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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
[ ] 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 000-551030
OccuLogix, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 59 343 4771
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 Skymark Avenue, Unit 9, Suite 201
Mississauga, Ontario L4W 5B2
(Address of principal executive offices)
(905) 602-0887
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant (assuming officers, directors and 10%
stockholders are affiliates), based on the last sale price for such stock on
June 30, 2004: Not applicable because trading of the Registrant's Common Stock
on the NASDAQ National Market did not commence until December 9, 2004. The
Registrant has no non-voting common stock.
As of March 9, 2005, there were 41,806,768 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual
Meeting of Stockholders of the Registrant to be held June 24, 2005 are
incorporated by reference into Part III of this Form 10-K.
PART I
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
relating to future events and our future performance within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In some cases, you can identify
forward-looking statements by terms such as "may", "will", "should", "could",
"would", "expects", "plans", "intends", "anticipates", "believes", "estimates",
"projects", "predicts", "potential" and similar expressions intended to identify
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results,
performances, time frames or achievements expressed or implied by the
forward-looking statements.
Given these risks, uncertainties and other factors, you should not
place undue reliance on these forward-looking statements. Information regarding
market and industry statistics contained in this Form 10-K is included based on
information available to us that we believe is accurate. It is generally based
on academic and other publications that are not produced for purposes of
securities offerings or economic analysis. We have not reviewed or included data
from all sources and cannot assure you of the accuracy of the market and
industry data we have included.
ITEM 1. BUSINESS.
OVERVIEW
We are an ophthalmic therapeutic company founded to commercialize
innovative treatments for eye diseases, including age-related macular
degeneration, or AMD. AMD is the leading cause of late onset visual impairment
and legal blindness in people over the age of 50 in the United States and other
Western industrialized societies. We believe that Dry AMD, the most common form
of the disease, afflicts approximately 13.0 to 13.5 million people in the United
States, representing approximately 85% to 90% of all AMD cases. Although the
exact cause of AMD is not known, researchers have identified several factors
that are associated with AMD, including poor microcirculation and the gradual
build-up of cellular waste material in the retina. We believe that improved
microcirculation increases the supply of oxygen and nutrients to the compromised
retina and facilitates the removal of cellular waste material from the retina.
We believe that a treatment that improves microcirculation in the retina can
help to enhance the metabolic efficiency of the retina and the removal of waste
material and thereby aid in the treatment of Dry AMD. We believe there is a
significant opportunity for such a treatment.
Our product, the RHEO(TM) System, is designed to improve microcirculation
in the eye by filtering high molecular weight proteins and other macromolecules
from the patient's plasma. The RHEO(TM) Therapy is used to perform Rheopheresis,
which we refer to under our trade name RHEO(TM) System. Rheopheresis is a blood
filtration process that selectively removes molecules from plasma. The RHEO(TM)
System consists of the OctoNova Pump and a disposable treatment set, containing
two filters, through which the patient's blood circulates. We believe that the
RHEO(TM) System is the only Dry AMD treatment to target what we believe to be
the underlying cause of AMD rather than its symptoms and that, based on
preliminary data, appears to demonstrate improved vision in some patients. The
only currently accepted treatment option for persons with advanced cases of Dry
AMD are over-the-counter vitamins, antioxidants and zinc supplements that can
reduce the five-year risk of conversion to Wet AMD, the other form of the
disease, by approximately 25%.
We are currently conducting a pivotal clinical trial, called MIRA-1, or
Multicenter Investigation of Rheopheresis for AMD, which, if successful, is
expected to support our application to the U.S. Food and Drug Administration, or
FDA, to obtain approval to market the RHEO(TM) System in the United States. The
MIRA-1 protocols require us to obtain a minimum of 150 complete clinical data
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sets. To that end, we had enrolled a total of 185 patients in MIRA-1 as of
December 31, 2004. This completed the enrollment phase of MIRA-1, exceeding our
goal of enrolling 180 subjects by December 31, 2004. We have collected complete
12-month post-treatment data sets for 87 of these patients. Of the remaining 98
patients, 82 are in the process of treatment or follow-up and the treatment of
16 patients did not result in complete data sets. We intend to derive the
required 150 complete 12-month post-treatment data sets from our enrolled
subjects. As of December 31, 2004, we had also submitted to the FDA the first
three of four modules of the Pre-market Approval Application, or PMA, filing,
the non-clinical portion. We intend to submit the fourth module, which consists
of the follow-up clinical data, in two components. We expect that we will submit
the first component following completion of our six-month data on at least 150
data sets, including the 12-month data sets for all patients for whom they are
available; and that we will submit the second component following completion of
our 12-month data on at least 150 data sets.
The non-clinical portion of the PMA consists of technical data relating to
components of the RHEO(TM) System. In late 2001, with the permission of the FDA,
we submitted an interim analysis of 36 complete data sets from the first 43
patients enrolled. The remaining seven patients did not complete all of the
required follow-up and thus their results do not qualify as a complete data set.
Of the 36 data sets analyzed, 11 were from placebo patients. Fifty-eight percent
of, or 11 of 19, patients in the MIRA-1 interim analysis entering the clinical
trial with worse than legal driving vision, which is defined as best corrected
visual acuity, or BCVA, of worse than 20/40, improved to meet or exceed the
requirements to regain a driver's license. However, since MIRA-1 is a double
masked, placebo-controlled study, we do not know the degree of such improvement,
and we do not and will not have updated patient results until we have completed
the clinical portion of the MIRA-1 study.
As we cannot begin commercialization in the United States until we receive
FDA approval, we do not expect to generate revenues in the United States until
late 2006, at the earliest. However, in anticipation of commercialization in the
United States, we are establishing a plan to educate members of the eye care
community about RHEO(TM) Therapy. We are currently identifying multi-facility
health care service providers including hospitals, dialysis clinics and
ambulatory surgery centers, as well as private practices, which we believe may
be interested in providing RHEO(TM) Therapy in their facilities. We believe that
one of these potential providers may be TLC Vision Corporation or TLC Vision, an
eye care services company, which we believe has relationships with a large
number of optometrists and ophthalmologists in the United States.
In 2003, we received Health Canada approval for the components of the
RHEO(TM) System. The approval allows us to market the RHEO(TM) System in Canada
for use in the treatment of patients suffering from dysproteinemia due, for
example, to abnormal plasma viscosity and/or macular disease. Upon receiving our
approval, we began limited commercialization of the RHEO(TM) System through
sales of OctoNova pumps and disposable treatment sets to three clinics in
Canada. In September 2004, we signed an agreement with a private Canadian
company called Rheo Therapeutics Inc., which has agreed to purchase
approximately 8,000 treatment sets and 20 OctoNova pumps by the end of 2005,
with an option to purchase up to an additional 2,000 treatment sets, subject to
availability. We believe that Rheo Therapeutics plans to open a number of
commercial treatment centers in various Canadian cities where the RHEO(TM)
Therapy will be performed. Dr. Jeffrey Machat, who is an investor in and one of
the directors of Rheo Therapeutics, was a co-founder and former director of TLC
Vision.
We have exclusive rights to commercialize the RHEO(TM) System for
ophthalmic uses in North America and the Caribbean. In order to sell or export a
medical device in the European community, a Conformite Europeene or CE Mark, is
required. Although Rheopheresis for the selective removal of molecules from
plasma received CE Mark approval in 1998, we do not have the rights to
commercialize the RHEO(TM) System in Europe.
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OUR HISTORY AND MAJOR RELATIONSHIPS
Shortly after our inception, we began commercialization of therapeutic
apheresis by opening a therapeutic apheresis center in Florida. This site
generated revenues of $900,200 and $1,277,800 for the years ended June 30, 1999
and 1998, respectively. The therapeutic apheresis center was closed in 1999
pursuant to a directive issued by the FDA. After obtaining an FDA
investigational device exemption, we initiated a pivotal clinical trial called
MIRA-1 to support an application to the FDA for approval to market the RHEO(TM)
System, and have conducted this trial since 1999.
Relationship with TLC Vision
TLC Vision beneficially owns approximately 51.4% of our outstanding common
stock, or 48.2% on a fully diluted basis. Elias Vamvakas, the Chairman and
former CEO of TLC Vision, became our Chairman in 2003 and is now also our CEO.
In addition, two of our other directors, Thomas N. Davidson and Richard L.
Lindstrom, are also directors of TLC Vision. These three directors constitute
the majority of our board. Mr. Vamvakas beneficially owns 3,384,989 common
shares of TLC Vision, representing approximately 5.1% of TLC Vision's
outstanding shares. As of December 31, 2004, Mr. Davidson beneficially owned
64,827 common shares of TLC Vision and Dr. Lindstrom beneficially owned 63,500
common shares of TLC Vision.
On December 8 2004, we purchased TLC Vision's 50% interest in OccuLogix,
L.P. in exchange for which we issued 19,070,234 shares of our common stock to
TLC Vision. This resulted in OccuLogix, L.P. becoming our wholly-owned
subsidiary. Accordingly, 100% of the results of the OccuLogix, L.P. operations
are included in the consolidated financial statements since that date. We
believe that our value resides solely in OccuLogix, L.P. to which we licensed
all of the distribution and marketing rights for the RHEO(TM) System for
ophthalmic indications to which we are entitled. Prior to the acquisition, our
only profit stream has come from our share of OccuLogix, L.P. earnings. Our
acquisition of TLC Vision's 50% ownership interest in OccuLogix, L.P. will
transfer the earnings potential for sales of the RHEO(TM) System entirely to us.
As part of the formation of OccuLogix, L.P. in July 2002, we licensed
certain patent rights, trademark rights and know-how rights to OccuLogix, L.P.
We also provided OccuLogix, L.P. with licenses to our in-house software as well
as sublicensing software that we have licensed from TLC Vision. TLC Vision
agreed to provide OccuLogix, L.P., upon request, with $200,000 in funding at an
annual interest rate equal to the Bank of America prime rate of interest on the
date the loan is made, plus two percent. As at December 8, 2004, Occulogix, L.P.
had not requested for funding from TLC Vision.
Occulogix, L.P.'s primary customer was RHEO Clinic Inc., a subsidiary of
TLC Vision, for which Occulogix, L.P. has reported revenues of $401,236,
$459,730 and $0 for the years ended December 31, 2004, 2003 and 2002,
respectively. RHEO Clinic uses the RHEO(TM) System to treat patients, for which
it charges its customers (the patients) a per-treatment fee. RHEO Clinic has
advised us that the OctoNova pumps purchased from Occulogix, L.P. are
capitalized as fixed assets to be depreciated over a period of five years on a
straight line basis and the treatment sets are disposed of after each treatment
and expensed as a cost of sale. Rheo Clinic has further advised us that all of
its revenues, in Canadian dollars, of $595,275, $836,696 and nil for the years
ended December 31, 2004, 2003 and 2002, respectively, are derived from sales to
unrelated third parties. The revenues reported from RHEO Clinic are unaudited
and have not been independently verified by us. However, management believes the
amounts to be accurate. We do not expect going forward that RHEO Clinic will be
a significant source of revenue.
Dr. Jeffrey Machat, a co-founder of TLC Vision, served as a director of TLC
Vision from 1993 to 1999. From 1993 to 2001, Dr. Machat served as a Co-National
Medical Director of TLC Vision. Dr. Machat is an independent contractor to TLC
Vision York Mills Centre and pays the Centre a per-procedure facility fee for
using the Centre to perform LASIK on his patients. Based on public filings, we
believe that Dr. Machat is a shareholder of TLC Vision but does not own more
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than 5% of the shares of TLC Vision. We have been advised that Dr. Machat is a
co-founder, shareholder, one of its three directors and serves as Rheo
Therapeutics' National Medical Director. We have been advised that Dr. Machat
owns 25% of the shares of Rheo Therapeutics. We have recently signed an
agreement to provide the RHEO(TM) System in Canada to Rheo Therapeutics.
Other Major Relationships
In October 2003, our stockholders created a new company called Rheogenx
BioSciences Corporation to further develop the use of the current components of
the RHEO(TM) System for non-ophthalmic uses. At that time, we licensed our
rights to the RHEO(TM) System and associated intellectual property to them for
these non-ophthalmic uses, only to the extent that we have them or acquire them
in the future. Under the terms of our license with Rheogenx, Rheogenx has the
right to use the RHEO(TM) System patent rights, know-how rights and trademark
rights for non-ophthalmic uses in Canada, the United States and Mexico. In
exchange for these rights, Rheogenx compensates us for the full cost of the
license, including royalties and applicable license fees. The license agreement
may be terminated upon any breach of a material provision.
The components of the RHEO(TM) System were developed by our suppliers,
Diamed Med and Asahi Medical. In 2002, Apheresis Technologies, which is managed
by John Cornish, one of our stockholders, our Vice President of Operations and
one of our directors from April 1997 to September 2004 was spun off from us.
The purpose of the spin off was to allow us to focus on our clinical
trials. This spin off was accomplished by our transferring all the assets we had
in connection with our plasma filter distribution business to our then
wholly-owned subsidiary, Apheresis Technologies. In consideration for the
transfer of those assets, Apheresis Technologies agreed to pay us $25,000. The
full amount of this consideration was applied to amounts owing by us to
Apheresis Technologies. Following this transfer, we distributed the stock we
owned in Apheresis Technologies to our stockholders, such that the identity and
relative ownership of our stockholders and Apheresis Technologies' stockholders
were the same. We did not assume any liabilities in connection with this
transfer. Shortly after the spin off, we entered into a distribution services
agreement with Apheresis Technologies to provide us with logistical support,
including warehousing, order fulfillment, shipping and billing services. We have
the right to terminate this agreement at any time.
In June 2003, we entered into a reimbursement agreement with Apheresis
Technologies whereby we reimburse them for the applicable percentage of time
that their employees provide services to us. One of these employees is John
Cornish, our Vice President of Operations. While Mr. Cornish is one of our
officers, he is not an employee. Although we do not pay a salary directly to Mr.
Cornish, we reimburse Apheresis Technologies for the proportion of the time he
spends on our business. Currently, we reimburse Apheresis Technologies for
approximately 80% of his salary of $100,000 per year and his benefits.
Our primary activities include commercialization of the RHEO(TM) System in
Canada, working to obtain FDA regulatory approval for the RHEO(TM) System, and
building an operating infrastructure to support potential U.S. sales following
approval by the FDA.
INDUSTRY
OVERVIEW OF THE HUMAN EYE
The human eye is composed of focusing elements in the front, the cornea and
lens, and a light-sensing element in the back, the retina. Light falls on the
photoreceptors that are part of the retina and is converted into electrical
energy, which travels via the optic nerve to the brain. The brain processes the
complex signals sent from the retina into vision. The central 5% of the area of
the retina is the macula, the region responsible for seeing color and for the
central vision necessary for activities including reading, face recognition,
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watching television and driving. Due to its extremely small size, any damage to
the macula can result in significant visual impairment, including legal
blindness. In the Western World, the major diseases that usually result in
blindness in adults are those affecting the retina, including AMD.
[GRAPHIC OMITTED]
AGE-RELATED MACULAR DEGENERATION (AMD)
AMD is a chronic, progressive disease of the macula that results in the
loss of central vision. The most common symptoms include central distortion,
loss of contrast sensitivity and loss of color vision, none of which can be
corrected by refractive means, including glasses, contact lenses or laser eye
surgery. Peripheral vision usually remains unaffected so that patients are often
forced to look to the side of objects to see them, but are still unable to see
detail. AMD typically affects people initially in one eye, with a high
probability of occurrence in the second eye over time. People with AMD often
have difficulty living independently and performing routine daily activities.
We believe that approximately 15 million people in the United States suffer
from AMD. According to a ten-year study published in Ophthalmology in October
2002, the prevalence of AMD among a selected sample of U.S. residents increased
sharply with age, from 28.2% among people 65 to 74 years of age to 46.2% among
people 75 years and older. A study by Duke University published in 2003 reported
that the prevalence of AMD among a selected sample of U.S. residents aged 65 and
older was 27% in 1999. According to the U.S. Census Bureau, the number of people
in the United States aged 50 or older is approximately 80 million and is
5
expected to increase by approximately 40% over the next two decades. We expect
that this increase in the number of elderly people will result in a significant
increase in the number of cases of AMD in the United States.
AMD occurs in two forms -- a non-exudative "dry" form and an exudative
"wet" form.
DRY AMD. Dry AMD is the most common form of the disease. We believe that
Dry AMD affects approximately 13.0 to 13.5 million people in the United States,
or approximately 85% to 90% of all AMD cases. Dry AMD is characterized by a
gradual decrease of visual acuity, by pigment abnormalities on the macula and by
the build-up of protein and lipid deposits, called drusen. This build-up of
macromolecules affects the microcirculation in the eye. Research suggests that
the retinal cells, overwhelmed by the lack of oxygen and nutrients and the
build-up of debris, enter into a dysfunctional state of dormancy. Without
treatment, the retinal cells ultimately die and do not regenerate, leading to
irreversible vision loss either through the progression of Dry AMD or conversion
to Wet AMD. Patients with Dry AMD are classified at the time of diagnosis into
four categories of worsening severity. The higher the category, the greater the
risk of progression, or conversion, to Wet AMD within five years.
The following table contains the principal characteristics of each category
as described by the Age Related Eye Disease Report, or AREDS Report, No. 8:
RISK OF WET AMD
CATEGORY IN FIVE YEARS KEY CHARACTERISTICS
- -------------- ---------------- ------------------------------------------------------
Category 1 No Risk o no pigment changes and less than five small drusen
o BCVA(1) better than 20/32 in each eye
o neither eye with Wet AMD
Category 2 Low Risk o any combination of multiple small drusen, one
isolated
(Less than 2%) intermediate drusen or mild pigment abnormalities
in one or both eyes
o BCVA better than 20/32 in each eye
o neither eye with Wet AMD
Category 3(2) Moderate Risk o any combination of at least one large drusen,
extensive
(18%) intermediate drusen or geographic atrophy not
involving the central macula
o neither eye with Wet AMD
o BCVA better than 20/32 in at least one eye
Category 4(2) High Risk o one eye with no signs of Wet AMD (More
than 42%)
o other eye with either Wet AMD or BCVA worse
than 20/32 due to Dry AMD.
- ----------
(1) BCVA means best corrected visual acuity.
(2) Categories 3 and 4 are commonly referred to as "Advanced Dry AMD".
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WET AMD. We believe that Wet AMD affects approximately 1.5 to 2.0 million
people in the United States, representing approximately 10% to 15% of all cases
of AMD in the United States. Wet AMD occurs when new blood vessels grow into the
macular tissues of the eye. This abnormal blood vessel growth generally is known
as neovascularization. These new blood vessels tend to be fragile and often
bleed, leaking fluid into the macula, resulting in loss of vision. Untreated,
this blood vessel growth and leakage can lead to scarring, atrophy and,
eventually, macular cell death. Wet AMD patients experience vision loss more
rapidly than Dry AMD patients, usually within months of diagnosis. If treatment
is not received in this small window of time, the damage is usually
irreversible. As a result, the number of people who have Wet AMD that are
considered "potentially treatable", or hoping for significant, positive visual
outcomes, will stay relatively small each year as opposed to the number of
people who have Dry AMD.
TREATMENT ALTERNATIVES FOR WET AND DRY AMD
WET AMD
There is currently no cure for Wet AMD. However, retinal specialists may
treat the symptoms in an attempt to reduce blood vessel growth and leakage,
using one of very few approved therapies currently available -- thermal laser
treatment, photodynamic therapy and drug therapies. In addition, there are
currently more than 30 therapies being evaluated in U.S. clinical studies for
the treatment of Wet AMD. These treatments may slow the progression of the
disease, but do not prevent the reoccurrence of abnormal blood vessel growth and
do not restore lost vision.
o THERMAL LASER TREATMENT AND PHOTODYNAMIC THERAPY. Thermal laser
treatment of Wet AMD entails the use of a high-energy laser to destroy
the abnormal blood vessels that are growing and leaking in the macula.
This is a surgical procedure involving a medical device that was
approved more than two decades ago by the FDA. Because the
laser-treated portions of the retina are irreversibly destroyed due to
collateral damage from intense heat, thermal laser treatment generally
is now used only for the minority of Wet AMD patients whose abnormal
blood vessel growth and vessel leakage occur away from the center of
the macula. A more targeted approach, photodynamic therapy, involves
the use of a light-activated drug named Visudyne, which was developed
by QLT, Inc. This therapy involves a two-step process in which the
drug is administered systemically by intravenous infusion, after which
a dose of low energy light is delivered to the target site to activate
the drug and destroy the newly-grown abnormal blood vessels.
o DRUG THERAPIES. Rather than attempting to destroy abnormal blood
vessels, many drug therapies are designed to slow or stop the
proliferation of abnormal blood vessels before they can further damage
the retina. Current ongoing drug therapies in clinical trials for Wet
AMD, which have been developed by Eyetech Pharmaceuticals, Inc.,
Genentech, Inc. and Genaera Corporation, are believed to block the
effect of vascular endothelial growth factor, a natural protein that
stimulates the production and growth of blood vessels, using different
mechanisms of action. Alcon Laboratories, Inc.'s Retaane is a modified
steroid targeting enzymes produced by stimulated blood vessels by
blocking the effects of multiple growth factors.
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DRY AMD
Dry AMD is not a well-understood disease and there is no medical consensus
regarding its underlying cause. As a result, there have been few resources
devoted to developing a therapy for Dry AMD. However, there is some research
that suggests a vascular component to the disease. This "vascular model"
suggests that Dry AMD results from a disorder of the vascular microcirculation
in the retina which leads to a reduction in the amount of oxygen and nutrients
that reach the retina. This disorder also results in the accumulation of debris
between the cellular layers of the retina and the subsequent formation of
drusen. In addition, new studies have shown that AMD progression may be related
to the presence of elevated blood levels of certain macromolecules. Current
research has identified a number of high molecular weight blood components that
may have a detrimental effect on normal cellular functions and microcirculation.
There is currently no FDA-approved therapy for Dry AMD. Dry AMD is
diagnosed and monitored by a primary eye care doctor, such as an optometrist or
ophthalmologist, through a routine retinal exam. The AREDS Report provides
evidence that vitamin, antioxidant and zinc supplements only reduce the
five-year risk of conversion into Wet AMD by up to 25% for Category 3 and
Category 4 Dry AMD cases. Regardless of the supplement treatments, Dry AMD may
ultimately lead to irreversible vision loss, whether or not it converts into Wet
AMD.
POTENTIAL CAUSES OF AMD
The precise cause of AMD is not known. However, researchers have identified
certain factors that are associated with AMD:
o REDUCED METABOLIC EFFICIENCY OF RETINA. The macula must be able to
function at an extremely high rate of metabolic efficiency to provide
sharp vision. The macula, therefore, has an unusually high nutrient
and oxygen requirement. Intact cell transport mechanisms are required
to supply the necessary nutrients and oxygen. In addition to blood
vessels in the retina, the macula receives its blood supply from a
tiny meshwork of blood vessels, called the choroid, which lies
underneath the retina. The blood supply in this network decreases in
older people but even more so in some AMD patients. It has been
proposed that the decreased blood flow in the retina of AMD patients
reduces the metabolism in the retina resulting in significant
degradation of visual function.
o POOR WASTE MATERIAL DISPOSAL. Conversion of light in the retina into
electrical energy is a photochemical process which produces a large
quantity of cellular waste materials. Some researchers believe that
life-long environmental, oxidative and chemical stresses progressively
injure eye tissues, making it more difficult to clear away the waste
material generated by the vision-producing cells. This may explain why
waste products like drusen are often seen in the retinas of AMD
patients and why their presence is associated with an increased risk
of progressive vision loss.
We believe that a treatment that improves microcirculation in the retina
can help to enhance the metabolic efficiency of the retina and the removal of
waste material and thereby aid in the treatment of Dry AMD. We believe there is
a significant market opportunity for such a treatment.
OUR SOLUTION
The RHEO(TM) System, which consists of a pump and a disposable treatment
set, containing two filters, is designed to filter high molecular weight
proteins and macromolecules from the patient's plasma, leading to improved
microcirculatory function. Researchers involved in MIRA-1 believe that blood
filtered with the RHEO(TM) System is able to flow more easily through the tiny
capillaries of the eye and that the resulting improved microcirculation more
8
effectively supplies the macular cells with oxygen and nutrients which
facilitates removal of cellular waste materials. RHEO(TM) System represents a
fundamentally new approach to treatment of Dry AMD and offers the following
potential benefits:
o ADDRESSES A LARGE AMD PATIENT POPULATION WITH LIMITED CURRENT
TREATMENT OPTIONS. Current Wet AMD treatments are effective only on
patients who are newly-diagnosed with Wet AMD, of which there are
approximately 200,000 in the United States each year. RHEO(TM)
Therapy, however, is a treatment for most patients in the Category 3
and Category 4 Dry AMD populations, which, according to the AREDS
Report, represent approximately 54% of the total U.S. AMD patients, or
currently approximately 8 million people. RHEO(TM) Therapy is not
appropriate for everyone in the Category 3 and Category 4 Dry AMD
population. For example, RHEO(TM) Therapy would not be appropriate for
potential patients who may have existing ailments that would make it
unsafe for them to receive any blood transfusion type procedure.
o PRESERVES OR IMPROVES VISION OF DRY AMD PATIENTS. Success in treating
AMD is generally measured by the ability to slow or halt progression
of the disease. We believe that RHEO(TM) Therapy is currently the only
Dry AMD therapy that, based on preliminary data, appears to
demonstrate improved vision in some patients. Furthermore, 58% of, or
11 of 19, patients in the MIRA-1 interim analysis entering the
clinical trial with worse than legal driving vision improved to meet
or exceed the requirements to regain a driver's license. However,
since our MIRA-1 protocol does not require us to follow patients
beyond 12 months, we have no data which would allow us to evaluate
whether RHEO(TM) Therapy is effective on a long-term basis.
o PATIENT-FRIENDLY PROCEDURE. RHEO(TM) Therapy is a form of therapeutic
apheresis, a procedure that selectively removes molecules from the
plasma. Apheresis has been used safely for more than twenty years in
the United States and Europe to treat various diseases including
leukemia, rheumatoid arthritis, sickle cell disease and several other
medical conditions. Although RHEO(TM) Therapy is a patient-friendly
procedure, it is time consuming, with an initial course of RHEO(TM)
Therapy requiring eight procedures over a 10- to 12-week period, with
each procedure lasting between two and four hours depending on patient
weight and height. Patients recline in a comfortable chair and
typically listen to music or otherwise relax during the procedure. As
with any medical procedure, there are potential side effects
associated with RHEO(TM) Therapy , which are all temporary and
generally mild, including drops in blood pressure, abnormal heart
rate, nausea, chills and localized bleeding, swelling, pain and
numbness in the area of the arms where the needles are inserted.
o LIMITED BARRIERS TO ADOPTION FOR EYE CARE PROFESSIONALS AND HEALTH
CARE SERVICE PROVIDERS. We believe that the RHEO(TM) System requires
lower capital expenditures and less physical space than equipment used
in many other procedures performed by eye care professionals,
including laser vision correction and cataract surgery. The RHEO(TM)
System requires no special installation and minimal maintenance costs.
