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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 2003.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the Transition period from
------------------------------ to ----------------------------------
Commission File Number: 0-19671
LASERSIGHT INCORPORATED
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0273162
- -------------------------- ----------
(State of Incorporation) (IRS Employer Identification No.)
6903 University Blvd., Winter Park, Florida 32792
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 678-9900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's common stock outstanding as of
May 15, 2003 is 27,841,941.
LASERSIGHT INCORPORATED AND SUBSIDIARIES
Except for the historical information contained herein, the discussion in this
report contains forward-looking statements (within the meaning of Section 21E of
the Exchange Act) that involve risks and uncertainties. LaserSight's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors and Uncertainties"
in this report and in LaserSight's Annual Report on Form 10-K for the year ended
December 31, 2002. LaserSight undertakes no obligation to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect any future events or
developments.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Independent Auditors' Review Report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Management's Quantitative and Qualitative Disclosures about
Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2003 2002
------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents $ 1,500,158 1,065,778
Accounts receivable - trade, net 2,415,173 3,811,065
Notes receivable - current portion, net 1,444,505 1,763,106
Inventories 8,313,571 8,928,099
Deferred tax assets 28,850 28,850
Other current assets 524,578 593,842
------------ ------------
Total Current Assets 14,226,835 16,190,740
Notes receivable, less current portion, net 757,920 1,020,731
Property and equipment, net 308,828 444,049
Patents, net 4,083,795 4,162,353
Other assets, net 1,186,822 1,289,748
------------ ------------
$ 20,564,200 23,107,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, net of unamortized discount of zero and $58,209
at March 31, 2003 and December 31, 2002, respectively $ 2,050,000 2,077,754
Accounts payable 2,953,515 2,755,358
Accrued expenses 4,953,134 5,166,049
Accrued commissions 1,531,439 1,594,634
Deferred revenue 1,885,307 1,657,352
------------ ------------
Total Current Liabilities 13,373,395 13,251,147
Accrued expenses, less current portion 147,083 187,449
Deferred royalty revenue 5,507,131 5,741,941
Deferred income taxes 28,850 28,850
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, par value $.001 per share;
authorized 10,000,000 shares:
Series H - 9,280,647 issued and outstanding at
March 31, 2003 and December 31, 2002, respectively 9,281 9,281
Common stock - par value $.001 per share; authorized
100,000,000 shares; 27,987,141 shares issued at
March 31, 2003 and December 31, 2002, respectively 27,987 27,987
Additional paid-in capital 103,801,064 103,796,812
Stock subscription receivable (16,336) (32,336)
Accumulated deficit (101,771,608) (99,360,863)
Less treasury stock, at cost; 145,200 common shares at
March 31, 2003 and December 31, 2002 (542,647) (542,647)
------------ ------------
1,507,741 3,898,234
------------ ------------
$ 20,564,200 23,107,621
============ ============
See accompanying notes to the condensed consolidated financial statements.
3
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
Revenues:
Products $ 2,086,155 1,866,205
Royalties 234,810 107,000
------------ ------------
2,320,965 1,973,205
Cost of revenues:
Product cost 1,345,544 1,392,612
------------ ------------
Gross profit 975,421 580,593
Research, development and regulatory expenses 196,500 542,974
Other general and administrative expenses 2,428,522 4,100,513
Selling-related expenses 617,780 822,997
Amortization of intangibles 115,059 115,059
------------ ------------
3,161,361 5,038,569
------------ ------------
Loss from operations (2,382,440) (5,000,950)
Other income and expenses
Interest and dividend income 26,615 65,949
Interest expense (112,628) (143,941)
------------ ------------
Loss before income taxes (2,468,453) (5,078,942)
Income tax benefit 57,708 --
------------ ------------
Net loss (2,410,745) (5,078,942)
Conversion discount on preferred stock (483,837) --
------------ ------------
Net loss $ (2,894,582) (5,078,942)
============ ============
Loss per common share
Basic and diluted: $ (0.10) (0.19)
============ ============
Weighted average number of shares outstanding
Basic and diluted: 27,842,000 26,488,000
============ ============
See accompanying notes to the condensed consolidated financial statements.
4
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ -----------------
Cash flows from operating activities
Net loss $ (2,410,745) (5,078,942)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 301,158 464,889
Common stock issued for services -- 42,500
Stock options issued for services 4,252 --
Changes in assets and liabilities:
Accounts and notes receivable 1,977,304 1,296,835
Inventories 614,528 293,864
Accounts payable 198,157 54,439
Accrued expenses (316,476) 222,677
Deferred revenue (6,855) 78,112
Other 97,057 236,901
------------ ------------
Net cash provided by (used in) operating activities 458,380 (2,388,725)
Cash flows from investing activities
Purchases of property and equipment, net -- (4,437)
------------ ------------
Net cash used in investing activities -- (4,437)
Cash flows from financing activities
Payments on debt financing (40,000) (20,000)
Proceeds from stock subscription receivable 16,000 --
------------ ------------
Net cash used in financing activities (24,000) (20,000)
------------ ------------
Increase (decrease) in cash and cash equivalents 434,380 (2,413,162)
Cash and cash equivalents, beginning of period 1,065,778 2,762,062
------------ ------------
Cash and cash equivalents, end of period $ 1,500,158 348,900
============ ============
See accompanying notes to the condensed consolidated financial statements.
5
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Month Periods Ended March 31, 2003 and 2002
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
of LaserSight Incorporated and subsidiaries (LaserSight, or the
Company) as of March 31, 2003, and for the three-month periods ended
March 31, 2003 and 2002 have been prepared in accordance with
accounting principles generally accepted in the United States of
America on a going concern basis, which contemplates the realization of
assets and the discharge of liabilities in the normal course of
business for the foreseeable future. The Company has suffered recurring
losses from operations and has a significant accumulated deficit that
raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described below. The condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The Company has incurred significant losses and negative cash flows
from operations in each of the years in the three-year period ended
December 31, 2002 and in the three month period ended March 31, 2003
and has an accumulated deficit of $101,771,608 at March 31, 2003,
however, cash flows were positive during the three month period ended
March 31, 2003. The substantial portion of these losses is attributable
to an inability to sell certain products in the U.S. due to delays in
Food and Drug Administration (FDA) approvals for the treatment of
various procedures on the Company's excimer laser system in the U.S. (a
key approval for the treatment of nearsightedness with or without
astigmatism was received in late September 2001) and the continued
development efforts to expand clinical approvals of the Company's
excimer laser and other products. Additionally, the Company's continued
lack of adequate funding and working capital has also contributed to
these losses.
The Company has significant liquidity and capital resource issues
relative to the timing of our accounts receivable collection and the
successful completion of new sales compared to our ongoing payment
obligations. In July 2002, the Company announced it had entered a
letter of intent with a company based in the People's Republic of
China. Definitive agreements relating to the transaction were executed
in August 2002 and include their commitment to purchase $10 million of
lasers and other products over a 12-month period ending in August 2003
and an equity investment in LaserSight of $2.0 million. The Company
started shipping products under those agreements in August 2002 and
received the equity investment in October 2002. Through April 1, 2003,
approximately $4.5 million worth of products were sold under these
agreements. Although as a result of this transaction the Company's
short-term liquidity had improved temporarily and its operating results
are improving, further improvements in revenues will be needed to
achieve profitability and sustained positive cash flow. There can be no
assurance that such improvements will continue. Your attention is
directed to the discussion under the caption "Risk Factors--Financial
and Liquidity Risks" set forth below as well as the financial
statements and disclosures set forth in the documents incorporated by
reference. Management of the Company continues undertaking steps as
part of a plan to attempt to continue to improve liquidity and
operating results with the goal of sustaining Company operations. These
steps include seeking (a) to increase sales; and (b) to control
overhead costs and operating expenses.
6
However, the Company's cash balances as of May 15, 2003 are
approximately $400,000. Its semi-monthly payroll and payroll related
expenses approximate $250,000, which it may not be able to fund as
early as May 31, 2003. Monthly cash requirements to service the
principal and interest payments of the Heller note are approximately
$65,000 monthly and will be due June 1, 2003. Additionally, in order to
conserve cash, the Company has only been funding vendor payments
necessary to support ongoing manufacturing operations. The Company has
entered into new discussions related to the payment terms of it's
License and Royalty Agreement covering its keratome products, after
advising the licensors that the Company was unable to make the April,
2003 payment of approximately $221,000. The licensors issued a third
notice of default to the Company on May 6, 2003. The cure period under
this default ends on Friday, May 23, 2003, and if payment is not made
on or before that date, the entire balance of approximately $3.3
million under the License Agreement becomes due. Based on the
circumstances, the Company is weeks, if not days, from exhausting its
cash reserves and as a result, may have to seek judicial reorganization
unless the Company is able to get an immediate cash infusion.
In that regard, since April 27, 2003, the Company has been in
continuous negotiations with New Industries Investment Consultants
(HK), Ltd. ("NII") to secure immediate cash payments for purchase of
Company products, further define the terms of a long-term strategy for
the Company in China, and outline a framework for additional product
purchases.
There can be no assurance the Company can successfully accomplish these
steps. Accordingly, the Company's ability to continue as a going
concern is uncertain and dependent upon continuing to achieve improved
operating results and cash flows or obtaining additional equity capital
and/or debt financing. These condensed consolidated financial
statements do not include any adjustments to the amounts and
classification of assets and liabilities that might be necessary should
the Company be unable to continue in business.
The condensed consolidated financial statements have been prepared in
accordance with the requirements for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and note
disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. These
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in LaserSight's annual report on Form 10-K for the
year ended December 31, 2002. In the opinion of management, the
condensed consolidated financial statements include all adjustments
necessary for a fair presentation of consolidated financial position
and the results of operations and cash flows for the periods presented.
There are no other components of comprehensive loss other than the
Company's consolidated net loss for the three-month periods ended March
31, 2003 and 2002. The results of operations for the three-month period
ended March 31, 2003 are not necessarily indicative of the operating
results for the full year. The report of KPMG LLP, independent
auditors, commenting upon their review accompanies the condensed
consolidated financial statements included in Item 1 of Part I.
7
NOTE 2 PER SHARE INFORMATION
Basic loss per common share is computed using the weighted average
number of common shares and contingently issuable shares (to the extent
that all necessary contingencies have been satisfied). Diluted loss per
common share is computed using the weighted average number of common
shares, contingently issuable shares, and common share equivalents
outstanding during each period. Common share equivalents include
options, warrants to purchase Common Stock, and convertible Preferred
Stock and are included in the computation using the treasury stock
method if they would have a dilutive effect.
NOTE 3 INVENTORIES
Inventories, which consist primarily of excimer and erbium laser
systems and related parts and components, are stated at the lower of
cost or market. Cost is determined using the standard cost method,
which approximates cost determined on the first-in first-out basis. The
components of inventories at March 31, 2003 and December 31, 2002 are
summarized as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 6,062,754 5,994,564
Work-in-process 140,534 245,195
Finished goods 1,636,569 2,057,672
Test equipment - clinical trials 473,714 630,668
------------ ------------
$ 8,313,571 8,928,099
============ ============
NOTE 4 SEGMENT INFORMATION
The Company's operations principally include refractive products.
Refractive product operations primarily involve the development,
manufacture and sale of ophthalmic lasers and related devices for use
in vision correction procedures. Patent services involve the revenues
and expenses generated from the ownership of certain refractive laser
patents.
Operating profit is total revenue less operating expenses. In
determining operating profit for operating segments, the following
items have not been considered: general corporate expenses,
non-operating income and expense and income tax expense. Identifiable
assets by operating segment are those that are used by or applicable to
each operating segment. General corporate assets consist primarily of
cash and income tax accounts.
The table below summarizes information about reported segments as of
and for the three months ended March 31:
Depreciation
Operating Operating and Capital
Revenues Profit (Loss) Assets Amortization Expenditures
-------- ------------ ------ ------------ ------------
2003
- ----
Operating segments:
Refractive products $ 2,086,155 (2,118,066) 18,994,926 250,139 --
Patent services 234,810 234,810 -- -- --
General corporate -- (499,184) 1,569,274 141 --
------------ ------------ ------------ ------------ -----------
Consolidated total $ 2,320,965 (2,382,440) 20,564,200 250,280 --
============ ============ ============ ============ ===========
2002
- ----
Operating segments:
Refractive products $ 1,866,205 (4,711,228) 30,927,789 400,100 4,437
Patent services 107,000 107,000 -- -- --
General corporate -- (396,722) 696,235 1,177 --
------------ ------------ ------------ ------------ -----------
Consolidated total $ 1,973,205 (5,000,950) 31,624,024 401,277 4,437
============ ============ ============ ============ ===========
Amortization of deferred financing costs and discount on note payable of $50,878
and $63,612 for the three months ended March 31, 2003 and 2002, respectively, is
included as interest expense.
8
NOTE 5 AMENDED LOAN AGREEMENT
On March 12, 2003, our loan agreement with Heller Healthcare Finance,
Inc ("Heller") was extended 30 days from March 12, 2003 to April 11,
2003. On March 31, 2003, our loan agreement with Heller was amended
again. In addition to the amendment, Heller waived our failure to
comply with the net revenue covenant for the fourth quarter of 2002.
