMENT. We have the authority to
issue up to 50,000,000 shares of common stock and to issue options and warrants
to purchase shares of our common stock without shareholder approval. Further, we
may authorize the issuance, without shareholder approval, of our preferred stock
with rights preferential to the rights of investors in this offering. We will be
required to raise additional funds during the first quarter of 2003, which may
be through the issuance of equity securities. We may issue additional equity
securities without shareholder approval. If we do issue additional equity
securities, those securities may have rights, preferences or privileges senior
to those of existing holders of our common stock. Additionally, the issuance of
additional equity securities could substantially dilute the holdings of our
existing shareholders and the investors in this offering.
TRADING IN OUR SECURITIES IS LIMITED AND SPORADIC, THEREFORE YOU MAY NOT BE ABLE
TO LIQUIDATE YOUR INVESTMENT WITHOUT CONSIDERABLE DELAY, OR AT ALL. While there
currently exists a limited and sporadic public trading market for our common
stock, the price paid for these securities and the amount of securities traded
are volatile. For example, between January 2001 and December 2002, the daily
trading volume in our common stock has ranged from approximately 200 to 977,600
shares. During the three month period ending December 31, 2002, the average
daily trading volume of our common stock was approximately 70,000 shares. We
cannot assure you that these markets will improve in the future. As a result,
you may not be able to liquidate your investment without considerable delay, if
at all.
OUR SECURITIES MAY BE REGULATED BY THE SECURITIES ENFORCEMENT AND PENNY STOCK
REFORM ACT OF 1990. THE ADDITIONAL SALES PRACTICES IMPOSED BY THIS ACT COULD
ADVERSELY AFFECT THE MARKET FOR OUR SECURITIES. Because our common stock is not
listed or quoted on any exchange or on NASDAQ, and no other exemptions currently
apply, the Securities and Exchange Commission, or SEC, "penny stock" rules
govern the trading in our common stock. These rules require any broker engaging
in a transaction in our securities to provide its customers with certain
12
disclosures and information both before and after effecting the transaction.
Brokers are generally less willing to effect transactions in our securities
because of these rules. This may make it more difficult for investors to dispose
of our common stock. In addition, the broker prepares the information provided
to its customer. Because we do not prepare the information, we cannot assure you
that such information is accurate, complete or current.
WE HAVE NOT PAID DIVIDENDS TO OUR SHAREHOLDERS IN THE PAST, AND WE DO NOT
ANTICIPATE PAYING DIVIDENDS IN THE NEAR FUTURE. We have not declared or paid
cash dividends on our common stock. We intend to retain all future earnings, if
any, to fund the operation of our business, and therefore we do not anticipate
paying dividends on our common stock in the future.
PROVISIONS OF OUR CHARTER DOCUMENTS AND CERTAIN AGREEMENTS WITH OUR OFFICERS MAY
HAVE ANTI-TAKEOVER EFFECTS THAT COULD DISCOURAGE OR PREVENT A CHANGE OF CONTROL,
WHICH MAY SUPPRESS OUR STOCK PRICE OR CAUSE IT TO DECLINE. Our articles of
incorporation authorize the issuance of up to 2,500,000 shares of preferred
stock. Our board of directors has the authority to fix and determine the
relative rights and preferences of preferred stock, as well as issue preferred
stock without shareholder approval. As a result, our board of directors could
authorize the issuance of a series of preferred stock which would grant to
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common shareholders, and the
right to the redemption of preferred shares, together with a premium, prior to
the redemption of common stock. Common shareholders have no redemption rights.
In addition, we have agreements with some of our officers that have change of
control provisions. The ability to issue preferred stock without shareholder
approval and our arrangements with officers may discourage, delay or prevent
someone from acquiring or merging with us.
THOSE SHARES OF OUR COMMON STOCK THAT CANNOT CURRENTLY BE TRADED WITHOUT
RESTRICTION MAY BECOME ELIGIBLE FOR TRADING IN THE FUTURE. As of January 17,
2003, 18,406,025 shares of our common stock were issued and outstanding. Of this
amount, approximately 8,000,000 shares are "restricted securities" and are not
currently traded. However, these restricted securities will be available for
trading in the future, so long as all the requirements of Rule 144, promulgated
under the Securities Act of 1933, are met. No prediction can be made as to the
effect, if any, that the availability of these shares for sale, or the sale of
these shares, will have on the market prices for our common stock prevailing
from time-to-time. If the number of shares offered for sale is greater than the
number of shares sought to be purchased, then the price of our common stock
would decline. The market price of our securities could be adversely affected by
future sales of these securities.
THERE ARE A LARGE NUMBER OF SHARES OF OUR COMMON STOCK UNDERLYING OUR WARRANTS
AND OPTIONS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES
MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. The issuance of shares of
common stock upon the exercise of our outstanding options and warrants will
result in dilution to the interests of our shareholders and you as an investor
in the offerings, and may have an adverse effect on the trading price and market
for our common stock. As of January 17, 2003, we had options and warrants
outstanding which may be exercised to acquire 6,480,219 shares of our common
stock at various times. The future sale of these shares may adversely affect the
market price of our common stock. Shares issued upon exercise of our outstanding
warrants and options will also cause immediate and substantial dilution to our
existing shareholders. In addition, as long as these warrants and options remain
outstanding, our ability to obtain additional capital through the sale of our
securities might be adversely affected.
OUR OUTSTANDING DEBT COULD BE CONVERTED TO EQUITY THAT COULD BE AVAILABLE FOR
FUTURE SALE. ADDITIONALLY, WE COULD ISSUE EQUITY SECURITIES IN PAYMENT OF FEES
OWED UNDER OUR CONSULTING ARRANGEMENTS. THE ISSUANCE OF THESE SHARES WILL RESULT
IN FURTHER DILUTION TO OUR SHAREHOLDERS. Presently, the aggregate principal
amount of our borrowed indebtedness is approximately $175,000, of which
approximately $115,000 is currently due. As of December 31, 2002, we owed Mr.
Oton Tisch, our Chairman of the Board, approximately $60,000 of principal under
an outstanding note. Additionally, Mr. Tisch may advance us additional sums in
the future under our September 17, 2002 note, of which an aggregate principal
amount of $1,422,700 presently remains available. We have in the past and in the
future may issue equity securities in payment of consulting fees, including our
consulting arrangement with Obras Electromecanicas TKV. Mr. Tisch is the sole
owner and Chief Executive Officer and President of TKV. Mr. Tisch beneficially
owned 5,968,026 shares, or 30.6%, of our common stock as of January 17, 2003. In
the past, Mr. Tisch has agreed to convert a substantial portion of our debt to
equity and accept equity securities in payment for consulting services. While
the terms of Mr. Tisch's current notes and consulting agreement do not expressly
permit the conversion of debt to equity or the payment of equity securities for
consulting fees, the company and Mr. Tisch may later agree to issue additional
equity securities in order to repay amounts owed. We cannot estimate the number
of shares of our common stock that may be issued if all or part of any
obligations owed to our debt holders
13
or consultants are repaid through the issuance of equity. However, depending on
the amount of the outstanding obligations and the related conversion rate,
shares issued in repayment of these obligations could cause immediate and
substantial dilution to our existing shareholders. In addition, since Mr. Tisch
is not subject to any limitations pertaining to his ownership, the number of
shares could be significant and further increase Mr. Tisch's ownership of the
company. The future sale of these shares may also adversely affect the market
price of our common stock.
ONE OF OUR DIRECTORS IS A RESIDENT OF VENEZUELA, AND SHAREHOLDERS MAY HAVE
DIFFICULTY ENFORCING A JUDGMENT AGAINST SUCH INDIVIDUAL OUTSIDE OF VENEZUELA.
One of our directors and the company's largest shareholder, Mr. Oton Tisch, is a
resident of Venezuela. It may not be possible for you to effect service of
process upon Mr. Tisch outside of Venezuela, or to enforce judgments obtained
against him in courts outside of Venezuela.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology, for instance the
terms "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," the negative of these terms or
other comparable terminology. In addition, these forward-looking statements
include, but are not limited to, statements regarding the following:
o anticipated operating results and sources of future revenue;
o growth;
o adequacy of our financial resources;
o development of new products and markets;
o obtaining and maintaining regulatory approval and changes in
regulations, including obtaining regulatory approvals for the
Infant Lasette;
o competitive pressures;
o commercial acceptance of new products;
o changing economic conditions;
o expectations regarding competition from other companies; and
o our ability to manufacture and distribute our products.
Potential investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results will differ and
could differ materially from these forward-looking statements. The factors that
could cause actual results to differ materially from those in the
forward-looking statements include the following: (1) industry conditions and
competition, (2) reforms in the health care industry or limitations imposed on
third party or Medicare reimbursement of health care costs, (3) the rate of
market acceptance of our products, particularly the Lasette and the UltraLight
Laser, (4) operational risks and insurance, (5) risks associated with operating
in foreign jurisdictions, (6) product liabilities which may arise in the future
which are not covered by insurance or indemnity, (7) the impact of current and
future laws and government regulation, as well as repeal or modification of
same, affecting the medical device industry and our operations in particular,
(8) the ability to retain key personnel, (9) renegotiation, nullification or
breach of contracts with distributors, suppliers or other parties and (10) the
relationship with our suppliers, particularly our supplier of crystals used in
our Ebrium:YAG lasers. In light of these risks and uncertainties, there can be
no assurance that the matters referred to in the forward-looking statements
contained in this prospectus will in fact occur.
14
USE OF PROCEEDS
If all of the selling securityholders exercise their stock purchase warrants in
full, then we will receive additional gross proceeds of $1,274,126. We will not
receive any proceeds from the resale of our common stock offered by the selling
securityholders.
The exercise prices of these stock purchase warrants range between $0.37 and
$2.40 per share. On January 17, 2003, the closing bid price of our common stock
was $0.34. For any warrant with an exercise price that exceeds the trading price
of our common stock, it is unlikely that the warrant will be exercised unless
the trading price of our common stock is above its exercise price. Whether or
not our common stock trades at a price above the exercise price of these
securities, we cannot assure you that any of our securityholders will exercise
any of the common stock purchase warrants.
If we were to receive proceeds from any of the foregoing, we anticipate that the
proceeds will be used as working capital in our day-to-day operations. While we
regularly evaluate possibilities for the acquisition of other businesses,
technologies and products as a part of our long-term business strategy, we do
not have any arrangements, agreements or understandings with respect to any such
acquisitions. At this time, we do not anticipate the proceeds we receive from
the exercise of the common stock purchase warrants will be used to repay debt.
MARKET PRICE INFORMATION AND DIVIDENDS
Our common stock and our redeemable common stock purchase warrants, or
Redeemable Warrants, are traded over-the-counter and quoted on the OTC Bulletin
Board on a limited and sporadic basis under the symbols "CRII" and "CRII.W,"
respectively. The reported high and low bid prices for our common stock and the
low bid and high ask prices for our Redeemable Warrants, each as reported by the
OTC Bulletin Board, are shown below for our two prior fiscal years through
January 17, 2003. These over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
<Table>
<Caption>
COMMON STOCK BID
-------------------------------
LOW HIGH
---------- ----------
2001
First Quarter $ 0.453 $ 1.313
Second Quarter $ 0.281 $ 0.830
Third Quarter $ 0.210 $ 0.760
Fourth Quarter $ 0.190 $ 0.500
</Table>
<Table>
<Caption>
BID
-------------------------------
LOW HIGH
---------- ----------
2002
First Quarter $ 0.230 $ 1.440
Second Quarter $ 0.470 $ 1.350
Third Quarter $ 0.360 $ 1.240
Fourth Quarter $ 0.370 $ 0.710
</Table>
<Table>
<Caption>
BID
-------------------------------
LOW HIGH
---------- ----------
2003
Through January 17, 2003 $ 0.34 $ 0.45
</Table>
15
<Table>
<Caption>
REDEEMABLE WARRANTS BID
-------------------------------
LOW HIGH
---------- ----------
2001
First Quarter $ 0.156 $ 0.234
Second Quarter $ 0.070 $ 0.156
Third Quarter $ 0.040 $ 0.080
Fourth Quarter $ 0.040 $ 0.060
</Table>
<Table>
<Caption>
BID
-------------------------------
LOW HIGH
---------- ----------
2002
First Quarter $ 0.040 $ 0.250
Second Quarter $ 0.050 $ 0.100
Third Quarter $ 0.050 $ 0.070
Fourth Quarter $ 0.030 $ 0.050
</Table>
<Table>
<Caption>
BID
-------------------------------
LOW HIGH
---------- ----------
2003
Through January 17, 2003 $ 0.01 $ 0.01
</Table>
As of January 17, 2003, there were approximately 187 holders of record of our
common stock and 8 holders of record of our Redeemable Warrants.
We have not paid any dividends on our common stock and do not expect to do so in
the foreseeable future. We anticipate that any earnings generated from our
operations will be used to finance our ongoing operations. No contractual
restrictions exist upon our ability to pay dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the nine-month periods ended September 30, 2002 and
2001 was $981,882 and $2,022,008, respectively. The primary reason for the
decrease in cash used in operations during the nine-month period ended September
30, 2002, as compared to the same period in the prior year, was that we had
fewer cash resources. We have also taken steps to limit or reduce our personnel
and other costs through personnel reductions, limitation of travel expenditures
and other methods to achieve other administrative cost reductions.
Net cash provided by financing activities for the nine-month periods ended
September 30, 2002 and 2001 was $988,850 and $1,112,150, respectively. The
decrease in net cash provided by financing activities resulted primarily from
fewer available sources of capital during the nine-month period ended September
30, 2002 when compared to the same period in 2001. The decrease also resulted
from the use of capital to pay down our debt. Between January and April 2002, we
repaid $193,818 of principal and interest owing under our note to Humagen
Fertility Diagnostics, Inc.
Total assets decreased to $1,215,103 at September 30, 2002 from $1,659,738 at
December 31, 2001, a decrease of $444,635, or 27%. This decrease in total assets
is primarily attributed to the following:
o Our current assets decreased $405,893, or 32%, as of September
30, 2002 compared to our current assets as of December 31,
2001. This decrease was primarily the result of decreases in
accounts receivable and inventory as described below.
o Accounts receivable decreased $100,892 from $278,482 at
December 31, 2001 to $186,590 at September 30, 2002. This
decrease occurred because we made an effort during the third
quarter of 2002 to collect as much cash as possible.
16
o Inventory decreased by $292,358, or 32%, to $619,063 at
September 30, 2002 from $911,421 at December 31, 2001. The
decrease was primarily due to the lack of financial resources
to purchase additional components.
Our current ratio at September 30, 2002 was 0.34 compared to 0.5 at December 31,
2001. Our total current liabilities decreased $6,686 from $2,489,415 at December
31, 2001 to $2,482,729 at September 30, 2002. Our working capital decreased to a
deficit of $1,635,077 at September 30, 2002 from a deficit of $1,235,870 at
December 31, 2001. The decrease in working capital was primarily due to the use
of cash resources to fund our ongoing operating losses, as well as decreases in
accounts receivable and inventory as described above.
In October 2001, we were notified by the Center for Medicare and Medicaid
Services, or CMS, that a Healthcare Common Procedure Coding System, or HCPCS,
code had been assigned to our Lasette. In January 2002, CMS published the
allowable for our Lasette that was associated with the newly issued HCPCS code.
Generally, Medicare reimburses 80% of the published allowable. In March 2002, we
were notified by CMS that they have not established a medical criteria for our
Lasette and as a result CMS will only reimburse approximately $17 for the price
of the Lasette, a minimal portion of its cost. Whether we can obtain a higher
reimbursement rate for the Lasette will depend on the establishment of a
favorable medical policy for the Lasette, which is largely outside our control.
We are currently working with CMS to provide input into CMS's establishment of
an appropriate medical policy so that a higher reimbursement rate may be set.
CMS is now conducting a review of the medical reimbursement of the Lasette.
Therefore, we believe that progress is taking place in our continuing efforts to
achieve a timely resolution of this matter. However, we can provide no assurance
as to whether a medical policy favorable to us will be established by CMS, or
when, if ever, an adequate reimbursement rate for the Lasette will be set or the
eventual amount of reimbursement.
COMMITMENTS - As of December 31, 2002, our outstanding indebtedness for borrowed
money includes the following:
o In January 2001, certain members of our board of directors and
affiliates of members or former members of our board of
directors agreed to make term loan advances to us in an
aggregate amount of $1,000,000 pursuant to the terms of a loan
agreement with us. The loans are evidenced by unsecured
promissory notes, bear interest at the rate of ten percent per
annum and were due on January 31, 2002. On November 13, 2002
pursuant to a stock purchase agreement between the company and
Mr. Oton Tisch dated November 12, 2002, we issued 2,309,255
shares of our common stock to Mr. Tisch at a price per share
of $0.45 in repayment in full of $900,000 of principal and
$139,165 of accrued interest owing to Mr. Tisch under the loan
agreement. As of December 31, 2002, the remaining principal
balance of loans outstanding under the loan agreement was
approximately $87,000, of which $77,000 can be demanded at any
time and $7,500 is payable in equal installments of $2,500
each month with all principal and interest due in March 2003.
In connection with the January 2001 loan commitment, each
lender was issued a warrant in proportion to the amount of the
loan made by that lender. The warrants allow the lenders to
purchase an aggregate of 150,000 shares of our common stock.
The warrants may be exercised until January 31, 2004, at a
price equal to $1.125 per share of our common stock.
o On March 29, 2002, we signed a promissory note in the face
amount of $2,000,000 payable to one of our directors, Mr. Oton
Tisch. The promissory note was amended and restated on
September 17, 2002. Under this promissory note, Mr. Tisch may
make one or more advances to us at times and in amounts, as
determined by Mr. Tisch in his discretion, up to an aggregate
principal sum of $1,488,500 (the "Loan A Facility").
Additionally, Mr. Tisch must make requested advances under
this note up to an aggregate principal sum of $511,500 so long
as he remains satisfied in his reasonable credit judgment with
our capital raising activities (the "Loan B Facility").
Therefore, Mr. Tisch has no obligation or commitment to make
any loans under the Loan A Facility and must make advances
under the Loan B Facility only to the extent he is satisfied
with our capital raising activities in his reasonable credit
judgment. This note bears interest at 8% per annum and is
presently secured by all our assets. Mr. Tisch has funded a
total principal amount of $577,300 under this note as of as of
December 31, 2002. On November 13, 2002 pursuant to a stock
purchase agreement between the company and Mr. Tisch dated
November 12, 2002, we issued 776,949 shares of our common
stock to Mr. Tisch at a price per share of $0.45 in repayment
in full of $337,300 of principal and $12,327 of accrued
interest owing to Mr. Tisch under the promissory note.
Additionally, on November 19, 2002, we repaid, in cash,
17
$180,000 owing under the note. As of December 31, 2002, the
remaining principal balance outstanding under the note was
approximately $60,000, all of which was outstanding under the
Loan B Facility. No amounts borrowed under the Loan A Facility
or the Loan B Facility may be reborrowed after being repaid by
us. As of December 31, 2002, the remaining amount available
under the Loan A Facility and the Loan B Facility is
$1,000,000 and $422,700, respectively. All principal and
interest outstanding under the note are due on April 1, 2004.
o A private investor that is not affiliated with the company has
advanced us the principal sum of $27,000. The outstanding
principal balance of $27,000 is payable by us upon demand.
CAPITAL SOURCES - Our operating cash flows continue to be provided by ongoing
sales of the Lasette and the Cell Robotics Workstation. During the first nine
months of 2002, sales of our products generated revenues of approximately
$976,000. In July 2002, we received a commitment from California Caltech, Inc.,
our distributor that sells the Lasette in China, to order additional Lasettes.
This commitment provides for sales of an additional 750 Lasettes and 1.5 million
clinical disposables through April 2003, of which 620 units and 350,000
disposables have been purchased as of December 31, 2002. The distributor has
also ordered an additional 2,000 Lasettes, and has committed to order
approximately 15 million corresponding disposables by May 2004. For the year
ended December 31, 2002, the company has recognized revenue of approximately
$360,000 from the sale of the Lasette and related disposables to California
Caltech. Although the distributor has committed to purchase the above Lasettes
and related disposables, we have no control over the timing or the amount of any
order within the relevant periods discussed above. Further, the risks associated
with these international activities includes, but are not limited to, the
compliance by our distributor with its commitments. Although we are not aware of
any reason that the distributor will not fulfill its commitment, we cannot
assure you that it will remain in compliance with its agreement with us.
We are currently developing a modified version of the Lasette, called the Infant
Lasette, designed specifically for neonatal/pediatric heelstick applications. We
have an oral agreement with Sandstone Medical Technologies, LLC, a private
company located in Homewood, Alabama, to use our core laser technology to
develop a proprietary medical laser for aesthetic or skin rejuvenation
applications, which we call the UltraLight Laser. On September 30, 2002, we
commenced our clinical trials of the Infant Lasette. After completing the
requisite tests in the clinical trial, we will submit the Infant Lasette for FDA
clearance. We anticipate that we will be able to make our submission to the FDA
in March 2003. We further anticipate that the FDA clearance will take at least
three months following this submission. However, FDA clearance will be delayed
if the FDA requests additional information based on the initial or subsequent
submissions. Although there can be no assurances, we expect that we will be
ready to sell the Infant Lasette late in the second quarter or early in the
third quarter of 2003. Additionally, we received FDA clearance of the UltraLight
Laser in September 2002. We are in the process of obtaining certain domestic and
international safety clearances for this product, such as Underwriters
Laboratories, Canadian Standards Association and CE certifications. We have back
orders of approximately $2.8 million for the Lasette and the UltraLight Laser as
of December 31, 2002, compared to no back orders for the Lasette and UltraLight
as of December 31, 2001. There were no back orders for the UltraLight Laser as
of December 31, 2001 because that product was developed during 2002. Over half
of the expected revenues from these open back orders are attributed to the
UltraLight Laser. The open back orders as of December 31, 2002 include the
commitments of California Caltech as described above and 200 units of the
UltraLight Laser. We expect that our open back orders will also produce
additional revenues based on disposable shields associated with these products.
We shipped the first 10 evaluation units of the UltraLight Laser in December
2002. The evaluation units were furnished for marketing research and
demonstration purposes. We expect to begin commercial shipments of the
UltraLight Laser in the first quarter of 2003 after the manufacturing clearances
have been obtained. The UltraLight Laser units covered by our open backorders
are required to be delivered during 2003. Although our goal is to ship the
Lasette units covered by our open back orders during 2003, all units are not
required to be delivered until May 2004.
As discussed above, on September 17, 2002, we entered into an amended and
restated promissory note payable to Mr. Tisch. Under this promissory note, Mr.
Tisch may, in his discretion, make one or more advances to us under the Loan A
Facility. Additionally, Mr. Tisch must make requested advances under this note
under the Loan B Facility so long as he remains satisfied in his reasonable
credit judgment with our capital raising activities. As of December 31, 2002,
the remaining amount available under the Loan A Facility and the Loan B Facility
is $1,000,000 and $462,700, respectively.
18
In addition to the above sources, we have and may continue to raise capital
through the issuance of debt, equity and convertible debt instruments, or
through the exchange of existing instruments through transactions that could
provide us with additional capital.
ADEQUACY OF CAPITAL - Since our inception, to provide working capital for our
product development and marketing activities, we have relied principally upon
the proceeds of both debt and equity financings and, to a lesser extent, the
proceeds of Small Business Innovative Research grants. Research and development
grants accounted for revenues of $137,597 in 2001. No research and development
grant revenue was received in the first nine months of 2002. We have not been
able to generate sufficient cash from operations and, as a consequence, we must
seek additional financing to fund ongoing operations.
We anticipate that our existing current working capital and expected cash flow
from operating activities will only be sufficient to allow us to meet
operational obligations through February 28, 2003, assuming the repayment of
approximately $115,000 of our current outstanding indebtedness for borrowed
money is not demanded before that date. As of September 30, 2002, our net
working capital was a deficit $1,635,077 and our total cash and cash equivalents
was less than $4,000. We expect to experience operating losses and negative cash
flow for the foreseeable future. Therefore, we do not have sufficient cash to
sustain those operating losses without additional financing. We presently need
financing to repay our current indebtedness, including payment of our notes in
the aggregate principal amount of approximately $175,000 of which approximately
$115,000 is currently due. In addition to debt service requirements, we will
require cash to fund our operations. Based on our current operations, we
estimate that our cash needs will be approximately $150,000 each month for the
foreseeable future and will be a total of approximately $900,000 from January 1
through June 30, 2003. Our operating requirements depend upon several factors,
including the rate of market acceptance of our products, particularly the
Lasette, our level of expenditures for manufacturing, marketing and selling our
products, costs associated with our staffing and other factors. We have been
funding our operating requirements with proceeds from small private placements
of our equity securities and indebtedness for borrowed money, particularly with
financings with Mr. Oton Tisch, one of our directors, and sales of our products.