We believe that RHEO(TM) Therapy, which can be administered by a
nurse, can be easily integrated into our customers' workflow and
offers an attractive source of additional revenues for both facilities
and providers. However, our success is dependent upon achieving
widespread acceptance of RHEO(TM) Therapy among ophthalmologists and
optometrists who may be reluctant to accept RHEO(TM) Therapy.
o COST-EFFECTIVE PROCEDURE. The initial course of RHEO(TM) Therapy is
initially expected to cost between $16,000 and $25,600. We believe
that Medicare and third-party payors will determine that the benefits
of RHEO Thereapy(TM) will justify the cost of reimbursement. However,
should Medicare and third-party payors decline to provide coverage of
RHEO(TM) Therapy or set broad restrictions on patient coverage or on
treatment settings in which RHEO(TM) Therapy is covered, our potential
revenues may be significantly limited, particularly if potential
9
patients deem our treatment to be too expensive. Nonetheless, we
believe that to the extent that RHEO(TM) Therapy is not reimbursed by
the government or private third-party payors, some patients with the
economic means to do so will be willing to pay for RHEO(TM) Therapy
themselves in order to avoid the consequences of uncorrectable
impaired vision, including, but not limited to, the inability to
drive.
OUR STRATEGY
Our goal is to establish RHEO(TM) Therapy as the leading treatment for Dry
AMD in North America. Key elements of our strategy include:
o CREATING A PLAN TO DEVELOP MARKET AWARENESS OF RHEO(TM) THERAPY BY
EDUCATING EYE CARE PROFESSIONALS AND PATIENTS. If RHEO(TM) Therapy is
approved by the FDA, we intend to increase market awareness of
RHEO(TM) Therapy by identifying and developing relationships with key
opinion leaders in each of the eye care disciplines, including
ophthalmologists and optometrists. We believe that these opinion
leaders, some of whom are investigators in MIRA-1, will help establish
acceptance of RHEO(TM) Therapy. If and when the FDA grants approval
for the RHEO(TM) Therapy, we intend to launch a public relations
campaign targeted directLY at patients and advocacy groups to alert
them of our treatment. Members of our management team were leaders in
creating market awareness of laser vision correction when it was
introduced to the North American market in the 1990s and, in doing so,
were effective in creating relationships with a large number of
optometrists and ophthalmologists in the United States.
o ESTABLISHING THIRD-PARTY REIMBURSEMENT FOR RHEO(TM) THERAPY. We
believe that an insurance billing coDE established by the American
Medical Association in January 2003 accurately characterizes the
RHEO(TM) Therapy procedure. This code identifies therapeutic apheresis
with extracorporeal selective adsorption or selective filtration and
plasma reinfusion. The procedure for which this billing code currently
applies is a category of low density lipids, or LDL, apheresis, which
partially filters the "bad" cholesterol from the blood plasma. If and
when the FDA grants marketing clearance for the RHEO (TM) SystEM , we
plan on seeking a Medicare National Coverage Determination for
RHEO(TM) Therapy for specified patienTS with Dry AMD, with the goal of
securing Medicare coverage under the existing procedure code for use
in treatment of Dry AMD. Currently, Medicare covers and pays for other
FDA-licensed services billed with this code only when performed in a
hospital outpatient setting. A payment rate for FDA-licensed services
billed with this code when performed in a physician Medicare
office-based setting has been established by the Center for Medicare
and Medicaid Services, or CMS, effective on January 1, 2005. If
RHEO(TM) TheraPY is cleared for marketing by the FDA and covered by
Medicare for treatment of Dry AMD, we believe that this Medicare
office-based reimbursement policy will similarly apply for this
procedure and will provide a significant positive impact on our
revenues. We also plan to assist our customers in securing coverage
and appropriate reimbursement for RHEO(TM) Therapy from Medicare and
private insurers through a dedicatED reimbursement group and the
provision of detailed supporting documentation.
o SECURING RELATIONSHIPS WITH KEY MULTI-FACILITY HEALTH CARE SERVICE
PROVIDERS. To facilitate a rapid rollout of the RHEO(TM) System if and
when we receive FDA approval, we are identifying key groups OF
multi-facility health care service providers, including hospitals,
dialysis clinics and ambulatory surgery centers, as well as private
practices, which may be future treatment centers for the RHEO(TM)
System. To date, our marketing activities have been limited to
identifying to whom we will choose to market if and when we receive
FDA approval. We are not currently in negotiations with any U.S.
healthcare service provider to supply or license the RHEO(TM) System,
nor can we pursue any suCH relationship unless and until we receive
FDA approval. In advance of commercialization in the United States, we
intend to develop a plan to ensure that there is an adequate supply of
10
trained nurses to support our service provider partners. We intend to
leverage the experience of clinics in Canada currently using the
RHEO(TM) System to assist in training nurses and our service provider
partners IN advance of FDA approval. The components of the RHEO(TM)
System have had Health Canada approval since 2003. We currently supply
three clinics in Canada which commercially provide RHEO(TM) Therapy to
Dry AMD patienTS at the direction of their physician. We have recently
signed an agreement to provide the RHEO(TM) System IN Canada to a
private company called Rheo Therapeutics Inc. Dr. Machat, who is an
investor in and one of the directors of Rheo Therapeutics, was a
co-founder and former director of TLC Vision. We believe that our
experience in Canada and the experience of one of our principal
stockholders in Germany will allow us to develop best practice
guidelines for integrating RHEO(TM) Therapy into a clinic setting.
o ENSURING SUFFICIENT MANUFACTURING CAPACITY AND INVENTORY TO SUPPORT
OUR COMMERCIALIZATION PLAN. We intend to work with our manufacturing
and supplier partners to ensure that there is sufficient capacity and
inventory to support our commercialization plans. In advance of FDA
approval, we intend to accumulate an inventory of filters and pumps to
support a rapid product launch. We have a distribution agreement with
Asahi Medical which appoints us as Asahi Medical's exclusive
distributor of filters in the United States, Canada, Mexico and
certain other countries. We recently signed a purchase order with
Asahi Medical for 9,600 filter sets (each filter set consists of one
Plasmaflo filter and one Rheofilter), including 1,600 filter sets in
the fourth quarter of 2004 and 4,000 filter sets for each of the
following two quarters. We intend to order 4,000 filter sets per
quarter in 2005 and 2006 in order to accumulate inventory in excess of
our current requirements until we receive FDA approval in order to
maximize the number of filters available to us due to manufacturing
constraints on the number of cellulose acetate filters that Asahi
Medical can produce. Each filter has a shelf life of three years.
Based on our expected current requirements, we do not believe that the
accumulated filters will expire before use. While we believe this
strategy is prudent to maximize future revenues, holding inventory in
this manner will decrease our short term liquidity. We will be working
closely with Asahi Medical to develop and conduct clinical tests on a
next generation polysulfone Rheofilter with similar characteristics to
the current cellulose acetate Rheofilter. We believe that the proposed
polysulfone Rheofilter will be able to be manufactured at
significantly higher volumes and lower costs than the current filter
technology.
o MAINTAINING OUR INTELLECTUAL PROPERTY PORTFOLIO AND OTHER BARRIERS TO
ENTRY. We believe that our intellectual property position may assist
us in maintaining our competitive position. We also believe that the
manufacturing process expertise relating to the production by Asahi
Medical of the Rheofilter is protected by Asahi Medical as a trade
secret. We believe that the exclusive nature of our supplier
relationship with Asahi Medical gives us a competitive advantage. We
intend to continue to strengthen our relationships with our exclusive
suppliers and to strengthen our current patents and seek additional
patent protection.
OUR PRODUCT
THE RHEO(TM) SYSTEM
The RHEO(TM) System employs a double filtration apheresis process, whereby
a pair of single use blood aND plasma filters sequentially separate and
partially remove the targeted plasma components. The system removes
macromolecules greater than a specified size from the plasma. The RHEO(TM)
System consists of two primary components:
11
o OCTONOVA PUMP. The OctoNova pump is a microprocessor controlled device
used to circulate blood and plasma from the patient through the
filters, and back to the patient. The OctoNova pump is complemented by
single-use sterilized tubing which creates a closed-loop system. Blood
is pumped through the tubing with small gear-like sprockets that
create a peristaltic action in the tube similar to that which occurs
in our intestines. The smooth-edged teeth of the sprockets press
against the outside surface of the tube pushing the blood along the
length of the tube as the wheels turn all at the same rate and
direction. No blood ever leaves the closed-loop system. The OctoNova
pump was developed in the 1990s by Diamed and licensed to us in 2002.
We are seeking FDA approval of the OctoNova pump as part of the
RHEO(TM) System PMA.
o DISPOSABLE TREATMENT SETS. Disposable treatment sets consist of the
tubing and two filters, the Plasmaflo filter and the Rheofilter. One
treatment set is used for each treatment undertaken by the patient.
The Plasmaflo filter performs the initial function of separating the
blood cells from the plasma. The Rheofilter is a single-use,
hollow-fiber nanopore membrane, which is used to filter specific high
molecular weight proteins and other macromolecules from the plasma.
Following this, the filtered plasma is reconstituted with the blood
cells and returned into the patient. The tubing and the filters are
easily disposed after each patient procedure by the administering
nurse, providing us with a recurring source of revenue. The Rheofilter
was developed in the early 1980s by Asahi Medical. We are seeking FDA
approval of the tubing and two filters as part of the RHEO(TM) System
PMA. We are working TO complete the PMA with Asahi Medical, and upon
FDA approval of the PMA we have an agreement to transfer this FDA
approval to them. In that same agreement, Asahi Medical agreed to us
being the exclusive distributor of the Plasmaflo filter and the
Rheofilter in the United States, Canada, Mexico and the Caribbean for
a term of ten years beginning at the date of the FDA approval, which
term is automatically renewable for one year terms unless terminated
upon six months' notice. The Rheofilter is currently made of a
cellulose acetate filter material. We are working with Asahi Medical
to develop a new filter made of polysulfone to replace the current
filter. We believe Asahi Medical has delivered two versions of its new
polysulfone filter to Germany to begin clinical trials to support the
safety data necessary to obtain a CE Mark. Asahi Medical has informed
us that the clinical trials should begin before the end of 2004 and
should take approximately a year to complete. Following obtaining a CE
Mark, we will work with Asahi to obtain the necessary approvals to use
the new polysulfone filter in the RHEO(TM) System in CanaDA and the
United States.
The disposable treatment sets received Health Canada regulatory approval in
2002. The OctoNova pump received Health Canada approval in 2003. The
Rheopheresis system components have also been granted a CE Mark in Europe, where
the commercialization rights for Rheopheresis are exclusively held by Diamed,
one of our stockholders and suppliers. We are currently conducting clinical
studies with the goal of obtaining FDA approval and widespread physician
acceptance of RHEO(TM) Therapy.
THE RHEO(TM) PROCEDURE
Each RHEO(TM) Therapy procedure typically takes between two and four hours
to complete and begins by placiNG one intravenous line in each forearm of the
patient. Blood is pumped from a large vein in one arm and circulated through the
filtration system where the whole blood is separated from the plasma by the
Plasmaflo filter. The plasma is filtered through the Rheofilter, which filters
high molecular weight proteins and other macromolecules from the patient's
plasma. The plasma is then remixed with the blood and is returned to the patient
intravenously. Only approximately 1.25 pints of blood are outside the patient's
body and at all times blood remains in a sterile closed circuit. Throughout the
RHEO(TM) Therapy procedure, the attending nurse monitors tHE blood pressure,
heart rate, oxygen saturation, cardiac rhythm and activated clotting time of the
patient. The attending nurse also gauges the flow rates, temperature and
pressures of the filters. No blood products or medications are added, other than
a small amount of heparin to prevent clotting in the tubing system. We believe
12
the initial course of eight procedures of RHEO(TM) Therapy given over a 10- to
12-week period provides the beST results for patients with Dry AMD. Typically,
one or two booster procedures are given each 12 to 18 months thereafter to
maintain the clinical benefits derived from the initial course of RHEO(TM)
Therapy . The referriNG physician monitors post-procedure follow-up. The
following graphic shows the RHEO(TM) Therapy process:
[GRAPHIC OMITTED]
BACKGROUND OF RHEOPHERESIS
Researchers discovered Rheopheresis for AMD during the search for a blood
treatment for elevated cholesterol levels in the mid-1980s. Asahi Medical
developed a filter aimed at selectively removing the low-density lipid, or LDL,
macromolecules known as the "bad" cholesterol in an apheresis procedure.
Although the filter successfully removed LDL, it also removed several other
large molecules, including von Willebrand's factor, fibrinogen, lipoprotein A
and C reactive protein. Researchers have confirmed that apheresis, a plasma
filtering or exchange procedure, is a relatively safe procedure and that there
do not appear to be negative consequences to also filtering out these large
molecules. At approximately the same time, however, the first statin drug was
proven to be effective in lowering LDL levels in the blood, thereby eliminating
the need for an apheresis procedure to remove LDL. Shortly thereafter, Asahi
Medical ceased its efforts to develop and commercialize apheresis treatment for
elevated LDL levels.
In the late 1980s, researchers at the University of Cologne in Germany were
searching for a treatment for a small group of patients referred to the
university with a condition known as refractory uveitis, a chronic inflammatory
eye condition that was not responding to conventional therapy. Having learned
that the Asahi Medical filters had the ability to remove large molecules from
the blood and that the eye condition was related to significant levels of many
of the same molecules, the researchers performed a small pilot study. The
filtration procedure was effective for uveitis but also showed preliminary
success in improving the vision of two patients in the study that also had AMD.
This led the researchers to conduct several years of clinical research to
develop apheresis for AMD in Germany. The research suggested that eight
procedures over a 10- to 12-week period was the optimal treatment regime.
13
CLINICAL STUDIES
We are currently conducting our FDA clinical trial, MIRA-1, or Multicenter
Investigation of Rheopheresis for AMD. Two other clinical trials have been
conducted by third parties: MAC-1, which was conducted in Germany from 1995 to
1998; and the Rheopheresis pilot study which was conducted by the University of
Utah from 1997 to 1998. While the protocols of these three clinical trials were
not identical, the results of each of them to date have been generally
consistent.
MIRA-1 is currently being conducted at eight treatment centers in the
United States and Canada. We have an agreement with Promedica International, a
contract research organization, to oversee each center. Promedica International
provides study monitoring and site and data management services. We expect to
pay Promedica International a total of approximately $1,500,000 for certain fees
and expenses for the period from 2003 to the completion of the MIRA-1 study.
Either party may terminate this agreement by giving the other thirty days'
written notice.
MIRA-1
MIRA-1 is a randomized, placebo-controlled trial designed to evaluate the
safety and efficacy of RHEO(TM) Therapy in patients with intermediate-to-late
stage, or Category 3 and Category 4, Dry AMD.
In September 1999, we received an Investigational Device Exemption from the
FDA to begin MIRA-1. Between early 2000 and August 2001, we enrolled 98 patients
in MIRA-1. In August 2001, due to financial constraints, we temporarily
suspended the new enrollment of patients but continued to pursue follow-up with
the remaining patients in MIRA-1. In late 2001, with permission of the FDA, we
submitted the data sets of the 43 patients who had reached their full 12-month
follow-up in MIRA-1 for independent third-party analysis. Over the course of the
next several months, the FDA addressed a number of matters relating to MIRA-1.
First, the FDA allowed us to submit the PMA in modules. Second, the FDA
acknowledged that MIRA-1 is intended to be the pivotal trial for obtaining FDA
approval for RHEO(TM) Therapy . Third, the FDA allowed us to treat the patients
in the placebo groUP with RHEO(TM) Therapy free of charge once their full
12-month follow-up data had been obtained. Fourth, the FDA confirmed that we
would be required to submit at least 150 full data sets from the 180 patients
that were to be enrolled in the trial. Following disclosure of the interim
results of MIRA-1 and these changes to the MIRA-1 protocol, we were able to
obtain new financing. As a result of the new financing, in October 2003, we
began screening additional patients for enrollment in MIRA-1 and since then we
have opened five additional MIRA-1 sites and are now currently operating eight
MIRA-1 sites.
As of December 31, 2004, we had enrolled a total of 185 patients in MIRA-1.
This completes the enrollment phase of MIRA-1, exceeding our goal of enrolling
180 subjects by December 31, 2004. We have collected complete 12-month
post-treatment data sets for 87 of these patients. Of the remaining 98 patients,
82 are in the process of treatment or follow-up and the treatment of 16 patients
did not result in complete data sets. We intend to derive the required 150
complete 12-month post-treatment data sets from our enrolled subjects. As of
December 31, 2004, we had also submitted to the FDA the first three of four
modules of the PMA filing, the non-clinical portion. These first three modules
contain non-clinical results of bench tests and quality assurance, and document
manufacturing processes on the components of the RHEO(TM) System. We intend to
submit the fourth modulE, which consists of the follow-up clinical data, in two
components. We expect that we will submit the first component following
completion of our six-month data on at least 150 data sets, including the
12-month data sets for all patients for whom they are available; and that we
will submit the second component following completion of our 12-month data on at
least 150 data sets.
To be included in MIRA-1, a patient's eyes must demonstrate
intermediate-to-late stage Dry AMD, corresponding to Category 3 and Category 4,
with ten or more intermediate or large drusen. Additionally, patients must show
elevated serum levels of at least two out of three macromolecules associated in
14
previous studies that suggested the best positive treatment outcomes. Primary
eyes in the study must show no signs of Wet AMD and must demonstrate best
corrected visual acuity, or BCVA, between 20/32 and 20/125, inclusive.
Two out of every three patients are treated in the trial, while the third
is a placebo or control patient. Patients receive eye exams prior to treatment
and at three-, six-, nine-, and 12-month follow-up intervals. Each patient
receives either eight RHEO(TM) Therapy or eight placebo procedures over ten
weeks. Patients in tHE placebo-control group are made to believe that they are
receiving RHEO(TM) Therapy. All subjects, including thoSE randomized to the
placebo group, are shrouded from the neck down to prevent them from observing
their treatment and receive actual needle sticks in both arms. Additionally, a
partition is positioned in front of the OctoNova pump so that the patient cannot
see the system. The machine is activated so that the patients can hear the
background noise of the machine, but those patients in the placebo group are not
connected to the tubing circuit. In addition, all subjects, including those
randomized in the placebo group, are required to take the same dose of
antioxidant vitamins that are commonly recommended for Dry AMD patients as a
possible inhibitor of conversion into Wet AMD.
The study's primary endpoint is the mean change in BCVA. In this trial,
visual acuity is measured as the number of letters that the patient can read on
the Early Treatment Diabetic Retinopathy Study, or ETDRS, eye chart. This is the
standard eye chart used in these types of trials. Five letters on the ETDRS eye
chart equate to one line of visual acuity. Secondary and tertiary endpoints
include:
o the ability to pass a vision test in order to regain a driver's
license;
o vision improvement;
o vision loss;
o drusen reduction;
o the Pepper Visual Skills for Reading Test, which is a measure of
reading ability;
o the National Eye Institute visual functioning questionnaire; and
o progression to legal blindness.
The following chart presents the interim 12-month results of the first 43
patients in the MIRA-1 study. Of these 43 patients, we only obtained 12-month
results from 36 patients because three treated patients and four patients in the
placebo group did not complete all of the required follow-up.
TOTAL COHORT
---------------------------------------------------
PRIMARY EYES PLACEBO NET LINES
(N=25) (N=11) DIFFERENCE P VALUE
------------ ------------ ---------- --------
Mean change BCVA............................ 0.74 -0.87 1.61 0.0011
Vision improvement greater or equal to:
3 lines................................... 3(12%) 0(0%)
2 lines................................... 7(28%) 2(18%)
1 line.................................... 12(48%) 3(27%)
Vision loss greater or equal to:
3 lines................................... 1(4%) 2(18%)
2 lines................................... 2(8%) 2(18%)
Drusen reduction............................ 29% 13%
Progression to legal blindness.............. 0% 18%
15
The following chart represents the subgroup of 28 patients with worse than
legal driving vision, or a BCVA of worse than 20/40, prior to enrolling in the
trial. Twenty-six patients (19 treatment and seven placebo) completed the entire
12 month follow-up; the remaining two patients in the placebo group who did not
complete 12 month follow up are not included.
COHORT (SUB-GROUP) WITH BCVA
----------------------------------------------------
WORSE THAN 20/40 AT ENROLLMENT
TREATMENT GROUP PLACEBO NET LINES
(N=19) (N=7) DIFFERENCE P VALUE
--------------- ---------- ---------- --------
Mean change BCVA.............................. +1.1 -1.9 3.00 0.0014
Improved to >20/40 (legal driving vision).... 11(58%) 1(14%)
Vision improvement greater or equal to:
3 lines..................................... 3(16%) 0(0%)
2 lines..................................... 6(31%) 1(14%)
1 line...................................... 11(58%) 2(29%)
Vision loss greater or equal to:
3 lines..................................... 1(5%) 2(29%)
2 lines..................................... 1(5%) 2(29%)
Drusen reduction.............................. 35% 14%
Vision research typically uses a "standard measurement" called the "change
in BCVA", which is measured using a chart that provides five letters per line of
decreasing size or increasing difficulty. Each letter has a relative value of
0.2 or 20% of the entire line. A patient entering the study who gains two lines
of vision will be able to read ten additional letters or two complete lines of
vision.
"Mean change" is the cumulative averaging of all patient results in a
specific category. For example, a patient entering the study with 20/40 vision
and gaining 1.4 lines following treatment would have improved to 20/32 plus two
16
letters on the 20/25 line. This number, 1.4, would be included in the
calculation with all other individual patient results when calculating the
cumulative average.
We do not know whether the completed MIRA-1 results will be consistent with
the interim results, which are based on a very small number of subjects, or
whether, if the results are consistent, the FDA would consider them sufficient
to support our approval.
LEARN STUDIES
On February 28, 2005, we announced that the FDA had completed a review of
the Long-term Efficacy in AMD from Rheopheresis in North America, or LEARN,
protocols submitted to it by us on January 21, 2005 and has given us permission
to initiate those two studies.
LEARN-1 is an open-label multi-center study that will enroll up to 120
subjects who were treated in the MIRA-1 study. There will be up to 12
investigational sites where the subjects will be randomized in a 1:1 fashion to
receive either two or four RHEO Therapy "booster" procedures. The results
between the groups will be compared after three, six, nine and twelve months of
follow-up from baseline.
LEARN-2 is an open-label multi-center study that will enroll up to 60
subjects who were placebo patients in the MIRA-1 study. There will be up to 12
investigational sites where the subjects will receive eight RHEO Therapy
procedures and will have a three-, six-, nine- and twelve-month follow-up from
baseline evaluation.
MAC-1
The MAC-1 trial was a 40-patient study conducted in Germany by the
University of Cologne from 1995 to 1998 and resulted in Rheopheresis for Dry AMD
achieving the CE Mark. The patients were randomized into two groups, a treatment
group and a placebo-control group. The treatment group was treated ten times
over a period of 21 weeks.
Unlike MIRA-1, the investigators and each patient knew whether that patient
was in the treatment group or the control group because the 20 patients in the
control group did not receive placebo treatments but were simply examined at the
designated follow-up intervals. The MAC-1 study also included patients with
signs of Wet AMD and included patients with significant soft drusen. Eighteen of
the patients in the study had signs of Wet AMD and would have been excluded from
MIRA-1 under the MIRA-1 protocol.
The main parameter of the study was BCVA. Electrical activity in the eye
was also recorded. Plasma and whole-blood speed and volume in the macular region
were also measured. The results of MAC-1 were similar to the interim results
that have been seen in MIRA-1: statistically significant relative improvement of
1.6 lines of BCVA immediately following the course of treatment, with the same
level of benefit seen at 12-months. For patients with soft drusen, the average
difference was 2.3 lines (p<0.01); for patients without soft drusen, the
difference was only 0.64 lines (p=0.43). In the treated group, improvement in
electrical activity was statistically significant, indicating that the cells of
the retina were functioning more efficiently. The speed and volume of blood flow
in the choridial arteries which supply blood to the retina were found to be
decreased by 37% and 33%, respectively, in patients with AMD. Following
treatment of those patients, blood flow increased by 22%. There were no serious
adverse events noted.
RHEOPHERESIS PILOT STUDY
The study was conducted by physicians at the University of Utah Health
Sciences Center in Salt Lake City, Utah under an Investigational Device
Exemption from the FDA. The University of Utah's Institutional Review Board also
provided approval for human experimentation prior to enrollment. The study
17
involved 30 patients. The trial measured electrical activity in the cells of the
macula before and after treatment. The results of this study were used to
support the application for the Investigational Device Exemption to conduct
MIRA-1.
PERC STUDY
In April 2004, RHEO Clinic Inc., a subsidiary of TLC Vision, received
Institutional Review Board approval for and launched a new study called the
Prospective Evaluation of Rheopheresis in Canada, or PERC.
PERC is a single center study in Canada designed to examine the effect of
RHEO(TM) Therapy on the outcoME variables for 60 patients with Dry AMD to gain a
greater understanding of the treatment's method of action. As of December 31,
2004, 13 patients were enrolled in PERC. Each patient will receive a series of
eight RHEO(TM) TheraPY over a 10- to 12-week period. Clinical data will be
collected at three-month intervals for one year following the initial
treatments.
One objective of the study is to develop a complete description of the
physiological changes produced by RHEO(TM) Therapy. This will be done using
structural and functional objective tests and subjective measures of visiON in
its broad context. This includes measurements of the size and shape of the
retina, retinal electrical activity and vascular function as well as general
visual performance using standard measurements of acuity, reading speed, and
color and contrast sensitivity. Subjective vision assessments using the National
Eye Institute Visual Functioning Questionnaire 25 will also be evaluated to gain
understanding about general quality of life and AMD-specific visual symptoms.
David T. Wong, MD, FRCSC or Fellow of the Royal College of Surgeons of
Canada, is the principal investigator of the PERC study. Dr. Wong has been our
Medical Director since July 2004. Dr. Wong is an Assistant Professor of
Ophthalmology at the University of Toronto, Active Staff Ophthalmologist at St.
Michael's Hospital and Director of Fellowship Training in Ophthalmology at the
University of Toronto. Dr. Wong is a sub-specialist surgical ophthalmologist in
the areas of the vitreous and retina of the eye. Dr. Wong is a member of
numerous organizations including the Canadian Ophthalmology Society, American
Academy of Ophthalmology, the American Society of Retina Specialists and the
Association for Research in Vision and Ophthalmology. Dr. Wong is a frequently
invited lecturer in North America, Asia and Europe, has authored numerous
scientific papers and publications and is an investigator in numerous FDA
clinical trials, including trials for QLT's Visudyne, Eyetech's Macugen and
Alcon's Retaane.