In exchange for the amendment and waiver, we paid approximately $9,250
in fees to Heller and agreed to increase our monthly principal
payments to $45,000 beginning in April 2003. Revised covenants became
effective on March 31, 2003 that decreased the minimum level of net
worth to $1.0 million, minimum tangible net worth to negative $4.0
million and minimum quarterly net revenue during 2003 to $2.0 million.
We have agreed to work in good faith with Heller to adjust these
covenants by May 31, 2003 based on our first quarter 2003 financial
results and our ongoing efforts to obtain additional cash infusion.
Unless we receive an immediate cash infusion and an additional equity
infusion, there is a risk that our net worth may drop below this $1.0
million minimum sometime during the second quarter 2003. The remaining
principal balance will be due on September 12, 2004.
NOTE 6 LETTER OF INTENT
China Letter of Intent
----------------------
On March 11, 2003, we announced we have signed a non-binding letter of
intent with Shenzhen New Industries Venture Capital Company, an
affiliate of New Industries Investment Consultants (HK), Ltd., the
party based in the People's Republic of China that invested $2.0
million in our series H preferred stock in October of 2002. The
transaction contemplated by the letter of intent would result in us
acquiring the assets and the on-going revenue stream of 15 refractive
laser centers currently operated within China. China is believed to be
the world's largest market for refractive procedures. If we enter into
this transaction, it would allow us to generate revenues not only
through equipment sales but also through participation in the recurring
revenues that we believe will be generated from these refractive laser
centers. Under the terms of the letter of intent, the value of the 15
existing centers would be determined by an independent third party and,
if a valuation of $6.0 million is confirmed and we elect to proceed
with the transaction, we would purchase the centers in exchange for the
issuance of approximately 26.1 million shares of our common stock at a
price of $0.23 per share. If completed on these terms, the china group,
including affiliates, would own approximately 61% of LaserSight. In
addition, we would have an option to purchase additional refractive
laser centers that may be developed in the future at a purchase price
equal to 110% of the start-up costs for such center. Each option would
be in existence for a period of 18 months following the date a center
opens and the purchase price would be paid by the issuance of shares of
our common stock that would be valued at 90% of the then 30-day average
closing bid price per share. The transactions contemplated by this
letter of intent are initially subject to the acceptance of the letter
of intent by LaserSight's Board of Directors and if such acceptance
occurs, the transactions are subject to satisfactory completion of due
diligence, receipt of all necessary approvals, negotiation of
definitive agreements and receipt of shareholder approval.
As indicated in Note 1, we have been in continuous negotiations with
NII to secure immediate cash payments for the purchase of Company
products, further define the terms of the a long term strategy for the
Company in China, and outline a framework for additional product
purchases. Specifically, with regard to the "China Letter of Intent",
the business model for this transaction is not yet finalized and may or
may not include participation in recurring revenues, and may or may not
include sales of equipment to centers that the Company may ultimately
buy. As this transaction has not yet been approved by the Company's
Board of Directors, as it is being structured, the Company's management
and Board of Directors will be mindful of GAAP revenue recognition
issues and will adopt transaction, business form, business model, and
revenue recognition standards that conform to GAAP.
9
NOTE 7 STOCK BASED COMPENSATION
The Company accounts for stock-based employee compensation plans using
the intrinsic value method under Accounting Principles Board Opinion
No. 25 and related interpretations. Accordingly, stock-based employee
compensation cost is not reflected in net earnings, as all stock
options granted under the plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of Statement No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ ------------
Net loss, as reported $ (2,410,745) (5,078,942)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (502,851) (627,195)
------------ ------------
Pro forma net loss (2,913,596) (5,706,137)
Conversion discount on
preferred stock (483,837) --
------------ ------------
Pro forma loss attributable to
common shareholders (3,397,433) (5,706,137)
============ ============
Basic and diluted loss per share:
As reported $ (0.10) (0.19)
Pro forma (0.12) (0.22)
10
Independent Auditors' Review Report
The Board of Directors
LaserSight Incorporated:
We have reviewed the condensed consolidated balance sheet of LaserSight
Incorporated and subsidiaries as of March 31, 2003, and the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 2003 and 2002. These condensed consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
LaserSight Incorporated and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
March 21, 2003, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Our report dated March 21, 2003, on the consolidated financial statements of
LaserSight Incorporated and subsidiaries as of and for the year ended December
31, 2002, contains an explanatory paragraph that states that the Company's
recurring losses from operations and significant accumulated deficit raise
substantial doubt about the entity's ability to continue as a going concern. The
condensed consolidated balance sheet as of December 31, 2002, does not include
any adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
St. Louis, Missouri
May 6, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LaserSight is principally engaged in the manufacture and supply of
narrow beam scanning excimer laser systems, topography-based diagnostic
workstations, keratomes, keratome blades and other related products used to
perform procedures that correct common refractive vision disorders such as
nearsightedness, farsightedness and astigmatism. Since 1994, we have marketed
our laser systems commercially in over 30 countries worldwide and currently have
an installed base of approximately 400 laser systems, including over 220 of our
LaserScan LSX(TM) laser systems. We are currently focused on selling in selected
international markets, primarily China, while we await further regulatory
approvals of our laser product in the U.S.
We have significant liquidity and capital resource issues relative to
the timing of our accounts receivable collection and the successful completion
of new sales compared to our ongoing payment obligations and our recurring
losses from operations and net capital deficiency raises substantial doubt about
our ability to continue as a going concern. We have experienced significant
losses and operating cash flow deficits, and we expect that operating cash flow
deficits will continue without improvement in our operating results. In August
2002, we executed definitive agreements relating to our China Transaction (see
"Present Situation - China Transaction and Liquidity Issues"). While the China
transaction initially provided limited improvements in the Company's short-term
liquidity, further improvements in revenues will be needed to achieve
profitability and positive cash flow. However, as described elsewhere without an
immediate cash infusion the Company will exhaust it's cash reserve within weeks,
if not days and as a result, may have to seek judicial reorganization unless it
is able to get an immediate cash infusion.
PRESENT SITUATION - CHINA TRANSACTION AND LIQUIDITY ISSUES
As of May 15 2003, we have a cash balance of approximately $400,000. In
the last half of 2002 and during the first quarter of 2003, our revenues and
operations improved, primarily as a result of our China transaction. The China
transaction called for four quarterly letters of credit, each for $2.5 million
and each payable upon the shipment of our products and the presentation of
shipping documents. After providing the first letter of credit, the China group
was delinquent on the second and third letters of credit, which were due in
early December 2002 and March 2003, respectively. During March 2003, the China
group advanced us $2.0 million and indicated that they would provide a letter of
credit for approximately $5.5 million, representing the balance of the $10
million purchase order executed in August 2002. As a result of the delayed
letters of credit, we limited our purchases of parts necessary to complete some
products and to the extent possible, completed products and subassemblies with
existing inventory. With the recent cash advance, we commenced purchasing parts
and components and moving forward in our production process as much product as
possible, and expect to resume shipments if and when there is an additional cash
infusion and products are completed. Our current production and shipments are
focused on satisfying our delivery requirements with respect to the China group.
Additional production will depend on the future availability of cash and the
timing of our receipt of the $5.5 million letter of credit, as our cash position
requires us to focus on production and shipment to the China group in order to
satisfy the cash advance and then collect on the letter of credit.
12
As a result of the delayed letters of credit and resulting negative
impact on cash, we continue to have significant liquidity and capital resource
issues. Our revenues and operating results have improved during the last half of
2002 and first quarter of 2003, primarily due to our China transaction that
resulted in $2.7 million of revenue during the last half of 2002 and $1.7
million in the first quarter of 2003. We need to increase sales to the China
group and to other customers, and/or decrease expenses further before we will
reach profitability or positive cash flow. Our future working capital
requirements and our ability to continue operations are based on various factors
and assumptions, which are subject to substantial uncertainty and risks beyond
our control and no assurances can be given that these expectations will prove
correct. The occurrence of adverse developments related to these risks and
uncertainties or others could result in LaserSight being unable to generate
additional sales or collect new and outstanding accounts receivable. Any such
adverse developments may also result in the incurrence of unforeseen expenses or
LaserSight being unable to control expected expenses and overhead. Furthermore,
without an immediate cash infusion, the Company will exhaust its cash reserve
with the next few weeks. If we fail to generate additional sales and collect new
and outstanding accounts receivable or incur unforeseen expenses or fail to
control our expected expenses and overhead, we will likely be unable to continue
operations in the absence of obtaining additional sources of cash. The most
immediate source of obtaining additional cash is our ongoing discussion with NII
outlined above.
If the Company receives an immediate cash infusion and generates
additional revenues as a result of the China transaction, and realizes the
projected sales to other customers, management anticipates that LaserSight's
cash and cash equivalent balances and funds from operations (which are
principally the result of sales and collection of accounts receivable) will be
sufficient to meet its anticipated operating cash requirements for the next
several months. This expectation is based upon assumptions regarding cash flows
and results of operations over the next several months and is subject to
substantial uncertainty and risks beyond our control. If these assumptions prove
incorrect, the duration of the time period during which LaserSight could
continue operations could be materially shorter. We continue to face liquidity
and capital resource issues including those related to the timing of our receipt
of the $5.5 million letter of credit from the China group, accounts receivable
collection and the successful completion of new sales compared to our ongoing
payment obligations. To continue our operations, we will need to generate
increased revenues, collect them and reduce our expenditures relative to our
recent history, and secure an additional equity infusion. While we are working
to achieve these improved results, we cannot assure you that we will be able to
generate increased revenues and collections to offset required cash
expenditures. We are currently unable to borrow under our revolving credit
facility.
Our working capital remained positive (approximately $853,000 as of the
end of March 2003), though the timing of the conversion of our current assets
into cash is not totally in our control. For example, we cannot dictate the
timing of the collection of our accounts receivable with our customers and
converting our inventory into cash is dependent on our ability to generate new
sales of our products and collect the sales price in a timely manner. While to
date we have been able to negotiate payment terms with our suppliers and other
creditors, there is no assurance that we can continue to do so. During the past
few weeks, in order to conserve our remaining cash, we have only funded vendors
in support of ongoing manufacturing operations, payroll and payroll related
funding.
Our expectations regarding future working capital requirements and our
ability to continue operations are based on various factors and assumptions that
are subject to substantial uncertainty and risks beyond our control and no
assurances can be given that these expectations will prove correct. The
occurrence of adverse developments related to these risks and uncertainties or
others could result in LaserSight incurring unforeseen expenses, being unable to
deliver under the China transaction purchase order, being unable to generate
additional sales, to collect new and outstanding accounts receivable, to control
expected expenses and overhead, or to negotiate payment terms with creditors,
and we would likely be unable to continue operations. Even if we succeed in our
attempt to secure additional funds, we cannot assure you that we will be able to
generate increased revenues and collections to fund required cash expenditures
in a timely manner.
13
Given our present financial position, the extent of previous efforts to
sell assets or access capital, the China transaction and the possible additional
transaction with our largest shareholder who currently owns our series H
preferred stock which, upon conversion, would result in this shareholder owning
approximately 40% of our common stock (see next paragraph and "Present Situation
- - China Transaction and Liquidity Issues"), it is unlikely that there will be
any other buyer, strategic partner or major investor.
On March 11, 2003, we announced we have signed a non-binding letter of
intent with Shenzhen New Industries Venture Capital Company, an affiliate of New
Industries Investment Consultants (HK), Ltd., the party based in the People's
Republic of China that invested $2.0 million in our series H preferred stock in
October of 2002. The transaction contemplated by the letter of intent would
result in us acquiring the assets and the on-going revenue stream of 15
refractive laser centers currently operated within China. China is believed to
be the world's largest market for refractive procedures. If we enter into this
transaction, it would allow us to generate revenues not only through equipment
sales but also through participation in the recurring revenues that we believe
will be generated from these refractive laser centers. Under the terms of the
letter of intent, the value of the 15 existing centers would be determined by an
independent third party and, if a valuation of $6.0 million is confirmed and we
elect to proceed with the transaction, we would purchase the centers in exchange
for the issuance of approximately 26.1 million shares of our common stock at a
price of $0.23 per share. If completed on these terms, the China group,
including affiliates, would own approximately 61% of LaserSight. In addition, we
would have an option to purchase additional refractive laser centers that may be
developed in the future at a purchase price equal to 110% of the start-up costs
for such center. Each option would be in existence for a period of 18 months
following the date a center opens and the purchase price would be paid by the
issuance of shares of our common stock that would be valued at 90% of the then
30 day average closing bid price per share. The transactions contemplated by
this letter of intent are initially subject to the acceptance of the letter of
intent by LaserSight's Board of Directors and if such acceptance occurs, the
transactions are subject to satisfactory completion of due diligence, receipt of
all necessary approvals, negotiation of definitive agreements and receipt of
shareholder approval.