However, these sources of capital have only been adequate to meet our short-term
needs. We need to secure one or more additional financings sufficient to fund
our operations on a long-term basis. Therefore, we intend to continue to seek to
raise equity or debt financing. Although we have had discussions with potential
investors, we have not been able to obtain sufficient long-term financing on
acceptable terms as of the date of this prospectus. No assurance can be given
that we will be able to obtain any additional financing on favorable terms, if
at all. If our operating requirements vary materially from those currently
planned, we may require more financing than currently anticipated. Borrowing
money may involve pledging some or all of our assets. Raising additional funds
by issuing common stock or other types of equity securities would further dilute
our existing shareholders. If we cannot obtain additional financing in a timely
manner, we will not be able to continue our operations. In addition, we have
received a report from our independent auditors covering our fiscal years ended
December 31, 2001 and 2000 financial statements. The report contains an
explanatory paragraph that states that our recurring losses and negative cash
flows from operations raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
To date, we have generated only limited revenues from the sale of our products
and have been unable to profitably market our products. We incurred net losses
applicable to common shareholders of $1,524,232 and $1,989,762 for the
nine-month periods ended September 30, 2002 and 2001, respectively, and net
losses of $2,723,844 and $5,036,182 in 2001 and 2000, respectively. Revenues
from the sale of our products were $976,330 and $1,007,453 for the nine-month
periods ended September 30, 2002 and 2001, respectively and were $1,461,447 and
$992,710 for the years ended December 31, 2001 and 2000, respectively. We expect
to experience operating losses and negative cash flow for the foreseeable
future. We do not have sufficient cash to sustain continuing operating losses
without additional financing. Even if we are able to obtain additional financing
to allow us to continue operations and repay indebtedness, we will still need to
generate significant revenues and improve our gross margins to fund anticipated
manufacturing and marketing costs and to achieve and maintain profitability. We
cannot assure you that we will ever generate sufficient revenues to achieve
profitability, which will have a negative impact on the price of our common
stock. If we do achieve profitability, we cannot assure you that we will be able
to sustain or increase profitability in the future.
19
RESULTS OF OPERATIONS --THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2001
Sales of products for the three-month period ended September 30, 2002 increased
$75,214, or 19%, to $477,277 from $402,063 in the same period of 2001. The
increase was primarily due to purchases by California Caltech, Inc., our new
distributor who sells our laser-based medical products into China. The purchases
by the new distributor were made for initial stocking purposes. Sales of our
scientific research instruments decreased $37,118 or 12% from $320,057 during
the quarter ended September 30, 2001 to $282,939 for the quarter ended September
30, 2002. Sales of our laser-based medical products increased $112,332, or 137%,
from $82,006 for the quarter ended September 30, 2001 to $194,338 for the
quarter ended September 30, 2002.
We generated no revenues from research and development grants in the third
quarter of 2002 because our final research grant expired in September 2001.
Our gross margin on product sales decreased to a margin of 20% for the quarter
ended September 30, 2002 from a gross margin of 33% for the quarter ended
September 30, 2001. A lack of efficiencies in the production of our products
contributed to the lower gross margin.
General and administrative expenses increased $128,912, or 65%, from $198,478
for the quarter ended September 30, 2001 to $327,390 for the quarter ended
September 30, 2002. The increase is primarily due to non-cash charges incurred
in connection with the issuance of 117,442 shares of our common stock in payment
of consulting services. Marketing and sales expenses decreased $118,573, or 38%,
from $308,917 for the quarter ended September 30, 2001 to $190,344 for the
quarter ended September 30, 2002. The decrease was primarily due to four sales
positions that were staffed in 2001, but not in 2002. In the latter part of 2001
four marketing and sales positions were eliminated. Therefore, the salaries and
travel expenditures associated with these positions were eliminated. The
increase in research and development expenses was primarily due to more
engineering components being purchased in the third quarter of 2002 when
compared with the same period in 2001. These engineering components were
purchased for the development of the modified Lasette to perform heelsticks on
infants and the skin refreshening UltraLight Laser.
Interest income decreased from $284 for the quarter ended September 30, 2001 to
$0 in the quarter ended September 30, 2002. The reason for the decrease is that
we had no excess cash to invest in short-term securities during 2002. Interest
expense decreased $5,990 in the quarter ended September 30, 2002 when compared
with interest expense for the three-month period ended September 30, 2001. The
reason for the decrease was due to a slightly lower amount of outstanding debt
in the third quarter of 2002 when compared with the same period in 2001. Other
income increased $14,453 in the third quarter of 2002 compared with the third
quarter of 2001. The reason for the increase was our receipt of a royalty
payment from Hamilton Thorne Research, who purchased our IVF technology in 2000.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2001
Sales of products for the nine-month period ended September 30, 2002 decreased
$31,123, or 3%, to $976,330 from $1,007,453 in the same period of 2001. The
decrease can primarily be attributed to lower sales in the second quarter of
2002. Sales in the second quarter of 2002 decreased primarily due to a lack of
financial resources to promote sales and to purchase inventory components that
were required to assemble products for orders.
Research and development grant revenue was $133,823 for the nine-month period
ended September 30, 2001 compared to no revenues in the same period of 2002. We
generated no revenues from research and development grants in the nine-month
period ended September 30, 2002 because our final research grant expired in
September 2001.
Our gross margin on product sales decreased from 19% for the period ended
September 30, 2001 to 12% for the nine-month period ended September 30, 2002. A
lack of efficiencies in the production of our products contributed to the
decline in gross margin.
Operating expenses decreased $548,200, or 26%, from $2,119,010 for the
nine-month period ended September 30, 2001 to $1,570,810 for the period ended
September 30, 2002. The decrease is primarily due to our efforts to reduce to
the extent possible all expenditures in 2002 because of the lack of financial
resources. Reductions in expenditures
20
for personnel, advertising, travel and engineering all contributed to the
decrease in operating expenses. Marketing and sales expenses decreased $472,945
mainly because of the elimination of four positions in September 2001. No
expenses associated with those positions were incurred in 2002.
Interest income decreased in the nine-month period ended September 30, 2002 to
$17 from $5,730 in the nine-month period ended September 30, 2001. The decrease
was due to us having practically no excess cash to invest in 2002. Interest
expense increased during the nine-month period ended September 30, 2002 over the
same period in 2001 because of increased borrowings in 2002 over those in 2001.
Most of the increased borrowing is attributed to advances made under the August
2, 2001 convertible note and advances made under the March 29, 2002 promissory
note. Both notes were made by Mr. Oton Tisch, one of our directors.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED
DECEMBER 31, 2000
Product sales for the year ended December 31, 2001 increased $468,737, or 47%,
to $1,461,447 from $992,710 in the comparable period of 2000. The increase in
sales resulted mainly from sales in our scientific research instruments
products. The sales of scientific instrumentation products increased $381,121
during the year ended December 31, 2001 to $986,998 from $605,877 when compared
to the same period of 2000. The increase was due to our placing a greater
emphasis on our scientific instrumentation products in 2001 than we did in 2000.
Additionally, at the end of September 2001 we released the LS300 Pro
Workstation, which contributed approximately $288,000 to the increase. Sales of
our laser-based medical products increased $87,616 to $474,449 for the year
ended December 31, 2001 from $386,833 for the year ended December 31, 2000.
Revenue generated from research and development grants increased $123,244 to
$137,597 during the year ended December 31, 2001 from $14,353 for the year ended
December 31, 2000. This increase is attributed to more work being completed on a
specific grant by our personnel in 2001 compared to the work completed in 2000.
Our gross margin from sales of products increased from a negative margin of 53%
during the year ended December 31, 2000 to a positive margin of 7% for the year
ended December 31, 2001. The negative gross margin experienced in 2000 was
primarily due to three factors. First, and most importantly, the negative gross
margin is attributed to an accrual of $400,000 that was made in anticipation of
the settlement of a lawsuit with Big Sky Laser Technologies, Inc., or BSLT. This
lawsuit was settled in the first quarter of 2001. Second, we accrued
approximately $64,000 in cost of sales during 2000 to pay expenses associated
with a design improvement in one of the main components of the laser-based
medical products. As a result of the modification, certain parts in stock had to
be reworked. Third, a lack of efficiencies in the production of our laser-based
medical products also contributed to the negative gross margin in 2000. These
inefficiencies were primarily due to low volume. As sales increased during 2001,
our gross margin returned to a positive level. During 2001 we recorded charges
to cost of goods sold of approximately $173,000 to write-off the value of
inventory associated with the Professional Lasette, a discontinued product. This
charge reduced our gross margin for the year ended December 31, 2001 to 7%.
Operating expenses decreased $646,086, or 19%, from $3,404,166 during 2000 to
$2,758,080 during 2001. The decrease occurred in nearly all areas of our
operations. Because our cash resources were limited, we implemented measures to
reduce expenditures during the year ended December 31, 2001. The decrease in
general and administrative expenses resulted primarily from decreases in fees
paid for legal services. Legal fees decreased by approximately $321,000 for the
year ended December 31, 2001 when compared with the same period in 2000.
Marketing and sales expenses decreased slightly primarily because of the use of
less advertising as one of the steps we implemented to reduce expenditures
during 2001 in response to our limited cash resources. The decrease in research
and development expenses occurred because we decided to devote less resources
toward research and development during the year ended December 31, 2001
considering our decreasing available cash balance.
Interest income decreased during the year ended December 31, 2001 from the
amount in the same period of 2000 primarily due to our decreasing cash balance
during 2001. In the first half of 2000 we completed two large private placements
that provided us aggregate gross proceeds of approximately $3.2 million. The
interest income earned in 2000 resulted from investments of the cash proceeds
from these placements. As the cash balance decreased during 2000 and 2001 we
earned less in interest income. Interest expense decreased in 2001 from 2000
because of the beneficial conversion charge of $1.2 million to interest expense
associated with the conversion of our $1.2 million convertible note in August
2000 into 500,000 shares of common stock. A similar charge was not incurred in
2001. Excluding the $1.2 million charge in 2000, our interest expense increased
by $67,036 in 2001 compared to interest expense in 2000. The reason for the
increase in 2001 was because of interest expense associated with higher
21
outstanding balances of borrowed indebtedness in 2001 verses 2000. These higher
debt balances are primarily attributed to the $1 million board loan signed in
January 2001 and the $500,000 convertible note signed in August 2001. Other
income, net decreased in 2001 when compared with the amount in 2000. The
decrease is primarily attributed to a one-time benefit from the sale of our IVF
workstation technology recorded in 2000.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
Product sales for the year ended December 31, 2000 decreased $302,226, or 23%,
to $992,710 from $1,294,936 in the comparable period of 1999. The decrease is
due to our change in emphasis from our scientific instrumentation products and
Professional Lasette to the Lasette that can be used for either home or clinical
use. Sales of scientific instrumentation products and the Professional Lasette
decreased $130,740 to $605,877 and $300,667 to $23,550, respectively, during the
year ended December 31, 2000 when compared with 1999. The sales decline in
scientific instrumentation products is due to fewer resources being allocated to
achieve sales of those products. We terminated our distribution arrangement with
the distributor of the Professional Lasette in August 2000 because of low sales
activity by the distributor. Also, in May 2000, we sold the IVF Workstation and
related technology. This resulted in a decline of revenues in the year ended
December 31, 2000 of approximately $126,000 when compared with the prior year.
Sales of our Lasette that can be used for either home or clinical use increased
approximately $250,000 during 2000 when compared with no sales in 1999. As
previously mentioned, we have made a strategic decision to focus our efforts to
develop and market the Lasette that can be used for either home or clinical use.
Our research and development grant revenue decreased $108,381 from the period
ended December 31, 1999 to the period ended December 31, 2000 as a result of our
decision to divert our resources from work on the grant to other projects.
Our gross margin on product sales decreased from 18% during 1999 to a negative
gross margin of 53% for 2000. The decrease is primarily due to an accrual of
$400,000 that we made during the third fiscal quarter of 2000 as an estimate of
the financial impact of settling our lawsuit with BSLT. The lawsuit was settled
in January 2001. Additionally, during the third fiscal quarter we accrued
approximately $64,000 in cost of sales to pay the cost associated with a design
improvement in one of the main components of the Lasette to increase the
efficiency of the laser beam profile. As a result of the design modification,
certain parts in stock had to be reworked. Finally, the negative gross margin
was due to a lack of efficiencies in the production of our laser-based medical
products that we market.
Operating expenses increased $1,238,615 from $2,165,551 for the period ended
December 31, 1999 to $3,404,166 for the year ended December 31, 2000. Our
operating expenses increased as a result of greater marketing and sales, general
and administrative and research and development expenses in 2000 compared to
1999. Of this increase, $663,951 is due to our marketing and selling expenses as
we launched an aggressive campaign to sell our laser-based medical products and
increased our sales staff from two persons in 1999 to nine persons in 2000. The
increase in general and administrative expenses is primarily due to the legal
fees we incurred in the second quarter of fiscal 2000 primarily to update
previous registration statements filed with the SEC and for legal services in
connection with a secured convertible note. Our legal fees increased $339,028
for the year ended December 31, 2000 compared to the year ended December 31,
1999. We paid these legal fees by issuing shares of our common stock rather than
by expending working capital resources.
Our research and development expenses increased $265,173 from $551,468 for the
period ended December 31, 1999 to $816,659 for the period ended December 31,
2000. This increase is primarily due to the expenses we incurred to hire an
additional engineer in 2000 and resources we committed to research to enhance
and further develop the Lasette. Interest income increased $49,977, or 191%, in
the year ended December 31, 2000 compared to the prior year. The increase is due
to additional cash investments primarily as a result of the $2 million private
placement that was completed in May 2000 and proceeds from the issuance of the
$1.2 million convertible note in March 2000.
Interest expense increased because of a required beneficial conversion charge to
interest expense associated with our conversion of a $1.2 million convertible
note in August 2000 into 500,000 shares of common stock. In accordance with
accounting rules, we made a non-cash charge of $1.2 million to interest expense
when the $1.2 million convertible note was converted to our common stock. The
increase in other income resulted from the sale of the IVF Workstation and
related technology.
22
Our net loss for the year ended December 31, 2000 was $5,036,182 compared to a
net loss of $2,424,630 for the same period in 1999. The increase in our net loss
in 2000 is primarily attributed to the factors discussed above.
EXPECTED PRODUCT SALES -- YEAR AND THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED
TO THE YEAR AND THREE MONTHS ENDED DECEMBER 31, 2001
We expect to report product sales for the fourth quarter of 2002 of
approximately $600,000 which would be an increase over the fourth quarter of
2001 of approximately $146,000 or 32%. On a sequential basis, this $600,000 of
fourth quarter product sales represents an increase of 26% over third quarter
product sales of $477,000. We also expect to report revenues from the sale of
products for 2002 of approximately $1,576,000 as compared to 2001 of $1,461,447.
All figures for the fourth quarter and full year of 2002 are based on currently
available information and are preliminary.
CRITICAL ACCOUNTING POLICIES
High-quality financial statements require rigorous application of high-quality
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of our financial statements because their
application places the most significant demands on management's judgment, with
financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies,
management cautions that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.
REVENUE RECOGNITION - Sales to qualified distributors are recognized when the
products are shipped from the plant and ownership is transferred to the
customer. In certain instances where we are required to install its products at
a customer location, the revenue is deferred until the installation is complete.
We provide an allowance for returns based on historical experience.
LOSS CONTINGENCIES - Loss contingencies are recorded as liabilities when it is
probable that a liability has been incurred and the amount of the loss is
reasonably estimable. Disclosure is required when there is a reasonable
possibility that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis of multiple forecasts that often depend on
judgments about potential actions by third parties such as regulators.
RECENT DEVELOPMENTS
Although there can be no assurances, we believe that we are poised to generate
increased sales and achieve profitability in 2003. We believe that we could
achieve profitability in 2003 based on increased sales during 2003, as well as
reductions in manufacturing costs resulting from greater economies of scale. We
believe that greater sales in 2003 will be achieved based on our existing
backorders of approximately $2.8 million as of December 31, 2002. In addition to
these backorders, based on the interest expressed to date by existing and
potential distributors, we believe that we may generate additional sales in 2003
by new sales of our two new products, the UltraLight Laser and the Infant
Lasette. This $2.8 million backorder is almost twice our annual sales for each
of 2001 and 2002. More than half of our $2.8 million backorder is associated
with the new UltraLight Laser, which we expect to begin shipping in the first
quarter of 2003. Further, we expect to begin shipments of the Infant Lasette
late in the second quarter or early in the third quarter of 2003. We also
anticipate that these sales will generate additional incremental revenues based
on disposable shields associated with these products. In addition, we believe
that we can leverage any increased sales to achieve greater economies of scale,
which will reduce our manufacturing costs. We believe that these reductions in
costs can primarily be obtained through obtaining better price terms from
existing and/or new suppliers of component parts based on increased purchase
volumes. In particular, we believe that we could achieve savings associated with
volume purchases of certain higher cost component parts, such as our electronic
components.
Obtaining profitability will primarily depend on our ability to substantially
increase sales, which is largely dependent on our ability to generate demand for
and market acceptance of our products. Demand and market acceptance of our
products are subject to a high level of uncertainty and risk, many of which are
outside our control. These risks include the following, among others:
o the demand for our products may fail to develop or develop
slower than expected or our products may not achieve or
sustain market acceptance;
o the difficulty in predicting our product's future growth rate;
o our operating requirements, including our level of
expenditures for manufacturing, marketing and selling our
products, costs associated with our staffing and other costs,
may vary materially from those currently planned;
o the prices at which our products are accepted by purchasers
may be too low, which may prevent us from operating
profitably;
o even if we can increase our purchase volumes, we may not be
able to purchase component parts from suppliers at prices that
will result in anticipated cost savings to the company;
o third parties may manufacture and market a product superior in
performance and price; and
o the possibility that the UltraLight Laser and the Infant
Lasette may fail to receive necessary regulatory and/or
manufacturing clearances.
We cannot assure you that we will be successful in addressing the risks
described above. Our failure to address these risks could have a negative impact
on our business, operating results and financial condition and prevent us from
achieving profitability in 2003.
BUSINESS
OVERVIEW
We manufacture, market and sell a laser-based medical device and a scientific
research instrument. We are also developing a proprietary medical laser for
aesthetic or skin rejuvenation applications, which we call the UltraLight Laser.
Our key targets include the clinical and diabetes care markets for the Lasette
and the scientific research market for the Cell Robotics Workstation. We were
incorporated in Colorado on September 28, 1988, under the name Bonus, Ltd. In
September 1991, we changed our name to Intelligent Financial Corporation. In
February 1995, we acquired all of the issued and outstanding shares of Cell
Robotics, Inc., a New Mexico corporation, which had been formed in 1988 to
develop the Cell Robotics Workstation. In May 1995, we changed our name from
Intelligent Financial Corporation to Cell Robotics International, Inc.
BUSINESS STRATEGY
We hope to become a leader in the development and sale of technologically
advanced laser-based medical devices. To achieve this goal, our business
strategy capitalizes on our core laser technologies to develop unique products
targeted at large markets in which we can compete effectively. Key components of
our business strategy include the following:
o DEVELOP UNIQUE TECHNOLOGY. Through know-how and core
technology, we plan to develop products that offer more
effective, safer and less painful solutions than conventional
procedures. This development strategy includes using patents,
licenses and collaboration where appropriate.
23
o DEVELOP MARKET RECOGNITION. We are positioning our laser-based
medical devices as preferred technological solutions to
clearly-defined medical needs. We seek to create significant
brand awareness for the Lasette, our signature product,
particularly with consumers that use the Lasette for home use.
To accomplish this, we plan to advertise in clinical and
diabetes-related publications, direct mailings, tradeshows and
print and Internet media. We also use trademarked product
names that can be clearly recognized by customers, such as
Lasette(R) and LaserTweezers(R).
o EXPAND DISTRIBUTION CHANNELS. We believe that expanding our
distribution channels will be a key component to the success
of our products, particularly the Lasette for clinical use.
Currently, the Lasette for clinical use is distributed through
several regional distributors within and outside the United
States, and to a limited extent to one national distributor in
the United States. We intend to pursue additional
non-exclusive distribution agreements for our Lasette for
clinical use with national and regional distributors, and
non-exclusive or exclusive distribution agreements with
international distributors of medical products to take
advantage of their existing distribution channels and name
recognition.
o CAPITALIZE ON THE OPPORTUNITY PRESENTED BY THE NEEDLESTICK
SAFETY ACT. The Needlestick Safety Act requires OSHA to revise
its existing bloodborne pathogens standards to set forth in
greater detail, and make more specific, OSHA's requirement for
health facilities to identify, evaluate and implement safer
medical devices, such as safety engineered sharps devices or
needleless systems, to reduce or eliminate the accidental
needlesticks suffered by health care workers. The needle-free,
laser-based design of the Lasette eliminates the risk of
accidental needlesticks because a patient's blood sample is
obtained by the use of a laser pulse rather than by a needle
or lancet. We believe this feature of the Lasette will be an
important selling strategy for developing the market for the
Lasette for clinical use. Accordingly, we intend to market the
Lasette for clinical use to hospitals, clinics and doctors'
offices as a means to comply with the OSHA regulations and the
Needlestick Safety Act and offer their patients a more
effective, safer and less painful solution than conventional
procedures.
We also believe the following trends in blood sampling will provide us with
unique opportunities:
o an increasing demand for less painful alternatives for
capillary blood sampling;
o an increasing desire to eliminate cross-contamination from
accidental needle or lancet sticks in hospitals and clinics to
address continued public health concerns and, in U.S. markets,
to comply with bloodborne pathogen standards of OSHA,
including the recently adopted standards of OSHA required by
the Needlestick Safety Act;
o a growing number of diagnosed diabetics seeking better insulin
control; and
o a growing understanding of the need to provide testing methods
for needle-phobic individuals.
PRODUCTS
LASER-BASED MEDICAL DEVICES -- THE LASETTE
GENERAL. Our primary focus is distributing and selling our laser-based medical
device to the clinical and diabetes care markets, namely diabetic consumers,
hospitals, clinics and doctors' offices. The Lasette is a compact, lightweight,
portable crystal laser that utilizes laser light to vaporize a small hole in the
finger for capillary blood sampling. At nine ounces, the Lasette is larger than
a handheld cellular telephone and it fits into a suit-coat pocket or a purse.
The Lasette is a better alternative for capillary blood sampling for many
diabetics because, for many patients, it causes less pain and residual soreness
than the traditional steel lancet. The Lasette may be a better alternative for
children with diabetes, newly diagnosed diabetics and needle-phobic or
needle-adverse individuals.
We previously marketed two laser-based medical devices, the Personal Lasette and
the Professional Lasette. The Personal Lasette was marketed for home use, while
the Professional Lasette was targeted for clinical applications.
24
In the third quarter of 2000, we made a strategic decision to discontinue
marketing the Professional Lasette and completed modifications to the Personal
Lasette so that it could be used for either home or clinical use. The primary
difference between the Lasette used in these home and clinical environments is
that a different disposable lens shield is attached to the product for clinical
applications than that attached for home use. We believe that focusing on a
single product line will reduce direct costs associated with manufacturing the
Lasette and promote brand awareness of the Lasette. We currently market the
Lasette under the "Lasette Plus" name. The suggested retail price of the Lasette
is presently $995.
The Lasette for home use allows diabetics to test their glucose levels at home.
This application requires a disposable lens shield, which is a cassette of
specialized plastic film. The film advances with each use of the device and has
the capacity for 120 applications. We designed the disposable cassette to
provide a one-month supply of film for diabetic patients who test four times per
day. The suggested retail price of the disposable cassette for the Lasette for
home use is presently $15.
The Lasette for clinical use is used to draw blood for various tests, including
testing glucose levels, in the clinical setting. This application requires a
single disposable lens shield that inserts into the device for each use. The
patented disposable lens shield is replaced after each use in a clinical setting
which prevents the patient's blood from contaminating the Lasette unit and
therefore minimizes the risk of cross-contamination. The disposable shield also
uses a specialized plastic film to prevent any vapors from condensing on the
laser lens. The suggested retail price of the disposable shield for the Lasette
for clinical use is presently $0.39.
We have encountered some design and quality problems with the Lasette since we
introduced it on a limited basis in December 1999. For instance, we implemented
design improvements to increase the efficiency of the Lasette beam profile and
to limit the effect extreme temperatures had on the Lasette's functionality. We
believe that we have resolved these problems; however, we cannot provide any
assurances that quality and design problems will not occur in the future with
the Lasette or enhancements to the Lasette.
MARKETS. In the United States, an estimated 17 million people have some form or
variation of diabetes. However, only 11.1 million people in the United States
have been diagnosed with diabetes.
We market the Lasette for clinical use to businesses performing capillary blood
sampling. Capillary blood sampling is performed in virtually all clinical
settings. These include hospitals, dialysis clinics, blood banks, nursing
facilities, home health agencies and physicians' offices. Presently, the most
commonly used device for capillary blood sampling is the stainless steel lancet.
Needlestick injuries and other sharps-related injuries, including accidental
lancet sticks, that result in occupational bloodborne pathogens exposure, such
as human immunodeficiency virus, hepatitis B virus, hepatitis C virus and
others, continue to be an important public health concern. OSHA estimates that
5.6 million workers in the health care industry and related occupations are at
risk of occupational exposure to bloodborne pathogens. According to The Centers
for Disease Control and Prevention, or CDC, in March 2000, it is estimated that
600,000 to 800,000 needlestick injuries and other skin introduced or effected
injuries occur annually among health care workers. The CDC estimates that 62 to
88% of sharps injuries can potentially be prevented by the use of safer medical
devices.
In response to these health concerns, OSHA's bloodborne pathogens standards
require health care facilities to select safer needle devices to reduce or
eliminate accidental needlesticks suffered by health care workers. The
Needlestick Safety Act was enacted in November 2000, requiring OSHA to revise
its existing bloodborne pathogens standards to set forth in greater detail, and
make more specific, OSHA's requirement for health facilities to identify,
evaluate and implement safer medical devices, such as safety engineered sharps
devices or needleless systems, to reduce or eliminate the accidental
needlesticks suffered by health care workers. The Needlestick Safety Act and
OSHA regulations also require health care facilities to, among other things:
o Review their exposure control plans annually to reflect
changes in technology that will help eliminate or reduce
exposure to bloodborne pathogens. Health care facilities must
take into account innovations in medical procedure and
technological developments that reduce the risk of exposure to
accidental needlesticks. That review must include
documentation of the employer's consideration and
implementation of appropriate, commercially available and
effective safer devices;
25
o Solicit input from non-managerial health care workers
regarding the identification, evaluation and selection of
effective engineering controls, including safer medical
devices; and
o Maintain a sharps injury log if the health care facility
employs 11 or more employees and the health care facility is
required to keep records by current recordkeeping standards.