RHEONET REGISTRY
The RHEONET Registry is a collaborative effort between the Apheresis
Research Institute in Cologne, Germany and us. The registry contains a database
of Rheopheresis procedures from centers and clinics performing Rheopheresis
commercially in Germany, using systems sold by Diamed, and in Canada, using
systems sold by us. In March 2004, a total of 3,314 Rheopheresis procedures on
529 patients were registered, including 365 patients with AMD. Ophthalmological
data of 149 eyes of 108 patients with Dry AMD could be analyzed from the
registry as of March 2004.
SUPPLIER RELATIONSHIPS
We have three key supplier arrangements -- with Asahi Medical, who
manufactures the treatment sets, including the Rheofilter and the Plasmaflo
filter, and with Diamed and MeSys, the designer and the manufacturer,
respectively, of the OctoNova pump. The Rheofilter, the Plasmaflo filter and the
OctoNova pump are all key components of the RHEO(TM) System.
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RHEOFILTER AND PLASMAFLO FILTER. We purchase the Rheofilter and Plasmaflo
filter from Asahi Medical. We make these purchases pursuant to a distribution
agreement which appoints us as Asahi Medical's exclusive distributor of the
Rheofilter and the Plasmaflo filter for use in treating AMD in the United
States, Canada, Mexico and certain Caribbean countries, subject to us obtaining
necessary regulatory approvals in those agreed countries where we choose to sell
the filters. Under this agreement:
o we may not market or sell any product that is similar to or
competitive with the filters;
o we must use our best efforts to support providers in their efforts to
secure reimbursement from public and private U.S. health insurers on
behalf of patients whose Dry AMD treatment involves utilization of
these filters;
o we must purchase a minimum of 9,000 filters during the one-year period
commencing six months following FDA approval, 15,000 filters in the
succeeding one-year period and 22,500 filters in the next succeeding
one-year period. If we fail to meet our minimum purchase requirements
under our agreement with Asahi Medical, our agreement may be
terminated or rendered non-exclusive at the sole discretion of Asahi
Medical; and
o we must transfer the whole ownership of the FDA approval to Asahi
Medical upon receipt. We will, however, continue to own the clinical
trial data from MIRA-1. We have agreed with Asahi Medical to allow
them to use the clinical data from MIRA-1 to obtain approval to sell
the Rheofilters in other countries so long as we are granted a
distributorship in those other countries.
Although we have an obligation to purchase a minimum annual quantity of
filters, Asahi Medical has the right to reject any order but may not
unreasonably reject any order placed by us in order to satisfy our minimum
purchase requirements. Under the agreement, Asahi Medical can cease to supply
Rheofilters and Plasmaflo filters to us, after a 12-month notice period, in the
event that: (1) Asahi Medical cannot economically supply the product; (2) due to
special circumstances, such as patent infringement liability or product
liability issues, Asahi Medical cannot supply the product; or (3) Asahi Medical
develops an improved product, in which case, we have a right of first refusal to
become the exclusive distributor of that new product in the same territories
where we are the exclusive distributor of the Rheofilter on terms and conditions
satisfactory to Asahi Medical and to us.
Asahi Medical has indicated that they intend to discontinue manufacturing
the cellulose acetate Rheofilter in 2008 and replace it with a newer polysulfone
Rheofilter. We believe that Asahi Medical has delivered two versions of its new
polysulfone filter to Germany to begin clinical tests to support the safety data
necessary to obtain a CE Mark. Following obtaining a CE Mark, we will work with
Asahi Medical to obtain the necessary approvals to use the new polysulfone
filter in the RHEO(TM) System in Canada and the United States. Based on tHE
discussion we have had with Asahi Medical to date, we expect to obtain
distribution rights to this new filter on terms substantially equivalent to the
terms for the existing filter. We are currently not seeking an alternative
supplier of the Rheofilter because we believe that Asahi is the only
manufacturer possessing the requisite technological and production capabilities
to produce the Rheofilter.
This agreement has a term of ten years from our obtaining FDA approval to
use the filters to treat AMD, and is automatically renewable for one-year terms
unless terminated upon six months' notice. In addition, Asahi Medical may
terminate our agreement in certain circumstances, including:
o if we become insolvent or are petitioned into bankruptcy;
19
o if we transfer all or an important part of our business to a third
party;
o if we are unable to obtain FDA approval and other necessary approvals
in the territories for which we have distribution rights by the end of
December 2006;
o if we breach the agreement and do not remedy the default within 30
days of Asahi Medical notifying us that we are in default; or
o if any essential changes in our management or ownership of our shares
would adversely affect the sale of filters in the territories in which
we have exclusive distribution rights.
OCTONOVA PUMP. We purchase the OctoNova pump pursuant to a marketing and
distribution agreement with Diamed, the developer of the OctoNova pump, and a
distribution agreement with MeSys GmbH, the company that manufactures the pumps
for Diamed.
Under the agreement with Diamed we have been appointed Diamed's exclusive
distributor of the OctoNova pump in the United States, Canada, Mexico and the
Caribbean. Under this agreement:
o we have committed to use our best efforts in promoting the sale and
use of, and securing orders and developing the market for, the
OctoNova pump in the territories for which we have distribution
rights; and
o we are obligated to use our best efforts in promoting public and
private medical insurance reimbursement for the treatment of
hemo-rheological disorders in microcirculation in the United States.
This agreement has a term of ten years from FDA approval of the RHEO(TM)
System, and is automatically renewabLE for one-year terms unless terminated upon
six months' notice. In addition, Diamed may terminate this agreement in certain
circumstances, including:
o if we become insolvent or are petitioned into bankruptcy;
o if the whole or an important part of our business is transferred to a
third party and such transfer would adversely affect the sale of the
OctoNova pump;
o if we breach the agreement and do not remedy the default within 30
days of Diamed notifying us that we are in default;
o if any essential changes in our management or our share ownership
would adversely affect the sale of the OctoNova pump;
o if our distribution agreement with MeSys is terminated; or
o if we are unable to obtain FDA approval and other necessary approvals
in the territories for which we have distribution rights by the end of
2006.
Under this agreement, we have an obligation to purchase a minimum quantity
of 1,000 OctoNova pumps before the fifth anniversary of FDA approval. If we fail
to meet our minimum purchase requirements under our agreement with Diamed, our
agreement may be terminated or rendered non-exclusive at the sole discretion of
Diamed. Subsequent minimum purchase orders will be as mutually agreed.
Under our agreement with MeSys, MeSys agrees to manufacture and sell to us
the OctoNova pump. Under our agreement with MeSys, we have an obligation to
purchase a minimum annual quantity of OctoNova pumps. This agreement expires on
20
the third anniversary of our obtaining FDA approval to use the OctoNova pump to
treat AMD. In addition, MeSys may terminate our agreement in certain
circumstances, including:
o if we become insolvent or are petitioned into bankruptcy;
o if we breach the agreement and do not remedy the default within 60
days of MeSys notifying us that we are in default;
o if Diamed's manufacturing agreement with MeSys is terminated; or
o if our marketing agreement with Diamed is terminated.
SALES AND MARKETING
We currently have limited sales and marketing capabilities and no
distribution capabilities. We will seek to develop our own sales and marketing
infrastructure to commercialize the RHEO(TM) System. We have recruited a chiEF
operating officer with significant sales, marketing and distribution experience.
We intend to recruit our domestic ophthalmic sales force in the near future in
order to have an established sales and marketing capability if and when we
receive FDA approval to market the RHEO(TM) System in the United States.
We expect to focus our sales and marketing efforts on multi-facility health
care service providers, including hospitals, dialysis clinics and ambulatory
surgery centers, as well as private eye care professionals, including
optometrists and ophthalmologists. Each of these two groups would be serviced by
separate dedicated sales forces, with knowledge of the particular needs and
concerns of each group.
In order to make the RHEO(TM) System more attractive to multi-facility
health care service providers aND private eye care professionals, prior to
commercialization in the United States, we will seek to create a training
program for nurses, leveraging existing clinics in Canada and potential partners
who already have experience in apheresis treatments, such as dialysis clinics,
to ensure an adequate supply of trained nurses for our service provider
partners.
If the RHEO(TM) System is approved for commercialization by the FDA, we
also intend to increase markET awareness of RHEO(TM) Therapy by identifying and
developing relationships with key opinion leaders in each of tHE eye care
disciplines, including ophthalmologists and optometrists. We believe that these
opinion leaders, some of whom are investigators in MIRA-1, will help establish
credibility for RHEO(TM) Therapy . If and when we obtain FDA approval, we intend
to launch a public relations campaign targeted directly at patients and advocacy
groups to alert them to this new treatment. Members of our management team were
leaders in creating market awareness of laser vision correction when it was
introduced to the North American market in the 1990s and in doing so they were
effective in creating relationships with a large number of optometrists and
ophthalmologists in the United States.
We currently have an exclusive agreement with Apheresis Technologies to
provide warehousing, order fulfillment, shipping, billing services and customer
service related to shipping and billing for the RHEO(TM) System. Under this
agreement, we pay Apheresis Technologies a basic service fee of 5% of the cost
to us of the RHEO(TM) System. The agreement expires 10 years subsequent to
approval by the FDA of the RHEO(TM) System uNLess otherwise terminated by us.
In Canada, we are currently marketing and selling the RHEO(TM) System
through a small, dedicated Canadian salES force. In September 2004, we signed an
agreement with Rheo Therapeutics Inc., a private Canadian company, which has
21
agreed to purchase approximately 8,000 treatment sets and an estimated 20
OctoNova pumps by the end of 2005, with an option to purchase up to an
additional 2,000 treatment sets, subject to availability. Rheo Therapeutics pays
a first-to-the-market favorable price of $750 per treatment set. However, we
expect our pricing in the United States to be approximately $1,200 per treatment
set. Under our agreement with Rheo Therapeutics, either party may terminate the
agreement with 90 days' written notice to the other party. However, if Rheo
Therapeutics gives notice to terminate the agreement before all of its orders
have been shipped, Rheo Therapeutics is liable for the remaining balance of its
orders. Dr. Machat, who is an investor in and one of the directors of Rheo
Therapeutics, was a co-founder and former director of TLC Vision.
COMPETITION
The pharmaceutical, biotechnology and medical industries are intensely
competitive. We specifically target those afflicted with Dry AMD. While we are
aware that a number of companies have developed or are in the process of
developing treatments for Wet AMD, including Eyetech Pharmaceuticals,
Inc./Pfizer Inc., Genentech, Inc./Novartis Ophthalmics, Alcon Laboratories,
Inc., Iridex Corporation, QLT Inc. and Gen Vec, Inc., we are not aware of any
companies developing treatments specifically for Dry AMD. This significantly
enhances our competitive position. However, some of these companies may develop
new treatments for Dry AMD or may develop modifications to their treatments for
Wet AMD that may be effective for Dry AMD as well. In addition, other companies
also may be involved in competitive activities of which we are not aware.
While there are other suppliers who manufacture a pump that could be used
in the RHEO(TM) Therapy , there aRE no other suppliers of Asahi's Rheofilter and
consequently we believe that a third party could not readily make a system
similar to the RHEO(TM) System. Furthermore, if a third party were to be
successful in making a systEM similar to the RHEO(TM) System, it would be
required to have that system approved for marketing in the United StatES by the
FDA.
PATENTS AND PROPRIETARY RIGHTS
Our success depends in part on our ability to develop a competitive
intellectual property advantage over potential competitors for the treatment of
Dry AMD. There is currently no FDA-approved therapy for Dry AMD and, to date, we
are not aware of any other treatment in clinical development in North America.
We own or have licenses to certain patents and we have exclusive arrangements
with certain suppliers that we believe will help us develop this competitive
advantage. We also rely on know-how, continuing technological innovation and
in-licensing opportunities to further develop our proprietary position. Our
ability and the ability of our licensors to obtain intellectual property
protection for the RHEO(TM) System and related processes, and our abiliTY to
operate without infringing the intellectual property rights of others and to
prevent others from infringing our intellectual property rights will be an
important factor to our success. Our strategy is to seek to protect our
proprietary position by, among other methods, filing U.S. patent applications
related to our technology, inventions and improvements that are important to the
development of our business.
One aspect of the RHEO(TM) System is a treatment method described in an
issued U.S. patent which expires IN 2017. This patent, issued under U.S. patent
number 6,245,038 and entitled "Method for Treatment of Ophthalmological
Diseases", is directed to a process for treating ocular diseases using
apheresis. We license this patent from the two co-owners of the patent under a
separate license agreement with each owner. Under the license agreements, we
have the exclusive right to use the claimed treatment method in the U.S. during
the term of the patent. As part of those agreements, we are required to make
royalty payments in the aggregate of 2% of the sales for the OctoNova pumps and
filters, subject to minimum required payments in the aggregate amount of $25,000
during each calendar quarter.
22
We expect that we will request re-examination of the patent licensed to us
in 2005 at the U.S. Patent and Trademark Office and we believe that a more
detailed claim set will be issued. Subsequent to entering into these license
agreements, we determined that certain prior art publications written by the
inventor related to the claimed subject matter may not have been considered by
the Examiner during prosecution of this patent and that these references may
affect the validity of certain patent claims as issued. We therefore intend to
request re-examination in order to have the issued claims in this patent
considered in view of these publications. During the re-examination proceeding,
we also intend to submit additional claims, which are narrower in scope than the
issued claims, and are limited to the use of plasma filtration processes for
treatment of ophthalmological diseases.
In addition, we own one issued patent in the United States, which expires
in 2019. This patent, issued under U.S. patent number 6,551,266 and entitled
"Rheological Treatment Methods and Related Apheresis Systems", is directed to
methods of screening and identifying patient candidates for RHEO(TM) Therapy .
We also have thrEE additional pending patent applications in the United States,
Europe and Japan relating to the 6,551,266 patent.
The patent position of companies like ours is generally uncertain and
involves complex legal and factual questions. Our ability to maintain and
solidify a proprietary position for our technology will depend on our success in
obtaining effective claims and enforcing those claims once granted. We do not
know whether any part of our patent applications will result in the issuance of
any patents. Our issued patents and those that may issue in the future, or those
licensed to us, may be challenged, invalidated or circumvented, which could
limit our ability to stop competitors from marketing our product or the length
of term of patent protection that we may have for our processes. The
reexamination of patent 6,245,038 may result in the patent being rejected and no
claims of commercial value being issued or it may result in competitors
acquiring intervening rights. In addition, the rights granted under any issued
patents may not provide us with proprietary protection or competitive advantages
against competitors with similar technology. Because of the extensive time
required for development, testing and regulatory review of a potential product,
it is possible that, before any of our products can be commercialized, any
related patent may expire or remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.
In addition to patent protection, we have registered the following U.S.
trademarks:
o OCCULOGIX;
o OUR VISION IS YOUR VISION;
o RHEOTHERAPY;
o VASCULAR SCIENCES; and
o RHEOPHERESIS
We also have the right to use the following registered trademarks from
Asahi Medical: Rheofilter, and Plasmaflo.
We may rely, in some circumstances, on trade secrets to protect our
technology. However, trade secrets are difficult to protect. We seek to protect
our proprietary technology and processes, in part, by confidentiality agreements
with our employees, consultants, scientific advisors and other contractors.
These agreements may be breached, and we may not have adequate remedies for any
breach. In addition, our trade secrets may otherwise become known or be
independently discovered by competitors. To the extent that our employees,
23
consultants or contractors use intellectual property owned by others in their
work for us, disputes may arise as to the rights in related or resulting
know-how and inventions.
GOVERNMENT REGULATION
Government authorities in the United States and other countries extensively
regulate, among other things, the research, development, testing, manufacture,
labeling, promotion, advertising, distribution and marketing of the RHEO(TM)
System, which is a medical device. In the United States, the FDA regulates
medical devices under tHE Federal Food, Drug, and Cosmetic Act and implementing
regulations. Failure to comply with the applicable FDA requirements, both before
and after approval, may subject us to administrative and judicial sanctions,
such as a delay in approving or refusal by the FDA to approve pending
applications, warning letters, product recalls, product seizures, total or
partial suspension of production or distribution, injunctions, and/or criminal
prosecution.
Unless exempted by regulation, medical devices may not be commercially
distributed in the United States unless they have been cleared or approved by
the FDA. Medical devices are classified into one of the three classes, class I,
II or III, on the basis of the controls necessary to reasonably assure their
safety and effectiveness. Class I devices are subject to general controls, such
as labeling, premarket notification, and adherence to good manufacturing
practices. Class II devices are subject to general and specific controls, such
as performance standards, patient registries and FDA guidelines. Generally,
class III devices are those which must receive approval of a PMA by the FDA to
provide reasonable assurance of their safety and effectiveness. For example,
life-sustaining, life-supporting, and implantable devices, or new devices which
have not been found substantially equivalent to legally marketed devices,
generally require approval of a PMA by the FDA.
There are two review procedures by which medical devices can receive
clearance or approval. Some products may qualify for clearance under a Section
510(k) procedure, in which the manufacturer provides a premarket notification
that it intends to begin marketing the product, and shows that the product is
substantially equivalent to another legally marketed product, that is that it
has the same intended use and is as safe and effective as a legally marketed
device and does not raise different questions of safety and effectiveness than
does a legally marketed device. In some cases, the submission must include data
from human clinical studies. Marketing may commence when the FDA issues a
clearance letter finding substantial equivalence.
If the medical device does not qualify for the 510(k) procedure, either
because it is not substantially equivalent to a legally marketed device or
because it is a class III device required to have an approved PMA, then the FDA
must approve a submitted PMA before marketing can begin. A PMA must demonstrate,
among other matters, that the medical device is safe and effective. A PMA is
typically a complex submission, usually including the results of preclinical and
clinical studies, and preparing an application is a detailed and time-consuming
process. The PMA must be accompanied by the payment of user fees which currently
exceed $200,000 for most submissions. When modular submissions are used, the
entire fee is due when the first module is submitted to the FDA. Once a PMA has
been submitted, the FDA's review may be lengthy and may include requests for
additional data. The FDA usually inspects device manufacturers before approval
of a PMA, and the FDA will not approve the PMA unless the manufacturer's
compliance with the quality systems regulation is satisfactory.
The RHEO(TM) System is a class III device and will require approval of a
PMA, which has not yet been submittED to the FDA. Once submitted, we cannot be
sure when the FDA's review will be complete or that the FDA will approve a PMA
for our product in a timely fashion, or at all. FDA requests for additional
studies during the review period are not uncommon and can significantly delay
approvals. Even if we were able to obtain approval of a PMA of a product for one
indication, changes to the product, its indication or its labeling can require
additional clearances or approvals.
24
To obtain approval of a PMA, clinical studies demonstrating the safety and
effectiveness of the medical device must be conducted. Prior to beginning such
studies, an Investigational Device Exemption, or IDE, for the study must become
effective. The IDE will automatically become effective 30 days after its receipt
by the FDA, unless the FDA raises concerns or questions about the conduct of the
study. In that case, the concerns and questions must be resolved before the
study can begin. Even after an IDE becomes effective, the FDA may suspend it at
any time on various grounds, including a finding that patients are being exposed
to an unacceptable health risk. The RHEO(TM) System is the subject of an
effective IDE, but we cannot be sure that the FDA will not suspeND it, which
would prevent us from completing the MIRA-1 and other studies.
Regardless of whether a medical device requires FDA clearance or approval,
a number of other FDA requirements apply to the device, its manufacturer and
those who distribute it. Device manufacturers must be registered and their
products listed with the FDA, and certain adverse events and product
malfunctions must be reported to the FDA. The FDA also regulates the product
labeling, promotion, and in some cases, advertising, of medical devices. In
addition, manufacturers and their suppliers must comply with the FDA's quality
system regulation which establishes extensive requirements for quality and
manufacturing procedures. Thus, suppliers, manufacturers and distributors must
continue to spend time, money and effort to maintain compliance, and failure to
comply can lead to enforcement action. The FDA periodically inspects facilities
to ascertain compliance with these and other requirements.
EMPLOYEES
As of December 31, 2004, we had 17 full-time employees. Of our full-time
workforce, seven employees are engaged in clinical trial activities and ten are
engaged in business development, finance and administration. We also retain
outside consultants. None of our employees are covered by collective bargaining
arrangements, and our management considers its relationships with our employees
to be good. To date, our strategy has been to limit the size of our full-time
workforce and to outsource several of our key operating functions, including the
management of the MIRA-1 clinical trial. We have also relied significantly on
the resources of two of our major stockholders, TLC Vision and Diamed, to assist
us in the planning and execution of our business plan to date.
RISK FACTORS
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED LOSSES SINCE INCEPTION AND ANTICIPATE THAT WE WILL INCUR
CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
We have incurred losses in each year since our inception in 1996. Our net
loss for the fiscal years ended December 31, 2004, 2003, 2002 and 2001 was $21.8
million, $2.5 million, $2.9 million and $4.1 million, respectively. As of
December 31, 2004, we had an accumulated deficit of $48.0 million. These losses,
among other things, have had and will continue to have an adverse effect on our
stockholders' equity and working capital. We expect our clinical and regulatory
expenses to increase in connection with MIRA-1 and any other clinical trials
that we may initiate. In addition, subject to FDA approval of the RHEO(TM)
System , we expect to incur significaNT sales, marketing and procurement
expenses. As a result, we expect to continue to incur significant and increasing
operating losses for the next several years. Because of the numerous risks and
uncertainties associated with developing new medical therapies, we are unable to
predict the extent of any future losses or when we will become profitable, if
ever.
OUR BUSINESS MAY NOT GENERATE THE CASH NECESSARY TO FUND OUR OPERATIONS.
Since inception, we have funded our operations through private placements of
our equity and debt securities, early stage revenues and a recently successful
initial public offering, or IPO. Prior to the IPO, our cash resources were
limited. We may need additional capital in the future, and our prospects for
25
obtaining it are uncertain. We expect that the funding requirements for our
operating activities will continue to increase substantially in the future,
primarily due to the commercialization of the RHEO(TM) System . We may need to
seEK additional funds in the future from a combination of sources, including
product licensing, joint development and other financing arrangements. In
addition, we may issue debt or equity securities if we determine that additional
cash resources could be obtained under favorable conditions or if future funding
requirements cannot be satisfied with available cash resources. Additional
capital may not be available on terms favorable to us, or at all. If adequate
capital is unavailable, and if our operations do not generate cash, our
commercialization of the RHEO(TM) System will be delayed and we may be unable to
continue our operations.
WE DO NOT KNOW WHETHER WE WILL BE ABLE TO INCREASE OUR REVENUES, DERIVE REVENUES
FROM SOURCES OTHER THAN SALES TO A RELATED PARTY OR BECOME PROFITABLE IN THE
FUTURE.
We were founded in 1996 but the focus of our operations since 2000 has
shifted towards our ongoing pivotal trial, MIRA-1, for the RHEO(TM) System.
Prior to 2000, our focus was on commercializing and performing therapeutIC
apheresis, or blood filtering. We generated revenues of approximately $900,200
and $1,277,800 for the years ended June 30, 1999 and 1998, respectively, all of
which were earned in the United States. For the years ended December 31, 2004
and 2003, we had revenues of $969,357 and $390,479, respectively of which
$731,757 and $390,479, respectively, were derived from sales of the RHEO(TM)
System to OccuLogix, L.P., a related party, which then selLS the RHEO(TM) System
to three clinics in Canada, one of which is a related party, RHEO Clinic Inc., a
subsidiary OF TLC Vision. For the period from July 2002 to December 8, 2004, our
only customer was OccuLogix, L.P., a related party. Subsequent to December 8,
2004, OccuLogix, L.P. became wholly owned by us. Our ability to increase our
revenues and to earn revenues in the United States is dependent on a number of
factors, including:
o successfully completing MIRA-1 for the RHEO(TM) System;
o obtaining FDA approval to market the RHEO(TM) System in the United
States;
o successfully building the infrastructure and manufacturing capacity to
market and sell the RHEO(TM) System;
o achieving widespread acceptance of RHEO(TM) Therapy among physicians
and patients; and
o agreement of governmental and third-party payors to reimburse for
RHEO(TM) Therapy.
We do not anticipate that we will generate any revenues in the United States
until late 2006, at the earliest. If we do not obtain FDA approval and are
required to focus our efforts on marketing the RHEO(TM) System TO clinics in
Canada, or if we are unable to generate significant revenues in the United
States, we may not become profitable, and we may be unable to continue our
operations.
WE MAY BE UNABLE TO COMPLETE MIRA-1.
We are required to obtain FDA approval to market the RHEO(TM) System in the
United States. To support AN application for FDA approval, we are conducting, at
our own expense, MIRA-1 to evaluate the safety and efficacy of RHEO Therapy in
humans. Clinical testing is expensive, can take many years and has an uncertain
outcome. Although we have submitted an interim analysis to the FDA, these
results may not be indicative of the final results for MIRA-1. Failure can occur
at any stage of the testing. We may encounter numerous factors during, or as a
result of, MIRA-1 that could delay or prevent us from completing MIRA-1 and
receiving FDA approval for a number of reasons, including:
26
o we may be unable to obtain the complete number of data sets required
by the protocol filed with the FDA if patients do not fulfill the
requirement to have a 12-month follow-up visit, or otherwise;
o costs of MIRA-1 may be greater than we currently anticipate;
o we, or the regulators, may suspend or terminate MIRA-1 if the
participating patients are being exposed to unacceptable health risks;
and
o MIRA-1 may produce negative or inconclusive results, and we may
decide, or regulators may require us, to conduct additional clinical
and/or preclinical testing.
MIRA-1 is currently being conducted at eight treatment centers in the United
States and Canada. We are working with our contract research organization,
Promedica International, and the following consulting organizations to conduct
our MIRA-1 trial: McGarvey Group, Center for Clinical Research (Don Sanders,
PhD), Jules Stein Eye Institute, LabCorp, and Biostat International. If our
relationship with any of these organizations terminates, we believe that we
would be able to enter into arrangements with alternative third parties,
however, such a change may delay the completion of MIRA-1. If these
organizations or any replacements do not successfully carry out their
contractual duties or obligations, do not meet expected deadlines or need to be
replaced, or if the quality or accuracy of the clinical data they obtain is
compromised due to their failure to adhere to our clinical protocols or for
other reasons, our clinical trial may be extended, delayed or terminated, and we
may not be able to obtain regulatory approval for the RHEO(TM) System.
EVEN IF WE COMPLETE MIRA-1, WE MAY NOT RECEIVE FDA APPROVAL TO MARKET THE
RHEO(TM) SYSTEM IN THE UNITED STATES.
Even if we complete MIRA-1 successfully, we may not receive FDA approval to
market the RHEO(TM) System in tHE United States. Obtaining FDA approval is a
lengthy and expensive process, and approval is uncertain. We may never receive
FDA approval for the RHEO(TM) System or we may experience delays in receiving
approval. Delays in obtainiNG or failure to obtain FDA approval would delay or
prevent the successful commercialization of the RHEO(TM) SysteM, diminish our
competitive advantage and/or defer or decrease our receipt of revenues. Even if
we obtain FDA approval, this approval may only be for a limited or narrow class
of Dry AMD patients, thereby diminishing the size of the class of prospective
patients for whose use the RHEO(TM) System can be promoted.