As mentioned earlier, we have been in continuous negotiations with NII
in an attempt to secure immediate cash payments for the purchase of company
products, further define the terms of a long term strategy for the Company in
China and outline a framework for additional product purchases.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information
derived from our statements of operations for those periods expressed as a
percentage of net sales, and the percentage change in such items from the
comparable prior year period. Any trends illustrated in the following table are
not necessarily indicative of future results.
14
Percent Increase / (Decrease)
As a Percentage of Net Sales Over Prior Periods
Three Months Ended March 31, Three Months Ended March 31,
---------------------------- ----------------------------
2003 2002 2003 vs. 2002
---- ---- -------------
Statements of Operations Data:
Net revenues:
Refractive products..................... 89.9% 94.6% 11.8%
Patent services......................... 10.1 5.4 119.4
----- ----- -----
Net revenues......................... 100.0 100.0 17.6
Cost of revenue.......................... 58.0 70.6 (3.4)
----- -----
Gross profit(1).......................... 42.0 29.4 68.0
Research, development and
regulatory expenses (2) ............. 8.4 27.5 (63.8)
Other general and administrative
expenses............................. 104.6 207.8 (40.8)
Selling-related expenses (3)............ 26.6 41.7 (24.9)
Amortization of intangibles.............. 5.0 5.8 --
----- ----- -----
Loss from continuing operations.......... (102.6) (253.4) (52.4)
- ---------------
(1) As a percentage of net revenues, the gross profit for refractive
products only for the three months ended March 31, 2003 and 2002, were
36% and 25%, respectively.
(2) As a percentage of refractive product net sales, research, development
and regulatory expenses for the three months ended March 31, 2003 and
2002, were 9% and 29%, respectively.
(3) As a percentage of refractive product net sales, selling-related
expenses for the three months ended March 31, 2003 and 2002, were 30%
and 44%, respectively.
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUES. Net revenues for the three months ended March 31, 2003
increased by $0.3 million, or 18%, to $2.3 million from $2.0 million for the
comparable period in 2002.
During the three months ended March 31, 2003, refractive products
revenues increased $0.2 million, or 12%, to $2.1 million from $1.9 million for
the comparable period in 2002. This revenue increase was primarily the result of
higher average selling prices of our excimer laser system, which increased
approximately 23%. During the three months ended March 31, 2003, excimer laser
system sales accounted for approximately $1.6 million in revenues compared to
$1.4 million in revenues over the same period in 2002. During the three months
ended March 31, 2003, seven laser systems were sold. The same number of laser
systems was sold during the comparable period in 2002.
15
Net revenues from patent services for the three months ended March 31,
2003 increased approximately $0.1 million, or 119%, to $0.2 million from $0.1
million for the comparable period in 2002, due to non-exclusive license
agreements we entered into during 2002.
Geographically, China has become our most significant market with $1.7
million in revenue during the three months ended March 31, 2003, all of which
resulted from the China transaction.
COST OF REVENUES; GROSS PROFIT. For the three months ended March 31,
2003 and 2002, gross profit margins were 42% and 29%, respectively. The gross
margin increase during the three months ended March 31, 2003 was primarily
attributable to higher average selling prices of our excimer laser system and
the higher margins that the Company experiences on sales of its AstraMax
diagnostic workstations.
RESEARCH, DEVELOPMENT AND REGULATORY EXPENSES. Research, development
and regulatory expenses for the three months ended March 31, 2003 decreased
approximately $0.3 million, or 64%, to $0.2 million from $0.5 million for the
comparable period in 2002. While decreasing our expenses, we continued to
develop our AstraMax diagnostic workstation and excimer laser systems and
continued to pursue protocols in our effort to attain and expand our FDA
approvals for our refractive products. If we have sufficient funds, we expect
research and development expenses during the remainder of 2003 to be at levels
that we are unable to presently quantify. Additionally, if we have sufficient
funds, we expect regulatory expenses will be at levels that we are unable to
presently quantify. Our continued pursuit of various FDA approvals, including
pre-market approval supplements, and the possible development of additional
pre-market approval supplements and future protocols for submission to the FDA
is at risk and depends on an additional cash infusion. The FDA has recently
instituted a fee structure that will increase the cost of pursuing new or
supplemental approvals.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and
administrative expenses for the three months ended March 31, 2003 decreased $1.7
million, or 41%, to $2.4 million from $4.1 million for the comparable period in
2002. This decrease was primarily due to a decrease in expenses incurred at our
refractive products subsidiary of approximately $1.8 million related to cost
reductions to the sales and marketing, customer support, professional services
departments of $0.6 million, $1.0 million in cost reductions in other
departments and a reduction of $0.1 million in reduced bad debt expense.
SELLING-RELATED EXPENSES. Selling-related expenses consist of those
items directly related to sales activities, including commissions on sales,
royalty or license fees, warranty expenses, and costs of shipping and
installation. Commissions and royalties, in particular, can vary significantly
from sale to sale or period to period depending on the location and terms of
each sale. Selling-related expenses for the three months ended March 31, 2003
decreased $0.2 million, or 25%, to $0.6 million from $0.8 million during the
comparable period in 2002. This decrease was primarily attributable to a $0.1
million decrease in costs of sales commissions and a decrease of $0.1 million of
warranty expense primarily related to the terms on our excimer laser system
sales.
16
AMORTIZATION OF INTANGIBLES. During the three months ended March 31,
2003, costs relating to the amortization of intangible assets were unchanged
from the comparable period in 2002. Items directly related to the amortization
of intangible assets are acquired technologies, patents and license agreements.
LOSS FROM OPERATIONS. The operating loss for the three months ended
March 31, 2003 was $2.4 million compared to the operating loss of $5.0 million
for the same period in 2002. This decrease in the loss from operations was
primarily due to reductions in operating expenses and higher related margins of
our excimer laser systems and AstraMax diagnostic workstations.
OTHER INCOME AND EXPENSES. Interest and dividend income for the three
months ended March 31, 2003 was $27,000, a decrease of $39,000 over the
comparable period in 2002. Interest and dividend income was earned from the
investment of cash and cash equivalents and the collection of long-term
receivables related to laser system sales. During the three months ended March
31, 2003, interest expense decreased by $31,000, or 22%, from $144,000 to
$113,000 as a result of repayments on our term loan.
INCOME TAXES. For the three months ended March 31, 2003, income tax
benefit amounted to approximately $58,000, which was related to a refund the
Company received from a settlement with the IRS on its 1995 return. For the
three months ended March 31, 2002, we had no income tax expense.
NET LOSS. Net loss for the three months ended March 31, 2003, was $2.4
million compared to a net loss of $5.1 million for the comparable period in
2002. The decrease in net loss for the three months ended March 31, 2003 can be
attributed to the significant reductions in our operating expenses and higher
related margins of our excimer laser system.
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. For the three months ended
March 31, 2003, the Company's loss attributable to common shareholders was
impacted by the accretion of the value of the conversion discount on the Series
H Preferred Stock.
LOSS PER SHARE. The loss per basic and diluted share was $0.10 for the
three months ended March 31, 2003 and $0.19 for the comparable period in 2002.
From March 31, 2002 to March 31, 2003, the weighted average shares of common
stock outstanding increased from 26,488,000 to 27,842,000 primarily due to the
conversion of preferred stock during May 2002.
LIQUIDITY AND CAPITAL RESOURCES
LaserSight had approximately $400,000 of cash and cash equivalents
available, as of May 15, 2003, to fund continuing operations. Definitive
agreements relating to the China transaction were executed in August 2002 and
include a commitment by the China-based group to purchase $10.0 million of
lasers and other products over the 12-month period ending August 15, 2003 and an
equity investment in LaserSight of $2.0 million. We started shipping products
under this agreement in August 2002 and received the equity investment in
October 2002. Our current product production and shipments are focused on
meeting the needs of the China group. Additional production will depend on the
future availability of cash and the timing of our receipt of the $5.5 million
letter of credit, as our cash position requires us to focus on satisfying our
delivery requirements with respect to the China group in order to produce and
ship the product necessary to collect on the promised letter of credit. See
"Business--Present Situation." Management continues undertaking steps as part of
a plan to attempt to continue to improve liquidity and operations. These steps
include seeking (a) to increase sales; and (b) to control overhead costs and
operating expenses.
17
If the Company receives an immediate cash infusion and generates
additional revenues as a result of the China transaction, and realizes projected
sales to other customers, management anticipates that LaserSight's cash and cash
equivalent balances and funds from operations (which are principally the result
of sales and collection of accounts receivable) will be sufficient to meet its
anticipated operating cash requirements for the next several months. This
expectation is based upon assumptions regarding cash flows and results of
operations over the next several months and is subject to substantial
uncertainty and risks beyond our control. If these assumptions prove incorrect,
the duration of the time period during which LaserSight could continue
operations could be materially shorter. We continue to face liquidity and
capital resource issues relative to the timing of our accounts receivable
collection and the successful completion of new sales compared to our ongoing
payment obligations. To continue our operations, we will need to generate
increased revenues, collect them and reduce our expenditures relative to our
recent history. While we are working to achieve these improved results, we
cannot assure you that we will be able to generate increased revenues and
collections to offset required cash expenditures. We are currently unable to
borrow under our revolving credit facility.
As noted previously, the Company's cash balances as of May 15, 2003 are
approximately $400,000. Its semi-monthly payroll and payroll related expenses
approximate $250,000, which it may not be able to fund as early as May 31, 2003.
Monthly cash requirements to service the principal and interest payments of the
Heller note approximate $65,000 monthly and will be due June 1, 2003.
Additionally, in order to conserve cash, the Company has only been funding
vendor payments necessary to support ongoing manufacturing operations. Based on
these circumstances, the Company may be weeks, if not days, from exhausting its
cash reserves and as a result, may have to seek judicial reorganization unless
it is able to get an immediate cash infusion.
In that regard, as mentioned previously, the Company has been in
continuous negotiations since April 27, 2003 with NII to secure immediate cash
payments for the purchase of Company products, further define the terms of a
long-term strategy for the Company in China, and outline a framework for an
additional product purchases.
The risks and uncertainties regarding management's expectations are
also described under the heading "Risk Factors and Uncertainties--Financial and
Liquidity Risks."
Our working capital remains positive (approximately $853,000 as of the
end of March 2003), though the timing of the conversion of our current assets
into cash is not totally in our control. For example, we cannot dictate the
timing of the collection of our accounts receivable with our customers and
converting our inventory into cash is dependent on our ability to generate new
sales of our products and collect the sales price in a timely manner. While to
date we have been able to negotiate payment terms with our suppliers and other
creditors, there is no assurance that we can continue to do so.
Our expectations regarding future working capital requirements and our
ability to continue operations are based on various factors and assumptions that
are subject to substantial uncertainty and risks beyond our control and no
assurances can be given that these expectations will prove correct. The
occurrence of adverse developments related to these risks and uncertainties or
others could result in LaserSight incurring unforeseen expenses, being unable to
deliver under the China transaction purchase order, being unable to generate
additional sales, to collect new and outstanding accounts receivable, to control
expected expenses and overhead, or to negotiate payment terms with creditors,
and we would likely be unable to continue operations. Even if we succeed in our
attempt to secure additional funds, we cannot assure you that we will be able to
generate increased revenues and collections to fund required cash expenditures
in a timely manner.
18
Given our present financial position, the extent of previous efforts to
sell assets or access capital, the China transaction and the possible additional
transaction with our largest shareholder who currently owns our series H
preferred stock which, upon conversion, would result in this shareholder owning
approximately 40% of our common stock (see "Present Situation - China
Transaction and Liquidity Issues"), it is unlikely that there will be any other
buyer, strategic partner or major investor.
Our principal sources of funds have historically been from sales of
preferred stock and common stock, sales of subsidiaries and patent rights and,
to a lesser extent, our operating cash flows. We issued equity securities
totaling approximately $14.8 million in 1997, $15.8 million in 1998, $8.9
million in 1999, $19.1 million in 2000, $3.0 million in 2001 and $2.0 million in
2002, and received proceeds from the exercise of stock options, warrants and our
Employee Stock Purchase Plan of approximately $98,000 in 1997, $0.5 million in
1998, $10.4 million in 1999, $85,000 in 2000, $67,000 in 2001 and $1,000 in
2002. In addition, we sold subsidiaries and various patent rights, resulting in
proceeds to us of approximately $10.5 million in 1997, $12.7 million in 1998 and
$6.5 million in 2001. Additionally, we received $5.0 million in 2001 and $2.6
million in 2002 for paid up licenses to our `504 Scanning Patent, which will be
amortized to revenue over the life of the patent, approximately 10 years. We
have principally used these capital resources to fund operating losses, working
capital requirements, capital expenditures, acquisitions and retirement of debt.
At March 31, 2003, we had an accumulated deficit of $101.8 million.
On March 12, 2001, we established a $3.0 million term loan and $10.0
million revolving credit facility with Heller. We borrowed $3.0 million under
the term loan at an annual rate equal to two and one-half percent (2.5%) above
the prime rate. Interest is payable monthly. As of May 14, 2003, the outstanding
principal on our term loan is approximately $2.0 million. Under the credit
facility, we have the option to borrow amounts at an annual rate equal to one
and one-quarter percent (1.25%) above the prime rate for short-term working
capital needs or such other purposes as may be approved by Heller. Borrowings
are limited to 85% of eligible accounts receivable related to U.S. sales.