Cross-contamination is also a concern outside of the United States. Because of
this concern, we believe that countries outside the United States represent
important markets for the Lasette. We have consequently focussed increasing
efforts in expanding our distribution channels into foreign markets,
particularly in China and other Asian countries.
We believe that the Lasette for clinical use can substantially reduce the pain
and trauma involved with capillary blood sampling and the risk of inadvertent
cross-contamination for both the clinician and the patient, as well as eliminate
the risk of accidental needlesticks. The needle-free, laser-based design of the
Lasette substantially reduces the risk of cross-contamination and eliminates the
risk of accidental needlesticks because a patient's blood sample is obtained by
the use of a laser pulse rather than by a needle or lancet. We believe this
feature of the Lasette will be an important selling strategy for developing the
market for the Lasette for clinical use.
We will market the Lasette for home use primarily to children with diabetes,
newly diagnosed diabetics, high frequency testing diabetics with sore fingers
and needle-phobic and needle-adverse patients. The needle-phobic and
needle-adverse market is attractive for this model. Presently, a diabetic must
stick himself or herself with a steel lancet or needle to draw a blood sample
for glucose testing. Diabetics' needle phobia prevents them from testing their
glucose levels on the regularly recommended basis. Others dislike the pain of
the steel lancet sticks and the continual residual soreness in their fingertips
from the multiple daily sticks. In medical literature, needle phobics are
estimated to number more than 10% of the population. The Lasette draws blood in
a way that eliminates the effects of needle phobia, minimizes pain and
eliminates the long-term finger soreness.
RAW MATERIALS. We rely on third parties to produce and manufacture the
components for the Lasette. The Erbium:YAG laser rod we use in the Lasette is
made from crystals that are produced and processed from a single supplier in
Russia, New Technologies Engineering Center. To date, we have experienced no
material interruptions in the supply of our laser components. However, our
agreements with our Russian supplier have historically been short-term in nature
expiring after a specified dollar volume of rods are purchased or a specified
period of time has elapsed, which has typically been one year or less. Although
to date we have been able to maintain arrangements for the supply of our rods
from New Technologies, there can be no assurances that we will be able to
continue to do so in the future. Additionally, our source of supply could be
restricted due to events flowing from Russia's political or economic
instability, or due to the supplier's non-performance. Although we believe
alternative crystal suppliers will be available if needed, we believe the prices
of these alternative crystal suppliers would be significantly higher than the
prices we currently pay. The prices of our laser rods from our Russian supplier
may fluctuate each time we enter into a new agreement. Since January 1, 2002,
the price we have negotiated for the purchase of rods from our Russian supplier
has been approximately $107 per rod. Depending upon on our purchase volumes, we
believe that the price of similar rods provided by alternative suppliers would
range between approximately $175 and $380 per rod. Therefore, we believe we
realize a significant cost savings by having our crystals manufactured by New
Technologies. There can be no assurances that will be able to purchase rods from
New Technologies at prices that will result in cost savings to the company in
the future. We obtain the remaining materials used to manufacture the Lasette
from various suppliers. We believe alternate sources of supply will be available
for these materials if needed.
MANUFACTURING. We are currently manufacturing the Lasette at our Albuquerque,
New Mexico facility. We have instituted the record keeping, quality control,
production procedures and other requirements needed to meet the manufacturing
regulatory requirements of the FDA MDQSR, ISO 9001 and EN 46001. We believe our
manufacturing capacity at our existing facility is adequate to meet customer
demands for the Lasette for the foreseeable future.
MARKETING AND DISTRIBUTION. We have advertised the Lasette for home use and for
clinical use in journals placed with clinics and direct marketing to medical
device distributors and other groups and organizations that may have an interest
in the benefits of the Lasette for themselves and for their clients. We also
advertise through direct mailings, tradeshows and print and Internet media. The
Lasette for home use is sold through distributors and directly to customers. The
Lasette for clinical use is distributed through several regional distributors
within and outside the
26
United States. Beginning in November 2001 and continuing until June 2002, our
exclusive distributor in China was C.A. Continentals, Inc. C.A. Continental,
Inc., our former exclusive United States based distributor of the Lasette in
China, accounted for 18% of our product sales in 2001. We terminated our
relationship with C.A. Continental in June 2002 as a result of certain defaults
by C.A. Continental under our agreement. We entered into a new distribution
agreement with California Caltech, Inc. in July 2002, which grants exclusive
distribution rights for the Lasette in China. The initial term of the
distribution agreement with California Caltech is for three years, but can be
extended for additional periods of two years if both parties agree to do so. For
the nine months ending September 30, 2002, California Caltech, Inc., our
exclusive United States based distributor of the Lasette in China since July
2002, has accounted for approximately 19% of our product sales. We believe that
we will accomplish marketing and distribution of this Lasette product line
through a collection of regional, national and international distributors of
diabetic supplies or through manufacturers' representatives. We are currently
holding discussions with regional, national and international distributors and
intend to pursue additional non-exclusive regional and national distribution
relationships, and non-exclusive or exclusive international distribution
relationships.
COMPETITION. We are not aware of any product similar to the Lasette that has
received FDA clearance or the CE Mark certification for commercial marketing in
either the United States or European Union. However, the Lasette directly
competes with traditional stainless lancets and safety lancets used for routine
capillary blood sampling. The Lasette also indirectly competes with non-invasive
and partially invasive products that determine and/or control glucose levels in
diabetic patients.
The Lasette represents a technological alternative to the traditional stainless
steel lancet and the safety lancet for routine capillary blood sampling. We
designed it to reduce the pain, fear and anxiety associated with drawing blood.
The Lasette for clinical use, with its disposable lens, also eliminates the risk
of cross contamination as well as reduces the costs associated with lancet waste
disposal incurred by hospitals, clinics and doctors' offices. In response to
OSHA's bloodborne pathogens standards, as well as the Needlestick Safety Act,
which requires health facilities to employ measures to reduce or eliminate
accidental needlesticks, several companies are marketing or are developing
safety lancets. Safety lancets have retractable blades or nails intended to
reduce accidental needlesticks and, thus, the threat of cross-contamination.
While these devices will not eliminate the pain associated with using a
traditional steel lancet, the safety lancets may reduce the threat of
cross-contamination.
The cost of the Lasette is significantly higher than that of the stainless steel
lancets and safety lancets. The suggested retail price of the Lasette is
presently $995, although this initial cost could be substantially less depending
on the program accepted by the customer, such as the number of units purchased
or the commitment by the customer to purchase disposable shields in the future.
Comparatively, we believe that the price of stainless steel lancets is currently
approximately $0.05 per unit and the price of safety lancets is between $0.18
and $0.52 per unit. Although the investment in the Lasette is significantly
higher than that for either a steel lancet or safety lancet, we believe that
users of the Lasette will be able to recover this investment over time through
cost savings. The cost for each stainless steel lancet or safety lancet has
indirect costs associated with them, such as disposal costs, that are higher
than the Lasette. Users of the Lasette for home use may obtain 120 uses from the
disposable shield before it must be replaced. The user may dispose of the shield
in the regular trash following the 120 uses. While the disposable shield on the
Lasette for clinical use is disposed of after each use, hospitals, clinics and
doctors' offices incur lower costs disposing of the Lasette's disposable shields
as compared to disposing of sharps devices, such as the steel lancets and safety
lancets. By reducing or eliminating the indirect costs associated with the steel
lancets and safety lancets, we believe that the Lasette provides a competitive
alternative.
The Lasette's position in the market is also threatened by corporate research
and development efforts throughout the world that are focusing on the
development of new, advanced non-invasive and partially invasive technologies
for determining and/or controlling glucose levels in diabetic patients. Several
companies have developed or are attempting to develop minimally invasive or
non-invasive glucose testing products. The technologies that appear to be
receiving the most attention are the GlucoWatch(R) by Cygnus, Inc. and the
continuous glucose monitoring system, or CGMS, by MiniMed Inc.
Cygnus' GlucoWatch(R) has been approved by the FDA for detecting trends and
tracking patterns in adult diabetics' glucose levels. Information released by
MiniMed states that the CGMS has been cleared by the FDA for use by physicians
to track trends and patterns in patients' glucose levels as well. The CGMS is
only for use by physicians and is not for determining the amount of insulin to
inject or pump into a patient at a given time. The GlucoWatch(R) and CGMS study
the trends or track the patterns of diabetics who do not have their diabetes
under control. For those particular patients, either the GlucoWatch(R) or the
CGMS is a good supplement to the Lasette product line as
27
each require multiple daily finger sticks to calibrate the devices. Currently,
neither product is a substitute or a replacement for testing the blood from a
traditional finger-stick and meter.
REGULATORY STATUS. Our products are subject to a great deal of regulation. See
"Business - Government Regulation; Product Approval Process" for a description
of government regulations affecting our products. The following details the
regulatory clearances we have obtained for the Personal Lasette and the
Professional Lasette since mid-1997:
o FDA clearance for use of the Professional Lasette for testing
glucose and hematocrit in healthy adult patients in a clinical
setting (application submitted December 1996, clearance
received August 1997);
o FDA clearance for use of the Professional Lasette for testing
glucose and hematocrit in diabetic adult patients in a
clinical setting (application submitted July 1996, clearance
received October 1997);
o CE Mark testing complete for Professional Lasette (May 1998);
o FDA clearance for use of the Professional Lasette for testing
glucose and hematocrit in all juvenile patients in a clinical
setting (application submitted and clearance received June
1998);
o ISO 9001/EN 46001/Medical Device Directive Certification
(September 1998; recertified in September 1999 and September
2000);
o FDA clearance for use of all glucose meters with the
Professional Lasette (application submitted March 1998,
clearance received September 1998);
o FDA Variance for Professional Lasette design (application
submitted September 1998, clearance received October 1998);
o FDA clearance for home use of the Professional Lasette for
glucose monitoring (application submitted May 1998, clearance
received December 1998);
o FDA approval of 510(k) amendment to include Personal Lasette
safety and efficacy (application submitted December 1998,
approval received January 1999);
o FDA clearance of the Lasette for all screening blood tests in
a clinical setting (application submitted October 1998,
clearance received January 1999);
o CE Mark certification for the Professional Lasette (March
1999);
o Registration Certificate of the Lasette for medical devices
granted by China (May 1999);
o CE Mark certification for the Personal Lasette (August 2000);
and
o Medical device license granted in Canada for the Personal
Lasette (August 2000).
The Lasette has received 510(k) clearance from the FDA for drawing capillary
blood samples. In addition, the FDA has cleared the Lasette for capillary blood
sampling for all clinical screening tests. The Lasette has also received the CE
Mark designation. The Lasette is the only alternative to the steel lancet or
needle that has been approved by the FDA that allows diabetics to sample their
blood for glucose testing so they can determine their subsequent insulin
injections. Clearance of the Lasette by the FDA allows us to market the Lasette
in the United States. The CE Mark designation of the Lasette also permits us to
market the Lasette in the European Union. To date, we have not had any recalls
of our products by the FDA or any other comparable agency.
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REIMBURSEMENT. In the United States, as well as in foreign countries,
government-funded or private insurance programs, commonly known as third-party
payors, pay a significant portion of the cost of a patient's medical expenses. A
uniform policy of reimbursement does not exist among all these payors.
Therefore, reimbursement can be quite different from payor to payor. We believe
that reimbursement is an important factor in the success of medical devices.
Consequently, we plan to continue to seek reimbursement for the Lasette.
Some health insurance companies have covered the consumer's costs of the Lasette
if a physician provides documentation indicating a medical necessity. However,
currently the cost of the Lasette is not reimbursed by most private insurance
programs. We plan to continue our efforts to seek consumer reimbursement for the
Lasette by private payors. We intend to conduct clinical studies to determine
the short-term and long term clinical utility of using the Lasette. However,
because of limited cash resources, we cannot be certain as to when, if ever, we
will be able to implement these clinical studies. If and when we are able to
obtain these clinical trials, we will seek to use their results to demonstrate
the economic benefits of the Lasette to third-party payors, which we believe
will support our efforts to secure reimbursement.
In October 2001, we were notified by the Center for Medicare and Medicaid
Services, or CMS, that a Healthcare Common Procedure Coding System, or HCPCS,
code had been assigned to our Lasette. In January 2002, CMS published the
allowable for our Lasette that was associated with the newly issued HCPCS code.
Generally, Medicare reimburses 80% of the published allowable. In March 2002, we
were notified by CMS that they have not established a medical criteria for our
Lasette and as a result CMS will only reimburse approximately $17 for the price
of the Lasette, a minimal portion of its cost. Whether we can obtain a higher
reimbursement rate for the Lasette will depend on the establishment of a
favorable medical policy for the Lasette, which is largely outside our control.
We are currently working with CMS to provide input into CMS's establishment of
an appropriate medical policy so that a higher reimbursement rate may be set.
CMS is now conducting a review of the medical reimbursement of the Lasette.
Therefore, we believe that progress is taking place in our continuing efforts to
achieve a timely resolution of this matter. However, we can provide no assurance
as to whether a medical policy favorable to us will be established by CMS, or
when, if ever, an adequate reimbursement rate for the Lasette will be set or the
eventual amount of reimbursement.
LASER-BASED MEDICAL DEVICES -- THE ULTRALIGHT LASER
DESCRIPTION. The UltraLight Laser is a proprietary medical laser for aesthetic
or skin rejuvenation applications commonly known as laser skin photo
rejuvenation. This product takes advantage of a small compact laser cavity
designed to produce an affordable aesthetic medical laser that can be used by
dermatologists, plastic surgeons, spas and physicians to rejuvenate and
revitalize the skin. The UltraLight Laser provides laser skin photo rejuvenation
with an Ebrium:YAG laser, which emits a long pulse 2.94 microns wavelength. The
characteristic shallow penetration of the Ebrium:YAG energy into the skin also
allows precise removal of tissue without heating adjacent tissue and also
permits the treatment of delicate skin on and around the neck, eyes and hands,
as well as darker pigmented skin. The two most common lasers used in skin
rejuvenation treatment are ebrium:YAG lasers, such as used with the UltraLight
Laser, and carbon dioxide lasers. We believe that the Ebrium:YAG laser used in
the UltraLight will generally offer minimal pain, easier post operative care and
quicker recovery time compared to carbon dioxide lasers. The UltraLight Laser is
being developed under an oral agreement with Sandstone Medical Technologies,
LLC, a private company located in Homewood, Alabama. See "Business -- Research
and Development" for additional discussion concerning our oral agreement with
Sandstone Medical Technologies. We shipped the first 10 evaluation units of the
UltraLight Laser in December 2002. The evaluation units were furnished for
marketing research and demonstration purposes. We expect to begin commercial
shipments of the UltraLight Laser in the first quarter of 2003 after the
manufacturing clearances have been obtained. We expect that the suggested retail
price of the UltraLight Laser to end users will be approximately $22,000.
MARKET. Our principal target markets will include dermatologists, plastic
surgeons, spas and physicians. According to the American Academy of Cosmetic
Surgery, over 300,000 people had some type of aesthetic laser procedure in the
year 2000. We believe that demand for this procedure will continue to expand as
"baby boomers" age and desire to retain a more youthful appearance.
RAW MATERIALS AND MANUFACTURING. Under our oral agreement with Sandstone
Medical, we were granted a right of first refusal to be the OEM manufacturer of
the UltraLight Laser. We will manufacture the UltraLight Laser at our
Albuquerque, New Mexico facility. We believe our manufacturing capacity at our
existing facility is adequate to meet customer demands for the UltraLight Laser
for the foreseeable future. We will rely on third parties to produce
29
and manufacture the components for the UltraLight Laser. The Erbium:YAG laser
rod we use in the UltraLight Laser is the same as used in the Lasette. As with
the Lasette, we expect to continue to purchase the supply of our rods for the
UltraLight Laser from New Technologies Engineering Center. We obtain the
remaining materials used to manufacture the UltraLight Laser from various
suppliers. We believe alternate sources of supply will be available for these
remaining materials if needed.
MARKETING AND DISTRIBUTION. Under our oral agreement with Sandstone Medical,
Sandstone Medical will exclusively market and sell the product in North America,
while we will have rights to market and sell the product in other international
markets. We plan to rely on a network of distributors for sales of the
UltraLight Laser in international markets; however, to date we have not entered
into distribution relationships covering territories outside North America.
Although we intend to pursue marketing and distribution relationships for the
UltraLight Laser, we cannot make any assurances that any discussions or
negotiations with third parties regarding the marketing or distribution of our
products will be successful.
COMPETITION. The market for aesthetic elective products and treatments is highly
competitive and technological developments are expected to continue at a rapid
pace. In general, we believe that we compete on the basis of price, product
features and product quality. There are a variety of equipment and treatment
techniques used for skin revitalization. We believe that our direct competitors
consist of those products and treatments that provide laser-based skin photo
rejuvenation treatments, particularly those products that use the ebrium:YAG
laser. The UltraLight Laser will also indirectly compete with manufacturers and
providers of non-invasive, partially invasive and other invasive skin
rejuvenation products and treatments, such as chemical peels, dermabrasion,
microdermabrasion, drugs, lotions and creams.
REGULATORY STATUS. We received FDA clearance of the UltraLight Laser in
September 2002. We are in the process of obtaining certain domestic and
international manufacturing clearances for this product, such as Underwriters
Laboratories, Canadian Standards Association and CE certifications. We expect to
obtain all necessary manufacturing clearances for the UltraLight Laser before
the end of the first quarter of 2003.
SCIENTIFIC RESEARCH INSTRUMENTS -- THE CELL ROBOTICS WORKSTATION
DESCRIPTION. In 1996, we introduced the computer-controlled Cell Robotics
Workstation for optical trapping, micromanipulation and microsurgery. This
workstation is based on our core LaserTweezers, LaserScissors, CellSelector and
SmartStage technologies. The LaserTweezers application of the Cell Robotics
Workstation is based upon a non-exclusive license from AT&T, which was
transferred by AT&T to Lucent Technologies, Inc. Computer control provides
powerful, user-friendly features such as interactive software with mouse or
keyboard control, a unique motorized stage and a motorized focus drive providing
motion in three directions. The Cell Robotics Workstation integrates our
research instruments into a complete computer-controlled optical trapping and
ablation workstation.
We have made, and are continuing to make, enhancements to the Cell Robotics
Workstation so that it includes a sophisticated imaging and quantitative
measurement capability. In addition, we have developed a more specialized
diagnostics workstation known as the LS300 Pro Workstation, which is a
modification of the Cell Robotics Workstation. The LS300 Pro Workstation
contains a more powerful LaserScissors and is marketed primarily to pathologists
and researchers. The enhancements to the LaserScissors applications will allow
pathologists and researchers to automatically cut out cells of interest from a
biopsy and retrieve those cells for DNA and RNA analysis. The LS300 Pro
Workstation is the first configuration of the Cell Robotics Workstation to be a
diagnostics instrument instead of being simply limited to a research instrument.
APPLICATIONS OF THE SCIENTIFIC RESEARCH INSTRUMENTS. The Cell Robotics
Workstation allows scientists to manipulate objects in micro-space, upgrading
the microscope to an interactive micro-laboratory. The scientific research
instruments enhance the usefulness and importance of the conventional laboratory
microscope as a tool in medical, biological and genetic applications in the life
sciences. Scientists can use the technology for cell separation, cell-to-cell
interaction, micro-dissection and intercellular manipulation of living cells.
Third parties currently use the Cell Robotics Workstation for cancer,
immunology, neurobiology, assisted reproductive techniques and genome research.
With respect to genome research, the Cell Robotics Workstation can be used by
third parties to assist in the human genome project. Using the genome as a
blueprint, the study of proteins helps explain what can cause or cure
30
diseases. The study of proteins, called functional genomics or proteomics, is a
new emphasis area for biology. The Cell Robotics Workstation, through its
LaserTweezers(R) and LaserScissors, allows new ways to study the function and
structure of proteins. Understanding proteins is a key to curing such
neurological diseases as Multiple Sclerosis, Parkinson's and Alzheimer's.
The Cell Robotics Workstation also provides increased efficiency in the
production of transgenic animals and laboratory. Transgenic animals are animals
that have human genes inserted into them. For example, transgenic chickens may
produce a particular protein in the whites of their eggs. This protein can then
be harvested from the egg as a constituent of a drug to treat disease. The Cell
Robotics Workstation can be used in the production process to isolate the nuclei
and make it possible to create a transgenic chicken. Each transgenic chicken has
the potential to produce thousands of eggs that are harvested to produce the
specific drug. In the laboratory, scientists can supervise technicians using the
Cell Robotics Workstation rather than being required to use their personal
expertise to perform detailed operations. For example, technicians can isolate
stem cells from such tissues as fat obtained by liposuction for the growing of
skin, bone or cartilage.
MARKET. The principal market for the Cell Robotics Workstation is the scientific
research market, consisting of colleges, universities, research laboratories,
biotechnology and pharmaceutical companies and commercial laboratories
conducting biological research. Our present customers of the Cell Robotics
Workstation include colleges, universities, research laboratories and similar
institutions. These customers accounted for substantially all of our sales of
the Cell Robotics Workstation and 55%, 68% and 61% of our total product sales in
the nine months ending September 30, 2002 and the years ending December 31, 2001
and 2000, respectively. We intend to identify scientists that have specific
research applications particularly well suited to the company's scientific
research instrument.
RAW MATERIALS AND MANUFACTURING. To minimize capital outlay, we outsource parts
of the Cell Robotics Workstation to machine shops and circuit board companies.
We complete final assembling and testing at our Albuquerque, New Mexico,
facility to ensure the quality of the final product. We plan to continue this
approach for the foreseeable future. If needed, we believe alternate sources of
supply will be available for these parts.
MARKETING AND DISTRIBUTION. While we intend to focus on the distribution and
sale of our laser-based medical devices, we will continue to promote and market
the scientific research instruments through direct sales, dealers,
representatives and distribution arrangements. We currently have an agreement
with Meiwa Shoji Company Ltd. granting exclusive distribution rights for the
Cell Robotics Workstation in Japan. Meiwa Shoji accounted for 33% of our product
sales in 2001 and 17% of our product sales for the nine month period ended
September 30, 2002. Since January 2002, Meiwa Shoji has no obligation to further
promote or purchase the Cell Robotics Workstation under the agreement. Its
appointment as distributor can be terminated by either party on 90 days' notice.
We have also expanded domestic and international non-exclusive distribution
channels for the Cell Robotics Workstation to include distributors in 17
countries.
COMPETITION. Third party competitors of the Cell Robotics Workstation include
P.A.L.M. and S&L Microtest, both German companies, Sigma Koki, a Japanese
company, and Arcturus, a United States company. P.A.L.M., S&L Microtest and
Sigma Koki make multi-trap and custom trapping instruments that compete with the
Cell Robotics Workstation. Arcturus offers a laser micro-dissection system.
REGULATORY STATUS. We received the CE Mark for the Cell Robotics Workstation and
all of its modules in September 1997. Although the Cell Robotics Workstation is
subject to FDA safety regulations, this product line does not currently require
other regulatory clearances, including clearance from the FDA.
CONTINUING INTEREST IN THE IVF WORKSTATION
In May 2000, we sold the IVF Workstation product line to Hamilton Thorne
Research, a major producer and marketer of sperm analysis equipment worldwide,
for $100,000 in cash and 12% royalty payments on future net sales. We do not
expect these royalty payments will have a material effect on our cash flow. We
decided to sell the IVF Workstation and associated technology to further focus
our efforts on the development and sale of the Lasette.
The IVF Workstation is a computer-controlled multi-functional workstation that
combines, for the first time, a technological solution to both the functional
and informational requirements of clinicians working in the in vitro
fertilization environment. Utilizing a microscope, computer-controlled motorized
stage, video camera, sophisticated
31
laser-based technology and data storage and retrieval systems, the IVF
Workstation permits standardized evaluation, measurement and diagnosis of eggs
and embryos, sperm injection and laser-assisted embryo hatching in one
integrated system. With its computer hardware and software, the IVF Workstation
also permits the detailed cataloguing and documentation of each in vitro
fertilization procedure and the organization and retrieval of data and other
information.
In vitro fertilization is a rapidly-growing area of human fertility treatment.
However, success rates with current procedures vary significantly from clinic to
clinic. The IVF Workstation is designed to improve success rates for clinics and
in vitro fertilization patients.
COMPETITION
Specialized laser-based medical device companies, pharmaceutical and medical
diagnostic equipment companies, colleges, universities, governmental agencies
and other public and private research institutions will continue to conduct
research and protect technologies that they may develop or have developed, some
of which will be directly competitive to our products. The principal factor
affecting our competitive position is the suitability of our instruments for,
and their performance in, a particular application. For the UltraLight Laser, we
believe that we will also compete on the basis of price, product features and
product quality. We face potential competition from a number of established
domestic and international companies, many of which have substantially greater
engineering, manufacturing, marketing and financial capabilities. Our ability to
compete successfully in existing and future markets will depend on elements both
within and outside of our control.
INTELLECTUAL PROPERTY
Our success will depend, in part, upon our ability to develop superior products
that we can market at competitive prices. Our ability to do this will depend, in
part, on our ability to protect and defend our intellectual property rights and
the competitive advantages those rights offer. We rely primarily on patent,
trade secret, copyright and trademark laws, confidentiality procedures and other
intellectual property protection methods to protect our proprietary technology.
As of the date of this prospectus, we have been issued three patents and have
applied for additional patent protection for our laser-based medical devices.