In addition, changes to the RHEO(TM) System can require additional FDA
approvals. The RHEO(TM) System currENtly uses a cellulose acetate Rheofilter
which is manufactured by Asahi Medical. We have been informed by Asahi Medical
that it intends to discontinue manufacturing the cellulose acetate filter in
2008 and we are working with Asahi Medical to develop a new polysulfone filter
to replace it. We will require FDA approval to replace the cellulose acetate
Rheofilter with the new polysulfone Rheofilter which may require the generation
and submission of additional clinical data which could delay the timing of the
application and increase the cost of obtaining such approval. If we do not
receive FDA approval for the new polysulfone Rheofilter or, if obtaining the
approval takes longer than we expect, we may be unable to market the RHEO(TM)
System.
OUR PURCHASE COMMITMENTS MAY ADVERSELY AFFECT OUR LIQUIDITY.
We currently have commitments to purchase approximately $21.6 million of
OctoNova pumps (based on current exchange rates) within five years after FDA
approval and $13.3 million of Rheofilters and Plasmaflo filters over a
three-year period beginning six months after FDA approval. We expect to fund our
purchase commitments with up to $15.2 million from the proceeds of the IPO, cash
from operations following FDA approval or, in the event we do not have
27
sufficient cash from operations, other financing sources. Should these sources
be insufficient to fund our purchase commitments, our liquidity may be adversely
affected.
WE CURRENTLY DEPEND ON SINGLE SOURCES FOR KEY COMPONENTS OF THE RHEO(TM) SYSTEM
.. THE LOSS OF ANY OF THESE SOURCES COULD DELAY OUR CLINICAL TRIALS OR PREVENT OR
DELAY COMMERCIALIZATION OF THE RHEO(TM) SYSTEM .
We currently depend on single sources for the filters and the OctoNova pump
used in the RHEO(TM) System . WE have entered into a supply agreement for the
filters with Asahi Medical and for the OctoNova pump with Diamed, which designed
the OctoNova pump, and MeSys, which manufactures the pumps for Diamed. We
currently have commitments to purchase $21.6 million of OctoNova pumps (based on
current exchange rates) within five years after FDA approval and $13.3 million
of Rheofilters and Plasmaflo filters over a three-year period beginning six
months after FDA approval. If we fail to meet our minimum purchase requirements
under our agreements with Diamed or Asahi Medical, those agreements may be
terminated or rendered non-exclusive at the sole discretion of the supplier. If
any of these suppliers ceases to supply components to us or does not supply an
adequate number of components, our sales and growth could be restricted,
potentially materially. If we do not achieve FDA approval and other necessary
approvals in the territories for which we have distribution rights by the end of
December 2006, Asahi Medical can terminate the supply agreement for the filters
and Diamed can terminate the supply agreement for the pumps. Each of the
agreements has a term ending ten years after the date of FDA approval, and is
automatically renewable for one year terms unless terminated upon six months'
notice. In addition, Diamed may terminate its agreement upon the termination of
our manufacturing agreement with MeSys, which has a term of three years
following FDA approval. We believe that establishing additional or replacement
suppliers for these components may not be possible as these suppliers have trade
secrets, patents and other intellectual property that may prevent a third party
from manufacturing a suitable replacement product. Even if we switch to
replacement suppliers and the supplier can manufacture the necessary components
without violating any third-party intellectual property rights, we may face
additional regulatory delays and the distribution of the RHEO(TM) SystEM could
be interrupted for an extended period of time, which may delay or slow the
commercialization of RHEO(TM) Therapy and adversely impact our financial
condition and results of operations.
OUR SUPPLY AGREEMENT WITH ASAHI MEDICAL REQUIRES US TO TRANSFER THE FDA APPROVAL
OF THE RHEO(TM) SYSTEM TO IT UPON RECEIPT WHICH WILL LIMIT OUR CONTROL OF THE
FDA APPROVAL.
In the 2001 supply agreement with Asahi Medical for the filters that are
used in the RHEO(TM) System, we agreED to obtain the FDA approval in the name of
Asahi Medical and to maintain that approval. In a subsequent 2003 amendment to
that agreement, we agreed to transfer FDA approval to Asahi Medical upon receipt
from the FDA. Any clinical data contained in the application for FDA approval
continues to belong to us. Asahi Medical will have the right to use the data in
any territory where Asahi Medical grants us a distributorship. This agreement
also makes us the exclusive distributor of Asahi Medical's RHEO(TM) System
filters in the United States, Canada, MexiCO and the Caribbean for a term of ten
years beginning at the date of the FDA approval, and is automatically renewable
for one-year terms unless terminated upon six months' notice. The agreement also
provides that Asahi Medical may terminate the exclusivity provision if certain
post-FDA approval minimum purchase requirements are not met. This transfer of
FDA approval to Asahi Medical may limit our flexibility to make changes in the
FDA approval such as the addition of alternate suppliers of RHEO(TM) System
components without Asahi Medical's consenT, or limit our ability to prevent
changes to the FDA approval that we might consider detrimental, such as the
addition of labeling changes or the substitution of alternate component
suppliers.
IF WE OR OUR SUPPLIERS FAIL TO COMPLY WITH THE EXTENSIVE REGULATORY REQUIREMENTS
TO WHICH WE AND THE RHEO(TM) SYSTEM ARE SUBJECT, THE RHEO(TM) SYSTEM COULD BE
SUBJECT TO RESTRICTIONS OR WITHDRAWALS FROM THE MARKET AND WE COULD BE SUBJECT
TO PENALTIES.
28
We, our suppliers and our products are subject to numerous FDA requirements
covering the design of the RHEO(TM) System, testing, manufacturing, quality
control, labeling, advertising, promotion and export of the RHEO(TM) SysteM and
other matters. Failure to comply with statutes and regulations administered by
the FDA could result in, among other things, any of the following actions:
o warning letters;
o fines and other civil penalties;
o unanticipated expenditures;
o withdrawal of FDA approval;
o delays in approving or refusal to approve the RHEO(TM) System;
o product recall or seizure;
o interruption of production;
o operating restrictions;
o injunctions; and
o criminal prosecution.
We and our suppliers are subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. In addition, advertising and promotional
materials relating to medical devices are, in certain instances, subject to
regulation by the Federal Trade Commission. We and our suppliers may be required
to incur significant costs to comply with such laws and regulations in the
future, and such laws and regulations may materially harm our business.
Unanticipated changes in existing regulatory requirements, the failure of us or
our manufacturers to comply with such requirements or the adoption of new
requirements could materially harm our business.
WE MAY BE UNABLE TO COMMERCIALIZE THE RHEO(TM) SYSTEM SUCCESSFULLY IN THE UNITED
STATES.
Even if we successfully complete MIRA-1 and obtain FDA approval for the
RHEO(TM) System, our success depends oN our ability to market and sell the
RHEO(TM) System. Successful commercialization of the RHEO(TM) System depends On
a number of factors, including:
o achieving widespread acceptance of RHEO(TM) Therapy among physicians and
patients;
o agreement of governmental and third-party payors to provide
reimbursement for RHEO(TM) Therapy;
o maintaining our relationships with our single source suppliers;
o obtaining sufficient quantities of components for the RHEO(TM) System;
o establishing adequate sales and marketing capabilities;
o obtaining sufficient facility space;
29
o our ability to identify and sell the RHEO(TM) System to key
multi-facility health care providers as well aS to private eye care
professional practices;
o our ability to successfully sell the RHEO(TM) System at our projected
selling price;
o whether there are adverse side effects or unfavorable publicity
concerning the RHEO(TM) System; and
o whether there is competition for the RHEO(TM) System from new or
existing products, which may prove to bE safer, more efficacious or more
cost-effective than the RHEO(TM) System.
RHEO(TM) THERAPY IS BASED ON A MODEL THAT HAS NOT ACHIEVED WIDESPREAD
ACCEPTANCE, AND MAY BE PROVEN INCORRECT. IF WE ARE UNSUCCESSFUL IN ACHIEVING
WIDESPREAD ACCEPTANCE OF RHEO(TM) THERAPY AMONG PHYSICIANS AND PATIENTS, OUR
BUSINESS MAY NOT SUCCEED.
AMD is not a well-understood disease and its underlying cause is not known.
RHEO(TM) Therapy is based on A disease model that has not achieved widespread
acceptance with eye care professionals. Unlike traditional therapeutic
treatments for eye diseases, RHEO(TM) Therapy is a systemic approach for the
treatment of Dry AMD, rather than a localized approach. Our success is dependent
upon achieving widespread acceptance of RHEO(TM) TherapY among ophthalmologists
and optometrists. Eye care professionals and health care service providers may
not be willing to integrate RHEO(TM) Therapy into their workflow. In addition,
because RHEO(TM) Therapy can be performeD by health care providers other than
eye care professionals, eye care professionals may be reluctant to endorse
RHEO(TM) Therapy.
Even if we are successful in achieving widespread acceptance of RHEO(TM)
Therapy among physicians, we may bE unable to achieve widespread acceptance
among potential patients. An initial course of RHEO(TM) Therapy is timE
consuming, requiring eight procedures over a 10- to 12-week period, with each
procedure lasting between two and four hours. Some patients may be reluctant to
undergo RHEO(TM) Therapy because of the time commitment. In addition, RHEO(TM)
Therapy providers may not be easily accessible to all patients and some patients
may be unwilling or unablE to travel to receive RHEO(TM) Therapy. If we are
unable to achieve widespread acceptance, our financial conditioN and results of
operations will be adversely affected.
In August 1997, our predecessor opened its sole client facility, the
Rheotherapy Center, in Tampa, Florida to perform therapeutic apheresis
commercially. In 1999, the FDA's Office of Compliance issued a directive
notifying our predecessor that further conducting of therapeutic apheresis would
need to be conducted under the authority of an Investigational Device Exemption
filed with the FDA. In a related action, our predecessor, on behalf of one of
our founders, Dr. Richard C. Davis, made a payment in the amount of $10,000 to
cover legal expenses incurred by the Florida Board of Medicine in prosecuting
our predecessor's unauthorized advertising of new medical therapies. Our
predecessor closed the Rheotherapy Center in 1999 and we have since received an
Investigational Device Exemption and focused our resources on completing MIRA-1
in order to obtain FDA approval of the RHEO(TM) System. Dr. Davis was our Chief
Executive Officer from January to June 2003 and was our Chief Science Officer
from July 2003 to April 2004 and since then has served as a consultant to us.
Dr. Davis is also a former director of ours. We believe that the activities of
the Rheotherapy Center engendered opposition in certain segments of the eye care
community to RHEO(TM) Therapy and if this opposition continues, acceptance of
RHEO(TM) Therapy among eye care professionals and patients may be difficult to
achieve.
IF RHEO(TM) THERAPY IS NOT REIMBURSED BY GOVERNMENTAL AND OTHER THIRD-PARTY
PAYORS, OR IS ONLY REIMBURSED ON A LIMITED BASIS, OUR BUSINESS MAY NOT SUCCEED.
Undergoing RHEO(TM) Therapy is expensive, with an initial course of
treatment expected to initially cost betweeN $16,000 and $25,600 in the United
States. Continuing efforts of governmental and third-party payors to contain or
30
reduce the costs of health care could negatively affect the sale of the RHEO(TM)
System. Our ability tO commercialize the RHEO(TM) System successfully will
depend in substantial part on favorable determinations bY governmental payors,
most prominently Medicare, private health insurers and state-funded health care
coverage programs. Without the establishment of timely, favorable coverage and
reimbursement policies, we may be unable to set or maintain price levels
sufficient to realize an appropriate return on our investment in product
development. Other significant insurance coverage limitations, such as narrow
restrictions on patient coverage criteria and restrictions on treatment settings
in which RHEO(TM) Therapy is covered, may also limit our potentiaL revenues.
OUR PATENTS MAY NOT BE VALID AND WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE
PATENTS TO PROTECT OUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS.
Our owned and licensed patents may not be valid and we may not be able to
obtain and enforce patents and to maintain trade secret protection for our
technology. The extent to which we are unable to do so could materially harm our
business.
We have applied for and will continue to apply for patents for certain
processes used in the RHEO(TM) System. Such applications may not result in the
issuance of any patents, and any patents now held or that may be issued may not
provide us with adequate protection from competition. In addition, we expect
that we will seek to have the patent licensed to us re-examined in the next 12
months at the U.S. Patent and Trademark Office, and we believe that a more
detailed claim set will be issued. The re-examination of this patent may result
in the patent being rejected or no claims of commercial value being issued or it
may result in competitors acquiring intervening rights. Furthermore, it is
possible that patents issued or licensed to us may be challenged successfully.
In that event, if we have a preferred competitive position because of such
patents, any preferred position held by us would be lost. If we are unable to
secure or to continue to maintain a preferred position, the components of the
RHEO(TM) System could become subject to competition from the sale of generic
products.
Patents issued or licensed to us may be infringed by the products or
processes of others. The cost of enforcing our patent rights against infringers,
if such enforcement is required, could be significant, and the time demands
could interfere with our normal operations. There has been substantial
litigation and other proceedings regarding patent and other intellectual
property rights in the pharmaceutical, biotechnology and medical technology
industries. We may become a party to patent litigation and other proceedings.
The cost to us of any patent litigation, even if resolved in our favor, could be
substantial. Some of our competitors may be able to sustain the costs of such
litigation more effectively than we can because of their substantially greater
financial resources. Litigation may also absorb significant management time.
Unpatented trade secrets, improvements, confidential know-how and continuing
technological innovation are important to our scientific and commercial success.
Although we attempt to and will continue to attempt to protect our proprietary
information through reliance on trade secret laws and the use of confidentiality
agreements with our corporate partners, collaborators, employees and consultants
and other appropriate means, these measures may not effectively prevent
disclosure of our proprietary information, and, in any event, others may develop
independently, or obtain access to, the same or similar information.
Certain of our patent rights are licensed to us by third parties. If we fail
to comply with the terms of these license agreements, our rights to those
patents may be terminated, and we will be unable to conduct our business.
PATENTS OF OTHER COMPANIES COULD REQUIRE US TO STOP USING OR PAY TO USE REQUIRED
TECHNOLOGY.
It is possible that a court may find us to be infringing upon validly issued
patents of third parties. In that event, in addition to the cost of defending
the underlying suit for infringement, we may have to pay license fees and/or
31
damages and we may be enjoined from conducting certain activities. Obtaining
licenses under third-party patents can be costly, and such licenses may not be
available at all. Under such circumstances, we may need to materially alter our
products or processes and we may be unable to do so successfully.
IF WE ARE UNABLE TO ESTABLISH ADEQUATE SALES AND MARKETING CAPABILITIES, WE MAY
NOT BE ABLE TO GENERATE SIGNIFICANT REVENUE AND MAY NOT BECOME PROFITABLE.
While our management team has some experience in marketing medical
technology, we do not have a sales organization and have limited experience as a
company in the sales, marketing and distribution of ophthalmic therapy products.
In order to commercialize RHEO(TM) Therapy, we must develop our sales, marketing
and distributioN capabilities or make arrangements with a third party to perform
these functions. If and when marketing of the RHEO(TM) System is approved by the
FDA, we currently plan to establish our own sales force to market the RHEO(TM)
SyStem in the United States. Developing a sales force is expensive and time
consuming and we may not be able to develop this capacity. If we are unable to
establish adequate sales, marketing and distribution capabilities, independently
or with others, we may not be able to generate significant revenue and may not
become profitable.
OUR SUPPLIERS MAY NOT HAVE SUFFICIENT MANUFACTURING CAPACITY AND INVENTORY TO
SUPPORT OUR COMMERCIALIZATION PLANS.
Our success requires that our suppliers have adequate manufacturing capacity
and inventory in order to facilitate a rapid rollout of the RHEO(TM) System. We
have been informed by Asahi Medical that the currenT Rheofilter being used in
the RHEO(TM) System will be discontinued in 2008 and that, even if it is not
discontinued, Asahi Medical would not be able to produce enough of the current
cellulose acetate Rheofilter to meet our anticipated demand. Although we are
working with Asahi Medical to develop a new polysulfone filter that we believe
Asahi Medical will be able to manufacture in larger quantities and at a lower
cost to us, there can be no assurance that we and Asahi Medical will be
successful in these efforts. Even if we are able to develop a new filter, we may
not be able to obtain FDA approval for the new filter and the new filter may not
be manufactured at a lower cost to us. If we are unable to obtain FDA approval
for, or the necessary quantities of, this new filter, we may not be able to
generate product revenue and may not become profitable.
We plan to use between $9.5 million and $10.5 million of the net proceeds of
our recent IPO to stockpile an inventory of filters from Asahi Medical. We
recently signed a purchase order with Asahi Medical for 9,600 filter sets (each
filter set consists of one Plasmaflo filter and one Rheofilter), including 1,600
filter sets in the fourth quarter of 2004 and 4,000 filter sets for each of the
following two quarters. We intend to accumulate inventory in advance of FDA
approval in order to maximize the number of filters available to us due to
manufacturing constraints on the number of cellulose acetate filters that Asahi
Medical can produce. However, we will not be in a position to commercially
market the RHEO(TM) System in the United States until late 2006, at thE
earliest. Each filter has a shelf life of approximately three years. It is
possible that some or all of these filters will expire before they are used.
Moreover, holding inventory in this manner will decrease our short term
liquidity.
Our ability to conduct MIRA-1 and commercialize the RHEO(TM) System,
depends, in large part, on our ability tO have components manufactured at a
competitive cost and in accordance with FDA and other regulatory requirements.
We do not control the manufacturing processes of our suppliers. If current
manufacturing processes are modified, or the source or location of our product
supply is changed, voluntarily or involuntarily, the FDA will require us to
demonstrate that the material produced from the modified or new process or
facility is equivalent to the material used in the clinical trials or products
previously approved. Any such modifications to the manufacturing process or
supply may not achieve or maintain compliance with the applicable regulatory
32
requirements. In many cases, prior approval by regulatory authorities may be
required before any changes can be made, which may adversely affect our
business.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO SELL TO KEY MULTI-FACILITY HEALTH CARE
PROVIDERS AS WELL AS PRIVATE EYE CARE PROFESSIONAL PRACTICES.
In order to facilitate a rapid rollout of the RHEO(TM) System if and when we
receive FDA approval, we will neeD to establish relationships with key organized
groups of multi-facility health care service providers, including hospitals,
dialysis clinics and ambulatory surgery centers, as well as private practices.
We may be unsuccessful in establishing these relationships, which could limit
our ability to commercialize the RHEO(TM) System.
We anticipate that RHEO(TM) Therapy will be prescribed by physicians and
administered by nurses, and thereforE our service provider customers will need
the support of an adequate supply of trained nurses. Training nurses to
administer RHEO(TM) Therapy may be costly, and our customers may experience
shortages of nurses from time to time. If there is a shortage of trained nurses
to work in our customers' facilities, our commercialization of RHEO(TM) Therapy
may be unsuccessful.
RHEO(TM) THERAPY MAY PRODUCE ADVERSE SIDE EFFECTS IN PATIENTS THAT PREVENT ITS
ADOPTION OR THAT NECESSITATE WITHDRAWAL FROM THE MARKET.
RHEO(TM) Therapy may produce unexpected side effects not previously observed
during clinical trials. ThesE undesirable and unintended side effects in
patients may prevent or limit its commercial adoption and use. Side effects that
have been observed in MIRA-1 were all temporary and generally mild, and included
temporary drops in blood pressure, abnormal heart rate, nausea, chills and
localized bleeding, pain, numbness and swelling in the area of the arms where
the needles were inserted. Even after approval by the FDA and other regulatory
authorities, the RHEO(TM) System may later be found to produce adverse side
effects that prevent widespread use oR necessitate withdrawal from the market.
The manifestation of such side effects could cause our business to suffer. In
some cases, regulatory authorities may require additional disclosure to patients
that could add warnings or restrict usage based on unexpected side effects seen
after marketing a medical treatment.
WE MAY FACE FUTURE PRODUCT LIABILITY CLAIMS THAT MAY RESULT FROM THE USE OF OUR
PRODUCTS.
The testing, manufacturing, marketing and sale of therapeutic products
entails significant inherent risks of allegations of product liability. Our use
of such products in clinical trials and our sale of the RHEO(TM) SysteM may
expose us to liability claims. These claims might be made directly by patients,
health care providers or others selling the RHEO(TM) System. We carry clinical
trials and product liability insurance to cover certain claimS that could arise
during MIRA-1 or during the commercial use of RHEO(TM) Therapy. We currently
maintain clinicaL trials and product liability insurance with coverage limits of
$1,000,000 in the aggregate annually. Such coverage, and any coverage obtained
in the future, may be inadequate to protect us in the event of a successful
product liability claim, and we may not be able to increase the amount of such
insurance coverage or even renew it. A successful product liability claim could
materially harm our business. In addition, substantial, complex or extended
litigation could cause us to incur large expenditures and divert significant
resources.
WE WILL NEED TO INCREASE THE SIZE OF OUR ORGANIZATION, AND WE MAY EXPERIENCE
DIFFICULTIES IN MANAGING OUR GROWTH.
In order to commercialize the RHEO(TM) System, we will need to expand our
employee base for management oF operational, sales and marketing, financial and
other resources. We do not expect to be able to commercially launch the RHEO(TM)
System until late 2006, at the earliest. Future growth will impose significant
additionaL responsibilities on members of management, including the need to
33
identify, recruit, maintain and integrate additional employees. Our future
financial performance and our ability to commercialize the RHEO(TM) System and
tO compete effectively will depend, in part, on our ability to manage any future
growth effectively. To that end, we must be able to:
o manage MIRA-1 effectively;
o integrate additional management, administrative, distribution and
sales and marketing personnel;
o develop our administrative, accounting and management information
systems and controls; and
o hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish
any of them could prevent us from achieving or maintaining profitability.
WE MAY FACE COMPETITION AND MAY NOT BE SUCCESSFUL IN ADDRESSING IT.
The pharmaceutical, biotechnology and medical technology industries are
characterized by rapidly changing technology and intense competition. AMD is not
a well-understood disease and researchers are continuing to investigate
different theories of the cause of AMD. If the cause of AMD is determined,
competitors could potentially develop a treatment for Dry AMD that would replace
RHEO(TM) Therapy. In addition, competitors maY develop alternative treatments
for Dry AMD that prove to be superior to, or more cost-effective than, RHEO(TM)
Therapy. Some of these competitors may include companies which have access to
financial, technical and marketing resources significantly greater than ours and
substantially greater experience in developing, manufacturing and distributing
products, conducting preclinical and clinical testing and obtaining regulatory
approvals.
We are aware of a number of companies which have developed or are in the
process of developing treatments for Wet AMD, including Eyetech Pharmaceuticals,
Inc./Pfizer Inc., Genentech, Inc./Novartis Ophthalmics, Alcon Laboratories,
Inc., Iridex Corporation, Genaera Corporation, QLT, Inc. and GenVec, Inc. Some
of these treatments are in late-stage clinical development or have been approved
by the FDA. Some of these companies may develop new treatments for Dry AMD or
may develop modifications to their treatments for Wet AMD that may be effective
for Dry AMD as well. In addition, other companies also may be involved in
competitive activities of which we are not aware.
WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL WHICH MAY ADVERSELY AFFECT
OUR BUSINESS.
Our success depends on the continued contributions of our executive officers
and scientific personnel. Many of our key responsibilities have been assigned to
a relatively small number of individuals. We will be required to hire eyecare
specialists as well as personnel with skill sets in apheresis, nursing,
training, equipment maintenance, finance, distribution, logistics, warehousing,
sales and service to meet our personnel needs. There is competition for
qualified personnel, and the failure to secure the services of key personnel or
loss of services of key personnel could adversely affect our business.
FOR AS LONG AS TLC VISION OWNS A SUBSTANTIAL PORTION OF OUR COMMON STOCK, OUR
OTHER STOCKHOLDERS MAY BE EFFECTIVELY UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING.
TLC Vision beneficially owns approximately 51.4% of our outstanding common
stock, or 48.2% on a fully diluted basis. Accordingly, TLC Vision on its own
could possess an effective controlling vote on matters submitted to a vote of
the holders of our common stock.
34
While it owns a substantial portion of our common stock, TLC Vision will
effectively control decisions with respect to:
o our business direction and policies, including the election and
removal of our directors;
o mergers or other business combinations involving us;
o the acquisition or disposition of assets by us;
o our financing; and
o amendments to our certificate of incorporation and bylaws.
Furthermore, TLC Vision may be able to cause or prevent a change of control
of our company, and this concentration of ownership may have the effect of
discouraging others from pursuing transactions involving a potential change of
control of our company, in either case regardless of whether a premium is
offered over then-current market prices.
CONFLICTS OF INTEREST MAY ARISE BETWEEN US AND TLC VISION, WHICH HAS THREE
DIRECTORS ON OUR BOARD AND FOR WHICH OUR CHIEF EXECUTIVE OFFICER AND CHAIRMAN
SERVES AS CHAIRMAN. OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER WILL ALSO DEVOTE A
PORTION OF HIS TIME TO TLC VISION, WHICH MAY DIVERT HIS ATTENTION FROM OUR
BUSINESS AND OPERATIONS.
TLC Vision beneficially owns approximately 51.4% of our outstanding common
stock, or 48.2% on a fully diluted basis. Messrs. Vamvakas and Davidson and Dr.
Lindstrom, who comprise a majority of the members of our board of directors, are
also directors of TLC Vision. Mr. Vamvakas beneficially owns 3,384,989 common
shares of TLC Vision, representing approximately 5.1% of TLC Vision's
outstanding shares. As of December 31, 2004, Mr. Davidson beneficially owned
64,827 common shares of TLC Vision and Dr. Lindstrom beneficially owned 63,500
common shares of TLC Vision. Because they are directors of TLC Vision, a
conflict of interest could arise. Conflicts may arise between TLC Vision and us
as a result of our ongoing agreements. We may not be able to resolve all
potential conflicts with TLC Vision, and even if we do, the resolution may be
less favorable to us than if we were dealing with an unaffiliated third party.
In addition, our Chairman and Chief Executive Officer, Mr. Vamvakas, also
serves as Chairman of TLC Vision and, therefore, devotes a portion of his time
to matters other than our business and operations. We believe that Mr. Vamvakas
devotes approximately 20% of his time, on average, to TLC's operations, which
may divert his attention from our business operations and which may adversely
affect our business.
WE HAVE ENTERED INTO A NUMBER OF RELATED PARTY TRANSACTIONS WITH SUPPLIERS,
CREDITORS, STOCKHOLDERS, OFFICERS AND OTHER PARTIES, EACH OF WHICH MAY HAVE
INTERESTS WHICH CONFLICT WITH THOSE OF OUR PUBLIC STOCKHOLDERS.