Eligible accounts receivable will primarily be based on future U.S. sales, which
are not expected to increase as a result of our decision to not actively market
our laser in the U.S. until we receive additional FDA approvals. See "Industry
and Competitive Risks--We do not intend to continue actively marketing our
LaserScan LSX laser system in the U.S. until we receive additional FDA
approvals." At the present time, we do not have the ability to borrow under the
credit facility. Borrowings under the loans are secured by substantially all of
the Company's assets. The term loan and credit facility required us to meet
certain covenants, including the maintenance of a minimum net worth. In addition
to the costs and fees associated with the transaction, we issued to Heller a
warrant to purchase 243,750 shares of common stock at an exercise price of $3.15
per share. The warrant expires on March 12, 2004.
On August 15, 2002, Heller provided a waiver of our failure to comply
with certain financial covenants under our loan agreement pending the funding of
the equity portion of the China transaction. Upon receipt of the equity
investment in October 2002, revised covenants became effective that decreased
the required minimum level of net worth to $2.1 million, decreased minimum
tangible net worth to negative $2.8 million and decreased minimum quarterly
revenues during the third quarter of 2002 to $2.5 million, the fourth quarter of
2002 to $4.2 million and the first quarter of 2003 to $5.3 million. In exchange
for the waiver and revised covenants, we paid $150,000 in principal to Heller
upon the receipt of the equity investment in October 2002 and agreed to increase
other monthly principal payments to $60,000 in October 2002 and $40,000 during
each of November and December 2002 and January 2003, with the remaining
principal due on March 12, 2003.
19
On March 12, 2003, our loan agreement with Heller was extended 30 days
from March 12, 2003 to April 11, 2003. On March 31, 2003, our loan agreement
with Heller was amended again. In addition to the amendment, Heller waived our
failure to comply with the net revenue covenant for the fourth quarter of 2002.
In exchange for the amendment and waiver, we paid approximately $9,250 in fees
to Heller and agreed to increase our monthly principal payments to $45,000
beginning in April 2003. Revised covenants became effective that decreased the
minimum level of net worth to $1.0 million, minimum tangible net worth to
negative $4.0 million and minimum quarterly net revenue during 2003 to $2.0
million. In addition, we have agreed to work in good faith with Heller to adjust
these covenants by May 31, 2003 based on our first quarter 2003 financial
results. The remaining principal balance will be due on September 12, 2004.
There is a risk our net worth may drop below this $1.0 million minimum sometime
during the second quarter of 2003.
In October 2002, we completed a $2.0 million private placement of
series H convertible participating preferred stock.
Our working capital decreased $2.0 million from $2.9 million at
December 31, 2002 to $0.9 million as of March 31, 2003. This decrease in working
capital resulted primarily from the net loss of $2.4 million offset by cash
provided from operating activities of approximately $0.5 million.
Operating activities provided net cash of $0.5 million during the three
months ended March 31, 2003, compared to net cash used of $2.4 million during
the same period in 2002, and compared to $2.7 million during the year ended
December 31, 2002. We expect to incur a loss and a deficit in cash flow from
operations during the first half of 2003. There can be no assurance that we can
regain or sustain profitability or positive operating cash flow in any
subsequent fiscal period. There was no cash provided or used by investing
activities during the three months ended March 31, 2003, compared to net cash
used of $4,437 for the same period in 2002. Net cash used by financing
activities during the three months ended March 31, 2003 of $24,000 can be
attributed to the principal payments on our term debt.
There can be no assurance as to the correctness of the other
assumptions underlying our business plan or our expectations regarding our
working capital requirements or our ability to continue operations.
Our ability to continue operations is based on factors including: the
success of our sales efforts in China where our efforts are primarily focused at
this time, the uncertain timing of additional supplemental FDA approvals for our
excimer laser system (which has resulted in our decision to not actively market
our laser system in the U.S. until additional FDA approvals are received),
potential growth in laser sales after receipt of further FDA approvals,
collection on our outstanding accounts receivable and the ability to purchase
the necessary inventory when sales increase, our present inability to borrow
under our revolving credit facility and the absence of unanticipated product
development and marketing costs. Our current product production and shipments
are focused on meeting the needs of the China group. Additional production will
depend on the future availability of cash and the timing of our receipt of the
committed $5.5 million letter of credit, as our cash position requires us to
focus on product for the China group in order to produce and ship the product
necessary to collect on the committed letter of credit. See "Risk Factors and
Uncertainties--Industry and Competitive Risks--We cannot assure you that our
keratome products will achieve market acceptance" and "--We do not intend to
continue actively marketing our LaserScan LSX laser system in the U.S. until we
receive additional FDA approvals." These factors and assumptions are subject to
certain contingencies and uncertainties, some of which are beyond our control
and no assurances can be given that these expectations will prove correct.
Similarly, our long-term liquidity will be dependent on the growth of sales in
China and other selected international markets, the successful entrance into the
U.S. market of our laser systems, the successful entrance into U.S. and
international markets of our diagnostic workstation and our ability to collect
our receivables on a timely basis.
20
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities." This statement nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits Restructuring." Statement
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred rather than the date of an
entity's commitment to an exit plan. We adopted Statement No. 146 on January 1,
2003. The adoption of Statement No. 146 did not have a material effect on our
consolidated financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-base
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. While we have not elected to adopt fair
value accounting for its stock-based compensation, we have complied with the new
disclosure requirements under Statement No. 148. As adopted, this statement does
not have a material impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements
of SFAS No. 5, Accounting for Contingencies, relating to a guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
For certain guarantees issued after December 31, 2002, FIN 45 requires a
guarantor to recognize, upon issuance of a guarantee, a liability for the fair
value of the obligations it assumes under the guarantee. Guarantees issued prior
to January 1, 2003, are not subject to liability recognition, but are subject to
expanded disclosure requirements. As adopted, this interpretation does not have
a material impact on our consolidated financial statements.
RISK FACTORS AND UNCERTAINTIES
The business, results of operations and financial condition of
LaserSight and the market price of our common stock may be adversely affected by
a variety of factors, including the ones noted below:
FINANCIAL AND LIQUIDITY RISKS
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND OPERATING CASH FLOW DEFICITS
AND WE EXPECT THAT OPERATING CASH FLOW DEFICITS WILL CONTINUE.
Although our revenues and operating results have improved during the
last half of 2002, primarily due to our China transaction that resulted in $2.7
million of revenue during the last half of 2002 and $1.7 million during the
first quarter of 2003, we continue to have significant liquidity and capital
resource issues. We need to increase sales to the China group and to other
customers, and/or decrease expenses further before we will reach profitability
or positive cash flow. Our future working capital requirements and our ability
to continue operations are based on various factors and assumptions, which are
subject to substantial uncertainty and risks beyond our control and no
assurances can be given that these expectations will prove correct. The
occurrence of adverse developments related to these risks and uncertainties or
others could result in LaserSight being unable to generate additional sales or
collect new and outstanding accounts receivable. Any such adverse developments
may also result in the incurrence of unforeseen expenses or LaserSight being
unable to control expected expenses and overhead. If we fail to generate
additional sales and collect new and outstanding accounts receivable or incur
unforeseen expenses or fail to control our expected expenses and overhead, we
will be unable to continue operations in the absence of obtaining additional
sources of capital.
21
As indicated earlier, we have been in continuous negotiations with NII
to secure immediate cash payments for the purchase of Company products, further
define the terms of a long-term strategy for the Company in China and outline a
framework for additional product purchases. Without such immediate cash
infusion, we will exhaust our cash reserves within a few weeks, if not days, and
be forced to seek judicial reorganization.
Our working capital remains positive (approximately $853,000 as of the
end of March 2003), though the timing of the conversion of our current assets
into cash is not totally in our control. For example, we cannot dictate the
timing of the collection of our accounts receivable with our customers and
converting our inventory into cash is dependent on our ability to generate new
sales with our products and collect the sales price in a timely manner. While to
date we have been able to negotiate payment terms with our suppliers and other
creditors, there is no assurance that we can continue to do so.
We experienced significant net losses and deficits in cash flow from
operations for the years ended December 31, 2002, 2001 and a slight surplus for
the three months ended March 31, 2003, as set forth in the following table. We
cannot be certain that we will be able to achieve or sustain profitability or
positive operating cash flow in the future.
Year Ended December 31, Three months Ended
----------------------- March 31,
2001 2002 2003
---- ---- ----
Net loss $ 26.2 million $13.6 million $2.4 million
Surplus (Deficit) in cash
flow from operations $(17.7) million $(2.7) million $0.5 million
In the longer term, our expectations are based on additional factors
including: the success of our sales efforts in China where our efforts will
initially be primarily focused, the uncertain timing of additional supplemental
FDA approvals for our LaserScan LSX excimer laser system (which has resulted in
our decision to not actively market our laser system in the U.S. until
additional FDA approvals are received), potential growth in laser sales after
receipt of further FDA approvals, increases in accounts receivable and inventory
purchases when sales increase, our present inability to borrow under our
revolving credit facility, the uncertain impact of the market introduction of
our UltraShaper durable keratomes and AstraMax diagnostic workstations, and the
absence of unanticipated product development and marketing costs. These factors
and assumptions are subject to substantial uncertainty and risks beyond our
control and no assurances can be given that these expectations will prove
correct. These risks and uncertainties include:
o the willingness of trade creditors to continue to extend credit to
LaserSight;
o reductions and cancellations in orders;
o our ability to fulfill orders in light of our current financial
condition;
o our ability to sell products and collect accounts receivables at or
above the level of management's expectations;
o the occurrence of unforeseen expenses and our ability to control
expected expenses and overhead;
o the occurrence of property and casualty losses which are uninsured or
that generate insurance proceeds that cannot be collected in a short
time frame;
o our ability to improve pricing and terms of international sales;
o the loss of, or failure to obtain additional, customers; and
o changes in pricing by our competitors.
22
With respect to management's expectations regarding LaserSight's
ability to continue operations for the expected period and the risks and
uncertainties relating to those expectations, readers are encouraged to review
the discussions under the captions "--If our uncollectible receivables exceed
our reserves we will incur additional unanticipated expenses, and we may
experience difficulty collecting restructured receivables with extended payment
terms," "--Industry and Competitive Risks--We do not intend to continue actively
marketing our LaserScan LSX laser system in the U.S. until we receive additional
FDA approvals," "--Additional Company and Business Risks--Required per procedure
fees payable to Visx under our license agreement may exceed per procedure fees
collected by us," and "--Our supply of certain critical components and systems
may be interrupted because of our reliance on a limited number of suppliers."
These risks and uncertainties can affect LaserSight's ability to continue
operations for the expected period in the absence of obtaining additional
capital resources. As stated elsewhere, without an immediate cash infusion, the
Company will exhaust it's cash reserve with weeks, if not days, and as a result,
may have to seek judicial reorganization.
IF WE FAIL TO MEET THE FINANCIAL COVENANTS IN OUR LOAN WITH HELLER AND
OUR LOAN OBLIGATION IS ACCELERATED, WE WILL NOT HAVE ENOUGH AVAILABLE CASH TO
PAY THE AMOUNTS OWED.
Under the original terms of our term loan with Heller, we were required
to pay Heller approximately $2.1 million in March 2003. On March 12, 2003, the
due date was extended 30 days to April 11, 2003. On March 31, 2003, our loan
agreement with Heller was amended again. In addition to the amendment, Heller
waived our failure to comply with the net revenue covenant for the fourth
quarter of 2002. In exchange for the amendment and waiver, we paid approximately
$9,250 in fees to Heller, and we have agreed to increase our monthly principal
payments to $45,000 beginning in April 2003. Revised covenants became effective
that decreased the minimum level of net worth to $1.0 million, minimum tangible
net worth to negative $4.0 million and minimum quarterly net revenue during 2003
to $2.0 million. In addition, we have agreed to work in good faith with Heller
to adjust these covenants by May 31, 2003 based on our first quarter 2003
financial results. The remaining principal balance will be due on September 12,
2004. If we are unable to meet the financial covenants of the Heller loan,
Heller could declare us in default and require the entire principal balance to
be due and payable. If Heller accelerates our payment obligations, it is
unlikely we will have enough available cash to repay the debt, and we will be
unable to continue operations in the absence of obtaining additional sources of
capital. If we do not receive an immediate cash infusion, the existing
convenants will not be met, and it is unlikely that Heller will further adjust
these convenants.
IF OUR UNCOLLECTIBLE RECEIVABLES EXCEED OUR RESERVES WE WILL INCUR
ADDITIONAL UNANTICIPATED EXPENSES, AND WE MAY EXPERIENCE DIFFICULTY COLLECTING
RESTRUCTURED RECEIVABLES WITH EXTENDED PAYMENT TERMS.