Additionally, we have been issued two patents for our scientific research
instrument. Our products have only limited patent protection. It is our policy
to require our employees to execute confidentiality agreements upon the
commencement of such relationships.
LASETTE. The Lasette was originally developed using the multifaceted crystal
resonator, or MCR, patent acquired from Tecnal Products, a subsidiary of
Lovelace Scientific Resources, Inc., in January 1996. The patent expires in
March 2014. The MCR patent was originally developed under a license agreement
with New Technology Engineering Center of Russia. However, new developments in
crystal laser coating technologies have decreased the value of the MCR patent
and related patent applications and licenses.
We have since advanced the Lasette's laser design and have sought, or are
preparing to seek, continuations of existing patents and/or new patents
protecting those designs. Two issued United States patents cover certain
technological foundations of the current Lasette product line. These patents
were issued in September 1996 and June 1999 and include claims regarding
mechanisms to create and control laser energy distribution profiles that are
essential for reducing pain in laser lancing devices. The patents expire in
August 2014. In November 1999, we received a United States patent for the
disposable finger shield used with the Lasette for clinical use. This patent
expires in April 2017. We also have received a United States patent covering the
disposable finger shield mechanism used in the Lasette for home use. That patent
expires in December 2018. Other mechanisms for reducing the size and cost and
improving the reproducibility and painlessness of laser lancing devices are
regarded as trade secrets, or are the subject of planned patent applications.
Finally, we have registered the mark Lasette(R) with the United States Patent
and Trademark Office.
In 1996, we became aware that Mr. Tankovich, a former employee of the Russian
Academy of Science now residing in San Diego, California, holds the United
States patent relating to the use of a laser for blood sample collection. In
this prospectus, we sometimes refer to Mr. Tankovich's patent as the "Tankovich
Patent." The Tankovich Patent was issued on November 24, 1992. Becton Dickinson
and Company, a medical technology company, obtained a license of the Tankovich
Patent from Mr. Tankovich in December 1995. The Lasette contains technological
foundations that are similar to the claims made by the Tankovich Patent.
32
In January 2002, we signed an exclusive license agreement with Becton Dickinson
regarding the Tankovich Patent. The license is valid until the patent expires,
which we estimate to be in 2012 based upon the patent's original filing date. We
are required to pay Becton Dickinson a royalty of 2.5% on all sales of the
Lasette and its related accessories. Under the license, the payment of royalties
for sales during the first two years of the agreement is deferred until November
2004. Royalties earned during the third year of the agreement through the
remainder of the term will be payable on a quarterly basis. Beginning in
November 2004, we must also pay Becton Dickinson a minimum annual royalty, less
any earned royalties that have been accrued and paid or paid to Becton Dickinson
during the previous 12 months. The aggregate minimum royalty through November
2004 is $10,000 (less earned royalties), which is payable in November 2004.
Thereafter, the minimum royalty is $5,000 (less earned royalties) payable in
November of each year. If we do not pay the minimum annual royalty when due,
Becton Dickinson may convert the agreement into a non-exclusive license. Under
the agreement, until November 2006 Becton Dickinson has a right of first refusal
on any offer we receive from a third party to exclusively market and sell the
Lasette and its related accessories. Becton Dickinson has also given us an
exclusive right and option to enter into license agreements with Becton
Dickinson relating to its current laser lancet patent portfolio and future laser
technology. Our option expires in November 2004. Additionally, as part of the
license we issued warrants to Becton Dickinson to purchase 225,000 shares of our
common stock. These warrants have an exercise price of $0.37 per share and
expire in November 2006. In connection with the license, Becton Dickinson
released us from any alleged infringement under the Tankovich Patent.
In October 1997, Transmedica (formerly Venisect) commenced a patent infringement
action against us in which it claimed the Lasette infringed the United States
patent underlying Transmedica's skin perforator. A federal court dismissed the
suit on procedural grounds. Transmedica appealed the federal court ruling, but
subsequently withdrew its appeal. Transmedica was recently purchased by Norwood
Abbey Ltd. Transmedica did not begin any further proceedings against us prior to
being acquired by Norwood Abbey. As of the date of this prospectus, Norwood
Abbey has also not begun any further proceedings against us.
ULTRALIGHT LASER. The UltraLight Laser uses our Ebrium:YAG core laser
technology. We rely primarily on trade secret laws and confidentiality
procedures and other intellectual property protection methods to protect our
proprietary technology relating to the UltraLight Laser.
CELL ROBOTICS WORKSTATION. Our Cell Robotics Workstation is based on our
LaserTweezers, LaserScissors, CellSelector and SmartStage technologies. The
LaserTweezers application of our Cell Robotics Workstation is based upon a
non-exclusive patent license from AT&T, which was transferred by AT&T to Lucent
Technologies, Inc. Our license will expire in January 2007, the end of the term
of the licensed patent. We were in default under this license agreement, and
renegotiated its terms in 1998. Under the renegotiated agreement, we paid Lucent
$100,000 in lieu of all sums due and owing for prior years. Additionally, we
agreed to increase the royalty from five to seven percent of the value of each
product sold utilizing the patent. Finally, the minimum annual royalties under
the license have been reduced to $35,000 per year for the term of the license.
Based on these changes, we must pay Lucent a royalty of seven percent per year
with a minimum annual payment of $35,000. We own two issued United States
patents that cover certain technological foundations of the Cell Robotics
Workstation. These patents were issued in November 1994 and December 1994 and
include claims regarding the flexure structure for 3-D microscope stage and the
manipulation chamber for LazerTweezers. The patents expire in July 2012. We have
also registered the LaserTweezers(R) mark with the United States Patent and
Trademark Office.
RESEARCH AND DEVELOPMENT
To succeed, we must continually enhance existing products and develop new
products incorporating the latest improvements in laser technology. Accordingly,
we are committed to investing resources in research and development activities.
During the nine-month period ended September 30, 2002 and the years ended
December 31, 2001 and 2000, we spent $339,106, $610,354 and $816,659,
respectively, on internal research and development programs. As of December 31,
2002, four of our scientists and engineers were engaged in research and
development activities. We channeled the majority of the proceeds from equity
financing, short-term borrowings and the sale of securities in 1995 through 2000
to fund our internal research and development activities. We do not have
research arrangements with any outside research and development firms. We
received a Small Business Innovative Grant from the National Cancer Institute in
April 1997. Originally, the grant awarded funds for two years of development of
a proprietary laser instrument for semi-automated single cell sorting. The grant
was recently modified to validate
33
capabilities of applying laser energy in connection with a polymerase chain
reaction or PCR. Additionally, the period during which funds could be expended
was extended until September 30, 2001. The total grant award that was available
to and expended by us was approximately $635,000, substantially all of which we
have received.
We plan to introduce a modified version of the Lasette designed specifically for
neonatal/pediatric heelstick applications. The new "Infant Lasette" will be
based upon the current Lasette model for clinical use, but specifically designed
to draw capillary blood from the heels of infants, replacing the current and
often painful use of costly lancets and scalpels. The "Infant Lasette" is
expected to be designed to easily accommodate an infant's heel and a specially
designed single-use disposable lens shield. We expect the Lasette disposables
will be competitively priced with current disposable heelstick devices. Each
year, there are approximately 130 million births worldwide. In most developed
countries, newborn infants are subjected to routine capillary blood tests with
samples drawn via "heelstick" with safety needles and scalpels. According to the
CDC, in the United States there are over 4 million births annually, and each
infant is mandated to have a routine battery of blood chemistries performed at
birth. In the U.S., pre-mature infants account for approximately 11% of all
births while low birthweight babies are an additional 7.8% of births. Pre-mature
births can be subjected to multiple heelsticks per day. The current national
average length of stay is 15 days for neo-natal infants in intensive care. These
repeated heelsticks may be harmful to the premature infants' heels causing, in
some cases, the use of an infant's fingers to obtain the blood sample. In our
opinion, FDA approval of the new "Infant Lasette" should require a clinical
trial of less than 100 infants and the filling of a 510K. This opinion is based
on our review of various models which indicate that a sample of less than 100
infants will be adequate to prove, statistically, that the blood chemistry of an
infant is not changed as a result of drawing the blood with a laser as opposed
to the traditional needle or steel lancet.
On September 30, 2002, we commenced our clinical trials of the Infant Lasette.
The commencement of the clinical trials was delayed approximately three months
because we were required to change the contractor performing the clinical trials
due to the contractors' non-performance. After completing the requisite tests in
the clinical trials, we will submit the Infant Lasette for FDA clearance. We
anticipate that we will be able to make our submission to the FDA in March 2003.
The FDA submission for the Infant Lasette will be similar to the submission that
was approved by the FDA for the original Lasette. We have written the submission
and we are only waiting for the clinical trials results to confirm that there is
no change to the blood chemistry of an infant because of the laser apparatus of
the Infant Lasette. We anticipate that the FDA clearance will take at least
three months following our FDA submission. However, FDA clearance will be
delayed if the FDA requests additional information based on the initial or
subsequent submissions. Although there can be no assurances, we expect that we
will be ready to sell the Infant Lasette late in the second quarter or early in
the third quarter of 2003. We also expect to obtain all necessary manufacturing
clearances for the UltraLight Laser before the end of the first quarter of 2003.
We have an oral agreement with Sandstone Medical Technologies, LLC, a private
company located in Homewood, Alabama, to use our core laser technology to
develop a proprietary medical laser for aesthetic or skin rejuvenation
applications, which we call the UltraLight Laser. Under the agreement, the costs
associated with the development of the technology and the FDA submittals and
other regulatory requirements will be paid by Sandstone Medical. Sandstone
Medical will exclusively market and sell the product in North America, while we
will have rights to manufacture and sell the product in other international
markets. We were also granted a right of first refusal to be the OEM
manufacturer of the product. The agreement cannot be terminated without default.
We received FDA clearance of the UltraLight Laser in September 2002. We are in
the process of obtaining certain domestic and international manufacturing
clearances for this product, such as Underwriters Laboratories, Canadian
Standards Association and CE certifications. We shipped the first 10 evaluation
units of the UltraLight Laser in December 2002. The evaluation units were
furnished for marketing research and demonstration purposes. We expect to begin
commercial shipments of the UltraLight Laser in the first quarter of 2003 after
the manufacturing clearances have been obtained.
GOVERNMENT REGULATION; PRODUCT APPROVAL PROCESS
United States government agencies and comparable agencies in countries outside
the United States regulate the testing, manufacture, labeling, distribution,
marketing and advertising of our products and our ongoing research and
development activities. We have successfully obtained many of the regulatory
clearances necessary to market and sell our products in our current markets. We
may require additional clearances if we enter new markets, improve existing
products or develop new products, such as the Infant Lasette and the UltraLight
Laser. We are also in the process of obtaining the requisite regulatory
clearances to market and sell the Infant Lasette and the UltraLight Laser.
34
For research applications, our products are subject only to FDA safety
regulations. However, the European Community requires that research instruments
receive the CE Mark before they can be exported to Europe. We received the CE
Mark for the Cell Robotics Workstation and all of its modules in September 1997.
The Lasette has received 510(k) clearance from the FDA for drawing capillary
blood samples. In addition, the FDA has cleared the Lasette for capillary blood
sampling for all clinical screening tests. The Lasette has also received the CE
Mark designation. While the Lasette has received all necessary FDA clearances,
has received the European Community's CE Mark and currently meets ISO and EN
requirements, its manufacture and marketing will be subject to ongoing
regulation. We are subject to inspection and market surveillance by the FDA and
the European Community for compliance with good manufacturing practices and
other requirements, which include testing, design, quality control and
documentation procedures. We must register and seek FDA approval for each
manufacturing establishment. These establishments must be certified to meet ISO
9001 and EN 46001 requirements. We must maintain our current FDA clearances by
periodic audits. In order to manufacture and sell the Lasette under the CE Mark,
we must also pass annual ISO maintenance audits, as well as comprehensive ISO
audits every three years. Our next ISO audit is scheduled to be conducted in
January 2003. There can be no assurance that we will obtain, maintain or receive
additional necessary clearances.
In the United States, federal and state statutes regulate the testing,
manufacture, safety and efficacy, labeling, record keeping, approval,
advertising and promotion of our products. Product development and approval
within this regulatory framework may take many months and may involve the
expenditure of substantial resources. Currently, we meet these requirements.
The FDA has separate review procedures for medical devices before such products
may be commercially marketed in the United States. There are two basic review
procedures for medical devices in the United States. Certain products may
qualify for a Section 510(k) procedure, under which the manufacturer gives the
FDA a Pre-Market Notification, or 510(k) Notification, of the manufacturer's
intention to commence marketing of the product at least 90 days before the
product will be introduced for clinical use. The manufacturer must obtain
written clearance from the FDA before it can commence marketing the product.
Among other requirements, the manufacturer must establish in the 510(k)
Notification that the product to be marketed is "substantially equivalent" to
another legally-marketed, previously existing product. If a device does not
qualify for the 510(k) Notification procedure, the manufacturer must file a
Pre-Market Approval Application. The Pre-Market Approval Application requires
more extensive pre-filing testing than the 510(k) Notification procedure and
involves a significantly longer FDA review process. See "Business -- Products --
Laser-Based Medical Devices -- The Lasette -- Regulatory Status" for a listing
of the regulatory clearances we have obtained for the Personal Lasette and
Professional Lasette since mid-1997.
We can market the Lasette for essentially all applications requiring capillary
blood drawing for blood screening and/or sampling in the United States. For
marketing outside of the United States, we will be subject to foreign regulatory
requirements governing clinical trials and marketing approval for the products.
Requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. Although we have
employees who are experienced with the regulatory procedures of the European
Community and other jurisdictions, we do not currently have any facilities or
employees outside of the United States. In some cases, we will rely on our
strategic partners in foreign markets to satisfy the regulatory requirements
imposed by those jurisdictions.
We are in the process of developing two new products, the UltraLight Laser and
the Infant Lasette. Both products require FDA clearance. Further, we will be
required to obtain certain regulatory clearances for the UltraLight Laser,
including safety testing for electrical emissions and power regulation testing
as required by Underwriters Laboratories, Canadian Standards Association and
various regulatory body notifications, such as with ISO and in connection with
the European Community's CE certification. We received FDA clearance for the
UltraLight Laser in September 2002. We are in the process of obtaining the
requisite domestic and international manufacturing clearances for this product.
On September 30, 2002, we commenced our clinical trials of the Infant Lasette.
After completing the requisite tests in the clinical trials, we will submit the
Infant Lasette for FDA clearance. We anticipate that we will be able to make our
submission to the FDA in March 2003. We further anticipate that the FDA
clearance will take at least three months following this submission. Although
there can be no assurances, we expect that we will be ready to sell the Infant
Lasette late in the second quarter or early in the third quarter of 2003. We
also expect to obtain all necessary manufacturing clearances for the UltraLight
Laser before the end of the first quarter of 2003. There can be no assurances
that we will obtain all necessary clearances in a timely manner, if at all.
35
Our failure to obtain the necessary regulatory clearances will prevent us from
marketing and selling the UltraLight Laser and the Infant Lasette.
EMPLOYEES
As of December 31, 2002, we had 25 permanent full-time employees and 2 part-time
employees. Of these employees, 4 were principally engaged in product
development, 11 in manufacturing, including quality control, 9 in marketing and
sales and the balance in administration and finance. From time to time, we may
also hire temporary employees to assist during busy periods. Our employees are
not represented by a labor organization or covered by a collective bargaining
agreement. We have not experienced work stoppages and we believe that our
relationship with our employees is good.
FACILITIES
Our facilities are located in approximately 12,000 square feet in Albuquerque,
New Mexico. This facility contains our executive and administrative offices, as
well as facilities for our assembly, production, testing, storage and inventory
functions. Our monthly rent payments are $8,997.90, subject to an annual
increase of approximately three percent. Our lease terminates in November 2007.
We have an option to terminate the lease as of November 30, 2005 if we pay the
landlord a cancellation fee of $18,500 plus accrued rent through termination. We
believe that this facility is adequate for our present and near-term
requirements. Our equipment, fixtures and other assets located within the
facility are insured against loss.
LEGAL PROCEEDINGS
We are currently not subject to any material legal proceedings.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The name, age and position of our directors, executive officers and key
employees are as follows:
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Gary Oppedahl 43 President, Chief Executive Officer and Director
Paul Johnson 39 Chief Financial Officer, Chief Operating Officer, Secretary and Director
Richard Zigweid 54 Vice President of Manufacturing
Steve Aiken 47 Vice President of Research and Development
Dr. Larry Keenan 55 Product Manager, Cell Robotics Workstation
Oton Tisch 72 Chairman of the Board of Directors
Eutimio Sena 54 Vice Chairman of the Board of Directors
Dr. David Mueller 63 Director
Dr. Toby Simon 58 Director
</Table>
GARY OPPEDAHL was appointed as our President and Chief Executive Officer on July
15, 2002. He was also appointed as an interim director for the company on July
15, 2002. From 1999 to July 2002, he served as Senior Vice President of Business
Development, Product Realization and Marketing at Novalux, Inc., an innovator in
the design and manufacturer of optoelectronics, specifically extended cavity
surface emitting lasers, for use in long-haul fiber optic telecommunication
networks, in Silicon Valley, California. From 1996 to 1999, Mr. Oppedahl was
Vice President of Operations for MODE, Inc., a manufacturer of vertical cavity
surface emitting lasers for commercial use in optical data communication
applications. He has a degree in Electrical Engineering from Chapman College.
PAUL JOHNSON was appointed as our Chief Financial Officer in July 2000,
Secretary in November 2000 and Chief Operating Officer in June 2001. He was also
appointed as an interim director of the company in March 2002. From September
1994 to July 2000, he served as Assistant Controller and then the Controller for
Helen of Troy Limited, a $300 million manufacturer and distributor of personal
care products. From November 1987 to September 1994, he was employed by KPMG
Peat Marwick LLP, now known as KPMG LLP. He has a degree in accounting and a
masters degree in accountancy from Brigham Young University.
36
RICHARD ZIGWEID was appointed as our Vice President of Manufacturing in August
1996. Mr. Zigweid was Manufacturing Manager at Olympus America from May 1994 to
August 1996. He served as engineering manager at Bausch & Lomb from 1991 to 1994
and as engineering manager and manufacturing engineer at Baxter Healthcare from
1983 to 1991. He received his B.S. degree in Mechanical Engineering from the
University of Wyoming.
STEVE AIKEN was appointed as our Vice President of Research and Development in
October 2000. Mr. Aiken joined the company as a laser engineer in July 2000. Mr.
Aiken worked as an engineer from March 1995 to June 2000 for Decade Optical
Systems and from May 1991 to February 1995 for the Core Group.
DR. LARRY KEENAN was appointed as our Sales Representative in January 1993 and
has been Product Manager for the Cell Robotics Workstation since July 1997. Dr.
Keenan was the Regional Sales Manager of BioRad for the confocal microscope
product line of BioRad from 1991 through 1992. He received his Ph.D. in
Biological Sciences at the University of California at Irvine and was an
Associate Research Scientist in Neurobiology at Yale University.
OTON TISCH was appointed to our board of directors as an interim director in
February 2000 and was elected as a director in May 2000. In August 2002, Mr.
Tisch was appointed as Chairman of the Board of Directors. Mr. Tisch is an
international businessman and is the President, Chief Executive Officer and sole
owner of Obras Electromecanicas TKV, located in Caracas, Venezuela, and its
subsidiary located in Zurich, Switzerland. These enterprises were incorporated
in 1980 and today generate approximately $10 million of aggregate annual
revenues. Mr. Tisch's businesses specialize in equipment procurement and
building and financing high voltage turn-key substations up to 400 kV, including
the electronic and/or digital automatic control.
EUTIMIO SENA was appointed to our board of directors on August 29, 2002 and
serves as Vice Chairman of the Board of Directors. Mr. Sena has over 20 years
management experience, particularly in emerging technologies and market
launches. From 1992 to present, he has served as the Vice President/General
Manager of OCM, Inc., launching OCM's mergers, acquisitions and restructures.
Mr. Sena also served as Division Vice President/Multimedia integrated Systems,
Division Vice President/Strategic Accounts/Government, and Corporate
Director/Strategic Business Planning with Fujitsu America, Inc. from 1984 to
1992. Mr. Sena holds a BS in Computer Information Systems from the University of
Colorado and a BA/MBA in Management Information Systems from the University of
New Mexico.
DR. DAVID MUELLER was appointed to the Board of Directors on September 27, 2002.
Dr. Mueller has a strong technical and medical background and has over 20 years
of experience in technology transfer and venture capital and leading and
follow-up financing of venture-backed companies. During his career, Dr. Mueller
managed product development groups for biomedical companies, including
Medtronic, Inc., Beckman Instruments, Inc. and Tracor, Inc. He also worked at
the Texas Instruments Central Research Lab, Aerojet General Corporation and the
Texas A&M University Nuclear Science Center. In 1984, he was appointed General
Manager of BCM Technologies, Inc., a for-profit, technology transfer arm of
Baylor College of Medicine. In 1988, Dr. Mueller was one of the founders of the
AM Fund and is currently a Managing General Partner of the AM Fund. From 1999 to
2002, Dr. Mueller was also a Venture Partner at Vanguard Ventures and served as
interim CEO/COO/Advisor for six of Vanguard's portfolio companies following seed
or first round funding. He was also co-founder and Ex-Director for the Texas
Technology Transfer Association. Dr. Mueller received his BS from Texas A&M
University, where he also earned his Ph.D. in Chemistry.
DR. TOBY SIMON was appointed to the Board of Directors on December 9, 2002. Dr.
Simon has over 32 years of experience in the medical field, specifically
internal medicine, hematology and managing blood banks. Since 2001, he has
served as Chief Medical Officer/Chief Operating Officer at TriCore Reference
Laboratories, Albuquerque, New Mexico. TriCore is a medical laboratory that
provides comprehensive laboratory testing services at University and
Presbyterian Hospitals and other hospitals throughout New Mexico, with some
specialized testing throughout the country. Since June 2001, he has also been
the Clinical Professor of Pathology at the University of New Mexico School of
Medicine. From March 1997 to May 2001, Dr. Simon served as Vice President of
Medical and Scientific Affairs for Serologicals Corporation. Dr. Simon's career
has also included serving as President and Chief Executive Officer of Blood
Systems, Inc. He is currently on the Transfusion Medicine/Blood Banking Test
Committee of the American Board of Pathology and the editorial board of the
journal, Transfusion. He is the past Chairman of the Medical Director's
Committee of the American Blood Resources Association (ABRA) and has recently
finished his term as industry representative on the FDA Blood Products Advisory
Committee. Dr. Simon earned his MD from Washington University, St. Louis,
Missouri, and completed his internship and residency at Temple University
Hospital, Philadelphia, Pennsylvania.
37
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the summary information of compensation paid to
our Chief Executive Officer, our only highly compensated executive officer in
fiscal years 1999 through 2001.
<Table>
<Caption>
ANNUAL COMPENSATION
-----------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
--------------------------- ---- ------------ ------------
Gary Oppedahl, President and Chief Executive Officer(1) 2002 $ 60,782 $ 956
Ronald K. Lohrding, Chief Executive Officer, President 2002 $ 97,932 $ 1,587
and Chairman of the Board(1) 2001 $ 104,814 $ 2,377
2000 $ 119,799 $ 2,625
</Table>
- ----------
(1) Ronald K. Lohrding resigned as our Chief Executive Officer and President on
July 15, 2002. Gary Oppedahl was appointed the new President and Chief Executive
Officer on that date. On August 2, 2002, Oton Tisch was appointed as Chairman of
the Board. In connection with his retirement, Dr. Lohrding resigned as a
director of the company in September 2002.
EMPLOYMENT AGREEMENT
On June 28, 2000, we entered into an employment agreement with Paul Johnson, our
Chief Operating Officer, Chief Financial Officer and Secretary. Mr. Johnson also
currently serves as Director. Under the employment agreement, if there is a
change in control under Mr. Johnson's employment agreement that results in his
termination or he resigns within 45 days of the change in control, then we must
pay Mr. Johnson in 12 equal monthly installments commencing after the
termination date an aggregate amount equal to Mr. Johnson's then prevailing
annual total compensation, including base salary but excluding fringe benefits.
STOCK INCENTIVE PLAN
During fiscal 1992, we adopted a Stock Incentive Plan. Pursuant to the Stock
Incentive Plan, stock options granted to eligible participants may be incentive
stock options, or ISOs, under Section 422 of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options, or NSOs. Eligible participants under
the Stock Incentive Plan include our directors, officers and other salaried key
employees. The Stock Incentive Plan terminated in August 2002.
Under the Stock Incentive Plan, an option is not transferable, except by will or
the laws of descent and distribution. The Board of Directors may administer the
Stock Incentive Plan, or delegate administration of the plan to a committee
comprised of disinterested directors. Currently, the Stock Incentive Plan is
administered by our board of directors. The administrator decides when and to
whom to make grants, the number of shares to be covered by the grants, the
vesting schedule, the type of award and the terms and provisions relating to the
exercise of the awards.
At December 31, 2002, we had options outstanding to purchase a total of 705,235
shares of our common stock under the Stock Incentive Plan consisting of ISOs and
NSOs to purchase 560,265 shares and 144,970 shares, respectively. The ISOs are
exercisable at prices ranging from $0.57 to $4.47 per share. The NSOs are
exercisable at prices ranging from $0.47 to $4.38 per share. All options have
been issued with exercise prices at or above market value on the date of grant.
At December 31, 2002, we had also granted options to purchase a total of
2,425,634 shares of our common stock outside of the Stock Incentive Plan. The
options are exercisable at prices ranging from $0.37 to $3.25 per share. All
options have been issued with exercise prices at or above market value on the
date of grant.