We have entered into several related party transactions with our suppliers,
creditors, stockholders, officers and other parties, each of which may have
interests which conflict with those of our public stockholders.
CERTAIN OF OUR DIRECTORS AND MANAGEMENT TEAM MEMBERS HAVE BEEN WITH US FOR ONLY
A SHORT TIME.
Thomas P. Reeves, our President and Chief Operating Officer, Stephen Kilmer,
our Vice President, Corporate Affairs, Julie Fotheringham, our Vice President,
Marketing, Joseph Zawaideh, our Vice President, Sales and our directors Thomas
Davidson, Jay T. Holmes, and Richard L. Lindstrom have all served as members of
35
our management team for less than one year. This poses a number of risks,
including the risk that these persons may:
o have limited familiarity with our past practices;
o lack experience in communicating effectively within the team and with
other employees;
o lack settled areas of responsibility; and
o lack an established track record in managing our projected growth.
36
ITEM 2. PROPERTIES.
In December 2004, we moved from our previous headquarters which we
subleased from TLC Vision to our new headquarters, which are also in
Mississauga. We sublease our new headquarters from Echo Online Internet, Inc.
The facility consists of approximately 5,237 square feet of office space
utilized for corporate finance and clinical trial management personnel and our
current arrangement expires on January 29, 2006. Our current annual lease
obligation for rent for this facility is Cdn. $20,948. TLC Vision has advised us
that it does not have any ownership interest in our new headquarters.
We also lease space in a facility in Palm Harbor, Florida consisting of
5,020 square feet of space used for warehousing the RHEO(TM) System components
and providing office space for our clinical trial personnel, JohN Cornish who is
our Vice President of Operations, and administrative personnel and records. The
facility consists of office and working space and an approximately 1,700 square
foot warehouse in the back. Our lease on this property expires on December 31,
2005. Our current monthly lease obligation for rent for this facility is
approximately $2,745. The landlord under this lease is Cornish Properties, which
is owned by Mr. Cornish. Mr. Cornish was also one of our directors from April
1997 to September 2004.
We believe that if our existing facilities are not adequate to meet our
business requirements for the near-term, additional space will be available on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
We are not aware of any litigation involving us that is outstanding,
threatened or pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 27, 2004, the majority of our stockholders authorized by
written consent the following: to remove John Cornish and Richard C. Davis as
directors; to elect Jay Holmes, Richard Lindstrom and Tom Davidson as directors;
to remove Ray Gonzalez, Reinhard Klingel and W. David Sullins as directors; and
to waive their rights that may arise pursuant to the Amended and Restated
Investor's Rights Agreement in relation to the foregoing matters.
On November 15, 2004, the majority of our stockholders approved by
written consent the Company's Second Amended and Restated Certificate of
Incorporation and conversion of Series A and B Convertible Preferred Stock into
Common Stock and to ratify all actions in general since incorporation.
On December 7, 2004, the majority of our stockholders authorized by
written consent the approval and adoption of the Amended 2002 Stock Option Plan.
All such actions were effected pursuant to an action by written consent
of our stockholders in compliance with Section 228 of the Delaware General
Corporation Law.
These written consents were adopted by the majority holders of shares
of our Common Stock, our Series A Convertible Preferred Stock and our Series B
Convertible Preferred Stock, as applicable, issued and outstanding as of the
date listed above.
37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET FOR COMMON EQUITY
Our Common Stock commenced trading on the NASDAQ National Market System
under the symbol "RHEO" and the Toronto Stock Exchange under the symbol "RHE" on
December 9, 2004, in connection with our initial public offering which closed on
December 16, 2004.
The following table sets forth the range of high and low sales prices
per share of our Common Stock on both the NASDAQ National Market System and the
Toronto Stock Exchange for the fourth quarter of 2004. Prior to December 9,
2004, there was no established public trading market for our Common Stock.
Therefore, 2004 fourth quarter high and low sales prices per share can only be
calculated from December 9, 2004 through December 31, 2004.
Common Stock Prices
----------------------------
High Low
---------- -----------
NASDAQ National Market System
2004 Fourth Quarter (December 9 to
December 31, 2004) US$ 13.86 US$9.35
Toronto Stock Exchange
2004 Fourth Quarter (December 9 to
December 31, 2004) CDN$ 16.50 CDN$ 12.04
The closing share price for our Common Stock on March 9, 2005, as
reported by the NASDAQ National Market System , was $8.03. The closing share
price for our Common Stock on March 9, 2005, as reported by the Toronto Stock
Exchange, was CDN$9.55.
As of March 9, 2005 there were approximately 167 stockholders of record
of our Common Stock.
We have never declared or paid any cash dividends on shares of our
capital stock. We currently intend to retain all available funds to support
operations and to finance the growth and development of our business. Any
determination related to payments of future dividends will be at the discretion
of our board of directors after taking into account various factors that our
board of directors deems relevant, including our financial condition, operating
results, current and anticipated cash needs, plans for expansion and debt
restrictions.
(a) UNREGISTERED ISSUANCES OF CAPITAL STOCK
On January 27, 2004, we issued an aggregate of 25,000 shares of Common
Stock to Northlea Partners at a purchase price per share of $0.80 in
consideration for cash.
38
On March 22, 2004, we issued an aggregate of 24,750 shares of Common
Stock to Shirley McGarvey at a purchase price per share of $0.13 in
consideration for cash.
On July 17, 2004, we issued an aggregate of 77,370 shares of Common
Stock to Carolina Eye Associates, Gale Martin and the children of Richard C.
Davis at a purchase price per share of $1.20, $1.20 and $4.00, respectively, in
consideration for cash.
On July 17, 2004, we issued an aggregate of 40,871 shares of Series A
Convertible Preferred Stock to Alexander Eaton, M.D., Joshua Feldman, William
Jacobsen, Charles Jones, Harvey Kahn, Ralph Katz, Joel Levin, Lorraine Mikolon,
Gregory Mincey, M.D., Joseph Santaromita and Lior Sher at a purchase price per
share of $7.83 in consideration for cash.
On July 17, 2004, we issued an aggregate of 173,224 shares of Series A
Convertible Preferred Stock to Capital Paradigms, Inc., David Israel, Richard
Davis, Jr., Diamed, Dominion Financial Group Management, Inc., Burt Dubow, Jerre
Freeman, M.D., James Gills, M.D., JTB VisionQuest, Northlea Partners, A.H.
Rodriquez, Safe Harbor Fund I, L.P., Safe Harbor Managed Account 101-A, Ltd. and
Paul Scharfer at a purchase price per share of $5.55 in consideration for cash.
On July 17, 2004, we issued an aggregate of 165,189 shares of Series A
Convertible Preferred Stock to Alan Akers, M.D., Gale Martin, M.D., John
Retzlaff, M.D., Donald Sanders, M.D., Sanders Children's Trust and Wise in
exchange for the cashless exercise of warrants.
On July 28, 2004, we issued an aggregate of 152,500 shares of Common
Stock to Dana Deupree, M.D., James Gills, M.D., JTB VisionQuest, Andrew Krusen
and A.H. Rodriguez at a purchase price per share of $0.04 in consideration for
cash.
On July 28, 2004, we issued an aggregate of 12,500 shares of Common
Stock to Gray Cary at a purchase price per share of $0.13 in consideration for
cash.
On July 28, 2004, we issued an aggregate of 32,250 shares of Common
Stock to Burt Dubow, M.D., Tom Minero and A.H. Rodriquez at a purchase price per
share of $2.00 in consideration for cash.
On July 28, 2004, we issued an aggregate of 3,000 shares of Common
Stock to Burt Dubow, M.D., at a purchase price per share of $4.00 in
consideration for cash.
On December 6, 2004, we issued an aggregate of 22,200 shares of Common
Stock to Karen Coyle, Carol Jones and Don Strickland at a purchase price per
share of $0.99 in consideration for cash.
On December 8, 2004, we issued 4,622,605 shares of Common Stock to our
Series A and Series B Convertible Preferred Stockholders upon the automatic
conversion of all our outstanding shares of Series A and Series B Convertible
Preferred Stock.
On December 8, 2004, we issued 7,106,454 shares of common stock to TLC
Vision and Diamed upon conversion of $7,000,000 aggregate principal amount of
convertible debentures. The conversion price was $0.98502 per share.
On December 8, 2004, we issued 19,070,234 shares of Common Stock to TLC
Vision in connection with the purchase by us of TLC Vision's 50% interest in
OccuLogix, L.P. This amount included 1,281,858 shares of Common Stock which have
been issued upon the exchange of shares of OccuLogix ExchangeCo ULC, one of our
Canadian subsidiaries which was subsequently dissolved, issued for tax purposes
to TLC Vision in connection with the purchase of OccuLogix, L.P.
39
On December 16, 2004, we issued an aggregate of 24,999 shares of Common
Stock to Manus Kraff, Colman Kraff and Mira Perlman in exchange for the cashless
exercises of warrants.
No underwriters were involved in the foregoing sales of securities. The
foregoing sales, with the exception of the December 8, 2004 conversion of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
and the conversion of debentures held by TLC Vision and Diamed, were made in
reliance upon the exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), as set forth in Section 4(2)
under the Securities Act and Rule 506 of Regulation D promulgated thereunder
relative to the sales by an issuer not involving any public offering, to the
extent an exemption from such registration was required. All purchasers of our
securities described above, with the exception of those involved in the December
8, 2004 conversion of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Sock and the conversion of debentures held by TLC Vision
and Diamed, represented to us in connection with their purchase that they were
accredited investors and were acquiring the shares for investment and not
distribution, that they could bear the risks of the investment and could hold
the securities for an indefinite period of time. The purchasers received written
disclosures that the securities had not been registered under the Securities Act
and that any resale must be made pursuant to a registration or an available
exemption from such registration. The December 8, 2004 issuances in connection
with the conversion of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and the conversion of debentures held by TLC Vision
and Diamed, were made in reliance upon the exemption from the registration
requirements of the Securities Act, as set forth in Section 3(a)(9) under the
Securities Act.
USE OF PROCEEDS FROM REGISTERED SECURITIES
We registered 9,660,000 shares of our Common Stock (including 1,260,000
shares with respect to the underwriters' over-allotment option) in connection
with our initial public offering under the Securities Act. Our Registration
Statement on Form S-1 (Reg. No. 333-118204) in connection with our initial
public offering was declared effective by the U.S. Securities and Exchange
Commission ("SEC") on December 8, 2004 and closed on December 16, 2004. We sold
5,600,000 shares of our Common Stock in the offering and the selling
shareholders sold 2,800,000 shares of Common Stock, all at the initial public
offering price per share of $12.00. The underwriters of the offering were
Citigroup Global Markets Inc., the sole book-runner, SG Cowen & Co., LLC and
ThinkEquity Partners LLC.
The aggregate purchase price of the offering was $100,800,000. Prior to
the payment of expenses, we received proceeds from the offering in the amount of
$62,496,000. The net offering proceeds to us after deducting total expenses were
$59,429,925. We incurred total expenses in connection with the offering of
$7,770,075, which consisted of direct payments of:
(i) $2,501,142 in legal, accounting and printing fees;
(ii) $4,704,000 in underwriters' discounts, fees and commissions; and
(iii) $564,933 in miscellaneous expenses.
40
No payments for such expenses were made directly or indirectly to (i)
any of our directors, officers or their associates, (ii) any person(s) owning
10% or more of any class of our equity securities or (iii) any of our
affiliates.
We will use the net proceeds from our initial public offering to fund
our ongoing pivotal clinical trial, MIRA-1, and related clinical trials, and to
purchase and accumulate inventory and build infrastructure for commercialization
of the RHEO System in the United States if and when we receive FDA approval. We
will also use the funds to continue our expansion in Canada. We expect to use
the remainder of the net proceeds for general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA.
In December 2004, we completed the acquisition of TLC Vision's 50% interest
in OccuLogix, L.P. The transaction was effected as an all-stock purchase in
which we issued 19,070,234 shares of our common stock valued at $228,842,808 to
TLC Vision. See Note 3 to our consolidated financial statements included in Item
8 of this Form 10-K.
The following tables set forth our selected historical consolidated
financial data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000
which have been derived from our consolidated financial statements included
elsewhere in this Form 10-K and our consolidated financial statements included
on Form S-1 for the years ended December 31, 2003, 2002, 2001 and 2000. The
following tables should be read in conjunction with our financial statements,
the related notes thereto and the information contained in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(in thousands except per share and unit amounts)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues from related
party ...................... $ -- $ -- $ 94 $ 390 $ 732
--------- --------- --------- --------- ---------
Revenues from third
parties .................... -- -- -- -- 238
--------- --------- --------- --------- ---------
Total revenues ............... -- -- 94 390 970
--------- --------- --------- --------- ---------
Cost of goods sold to
related party ........... -- -- 81 373 689
Cost of goods sold to
third parties ........... -- -- -- -- 134
Royalty costs .............. 6 -- 78 109 135
--------- --------- --------- --------- ---------
Gross margin (loss) .......... (6) -- (65) (92) 12
Operating expenses
General and administrative . 1,373 911 449 1,565 17,530
Clinical and regulatory .... 3,202 1,873 1,447 731 3,995
Sales and marketing ........ -- -- -- -- 220
--------- --------- --------- --------- ---------
4,575 2,784 1,896 2,296 21,745
Other (expenses) income ...... (709) (1,342) (921) (82) (110)
--------- --------- --------- --------- ---------
Earnings (loss) from
discontinued operations .... (15) 67 -- -- --
Net loss for the period before
Income taxes ............... $ (5,305) $ (4,059) $ (2,882) $ (2,470) $ (21,843)
Income tax benefit ........... -- -- -- -- 24
Net loss for the period ...... $ (5,305) $ (4,059) $ (2,882) $ (2,470) $ (21,819)
========= ========= ========= ========= =========
PER SHARE DATA:
Loss per share from
continuing operations --
basic and diluted .......... $ (1.47) $ (1.15) $ (0.77) $ (0.62) $ (2.96)
Earnings per share from
discontinued operations .... -- 0.02 -- -- --
--------- --------- --------- --------- ---------
Net loss per share ........... $ (1.47) $ (1.13) $ (0.77) $ (0.62) $ (2.96)
========= ========= ========= ========= =========
Weighted average number of
shares used in per share
calculations -- basic
and diluted ................ 3,603 3,603 3,735 3,977 7,370
41
AS OF DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents .... $ 83 $ (8) $ 602 $ 1,237 $ 17,531
Marketable securities ........ -- -- -- -- 42,500
Working capital
(deficiency) ............... (834) (2,848) (1,780) (2,538) 58,073
Total assets ................. 1,135 768 1,038 1,868 301,601
Long-term debt (including
current portion due to
stockholders) .............. 5,220 7,820 1,507 3,694 517
Total liabilities ............ 6,321 9,526 2,693 4,134 13,502
Common stock ................. 4 4 4 5 42
Series A Convertible
Preferred
Stock ...................... 1 1 2 2 --
Series B Convertible
Preferred
Stock ...................... -- -- 1 1 --
Additional paid-in
capital .................... 11,415 11,839 22,057 23,915 336,064
Accumulated deficit .......... (16,606) (20,602) (23,718) (26,188) (48,007)
Total stockholders' equity
(deficiency) ............... (5,186) (8,759) (1,655) (2,266) 288,098
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our consolidated financial
statements and related notes, included in item 8 of this Form 10-K. Unless
otherwise specified, all dollar amounts are U.S. dollars.
OVERVIEW
We are an ophthalmic therapeutic company founded to commercialize innovative
treatments for eye diseases, including AMD. The RHEO(TM) System is used to
perform Rheopheresis, a procedure that selectively removes moleculeS from
plasma, which is designed to treat Dry AMD, the most common form of the disease.
Shortly after our inception, we focused on commercializing therapeutic
apheresis, including the opening and operation of the Rheotherapy Center, which
generated revenues of $900,200 and $1,277,800 for the fiscal years ended June
30, 1999 and 1998 respectively. In 1999, the FDA's Office of Compliance issued a
directive notifying the Rheotherapy Center that any further conducting of
therapeutic apheresis would need to be conducted under the authority of an
Investigational Device Exemption filed with the FDA which resulted in the
closure of the Rheotherapy Center. Subsequent to the closure of the Rheotherapy
Center, our focus changed primarily to conducting clinical trials and seeking
regulatory approval for the RHEO(TM) System. In September 1999, we received an
Investigational DevicE Exemption from the FDA to begin a pivotal clinical trial,
MIRA-1, for the RHEO(TM) System. Between early 2000 anD August 2001, we enrolled
98 patients in MIRA-1. In August 2001, due to financial constraints, we
downsized and temporarily suspended the enrollment of new patients. However, we
continued to follow-up with the existing patients enrolled in MIRA-1. In late
2001, with permission of the FDA, we submitted for independent third party
analysis data for the 43 enrolled patients for whom we had collected complete
12-month post-treatment data sets. The results of this data analysis were used
to support our efforts to secure additional financing.
In 2002 and 2003, we received a net aggregate of $5,951,870 of additional
financing from Diamed, TLC Vision and other investors. As a result of this
incremental funding, in October 2003, we hired new management and began
screening additional patients for enrollment in MIRA-1. In addition, in 2003, we
began limited commercialization of the RHEO(TM) System in three clinics in
Canada.
In September 2004, we signed an agreement with Rheo Therapeutics Inc., a
private Canadian company, which has agreed to purchase approximately 8,000
treatment sets, and an estimated 20 OctoNova pumps by the end of 2005, with an
option to purchase up to an additional 2,000 treatment sets, subject to
availability. We believe that Rheo Therapeutics plans to open a number of
commercial treatment centers in various Canadian cities where RHEO(TM) Therapy
will be performed. Dr. Jeffrey Machat, who is an investor in and one of the
directors of Rheo Therapeutics, was a co-founder and former director of TLC
Vision.
On December 8, 2004, we purchased TLC Vision's 50% interest in OccuLogix,
L.P., which resulted in OccuLogix, L.P. becoming a wholly-owned subsidiary of us
for total consideration and related costs of $229,611,616. Accordingly, 100% of
the results of OccuLogix, L.P.'s operations are included in the consolidated
financial statements since that date. We believe that our value resides solely
in OccuLogix, L.P. to which we licensed all of the distribution and marketing
rights for the RHEO(TM) System foR ophthalmic indications to which we are
entitled. Prior to the acquisition, our only profit stream has come from our
share of OccuLogix, L.P. earnings. Our acquisition of TLC Vision's 50% ownership
interest in OccuLogix, L.P. will transfer the earnings potential for sales of
the RHEO(TM) System entirely to us.
In December 2004, 5,600,000 shares of our common stock at $12.00 per share
were issued in connection with the initial public offering for gross cash
proceeds of $67,200,000 (less issuance costs of $7,770,075).
43
As of December 31, 2004, we had enrolled a total of 185 patients in MIRA-1.
This completes the enrollment phase of MIRA-1, exceeding our goal of enrolling
180 subjects by December 31, 2004. We have collected complete 12-month
post-treatment data sets for 87 of these patients. Of the remaining 98 patients,
82 are in the process of treatment or follow-up and the treatment of 16 patients
did not result in complete data sets. We intend to derive the required 150
complete 12-month post-treatment data sets from our enrolled subjects. As of
December 31, 2004, we had also submitted to the FDA the first three of four
modules of the PMA filing, the non-clinical portion. We intend to submit the
fourth module, which consists of the follow-up clinical data, in two components.
We expect that we will submit the first component following completion of our
six-month data on at least 150 data sets, including the 12-month data sets for
all patients for whom they are available; and that we will submit the second
component following completion of our 12-month data on at least 150 data sets.
REVENUES
Up to the date of acquisition of TLC Vision's 50% interest in OccuLogix,
L.P., we derived the majority of our revenues from sales of the OctoNova pump
and disposable treatment sets, which include two disposable filters and tubing,
to OccuLogix, L.P., which then sold the pumps and treatment sets to three
clinics in Canada, one of which is a related party, RHEO Clinic Inc., a
subsidiary of TLC Vision. Historically, we set sales prices at a level which
would reimburse our cost of sales excluding the effects of ongoing minimum
royalty commitment costs. Following the acquisition, our revenues have been
derived from sales of the OctoNova pump and disposable treatment sets directly
to RHEO Clinic Inc., and to other commercial providers of RHEO(TM) Therapy in
Canada. WE believe that, in the future, sales of disposable treatment sets will
provide a recurring source of revenue and that the percentage of our revenues
that we derive from disposable treatment sets will increase over time as our
installed base of OctoNova pumps increases. We also expect to derive additional
revenues from miscellaneous services for annual calibration, maintenance and
training, which are not already included in the initial sale and service of the
RHEO(TM) System.
OccuLogix, L.P.'s primary customer was RHEO Clinic Inc., a subsidiary of TLC
Vision, for which OccuLogix, L.P. has reported revenues of $401,236, $459,730
and nil for the years ended December 31, 2004, 2003 and 2002, respectively. RHEO
Clinic uses the RHEO(TM) System to treat patients, for which it charges its
customers (thE patients) a per-treatment fee. RHEO Clinic has advised us that
the OctoNova pumps purchased from OccuLogix, L.P. are capitalized as fixed
assets to be depreciated over a period of five years on a straight line basis
and the treatment sets are disposed of after each treatment and expensed as a
cost of sale. RHEO Clinic has further advised us that all of its revenues, in
Canadian dollars, of $595,275, $836,696 and nil for the years ended December 31,
2004, 2003 and 2002, respectively, are derived from sales to unrelated third
parties. The revenues reported from RHEO Clinic are unaudited and have not been
independently verified by us. However, management believes the amounts to be
accurate.
COST OF SALES
Cost of sales includes costs of goods sold and royalty costs. Our cost of
goods sold consists primarily of costs for the manufacture of the RHEO(TM)
System, including the costs we incur for the purchase of component partS from
our suppliers, applicable freight and shipping costs, fees related to
warehousing, logistics inventory management and recurring regulatory costs
associated with conducting business in Canada and ISO certification. We
currently have a contract with a related party which performs warehousing,
shipping and inventory management for us in exchange for a fee. The terms of
this contract permit us to terminate the contract upon notice at any time. We
expect that we will terminate this contract once we have the necessary
infrastructure to perform such functions internally.
To acquire the necessary licensing and distribution rights for the
components of the RHEO(TM) System, we havE entered into agreements with Mr. Hans
Stock and Dr. Richard Brunner, the owners of a patent that we license, that
44
require us to pay them an aggregate of 2% of our cost of the disposable filter
sets purchased from Asahi Medical and of sales of the Octo Nova pumps and the
tube sets, (which together with the filter sets, make up the treatment sets),
with minimum required payments to Mr. Stock and Dr. Brunner in the aggregate
amount of $25,000 during each calendar quarter. This resulted in royalty
payments for the years ended December 31, 2004, 2003 and 2002 of $100,000,
$100,000 and $75,000, respectively. To date, the minimum required quarterly
payments have exceeded the amounts that would have been payable absent the
requirement of a minimum payment, and we are entitled to apply this excess in
future periods if and when our revenue increases sufficiently to generate
royalty payments in excess of the minimum payments. We treat these minimum
royalty payments as an expense within cost of sales as they are only recoverable
based on sufficient volume. We intend to use a portion of the net proceeds of
our recent initial public offering to accumulate inventory levels to help ensure
our ability to meet forecasted sales levels if and when we obtain FDA approval.
As a result of the expected increase in sales, we expect royalty payments to
increase in the future and to exceed the minimum requirement.
We have entered into an agreement with Mr. Stock in consideration for
assisting us in procuring a distribution agreement with Asahi Medical relating
to the filters used in the RHEO(TM) System and for his commitmenT to assist in
the procurement of distribution rights for new product lines. This agreement
with Mr. Stock requires us to pay royalties of 5% of the price we pay to Asahi
Medical for all products it supplies to us. We record these royalties as an
expense when we sell the products. Royalty expenses incurred as a result of this
agreement in the years ended December 31, 2004, 2003 and 2002 were $35,457,
$9,234 and $598, respectively.
OPERATING EXPENSES
Our operating expenses consist primarily of clinical and regulatory expenses
and general and administrative expenses. Clinical and regulatory expenses
consist primarily of those expenses related to MIRA-1. These expenses include
payments to clinical trial sites for conducting the trial, costs of a contract
research monitoring organization and other non-employee consultants and experts
as well as compensation and overhead for those of our employees who are
primarily involved in clinical trial activities. We expect clinical and
regulatory expenses to remain relatively constant until MIRA-1 and the related
clinical trials are complete.
General and administrative expenses consist primarily of the costs of
corporate operations and personnel, rent and legal and accounting expenses. As
of December 31, 2004, we had 17 full-time employees. We expect that general and
administrative expenses will increase in the future as we incur additional costs
related to the growth of our business, as well as the costs associated with
becoming a public company, including the costs of annual and periodic reporting
and investor relations programs. General and administrative expenses also
include the cost of 1,352,500 stock options granted to seven employees, five
directors and three consultants in December 2003 at an exercise price of $0.99.
The Company estimated the intrinsic value of these options to be $15,905,400 of
which $513,077 and $15,392,323 have been expensed in the years ended December
31, 2003 and 2004, respectively. All of these options became fully vested upon
the Company's initial public offering and therefore the remaining $15,392,323 of
stock based compensation charges as of December 31, 2003 was expensed in the
year ended December 31, 2004. Of these stock options, 500,000 options were
granted to Elias Vamvakas, 300,000 options were granted to Irving Siegel,
100,000 options were granted to William Dumencu and 80,000 options were granted
to each of David Eldridge and John Cornish. 292,500 options were granted to
other employees, directors and consultants. Management estimated the intrinsic
value of these options based on a range of then expected offering prices of our
initial public offering. Management expects to issue stock options in the future
to compensate and attract employees and directors. Also included in general and
administrative expenses is the amortization of intangibles expense of $106,138
for the year ended December 31, 2004, of the intangible assets acquired on the
acquisition of TLC Vision's 50% interest in OccuLogix, L.P.
45
Historically, we have not incurred any sales and marketing expense because
we have had limited commercialization and because recent sales have been to
OccuLogix, L.P. In September 2004, we hired two full-time employees to begin
establishing sales and marketing efforts to promote the use of the RHEO(TM)
System in Canada and, upon FDA approval, in the United States. We have begun
incurring sales and marketing expenses following the acquisition of TLC Vision's
50% interest in OccuLogix, L.P. and we expect these expenses to increase
substantially in the future.
OTHER INCOME (EXPENSES)
Other income (expenses) consists primarily of interest, foreign exchange and a
50% share of equity earnings from OccuLogix, L.P.'s activities up to the date of
our acquisition of TLC Vision's 50% interest. Net interest income (expense)
reflects interest revenue from the Company's cash position offset by interest
expense from convertible debentures and promissory notes, interest on amounts
due to stockholders and the accretion of the value we assign to our outstanding
warrants.
INCOME TAX BENEFIT
Income tax benefit represents the amortization of the deferred tax
liability net of an income tax liability for the year ended December 31, 2004.