Although we monitor the status of our receivables and maintain a
reserve for estimated losses, we cannot be certain that our reserves for
estimated losses, which were approximately $5.2 million at March 31, 2003, will
be sufficient to cover the amount of our actual write-offs over time. At March
31, 2003, our net trade accounts and notes receivable totaled approximately $4.6
million, and accrued commissions, the payment of which generally depends on the
collection of such net trade accounts and notes receivable, totaled
approximately $1.7 million. Actual write-offs that exceed amounts reserved could
have a material adverse effect on our consolidated financial condition and
results of operations. The amount of any loss that we may have to recognize in
connection with our inability to collect receivables is principally dependent on
our customers' ongoing financial condition, their ability to generate revenues
from our laser systems, and our ability to obtain and enforce legal judgments
against delinquent customers.
23
Our ability to evaluate the financial condition and revenue-generating
ability of our prospective customers located outside of the U.S. and our ability
to obtain and enforce legal judgments against customers located outside of the
U.S. is generally more limited than for our customers located in the U.S. Our
agreements with our international customers typically provide that the contracts
are governed by Florida law. We have not determined whether or to what extent
courts or administrative agencies located in foreign countries would enforce our
right to collect such receivables or to recover laser systems from customers in
the event of a customer's payment default. When a customer is not paying
according to established terms, we attempt to communicate and understand the
underlying causes and work with the customer to resolve any issues we can
control or influence. In most cases, we have been able to resolve the customer's
issues and continue to collect our receivable, either on the original schedule
or under restructured terms. If such issues are not resolved, we evaluate our
legal and other alternatives based on existing facts and circumstances. In many
cases, we have concluded that the account should be reserved or written off as
uncollectible based on the economic condition in the region and our
understanding of the customer's business and related items. The reserves and
write-offs are generally the result of events and circumstances that could not
realistically be foreseen at the time sales were completed. In addition, during
our recent period of declining revenues, the relationship between the bad debts
that resulted from these events compared to lower revenues is magnified. Events
and circumstances that impact our bad debt expense include FDA approvals on our
laser system that took and are taking longer than anticipated, economic
downturns in certain countries or regions of the world, including the U.S. and
South and Central America, and the terrorist attacks that affected personal
spending decisions of consumers, and thus the business levels of many of our
customers. Accounts written off during the three months ended March 31, 2003 and
the year ended December 31, 2002 totaled approximately 9% and 22%, respectively,
of ending receivables for each period. International revenues represented 85% of
total revenues during the three months ended March 31, 2003 and 78% during the
three months ended March 31, 2002.
INDUSTRY AND COMPETITIVE RISKS
The following Industry and Competitive Risks relate primarily to the
longer term. They assume we receive the necessary cash infusion to resolve our
present cash flow problems.
WE DO NOT INTEND TO CONTINUE ACTIVELY MARKETING OUR LASERSCAN LSX LASER
SYSTEM IN THE U.S. UNTIL WE RECEIVE ADDITIONAL FDA APPROVALS.
We received the FDA approval necessary for the commercial marketing and
sale of our LaserScan LSX excimer laser system in the U.S. in late 1999 and
commercial shipments to customers in the U.S. began in March 2000. To date, our
LaserScan LSX laser system and per procedure fee business model have not
achieved a level of market acceptance sufficient to provide our cash flows from
operations to fund our business. Our excimer laser system has not been approved
by the FDA for use in the U.S. for as wide a range of treatments as have many of
our competitors' lasers. Because of the limited treatment ranges many physicians
have resisted purchasing our excimer laser. In order to become more competitive
we need to obtain FDA approval to treat patients with farsightedness,
farsightedness with astigmatism and mixed astigmatism. In the international
market, however, these limitations on treatment ranges do not exist, and we can
more effectively compete with other laser manufacturers. If we obtain FDA
approval for expanded treatment ranges for our laser system in the U.S. we
believe that we would be in a position to more effectively market our laser
system to physicians. As a result of our current liquidity and capital resource
issues, we have decided to focus on international markets, primarily China with
our LaserScan LSX laser system and other select international markets with a
custom ablation product line, and not to continue actively marketing our laser
system in the U.S. until we receive additional FDA approvals.
24
The current level of per procedure fees payable to us by existing
refractive surgeon customers in the U.S. may not continue to be accepted by the
marketplace or may exceed those charged by our competitors. If our competitors
reduce or do not charge per procedure fees to users of their systems, we could
be forced to reduce or eliminate the fees charged under this business model,
which could significantly reduce our revenues. We are not aware of the existence
of a current trend toward reducing or eliminating per procedure fees. In the
spring of 2000 industry leader Visx reduced the per-procedure fees it was
charging the users of its laser system, and shortly thereafter, Alcon announced
that it too would be reducing its licensing fee. Since that time, to our
knowledge there has been no trend to further reduce or eliminate per procedure
fees. See also "--Additional Company and Business Risks--Required per procedure
fees payable to Visx under our license agreement may exceed per procedure fees
collected by us."
WE CANNOT ASSURE YOU THAT OUR KERATOME PRODUCTS WILL ACHIEVE MARKET
ACCEPTANCE.
Keratomes are surgical devices used to create a corneal flap needed to
perform a laser vision correction procedure called Laser In-Situ Keratomileusis,
or LASIK. Once the corneal flapped is created, it is then flipped back, the
excimer laser beam is directed to the exposed corneal surface, and the flap is
placed back and re-adhered to the surface of the eye. We began to roll out our
MicroShape family of keratome products with the commercial launch of our
UltraEdge keratome blades in July 1999 and of our UniShaper single-use keratomes
and control consoles in December 1999. We have suspended the manufacture and
sale of our UniShaper keratome product. The decision to suspend the manufacture
and sale of our UniShaper product was made after we encountered difficulties
consistently meeting required tolerances utilizing injection-molded plastics in
the manufacturing process and it became apparent that our potential customers
preferred stainless steel, durable keratomes like our UltraShaper product. If we
decide in the future to re-focus our efforts on the manufacture and sale of our
UniShaper product, it will need to be reengineered, if possible, to include most
or all of the features included in our UltraShaper keratome for the UniShaper to
be commercially viable. In November 2001, we commercially released our
UltraShaper durable keratomes after a thorough process of engineering refinement
and validity testing. Our UltraShaper durable keratome incorporates the features
found in the ACS keratome previously marketed by Bausch & Lomb, Inc. with new
enhancements and features. However, Bausch & Lomb has not aggressively marketed
or serviced the ACS since 1997 when we licensed the rights to commercially
market keratomes based on the same technology, and has successfully transitioned
a large number of refractive surgeons from the ACS to its Hansatome durable
keratome product. We believe that many refractive surgeons learned to perform
the LASIK procedure using the ACS and prefer the surgical technique required by
the ACS, which is also used to operate our UltraShaper durable keratome, to the
surgical technique required to operate the Hansatome keratome product. However,
we cannot assure you that we will be successful in commercially introducing or
achieving broad market acceptance of our UltraShaper durable keratome or our
other keratome products.
We have previously indicated that the successful implementation of our
keratome product sales strategy was in part dependent upon our marketing and
distribution alliance with Becton Dickinson. Due to the delay in the commercial
launch of our UltraShaper durable keratome, we initiated discussions with Becton
Dickinson in order to modify our manufacturing and marketing agreements. During
2001 we mutually agreed to terminate both agreements. If we cannot successfully
market and sell our keratome products or if we are unable to successfully find a
marketing and distribution alliance with another company, our ability to
generate revenues from the sale of our keratome products will be impaired, and
if we cannot finance our business operations through operating revenues we might
not be able to continue our business. See also "--Additional Company and
Business Risks--Required minimum payments under our keratome license agreement
may exceed our gross profits from sales of our keratome products."
25
THE VISION CORRECTION INDUSTRY CURRENTLY CONSISTS OF A FEW ESTABLISHED
PROVIDERS WITH SIGNIFICANT MARKET SHARES AND WE ARE ENCOUNTERING DIFFICULTIES
COMPETING IN THIS HIGHLY COMPETITIVE ENVIRONMENT.
The vision correction industry is subject to intense, increasing
competition, and we do not know if we will be able to compete successfully
against our current and future competitors. Many of our competitors have
established products, distribution capabilities and customer service networks in
the U.S. marketplace, are substantially larger and have greater brand
recognition and greater financial and other resources than we do. Visx, the
historical industry leader for excimer laser system sales in the U.S., sold
laser systems that performed a significant majority of the laser vision
correction procedures performed in the U.S. from 1999 through 2002. Similarly,
Bausch & Lomb sold a significant majority of the keratomes used by refractive
surgeons in the U.S. from 1999 through 2002. Alcon, one of the largest
ophthalmic companies in the world, and its narrow beam laser technology platform
also competes directly with our precision beam, scanning microspot LaserScan LSX
excimer laser system. In addition, Alcon, as a result of its acquisition of
Summit Autonomous Inc., is able to sell its narrow beam laser systems under a
royalty-free license to certain Visx patents without incurring the expense and
uncertainty associated with intellectual property litigation with Visx. Alcon
also has the ability to leverage the sale of its laser systems with its other
ophthalmic products, and has placed a significant number of its lasers systems
in the U.S. Competitors are using our weak financial condition as a reason why a
buyer shouldn't buy our laser.
MANY OF OUR COMPETITORS RECEIVED EARLIER REGULATORY APPROVALS THAN US
AND HAVE A COMPETITIVE ADVANTAGE OVER US DUE TO THE SUBSEQUENT EXPANSION OF
THEIR REGULATORY APPROVALS AND THEIR SUBSTANTIAL EXPERIENCE IN THE U.S. MARKET.
We received the FDA approval necessary for the commercial sale of our
LaserScan LSX excimer laser system in the U.S. in November 1999 and commercial
shipments to customers in the U.S. began in March 2000. Our direct competitors
include large corporations such as Visx and Alcon, each of whom received FDA
approval of excimer laser systems more than three years prior to our approval
and has substantial experience manufacturing, marketing and servicing laser
systems in the U.S. In addition to Visx and Alcon, Nidek and Bausch & Lomb have
also received FDA approval for their laser systems.
In the U.S., a manufacturer of excimer laser vision correction systems
gains a competitive advantage by having its systems approved by the FDA for a
wider range of treatments for refractive errors such as nearsightedness,
farsightedness or astigmatism. A laser that has been approved for a wider range
of treatments is more attractive because it enlarges the pool of laser
correction candidates to whom laser correction procedures can be marketed.
Initial FDA approvals of excimer laser vision correction systems historically
have been limited to the treatment of low to moderate nearsightedness, with
additional approvals for other and broader treatments granted only as a result
of subsequent FDA applications and clinical trials. The range of treatments is
generally described in terms of diopters. The term diopter is used to describe
the measure of severity of the particular refractive error, and the greater the
number expressed in terms of diopters, the more severe the refractive error. In
addition, diopters that are expressed as a negative number represent the
severity of nearsightedness and diopters that are expressed as a positive number
reflect the severity of farsightedness.
26
Our LaserScan LSX is currently approved in the US for the LASIK
treatment of nearsightedness with and without astigmatism for a range of
treatment of refractive errors up to -6.0 diopters MRSE with or without a
refractive astigmatism up to 4.5 diopters and for the Photorefractive
Keratectomy, or PRK, treatment of low to moderate nearsightedness (up to -6.0
diopters) without astigmatism. In PRK, the refractive surgeon prepares the eye
by gently removing the surface layer of the cornea called the epithelium. The
surgeon then applies the excimer laser beam directly to the corneal surface
reshaping the curvature of the cornea. Additionally, we have received FDA
approval to operate our laser systems at a repetition rate of 300 pulses per
second, three times the originally approved rate. We have submitted PMA
supplements to the FDA to permit our laser systems sold to customers in the U.S.
to utilize LASIK to treat farsightedness, farsightedness with astigmatism and
mixed astigmatism. FDA approval of these applications is anticipated in 2003,
though we cannot ensure if or when the approval will be received. We do not
intend to sell our laser systems in the U.S. until the FDA approves these
supplements. Visx and Alcon have received FDA approval, in 2001 and 2000,
respectively, for the treatment of moderate levels of farsightedness with or
without astigmatism and Visx received approval for the treatment of mixed
astigmatism in 2001.
Currently, the excimer laser vision correction systems manufactured by
Visx, Alcon, Bausch & Lomb and Nidek have been approved for higher levels of
nearsightedness than the LaserScan LSX. Alcon's Apex Plus and Ladarvision
Excimer Laser Workstations, Visx's Star S2 Excimer Laser System and Nidek's
EC-5000 Excimer Laser System have received FDA approval for the LASIK treatment
of nearsightedness with or without astigmatism. The approvals for many of the
systems are for the correction of nearsightedness in the range of 0 diopters to
- -14.0 diopters and nearsightedness with astigmatism generally in the range of
- -0.5 diopters to -5.0 diopters. Bausch & Lomb's Technolas 217 excimer laser has
also received FDA approval for the treatment of nearsightedness from -1.0
diopter up to -11.0 diopters with up to -3.0 diopters of astigmatism. The Visx
and Alcon excimer laser systems are also approved for the treatment of moderate
farsightedness. In September 2000, the FDA approved Alcon's Ladarvision system
for the correction of farsightedness, using LASIK, of up to +6.0 diopters and an
astigmatism range of up to 6.0 diopters. In October 2000, the FDA approved
Visx's Star S2 and S3 systems for the correction using PRK of farsightedness of
up to +5.0 diopters and an astigmatism range of up to 3.0 diopters. In February
2001, the FDA approved of Visx's Custom-Contoured Ablation Pattern Method for
treatment of decentered ablations under a Humanitarian Device Exemption (HDE).