38
OPTION GRANTS
The following table sets forth certain information concerning individual grants
of stock options made during the last completed fiscal year to each of the named
executive officers:
<Table>
<Caption>
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE PRICE
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE
---- --------------- ------------------ -------------- ---------------
Gary Oppedahl 500,000 20% $1.25 07/15/08
</Table>
OPTION EXERCISES AND OPTION VALUES
The following tables sets forth certain information concerning the exercise of
options during the last completed fiscal year by each of the named executive
officers and the fiscal year-end value of such named executive officers'
unexercised options on an aggregated basis:
<Table>
<Caption>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END OPTIONS AT FY-END
(#) ($)(2)
SHARES ----------------- -----------------
ACQUIRED ON VALUE REALIZED(1) UNEXERCISABLE/ UNEXERCISABLE/
NAME EXERCISE (#) ($) EXERCISABLE EXERCISEABLE
---- ------------ ----------------- ----------------- -----------------
Gary Oppedahl -0- -0- 300,000/200,000 $0/$0
Ronald K. Lohrding -0- -0- 0/741,228 $0/$0
</Table>
- ----------
(1) Value realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market
value of Common Stock on the date the options are exercised.
(2) The value of unexercised options is determined by calculating the
difference between the fair market value of the securities underlying
the options at fiscal year end and the exercise price of the options.
The closing bid price of our common stock at fiscal year end 2002 was
$0.37.
BOARD STRUCTURE
Our board of directors currently has five members. Each director is elected to
serve for a term of one year until the next annual meeting of shareholders or
until a successor is duly elected and qualified.
DIRECTOR COMPENSATION
The members of our board of directors that are not employees of the company are
reimbursed for the expenses they incur in attending meetings of the board. No
officer of the company receives any additional compensation for his services as
a director, and we do not contribute to any retirement, pension or profit
sharing plans covering our directors. We do, however, maintain a group health
insurance plan and retirement plan for our employees, and those directors who
are also our employees are eligible to participate in each plan. Our directors
are also entitled to participate in the Stock Incentive Plan. Non-employee
directors may also receive stock option grants outside of the Stock Incentive
Plan. No member of any committee of our board of directors receives any
additional compensation for his service as a member of that committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of January 17, 2003, for the following: (1)
each person who is known by us to own beneficially five percent or more of
39
our outstanding common stock, (2) each of our directors and officers who
beneficially own such shares and (3) our officers and directors as a group.
<Table>
<Caption>
SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ------------ ------------
Oton Tisch(1) 5,968,026(3) 30.6%
Frederick A. Voight(2) 1,500,000(4) 8.0%
Dr. Ronald K. Lohrding(1) 1,044,978(5) 5.5%
Eutimio Sena(1) 5,000 *
Dr. Toby Simon(1) 30,000(6) *
Gary Oppedahl(1) 206,000(7) 1.1%
Paul Johnson(1) 249,267(6) 1.3%
All officers and directors as a group (6 persons) 6,458,293(8) 32.4%
</Table>
- ----------
* Represents ownership interests of less than one percent.
(1) The business address is c/o Cell Robotics International, Inc., 2715
Broadbent Parkway N.E., Albuquerque, New Mexico 87107. Mr. Tisch's
principal residence is in Caracas, Venezuela.
(2) The business address is c/o F.A. Voight Investments, 7311 Stevens Ridge
Road, Lincoln, Nebraska 68516.
(3) We issued Mr. Tisch 500,000 shares of our common stock upon conversion
of a secured convertible promissory note in the principal amount of
$1,200,000. We also issued Mr. Tisch 186,498 shares of common stock and
a common stock purchase warrant exercisable for 55,949 shares of common
stock in a May 2002 private placement of our securities. Also includes
935,051 shares issuable upon exercise of common stock purchase warrants
issued to Mr. Tisch in connection with loans made by him to us under
the January 2001, the August 2001 promissory notes and the conversion
of certain of his outstanding loans to the company in November 2002.
Further, includes stock options covering 5,000 shares issued to Mr.
Tisch for serving as a director. Additionally, includes 684,685 shares
of our common stock issued upon conversion of the outstanding balance
of the August 2001 convertible promissory note. Further, Mr. Tisch
received 3,086,204 shares in connection with the conversion of certain
of his outstanding loans to the company in November 2002. In August
2002 and December 2002, we issued to Obras Electromecanicas TKV an
aggregate of 421,711 shares of our common stock and warrants to
purchase an aggregate of 92,928 shares of our common stock in payment
in full of fees, plus reimbursement of out-of-pocket expenses, incurred
under our consulting agreement with Mr. Tisch. Mr. Tisch is the sole
owner and Chief Executive Officer and President of TKV.
(4) Includes 1,250,000 shares of our common stock issued to Mr. Voight in
connection with a private placement. Also includes 250,000 shares
issuable upon exercise of a common stock purchase warrant issued to Mr.
Voight in connection with a private placement.
(5) Includes 741,228 shares subject to options exercisable within 60 days
of January 17, 2003 and 3,750 shares underlying immediately exercisable
warrants.
(6) Represents shares subject to options exercisable within 60 days of
January 17, 2003.
(7) Includes 200,000 shares subject to options exercisable within 60 days
of January 17, 2003.
(8) Includes 484,267 shares subject to options exercisable within 60 days
of January 17, 2003 and 1,083,928 shares underlying immediately
exercisable warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2000, we entered into an employment agreement with Dr. Lohrding. Prior
to his resignation on July 15, 2002, Dr. Lohrding served as our President and
Chief Executive Officer under the contract. Until the agreement expires on June
30, 2003, Dr. Lohrding will continue to serve as an employee providing
consulting and advisory services to the company. As such, Dr. Lohrding agreed
that he will devote no less than one-half of his time to the company's business.
Dr. Lohrding currently is paid an annual fee of $65,206 under the contract. The
contract granted Dr. Lohrding 100,000 stock options that vested immediately and
expire on July 1, 2005. These options were granted outside of the company's
Stock Incentive Plan. Dr. Lohrding is also entitled to bonuses based upon the
achievement of specified target sales of the Lasette. Dr. Lohrding will receive
a bonus equal to five percent of his base salary once we ship and sell 500
Lasettes for three consecutive months and then again once we ship and sell 1,000
Lasettes for three consecutive months. If a third party acquires at least 30% of
our capital stock, then Dr. Lohrding will be entitled to the following:
40
o a lump sum payment, in cash, equal to his base salary under
his agreement, which may not be less than $50,000;
o a lump sum payment, in cash, equal to any accrued but unpaid
bonus; and
o all options, warrants and other rights subject to vesting will
accelerate and vest on his termination.
In January 2001, certain members of our board of directors and affiliates of
members or former members of our board of directors agreed to make term loan
advances to us in an aggregate amount of $1,000,000 pursuant to the terms of a
loan agreement with us. The loans are evidenced by unsecured promissory notes,
bear interest at the rate of ten percent per annum and were due on January 31,
2002. On November 13, 2002 pursuant to a stock purchase agreement between the
company and Mr. Oton Tisch dated November 12, 2002, we issued 2,309,255 shares
of our common stock to Mr. Tisch at a price per share of $0.45 in repayment in
full of $900,000 of principal and $139,165 of accrued interest owing to Mr.
Tisch under the loan agreement. As of December 31, 2002, the remaining principal
balance outstanding under the loan agreement was approximately $87,000, all of
which is owed to former members of our board of directors. These remaining loans
can be demanded at any time. In connection with the January 2001 loan
commitment, each lender was issued a warrant in proportion to the amount of the
loan made by that lender. The warrants allow the lenders to purchase an
aggregate of 150,000 shares of our common stock. The warrants may be exercised
until January 31, 2004, at a price equal to $1.125 per share of our common
stock.
In August 2001, we signed a convertible note in the face amount of $500,000
payable to Mr. Oton Tisch, one of our directors. Mr. Tisch, funded $190,000
after the signing of the convertible note in August 2001. Additional funds of
$150,000 and $40,000 were provided by Mr. Tisch in December 2001 and January
2002. On July 29, 2002, we issued 684,685 shares of our common stock to convert
all principal and interest owed of $410,400 under the August 2, 2001 convertible
note to equity. The conversion price of the convertible note was $0.5994 per
share of our common stock. As of July 29, 2002, no amounts remained outstanding
under the convertible note. In connection with the issuance of the convertible
note, Mr. Tisch was issued a warrant to purchase up to 28,500 shares of our
common stock. The warrant is exercisable until August 2, 2004, for common stock
at a price of $0.67 per share.
We entered into an International Sales and Marketing Contract with Obras
Electromecanicas TKV in August 2001. Mr. Oton Tisch, one of our directors, is
the President, Chief Executive Officer and the owner of TKV. Under the contract,
TKV will perform international sales and marketing services for the Lasette and
related accessories and the Cell Robotics Workstation in Mexico and various
countries in Asia, Latin America, Central America, the Caribbean and Europe
(these are referred to as the "territory" in the contract). During each year of
the contract, TKV will receive 5% of the net value of Lasette and related
accessories exports to the territory for the first $1,000,000 sold, 3.5% for the
second $1,000,000 sold, 2.5% for the third $1,000,000 sold and 2% for the
balance. TKV will not be separately compensated for services provided for the
Cell Robotics Workstation unless TKV is involved in certain issues, in which
case TKV will receive 3% of the sale value. To date, TKV has earned $203,020
under the contract. In August 2002 and December 2002, we issued to TKV an
aggregate of 421,711 shares of our common stock and warrants to purchase an
aggregate of 92,928 shares of our common stock in payment in full of these fees,
plus reimbursement of out-of-pocket expenses. This warrant has an exercise price
of $0.60 per share and expires on December 7, 2007. The contract expires on
August 1, 2003.
On March 29, 2002, we signed a promissory note in the face amount of $2,000,000
payable to one of our directors, Mr. Oton Tisch. The promissory note was amended
and restated on September 17, 2002. Under this promissory note, Mr. Tisch may
make one or more advances to us at times and in amounts, as determined by Mr.
Tisch in his discretion, up to an aggregate principal sum of $1,488,500 (the
"Loan A Facility"). Additionally, Mr. Tisch must make requested advances under
this note up to an aggregate principal sum of $511,500 so long as he remains
satisfied in his reasonable credit judgment with our capital raising activities
(the "Loan B Facility"). Therefore, Mr. Tisch has no obligation or commitment to
make any loans under the Loan A Facility and must make advances under the Loan B
Facility only to the extent he is satisfied with our capital raising activities
in his reasonable credit judgment. This note bears interest at 8% per annum and
is presently secured by all our assets. Mr. Tisch has funded a total principal
amount of $577,300 under this note as of as of December 31, 2002. On November
13, 2002 pursuant to a stock purchase agreement between the company and Mr.
Tisch dated November 12, 2002, we issued 776,949 shares of our common stock to
Mr. Tisch at a price per share of $0.45 in repayment in full of $337,300 of
principal and $12,327 of accrued interest owing to Mr. Tisch under the
promissory note. Additionally, on November 19, 2002, we repaid, in cash,
$180,000 owing under the note. As of December 31, 2002, the remaining principal
balance outstanding under the note was $60,000, all of which was outstanding
under the Loan B Facility.
41
No amounts borrowed under the Loan A Facility or the Loan B Facility may be
reborrowed after being repaid by us. As of December 31, 2002, the remaining
amount available under the Loan A Facility and the Loan B Facility is $1,000,000
and $422,700, respectively. All principal and interest outstanding under the
note are due on April 1, 2004.
On May 16, 2002, we issued 186,498 shares of our common stock in a private
placement with Mr. Oton Tisch, a director of the company. The gross proceeds
from the offering that was paid by Mr. Tisch was $100,000. In connection with
this private placement, Mr. Tisch was issued warrants to purchase 55,949 shares
of our common stock at a price of $0.87 per share. The warrants expire on May
17, 2007.
Mr. Eutimio Sena has provided consulting services to the company relating to our
marketing and sales strategies. On August 2, 2002, we issued 5,000 shares of our
common stock to Mr. Sena, a director of the company, in payment of fees owed for
these services. We also owe Mr. Sena $39,400 for fees owed for consulting
services as of December 31, 2002, which may be paid in cash or shares of our
common stock.
On November 13, 2002, in connection with the conversion of the outstanding
principal and interest owing to Mr. Tisch under the January 2001 loan agreement
and the promissory note in the face amount of $2,000,000, as described above, we
issued Mr. Tisch a warrant to purchase 771,551 shares of our common stock. The
warrant has an exercise price of $0.7125 per share and expires on November 13,
2007.
We believe that any transactions between us and our officers, directors,
principal shareholders or other affiliates have been on terms no less favorable
to us than could be obtained from unaffiliated third parties on an arms-length
basis.
INDEMNIFICATION
The Colorado Business Corporation Act, or the CBCA, provides that a company may
indemnify a person who was, is or is threatened to be made a named defendant or
respondent in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and whether formal or
informal (a "proceeding"), because the person is or was a director against
liability incurred in the proceeding if:
o the person conducted himself or herself in good faith;
o the person reasonably believed, in the case of conduct in an
official capacity with the company, that his or her conduct
was in the company's best interests;
o in all other cases, that his or her conduct was at least not
opposed to the company's best interests; and
o in the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
A company may not indemnify a director in connection with a proceeding by or in
the right of the company in which the director was adjudged liable to the
company or in connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving action in an
official capacity, in which proceeding the director was adjudged liable on the
basis that he or she derived an improper personal benefit.
Our Articles of Incorporation provide that we may and shall indemnify each of
our directors, officers, employees or agents, and their respective heirs,
executors and administrators, against any and all expenses or liability
reasonably incurred by them in connection with any action, suit or proceeding to
which he may be a party by reason of his being or having been a director,
officer, employee or agent of the company to the full extent required or
permitted by the CBCA.
Our Amended and Restated Bylaws also state that we may indemnify against
liability incurred in any proceeding an individual who was, is or is threatened
to be made a named defendant or respondent in any proceeding because he is or
was a director if that person meets the conditions for indemnification under the
CBCA as described above. We may not indemnify a director in connection with a
proceeding by or in the right of the company in which the director
42
was adjudged liable to the company or in connection with any proceeding charging
improper personal benefit to the director, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him. We must indemnify a person who
is or was a director or officer of the company and who was wholly successful, on
the merits or otherwise, in defense of any proceeding to which he was a party
against reasonable expenses incurred by him in connection with the proceeding.
Under the sections of the CBCA and the company's Bylaws, a "director" includes
an individual who is or was a director of a company or an individual who, while
a director of a company, is or was serving at the company's request as a
director, an officer, an agent, an associate, an employee, a fiduciary, a
manger, a member, a partner, a promoter or a trustee of, or to hold any similar
position with, another domestic or foreign corporation or other person or of an
employee benefit plan.
We currently maintain a $1,000,000 insurance policy that covers directors and
officers' liability.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
Each holder of our common stock is entitled to one vote for each share held of
record. There is no right to cumulative voting of shares for the election of
directors. The shares of common stock are not entitled to preemptive rights and
are not subject to redemption or assessment. Each share of common stock is
entitled to share ratably in distributions to shareholders and to receive
ratably any dividends we may declare out of funds legally available for the
payment of dividends. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled to receive, pro-rata, that portion of our
assets which are legally available for distribution to shareholders, subject to
the rights of preferred shareholders, if any. The issued and outstanding shares
of common stock are validly issued, fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue up to 2,500,000 shares of preferred stock. Our
preferred stock can be issued in one or more series as may be determined from
time to time by our board of directors. Our board of directors has the
authority, without shareholder approval, to fix the rights, preferences,
privileges and restrictions of any series of preferred stock, including:
o the rate of distribution;
o the price at and the terms and conditions on which shares can
be redeemed;
o the amount payable upon shares for distributions of any kind;
o sinking fund provisions for the redemption of shares;
o the terms and conditions on which shares may be converted if
shares of any series are issued with the privilege of
conversion; and
o voting rights except as limited by law.
We do not currently have any plans to issue shares of preferred stock, or to
designate any series of preferred stock. However, there can be no assurance that
we will not issue preferred stock in the future. In the near future, we will be
required to raise additional funds to finance our operations, which may be
through the issuance of preferred stock. Any issuance of preferred stock may
grant to holders preferred rights to our assets upon liquidation, the right to
receive dividends before dividends would be declared to common shareholders, and
the right to redemption of
43
their preferred shares, together with a premium, prior to the redemption of our
common stock. Common shareholders have no redemption rights. The ability to
issue preferred stock without shareholder approval may discourage, delay or
prevent someone from acquiring or merging with us.
SELLING SECURITYHOLDERS
The following table sets forth the names of the selling securityholders who may
sell their common stock pursuant to this prospectus. No selling securityholder
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates, except
as noted below.
The following table sets forth certain information as of January 17, 2003, to
the best of our knowledge, regarding the ownership of our common stock by the
selling securityholders and as adjusted to give effect to the sale of all the
common stock offered by the selling securityholder pursuant to this prospectus.
<Table>
<Caption>
NUMBER OF
SHARES PERCENTAGE
NUMBER OF SHARES BENEFICIALLY BENEFICIAL
SELLING BENEFICIALLY OWNED COMMON STOCK OWNED AFTER OWNERSHIP AFTER
SECURITYHOLDER BEFORE OFFERING(1) BEING OFFERED THE OFFERING THE OFFERING
-------------- ------------------ ------------- ------------ ---------------
Oton M. Tisch 5,968,026(2) 4,948,387(3) 1,019,639 5.2%
William S. Hayman 509,050(4) 509,050(4) -- *
Ronald K. Lohrding 1,044,978(5) 303,750(6) 741,228 3.9%
Raymond Radosevich 23,000(7) 3,000(8) 20,000 *
Haemedic LLC 26,500(9) 1,500(10) 25,000 *
Humagen Fertility Diagnostics, Inc. 11,750(11) 6,750(12) 5,000 *
Clark Aamodt 152,224 121,224(13) 31,000 *
Leof Strand 289,663(14) 221,080(15) 68,583 *
Becton, Dickinson and Company 225,000(16) 225,000(16) -- *
Frederick A. Voight 1,500,000(17) 1,500,000(17) -- *
Paul Bardacke 383,333(18) 163,333(19) 220,000 1.2%
TOTAL 8,003,074
</Table>
- ----------
* Represents ownership interests of less than one percent.
(1) Includes shares of our common stock issuable upon exercise of our
warrants and stock options within 60 days of January 17, 2003.
(2) Mr. Tisch serves on our board of directors and has served as a
consultant to the company. We issued Mr. Tisch 500,000 shares of our
common stock upon conversion of a secured convertible promissory note
in the principal amount of $1,200,000. We also issued Mr. Tisch 186,498
shares of common stock and a common stock purchase warrant exercisable
for 55,949 shares of common stock in a May 2002 private placement of
our securities. Also includes 935,051 shares issuable upon exercise of
common stock purchase warrants issued to Mr. Tisch in connection with
loans made by him to us under the January 2001, the August 2001
promissory notes and the conversion of certain of his outstanding loans
to the company in November 2002. Further, includes stock options
covering 5,000 shares issued to Mr. Tisch for serving as a director.
Additionally, includes 684,685 shares of our common stock issued upon
conversion of the outstanding balance of the August 2001 convertible
promissory note. Further, Mr. Tisch received 3,086,204 shares in
connection with the conversion of certain of his outstanding loans to
the company in November 2002. In August 2002 and December 2002, we
issued to Obras Electromecanicas TKV an aggregate of 421,711 shares of
our common stock and warrants to purchase an aggregate of 92,928 shares
of our common stock in payment in full of fees, plus reimbursement of
out-of-pocket expenses, incurred under our consulting agreement with
Mr. Tisch. Mr. Tisch is the sole owner and Chief Executive Officer and
President of TKV.
(3) Includes 684,685 shares of our common stock issued upon conversion of
the outstanding balance of the August 2001 convertible promissory note
and 3,086,204 shares in connection with the conversion of certain of
his outstanding loans to the company in November 2002. Also includes
935,051 shares issuable upon exercise of common stock purchase warrants
issued to Mr. Tisch in connection with loans made by him to us under
the January 2001, the August 2001 promissory notes and the conversion
of certain of his outstanding loans to the company in November 2002.
Additionally, includes 55,949 shares of common stock issuable upon
exercise of a common stock purchase warrant and 186,498 shares of
common stock, which were obtained by Mr. Tisch in a May 2002 private
placement of our securities.
44
(4) Includes 424,208 shares of our common stock issued to Mr. Hayman in
connection with our January 2002 private placement. Also includes
84,842 shares issuable upon exercise of a common stock purchase warrant
issued to Mr. Hayman in connection with our January 2002 private
placement.
(5) Dr. Lohrding served as our Chief Executive Officer and President until
his resignation on July 15, 2002. Dr. Lohrding also served as a member
of our board of directors until his resignation in September 2002. The
amount includes 741,228 shares of our common stock issuable upon
exercise of stock options and 3,750 shares issuable upon exercise of a
common stock purchase warrant issued to Dr. Lohrding in connection with
a loan made by him to us under the January 2001 promissory note.
(6) Includes 3,750 shares of our common stock issuable upon exercise of a
common stock purchase warrant issued to Dr. Lohrding in connection with
a loan made by him to us under the January 2001 promissory note.
(7) Mr. Radosevich is a former member of our board of directors. The amount
includes 20,000 shares of our common stock issuable upon exercise of
stock options and 3,000 shares issuable upon exercise of a common stock
purchase warrant issued to Mr. Radosevich in connection with a loan
made by him to us under the January 2001 promissory note.
(8) Represents 3,000 shares of our common stock issuable upon exercise of a
common stock purchase warrant issued to Mr. Radosevich in connection
with a loan made by him to us under the January 2001 promissory note.
(9) The president and majority shareholder of Haemedic LLC is Mr. Steven
Crees, a former director of the company. The amount includes 25,000
shares of our common stock issuable to Mr. Crees upon exercise of stock
options and 1,500 shares issuable upon exercise of a common stock
purchase warrant issued to Haemedic LLC in connection with a loan made
under the January 2001 promissory note.
(10) Represents 1,500 shares of our common stock issuable upon exercise of a
common stock purchase warrant issued to Haemedic LLC in connection with
a loan made to us under the January 2001 promissory note.
(11) The president and majority shareholder of Humagen Fertility
Diagnostics, Inc. is Ms. Debra Bryant who was a former member of our
board of directors. The amount includes 5,000 shares of our common
stock owned by Humagen Fertility Diagnostics, Inc. The amount also
includes 6,750 shares issuable upon exercise of a common stock purchase
warrant issued to Humagen Fertility Diagnostics, Inc. in connection
with a loan made to us under the January 2001 promissory note.
(12) Represents 6,750 shares of our common stock issuable upon exercise of a
common stock purchase warrant issued to Humagen Fertility Diagnostics,
Inc. in connection with a loan made to us under the January 2001
promissory note.
(13) Represents 27,975 shares of common stock issuable upon exercise of a
common stock purchase warrant and 93,249 shares of common stock, which
were obtained by Mr. Aamodt in a May 2002 private placement of our
securities.
(14) Mr. Strand has served as a consultant to the company since August 2002.
We issued Mr. Strand 158,523 shares of common stock and a common stock
purchase warrant exercisable for 47,557 shares of common stock in a May
2002 private placement of our securities. Also includes 8,333 shares
issued as a success fee in connection with a January 2002 private
placement of our securities.
(15) Includes 47,557 shares of common stock issuable upon exercise of a
common stock purchase warrant exercisable and 158,523 shares of common
stock, which were obtained by Mr. Strand in a May 2002 private
placement of our securities.
(16) Represents shares issuable upon exercise of a common stock purchase
warrant. Becton, Dickinson and Company is a exclusive licensor of the
company.
(17) Includes 1,250,000 shares of our common stock issued to Mr. Voight in
connection with a private placement. Also includes 250,000 shares
issuable upon exercise of a common stock purchase warrant issued to Mr.
Voight in connection with a private placement.
(18) Mr. Bardacke is an attorney who has provided legal services to us for
which we issued him a Redeemable Warrant exercisable for 15,000 shares
of our common stock. Mr. Bardacke also holds 15,000 Redeemable Warrants
granted in a private offering. Additionally, includes 111,111 shares of
our common stock issued to Mr. Bardacke in connection with our December
2002 private placement. Also includes 52,222 shares issuable upon
exercise of common stock purchase warrants issued to Mr. Bardacke in
connection with our December 2002 private placement.
(19) Includes 111,111 shares of our common stock issued to Mr. Bardacke in
connection with our December 2002 private placement. Also includes
52,222 shares issuable upon exercise of common stock purchase warrants
issued to Mr. Bardacke in connection with our December 2002 private
placement.
We will pay all expenses to register the common stock. The selling
securityholders will pay any underwriting and brokerage discounts, fees and
commissions, specified attorneys' fees and other expenses to the extent
applicable to them.
45
PLAN OF DISTRIBUTION
SELLING SECURITYHOLDERS' SECURITIES
The selling securityholders may offer their shares of common stock at various
times in one or more of the following transactions:
o on any of the United States securities exchanges where our
common stock are listed or may be listed in the future;
o in the over-the-counter market;
o in transactions other than on such exchanges or in the
over-the-counter market;
o in connection with short sales of our common stock;
o by pledge to secure debts and other obligations;
o in connection with the writing of non-traded and
exchange-traded call options, in hedge transactions and in
settlement of other transactions in standardized or
over-the-counter options; or
o in a combination of any of the above transactions.
The selling securityholders may sell their common stock at market prices
prevailing at the time of sale, prices related to such prevailing market prices,
negotiated prices or fixed prices.
The selling securityholders may use broker/dealers to sell their shares of
common stock. In this event, the broker/dealers will either receive a discount
or commission from the selling securityholder, or they will receive commissions
from the purchaser of common stock for whom they acted as agent.