The deferred tax liability was recorded based on the difference between the fair
value of the intangible asset acquired in December 2004 and its tax basis and is
being amortized over 15 years, the estimated useful life of the intangible asset
RESULTS OF OPERATIONS
The components of the RHEO(TM) System have been given regulatory approval in
Canada. Our wholly owneD subsidiary, OccuLogix, L.P., is actively
commercializing the sale of the RHEO(TM) System in Canada. Currently, thE cost
of the treatments in Canada is not covered by third parties such as insurance
companies or government health programs. As a result, sales levels have remained
modest. We intend to pursue reimbursement of the treatment in Canada but believe
that it will be necessary that both FDA approval of the RHEO(TM) System and a
National CoveragE Decision by the CMS in the United States to reimburse patients
for RHEO(TM) Therapy treatments be obtained before wE will be successful in
obtaining reimbursement in Canada.
At December 31, 2004, we had 2,749,199 options outstanding. The 1,352,500
options issued in December 2003, of which 1,330,300 were outstanding as at
December 31, 2004, were issued within twelve months of our initial pubic
offering date. These options have been accounted for based on their intrinsic
value as determined based on a range of the then expected price of our initial
public offering. While we believe that the exercise price of these options was
based on fair value at the time of grant, we understand that the U.S. Securities
and Exchange Commission has provided guidance which suggests that options issued
within twelve months of an initial public offering should be retrospectively
accounted for using the intrinsic value unless supported by significant third
party transactions.
The original value assigned to the options in December 2003 was consistent
with the price used in the conversion of $500,000 of the principal of the Asahi
Medical note to 507,604 shares of common stock at $0.98502 per share on November
30, 2003. It was also consistent with the price used in a subsequent offering to
existing investors under our Investor Rights Agreement which provided an
opportunity for our stockholders to maintain their ownership percentages
subsequent to the Asahi Medical conversion. The $0.98502 per share price was
established based on the pricing of our June 2003 agreement with TLC Vision and
Diamed to fund $7.0 million in convertible debt. Discussions with Asahi Medical
were ongoing at the time of the TLC Vision and Diamed transaction and we
established a price that remained constant until the Asahi Medical note
conversion occurred in November 2003. During the intervening period from June
46
2003 to November 2003, we did not experience any significant changes in our
operations, including but not limited to our efforts related to clinical and
regulatory activities which would have generated increased share value.
We believe that prior to 2004, there was no progression in the value of the
common stock. In early 2004, enrollment in the MIRA-1 clinical trial increased
which in turn resulted in analysts following TLC Vision to ascribe increasing
value in analysts reports to the investment by TLC Vision in us. In March 2004,
we began discussions with underwriters about the recently successfully completed
initial public offering process. Continued enrolment in MIRA-1 and the related
clinical trials, expansion of the management team, a signed sales agreement for
Canadian clinics and a greater acceptance of RHEO(TM) Therapy have had an impact
on the value ascribeD to us in the recent initial public offering.
The exercise price of stock options issued prior to 2003 was based on our
most recent financing transactions. The exercise price of stock options issued
upon the closing of our initial public offering was equal to the price of the
shares issued in the offering. We consider these transactions to be indicative
of fair value of our common stock.
Significantly impacting the results of operations is the issuance of
1,352,500 options in December 2003 at an exercise price of $0.99, of which
657,500 were issued to employees, 600,000 were issued to directors and 95,000
were issued to consultants. We estimated the intrinsic value of these stock
options to be $15,905,400, to be expensed over the 31-month vesting period at
$513,077 per month starting in the month of December 2003. Management estimated
the intrinsic value of these options based on a range of then expected offering
prices of our initial public offering.
Subsequent to the transaction in June 2003 in which TLC Vision and Diamed
agreed to invest a combined $7.0 million in convertible debentures and $5.0
million in non-convertible debentures issued by us, we increased our efforts to
complete the MIRA-1 clinical trial, resulting in increased clinical trial costs
in the second half of 2003 as new trial sites were established. Clinical trial
costs increased further in 2004 as these trial sites started incurring costs for
the screening, enrollment and treatment of patients. The total potential funding
of $12.0 million from TLC Vision and Diamed represented the forecasted costs to
complete the MIRA-1, associated crossover clinical trials and associated
corporate overhead costs. Enrollment in the MIRA-1 clinical trial had fully
resumed by June 30, 2004 and was completed by December 31, 2004. We anticipate
approximately $5.3 million to $6.6 million of the proceeds of the initial public
offering will be used to complete the MIRA-1 trial, a related crossover trial
and additional anticipated clinical trials.
Following the acquisition of TLC Vision's 50% interest in OccuLogix, L.P.,
we expect revenues to increase to reflect direct sales to clinics using the
RHEO(TM) System, while cost of sales is expected to remain materiallY unchanged.
Clinical and regulatory expenses will not be impacted by the acquisition but
general and administrative expenses will increase, reflecting the creation of
the organizational structure necessary for the commercialization process. We
have also begun to incur sales and marketing expenses related to establishing
sales and marketing efforts to promote the use of the RHEO(TM) System in Canada
and, upon FDA approval, in the UniteD States.
YEARS ENDED DECEMBER 31, 2004 AND 2003
REVENUES. Revenues increased by 148% to $969,357 for the year ended December
31, 2004 from $390,479 for the year ended December 31, 2003. This increase was
due to sales of treatment sets and pumps in the fourth quarter of the year to
Rheo Therapeutics Inc. in accordance with the Product Purchase Agreement that we
entered into with RHEO Therapeutics Inc. in September 2004.
47
COST OF SALES. Cost of sales increased by 98% to $957,269 for the year ended
December 31, 2004 from $482,780 for the year ended December 31, 2003, as a
result of the increase in sales in the year.
GROSS MARGIN. Gross margin was impacted by the sales of OccuLogix, L.P.
(acquired on December 8, 2004). OccuLogix, L.P. sales, post-acquisition, to
third parties generated sufficient profit to bring the consolidated gross margin
positive.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 1,021% to $17,530,019 for the year ended December 31, 2004 from
$1,564,362 for the year ended December 31, 2003. This increase resulted
primarily from the requirement to expense the intrinsic value of options granted
in December 2003 over the vesting period of these options. The Company estimated
the intrinsic value of these options to be $15,905,400 which resulted in a
monthly expense of $513,077 over the vesting period of the options. All of these
options became fully vested upon the Company's initial public offering and
therefore the remaining unamortized balance of stock based compensation charges
as of December 31, 2003 was expensed in the year ended December 31, 2004. The
expense for the years ended December 31, 2004 and 2003 was $15,392,323 and
$513,077, respectively. Employee and related travel costs increased 141% to
$1,126,641 for the year ended December 31, 2004 from $468,000 for the year ended
December 31, 2003 as a result of our having received sufficient additional
funding at the end of the first half of 2003 to fully resume operations and the
hiring of new employees in 2004. Expenses related to the hiring of professionals
increased 70% to $634,128 for the year ended December 31, 2004 from $374,000 for
the year ended December 31, 2003, due primarily to costs related to the audit
process. Amortization expense of the intangible assets acquired on the
acquisition of TLC Vision's 50% interest in OccuLogix, L.P. was $106,138 for the
year ended December 31, 2004. There was no comparable expense in the year ended
December 31, 2003.
CLINICAL AND REGULATORY EXPENSES. Clinical and regulatory expenses increased
by 446% to $3,994,967 for the year ended December 31, 2004 from $731,166 for the
year ended December 31, 2003, as a result of increased activities associated
with MIRA-1. We increased our activities as a result of additional funding we
have received from TLC Vision and Diamed since July 2003.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $219,556 for
the year ended December 31, 2004 with no comparable expense for year ended
December 31, 2003. In the third quarter of 2004, we hired two new employees to
begin establishing sales and marketing efforts to promote the use of the
RHEO(TM) System in Canada and, upon FDA approval, in the United States.
OTHER (EXPENSES) INCOME. Other (expenses) income totaled an expense of
$110,190 for the year ended December 31, 2004, an increase of 34% from an
expense of $82,059 for the year ended December 31, 2003. This increase was due
primarily to the expense of $100,000 owed to Apheresis Technologies in
accordance to the amended distribution services agreement which gives the
Company the sole discretion as to when to terminate the exclusive distribution
services agreement with Apheresis Technologies Inc. Also, foreign currency
exchange loss was $43,548 for the year ended December 31, 2004, compared to a
foreign exchange gain of $2,063 for the year ended December 31, 2003 due to
foreign exchange rate fluctuations. These increases were partially offset by the
decrease in net interest expense from $67,997 in the year ended December 31,
2004 to a net interest income of $35,735 in the year ended December 31, 2004 due
to the conversion of certain debt into common stock and interest revenue from
the Company's cash position subsequent to the initial public offering.
INCOME TAX BENEFIT. Income tax benefit of $23,771 represents the
amortization of the deferred tax liability of $39,271 net of an income tax
liability for the year ended December 31, 2004 of $15,500. This deferred tax
liability was recorded based on the difference between the fair value of the
intangible asset acquired in December 2004 and its tax basis. The deferred tax
48
liability of $9,527,500 is being amortized over 15 years, the estimated useful
life of the intangible asset. There was no corresponding tax benefit in the year
ended December 31, 2003.
YEARS ENDED DECEMBER 31, 2003 AND 2002
REVENUES. Revenues increased by 315% to $390,479 for the year ended December
31, 2003 from $94,100 for the year ended December 31, 2002 reflecting the first
full year of our commercial sales subsequent to the closure of the Rheotherapy
Center in the United States in 1999. Revenues in the second half of 2003 of
$30,240 were substantially lower than first half 2003 revenues of $360,239. We
believe this decrease resulted from the outbreak of SARS in Toronto which caused
our customers' Toronto-based clinics to experience a decline in patient volumes.
This caused our customers to accumulate excess inventory in the second half of
2003 due to fixed ordering commitments. As a consequence, our customers reduced
orders in early 2004 to reduce inventory. OccuLogix, L.P.'s revenues and net
loss increased to $486,394 and $20,308, respectively, for the year ended
December 31, 2003, from revenues and a net loss of $0 and $5,068, respectively,
for the period ended December 31, 2002.
COST OF SALES. Cost of sales increased by 204% to $482,780 for the year
ended December 31, 2003 from $158,694 for the year ended December 31, 2002. This
increase was due to an increase in the number of treatment sets sold and a
resulting increase in the amount of royalty payments paid.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 249% to $1,564,362 for the year ended December 31, 2003 from
$448,856 for the year ended December 31, 2002. This increase resulted primarily
from the requirement to expense the intrinsic value of options granted in
December 2003 over the 31-month vesting period of these options. Management
estimated the total intrinsic value of these options to be $15,905,400,
resulting in an additional expense of $513,077 for the month of December 2003,
representing one month in which this expense was incurred in 2003. There was no
comparable expense for the year ended December 31, 2002. These options fully
vest upon an initial public offering at which time any unamortized intrinsic
value would be fully expensed. Employee and related travel costs increased 131%
to $468,000 for the year ended December 31, 2003 from $203,000 for the year
ended December 31, 2002 reflecting the receipt of sufficient funding in the
second half of 2002 and the end of the first half of 2003 to fully resume
operations. Expenses related to the hiring of professionals increased 307% to
$374,000 for the year ended December 31, 2003 from $92,000 for the year ended
December 31, 2002 due to the increased costs of finance support and audit fees
not incurred in 2002 and increased legal costs incurred to reestablish
agreements, review and adjust as required existing contracts and address
operational legal issues. Director fees, which include the amortization of
vesting options granted to directors, increased 42% to $98,000 for the year
ended December 31, 2003 from $69,000 for the year ended December 31, 2002 due to
the resumption of reimbursement of directors in the second half of 2003.
Administrative costs increased 35% to $100,000 for the year ended December 31,
2003 from $74,000 for the year ended December 31, 2002 reflecting the receipt of
sufficient funding in the second half of 2002 and the end of the first half of
2003 to fully resume operations.
CLINICAL AND REGULATORY EXPENSES. Clinical and regulatory expenses decreased
by 49% to $731,166 in the year ended December 31, 2003 from $1,446,662 for the
year ended December 31, 2002. This reflects a decrease in clinical trial
activity as a result of reduced available funding for MIRA-1.
OTHER (EXPENSES) INCOME. Other (expenses) income, decreased by 91% to an
expense of $82,059 for the year ended December 31, 2003 from an expense of
$921,485 for the year ended December 31, 2002. This decrease was primarily due
to lower interest expense as a result of the conversion of certain convertible
debentures into Convertible Preferred Stock.
49
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations through placements of our
equity securities and through borrowings from financial institutions and others.
In December 2004, 5,600,000 shares of common stock were issued at $12.00 per
share in connection with the initial public offering for gross cash proceeds of
$67,200,000 (less issuance costs of $7,770,075).
Cash and cash equivalents and marketable securities at December 31, 2004 was
$60,030,552. To date, we have used the largest portion of our cash to finance
the ongoing costs of the MIRA-1 clinical trial, as well as losses generated by
our operations. In the future, we expect that we will continue to use our cash
resources to fund losses generated by our operations, to complete the MIRA-1
clinical trial, to accumulate inventory, to undertake other commercialization
activities and to start a new clinical crossover trial, treating patients from
the MIRA-1 clinical trial, including those patients in the placebo group.
From July 2003 to December 2004, we have used the monthly combined funding
received from TLC Vision and Diamed of up to $350,000 in connection with our
issuance of convertible debentures to fund MIRA-1 clinical trial activities.
Increased sales and negotiated credit terms has resulted in an increase in our
accounts receivable. We also continue to maintain our level of orders in line
with supplier expectations, resulting in increased levels of inventory. We have
reported an increased level of prepaid expenses in 2003 and 2004, representing
advance payments to our participating MIRA-1 clinical research organization and
clinical trial sites, and to insurance providers.
As a result of increased funding in 2003 and 2004 from our convertible
debenture transaction with TLC Vision and Diamed, and more recently, the
proceeds from the initial public offering, we have been able to reduce our
accounts payable and we continue to keep payments current to maintain positive
supplier relationships. Expense accruals are increasing as a result of higher
levels of clinical trial activity and costs associated with the initial public
offering and the related corporate reorganization.
We have incurred losses since inception and have had a working capital
deficiency in each of the years ended December 31, 2002 and 2003 and up to the
date of our initial public offering. As a result, we required additional funding
to continue our operations. During 2004 and prior to the closing of the initial
public offering in December 2004, TLC Vision and Diamed funded the remaining
$4,350,000 available as of December 31, 2003 for borrowing under the convertible
debentures. The convertible debentures required that these funds be used to
complete MIRA-1 and related clinical trials. Management believes that the
receipt of the funds available for borrowing under the convertible debentures
and the receipt of net proceeds of $59,429,925 from the initial public offering,
net of underwriting discounts and commissions and offering costs, will generate
sufficient funds for our operations and other demands and commitments until the
latter half of 2006.
We plan on using approximately $17.5 million to $18.8 million of the
proceeds of the initial public offering to build our organizational structure to
prepare for commercialization in the United States, approximately $5.3 million
to $6.6 million to complete the MIRA-1 clinical trial and related trials and
approximately $9.5 million to $10.5 million to purchase and accumulate an
inventory of components of the RHEO(TM) System to facilitate thE rapid
commercialization of the RHEO(TM) System in the United States if and when we
receive FDA approval. The use oF funds will be impacted by any delay in the
completion of the MIRA-1 trial which would result in a corresponding delay in
our commercialization efforts in the United States.
Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement and
involves risks and uncertainties. Actual results could vary as a result of a
number of factors (including the factors discussed at item 1 of this form 10-K).
We have based this estimate on assumptions that may prove to be wrong, and we
50
could utilize our available capital resources sooner than we currently expect.
Our future funding requirements will depend on many factors, including but not
limited to:
o the rate of progress, cost and results of MIRA-1 and related clinical
trials;
o our ability to obtain FDA approval to market and sell the RHEO(TM)
System and the timing of such approval; o whether government and
third-party payors agree to reimburse RHEO(TM) System;
o the cost and timing of building the infrastructure and manufacturing
capacity to market and sell the RHEO(TM) System;
o the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
o the costs of establishing sales, marketing and distribution
capabilities; and
o the effect of competing technological and market developments.
Even if we receive regulatory approval for the RHEO(TM) System, we will not
have significant product revenuE until late 2006, at the earliest. Until we can
generate a sufficient amount of product revenue, we expect to finance future
cash needs through public or private equity offerings, debt financings,
corporate collaboration or licensing arrangements or other arrangements. We
cannot be certain that additional funding will be available on acceptable terms,
or at all. To the extent that we raise additional funds by issuing equity
securities, our stockholders may experience dilution. In addition, future debt
financing, if available, may involve restrictive covenants. To the extent that
we raise additional funds through collaboration and licensing arrangements, it
may be necessary to relinquish some rights to our technologies, or grant
licenses on terms that are not favorable to us. If adequate funds are not
available, we may be required to delay, reduce the scope of or eliminate some of
our commercialization efforts.
The following table summarizes our contractual commitments as of December
31, 2004 and the effect those commitments are expected to have on liquidity and
cash flow in future periods.
PAYMENTS DUE BY PERIOD
-------------------------------------------------
LESS THAN
1 TO 3 MORE THAN
CONTRACTUAL COMMITMENTS TOTAL 1 YEAR YEARS 3 YEARS
----------------------- ---------- ---------- ---------- ----------
Operating leases ............ $ 98,620 $ 98,620 $ -- $ --
Royalty payments ............ $1,250,000 $ 100,000 $ 300,000 $ 850,000
Consulting and
non-competition
agreements ................ $ 60,000 $ 60,000 $ -- $ --
Pursuant to the terms of our distribution agreement with MeSys, dated
January 1, 2002, we undertook a minimum purchase commitment of 25 OctoNova pumps
per year beginning after FDA approval of the RHEO(TM) System, representinG an
annual commitment after FDA approval of (euro)405,000, or approximately
$552,420. The marketing and distributorsHip agreement with Diamed provides for a
minimum purchase of 1,000 OctoNova pumps during the period from the date of the
51
agreement until five years after FDA approval, representing an aggregate
commitment of (euro)16,219,000, or approximately $22,122,716 based on exchange
rates as of December 31, 2004.
To ensure there is sufficient capacity and inventory to support our
commercialization plan, we intend, in advance of FDA approval, to accumulate an
inventory of filters and pumps to support a rapid product launch. In line with
these intentions, in July 2004, we placed a purchase order with Asahi Medical
for 9,600 filter sets (each filter set consists of one Plasmaflo filter and one
Rheofilter), for the period ended March 31, 2005, representing a total
commitment of $2,736,000. This purchase order for 9,600 filter sets is in
addition to our minimum purchase commitment under our agreement with Asahi
Medical. Our minimum purchase obligations under our agreement with Asahi Medical
are triggered six months after we receive FDA approval of the RHEO(TM) System.
Pursuant to the terms of the distribution agreement with Asahi Medical,
dated January 1, 2002, the Company undertook a commitment to purchase a minimum
of 9,000, 15,000, and 22,500 each of Plasmaflo filters and Rheofilters in years
1, 2 and 3 respectively beginning six months after FDA approval of the RHEO(TM)
System. MinimuM purchase orders for the fourth year shall be determined
immediately after the term of the first year by mutual consent but shall not be
less than that of the previous year. This same method shall be used in
subsequent years to determine future minimum purchase quantities such that
minimum purchase quantities are always fixed for three years. Future minimum
annual commitments after FDA approval are approximately as follows:
Year 1 ........................................................$ 2,565,000
Year 2 ........................................................$ 4,275,000
Year 3 ........................................................$ 6,412,500
In July 2004, we amended our Distribution Services Agreement with Apheresis
Technologies, Inc. such that we would have the sole discretion as to when the
agreement would terminate. In consideration of this amendment, we agreed to pay
Apheresis Technologies $100,000 on the successful completion of our initial
public offering. Included in accounts payable as at December 31, 2004 is
$100,000 due to Apheresis Technologies.
CASH USED IN OPERATING ACTIVITIES
Cash used in operating activities was $5,382,465, $2,374,822 and $2,125,533
for the years ended December 31, 2004, 2003 and 2002, respectively. Changes in
net cash provided by operating activities in 2004 reflect a net loss adjusted
for non-cash items and netted against changes in working capital. Changes in
working capital in 2004 reflect a $222,218 increase in accounts receivable due
to increased sales and negotiated credit terms, a $324,353 increase in prepaid
assets due mainly to advance payments to insurance providers, and to
participating MIRA-1 clinical research organizations and clinical trial sites
and a $136,527 increase in inventory as we continue to maintain our level of
orders in line with supplier expectations. In addition, amounts due to
stockholders decreased by $931,652 with the repayment of the $500,000 loan from
Asahi Medical and the $500,000 due to the Stock Foundation. These increased uses
of cash was offset in part by a $2,538,445 increase in accounts payable and
accrued liabilities from increased obligations due to the initial public
offering process, MIRA-1 clinical trial expenses and professional fees. Changes
in working capital in 2003 and 2002 reflect the reduction of increased
liabilities from 2001 due to the receipt of additional funding.
52
CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities was $43,428,156, $175,780 and $31,045 for
the years ended December 31, 2004, 2003 and 2002, respectively. Cash used in
investing activities during the year ended December 31, 2004 included
$42,500,000 for the purchase of marketable securities, $192,281 for the purchase
of fixed assets and $768,808 for costs related to the corporate reorganization
transactions consummated in connection with the initial public offering. Cash
used in investing activities during the years ended December 31, 2003 and 2002
was primarily for the purchase of fixed assets of $164,716 and $24,151,
respectively. Fixed asset expenditures were for medical equipment and OctoNova
pumps to be used in clinical trials.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities was $65,104,005, $3,185,311 and
$2,766,559 for years ended December 31, 2004, 2003 and 2002, respectively.
Cash provided by financing activities primarily reflects issuances of common
stock, convertible debentures, as well as the issuance of Convertible Preferred
Stock. In 2002, we issued $492,500 in series B convertible debentures, a
$1,000,000 subordinated promissory note and 345,843 shares of Series B
Convertible Preferred Stock for gross cash proceeds of $2,000,000 less share
issue costs of $725,941. Cash provided by financing activities in 2003 was from
the issue of $2,650,000 in convertible grid debentures less issuance costs of
$24,796 and 613,292 shares of common stock for $604,092. In the year ended
December 31, 2004, we issued 5,600,000 shares of common stock, during the
Company's initial public offering, for gross cash proceeds of $67,200,000 less
issue costs of $7,770,075, $4,350,000 in convertible grid debentures and 374,569
shares of common stock for cash proceeds of $263,900. We also issued 379,284
shares of Series A Convertible Preferred Stock for total cash proceeds of
$1,281,841, of which $1,060,180 has been received and the balance of $221,661
has yet to be received as of December 31, 2004 and has been included in
stockholders' deficiency.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations
is based upon our audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to
uncollectible receivables, inventories, income taxes, financial income, warranty
obligations, excess component and order cancellation costs, and contingencies
and litigation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Because
this can vary in each situation, actual results may differ from these estimates
under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our audited
consolidated financial statements.
REVENUE RECOGNITION
We recognize revenue from the sale of the RHEO(TM) System which is
comprised of OctoNova pumps and the relateD disposable treatment sets. We
receive a signed binding purchase order from our customers. The pricing is a
negotiated amount between our customers and us.
We have the obligation to train, if required, and calibrate the OctoNova
pumps delivered to our customers. Only upon the completion of these services do
we recognize revenue for the pumps. We are also responsible for providing a
53
one-year warranty period complementary to that offered by the manufacturer and
the estimated cost of providing this service is accrued at the time revenue is
recognized. The treatment sets do not require any additional servicing and
revenue is recognized upon passage of title. All related costs of revenue are
accrued for by us.
INVENTORY VALUATION
Inventory is recorded at the lower of cost and net realizable value and
consists of finished goods. Cost is accounted for on a first-in, first-out
basis.
WE RECEIVE FREE INVENTORY FROM ASAHI MEDICAL FOR THE PURPOSE OF THE MIRA-1
AND RELATED CLINICAL STUDIES. WE ACCOUNT FOR THIS INVENTORY AT A VALUE
EQUIVALENT TO THE COST WE PAY FOR THE SAME FILTERS PURCHASED FOR COMMERICAL
SALES TO RELATED AND UNRELATED THIRD PARTIES.
FUNCTIONAL CURRENCY
The currency of the primary economic environment in which we operate is the
U.S. dollar. Substantially all of our sales are derived in U.S. dollars or in
other currencies linked to the U.S. dollar. Purchases of substantially all of
our materials and components are carried out in U.S. dollars or are linked to
the U.S. dollar. As a result, we have determined that our functional currency is
the U.S. dollar.
Monetary balances in non-U.S. dollar currencies are translated into U.S.
dollars using current exchange rates. Non-monetary balances in non-U.S. dollar
currencies are translated into U.S. dollars using historic exchange rates. For
non-U.S. dollar transactions reflected in our statements of operations, we use
the exchange rates as of the transaction dates. Depreciation, amortization and
changes in inventories and other changes deriving from non-monetary items are
based on historical exchange rates. We record the resulting translation gains or
losses as financial income or expenses, as appropriate.
STOCK-BASED COMPENSATION
We follow Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation," ("SFAS No. 123"). The provisions of SFAS No. 123
allow companies to either expense the estimated fair value of stock options or
to continue to follow the intrinsic method set forth in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") but
disclose the pro forma effects on net income (loss) had the fair value of the
options been expensed. We have elected to continue to apply APB 25 in accounting
for stock-based compensation.
During the year ended December 31, 2003, we issued stock options on a date
that, was within twelve months of the filing of the initial public offering
registration statement. Accordingly, subject to published guidance from the U.S.
Securities and Exchange Commission, or SEC, we estimated the intrinsic value of
these stock options based on the offering price of our common stock in the
initial public offering, which we expensed over the vesting period of these
options. These options became fully vested upon the closing of the initial
public offering. Therefore, the remaining unamortized stock compensation expense
has been recorded in the year ended December 31, 2004.
Pursuant to SFAS No. 123, the weighted-average fair values of employee
options granted during the years ended December 31, 2004, 2003 and 2002 (other
than the stock options described immediately above) were $6.96, $0.56 and $0.77,
respectively. The estimated fair value was determined using the following
assumptions:
o Volatility: 2004 -- 89.1%, 2003 -- 75%, 2002 -- 83%
54
o Expected life of option: 2004 -- 3 years, 2003 -- 4.1 years, 2002 --
8.9 years
o Risk-free interest rate: 2004 -- 3.21%, 2003 -- 2.15%, 2002 -- 4.95%
Compensation expense associated with non-employee stock options was $47,637,
$196,686 and $134,948 for the years ended December 31, 2004, 2003 and 2002,
respectively. The fair value of these options was determined using the
Black-Scholes fair value options model using the same assumptions above and is
included in general and administrative expenses within the consolidated
statement of operations.