An HDE authorizes the use and marketing of a device that is intended to benefit
patients in the treatment of conditions that affect fewer than 4,000
individuals. In August 2002, Alcon announced the approval of its
wavefront-guided laser eye surgery application for the treatment of
nearsightedness between zero and -7.0 diopters. Competitors' earlier receipt of
LASIK and farsightedness-specific FDA regulatory approvals have given them a
significant competitive advantage that could impede our ability to successfully
sell our LaserScan LSX system in the U.S. Our failure to successfully market our
product will impair our ability to generate revenues from the sale of our
products, and we may not be able to continue our business operations.
All of our principal competitors in the keratome business, including
current market leader Bausch & Lomb, received FDA clearance prior to the
commercialization of our keratome products and have substantial experience
marketing their keratome products. The established market presence in the U.S.
of previously approved laser systems and keratome products, as well as the entry
of new competitors into the market upon receipt of new or expanded regulatory
approvals, has impeded our ability to successfully introduce our LaserScan LSX
system in the U.S. and our keratome products worldwide. If we are unable to
successfully introduce our LaserScan LSX system in the U.S. and our keratome
products worldwide, our ability to generate revenues from the sale of our
products will be impaired, and we may not be able to continue our business
operations.
27
WE DEPEND UPON OUR ABILITY TO ESTABLISH AND MAINTAIN STRATEGIC
RELATIONSHIPS.
We believe that our ability to establish and maintain strategic
relationships will have a significant impact on our ability to meet our business
objectives. These strategic relationships are critical to our future success
because we believe that these relationships will help us to:
o extend the reach of our products to a larger number of refractive
surgeons;
o develop and deploy new products;
o further enhance the LaserSight brand; and
o generate additional revenue.
Entering into strategic relationships is complicated because some of
our current and future strategic partners may decide to compete with us in some
or all of our markets. In addition, we may not be able to establish
relationships with key participants in our industry if they have relationships
with our competitors, or if we have relationships with their competitors.
Moreover, some potential strategic partners have resisted, and may continue to
resist, working with us until our products and services have achieved widespread
market acceptance. Once we have established strategic relationships, we will
depend on our partners' ability to generate increased acceptance and use of our
products and services. To date, we have established only a limited number of
strategic relationships, and many of these relationships are in the early stages
of development. Our cash flow situation and our lack of recent profitability may
be a limiting factor in our ability to establish and maintain strategic
relationships. There can be no assurance as to the terms, timing or consummation
of any future strategic relationships. If we lose any of these strategic
relationships or fail to establish additional relationships, or if our strategic
relationships fail to benefit us as expected, we may not be able to execute our
business plan, and our business will suffer.
BECAUSE THE SALE OF OUR PRODUCTS IS DEPENDENT ON THE CONTINUED MARKET
ACCEPTANCE OF LASER-BASED REFRACTIVE EYE SURGERY USING THE LASIK PROCEDURE, THE
LACK OF BROAD MARKET ACCEPTANCE WOULD HURT OUR BUSINESS.
We believe that whether we achieve profitability and growth will
depend, in part, upon the continued acceptance of laser vision correction using
the LASIK procedure in China, the U.S. and in other countries. We believe that
if we achieve profitability and growth as a result of our focus in China, we can
increase our level of activity in the U.S. and other countries. We cannot be
certain that laser vision correction will continue to be accepted by either the
refractive surgeons or the public at large as an alternative to existing methods
of treating refractive vision disorders. The acceptance of laser vision
correction and, specifically, the LASIK procedure may be adversely affected by:
o possible concerns relating to safety and efficacy, including the
predictability, stability and quality of results;
o the public's general resistance to surgery;
o the effectiveness and lower cost of alternative methods of correcting
refractive vision disorders;
o the lack of long-term follow-up data;
o the possibility of unknown side effects;
o the lack of third-party reimbursement for the procedures;
o the cost of the procedure; and
o unfavorable publicity involving patient outcomes from the use of laser
vision correction.
28
Unfavorable side effects and potential complications that may result
from the use of laser vision correction systems manufactured by any manufacturer
may broadly affect market acceptance of laser-based vision correction surgery.
Potential patients may not distinguish between our precision beam scanning spot
technology and the laser technology incorporated by our competitors in their
laser systems, and customers may not differentiate laser systems and procedures
that have not received FDA approval from FDA-approved systems and procedures.
Any adverse consequences resulting from procedures performed with a competitor's
systems or an unapproved laser system could adversely affect consumer acceptance
of laser vision correction in general. In addition, because laser vision
correction is an elective procedure that is not typically covered by insurance
and involves more significant immediate expense than eyeglasses or contact
lenses, adverse changes in the U.S. or international economy may cause consumers
to reassess their spending choices and to select lower-cost alternatives for
their vision correction needs. Any such shift in spending patterns could reduce
the volume of LASIK procedures performed that would, in turn, reduce the number
of laser systems sold and our revenues from per procedure fees and sales of
single-use products such as our UltraEdge keratome blades.
The failure of laser vision correction to achieve continued market
acceptance would limit our ability to market our products which in turn would
limit our ability to generate revenues from the sale of our products. If we are
unable to generate revenue from the sale of our products, we may not be able to
continue our business operations. Even if laser vision correction achieves and
sustains market acceptance, sales of our keratome products could be adversely
impacted if a laser procedure that does not require the creation of a corneal
flap was to emerge as the procedure of choice.
NEW PRODUCTS OR TECHNOLOGIES COULD ERODE DEMAND FOR OUR PRODUCTS OR
MAKE THEM OBSOLETE, AND OUR BUSINESS COULD BE HARMED IF WE CANNOT KEEP PACE WITH
ADVANCES IN TECHNOLOGY.
In addition to competing with eyeglasses and contact lenses, excimer
laser vision correction competes or may compete with newer technologies such as
intraocular lenses, intracorneal inlays, corneal rings and surgical techniques
using different or more advanced types of lasers. Two products that may become
competitive within the near term are implantable contact lenses, which are
pending FDA approval, and corneal rings, which have been approved by the FDA.
Both of these products require procedures with lens implants, and their ultimate
market acceptance is unknown at this time. To the extent that any of these or
other new technologies are perceived to be clinically superior or economically
more attractive than currently marketed excimer laser vision correction
procedures or techniques, they could erode demand for our excimer laser and
keratome products, cause a reduction in selling prices of such products or
render such products obsolete. In addition, if one or more competing
technologies achieves broader market acceptance or renders laser vision
correction procedures obsolete, our ability to generate revenues from the sale
of our products would be limited. If we are unable to generate revenue from the
sale of our products, we may not be able to continue our business operations.
As is typical in the case of new and rapidly evolving industries, the
demand and market for recently introduced products and technologies is
uncertain, and we cannot be certain that our LaserScan LSX laser system,
UltraShaper durable keratome, UltraEdge keratome blades, or future new products
and enhancements will be accepted in the marketplace. In addition, announcements
or the anticipation of announcements of new products, whether for sale in the
near future or at some later date, may cause customers to defer purchasing our
existing products.
29
If we cannot adapt to changing technologies, our products may become
obsolete, and our business could suffer. Our success will depend, in part, on
our ability to continue to enhance our existing products, develop new technology
that addresses the increasingly sophisticated needs of our customers, license
leading technologies and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development of
our proprietary technology entails significant technical and business risks. We
may not be successful in using new technologies effectively or adapting our
proprietary technology to evolving customer requirements or emerging industry
standards.
ADDITIONAL COMPANY AND BUSINESS RISKS
The following Additional Company and Business Risks relate primarily to
the longer term, with the exception of "loss of key personnel" and "keratome
license" issues, which relate to the present as well as longer term.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our ability to maintain our competitive position depends in part upon
the continued contributions of our executive officers and other key employees,
especially Michael R. Farris, our president and chief executive officer. A loss
of one or more such officers or key employees would result in a diversion of
financial and human resources in connection with recruiting and retaining a
replacement for such officers or key employees. Such a diversion of resources
could prevent us from successfully executing our business plan, and our business
will suffer. We do not carry "key person" life insurance on any officer or key
employee.
During 2001 we reduced our staff by 59 positions representing
approximately $2.5 million in annual salaries and wages. During 2002, we further
reduced our staff by an additional 46 positions representing approximately $2.5
million in annual salaries and wages. Included in these reductions were the
resignations of our Chief Operating Officer, D. Michael Litscher, and our Senior
Vice President-Sales and Marketing, Christine A. Oliver. As of March 31, 2003 we
again reduced our staff by four positions representing approximately $0.3
million in annual salaries and wages. In addition, during April 2003, Greg
Wilson, our Chief Financial Officer, left the company as a reflection of our
reduced size. The Company regards these departures as consistent with its
overall reductions in positions and as not material to its present operations.
Additional staff reductions are likely. Our staff reductions may have a negative
impact on our ability to attract and retain personnel. If we fail to attract and
retain qualified individuals for necessary positions, we could be prevented from
successfully executing our business plan, and our business will suffer.
WE HAVE MOVED ALL INTERNATIONAL MANUFACTURING OPERATIONS FROM COSTA
RICA TO THE U.S. AND MUST CONTINUE TO COMPLY WITH STRINGENT REGULATION OF OUR
MANUFACTURING OPERATIONS.
We moved the manufacturing location our laser systems for sale in
international markets to our U.S. location from our manufacturing facility in
Costa Rica. We cannot assure you that we will not encounter difficulties in
increasing our production capacity for our laser systems at our Florida
facility, including problems involving production delays, quality control or
assurance, component supply and lack of qualified personnel. Any products
manufactured or distributed by us pursuant to FDA clearances or approvals are
subject to extensive regulation by the FDA, including record-keeping
requirements and reporting of adverse experience with the use of the product.
Our manufacturing facilities are subject to periodic inspection by the FDA,
certain state agencies and international regulatory agencies. We require that
our key suppliers comply with recognized standards as well as our own quality
standards, and we regularly test the components and sub-assemblies supplied to
us. Any failure by us or our suppliers to comply with applicable regulatory
requirements, including the FDA's quality systems/good manufacturing practice
(QSR/GMP) regulations, could cause production and distribution of our products
to be delayed or prohibited, either of which could impair our ability to
generate revenues form the sale of our products. If we are unable to generate
revenues from the sale of our products we may not be able to continue our
business operations.
30
REQUIRED PER PROCEDURE FEES PAYABLE TO VISX UNDER OUR LICENSE AGREEMENT
MAY EXCEED PER PROCEDURE FEES COLLECTED BY US.
In addition to the risk that our refractive lasers will not be accepted
in the marketplace, we are required to pay Visx a royalty for each procedure
performed in the U.S. using our refractive lasers. The required per procedure
fees we are required to pay to Visx may exceed the per procedure fees we are
able to charge and/or collect from refractive surgeons. If the per procedure
fees we are required to pay to Visx exceed the per procedure fees we are able to
charge and/or collect from refractive surgeons, we would have to pay the Visx
per procedure fees out of our limited available cash reserves. During each of
the years 2001 and 2002 and for the three months ended March 31, 2003, the per
procedure fees we are required to pay Visx did not exceed per procedure fees
collected by us.
REQUIRED MINIMUM PAYMENTS UNDER OUR KERATOME LICENSE AGREEMENT MAY
CONTINUE TO EXCEED OUR GROSS PROFITS FROM SALES OF OUR KERATOME PRODUCTS.
We are required to make certain minimum payments to the licensor under
our keratome license agreement that was amended and restated on January 4, 2001.
This amendment replaced a January 18, 2000 amendment in its entirety. Under the
terms of the amendment we issued 730,552 shares of common stock to the
licensors, valued at approximately $1.1 million, in partial payment for
royalties during the term of the license. The term of the license was extended
three years until July 31, 2005. In addition, in June of 2002 the licensors
agreed to further amend the payment schedule for the royalty payments, and the
remaining minimum royalty payments totaling approximately $3.3 million as of May
15, 2003 will be due in monthly installments (averaging approximately $150,000
per month through 2003) and quarterly installments (averaging approximately
$238,000 per quarter from January 2004 through October 2005) through the term of
the amendment. In connection with this June 2002 amendment the parties also
agreed that the number of notice and cure periods relating to the delinquent
payment of royalty payments would be limited to three, and, as of May 14, 2003,
no such notice and cure period remain under the terms of the keratome license
agreement. After this last remaining notice and cure period was used, if we fail
to make timely payments under the keratome license agreement, the licensors have
the right to immediately declare us in default and accelerate the balance of the
remaining unpaid royalty payments. As mentioned previously, the Company has
entered into new discussions related to the payment terms of it's License and
Royalty Agreement covering it's keratome products advising the licensors that
the Company was unable to make the April, 2002 payment of approximately
$221,000, and as a result, the licensors have issued a third notice of default
to the Company on May 6, 2003. The cure period under this default ends on
Friday, May 23, 2003, and if payment is not made on or before that date, the
entire balance of approximately $3.3 million under the License Agreement becomes
due. Based on the circumstances, the Company is weeks, if not days, from
exhausting its cash reserves and as a result, may have to seek judicial
reorganization unless the Company is able to get an immediate cash infusion.