The selling securityholders and any broker/dealers who sell their shares of
common stock may be deemed to be "underwriters" within the meaning of the
Securities Act. The commissions, discounts or other compensation paid to such
persons may be regarded as underwriters' compensation. These shares may later be
distributed, sold, pledged, hypothecated or otherwise transferred. In addition
to any other applicable laws or regulations, selling securityholders must comply
with regulations relating to distributions by selling securityholders, including
Regulation M under the Securities Exchange Act of 1934.
To comply with the securities laws of certain jurisdictions, the securities
offered in this prospectus will be offered or sold in those jurisdictions only
through registered or licensed broker/dealers. In addition, in certain
jurisdictions the securities offered in this prospectus may not be offered or
sold unless they have been registered or qualified for sale in those
jurisdictions, or unless an exemption from registration or qualification is
available and is complied with.
LEGAL MATTERS
The legality of the common stock offered under this prospectus was passed on for
us by Neuman & Drennen, LLC.
EXPERTS
Our consolidated financial statements as of December 31, 2001 and 2000, and for
the years then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, included herein, and upon the authority of said firm as experts in
accounting and auditing.
The report of KPMG LLP covering the December 31, 2001 and 2000 financial
statements contains an explanatory paragraph that states that the company's
recurring losses and negative cash flows from operations raise substantial doubt
about the company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 17, 2003, the Audit Committee of the Board of Directors of
the company unanimously approved the dismissal of KPMG LLP and the appointment
of Grant Thornton LLP as the independent accountant for the company and
subsidiary. The Company engaged Grant Thornton LLP on January 17, 2003.
In connection with the audits of the two fiscal years ended December
31, 2001, and the subsequent interim period through January 17, 2003, there were
no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of KPMG LLP on the consolidated financial statements
of the company and subsidiary as of and for the years ended December 31, 2001
and 2000, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles except as follows:
KPMG LLP's report on the consolidated financial statements of the
company and subsidiary as of and for the years ended December 31, 2001
and 2000, contained a separate paragraph stating "the Company has
suffered recurring losses and negative cash flows from operations that
raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 11. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty."
A letter from KPMG LLP is attached as Exhibit 16.1.
During our two most recent fiscal years, and through January 17, 2003,
we have not consulted with Grant Thornton LLP regarding any of the matters
specified in Item 304(a)(2) of Regulation S-K.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file with the SEC at the SEC's Public Reference Room in
Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C. 20549 and in
Chicago, Illinois at Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Rooms. Our electronic SEC filings are also
available on the web site maintained by the SEC, which is found at
http://www.sec.gov. Our SEC filings are also available from commercial document
retrieval services.
47
CELL ROBOTICS INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included:
<Table>
Independent Auditors' Report ...................................................................... F-2
Consolidated Balance Sheets - December 31, 2001 and December 31, 2000 ............................. F-3
Consolidated Statements of Operations - for the years ended December 31, 2001 and 2000 ............ F-4
Consolidated Statements of Stockholders' Equity (Deficit) - for the years ended December 31, 2001
and 2000 .......................................................................................... F-5
Consolidated Statements of Cash Flows - for the years ended December 31, 2001 and 2000 ............ F-6
Notes to Consolidated Financial Statements ........................................................ F-7
Consolidated Balance Sheets - September 30, 2002 (unaudited) and December 31, 2001 (audited) ...... F-19
Consolidated Statements of Operations - for the three months ended September 30, 2002 and 2001
(unaudited) ....................................................................................... F-20
Consolidated Statements of Operations - for the nine months ended September 30, 2002 and 2001
(unaudited) ....................................................................................... F-21
Consolidated Statements of Cash Flows - for the nine months ended September 30, 2002 and 2001
(unaudited) ....................................................................................... F-22
Notes to Unaudited Consolidated Financial Statements .............................................. F-23
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cell Robotics International, Inc.
We have audited the accompanying consolidated balance sheets of Cell Robotics
International, Inc. and subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cell Robotics
International, Inc. and subsidiary as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has suffered recurring losses
and negative cash flows from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
Albuquerque, New Mexico
February 22, 2002
F-2
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,633 $ 1,043,230
Accounts receivable, net of allowance for
doubtful accounts of $4,991 in 2001 and
$1,841 in 2000 287,482 378,853
Inventory 911,421 1,079,086
Other current assets 49,009 60,850
------------ ------------
Total current assets 1,253,545 2,562,019
Property and equipment, net 386,914 549,688
Other assets, net 19,279 24,109
------------ ------------
Total assets $ 1,659,738 $ 3,135,816
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 579,021 $ 350,399
Note payable - related parties 1,608,989 250,000
Payroll related liabilities 145,952 152,860
Royalties payable 110,846 79,046
Accrued litigation costs -- 400,000
Other current liabilities 44,607 118,010
------------ ------------
Total current liabilities 2,489,415 1,350,315
Stockholders' equity (deficit):
Preferred stock, $.04 par value. Authorized
2,500,000 shares, zero shares
issued and outstanding at December 31, 2001
and 2000 -- --
Common stock, $.004 par value. Authorized
50,000,000 shares, 9,956,137 and 9,965,644
shares issued and outstanding at December 31,
2001 and 2000, respectively 39,825 39,863
Additional paid-in capital 25,223,575 25,114,871
Accumulated deficit (26,093,077) (23,369,233)
------------ ------------
Total stockholders' equity (deficit) (829,677) 1,785,501
------------ ------------
Commitments and contingencies
$ 1,659,738 $ 3,135,816
============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-3
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
2001 2000
------------ ------------
Product sales $ 1,461,447 $ 992,710
Research and development grants 137,597 14,353
------------ ------------
Total revenues 1,599,044 1,007,063
------------ ------------
Product cost of goods sold (1,360,646) (1,516,846)
SBIR direct expenses (137,597) (14,353)
------------ ------------
Total cost of goods sold (1,498,243) (1,531,199)
------------ ------------
Gross profit (loss) 100,801 (524,136)
------------ ------------
Operating expenses:
General and administrative 936,000 1,297,779
Marketing & sales 1,211,726 1,289,728
Research and development 610,354 816,659
------------ ------------
Total operating expenses 2,758,080 3,404,166
------------ ------------
Loss from operations (2,657,279) (3,928,302)
------------ ------------
Other income (expense):
Interest income 11,979 76,088
Interest expense (125,489) (1,258,453)
Other, net 46,945 74,485
------------ ------------
Total other expense (66,565) (1,107,880)
------------ ------------
Net loss applicable to common shareholders $ (2,723,844) $ (5,036,182)
============ ============
Weighted average common shares
outstanding, basic and diluted 9,984,989 9,286,128
============ ============
Net loss per common share, basic and diluted $ (0.27) $ (0.54)
============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-4
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
Preferred Stock Common Stock
------------------------- -------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 -- $ -- 8,244,121 $ 32,976 19,154,908 (18,333,051)
Shares issued for services -- -- 130,000 520 550,885 --
Exercise of stock options -- -- 162,048 649 224,418 --
Exercise of stock warrants -- -- 429,475 1,718 690,038 --
Issuance of shares at $4.00 in a private
placement, less costs of offering -- -- 500,000 2,000 1,733,502 --
Options & warrants issued
for services -- -- -- -- 350,640 --
Issuance of stock on conversion of notes,
less costs of offering -- -- 500,000 2,000 2,410,480 --
Net loss for 2000 -- -- -- -- -- (5,036,182)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 -- -- 9,965,644 39,863 25,114,871 (23,369,233)
Shares issued for services -- -- 52,375 210 23,697 --
Stock cancellation -- -- (61,882) (248) 248 --
Options & warrants issued
for services -- -- -- -- 84,759 --
Net loss for 2001 -- -- -- -- -- (2,723,844)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 -- $ -- 9,956,137 $ 39,825 25,223,575 (26,093,077)
=========== =========== =========== =========== =========== ===========
</Table>
See accompanying notes to consolidated financial statements.
F-5
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (2,723,844) (5,036,182)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 174,521 126,351
Beneficial conversion charge -- 1,200,000
Loss on sale of property and equipment -- 35,000
Provision for bad debts 3,150 --
Options and warrants issued for service 84,759 350,640
Common stock issued for services 23,907 551,405
Decrease (increase) in accounts receivable 88,221 (172,575)
Decrease (increase) in inventory 167,665 (181,115)
Decrease (increase) in other current assets 11,841 (24,307)
Increase (decrease) in accounts payable
and payroll related liabilities 221,714 (297,761)
(Decrease) increase in other current
liabilities, accrued litigation costs
and royalties payable (441,603) 489,243
------------ ------------
Net cash used in operating activities (2,389,669) (2,959,301)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 232,500
Purchase of property and equipment (6,917) (453,153)
------------ ------------
Net cash used in investing activities (6,917) (220,653)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 1,735,502
Proceeds from exercise of stock options -- 225,067
Proceeds from exercise of warrants -- 691,756
Proceeds from loan - related parties 1,358,989 --
Proceeds from issuance of secured convertible
note, net of expenses -- 1,212,480
------------ ------------
Net cash provided by financing activities 1,358,989 3,864,805
------------ ------------
Net (decrease) increase in cash and cash equivalents: (1,037,597) 684,851
Cash and cash equivalents:
Beginning of year 1,043,230 358,379
------------ ------------
End of year $ 5,633 1,043,230
============ ============
Supplemental information:
Conversion of secured convertible note $ -- 1,200,000
Interest paid $ 4,546 --
============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-6
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND ACTIVITIES
The Company has developed and is manufacturing and marketing a
sophisticated laser-based medical device with applications in the blood
sample and glucose collection and in vitro fertilization markets.
During fiscal 2000 the Company sold the technology related to its in
vitro fertilization products to Hamilton Thorne Research. The Company
also develops, produces and markets a scientific research instrument
line that increases the usefulness and importance of the conventional
laboratory microscope. The Company markets its scientific instruments
in both domestic and international markets.
The Company's customers consist primarily of research institutes,
universities, distributors and mail-order business that serve patients
with diabetes as well as the physician community, and medical clinics.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of
Cell Robotics International, Inc. and its wholly owned
subsidiary (the Company). All significant intercompany
accounts and transactions have been eliminated in
consolidation.
(b) Financial Statement Estimates
The preparation of 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 reported amounts of assets and
liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all short-term investments with original maturities
of three months or less to be cash equivalents.
(d) Inventory
Inventory is recorded at the lower of cost, determined by the
first-in, first-out method, or market.
Inventory at December 31 consists of the following:
<Table>
<Caption>
2001 2000
------------ ------------
Finished goods $ 98,611 $ 56,273
Parts and components 729,378 1,022,813
Sub-assemblies 83,432 --
------------ ------------
$ 911,421 $ 1,079,086
============ ============
</Table>
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated on a straight-line basis over the estimated useful
lives of the assets, which range from five to seven years.
Leasehold improvements are amortized over the life of the
lease. Routine maintenance and repairs are charged to expense
as incurred.
F-7
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(f) Earnings Per Share
Basic loss per share is computed on the basis of the weighted average number of
common shares outstanding during the year. Diluted loss per share, which is
computed on the basis of the weighted average number of common shares and all
potentially dilutive common shares outstanding during the year, is the same as
basic loss per share for 2001 and 2000, as all potentially dilutive securities
were anti-dilutive.
Options to purchase 2,923,626 and 1,594,575 shares of common stock were
outstanding at December 31, 2001 and 2000, respectively. Additionally, warrants
to purchase 1,691,326 and 1,503,826 shares of common stock were outstanding at
December 31, 2001 and 2000, respectively. These were not included in the
computation of diluted earnings per share as the exercise of these options and
warrants would have been anti-dilutive because of the net losses incurred in
2001 and 2000.
(g) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, payroll related liabilities, royalties payable and accrued liabilities
in the consolidated financial statements approximate fair value because of the
short-term maturity of these instruments. The fair value of the notes payable at
December 31, 2001 cannot be determined without excessive costs due to its
related party nature.
(h) Income Taxes
The Company follows the asset and liability method for accounting for income
taxes whereby deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities.
(i) Revenue
The Company recognizes revenue on sales of its products when the products are
shipped from the plant and ownership is transferred to the customer. In certain
cases where the Company is required to install its products at a customers site,
the recognition of revenue is deferred until the installation is completed.
Appropriate allowances are made for returns.
(j) Advertising
Advertising costs, all of which are nondirect response advertising, are expensed
as incurred. Advertising expense was approximately $100,000 and $320,000 in 2001
and 2000, respectively.
(k) Research and Development
Research and development costs related to both present and future products are
expensed as incurred. Research and development costs consist primarily of
salaries, materials and supplies.
(l) Warranties
The Company warrants their products against defects in materials and workmanship
for one year. The warranty reserve is reviewed periodically and adjusted based
upon the Company's historical warranty costs and its estimate of future costs.
F-8
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(m) Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock
Based Compensation," permits entities to recognize as an expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company also issues stock, stock options or stock warrants to non-employees
for services. The fair value of these instruments, as determined by the market
price on the date of issuance, or of the options or warrants, as determined by
the Black-Scholes option pricing model, is charged to expense when incurred.
Stock issuances are discussed in Note 9 and issuances of options or warrants are
included in the disclosures in Note 5.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<Table>
<Caption>
2001 2000
------------ ------------
Furniture and fixtures $ 14,791 $ 14,791
Computers 393,458 391,487
Equipment 975,527 970,581
Leasehold improvements 48,961 48,961
------------ ------------
1,432,737 1,425,820
Accumulated depreciation (1,045,823) (876,132)
------------ ------------
Net property and equipment $ 386,914 $ 549,688
============ ============
</Table>
(4) OTHER ASSETS
Other assets consist of the following at December 31:
<Table>
<Caption>
2001 2000
------------ ------------
Patents 48,246 48,246
Non-compete agreements 8,116 8,116
------------ ------------
56,362 56,362
Accumulated amortization (37,083) (32,253)
------------ ------------
Net other assets $ 19,279 $ 24,109
============ ============
</Table>
F-9
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) STOCK OPTIONS AND WARRANTS
(a) Stock Options
The Company has adopted a Stock Incentive Plan (the Plan)
pursuant to which the Company's Board of Directors may grant
to eligible participants options in the form of Incentive
Stock Options (ISO's) under Section 422 of the Internal
Revenue Code of 1986, as amended, or options which do not
qualify as ISO's (Non-Qualified Stock Options or NQSO's). An
aggregate of 1,500,000 shares of the Company's common stock is
reserved for issuance under the Plan. Generally, stock options
granted under the Plan have five-year terms and become fully
exercisable after three or four years from the date of grant.
Following is a summary of activity in the Company's options
for employees, directors, outside consultants, and technical
advisors:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
2001 2000
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE NUMBER PRICE NUMBER
------------ ------------ ------------ ------------
Outstanding at beginning of year $ 2.14 1,594,575 $ 1.73 1,618,123
Granted $ 0.58 1,538,225 $ 2.56 605,833
Exercised $ -- -- $ 1.39 (162,048)
Forfeited $ 1.42 (209,174) $ 1.87 (467,333)
Outstanding at end of year $ 1.37 2,923,626 $ 2.14 1,594,575
Exercisable at end of year $ 1.30 2,284,874 $ 2.06 1,110,993
</Table>
The following summarizes certain information regarding outstanding stock options
at December 31, 2001:
<Table>
<Caption>
TOTAL EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICE RANGE NUMBER PRICE LIFE (YEARS) PRICE NUMBER
----------- ------------ ------------ ------------ ------------ ------------
$ 0.37 to 0.48 824,051 $ 0.38 4.75 $ 0.37 774,051
0.58 to 0.84 665,000 0.72 4.36 0.78 475,000
1.38 to 2.06 946,075 1.90 1.53 1.83 639,407
2.69 to 3.97 458,500 2.81 3.36 2.79 379,749
4.38 to 4.47 30,000 4.44 3.47 4.41 16,667
------------ ------------ ------------ ------------ ------------
Total 2,923,626 $ 1.37 3.39 $ 1.30 2,284,874
============ ============ ============ ============ ============
</Table>
During 2001 and 2000, the Company granted 1,238,225 and
403,000, respectively, options outside of the Plan, for the
purchase of the Company's common stock to employees,
directors, consultants and a provider of public relations
services for the Company. Such options are included in the
above table.
F-10
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) STOCK OPTIONS AND WARRANTS, CONTINUED
At December 31, 2001 and 2000, there were 677,765 and 716,710,
respectively, additional shares available for grant under the Plan. The
weighted-average fair value of stock options granted in 2001 and 2000
was $0.31 and $1.68, respectively, calculated on the date of grant
using the Black Scholes option-pricing model using the following
assumptions for 2001 and 2000, respectively. Expected dividend yield of
0% and 0%, risk-free interest rate of 2.5% and 5%, expected life of
option of 4 years and 4 years, and expected volatility of 97% and 92%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its employee
and director stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value at
the date of grant for its employee stock options under SFAS No. 123,
the Company's net loss would have been increased to the pro forma
amounts indicated below:
<Table>
<Caption>
2001 2000
------------ ------------
Reported net loss applicable to common
shareholders $ (2,723,844) $ (5,036,182)
Pro forma net loss applicable to common
shareholders (3,189,844) (5,889,284)
Pro forma net loss per share applicable to
common shareholders - basic and diluted $ (.32) $ (.63)
============ ============
</Table>
(b) Warrants
The Company has a Representative's Warrant outstanding that was granted
to an underwriter. The Representative's Warrant is exercisable through
February 2, 2002 to purchase 160,000 shares of common stock at a price
of $2.475 per share. The Representative's Warrant also includes 80,000
Common Stock Purchase Warrants exercisable through February 2, 2003 to
purchase 80,000 shares of common stock for a price of $2.40 per share.
The Representative's Warrant expired unexercised subsequent to year
end.
In conjunction with the Offering completed in February 1998, and the
exchange of common shares for Units in February 1998, the Company has
an additional 1,077,576 warrants outstanding exercisable through
February 2, 2003 to purchase 1,077,576 shares of common stock for a
price of $2.40 per share.
In connection with the private placement completed in July 1999, the
Company has an additional 101,250 warrants outstanding exercisable
through February 2, 2003 to purchase 101,250 shares of common stock for
a price of $2.40 per share.
In consideration for services received, the Company issued 15,000
warrants to a provider of corporate legal services. The warrants are
exercisable through February 2, 2003 to purchase 15,000 shares of
common stock for a price of $2.40 per share.
In 2000 the Company issued 70,000 common stock purchase warrants to an
investment research firm and a public relations firm. The warrants are
exercisable through February 3, 2003 to purchase one share of common
stock for a price of $2.40 per share.
In January 2001 the Company issued 150,000 common stock purchase
warrants to five of its directors. The warrants were issued in
connection with the $1 million board loan between the directors and the
Company, see note 10. The warrants are exercisable through January 31,
2004 to purchase one share of common stock for a price of $1.125 per
share.
F-11
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) STOCK OPTIONS AND WARRANTS, CONTINUED
In August 2001 the Company issued 37,500 common stock purchase
warrants to a director. The warrants were issued in connection
with the $500,000 convertible loan between the director and
the Company. The warrants are exercisable through August 2,
2004 to purchase one share of common stock for a price of
$0.67 per share.
(c) Employee Stock Purchase Plan
The board of directors and stockholders have approved an
Employee Stock Purchase Plan (ESPP). As of December 31, 2001
and 2000, no shares of common stock have been issued under the
ESPP and there have been no subscriptions of employees to
participate in the ESPP.
(6) ROYALTY AGREEMENTS
The Company is party to several royalty agreements under which it must
make payments to the original holders of patents on components used in
its products. Such royalties, equal to 1 to 2 percent of the net sales
of the products containing patented components, are generally due upon
sale of the products.
One royalty agreement pertains to the Company's worldwide,
non-exclusive license agreement which continues until January 2007.
Under the terms of the royalty agreement, the Company must pay an
annual royalty of 7 percent based on revenue generated from sales of
the Company's products that use the patent, with a minimum annual
payment of $35,000. Beginning with the year 1999, the minimum annual
royalty payment of $35,000 is payable as follows: $17,500 sixty days
after the end of each semiannual period ending June 30th and December
31st.
(7) INCOME TAXES
No provision for federal or state income tax expense has been recorded
due to the Company's losses. Total income tax benefit differs from the
amounts computed by applying the statutory tax rate to loss before
income taxes. The reason for this difference is as follows:
<Table>
Expected tax benefit at the
U.S. statutory rate of 34% $ (926,107) (1,712,302)
Valuation allowance 926,107 1,712,302
------------ ------------
Actual tax expense (benefit) 0
</Table>
The Company has net operating loss carryforwards and temporary
differences that give rise to the following deferred tax assets and
liabilities:
F-12
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
DECEMBER 31,
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 8,253,000 7,155,000
Inventory capitalization 184,000 71,000
Vacation and sick leave payable 43,000 30,000
Allowance for doubtful accounts 15,000 --
Capital loss carryforward 15,000 --
Depreciation -- 7,000
------------ ------------
8,510,000 7,263,000
Less valuation allowance (8,418,000) (7,234,000)
------------ ------------
Net deferred tax asset 92,000 29,000
------------ ------------
Deferred tax liabilities:
Amortization 39,000 29,000
Federal impact of state NOL carryforward 6,000 --
Depreciation 47,000 --
------------ ------------
Net deferred income taxes $ -- --
============ ============
</Table>
(7) INCOME TAXES, CONTINUED
The net deferred taxes have been fully offset by a valuation allowance
since the Company cannot currently conclude that it is more likely than
not that the benefits will be realized. The net operating loss
carryforward for income tax purposes of approximately $22,000,000
expires beginning in 2006 through 2021. Ownership changes resulting
from the Company's reorganization in 1995 will limit the use of this
net operating loss under applicable Internal Revenue Service
regulations.
(8) COMMITMENTS
The Company is obligated under a non-cancellable operating lease for
building facilities which is subject to 3 percent annual increases and
expires on November 30, 2002. Rent expense for 2001 and 2000 was
$120,676 and $116,111, respectively. The minimum annual lease
commitments for all building facilities at December 31, 2001 is $98,977
for 2002.
(9) EQUITY TRANSACTIONS
In January 2000, the Company terminated its public and investor
relations agreement with RCG Capital Markets Group, Inc. effective
January 1, 2000. In lieu of payment for three additional months of
service retainer fees, the Company granted options for an additional
25,000 shares of Common Stock at an exercise price equal to $3.25, the
closing price of the Company's Common Stock on February 15, 2000. Due
to early termination of this agreement, 50,000 unvested options were
canceled. The Company recorded a charge of $44,659, the fair value of
the options granted. The fair value was calculated on the grant date
using the Black Scholes option-pricing model. The significant
assumptions include an expected dividend of zero, a risk free interest
rate of 6.375% and an expected volatility of 75.2%.
Additionally, in January 2000, the Company issued a total of 40,000
Common Stock purchase warrants to an investment research firm and a new
public relations firm. The Company was also committed under the terms
of the agreement with the new public relations firm to issue an
additional 30,000 warrants if representation continued beyond six
months. The warrants are exercisable through February 2, 2003 to
purchase one share of Common Stock for a price of $2.40 per share. Of
the additional 30,000 warrants, 15,000 vested April 1, 2000, after
three months of service, and the remaining 15,000 vested on July 1,
2000, after six months of service. The fair value of these
performance-based options has been measured upon vesting and charged to
operations at such time. The Company recorded charges of $124,321, the
fair
F-13
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) EQUITY TRANSACTIONS, CONTINUED
value of the options granted. The fair value was calculated on the
grant dates using the Black Scholes option-pricing model. The
significant assumptions include an expected dividend of zero, a risk
free interest rate of 6.375% and an expected volatility of 75.2%.
In February 2000, an underwriter in a previous offering exercised a
portion of its Placement Agent's Warrants to purchase a total of
10.9825 units at a price of $25,000 per unit. Each unit consists of
20,000 shares of Common Stock and class A warrants exercisable for
10,000 shares of Common Stock. The underwriter exercised the underlying
class A warrants simultaneously with the exercise of the Private
Placement Warrants. Proceeds to the Company were approximately
$467,000.
In February 2000, the Company executed a secured convertible promissory
note from a member of the Company's Board of Directors, which was
amended in March 2000. The director advanced $250,000 on March 3, 2000;
$250,000 on March 9, 2000; $200,000 on March 28, 2000; and the
remaining $500,000 on April 26, 2000 under the note. The principal
amount of $1,200,000 was paid in full with and converted into 500,000
shares of Common Stock on August 30, 2000. An SB-2 registration
statement registering the shares issuable upon conversion of the
promissory note was declared effective by the SEC on July 20, 2000. In
connection with the beneficial conversion of this note, the Company
recorded a non-cash charge of $1,200,000 in the quarter ended September
30, 2000.
In March 2000, a previous distributor of the Company exercised its
warrant to purchase 100,000 shares of Common Stock at a price of $2.25
per share. Proceeds to the Company were approximately $225,000.
On May 26, 2000 the Company issued 500,000 shares of its Common Stock
for $2,000,000 in a private placement with Paulson Investment Company
of Portland, Oregon. A five percent placement fee was paid to Mark T.
Waller of BridgeWorks Capital, a former member of the Company's Board
of Directors after the close of the transaction.
In February, May and July 2000, and in January 2001, the Company issued
a total of 145,000 shares of its Common Stock to Pollet & Richardson as
payment for legal services. The Company recorded charges of $560,312,
the fair value of the stock issued. The fair value was calculated on
the measurement dates using the market price of the Company's common
stock on those dates.
In October 2001 the Company issued a total of 37,375 shares of its
Common Stock as payment for services. The Company recorded charges of
$15,000, the fair value of the stock issued. The fair value was
calculated on the measurement dates using the market price of the
Company's common stock on those dates.