EFFECTIVE CORPORATE TAX RATE
INCOME TAXES
As of December 31, 2004, we had net operating loss carry forwards for
federal income taxes of $28.2 million. Our utilization of the net operating loss
and tax credit carry forwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code, and similar state provisions, as a
result of changes in our ownership structure. The annual limitations may result
in the expiration of net operating losses and credits prior to utilization.
At December 31, 2004, we had recorded a deferred tax liability due to the
difference between the fair value of our intangible asset and its tax basis. We
also had deferred tax assets representing the benefit of net operating loss
carry forwards and certain stock issuance costs capitalized for tax purposes. We
did not record a benefit for the deferred tax asset because realization of the
benefit was uncertain and, accordingly, a valuation allowance is provided to
offset the deferred tax asset.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4"
("SFAS No. 151"). SFAS No. 151 requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs be excluded
from the cost of inventory and expensed as incurred. Additionally, SFAS No. 151
requires that the allocation of fixed overheads be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. We are currently evaluating the effect that the
adoption of SFAS No. 151 will have on our consolidated results of operations and
financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which revises SFAS No. 123 and supercedes APB No.
25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under
SFAS No. 123 will no longer be an alternative to financial statement
recognition. Under SFAS No. 123R, we must determine the appropriate
option-pricing model to be used for valuing share-based payments and the
transition method to be used at date of adoption. The transition alternatives
are the modified-prospective and modified-retrospective methods. Both of these
methods require that compensation expense be recorded for all share-based
payments granted, modified or settled after the date of adoption and for all
unvested stock options at the date of adoption; however, under the
modified-retrospective method, prior periods are restated by recognizing
compensation cost in amounts previously reported in the pro forma note
disclosures under SFAS No. 123. Prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. SFAS No. 123R is
effective beginning with the first interim or annual period after June 15, 2005.
Accordingly, we are required to adopt SFAS No. 123R beginning July 1, 2005. We
are currently evaluating the requirements of SFAS No. 123R and expect that the
adoption of SFAS No. 123R will have a material impact on our consolidated
results of operations. We have not yet determined the method of adoption or the
55
effect of adopting SFAS No. 123R, and we have not determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS No. 123.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS No. 153"). SFAS 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for the
fiscal periods beginning after June 15, 2005. We are currently evaluating the
effect that the adoption of SFAS No. 153 will have on our consolidated results
of operations and financial position, but we do not expect it to have a material
impact.
DEVELOPMENTS DURING THE YEAR ENDED DECEMBER 31, 2004
ON DECEMBER 8 2004, AS PART OF THE CORPORATE REORGANIZATION TRANSACTIONS
RELATING TO THE INITIAL PUBLIC OFFERING,WE ACQUIRED TLC VISION'S 50% INTEREST IN
OCCULOGIX, L.P. IN EXCHANGE FOR THE ISSUANCE TO TLC VISION 19,070,234 SHARES OF
ITS COMMON STOCK. THE STOCK CONSIDERATION WAS VALUED BASED ON OUR INITIAL
OFFERING SHARE PRICE OF $12.00 PER SHARE. THE RESULTS OF OCCULOGIX, L.P.'S
OPERATIONS HAVE BEEN INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS SINCE
THAT DATE.
In December 2004, 5,600,000 shares of our common stock at $12.00 per share
were issued in connection with the initial public offering for gross cash
proceeds of $67,200,000 (less issuance costs of $7,770,075).
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which revises SFAS No. 123 and supercedes APB No.
25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under
SFAS No. 123 will no longer be an alternative to financial statement
recognition. Under SFAS No. 123R, we must determine the appropriate
option-pricing model to be used for valuing share-based payments and the
transition method to be used at date of adoption. The transition alternatives
are the modified-prospective and modified-retrospective methods. Both of these
methods require that compensation expense be recorded for all share-based
payments granted, modified or settled after the date of adoption and for all
unvested stock options at the date of adoption; however, under the
modified-retrospective method, prior periods are restated by recognizing
compensation cost in amounts previously reported in the pro forma note
disclosures under SFAS No. 123. Prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. SFAS No. 123R is
effective beginning with the first interim or annual period after June 15, 2005.
Accordingly, we are required to adopt SFAS No. 123R beginning July 1, 2005. We
are currently evaluating the requirements of SFAS No. 123R and expect that the
adoption of SFAS No. 123R will have a material impact on our consolidated
results of operations. We have not yet determined the method of adopting SFAS
No. 123R.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
CURRENCY FLUCTUATIONS AND EXCHANGE RISK
All of our sales are in U.S. dollars or are linked to the U.S. dollar,
while a portion of our expenses are in Canadian dollars and euros. We cannot
predict any future trends in the exchange rate of the Canadian dollar or euro
against the U.S. dollar. Any strengthening of the Canadian dollar or euro in
56
relation to the U.S. dollar would increase the U.S. dollar cost of our
operations, and affect our U.S. dollar measured results of operations. We do not
engage in any hedging or other transactions intended to manage these risks. In
the future, we may undertake hedging or other similar transactions or invest in
market risk sensitive instruments if we determine that is advisable to offset
these risks.
INTEREST RATE RISK
The primary objective of our investment activity is to preserve principal
while maximizing interest income we receive from our investments, without
increasing risk. We believe this will minimize our market risk.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
OCCULOGIX, INC.[formerly Vascular Sciences Corporation]
December 31, 2004 and 2003
58
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
OCCULOGIX, INC.
We have audited the accompanying consolidated balance sheets of OCCULOGIX, INC.
[formerly Vascular Sciences Corporation] as of December 31, 2004 and 2003 and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of OCCULOGIX, INC. at
December 31, 2004 and 2003 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2004
in conformity with U.S. generally accepted accounting principles.
Toronto, Canada, /s/ Ernst & Young LLP
February 28, 2005. Chartered Accountants
59
OCCULOGIX, INC.
[formerly Vascular Sciences Corporation]
CONSOLIDATED BALANCE SHEETS
[expressed in U.S. dollars]
AS AT DECEMBER 31,
------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 17,530,552 $ 1,237,168
Marketable securities 42,500,000 --
Amounts receivable [note 13] 472,156 --
Due from related parties [note 13] 8,226 14,074
Inventory 1,086,339 188,071
Prepaid expenses 480,813 156,460
Deposit 8,996 --
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 62,087,082 1,595,773
- ---------------------------------------------------------------------------------------------------------
Fixed assets, net [note 4] 367,589 191,231
Patents and trademarks, net [note 5] 104,654 81,144
Intangible asset, net [note 6] 25,643,862 --
- ---------------------------------------------------------------------------------------------------------
Goodwill [note 7] 213,397,444 --
- ---------------------------------------------------------------------------------------------------------
301,600,631 1,868,148
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable 221,063 194,515
Accrued liabilities [note 15] 2,791,291 245,581
Deferred revenue and rent inducement [note9 and 10] 485,047 --
Due to stockholders [note 11] 516,756 1,043,865
Convertible debentures due to stockholders [note 12] -- 2,650,000
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,014,157 4,133,961
- ---------------------------------------------------------------------------------------------------------
Deferred tax liability [note 14] 9,488,229 --
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 13,502,386 4,133,961
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 13 and 16]
STOCKHOLDERS' EQUITY (DEFICIENCY)
Capital stock [note 17]
Common stock 41,807 5,033
Par value of $0.001 per share;
Authorized: 75,000,000; Issued and outstanding:
December 31, 2004 - 41,806,768; December 31, 2003 - 5,032,906
Preferred stock -- --
Par value of $0.001 per share;
Authorized: 10,000,000; Issued and outstanding:
December 31, 2004 and 2003 - nil
Series A Convertible Preferred Stock -- 1,768
Non-cumulative, convertible par value of $0.001 per share
Authorized: December 31, 2004 - nil; December 31, 2003 - 2,500,000;
Issued and outstanding:
December 31, 2004 - nil; December 31, 2003 - 1,767,740
Series B Convertible Preferred Stock -- 620
Non-cumulative, convertible par value of $0.001 per share
Authorized: December 31, 2004 - nil; December 31, 2003 - 2,000,000;
Issued and outstanding:
December 31, 2004 - nil; December 31, 2003 - 620,112
Additional paid-in capital 336,063,557 23,915,012
Accumulated deficit (48,007,119) (26,188,246)
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 288,098,245 (2,265,813)
- ---------------------------------------------------------------------------------------------------------
301,600,631 1,868,148
=========================================================================================================
See accompanying notes
60
OCCULOGIX, INC.
[formerly Vascular Sciences Corporation]
CONSOLIDATED STATEMENTS OF OPERATIONS
[expressed in U.S. dollars]
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------------
REVENUE
Sales to related parties $ 731,757 $ 390,479 $ 94,100
Sales to unrelated parties 237,600 -- --
- ---------------------------------------------------------------------------------------------------
969,357 390,479 94,100
- ---------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Cost of goods sold to related parties 688,102 373,546 80,391
Cost of goods sold to unrelated parties 133,710 -- --
Royalty costs 135,457 109,234 78,303
- ---------------------------------------------------------------------------------------------------
957,269 482,780 158,694
- ---------------------------------------------------------------------------------------------------
GROSS MARGIN 12,088 (92,301) (64,594)
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
General and administrative [notes 11, 13 and 17[f]] 17,530,019 1,564,362 448,856
Clinical and regulatory 3,994,967 731,166 1,446,662
Sales and marketing 219,556 -- --
- ---------------------------------------------------------------------------------------------------
21,744,542 2,295,528 1,895,518
- ---------------------------------------------------------------------------------------------------
Loss from operations (21,732,454) (2,387,829) (1,960,112)
- ---------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Interest income (expense) 35,735 (67,997) (1,022,627)
Other [notes 13 and 22] (145,925) (14,062) 101,142
- ---------------------------------------------------------------------------------------------------
(110,190) (82,059) (921,485)
- ---------------------------------------------------------------------------------------------------
Loss from operations before income taxes (21,842,644) (2,469,888) (2,881,597)
Recovery of income taxes [note 14] 23,771 -- --
- ---------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR (21,818,873) (2,469,888) (2,881,597)
===================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
- BASIC AND DILUTED 7,369,827 3,976,921 3,735,062
===================================================================================================
NET LOSS PER SHARE $ (2.96) $ (0.62) $ (0.77)
===================================================================================================
See accompanying notes
61
OCCULOGIX, INC.
[formerly Vascular Sciences Corporation]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
[expressed in U.S. dollars]
VOTING NON-VOTING SERIES A CONVERTIBLE
COMMON STOCK COMMON STOCK PREFERRED STOCK
AT PAR VALUE AT PAR VALUE AT PAR VALUE
----------------------- ----------------------- ------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES ISSUED SHARES ISSUED SHARES ISSUED
# $ # $ # $
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 3,603,362 3,604 288,940 289 581,325 582
Discontinued operations -- -- -- -- -- --
Stock issued in lieu of consulting fees 2,333 2 -- -- -- --
Stock based compensation [note 2] -- -- -- -- -- --
Conversion of non-voting common
stock to voting common stock upon
merger of companies [notes 17[b][i] and [f]] 288,940 289 (288,940) (289) -- --
Conversion of Series A convertible debentures
into Series A convertible preferred stock
[note 17[d][i]] -- -- -- -- 1,089,172 1,089
Shares issued pursuant to anti-dilution
provisions [note 17[d][i]] -- -- -- -- 97,243 97
Shares issued pursuant to private offering
memorandum, net of share issue
cost [note 17[d][ii]] -- -- -- -- -- --
Conversion of Series B convertible
debentures into Series B convertible
preferred stock [note 17[d][ii]] -- -- -- -- -- --
Conversion of subordinated convertible
debentures into Series B convertible
preferred stock [note 17[d][ii]] -- -- -- -- -- --
Contribution of inventory from related party
[note 13] -- -- -- -- -- --
Value ascribed to warrants issued [note 17[g]] -- -- -- -- -- --
Net loss for the year -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 3,894,635 3,895 -- -- 1,767,740 1,768
================================================================================================================================
SERIES B CONVERTIBLE
PREFERRED STOCK
AT PAR VALUE NET
-------------------- ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES ISSUED CAPITAL DEFICIT (DEFICIENCY)
# $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 -- -- 11,839,195 (20,602,323) (8,758,653)
Discontinued operations -- -- (66,000) (234,438) (300,438)
Stock issued in lieu of consulting fees -- -- 2,798 -- 2,800
Stock based compensation [note 2] -- -- 134,948 -- 134,948
Conversion of non-voting common
stock to voting common stock upon
merger of companies [notes 17[b][i] and [f]] -- -- -- -- --
Conversion of Series A convertible debentures
into Series A convertible preferred stock
[note 17[d][i]] -- -- 7,118,022 -- 7,119,111
Shares issued pursuant to anti-dilution
provisions [note 17[d][i]] -- -- (97) -- --
Shares issued pursuant to private offering
memorandum, net of share issue
cost [note 17[d][ii]] 345,843 346 1,273,713 -- 1,274,059
Conversion of Series B convertible
debentures into Series B convertible
preferred stock [note 17[d][ii]] 178,227 178 1,030,506 -- 1,030,684
Conversion of subordinated convertible
debentures into Series B convertible
preferred stock [note 17[d][ii]] 96,042 96 499,825 -- 499,921
Contribution of inventory from related party
[note 13] -- -- 155,141 -- 155,141
Value ascribed to warrants issued [note 17[g]] -- -- 69,138 -- 69,138
Net loss for the year -- -- -- (2,881,597) (2,881,597)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 620,112 620 22,057,189 (23,718,358) (1,654,886)
===================================================================================================================
62
OCCULOGIX, INC.
[formerly Vascular Sciences Corporation]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
[expressed in U.S. dollars]
VOTING NON-VOTING
COMMON STOCK COMMON STOCK
AT PAR VALUE AT PAR VALUE
----------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES ISSUED SHARES ISSUED
# $ # $
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 CONT'D 3,894,635 3,895 -- --
Conversion of debt into common
stock [notes 11 and 17[c]] 507,604 508 -- --
Stock issued in lieu of consulting fees [note 17[e]] 17,375 17 -- -- --
Stock issued pursuant to private offering
memorandum [note 17[e]] 613,292 613 -- --
Contribution of inventory from related party [note 13] -- -- -- --
Stock based compensation [note 2] -- -- -- --
Net loss for the year -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 5,032,906 5,033 -- --
Stock based compensation [note 17[f]] -- -- -- --
Stock issued on exercise of options
[note 17[f]] 272,200 273 -- --
Stock issued on exercise of warrants
[note 17[g]] 102,369 102 -- --
Subscription receivable [note 17[g]] -- -- -- --
Contribution of inventory from related party [note 13] -- -- -- --
Conversion of Series A convertible preferred
stock into common stock [note 17[b][ii]] 3,603,350 3,603 -- --
Conversion of Series B convertible preferred
stock into common stock [note 17[b][ii]] 1,019,255 1,019 -- --
Conversion of convertible grid debentures into
common stock [notes 12 and 17[b][ii]] 7,106,454 7,107 -- --
Fractional payout of converted shares due to
preferred stockholders -- -- -- --
Shares issued on acquisition of The Partnership
[note 17[b][ii]] 19,070,234 19,070 -- --
Initial public offering, net of issue costs [note 17[e]] 5,600,000 5,600 -- --
Net loss for the year -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 41,806,768 41,807 -- --
===================================================================================================================================
63
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
AT PAR VALUE AT PAR VALUE
--------------------------- --------------------------
NUMBER OF NUMBER OF
SHARES ISSUED SHARES ISSUED
# $ # $
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 CONT'D 1,767,740 1,768 620,112 620
Conversion of debt into common
stock [notes 11 and 17[c]] -- -- -- --
Stock issued in lieu of consulting fees [note 17[e]] 17,375 -- -- -- --
Stock issued pursuant to private offering
memorandum [note 17[e]] -- -- -- --
Contribution of inventory from related party [note 13] -- -- -- --
Stock based compensation [note 2] -- -- -- --
Net loss for the year -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 1,767,740 1,768 620,112 620
Stock based compensation [note 17[f]] -- -- -- --
Stock issued on exercise of options
[note 17[f]] -- -- -- --
Stock issued on exercise of warrants
[note 17[g]] 379,284 379 -- --
Subscription receivable [note 17[g]] -- -- -- --
Contribution of inventory from related party [note 13] -- -- -- --
Conversion of Series A convertible preferred
stock into common stock [note 17[b][ii]] (2,147) -- -- (1,456)
Conversion of Series B convertible preferred
stock into common stock [note 17[b][ii]] -- -- (620,112) (620)
Conversion of convertible grid debentures into
common stock [notes 12 and 17[b][ii]] -- -- -- --
Fractional payout of converted shares due to
preferred stockholders -- -- -- --
Shares issued on acquisition of The Partnership
[note 17[b][ii]] -- -- -- --
Initial public offering, net of issue costs [note 17[e]]5,600,0005,600 -- -- -- --
Net loss for the year -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 -- -- -- --
==================================================================================================================================
64
NET
ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
$ $ $
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 CONT'D 22,057,189 (23,718,358) (1,654,886)
Conversion of debt into common
stock [notes 11 and 17[c]] 480,507 -- 481,015
Stock issued in lieu of consulting fees [note 17[e]] 17,375 22,571 -- 22,588
Stock issued pursuant to private offering
memorandum [note 17[e]] 578,683 -- 579,296
Contribution of inventory from related party [note 13] 66,300 -- 66,300
Stock based compensation [note 2] 709,762 -- 709,762
Net loss for the year -- (2,469,888) (2,469,888)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 23,915,012 (26,188,246) (2,265,813)
Stock based compensation [note 17[f]] 15,439,960 -- 15,439,960
Stock issued on exercise of options
[note 17[f]] 129,147 -- 129,420
Stock issued on exercise of warrants
[note 17[g]] 1,415,840 -- 1,416,321
Subscription receivable [note 17[g]] (221,661) (221,661)
Contribution of inventory from related party [note 13] 146,905 -- 146,905
Conversion of Series A convertible preferred
stock into common stock [note 17[b][ii]] -- -- --
Conversion of Series B convertible preferred
stock into common stock [note 17[b][ii]] (399) -- --
Conversion of convertible grid debentures into
common stock [notes 12 and 17[b][ii]] 6,992,893 -- 7,000,000
Fractional payout of converted shares due to
preferred stockholders (747) -- (747)
Shares issued on acquisition of The Partnership
[note 17[b][ii]] 228,823,738 -- 228,842,808
Initial public offering, net of issue costs [note 17[e]] 59,424,325 -- 59,429,925
Net loss for the year -- (21,818,873) (21,818,873)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 336,063,557 (48,007,119) 288,098,245
======================================================================================================================
See accompanying notes
65
OCCULOGIX, INC.
[formerly Vascular Sciences Corporation]
CONSOLIDATED STATEMENTS OF CASH FLOWS
[expressed in U.S. dollars]
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
$ $ $
- ---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the year (21,818,873) (2,469,888) (2,881,597)
Adjustments to reconcile net loss to
cash used in operating activities:
Stock-based compensation [notes 2 and 17[f]] 15,439,960 709,761 134,948
Shares issued for services performed -- 22,588 2,800
Non-cash interest expense on long-term debt -- -- 938,427
Gain on settlement of debt -- (7,190) --
Non-cash warrant value -- -- 69,138
Amortization of fixed assets 42,956 12,742 79,395
Amortization of patents and trademarks 5,480 3,887 841
Amortization of intangible asset 106,138 -- --
Income taxes (39,271) -- --
Loss (gain) on sale of fixed assets (6,000) (1,746) 2,380
Impairment of fixed assets 13,850 46,128 131,240
Net change in non-cash working capital
balances related to operations [note 18] 873,295 (691,102) (603,105)
- ---------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (5,382,465) (2,374,820) (2,125,533)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds on sale of fixed assets 6,000 4,000 --
Purchase of marketable securities 42,500,000 -- --
Additions to fixed assets (192,281) (164,716) (24,151)
Additions to patents and trademarks (28,990) (15,064) (6,894)
Acquisition costs (768,808) -- --
Cash acquired on the acquisition OccuLogix, L.P. 55,923 -- --
- ---------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (43,428,156) (175,780) (31,045)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term convertible
debentures [note 12] 4,350,000 2,650,000 --
Increase in convertible debentures due
to stockholders -- -- 1,492,500
Repayment of long-term debt -- (25,000) --
Share issuance costs (7,770,075) (18,985) (725,941)
Debt issuance costs -- (24,796) --
Proceeds from exercise of common
stock options and warrants
[notes 17[f] and [g]] 263,900 604,092 --
Proceeds from exercise of Series A
convertible preferred stock warrants [note 17[g]] 1,060,180 -- --
Proceeds from sale of Series B
convertible preferred stock [note 17[d][ii]] -- -- 2,000,000
Proceeds from issuance of common stock [note 17[e]] 67,200,000 -- --
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 65,104,005 3,185,311 2,766,559
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS
DURING THE YEAR 16,293,384 634,711 609,981
Cash (bank indebtedness), beginning of year 1,237,168 602,457 (7,524)
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENT, END OF YEAR 17,530,552 1,237,168 602,457
===================================================================================================
See accompanying notes
66
1. NATURE OF OPERATIONS
OccuLogix, Inc. [formerly Vascular Sciences Corporation] and its subsidiaries:
OccuLogix Holdings, Inc., OccuLogix ExchangeCo ULC, OccuLogix, L.P. and
OccuLogix U.S. LLC. [collectively the "Company"], is an ophthalmic therapeutic
company founded to commercialize innovative treatments for eye diseases,
including age-related macular degeneration, or AMD. The RHEO(TM) System contains
a pump that circulates blood through two filters and is used to perform
Rheopheresis, a form of apheresis, which the Company refers to under the trade
name RHEO(TM) Therapy, which is designed to treat Dry AMD. The RHEO(TM) System
is designed to improve microcirculation in the eye by filtering high molecular
weight proteins and other macromolecules from the patient's plasma.
The Company owns and/or has licensed certain patents relating to the RHEO(TM)
System and has the exclusive right to develop and sell the equipment which
comprises the RHEO(TM) System in the North American markets.
The Company began limited commercialization of the RHEO(TM) System at some
clinics in Canada in 2003. The Company is currently conducting a clinical trial,
called MIRA-1, which, if successful, is expected to support its application with
the U.S. Food and Drug Administration ["FDA"] to obtain approval to market the
RHEO(TM) System in the United States.
The Company licensed its right to develop and sell the RHEO System to OccuLogix,
L.P. [the "Partnership"] in exchange for a 50% interest in the Partnership [note
8]. The other 50% interest in the Partnership was owned by TLC Vision
Corporation ["TLC Vision"], who is a significant stockholder of the Company. On
December 8, 2004, as part of the reorganization transactions [note 17[b]], the
Company purchased TLC Vision's 50% interest in the Partnership and the results
of the Partnership's operations have been included in the consolidated financial
statements since that date.
67
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
conformity with accounting principles generally accepted in the United States of
America ["U.S. GAAP"].
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
Revenue recognition
The Company recognizes revenue from the sale of the RHEO(TM) System, which is
comprised of OctoNova pumps and the related disposable treatment sets. The
Company receives a signed, binding purchase order from its customers. The
pricing is a negotiated amount between the Company and its customers.
The Company has the obligation to train, if required, and calibrate the OctoNova
pumps delivered to its customers. Only upon the completion of these services
does the Company recognize revenue for the pumps. The Company is also
responsible for providing a one year warranty period supplementary to that
offered by the manufacturer and the estimated cost of providing this service is
accrued at the time revenue is recognized. The treatment sets do not require any
additional servicing and revenue is recognized upon passage of title. All
related costs of revenue are accrued for by the Company.
Cost of sales
Cost of goods sold consists primarily of costs for the purchase of the Company's
products, including direct costs incurred for the purchase of component parts
from its suppliers, applicable freight and shipping costs and fees related to
warehousing. In addition to these direct costs, included in the cost of sales
that are only recoverable based on sufficient volume are the minimum royalty
payments due to Mr. Hans Stock and Dr. Richard Brunner and licensing costs
associated with distributing the RHEO(TM) System in Canada.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and highly liquid short-term
investments with original maturities of 90 days or less at the date of purchase.
As at December 31, 2004, the Company had cash equivalents of approximately
$16,900,000, comprised primarily of money market funds with a weighted average
effective rate of 1.8%.
Marketable Securities
Marketable securities are classified as "available-for-sale" and are carried at
market value with unrealized gains and losses reported as other comprehensive
income or loss which is a separate component of stockholders' deficit.
Available for sale investments consist primiarly of corporate notes, federal
agency notes and municipal notes.
As at December 31, 2004, the Company's available for sale investments all had
original maturity of less than 90 days and comprised of the following:
68
Cost
$
---
Corporate notes...................................... 24,000,000
Federal agency notes................................. 7,500,000
Municipal notes...................................... 11,000,000
- ------------------------------------------------------------------------
42,500,000
==========
========================================================================
The fair value of the Company's available for sale investments approximates the
carrying value given the short-term nature.
Inventory
Inventory is recorded at the lower of cost and net realizable value and consists
of finished goods. Cost is accounted for on a first-in, first-out basis.
The Company receives free inventory from Asahi Medical Co., Ltd. ["Asahi
Medical"] for the purpose of the MIRA-1 and related clinical studies. The
Company accounts for this inventory at a value equivalent to the cost the
Company pays for the same filters purchased for commercial sales unrelated third
parties.
Fair value of financial instruments
Fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The estimated fair values of cash and cash equivalents, due from related
parties, amounts receivable, accounts payable, accrued liabilities, due to
stockholders and convertible debentures due to stockholders approximate their
carrying values due to the short-term maturities of these instruments.
Fixed assets
Fixed assets are recorded at cost less accumulated amortization. Amortization is
calculated using the straight-line method, commencing when the assets become
available for productive use, based on the following estimated useful lives:
Furniture and office equipment 7 years
Computer equipment 3 years
Medical equipment 5 years
Impairment of long-lived assets
The Company reviews its fixed assets and intangible asset for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. When such an event occurs, management
estimates the future undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. In the event the undiscounted cash flows
are less than the carrying amount of the asset, an impairment loss equal to the
excess of the carrying amount over the fair value is charged to operations.
Investments
Investments are accounted for using the equity method if the Company has
significant influence, but not control, over an investee. Accordingly, prior to
the purchase of TLC Vision's 50% interest in the Partnership, the Company,
through its wholly-owned subsidiary OccuLogix Holdings, Inc. ("OHI") which owned
69
a 50% interest in the Partnership, recorded its share of loss from the
Partnership using the equity method. Subsequent to the purchase of the remaining
50% interest in the Partnership, the Company commenced consolidating the
Partnership's results effective December 9, 2004.
Patents and trademarks
Patents and trademarks have been recorded at historical cost and are amortized
using the straight-line method over their estimated useful lives, not to exceed
15 years.