In that regard, since April 27, 2003, the Company has been in
continuous negotiations with NII to secure immediate cash payments for purchase
of Company products, further define the terms of a long-term strategy for the
Company in China, and outline a framework for additional product purchases.
As a result of our obligations under this license arrangement, the
minimum royalty payments we are required to make to the licensors have, to date,
exceeded our gross profits from sales of our UniShaper and UltraShaper keratome
products and we expect this trend to continue. The amendment eliminated a
restriction on us manufacturing, marketing and selling other keratomes, but the
sale of other keratomes will be included in the gross profit to be shared with
the licensors. The licensor's share of the gross profit, as defined in the
amendment, decreased from 50% to 10%.
31
OUR FAILURE TO TIMELY OBTAIN OR EXPAND REGULATORY APPROVALS FOR OUR
PRODUCTS AND TO COMPLY WITH REGULATORY REQUIREMENTS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our excimer laser systems, diagnostic and custom ablation products and
keratome products are subject to strict governmental regulations that materially
affect our ability to manufacture and market these products and directly impact
our overall business prospects. FDA regulations impose design and performance
standards, labeling and reporting requirements, and submission conditions in
advance of marketing for all medical laser products in the U.S. New product
introductions, expanded treatment types and levels for approved products, and
significant design or manufacturing modifications require a premarket clearance
or approval by the FDA prior to commercialization in the U.S. The FDA approval
process, which is lengthy and uncertain, requires supporting clinical studies
and substantial commitments of financial and management resources. Failure to
obtain or maintain regulatory approvals and clearances in the U.S. and other
countries, or significant delays in obtaining these approvals and clearances,
could prevent us from marketing our products for either approved or expanded
indications or treatments, which could substantially decrease our future
revenues.
In March 2002, we pursued a "real time" PMA supplement seeking approval
for the use of our advanced adaptive eye tracking system in an accelerated time
frame, as few as 30 days. In April 2002, we were advised by the FDA that they
would review the submission in a 180-day timeframe. We are currently in the
process of addressing the FDA's questions related to this submission.
Additionally, product and procedure labeling and all forms of
promotional activities are subject to examination by the FDA, and current FDA
enforcement policy prohibits the marketing by manufacturers of approved medical
devices for unapproved uses. Noncompliance with these requirements may result in
warning letters, fines, injunctions, recall or seizure of products, suspension
of manufacturing, denial or withdrawal of PMAs, and criminal prosecution. Laser
products marketed in foreign countries are often subject to local laws governing
health product development processes, which may impose additional costs for
overseas product development. Future legislative or administrative requirements,
in the U.S. or elsewhere, may adversely affect our ability to obtain or retain
regulatory approval for our products. The failure to obtain approvals for new or
additional uses on a timely basis could prevent us from generating revenues from
the sale of our products, and if we are unable to generate revenues from the
sale of our products we may not be able to continue our business operations.
OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE
UNABLE TO PROTECT THEM, OUR COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED.
Our business plan is predicated on our proprietary systems and
technology, including our precision beam scanning microspot technology laser
systems. We protect our proprietary rights through a combination of patent,
trademark, trade secret and copyright law, confidentiality agreements and
technical measures. We generally enter into non-disclosure agreements with our
employees and consultants and limit access to our trade secrets and technology.
We cannot assure you that the steps we have taken will prevent misappropriation
of our intellectual property. Misappropriation of our intellectual property
would have a material adverse effect on our competitive position. In addition,
we may have to engage in litigation or other legal proceedings in the future to
enforce or protect our intellectual property rights or to defend against claims
of invalidity. These legal proceedings may consume considerable resources,
including management time and attention, which would be diverted from the
operation of our business, and the outcome of any such legal proceeding is
inherently uncertain.
32
We are aware that certain competitors are developing products that may
potentially infringe patents owned or licensed exclusively by us. In order to
protect our rights in these patents, we may find it necessary to assert and
pursue infringement claims against such third parties. We could incur
substantial costs and diversion of management resources litigating such
infringement claims and we cannot assure you that we will be successful in
resolving such claims or that the resolution of any such dispute will be on
terms that are favorable to us. See "--Patent infringement allegations may
impair our ability to manufacture and market our products."
PATENT INFRINGEMENT ALLEGATIONS MAY IMPAIR OUR ABILITY TO MANUFACTURE
AND MARKET OUR PRODUCTS.
There are a number of U.S. and foreign patents covering methods and
apparatus for performing corneal surgery that we do not own or have the right to
use. If we were found to infringe a patent in a particular market, we and our
customers may be enjoined from manufacturing, marketing, selling and using the
infringing product in the market and may be liable for damages for any past
infringement of such rights. In order to continue using such rights, we would be
required to obtain a license, which may require us to make royalty, per
procedure or other fee payments. We cannot be certain if we or our customers
will be successful in securing licenses, or that if we obtain licenses, such
licenses will be available on acceptable terms. Alternatively, we might be
required to redesign the infringing aspects of these products. Any redesign
efforts that we undertake could be expensive and might require regulatory
review. Furthermore, the redesign efforts could delay the reintroduction of
these products into certain markets, or may be so significant as to be
impractical. If redesign efforts were impractical, we could be prevented from
manufacturing and selling the infringing products. If we are prevented from
selling the infringing products we may not be able to continue our business
operations.
Litigation involving patents is common in our industry. While we do not
believe our laser systems or keratome products infringe any valid and
enforceable patents that we do not own or have a license to, we cannot assure
you that one or more of our other competitors or other persons will not assert
that our products infringe their intellectual property, or that we will not in
the future be deemed to infringe one or more patents owned by them or some other
party. We could incur substantial costs and diversion of management resources
defending any infringement claims. Furthermore, a party making a claim against
us could secure a judgment awarding substantial damages, as well as injunctive
or other equitable relief that could effectively block our ability to market one
or more of our products. In addition, we cannot assure you that licenses for any
intellectual property of third parties that might be required for our products
will be available on commercially reasonable terms, or at all.
In February of 2003, an Italian court issued an order restraining our
LaserSight Technologies subsidiary from marketing our AstraPro software at a
trade show in Italy. This restraining order was issued in favor of LIGI
Tecnologie Medicali S.p.a., a distributor of our products, and alleges that our
AstraPro software product infringes certain European patents owned by LIGI. We
retained Italian legal counsel to defend us in this litigation, and the Italian
court has revoked the restraining order and has ruled that LIGI must pay our
attorney's fees in connection with our defense of the restraining order. In
addition, our Italian legal counsel has informed us that LIGI has filed a motion
for a permanent injunction, and our Italian legal counsel is reviewing this
motion. We believe that our AstraPro software does not infringe the European
Patents owned by LIGI, and we intend to vigorously defend our rights to
distribute our AstaPro software in the European markets.
33
WE ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH OUR INTERNATIONAL
SALES.
Our international sales accounted for 85% and 83% of our total revenues
during the three months ended March 31, 2003 and year ended December 31, 2002,
respectively. In the future, we expect that sales to U.S. accounts will
represent a higher percentage of our total sales only when additional regulatory
approvals are received for our LaserScan LSX laser system in the U.S. We are
presently focusing our sales efforts on international sales in China and Europe.
International sales of our products may be limited or disrupted by:
o the imposition of government controls;
o export license requirements;
o economic or political instability;
o trade restrictions;
o difficulties in obtaining or maintaining export licenses;
o health concerns in China and other areas
o changes in tariffs; and
o difficulties in staffing and managing international operations.
Our sales have historically been and are expected to continue to be
denominated in U.S. dollars. The European Economic Union's conversion to a
common currency, the euro, is not expected to have a material impact on our
business. However, due to our significant export sales, we are subject to
exchange rate fluctuations in the U.S. dollar, which could increase the
effective price in local currencies of our products. This could result in
reduced sales, longer payment cycles and greater difficulty in collecting
receivables relating to our international sales.
OUR SUPPLY OF CERTAIN CRITICAL COMPONENTS AND SYSTEMS MAY BE
INTERRUPTED BECAUSE OF OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS.
We currently purchase certain components used in the production,
operation and maintenance of our laser systems and keratome products from a
limited number of suppliers, and certain key components are provided by a single
vendor. The majority of our UltraShaper components are manufactured exclusively
by Owens Industries pursuant to our agreement with them. We do not have
long-term contracts with providers of some key laser system components,
including TUI Lasertechnik und Laserintegration GmbH, which currently is a
single source supplier for the laser heads used in our LaserScan LSX excimer
laser system. Currently, SensoMotoric Instruments GmbH, Teltow, Germany, is a
single source supplier for the eye tracker boards used in our excimer laser
systems. Any interruption in the supply of critical laser or keratome components
could have a material adverse effect on our business, financial condition and
results of operations. If any of our key suppliers ceases providing us with
products of acceptable quality and quantity at a competitive price and in a
timely fashion, we would have to locate and contract with a substitute supplier
and, in some cases, such substitute supplier would need to be qualified by the
FDA. If substitute suppliers cannot be located and qualified in a timely manner
or could not provide required products on commercially reasonable terms, our
ability to manufacture, sell and generate revenues from our products would be
impaired.
34
UNLAWFUL TAMPERING OF OUR SYSTEM CONFIGURATIONS COULD RESULT IN REDUCED
REVENUES AND ADDITIONAL EXPENSES.
We include a procedure counting mechanism on LaserScan LSX lasers
manufactured for sale and use in the U.S. Users of our LaserScan LSX excimer
laser system could tamper with the software or hardware configuration of the
system so as to alter or eliminate the procedure counting mechanism that
facilitates the collection of per procedure fees. Unauthorized tampering with
our procedure counting mechanism by users could result in us being required to
pay per procedure fees to Visx that we were not able to collect from users. If
we are unable to prevent such tampering, our license agreement with Visx could
be terminated after all applicable notice and cure periods have expired.
INADEQUACY OR UNAVAILABILITY OF INSURANCE MAY EXPOSE US TO SUBSTANTIAL
PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability risks and
possible adverse publicity that are inherent in the development, testing,
manufacture, marketing and sale of medical devices for human use. These risks
increase with respect to our products that receive regulatory approval for
commercialization. We have agreed in the past, and we will likely agree in the
future, to indemnify certain medical institutions and personnel who conduct and
participate in our clinical studies. While we maintain product liability
insurance, we cannot be certain that any such liability will be covered by our
insurance or that damages will not exceed the limits of our coverage. Even if a
claim is covered by insurance, the costs of defending a product liability,
malpractice, negligence or other action, and the assessment of damages in excess
of insurance coverage limits in the event of a successful product liability
claim, may exceed the amount of our operating reserves. Further, product
liability insurance may not continue to be available, either at existing or
increased levels of coverage, on commercially reasonable terms.
LITIGATION COSTS OR AN UNFAVORABLE OUTCOME IN LITIGATION MAY EXCEED THE
AMOUNT OF CASH AVAILABLE.
Three former distributors for our excimer laser system in the United
States commenced legal action against our LaserSight Technologies subsidiary. In
April 2003, one of these distributors dismissed its claims with prejudice. The
lawsuit alleges various claims related to LaserSight Technologies' termination
of the distribution arrangements including breach of contract, breach of the
covenant of good faith and fair dealing, tortious interference with business
relationships, fraudulent misrepresentation, conversion and unjust enrichment.
The distributors have requested actual damages in excess of $5.0 million,
punitive damages, prejudgment interest, attorneys' fees and costs and other
equitable relief. An unfavorable outcome in this litigation that resulted in an
award of damages anywhere near the amount of damages requested by the
distributors would exceed the amount of our available cash on hand.
35
Since December 31, 2001, we have incurred legal fees related to
litigation of approximately $170,000 of which approximately $56,000 was
attributable to the distributor litigation and approximately $20,000 was
attributable to the litigation with Ligi Tecnologie. In addition, we made one
$50,000 settlement payment in October 2002 related to the previously reported
litigation involving a former shareholder of The Farris Group and our chief
executive officer. The lawsuit named Mr. Farris, LaserSight's chief executive
officer, as the sole defendant and alleged fraud and breach of fiduciary duty by
Mr. Farris in connection with the redemption by The Farris Group of the former
shareholder's capital stock in the Farris Group. Our Board of Directors
authorized us to retain and, to the fullest extent permitted by the Delaware
General Corporation Law, pay the fees of counsel to defend Mr. Farris. Future
settlement payments related to The Farris Group litigation are $45,000 due in
September 2003 and $45,000 due in March 2004. These amounts have been accrued in
the Company's 2002 consolidated financial statements. Recently the Company
received information from an attorney on behalf of Pacific Eye Institute, Inc. a
Laser Purchaser that litigation had been filed but not yet served on the Company
for a claim of approximately $50,000 owed to Pacific Eye Institute by the
Company. Other than the distributor litigation described above and the
litigation with LIGI Tecnologie described under the risk factor "Patent
infringement allegations may impair our ability to manufacture and market our
products", our other litigation has either been settled or stayed to facilitate
settlement discussions between the parties.