(10) NOTES PAYABLE
In December 1999, the Company issued a note payable for $250,000 to
Humagen Fertility Diagnostics, Inc. whose president, chief executive
officer and majority shareholder is Dr. Debra Bryant, a former member
of the Company's board of directors. The note bears interest at six
percent. In January 2001, the Company used $45,000 of the proceeds of
the loans by the Company's directors and their affiliates described
below as payment against the outstanding balance of $250,000 plus
accrued interest. The Company also paid monthly installments of $10,000
each from February through April 2001. The remaining balance of the
note is now payable upon demand. During the year ended December 31,
2001 the Company expensed approximately $12,000 of interest on this
note.
In February 2000, the Company executed a secured convertible promissory
note from a member of the Company's Board of Directors, which was
amended in March 2000. The director advanced $250,000 on
F-14
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) NOTES PAYABLE, CONTINUED
March 3, 2000; $250,000 on March 9, 2000; $200,000 on March 28, 2000;
and the remaining $500,000 on April 26, 2000 under the note. The
principal amount of $1,200,000 was paid in full by conversion into
500,000 shares of Common Stock on August 30, 2000. An SB-2 registration
statement registering the shares issuable upon conversion of the
promissory note was declared effective by the SEC on July 20, 2000. In
connection with the beneficial conversion of this note, the Company
recorded a non-cash charge of $1,200,000 in the quarter ended September
30, 2000.
On January 31, 2001, certain members of the Company's board of
directors and affiliates of members or former members of its board of
directors agreed to make term loan advances to the Company in an
aggregate amount of $1,000,000. Loans in the amount of $100,000,
$400,000 and $500,000 under this $1,000,0000 commitment were made in
February 2001, March 2001 and May 2001, respectively. The loans are
evidenced by unsecured promissory notes, bear interest at the rate of
ten percent per annum and were due on January 31, 2002. As of the
filing date of this report these loans are due and payable in full.
Additionally, the lenders were issued warrants to purchase an aggregate
of 150,000 shares of Common Stock. The warrants are exercisable until
January 31, 2004, for Common Stock at a price of $1.125 per share, the
market price for the Common Stock when the loan agreement was signed.
The warrants are immediately exercisable. The Company has allocated
$32,540 in proceeds from the loan to the warrants based on the fair
value of the warrants. This amount has been recorded as a discount on
the loans and is being amortized over the life of the loans. During the
year ended December 31, 2001 the Company expensed approximately $83,000
of interest on this loan agreement.
In August 2001, the Company signed a convertible note in the face
amount of $500,000 payable to Mr. Oton Tisch, one of our directors. Mr.
Tisch, funded $190,000 after the signing of the convertible note in
August 2001. Additional funds of $150,000 and $40,000 were provided by
Mr. Tisch in December 2001 and January 2002, respectively. Mr. Tisch no
longer has a commitment to loan any additional funds under this
convertible note. Principal and accrued interest evidenced by the note
are convertible into shares of the Company's common stock at any time.
The conversion price of the convertible note is $0.5994 per share of
our common stock or 90% of the average closing price per share of our
common stock for 15 trading days ending on the trading day immediately
prior to the date of conversion, whichever is less. However, the
conversion price cannot be less than $0.30 per share. The convertible
note, which is convertible at the Company's option, bears interest at
10% per annum and is presently secured by all our assets. Unless sooner
converted, the convertible note is due on August 2, 2002. We anticipate
that a non-cash beneficial conversion charge will be expensed as
interest as a result of this transaction. The amount of this charge
cannot be determined at this time due to the variable nature of the
conversion price. In connection with the issuance of the convertible
note, Mr. Tisch was issued a warrant to purchase up to 37,500 shares of
our common stock, of which 28,500 shares have become exercisable, after
including the January 2002 funding. The remaining shares covered by the
warrant will become exercisable in proportion to the amount funded by
Mr. Tisch under the convertible note. The warrant is exercisable until
August 2, 2004, for common stock at a price of $0.67 per share.
(11) CAPITAL RESOURCES
Since inception, the Company has incurred operating losses and other
equity charges which have resulted in an accumulated deficit of
$26,093,077 at December 31, 2001 and operations using net cash of
$2,389,669 in 2001.
The Company's ability to improve cash flow and ultimately achieve
profitability will depend on its ability to significantly increase
sales. Accordingly, the Company is manufacturing and marketing a
sophisticated laser-based medical device which leverages the Company's
existing base of patented technology. The Company believes the markets
for this new product are broader than that of the scientific research
F-15
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) CAPITAL RESOURCES, CONTINUED
instruments market and, as such, offer a greater opportunity to
significantly increased sales. In addition, the Company is pursuing
development and marketing partners for some of its new medical
products. These partnerships will enhance the Company's ability to
rapidly ramp-up its marketing and distribution strategy, and possibly
offset the products' development costs.
Although the Company has begun manufacturing and marketing its
sophisticated laser-based medical device and continues to market its
scientific research instrument line, it does not anticipate achieving
profitable operations until possibly the end of 2002. As a result, the
Company expects its accumulated deficit to increase in the near future.
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America which contemplate continuation of the Company
as a going concern. There is substantial doubt that the Company will be
able to continue as a going concern. The ultimate continuation of the
Company is dependent on attaining additional financing and profitable
operations.
(12) SUBSEQUENT EVENTS
On January 25, 2002, the Company issued 424,208 shares of its common
stock in a private placement with William Hayman, a private investor,
which resulted in gross proceeds to the Company of $300,000.
Additionally Mr. Hayman was issued warrants to purchase 84,842 shares
of our common stock at a price of $0.90 per share. The warrants expire
on January 25, 2007. A success fee of 8,333 shares of our common stock
was paid after the close of the transaction.
In January 2002 the Company signed an exclusive licensing arrangement
with Becton Dickinson and Company regarding the Tankovich Patent. The
license is valid until the patent expires in 2012. The Company is
required to pay Becton, Dickinson a royalty of 2.5% on all sales of the
Lasette and its related accessories and to issue 225,000 warrants.
Under the license, the payment of royalties for sales during the first
two years of the agreement is deferred until November 2004. Royalties
earned during the third year of the agreement and through the remainder
of the term will be payable on a quarterly basis. In connection with
the license, Becton Dickinson released the Company from any alleged
infringement under the Tankovich Patent.
(13) OPERATING SEGMENTS
The Company has two operating segments: scientific research instruments
and laser-based medical devices. The scientific research instruments
segment produces research instruments for sale to universities,
research institutes, and distributors. The laser-based medical devices
segment produces medical devices for sale to clinics, individual
consumers and to distributors.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates segment performance based on profit or loss from operations
prior to the consideration of unallocated corporate general and
administration costs. The Company does not have intersegment sales or
transfers.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business utilizes different technologies and marketing
strategies.
F-16
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
<Table>
<Caption>
SCIENTIFIC LASER-BASED
RESEARCH MEDICAL
INSTRUMENTS DEVICES CORPORATE TOTAL
------------ ------------ ------------ ------------
Revenues from customers $ 986,998 474,449 -- 1,461,447
Research and development
grants 137,597 -- -- 137,597
Loss from operations (1,767) (1,723,152) (932,360) (2,657,279)
Segment assets 167,647 496,274 995,817 1,659,738
</Table>
DECEMBER 31, 2000
<Table>
<Caption>
SCIENTIFIC LASER-BASED
RESEARCH MEDICAL
INSTRUMENTS DEVICES CORPORATE TOTAL
------------ ------------ ------------ ------------
Revenues from customers $ 605,877 386,833 -- 992,710
Research and development
grants 14,353 -- -- 14,353
Profit (loss) from operations 2,506 (2,646,140) (1,284,668) (3,928,302)
Segment assets 285,049 1,366,985 1,483,782 3,135,816
</Table>
Segment assets for scientific research instruments and laser-based
medical devices represent accounts receivable, inventory and
specifically identifiable manufacturing equipment. The remaining assets
are not allocated between the segments, as there is no practical method
to allocate those assets between the segments.
The Company has no foreign operations. However, total export sales for
the years ended December 31, 2001 and 2000 were approximately $691,000
and $406,000, respectively. The sales were primarily to companies in
Asia, Europe and Australia. Export sales are attributed to the country
where the product is shipped. The Company had sales to two customers,
the first of which is located in Japan, in fiscal 2001 that accounted
for 33% and 18%, respectively, of its consolidated product sales. In
fiscal 2000 the Company recorded sales to one customer located in Japan
that accounted for 16% of consolidated product sales.
(14) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No.142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual
impairment tests in accordance with these statements. Other intangible
assets will continue to be amortized over their useful lives. The
Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The effect of
the impairment tests on the earnings and financial position of the
Company have yet to be determined, but the Company does not expect
adoption of the standard to have any material impact on the Company's
earnings and financial position.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 (SFAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
144 addresses the financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 but
retains the fundamental provisions of SFAS 121 for (i)
F-17
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognition/measurement of impairment of long-lived assets to be held
and used and (ii) measurement of long-lived assets to be disposed of by
sales. SFAS 144 also supersedes the accounting and reporting provisions
of Accounting Principles Board's No. 30 (APB 30), "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed of
but retains APB 30's requirement to report discontinued operations
separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of or is
classified as held for sale. SFAS 144 is effective in 2002, but the
Company does not expect adoption of the standard to have any material
impact on the Company's earnings and financial position.
F-18
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<Table>
<Caption>
AS OF AS OF
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,678 $ 5,633
Accounts receivable, net of allowance
for doubtful accounts of $4,991 in
2002 and 2001 186,590 287,482
Inventory 619,063 911,421
Other 38,321 49,009
------------ ------------
Total current assets 847,652 1,253,545
Property and equipment, net 300,827 386,914
Other assets, net 66,624 19,279
------------ ------------
Total assets $ 1,215,103 $ 1,659,738
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable 380,725 579,021
Notes payable - related parties $ 1,664,794 $ 1,608,989
Payroll related liabilities 165,820 145,952
Royalties payable 131,434 110,846
Other current liabilities 139,956 44,607
------------ ------------
Total current liabilities 2,482,729 2,489,415
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.04 par value
Authorized 2,500,000 shares, no shares
issued and outstanding at
September 30, 2002 and 0 0
December 31, 2001
Common stock, $.004 par value
Authorized 50,000,000 shares,
11,636,999 and 9,965,137 shares issued
and outstanding at September 30, 2002
and December 31, 2001, respectively 46,548 39,825
Additional paid-in capital 26,303,135 25,223,575
Accumulated deficit (27,617,309) (26,093,077)
------------ ------------
Total stockholders' deficit (1,267,626) (829,677)
------------ ------------
$ 1,215,103 $ 1,659,738
============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
F-19
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Product sales $ 477,277 $ 402,063
Research and development grants -- 88,923
-------------- --------------
Total revenues 477,277 490,986
-------------- --------------
Product cost of goods sold (380,217) (269,236)
SBIR direct expenses -- (88,923)
-------------- --------------
Total cost of goods sold (380,217) (358,159)
-------------- --------------
Gross profit/(loss) (97,060) 132,827
-------------- --------------
Operating expenses:
General and administrative 327,390 198,478
Marketing & sales 190,344 308,917
Research and development 140,981 99,714
-------------- --------------
Total operating expenses 658,715 607,109
-------------- --------------
Loss from operations (561,655) (474,282)
-------------- --------------
Other income (expense):
Interest income -- 284
Interest expense (34,986) (40,976)
Other income, net 29,453 15,000
-------------- --------------
Total other expense (5,533) (25,692)
-------------- --------------
Net loss $ (567,188) $ (499,974)
============== ==============
Weighted average common shares
outstanding, basic and diluted 11,357,919 9,980,644
============== ==============
Net loss per common share, basic and dilutive $ (0.05) $ (0.05)
============== ==============
</Table>
See accompanying notes to unaudited consolidated financial statements.
F-20
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Product sales $ 976,330 $ 1,007,453
Research and development grants -- 133,823
------------------ ------------------
Total revenues 976,330 1,141,276
------------------ ------------------
Product cost of goods sold (857,012) (821,049)
SBIR direct expenses -- (133,823)
------------------ ------------------
Total cost of goods sold (857,012) (954,872)
------------------ ------------------
Gross profit 119,318 186,404
------------------ ------------------
Operating expenses:
General and administrative 699,469 699,693
Marketing & sales 532,235 1,005,180
Research and development 339,106 414,137
------------------ ------------------
Total operating expenses 1,570,810 2,119,010
------------------ ------------------
Loss from operations (1,451,492) (1,932,606)
------------------ ------------------
Other income (expense):
Interest income 17 5,730
Interest expense (130,116) (78,865)
Other income, net 57,359 15,979
------------------ ------------------
Total other expense (72,740) (57,156)
------------------ ------------------
Net loss $ (1,524,232) $ (1,989,762)
================== ==================
Weighted average common shares
outstanding, basic and diluted 10,748,007 9,980,203
================== ==================
Net loss applicable to common shareholders
per common share, basic and diluted $ (0.14) $ (0.20)
================== ==================
</Table>
See accompanying notes to unaudited consolidated financial statements.
F-21
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,524,232) $ (1,989,762)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deprecation and amortization 109,449 133,475
Beneficial conversion charge 19,884 --
Options and warrants issued for services 61,781 50,830
Common stock issued for services 71,573 8,907
Decrease in accounts receivable 100,892 54,317
Decrease (increase) in inventory 292,358 (187,536)
(Increase) decrease in other assets (51,096) 18,832
Decrease in current liabilities (62,491) (111,071)
------------------ ------------------
Net cash used in operating activities (981,882) (2,022,008)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities -
purchase of property and equipment (8,923) (6,900)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and
warrants - related party 687,533 1,140,204
Repayment of notes payable - related party (221,328) (28,054)
Proceeds from exercise of stock options 2,932 --
Net proceeds from issuance of common stock 519,713 --
------------------ ------------------
Net cash provided by financing activities 988,850 1,112,150
------------------ ------------------
Net decrease in cash and cash equivalents: (1,955) (916,758)
Cash and cash equivalents:
Beginning of period 5,633 958,144
------------------ ------------------
End of period $ 3,678 $ 41,386
================== ==================
SUPPLEMENTAL INFORMATION:
Interest paid $ 8,545 $ 4,546
Non-Cash - Conversion of debt to equity 410,400 --
================== ==================
</Table>
See accompanying notes to unaudited consolidated financial statements.
F-22
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. Presentation of Unaudited Consolidated Financial Statements
These unaudited consolidated financial statements have been prepared in
accordance with the rules of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes otherwise necessary for
a fair presentation of financial position, results of operations and cash flows,
in conformity with accounting principles generally accepted in the United
States. However, the information furnished, in the opinion of management,
reflects all adjustments necessary to present fairly the Company's financial
position, results of operations and cash flows. The results of operations are
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
2. Issuance of Equity Securities
In January 2001, the Company issued 15,000 shares of its Common Stock
to Pollet & Richardson as payment for legal services. The Company recorded a
charge of approximately $8,900, the fair value of the stock issued. The fair
value was calculated on the measurement date using the market price of the
Company's common stock on that date.
In October 2001 the Company issued a total of 37,375 shares of its
Common Stock as payment for services. The Company recorded charges of $15,000,
the fair value of the stock issued. The fair value was calculated on the
measurement dates using the market price of the Company's common stock on those
dates.
On January 25, 2002, the Company issued 424,208 shares of its Common
Stock in a private placement with William Hayman, a private investor, which
resulted in gross proceeds to the Company of $300,000. Additionally Mr. Hayman
was issued warrants to purchase 84,842 shares of the Company's Common Stock at a
price of $0.90 per share. The warrants expire on January 25, 2007. A success fee
of 8,333 shares of the Company's Common Stock was paid to Leof Strand, a finder,
after the close of the transaction.
On May 16, 2002, the Company issued 438,270 shares of its Common Stock
in a private placement with three private investors, one of whom included Mr.
Oton Tisch, a director of the Company. The gross proceeds to the Company were
$235,000. Additionally, the three investors were issued warrants to purchase a
total of 131,481 shares of the Company's Common Stock at a price of $0.87 per
share. The warrants expire on May 17, 2007.
On July 29, 2002, the Company issued 684,685 shares of its Common Stock
to convert all principal and interest owed of $410,400 under the August 2, 2001
convertible note to equity. As of July 29, 2002 no amounts remain outstanding
under the convertible note.
On August 2, 2002, the Company issued 70,000 shares of its Common Stock
to three consultants, of which 50,000 shares were issued to Mr. Oton Tisch and
5,000 shares were issued to Mr. Eutimio Sena, directors of the Company. The fair
value of these shares, as determined by the average trading prices for the
Company's Common Stock on August 2, 2002, was recorded as a non-cash charge of
$50,050 for the services provided by the consultants.
On September 12 and 18, 2002, the Company issued an aggregate of 47,442
shares of its Common Stock to two consultants. The fair value of these shares,
as determined by the average trading prices for the Company's Common Stock on
the issuance dates, was recorded as a non-cash charge of $21,523 for the
services provided by the consultants.
3. Notes Payable
In December 1999, the Company issued a note payable for $250,000 to
Humagen Fertility Diagnostics, Inc. whose president, chief executive officer and
majority shareholder is Dr. Debra Bryant, a former member of the
F-23
Company's board of directors. The note accrued interest at six percent. In
January 2001, the Company used $45,000 of the proceeds of the loans by the
Company's directors and their affiliates described below as payment against the
outstanding balance of $250,000 plus accrued interest. The Company also paid
monthly installments of $10,000 each from February through April 2001. The
remaining principal balance and accrued interest of the note were paid in
installments of $50,000 each month at the end of January, February and March
2002 with a final payment at the end of April 2002 of $43,828. Commencing
January 1, 2002 through the date of repayment, the Company accrued and paid
approximately $2,900 of interest on this note.
On January 31, 2001, certain members of the Company's board of
directors and affiliates of members or former members of its board of directors
agreed to make term loan advances to the Company in an aggregate amount of
$1,000,000. Loans in the amount of $100,000, $400,000 and $500,000 under this
$1,000,0000 commitment were made in February 2001, March 2001 and May 2001,
respectively. The loans are evidenced by unsecured promissory notes, bear
interest at the rate of ten percent per annum and were due on January 31, 2002.
As of the filing date of this report these loans are due and payable in full.
Additionally, the lenders were issued warrants to purchase an aggregate of
150,000 shares of Common Stock. The warrants are exercisable until January 31,
2004, for Common Stock at a price of $1.125 per share, the market price for the
Common Stock when the loan agreement was signed. The warrants are immediately
exercisable. The Company has allocated $32,540 in proceeds from the loan to the
warrants based on the fair value of the warrants. This amount was recorded as a
discount on the loans and was amortized over the life of the loans. As of
September 30, 2002 approximately $987,000 of principal was outstanding under the
loan agreement. During the nine-month period ended September 30, 2002 the
Company accrued approximately $75,000 of interest expense on these promissory
notes.
In August 2001, the Company signed a convertible note in the face
amount of $500,000 payable to Mr. Oton Tisch, one of the Company's directors.
Mr. Tisch, funded $190,000 after the signing of the convertible note in August
2001. Additional funds of $150,000 and $40,000 were provided by Mr. Tisch in
December 2001 and January 2002, respectively. All principal and accrued interest
evidenced by the note totaling $410,400 were converted into 684,685 shares of
the Company's Common Stock on July 29, 2002. The conversion price of the
convertible note was $0.5994 per share of the Company's Common Stock. Upon the
funding of the convertible note, warrants issued to Mr. Tisch to purchase 28,500
shares of the Company's Common Stock became exercisable. The warrants are
exercisable until August 2, 2004, for Common Stock at a price of $0.67 per
share.
On March 29, 2002, the Company signed a promissory note in the face
amount of $2,000,000 payable to one of the Company's directors, Mr. Oton Tisch.
This new promissory note allows Mr. Tisch to make one or more advances to the
Company at times and in amounts, as determined by Mr. Tisch in his discretion,
up to an aggregate principal sum of $2,000,000. Therefore, Mr. Tisch has no
obligation or commitment to make any loans under this note. This note bears
interest at 8% per annum and is secured by all the Company's assets. The
outstanding principal balance under this note was $537,300 on September 30,
2002. All principal and interest outstanding under the note is due on April 1,
2004. During the nine-month period ended September 30, 2002 the Company accrued
approximately $9,800 of interest under this promissory note.
4. Earnings Per Share
Basic loss per share is computed on the basis of the weighted average
number of common shares outstanding during the quarter. Diluted loss per share,
which is computed on the basis of the weighted average number of common shares
and all potentially dilutive common shares outstanding during the quarter, is
the same as basic loss per share for the periods ended September 30, 2002 and
2001, as all potentially dilutive securities were anti-dilutive.
Options to purchase 3,585,702 and 2,226,075 shares of common stock were
outstanding at September 30, 2002 and 2001, respectively. Warrants to purchase
2,182,649 and 1,691,326 shares of common stock were outstanding at September 30,
2002 and 2001, respectively. These were not included in the computation of
diluted earnings per share as the exercise of the options would have been
anti-dilutive because of the net losses incurred in the periods ended September
30, 2002 and 2001.
F-24
5. Operating segments
The Company has two operating segments: scientific research instruments
and laser-based medical devices. The scientific research instruments segment
produces research instruments for sale to universities, research institutes, and
distributors. The laser-based medical devices segment produces the Lasette for
home and clinical use for sale to clinics, individual consumers and to
distributors.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies in the Company's annual report
on Form 10-KSB. The Company evaluates segment performance based on profit or
loss from operations prior to the consideration of unallocated corporate general
and administration costs. The Company does not have intersegment sales or
transfers.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business utilizes different technologies and marketing strategies.
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------------------
SCIENTIFIC
RESEARCH LASER-BASED
INSTRUMENTS MEDICAL DEVICES CORPORATE TOTAL
------------ --------------- ------------ ------------
Revenues from customers $ 534,509 441,821 -- 976,330
Loss from operations (173,630) (578,393) (699,469) (1,451,492)
</Table>
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------------------------------------------------------
SCIENTIFIC
RESEARCH LASER-BASED
INSTRUMENTS MEDICAL DEVICES CORPORATE TOTAL
------------ --------------- ------------ ------------
Revenues from customers $ 714,770 292,683 -- 1,007,453
Research and development
grants 133,823 -- -- 133,823
Profit (loss) from operations 80,944 (1,316,856) (696,694) (1,932,606)
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------------------
Revenues from customers $ 282,939 194,338 -- 477,277
Profit (loss) from operations 5,120 (239,385) (327,390) (561,655)
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2001
------------------------------------------------------------------
Revenues from customers $ 320,057 82,006 -- 402,063
Research and development
grants 88,923 -- -- 88,923
Profit (loss) from operations 53,256 (330,135) (197,403) (474,282)
</Table>
F-25
6. Capital Resources
Since inception, the Company has incurred operating losses and
other equity charges which have resulted in an accumulated deficit of
$27,617,309 at September 30, 2002 and operations using net cash of
$981,882 in the nine-month period ended September 30, 2002.
The Company's ability to improve cash flow and ultimately
achieve profitability will depend on its ability to significantly
increase sales. Accordingly, the Company is manufacturing and marketing
a sophisticated laser-based medical device that leverages the Company's
existing base of patented technology. The Company believes the markets
for this product are broader than that of the scientific research
instruments market and, as such, offer a greater opportunity to
significantly increase sales. In addition, the Company is pursuing
development and marketing partners for some of its new medical
products. These partnerships will enhance the Company's ability to
rapidly ramp-up its marketing and distribution strategy, and possibly
offset the products' development costs.
Although the Company is manufacturing and marketing its
sophisticated laser-based medical device and continues to market its
scientific research instrument line, it does not anticipate achieving
profitable operations in the foreseeable future. As a result, the
Company expects its accumulated deficit to increase in the near future.
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America which contemplate continuation of the Company as a
going concern. There is substantial doubt that the Company will be able to
continue as a going concern. The ultimate continuation of the Company is
dependent on attaining additional financing and profitable operations.
F-26
================================================================================
Cell Robotics International, Inc.
8,003,074 Shares of Common Stock
----------
PROSPECTUS
, 2003
----------
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7-109-102 of the Colorado Business Corporation Act, or the CBCA,
provides that a company may indemnify a person who was, is or is threatened to
be made a named defendant or respondent in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (a "proceeding"), because the
person is or was a director against liability incurred in the proceeding if the
person conducted himself or herself in good faith; and the person reasonably
believed, in the case of conduct in an official capacity with the company, that
his or her conduct was in the company's best interests, and in all other cases,
that his or her conduct was at least not opposed to the company's best
interests; and in the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful. A company may not
indemnify a director in connection with a proceeding by or in the right of the
company in which the director was adjudged liable to the company or in
connection with any other proceeding charging that the director derived an
improper personal benefit, whether or not involving action in an official
capacity, in which proceeding the director was adjudged liable on the basis that
he or she derived an improper personal benefit. Unless limited by its articles
of incorporation, Section 7-109-103 of the CBCA states that a company shall
indemnify a person who was wholly successful, on the merits or otherwise, in the
defense of any proceeding to which the person was a party because the person is
or was a director against reasonable expenses (including attorneys' fees)
incurred in connection with the proceeding. Unless otherwise provided in a
company's articles of incorporation, Section 7-109-107 of the CBCA states that
an officer is entitled to mandatory indemnification under Section 7-109-103 of
the CBCA. Section 7-109-107 also states that unless provided in its articles of
incorporation, a company may indemnify an officer, employee, fiduciary or agent
of the company to the same extent as a director.
The company's Articles of Incorporation provide that the company may and shall
indemnify each director, officer and any employee or agent of the company, his
heirs, executors and administrators, against any and all expenses or liability
reasonably incurred by him in connection with any action, suit or proceeding to
which he may be a party by reason of his being or having been a director,
officer, employee or agent of the company to the full extent required or
permitted by the CBCA, as amended.
Article XIII of the company's Amended and Restated Bylaws states that the
company may indemnify against liability incurred in any proceeding an individual
who was, is or is threatened to be made a named defendant or respondent in any
proceeding because he is or was a director if he conducted himself in good
faith; he reasonably believed, in the case of conduct in his official capacity
with the company, that his conduct was in the company's best interests, or in
all other cases, that his conduct was at least not opposed to the company's best
interests; and in the case of any criminal proceeding, he had no reasonable
cause to believe his conduct was unlawful. The company may not indemnify a
director in connection with a proceeding by or in the right of the company in
which the director was adjudged liable to the company or in connection with any
proceeding charging improper personal benefit to the director, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. The company
shall indemnify a person who is or was a director or officer of the company and
who was wholly successful, on the merits or otherwise, in defense of any
proceeding to which he was a party against reasonable expenses incurred by him
in connection with the proceeding.
Under the sections of the CBCA and the company's Bylaws included in this
prospectus, a "director" includes an individual who is or was a director of a
company or an individual who, while a director of a company, is or was serving
at the company's request as a director, an officer, an agent, an associate, an
employee, a fiduciary, a manger, a member, a partner, a promoter or a trustee
of, or to hold any similar position with, another domestic or foreign
corporation or other person or of an employee benefit plan.
The company may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee, fiduciary or agent of the company and
who, while a director, officer, employee, fiduciary or agent of the company, is
or was serving at the request of the company as a director, officer, partner,
trustee, employee, fiduciary or agent of any other foreign or domestic company
or of any partnership, joint venture, trust, other enterprise or employee
benefit plan against any liability asserted against or incurred by him in any
such capacity or arising out of his status as such, whether or not the company
would have the power to indemnify him against such liability under
the provisions of Article XIII of the company's Bylaws. The company currently
maintains a $1,000,000 insurance policy that covers directors and officers'
liability.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, or the Securities Act, may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the offering, all of which are to be borne by the
company, are as follows:
<Table>
Printing Expenses* $ 3,000
Accounting Fees and Expenses* 1,500
Legal Fees and Expenses* 9,500
Miscellaneous* 1,000
--------
Total* $ 15,000
</Table>
- ----------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June 1999, we sold an additional 100,000 shares of our common stock, at a
price of $1.50 per share, for gross proceeds of $150,000. The investor was an
"accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
In July 1999, we sold to four investors a total of 9.5 units, each unit
consisting of 35,000 shares of our common stock and warrants to purchase 7,500
shares of our common stock. Each unit was sold at a price of $50,000, resulting
in gross proceeds of $475,000. The investors were persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act and Rule 506 of Regulation D.
In July 1999, in connection with our sale to four investors of 9.5 units, we
issued warrants to purchase 62,500 shares of our common stock to four persons
for services rendered in connection with the offering. The services were valued
at $.40625 per warrant. The persons receiving the warrants were all qualified
investors in terms of their investment sophistication or "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act
and Rule 506 of Regulation D.
In August 1999, we issued to one person warrants to purchase 15,000 shares of
our common stock in consideration of services rendered. We valued the services
at $.40625 per warrant. The warrants were issued to one person who qualified as
an "accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act and Rule 506 of Regulation D.
In January 2000, we terminated our public and investor relations agreement with
RCG Capital Markets Group, Inc. effective January 1, 2000. In lieu of payment
for three additional months of service retainer fees, options for an additional
25,000 shares of our common stock at an exercise price equal to the closing
price of our common stock on February 15, 2000 were granted. The options were
issued directly to the investor relations company, which
-2-
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
In January 2000, we issued a total of 40,000 common stock purchase warrants to
an investment research firm and our new public relations firm. The warrants are
exercisable through February 2, 2003 to purchase one share of common stock at a
price of $2.40 per share. The warrants were issued to entities which qualify as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act and Rule 506 of Regulation D.
In February 2000 and subsequently amended in March 2000, we executed a secured
convertible promissory note in favor of a private investor. The principal amount
of $1,200,000 was converted into 500,000 shares of the company's common stock in
August 2000. The note was issued to one person who qualified as an "accredited
investor" within the meaning of Rule 501(a) of Regulation D under the Securities
Act. The securities, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
In May 2000, we entered into an agreement for a $2,000,000 private placement
selling 500,000 shares of our common stock to Paulson Investment Company, Inc.
The shares were issued to Paulson, which qualified as an "accredited investor"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act
and Rule 506 of Regulation D. A 5% placement fee (or $100,000) was paid to
Bridgeworks Capital, Inc., of which Mark Waller, one of our former directors, is
an officer and majority owner.
In April, May and July of 2000 and January 2001, we issued 145,000 shares of our
common stock to Pollet & Richardson pursuant to a shares-for-debt agreement.
Pollet & Richardson served as our legal counsel. The shares were issued directly
to the law firm and to certain of its employees who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were subject
to appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
In February, March and May 2001, certain members of our board of directors and
affiliates of members or former members of our board of directors made loans to
us in the aggregate principal amount of $1,000,000. In connection with the
issuance of the promissory notes, each investor was issued a warrant in
proportion to the principal amount of the promissory note issued to that
investor. The warrants allow the investors to purchase an aggregate of 150,000
shares of our common stock. The warrants may be exercised until January 31,
2004, at a price equal to $1.125 per share of our common stock. The notes and
the warrants were issued to persons who qualified as "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act
and Rule 506 of Regulation D under the Securities Act.
In August 2001, we signed a convertible note in the face amount of $500,000
payable to Mr. Oton Tisch, one of our directors. Principal and accrued interest
evidenced by the note are convertible into shares of our common stock at any
time. On July 29, 2002, we paid the outstanding principal and interest of our
August 2001 note by issuing to Mr. Tisch 684,685 shares of our common stock upon
conversion of the note. The conversion price of the convertible note was $0.5994
per share of our common stock. In connection with the issuance of the
convertible note, Mr. Tisch was issued a warrant to purchase up to 37,500 shares
of our common stock. The shares covered by the warrant become exercisable in
proportion to the amount funded by Mr. Tisch under the convertible note. The
warrant is exercisable until August 2, 2004, for common stock at a price of
$0.67 per share. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
-3-
On January 25, 2002, we issued 424,208 shares of our common stock in a private
placement with William Hayman, a private investor, which resulted in gross
proceeds to us of $300,000. Additionally, Mr. Hayman was issued warrants to
purchase 84,842 shares of our common stock at a price of $0.90 per share. The
warrants expire on January 25, 2007. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D. We
also issued 8,333 shares of our common stock to Leof Strand, a finder, in
payment of a success fee in connection with this transaction. The common stock
issued in payment of the success fee, which was taken for investment and was
subject to appropriate transfer restrictions, was issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
On March 29, 2002, we signed a promissory note in the face amount of $2,000,000
payable to one of our directors, Mr. Oton Tisch. This promissory note was
amended and restated on September 17, 2002. This note bears interest at 8% per
annum and is presently secured by all our assets. All principal and interest
outstanding under the note is due on April 1, 2004. The security, which was
taken for investment and was subject to appropriate transfer restrictions, was
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act.
On May 16, 2002, we issued 438,270 shares of our common stock in a private
placement with three private investors, one of whom included Mr. Oton Tisch, a
director of the Company. The gross proceeds to the Company were $235,000.
Additionally, the three investors were issued warrants to purchase a total of
131,481 shares of our common stock at an exercise price of $0.87 per share. The
warrants expire on May 17, 2007. The securities, which were taken for investment
and were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided in
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On July 29, 2002, we converted the outstanding principal and interest of our
August 2, 2001 note by issuing to Mr. Oton Tisch 684,685 shares of our common
stock upon conversion of the note. The conversion price of the convertible note
was $0.5994 per share of our common stock. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
On August 2, 2002, we issued 70,000 shares of our common stock to three
consultants for services rendered, of which 50,000 shares were issued to Obras
Electromecanicas TKV and 5,000 shares were issued to Mr. Eutimio Sena, a
director of the company. Mr. Oton Tisch, one of our directors, is the sole owner
and Chief Executive Officer and President of TKV. The securities, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act.
On September 12 and 18, 2002, we issued and aggregate of 47,442 shares of our
common stock to two consultants for services rendered. The securities, which
were taken for investment and were subject to appropriate transfer restrictions,
were issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act.
On November 13, 2002 pursuant to a stock purchase agreement between the company
and one of our directors, Mr. Oton Tisch, dated November 12, 2002, we issued
2,309,255 shares of our common stock to Mr. Tisch at a price per share of $0.45
in repayment in full of $900,000 of principal and $139,165 of accrued interest
owing to Mr. Tisch under our January 31, 2001 loan agreement with him. On that
same date pursuant to such stock purchase agreement, we also issued 776,949
shares of our common stock to Mr. Tisch at a price per share of $0.45 in
repayment in full of $337,300 of principal and $12,327 of accrued interest owing
to Mr. Tisch under our September 17, 2002 amended and restated promissory note
in the face amount of $2,000,000. Additionally, on November 13, 2002 pursuant to
such stock purchase agreement, in connection with the conversion of the
outstanding principal and interest owing to Mr. Tisch under the January 2001
loan agreement and the September 17, 2002 promissory note, as described above,
we issued Mr. Tisch a warrant to purchase 771,551 shares of our common stock.
The warrant has an exercise price of $0.7125 per share and expires on November
13, 2007. The securities, which were taken for investment and were
-4-
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
On November 22, 2002, we issued 1,250,000 shares of our common stock in a
private placement with Frederick A. Voight, a private investor. Gross proceeds
to the company were $500,000. Additionally, Mr. Voight was issued a warrant to
purchase 250,000 shares of our common stock at an exercise price of $0.70 per
share. The warrant expires on November 22, 2007. The securities, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 506 of
Regulation D.
On December 2, 2002, we issued 111,111 shares of our common stock in a private
placement with Paul Bardacke, a private investor. The gross proceeds to the
company were $50,000. Additionally, Mr. Bardacke was issued warrants to purchase
22,222 and 30,000 shares, respectively, of our common stock. The warrant to
purchase 22,222 shares has an exercise price of $0.70 per share while the
warrant for 30,000 shares has an exercise price of $2.40 per share. Both of the
warrants expire on December 2, 2007. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On December 12, 2002, we issued 371,711 shares of our common stock to Obras
Electromecanicas TKV, for services rendered in the capacity as a consultant.
Additionally, TKV was issued a warrant to purchase 92,928 shares of our common
stock at an exercise price of $0.60 per share in consideration for consulting
services. The warrant expires on December 7, 2007. Mr. Oton Tisch, one of our
directors, is the sole owner and Chief Executive Officer and President of TKV.
The securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
EXHIBIT NO. TITLE
3.2(17) Amended and Restated By-laws
3.3(1) Amended and Restated Articles of Incorporation
4.1(1) Specimen Certificate of Common Stock
4.2(2) Representative Common Stock Purchase Warrant
4.3(3) Warrant Agreement between the company and Corporate Stock
Transfer, Inc.
4.4(2) Option Agreement between the company and Ronald K. Lohrding, Ph.D.
4.5(3) Specimen Common Stock Purchase Warrant Certificate
5.1(20) Legal Opinion of Neuman & Drennen, LLC
10.1(4) Agreement and Plan of Reorganization among the company,
Intelligent Financial Corporation, MiCel, Inc., Bridgeworks
Investors I, L.L.C. and Ronald K. Lohrding
10.2(5) Employment Agreement between the company and Ronald K. Lohrding
10.3(4) Irrevocable Appointment of Voting Rights by Ronald K. Lohrding,
Ph.D. to MiCel, Inc.
10.4(4) Stock Pooling and Voting Agreement
10.5(1) Royalty Agreement dated September 11, 1995 between the company,
Cell Robotics, Inc. and Mitsui Engineering & Shipbuilding Co.,
Ltd.
10.6(1) Agreement of Contribution and Mutual Comprehensive Release dated
September 11, 1995 between the company, Cell Robotics, Inc. and
Mitsui Engineering & Shipbuilding Co., Ltd.
10.7(6) Purchase Agreement between the company and Tecnal Products, Inc.
10.8(1) License Agreement between the company and NTEC
-5-
EXHIBIT NO. TITLE
10.9(7) Patent License Agreement between American Telephone and Telegraph
Company and Cell Robotics, Inc.
10.10(7) Amendment to Patent License Agreement between Lucent Technologies,
Inc., successor to American Telephone and Telegraph Company, and
Cell Robotics, Inc.
10.11(8) Development and Distribution Agreement dated September 10, 1999
between Hamilton Thorne Research and the company
10.12(8) Amendment to Development and Distribution Agreement dated May 18,
2000 between Hamilton Thorne Research and the company
10.13(9) Loan Agreement dated January 31, 2001, among the company, Oton
Tisch, Ronald K. Lohrding, Ph.D., Raymond Radosevich, Ph.D.,
HaeMedic LLC and Humagen Fertility Diagnostics, Inc.
10.14(9) Form of Warrant dated January 31, 2001 issued to Oton Tisch,
Ronald K. Lohrding, Ph.D., Raymond Radosevich, Ph.D., HaeMedic LLC
and Humagen Fertility Diagnostics, Inc.
10.15(10) Employment Agreement between the company and Paul Johnson
10.16(11) Loan Agreement dated August 2, 2001 between the company and Oton
Tisch
10.17(11) Warrant dated August 2, 2001 issued to Oton Tisch
10.18(12) Certificate for Common Stock Options dated August 17, 2001 between
the company and Ronald K. Lohrding
10.19(12) Certificate for Common Stock Options dated June 15, 2001 between
the company and Paul Johnson
10.20(12) Certificate for Common Stock Options dated October 31, 2001
between the company and Ronald K. Lohrding
10.21(12) Certificate for Common Stock Options dated October 31, 2001
between the company and Paul Johnson
10.22(13) License Agreement between the company and Becton, Dickinson &
Company
10.23(14) First Amendment to Loan Agreement dated March 29, 2002 between the
company and Oton Tisch
10.24(15) Certificate for Common Stock Options dated July 15, 2002 between
the company and Gary Oppedahl
10.25(16) Amended and Restated Promissory Note dated September 17, 2002
executed by the company and payable to Oton Tisch
10.26(17) Warrant dated November 12, 2002 issued to Oton Tisch
10.27(17) Stock Purchase Agreement dated November 12, 2002 between the
company and Oton Tisch
10.28(17) Cell Robotics International, Inc. 2002 Stock Purchase Plan
10.29(17) International Sales and Marketing Contract dated August 1, 2001
between the company and Obras Electromecanicas TKV
10.30(17) Certificate for Common Stock Options dated August 2, 2002 between
the company and Paul Johnson
10.31(17) Distribution Agreement dated July 8, 2002 between the company and
California Caltech, Inc.
10.32(17) Warrant dated December 7, 2002 issued to Oton Tisch
10.33(18) Distribution Agreement between Meiwa Shoji Company Ltd. and the
company
16.1(19) Letter from KPMG LLP to the Securities and Exchange Commission
dated January 20, 2003
21.1(1) Subsidiaries
23.1(20) Consent of KPMG LLP
23.2(20) Consent of Neuman & Drennen, LLC (included in Exhibit 5.1)
24.1(20) Power of Attorney
- ----------
(1) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 which was declared
effective by the SEC on February 14, 1996.
(2) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on November 24, 1997, SEC File No.
333-40895.
-6-
(3) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, as filed with the SEC on
January 12, 1998, SEC File No. 333-40895.
(4) Incorporated by reference from the company's Current Report on Form 8-K
dated February 23, 1995, as filed with the SEC on March 10, 1995.
(5) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000, as filed with the SEC on
August 14, 2000.
(6) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996, as filed with the SEC on
May 20, 1996.
(7) Incorporated by reference from the company's Pre-Effective Amendment
No. 2 to Registration Statement on Form S-3, as filed with the SEC on
November 19, 1998, SEC File No. 333-55951.
(8) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on July 6, 2000, SEC File No.
333-40920.
(9) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2001, as filed with the SEC on
May 15, 2001.
(10) Incorporated by reference from the company's Post-Effective Amendment
to Registration Statement on Form SB-2, as filed with the SEC on
December 29, 2000, SEC File No. 333-40920.
(11) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001, as filed with the SEC on
August 14, 2001.
(12) Incorporated by reference from the company's Post-Effective Amendment
to Registration Statement on Form SB-2, as filed with the SEC on
December 14, 2001, SEC File No. 333-40920.
(13) Incorporated by reference from the company's Amendment No. 2 to Annual
Report on Form 10-KSB/A for the year ended December 31, 2001, as filed
with the SEC on August 22, 2002.
(14) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on April 12, 2002, SEC File No.
333-86138.
(15) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, as filed with the SEC on
September 3, 2002, SEC File No. 333-86138.
(16) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002, as filed with the SEC
on November 14, 2002.
(17) Incorporated by reference from the company's Pre-Effective Amendment
No. 2 to Registration Statement on Form SB-2, as filed with the SEC on
December 20, 2002, SEC File No. 333-86138.
(18) Incorporated by reference from the company's Amendment No. 3 to Annual
Report on Form 10-KSB/A for the year ended December 31, 2002, as filed
with the SEC on January 8, 2003.
(19) Incorporated by reference from the company's Pre-Effective Amendment
No. 4 to Registration Statement on Form SB-2, as filed with the SEC on
January 24, 2003, SEC File No. 333-86138.
(20) Previously Filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, the company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the company of expenses incurred or paid by a director,
officer or controlling person of the company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
-7-
The undersigned registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution.
2. That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
-8-
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Albuquerque, State of New Mexico, on the 7th day of
February, 2003.
CELL ROBOTICS INTERNATIONAL, INC.
By: /s/ Gary Oppedahl
----------------------------------------
Gary Oppedahl, Chief Executive Officer,
President and Director
By: /s/ Paul Johnson
----------------------------------------
Paul Johnson, Chief Financial Officer,
Chief Operating Officer, Secretary and
Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
/s/ Gary Oppedahl February 7, 2003
- ---------------------------------------------------------------
Gary Oppedahl, Chief Executive Officer, President and Director
* February 7, 2003
- ---------------------------------------------------------------
Paul Johnson, Chief Financial Officer, Chief Operating Officer,
Secretary and Director
* February 7, 2003
- ---------------------------------------------------------------
Oton Tisch, Chairman of the Board of Directors
* February 7, 2003
- ---------------------------------------------------------------
Eutimio Sena, Vice Chairman of the Board of Directors
</Table>
* By: /s/ Gary Oppedahl
----------------------------------
Gary Oppedahl, Attorney-in-Fact
-9-
CELL ROBOTICS INTERNATIONAL INC.
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. TITLE
- ----------- -----
3.2(17) Amended and Restated By-laws
3.3(1) Amended and Restated Articles of Incorporation
4.1(1) Specimen Certificate of Common Stock
4.2(2) Representative Common Stock Purchase Warrant
4.3(3) Warrant Agreement between the company and Corporate Stock
Transfer, Inc.
4.4(2) Option Agreement between the company and Ronald K. Lohrding, Ph.D.
4.5(3) Specimen Common Stock Purchase Warrant Certificate
5.1(20) Legal Opinion of Neuman & Drennen, LLC
10.1(4) Agreement and Plan of Reorganization among the company,
Intelligent Financial Corporation, MiCel, Inc., Bridgeworks
Investors I, L.L.C. and Ronald K. Lohrding
10.2(5) Employment Agreement between the company and Ronald K. Lohrding
10.3(4) Irrevocable Appointment of Voting Rights by Ronald K. Lohrding,
Ph.D. to MiCel, Inc.
10.4(4) Stock Pooling and Voting Agreement
10.5(1) Royalty Agreement dated September 11, 1995 between the company,
Cell Robotics, Inc. and Mitsui Engineering & Shipbuilding Co.,
Ltd.
10.6(1) Agreement of Contribution and Mutual Comprehensive Release dated
September 11, 1995 between the company, Cell Robotics, Inc. and
Mitsui Engineering & Shipbuilding Co., Ltd.
10.7(6) Purchase Agreement between the company and Tecnal Products, Inc.
10.8(1) License Agreement between the company and NTEC
10.9(7) Patent License Agreement between American Telephone and Telegraph
Company and Cell Robotics, Inc.
10.10(7) Amendment to Patent License Agreement between Lucent Technologies,
Inc., successor to American Telephone and Telegraph Company, and
Cell Robotics, Inc.
10.11(8) Development and Distribution Agreement dated September 10, 1999
between Hamilton Thorne Research and the company
10.12(8) Amendment to Development and Distribution Agreement dated May 18,
2000 between Hamilton Thorne Research and the company
10.13(9) Loan Agreement dated January 31, 2001, among the company, Oton
Tisch, Ronald K. Lohrding, Ph.D., Raymond Radosevich, Ph.D.,
HaeMedic LLC and Humagen Fertility Diagnostics, Inc.
10.14(9) Form of Warrant dated January 31, 2001 issued to Oton Tisch,
Ronald K. Lohrding, Ph.D., Raymond Radosevich, Ph.D., HaeMedic LLC
and Humagen Fertility Diagnostics, Inc.
10.15(10) Employment Agreement between the company and Paul Johnson
10.16(11) Loan Agreement dated August 2, 2001 between the company and Oton
Tisch
10.17(11) Warrant dated August 2, 2001 issued to Oton Tisch
10.18(12) Certificate for Common Stock Options dated August 17, 2001 between
the company and Ronald K. Lohrding
10.19(12) Certificate for Common Stock Options dated June 15, 2001 between
the company and Paul Johnson
10.20(12) Certificate for Common Stock Options dated October 31, 2001
between the company and Ronald K. Lohrding
10.21(12) Certificate for Common Stock Options dated October 31, 2001
between the company and Paul Johnson
10.22(13) License Agreement between the company and Becton, Dickinson &
Company
10.23(14) First Amendment to Loan Agreement dated March 29, 2002 between the
company and Oton Tisch
10.24(15) Certificate for Common Stock Options dated July 15, 2002 between
the company and Gary Oppedahl
10.25(16) Amended and Restated Promissory Note dated September 17, 2002
executed by the company and
</Table>
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<Table>
<Caption>
EXHIBIT NO. TITLE
- ----------- -----
payable to Oton Tisch
10.26(17) Warrant dated November 12, 2002 issued to Oton Tisch
10.27(17) Stock Purchase Agreement dated November 12, 2002 between the
company and Oton Tisch
10.28(17) Cell Robotics International, Inc. 2002 Stock Purchase Plan
10.29(17) International Sales and Marketing Contract dated August 1, 2001
between the company and Obras Electromecanicas TKV
10.30(17) Certificate for Common Stock Options dated August 2, 2002 between
the company and Paul Johnson
10.31(17) Distribution Agreement dated July 8, 2002 between the company and
California Caltech, Inc.
10.32(17) Warrant dated December 7, 2002 issued to Oton Tisch
10.33(18) Distribution Agreement between Meiwa Shoji Company Ltd. and the
company
16.1(19) Letter from KPMG LLP to the Securities and Exchange Commission
dated January 20, 2003
21.1(1) Subsidiaries
23.1(20) Consent of KPMG LLP
23.2(20) Consent of Neuman & Drennen, LLC
24.1(20) Power of Attorney
</Table>
- ----------
(1) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 which was declared
effective by the SEC on February 14, 1996.
(2) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on November 24, 1997, SEC File No.
333-40895.
(3) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, as filed with the SEC on
January 12, 1998, SEC File No. 333-40895.
(4) Incorporated by reference from the company's Current Report on Form 8-K
dated February 23, 1995, as filed with the SEC on March 10, 1995.
(5) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000, as filed with the SEC on
August 14, 2000.
(6) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1996, as filed with the SEC on
May 20, 1996.
(7) Incorporated by reference from the company's Pre-Effective Amendment
No. 2 to Registration Statement on Form S-3, as filed with the SEC on
November 19, 1998, SEC File No. 333-55951.
(8) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on July 6, 2000, SEC File No.
333-40920.
(9) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2001, as filed with the SEC on
May 15, 2001.
(10) Incorporated by reference from the company's Post-Effective Amendment
to Registration Statement on Form SB-2, as filed with the SEC on
December 29, 2000, SEC File No. 333-40920.
(11) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001, as filed with the SEC on
August 14, 2001.
(12) Incorporated by reference from the company's Post-Effective Amendment
to Registration Statement on Form SB-2, as filed with the SEC on
December 14, 2001, SEC File No. 333-40920.
(13) Incorporated by reference from the company's Amendment No. 2 to Annual
Report on Form 10-KSB/A for the year ended December 31, 2001, as filed
with the SEC on August 22, 2002.
(14) Incorporated by reference from the company's Registration Statement on
Form SB-2, as filed with the SEC on April 12, 2002, SEC File No.
333-86138.
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(15) Incorporated by reference from the company's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, as filed with the SEC on
September 3, 2002, SEC File No. 333-86138.
(16) Incorporated by reference from the company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2002, as filed with the SEC
on November 14, 2002.
(17) Incorporated by reference from the company's Pre-Effective Amendment
No. 2 to Registration Statement on Form SB-2, as filed with the SEC on
December 20, 2002, SEC File No. 333-86138.
(18) Incorporated by reference from the company's Amendment No. 3 to Annual
Report on Form 10-KSB/A for the year ended December 31, 2002, as filed
with the SEC on January 8, 2003.
(19) Incorporated by reference from the company's Pre-Effective Amendment
No. 4 to Registration Statement on Form SB-2, as filed with the SEC on
January 24, 2003, SEC File No. 333-86138.
(20) Previously Filed.
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