OUR AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31, 2002 INCLUDES AN
EXPLANATORY PARAGRAPH REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our auditors' report included an explanatory paragraph regarding our
ability to continue as a going concern because we have incurred significant
losses and negative cash flows from operations for several years and our ability
to raise or generate enough cash to survive is questionable. The going concern
opinion has been used by competitors in an attempt to negatively impact our
sales and has resulted in shorter payment terms to meet the demands of some of
our vendors.
COMMON STOCK RISKS
VARIATIONS IN OUR SALES AND OPERATING RESULTS MAY CAUSE OUR STOCK PRICE
TO FLUCTUATE.
Our operating results have fluctuated in the past, and may continue to
fluctuate in the future, as a result of a variety of factors, many of which are
outside of our control. For example, historically a significant portion of our
laser system orders for a particular quarter have been received and shipped near
the end of the quarter. As a result, our operating results for any quarter often
depend on the timing of the receipt of orders and the subsequent shipment of our
laser systems. Other factors that may cause our operating results or stock price
to fluctuate include:
o our significant liquidity and capital resource issues;
o the addition or loss of significant customers;
o reductions, cancellations or fulfillment of major orders;
o changes in pricing by us or our competitors;
o timing of regulatory approvals and the introduction or delays in
shipment of new products;
o the relative mix of our business; and
o increased competition.
36
As a result of these fluctuations, we believe that period-to-period
comparisons of our operating results cannot be relied upon as indicators of
future performance. In some quarters our operating results may fall below the
expectations of securities analysts and investors due to any of the factors
described above or other uncertainties.
WE ARE NO LONGER LISTED ON NASDAQ SMALL CAP - NOW TRADED ON OTC:BB.;
THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO EXPERIENCE EXTREME
FLUCTUATIONS DUE TO MARKET CONDITIONS THAT ARE UNRELATED TO OUR OPERATING
PERFORMANCE.
The stock market, and in particular the securities of technology
companies like us, could experience extreme price and volume fluctuations
unrelated to our operating performance. Our stock price has historically been
volatile. Factors such as announcements of technological innovations or new
products by us or our competitors, changes in domestic or foreign governmental
regulations or regulatory approval processes, developments or disputes relating
to patent or proprietary rights, public concern as to the safety and efficacy of
refractive vision correction procedures, and changes in reports and
recommendations of securities analysts, have and may continue to have a
significant impact on the market price of our common stock.
Because of the lengthy period during which our common stock traded
below $1.00 per share, it no longer met the listing requirements for the Nasdaq
National Market and on August 15, 2002, Nasdaq approved our application to
transfer our listing to the Nasdaq SmallCap Market via an exception from the
minimum bid price requirement. While we failed to meet this requirement as of
February 10, 2003, we were granted a temporary exception from this standard
subject to meeting certain conditions. The exception required that on or before
April 15, 2003, we file a definitive proxy statement with the Securities and
Exchange Commission and Nasdaq evidencing our intent to seek shareholder
approval for the implementation of a reverse stock split. Other requirements
included that, on or before May 30, 2003, we demonstrate a closing bid price of
at least $1.00 per share and, immediately thereafter, a closing bid of at least
$1.00 per share for a minimum of ten consecutive trading days. Nasdaq could
require a minimum closing bid price of at least $1.00 for more than 10 days. In
addition, we must have been able to demonstrate compliance with the following
maintenance requirements for continued listing on the Nasdaq SmallCap Market:
o stockholders' equity of $2.5 million;
o at least 500,000 shares of common stock publicly held;
o market value of publicly held shares of at least $1.0 million;
o shareholders (round lot holders) of at least 300; and
o at least two registered and active market makers.
We asked for an extension to May 1, 2003 to file the definitive proxy.
On April 25, 2003, we again asked for a further extension. But because we did
not timely meet the requirements, our request for an extension was denied. As a
result, Nasdaq's Listing Qualification Panel determined that our securities
would be delisted from Nasdaq's SmallCap Market effective April 30, 2003. Our
common stock is currently listed in the OTC-Bulletin Board.
37
The delisting of our common stock from the Nasdaq SmallCap Stock Market
will result in decreased liquidity of our outstanding shares of common stock
(and a resulting inability of our stockholders to sell our common stock or
obtain accurate quotations as to their market value), and, consequently, will
reduce the price at which our shares trade. The delisting of our common stock
may also deter broker-dealers from making a market in or otherwise generating
interest in our common stock and may adversely affect our ability to attract
investors in our common stock. Furthermore, our ability to raise additional
capital may be severely impaired. As a result of these factors, the value of our
common stock may decline significantly, and our stockholders may lose some or
all of their investment in our common stock.
THE SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND DILUTIVE
STOCK ISSUANCES MAY ADVERSELY AFFECT OUR STOCK PRICE.
Sales, or the possibility of sales, of substantial amounts of our
common stock in the public market could adversely affect the market price of our
common stock. Substantially all of our 27,841,941 shares of common stock
outstanding at May 14, 2003 were freely tradable without restriction or further
registration under the Securities Act of 1933, except to the extent such shares
are held by "affiliates" as that term is defined in Rule 144 under the
Securities Act or subject only to the satisfaction of a prospectus delivery
requirement. An additional 9,280,647 shares of preferred stock, convertible into
18,561,294 shares of common stock, were issued in October 2002 upon the funding
of the equity investment portion of the China Transaction. We have agreed to
register the shares of common stock under the Securities Act of 1933 and, once
registered, the shares will be available for sale.
Other shares of common stock that we may issue in the future in
connection with financings or pursuant to outstanding warrants or agreements
could also adversely affect the market price of our common stock and cause
significant dilution in our earnings per share and net book value per share. We
may be required to issue more than 5,800,000 additional shares of common stock
upon the exercise of outstanding warrants and stock options. Including the China
Transaction, the number of shares we may be required to issue upon the
conversion of outstanding preferred stock and the exercise of outstanding
warrants and stock options will increase to approximately 24,400,000.
The former owners of our series C preferred stock have the right,
subject to certain limitations, to participate in our below-market certain
equity financing transactions that would allow them to maintain their ownership
level in common stock at the same level as immediately prior to the closing of
any such financing. See "Description of Capital Stock--Series C Preferred
Stock." In connection with future equity financings we may include anti-dilution
provisions that would require us to issue additional shares if we issue shares
of common stock below specified price levels. If a future share issuance
triggers these adjustments, the beneficiaries of such provisions effectively
receive some protection from declines in the market price of our common stock,
while our other stockholders incur additional dilution of their ownership
interest.
38
THE TERMS OF THE CHINA TRANSACTION WILL IN ALL PROBABILITY PREVENT OR
DISCOURAGE AN ACQUISITION OR CHANGE OF CONTROL OF LASERSIGHT.
In connection with the China Transaction, we issued shares of our
series H preferred stock that, upon conversion into shares of our common stock,
would result in the series H stockholders owning 40% of our outstanding common
stock. In addition, the series H preferred stockholders have the right to elect
that number of directors that will constitute up to 40% of the membership on our
board of directors. Either or both of these factors may discourage or even
prevent a party from acquiring us or making a bid that may result in a change of
control. See also " Common Stock Risks--The China transaction includes a
provision under which the purchaser of our preferred stock can acquire
approximately 40% of our common stock. That ownership position alone diminishes
the possibility of a competing bid for a majority of the common stock, but the
anti-takeover provision under Delaware law and in our certificate of
incorporation, our by-laws and our stockholder rights plan will nonetheless
require the board to exercise its fiduciary duty on any bid (whether by the
purchaser in the China Transaction or another) taking into consideration all of
the circumstances at that time" and "Description of Capital Stock--Series H
Preferred Stock."
THE CHINA TRANSACTION INCLUDES A PROVISION UNDER WHICH THE PURCHASER OF
OUR PREFERRED STOCK CAN ACQUIRE APPROXIMATELY 40% OF OUR COMMON STOCK. THAT
STOCKHOLDING POSITION ALONE DIMINISHES THE POSSIBILITY OF A COMPETING BID FOR A
MAJORITY OF THE COMMON STOCK, BUT THE ANTI-TAKEOVER PROVISION UNDER DELAWARE LAW
AND IN OUR CERTIFICATE OF INCORPORATION, OUR BY-LAWS AND OUR STOCKHOLDER RIGHTS
PLAN WILL NONETHELESS REQUIRE THE BOARD TO EXERCISE ITS FIDUCIARY DUTY ON ANY
BID (WHETHER BY THE PURCHASER IN THE CHINA TRANSACTION OR ANOTHER) TAKING INTO
CONSIDERATION ALL OF THE CIRCUMSTANCES AT THAT TIME.
Certain provisions of our certificate of incorporation, by-laws,
stockholder rights plan and Delaware law could delay or frustrate the removal of
incumbent directors, discourage potential acquisition proposals and delay, defer
or prevent a change in control of us, even if such events could be beneficial,
in the short term, to the economic interests of our stockholders. For example,
our certificate of incorporation allows us to issue preferred stock with rights
senior to those of the common stock without stockholder action, and our by-laws
require advance notice of director nominations or other proposals by
stockholders. We also are subject to provisions of Delaware corporation law that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an interested
stockholder) for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. We also have
adopted a stockholder rights agreement, or "poison pill," and declared a
dividend distribution of one preferred share purchase right for each share of
common stock.
The board will act with respect to anti-takeover provisions with its
fiduciary duty in mind.
RISKS RELATING TO INTANGIBLES
AMORTIZATION AND CHARGES RELATING TO OUR SIGNIFICANT INTANGIBLE ASSETS
COULD ADVERSELY AFFECT OUR STOCK PRICE AND REPORTED NET INCOME OR LOSS.
Of our total assets at March 31, 2003, approximately $4.7 million, or
23%, were intangible assets. Any reduction in net income or increase in net loss
resulting from the amortization of intangible assets resulting from future
acquisitions by us may have an adverse impact upon the market price of our
common stock. In addition, in the event of a sale of LaserSight or our assets,
we cannot be certain that the value of such intangible assets would be
recovered.
In accordance with FASB Statement No. 144, we review intangible assets
for impairment whenever events or changes in circumstances, including a history
of operating or cash flow losses, indicate that the carrying amount of an asset
may not be recoverable. If we determine that an intangible asset is impaired, a
non-cash impairment charge would be recognized.
39
OTHER RISKS
The following relates to risks on both a short and longer-term basis:
The risks described above are not the only risks facing LaserSight.
There may be additional risks and uncertainties not presently known to us or we
have deemed immaterial which could also negatively impact our business
operations. If any of the foregoing risks actually occur, it could have a
material adverse effect on our business, financial condition and results of
operations. In that event, the trading price of our common stock could decline,
and you may lose all or part of your investment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that our exposure to market risk for changes in interest and
currency rates is not significant. Our investments are limited to highly liquid
instruments generally with maturities of three months or less. At March 31,
2003, we had approximately $0.1 million of short-term investments classified as
cash and equivalents. All of our transactions with international customers and
suppliers are denominated in U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
(a) Based on their evaluation within 90 days prior to the filing date
of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures as
defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934, as
amended, are effective for gathering, analyzing, and disclosing, the information
we are required to disclose in our reports filed under the Act.
(b) There were no significant changes in our internal controls or in
other factors that could significantly affect those controls since the date of
evaluation of those internal controls.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Certain legal proceedings against LaserSight are described in
Item 3 (Legal Proceedings) of LaserSight's Form 10-K for the year ended
December 31, 2002.
ITEM 2 CHANGES IN SECURITIES
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number Description
- ------ -----------------------------------------------------------------------
10.1 Resignation and General Release - D. Michael Litscher
10.2 Resignation and General Release - Christine Oliver
11 Statement of Computation of Loss Per Share
15 Copy of letter from independent accountants' regarding unaudited
interim financial information
99.1 Additional Exhibits
Chief Executive Officer and Chief Financial Officer certifications
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
None
- ---------------------------
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the undersigned have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LaserSight Incorporated
Dated: May 15, 2003 By: /s/ Michael R. Farris
---------------------
Michael R. Farris, President,
Chief Executive Officer and Director
Dated: May 15, 2003 By: /s/ Richard R. Confessore
-------------------------
Richard R. Confessore,
Chief Financial Officer
41
CERTIFICATIONS PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED
I, Michael R. Farris, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
LaserSight Incorporated;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared.
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael R. Farris
- ---------------------
Principal Executive Officer
May 15, 2003
42
I, Richard R. Confessore, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
LaserSight Incorporated;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared.
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Richard R. Confessore
- -------------------------
Principal Financial Officer
May 15, 2003
43
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------------------------------------------------------------------
10.1 Resignation and general release - D. Michael Litscher
10.2 Resignation and general release - Christine Oliver
11 Statement of Computation of Loss Per Share
15 Copy of letter from independent accountants' regarding unaudited
interim financial information
99.1 Additional Exhibits
Chief Executive Officer and Chief Financial Officer certifications
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
44