Goodwill
Effective January 1, 2002, goodwill is no longer amortized and is subject to an
annual impairment test. Goodwill impairment is evaluated between annual tests
upon the occurrence of certain events or circumstances. Goodwill impairment is
assessed based on a comparison of the fair value of a reporting unit to the
underlying carrying value of the reporting unit's net assets, including
goodwill. When the carrying amount of the reporting unit exceeds its fair value,
the fair value of the reporting unit's goodwill is compared with its carrying
amount to measure the amount of impairment loss, if any. The fair value of
goodwill is determined using the estimated discounted future cash flows of the
reporting unit.
Intangible asset
The intangible asset is comprised of the exclusive distribution agreements the
Company has with Asahi Medical, the manufacturer of the Rheofilter and the
Plasmaflo filter, and Diamed Medizintechnik GmbH ["Diamed"] and MeSys Gmbh, the
designer and manufacturer, respectively, of the OctoNova pumps. The intangible
asset is amortized using the straight-line method over an estimated useful life
of 15 years.
Foreign currency translation
The Company's functional and reporting currency is the U.S. dollar. The assets
and liabilities of the Company's Canadian operations are maintained in U.S.
dollars. Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at the consolidated
balance sheet dates and non-monetary assets and liabilities are translated at
exchange rates in effect on the date of the transaction. Revenue and expenses
are translated into U.S. dollars at average exchange rates prevailing during the
year. Resulting exchange gains and losses are included in net loss for the year
and are not material in any of the years presented.
Clinical and regulatory costs
Clinical and regulatory costs attributable to the performance of contract
services are recognized as the services are performed. Non-refundable, up-front
fees paid in connection with these contracted services are deferred and
recognized as an expense on a straight-line basis over the estimated term of the
related contract.
Income taxes
The Company uses the liability method of accounting for income taxes. Deferred
tax assets and liabilities are recorded based on the differences between the
income tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes at the applicable enacted statutory tax rates.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is not more likely than not that some portion or all
of the deferred tax assets will be realized.
Stock-based compensation
The Company follows SFAS No. 123 "Accounting for Stock-Based Compensation,"
["SFAS No. 123"]. The provisions of SFAS No. 123 allow companies to either
expense the estimated fair value of employee stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
70
Opinion No. 25, "Accounting for Stock Issued to Employees" ["APB 25"] but
disclose the pro forma effects on net loss had the fair value of the options
been expensed. The Company has elected to apply APB 25 in accounting for
employee stock option incentive plan [note 17[f]]. The intrinsic value is
amortized over the vesting period.
The following table illustrates the pro forma net loss and pro forma loss per
share as if the fair value method had been applied to all awards:
Years ended December 31,
----------------------------------
2004 2003 2002
$ $ $
- ------------------------------------------------------------------------------------------
Net loss, as reported (21,818,873) (2,469,888) (2,881,597)
Adjustment for APB 25 [note 17[f]] 15,392,323 513,077 --
Adjustment for SFAS No. 123 (15,673,031) (539,012) (96,412)
- ------------------------------------------------------------------------------------------
Pro forma net loss (22,099,581) (2,495,823) (2,978,009)
==========================================================================================
Pro forma loss per share - basic and diluted (3.00) (0.63) (0.80)
==========================================================================================
Pursuant to SFAS No. 123, the weighted average fair values of employee stock
options granted during the years ended December 31, 2004, 2003 and 2002 were
$6.96, $11.91 and $0.77, respectively. The estimated fair value was determined
using the following assumptions:
Years ended December 31,
----------------------------------------
2004 2003 2002
- -----------------------------------------------------------------------
Volatility 89.1% 75.0% 83.0%
Expected life of option 3.0 yrs 4.1 yrs 8.9 yrs
Risk-free interest rate 3.21% 2.15% 4.95%
=======================================================================
The assumed dividend yield for all years presented is nil.
Net loss per share
The Company follows SFAS No. 128, ""Earnings Per Share" ["SFAS No. 128"]. In
accordance with SFAS No. 128, companies that are publicly held or have complex
capital structures are required to present basic and diluted earnings per share
("EPS") on the face of the statement of income. Basic EPS excludes dilution and
is computed by dividing net loss available to common stockholders by the
weighted average number of shares of common stock outstanding for the year.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted and the
resulting additional shares are dilutive because their inclusion decreases the
amount of EPS.
71
The following table presents the potentially dilutive effects of outstanding
securities:
Years ended December 31,
-------------------------------
2004 2003 2002
$ $ $
- -----------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding - basic 7,369,827 3,976,921 3,735,062
Effect of dilutive securities:
Convertible debentures -- 1,179,310 874,385
Convertible Preferred Stock -- 3,986,106 1,613,575
Warrants -- 960,145 674,359
Stock options 1,498,950 910,920 --
- -----------------------------------------------------------------------------------------------
Weighted average number of shares outstanding - diluted 8,868,777 11,013,402 6,897,381
===============================================================================================
Potentially dilutive securities have not been used in the calculation of diluted
net loss per share as they are anti-dilutive.
72
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ["SFAS No. 151"]. SFAS No. 151 requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be excluded from the cost of inventory and expensed as
incurred. Additionally, SFAS No. 151 requires that the allocation of fixed
overheads be based on the normal capacity of the production facilities. SFAS No.
151 is effective for fiscal years beginning after June 15, 2005. The Company is
currently evaluating the effect that the adoption of SFAS No. 151 will have on
its consolidated results of operations and financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ["SFAS No. 123R"], which revises SFAS No. 123 and supercedes APB No.
25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under
SFAS No. 123 will no longer be an alternative to financial statement
recognition. Under SFAS No. 123R, the Company must determine the appropriate
option-pricing model to be used for valuing share-based payments and the
transition method to be used at date of adoption. The transition alternatives
are the modified-prospective and modified-retrospective methods. Both of these
methods require that compensation expense be recorded for all share-based
payments granted, modified or settled after the date of adoption and for all
unvested stock options at the date of adoption; however, under the
modified-retrospective method, prior periods are restated by recognizing
compensation cost in amounts previously reported in the pro forma note
disclosures under SFAS No. 123. Prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. SFAS No. 123R is
effective beginning with the first interim or annual period after June 15, 2005.
Accordingly, the Company is required to adopt SFAS No. 123R beginning July 1,
2005. The Company is currently evaluating the requirements of SFAS No. 123R and
expects that the adoption of SFAS No. 123R will have a material impact on its
consolidated results of operations. The Company has not yet determined the
method of adoption or the effect of adopting SFAS No. 123R, and it has not
determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS No. 123.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
["SFAS No. 153"]. SFAS 153 eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets and replaces it with an
exception for exchanges that do not have commercial substance. SFAS No. 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for the fiscal periods beginning after June
15, 2005. The Company is currently evaluating the effect that the adoption of
SFAS No. 153 will have on its consolidated results of operations and financial
position but does not expect it to have a material impact.
3. ACQUISITIONS
On December 8, 2004, as part of the reorganization transactions [note 17[b]],
the Company acquired TLC Vision's 50% interest in the Partnership in exchange
for the issuance to TLC Vision of 19,070,234 shares of its common stock. The
stock consideration was valued based on the Company's initial offering share
price of $12.00 per share. The results of the Partnership's operations have been
included in the consolidated financial statements since that date.
The purchase price of the acquisition consists of 19,070,234 shares of common
stock of the Company valued at $228,842,808, plus acquisition costs of $768,808
for a total acquisition cost of $229,611,616. The purchase price has been
allocated as follows:
$
- --------------------------------------
Net tangible assets (8,328)
Deferred tax liability (9,527,500)
Intangible asset 25,750,000
- --------------------------------------
16,214,172
Goodwill 213,397,444
- --------------------------------------
229,611,616
======================================
73
If the acquisition of TLC Vision's 50% share of the Partnership had been
completed by January 1 2003, the unaudited pro forma effects on the consolidated
statements of operations for the years ended December 31, 2004 and 2003 would
have been to decrease revenue by $166,634 and increase revenue by $95,915,
respectively. The unaudited net loss for the years ended December 31, 2004 and
2003 would have increased by $1,008,371 and $26,573, respectively. As a result
of the impact of the above pro forma changes to net loss, combined with the
dilutive effect from the increased number of shares, the unaudited net loss per
share for the years ended December 31, 2004 and 2003 would have been reduced by
$2.06 and $0.51 per share, respectively.
The above unaudited pro forma information is presented for information purposes
only and may not be indicative of the results of operations as they would have
been if the acquisition had occurred on January 1, 2003, nor is it necessarily
indicative of the results of operations which may occur in the future.
74
4. FIXED ASSETS
2004 2003
--------------------- --------------------
Accumulated Accumulated
Cost amortization Cost amortization
$ $ $ $
- ----------------------------------------------------------------------------------
Furniture and office equipment 34,828 20,024 28,229 15,597
Computer equipment 52,654 20,675 27,864 13,930
Medical equipment 764,071 443,265 590,080 425,415
- ----------------------------------------------------------------------------------
851,553 483,964 646,173 454,942
Less accumulated amortization 483,964 454,942
- ----------------------------------------------------------------------------------
367,589 191,231
==================================================================================
The Company has recorded a reduction of the carrying value of fixed assets for
the year ended December 31, 2004 of $13,850 [2003 - $46,128; 2002 - $131,240],
of which, $12,640 [2003 - $26,840; 2002 - nil] reflects a write down of certain
of the Company's medical equipment to a value at December 31, 2004 of nil. The
assets written down do not represent the most current technology available and
are no longer being used in the MIRA-1 clinical trials and the Company has made
the decision to write down these assets to their fair value and intends to
evaluate the best disposal option. In addition to the write down of medical
equipment, the carrying values of certain furniture and office equipment were
reduced in 2004 to current value. This was in addition to a reduction in the
carrying values of these same assets in prior years.
5. PATENTS AND TRADEMARKS
2004 2003
-------------------- ----------------
Accumulated Accumulated
Cost amortization Cost amortization
$ $ $ $
- ---------------------------------------------------------------------
Patents 87,859 6,777 60,991 2,711
Trademarks 27,608 4,036 25,486 2,622
- ---------------------------------------------------------------------
115,467 10,813 86,477 5,333
Less accumulated amortization 10,813 5,333
- ---------------------------------------------------------------------
104,654 81,144
=====================================================================
75
Estimated amortization expense for patents and trademarks for each of the next
five years are as follows:
Patents Trademarks Total
$ $ $
- -------------------------------------------
2005 4,066 1,476 5,542
2006 4,066 1,476 5,542
2007 4,066 1,476 5,542
2008 4,066 1,476 5,542
2009 4,066 1,476 5,542
- -------------------------------------------
20,330 7,380 27,710
===========================================
6. INTANGIBLE ASSET
The Company's intangible asset consists of the exclusive distribution agreements
the Company has with Asahi Medical, manufacturer of the Rheofilter and the
Plasmaflo filter, and Diamed and MeSys GmbH, the designer and manufacturer,
respectively, of the OctoNova pumps. The distribution agreements are amortized
using the straight-line method over an estimated useful life of 15 years.
Amortization expense was $106,138 for the year ended December 31, 2004 [2003 and
2002 - nil].
Estimated amortization expense for the intangible asset for each of the next
five years is as follows:
$
- -----------------
2005 1,716,667
2006 1,716,667
2007 1,716,667
2008 1,716,667
2009 1,716,667
=================
The intangible asset was valued using the cost approach methodology as part of
the Reorganization process [note 17[b]]. The cost approach is based on the
premise that a prudent investor would pay no more for an asset than its
replacement or reproduction cost. The cost to replace the asset would include
the cost of constructing a similar asset of equivalent utility at prices
applicable at the time of the appraisal. To arrive at the estimated fair value
using the cost approach, the replacement cost is determined and reduced for
amortization of the asset.
The Company determined that, as at December 31, 2004, there have been no
significant changes in the methods used to determine the fair market value of
the intangible asset using the cost approach. Therefore, no impairment charge
should be recorded during the year ended December 31, 2004.
76
7. GOODWILL
The Company follows SFAS No. 142, which requires that goodwill not be amortized
but instead be tested for impairment at least annually and more frequently if
circumstances indicate possible impairment.
The Company's goodwill amount is as follows:
$
- -----------------------------------------------
Balance, December 31, 2003 --
Acquired during the year [note 3] 213,397,444
- -----------------------------------------------
Balance, December 31, 2004 213,397,444
===============================================
The Company will perform its annual impairment test on its acquired goodwill on
October 1st of each year.
8. INVESTMENT IN LIMITED PARTNERSHIP
On July 25, 2002, the Partnership was formed by an agreement between OHI, TLC
Apheresis, L.P. ("Apheresis L.P."), a wholly-owned subsidiary of TLC Vision, and
OccuLogix Management, Inc. ("General Partner") for the purpose of pursuing
commercial applications of technologies owned or licensed by the Company
applicable to the evaluation, diagnosis, monitoring and treatment of Dry AMD.
The Company has an agreement with the Partnership appointing the Partnership as
the sole distributor of the RHEO(TM) System and its component parts in North
America, the Caribbean and Israel. Pricing is reviewed quarterly and adjusted as
required for future sales. Each of OHI and Apheresis L.P. directly or indirectly
own a 50% interest in the Partnership and the General Partner; in exchange for
the 50% interest each of the partners contributed certain assets which were
recorded at fair value which were nominal.
The Company did not consolidate the Partnership's results for the years ended
December 31, 2003 and 2002, as TLC Vision's effective interest in the
Partnership is greater than 50% due to its direct ownership and indirect
ownership through the Company. Accordingly, the Partnership was consolidated by
TLC Vision. In addition, the Partnership's management was primarily comprised of
TLC Vision's representatives and TLC Vision had disproportionately funded the
activity of the Partnership.
The amount reported represents the Company's proportionate share of the
Partnership's cumulative earnings to date on an equity basis.
The Company did not recognize in the consolidated statements of operations its
50% interest in the net loss of the Partnership for the years ended December 31,
2003 and 2002, as the net loss of the Partnership exceeded the net investment of
the Company.
On December 8, 2004, as part of the reorganization transactions [note 17[b]],
the Company purchased TLC Vision's 50% interest in the Partnership and the
results of the Partnership's operations have been included in the consolidated
financial statements since that date.
9. RENT INDUCEMENT
Deferred rent represents the benefit of operating lease inducements of $5,557,
net, which is being amortized on a straight-line basis over the related term of
the lease.
77
10. DEFERRED REVENUE
Deferred revenue includes the the sale of six pumps to RHEO Therapeutics, Inc.
for $187,200. Also included in deferred revenue is the balance of the advance
payment received from RHEO Therapeutics, Inc. for the purchase of 660 treatment
sets, of which the total amount received was $495,000. The 252 treatment sets,
at a total purchase price of $202,230 [plus applicable taxes] had been delivered
to the customer and is included in the revenue reported in the consolidated
statements of operations for the year ended December 31, 2004.
11. DUE TO STOCKHOLDERS
December 31,
------------
2004 2003
$ $
- ------------------------------------------------------------------
Due to
Asahi Medical Co., Ltd. -- 502,083
Hans K. Stock, stockholder [note 13] -- 500,000
TLC Vision Corporation [note 13] 473,929 --
Other stockholders [note 13] 42,827 41,782
- ------------------------------------------------------------------
516,756 1,043,865
==================================================================
On February 28, 2001, the Company issued a secured promissory note to Asahi
Medical in the principal amount of $1,000,000 [the "Asahi Medical Note"]. The
Asahi Medical Note had an annual interest rate of 8.5% and was originally due on
November 30, 2001. The terms of the Asahi Medical Note were amended twice in
each of the subsequent years to extend the maturity date to November 30, 2003
and 2002, respectively. On November 30, 2003, the Company and Asahi Medical
agreed to convert $500,000 of the principal of the Asahi Medical Note to 507,604
shares of common stock at a price of $0.98502 per share [note 17[c]]. All
accrued interest was paid. The remaining $500,000 matured on November 30, 2004
and had an annual interest rate of 5.0%, which was payable in arrears on
maturity. On December 22, 2004, the Company paid $523,918 to Asahi Medical as
repayment of the balance of the principal amount of the Asahi Medical Note,
together with accrued interest thereon.
On February 11, 1997, Apheresis Technologies, Inc. ["Old ATI"] entered into an
agreement with an entity controlled by a stockholder to pay that entity
$1,000,000 for the purpose of supporting the conduct of research and gathering
of clinical data in Germany by that entity. This amount has been expensed in
previous years. On May 20, 1998, the Company agreed to assume the obligation to
make this payment. Payments of $250,000 were made in each of December 1997 and
June 1999. The balance of $500,000 remained unpaid as at December 31, 2003. The
balance was unsecured, due on demand and no interest was payable on the
outstanding balance. On December 22, 2004, the Company paid the balance of
$500,000 to Hans Stock, the stockholder who controls the entity.
The balance owing to TLC Vision of $473,929 is included in general and
administrative expenses and is related to computer and administrative support
provided by TLC Vision, all of which is accrued at December 31, 2004 and which
has been expensed.
12. CONVERTIBLE DEBENTURES DUE TO STOCKHOLDERS
On June 25, 2003, the Company entered into agreements with TLC Vision and Diamed
to issue grid debentures in the maximum aggregate principal amount of
78
$12,000,000. $7,000,000 of the aggregate principal amount is convertible into
shares of common stock of the Company at a price of $0.98502 per share, and
$5,000,000 of the aggregate principal amount is non-convertible.
Advances, which were at the option of TLC Vision and Diamed, under the
convertible portion of the grid debentures were non-interest bearing and were
due six months following demand notice by the debenture holder.
Advances under the non-convertible portion of the grid debentures had an annual
interest rate of 10% per annum, with interest payments due monthly in arrears.
Advances under the non-convertible portion of the grid debentures were due at
the earlier of: [a] six months following demand notice by the debenture holder;
[b] 60 days following the date the Company has received FDA approval of the
technology described in note 1; and [c] two business days following the date of
closing of any debt financing of at least $5,000,000. No advances under the
non-convertible portion of the grid debentures were to be made until the maximum
amount of advances under the convertible portion of grid debentures had been
received.
During the years ended December 31, 2004 and 2003, the Company issued an
aggregate of $4,350,000 and $2,650,000, respectively, under the convertible
portion of the grid debentures. On December 8, 2004, as part of the
reorganization transactions [note 17[b]], the Company issued 7,106,454 shares of
common stock to TLC Vision and Diamed, upon conversion of $7,000,000 of
aggregate principal amount of convertible debentures at a conversion price of
$0.98502 per share.
13. RELATED PARTY TRANSACTIONS
The following are the Company's related party transactions in addition to those
disclosed in notes 1, 8, 11, 12 and 16:
December 31,
------------
2004 2003
$ $
- -------------------------------------------------
Due (to) from OccuLogix, L.P. -- 15,028
Diamed Medizintechnik GmbH -- 2,433
RHEO Clinic Inc. 8,226 (3,387)
- -------------------------------------------------
8,226 14,074
=================================================
The Partnership's primary customer is RHEO Clinic Inc., a subsidiary of TLC
Vision, for which the Partnership has reported revenues of $401,236, $459,730
and nil for the years ended December 31, 2004, 2003 and 2002, respectively. RHEO
Clinic Inc. uses the RHEO(TM) System to treat patients for which it charges its
customers [the patients] a per-treatment fee.
TLC Vision and Diamed
As discussed in note 12, on June 25, 2003, TLC Vision and Diamed agreed to
invest a total of $12,000,000 in the Company on an equal basis in connection
with the funding of the Company's MIRA-1 and related clinical trials.
Collectively, as at December 31 2004, the two companies control a combined 57.9%
of the equity interest in the Company on a fully diluted basis.
79
The Company is economically dependent on Diamed to control the supply of the
OctoNova pumps used in the RHEO(TM) System. The Company believes that the
OctoNova pumps are a critical component in the RHEO(TM) System.
As discussed in note 11, on February 11, 1997, Old ATI entered into an agreement
with the Stock Foundation ("the Foundation") to pay $1,000,000 for the purpose
of supporting the Foundation's conduct of research and gathering of clinical
data in Germany. On May 20, 1998, the Company agreed to assume the obligation to
make this payment. Payments of $250,000 were made in each of December 1997 and
June 1999. The balance of $500,000 remained unpaid as at December 31, 2003. The
balance was unsecured, due on demand and no interest was payable on the
outstanding balance. On December 22, 2004, the Company paid the balance of
$500,000 to Hans Stock, the stockholder who controls the Foundation.
The balance owing to TLC Vision of $473,929 is included in general and
administrative expenses and is related to computer and administrative support
provided by TLC Vision, all of which is accrued at December 31, 2004 and which
has been expensed.
Asahi Medical Co., Ltd. [note 11]
The Company is party to a distributorship agreement with Asahi Medical pursuant
to which Asahi Medical supplies the filter products used in the RHEO(TM) System.
The Company is economically dependent on Asahi Medical to continuously provide
filters and believes that the filter products provided by Asahi Medical are a
critical component in the RHEO(TM) System. In the event the Company is not able
to obtain regulatory approval for the RHEO(TM) System from the FDA and other
necessary approvals in the territories for which the Company has distribution
rights by the end of December 2006, Asahi Medical can terminate the
distributorship agreement.
On February 28, 2001, the Company issued the Asahi Medical Note to Asahi Medical
in the amount of $1,000,000 [note 11], of which $500,000 was repaid in cash and
$500,000 converted into common stock of the Company.
The Company receives free inventory from Asahi Medical for the purpose of the
MIRA-1 and related clinical studies. The Company has accounted for this
inventory at a value equivalent to the cost the Company pays for the same
filters for commercial sales to the Partnership. The value of the free inventory
received was $146,905 and $66,300 for the years ended December 31, 2004 and
2003, respectively.
Apheresis Technologies, Inc. and other related party acquisitions
On September 13, 2000, the Company acquired 100% of the issued and outstanding
shares of Old ATI for consideration of $100 cash. Old ATI was a distributor of
Plasmaflo filters and related products in North America. Prior to and at the
time of the acquisition, the Company and Old ATI were related parties as a
result of the significant influence exercisable by officers and directors common
to both companies. Accordingly, the acquisition has been recorded at the
historical cost of Old ATI, under the continuity of interest basis of
accounting. Subsequent to the acquisition, the Company and Old ATI merged. In
2002, the Company reorganized its assets, such that the net assets of Old ATI
were spun-out into a new separate corporation, Apheresis Technologies, Inc.
["New ATI"].
Mr. Hans Stock [see note 11]
On February 21, 2002, the Company entered into an agreement with Mr. Stock as a
result of his assistance in procuring a distributor agreement for the filter
products used in the RHEO(TM) System from Asahi Medical. Mr. Stock agreed to
further assist the Company in procuring new product lines from Asahi Medical for
marketing and distribution by the Company. The agreement will remain effective
for a term consistent with the term of the distributorship agreement with Asahi
Medical and Mr. Stock will receive a 5% royalty payment on the purchase of the
filters from Asahi Medical.
80
On June 25, 2002, the Company entered into a consulting agreement with Mr. Stock
for the purpose of procuring a patent license for the extracorporeal
applications in ophthalmic diseases for that period of time in which the patent
was effective. Mr. Stock was entitled to 1.0% of total net revenue from the
Company's commercial sales of products sold in reliance and dependence upon the
validity of the patent's claims and rights in the United States. The Company
agreed to make advance consulting payments to Mr. Stock of $50,000 annually,
payable on a quarterly basis, to be credited against any and all future
consulting payments payable in accordance with this agreement. Due to the
uncertainty of future royalty payment requirements, all required payments to
date have been expensed.
On August 6, 2004, the Company entered into a patent license and royalty
agreement with Mr. Stock to obtain an exclusive license to U.S. Patent No.
6,245,038. The Company is required to make royalty payments totalling 1.5% of
product sales to Mr. Stock, subject to minimum advance royalty payments of
$12,500 per quarter. The advance payments are credited against future royalty
payments to be made in accordance with the agreement. This agreement replaces
the June 25, 2002 consulting agreement with Mr. Stock which provided for a
royalty payment of 1% of product sales [note 11].
New Apheresis Technologies, Inc.
On May 1, 2002, the Company entered into an exclusive distribution services
agreement with New ATI, a company controlled by certain stockholders of the
Company pursuant to which the Company pays New ATI 5% of the Company's cost of
components of the RHEO System. Under this agreement, New ATI is the exclusive
provider of warehousing, order fulfillment, shipping, billing services and
customer service related to shipping and billing to the Company.
On July 30, 2004, the Company amended its distribution services agreement with
New ATI such that the Company would have the sole discretion as to when the
agreement would terminate. In consideration of this amendment, the Company
agreed to pay New ATI $100,000 on the successful completion of the initial
public offering. Included in accrued liabilities as at December 31, 2004 is
$100,000 due to New ATI. [note 22]
Other
On June 25, 2003, the Company entered into a reimbursement agreement with New
ATI, pursuant to which employees of New ATI provide services to the Company and
New ATI is reimbursed for the applicable percentage of time the employees spend
working for the Company. These employees of New ATI participate in the Company's
bonus plan. During the year ended December 31, 2004 and during the period
between June 25, 2003 and December 31, 2003, the Company paid New ATI $188,262
and $78,695, respectively. Included in accounts payable as at December 31, 2004
and 2003 are $28,721 and $3,961, respectively, due to New ATI.
During the period between January 1, 2004 and November 30, 2004 and the period
between November 1, 2003 and December 31, 2003, the Company paid $4,515 and
$826, respectively, to a subsidiary of TLC Vision for office space. These
amounts are expensed in the period incurred and paid monthly.
Effective January 1, 2004, the Company entered into a rental agreement with a
related party whereby the Company will lease space from New ATI at $2,745 per
month. The term of the lease extends to December 31, 2005 [note 11]. For the
year ended December 31, 2004 and the four months ended December 31, 2003, the
Company paid the related party $32,940 and $5,580, respectively. Amounts are
paid monthly.
Effective June 25, 2003, Elias Vamvakas, the Chairman of TLC Vision, became the
Chairman and Secretary of both the Company and the General Partner of the
Partnership. 500,000 options issued to Mr. Vamvakas in December 2003 were
accounted for in accordance with APB 25. The Company estimated the intrinsic
value of these options granted to Mr. Vamvakas to be approximately $5,880,000.
Management estimated the fair value of the underlying common stock based on
management's estimate of the Company's value. The intrinsic value of the options
is being amortized over the vesting period. However, upon the successful
completion of the Company's initial public offering, the options vested
immediately, therefore any unvested compensation expense was expensed
immediately. The impact of this stock compensation expense for the years ended
December 31, 2004 and 2003 was $5,690,323 and $189,677, respectively.
81
During the period from August 1, 2003 to December 31, 2003, the Company charged
$9,897 to the Partnership for clinical and management services. Included in due
from related parties as at December 31, 2003 is $9,897 due from the Partnership.
In addition, the Company entered into a consultancy and non-competition
agreement on July 1, 2003 with a related party, which requires the Company to
pay a fee of $5,000 per month. This resulted in a consulting expense for the
years ended December 31, 2004 and 2003 of $60,000 and $30,000, respectively. For
the year ended December 31, 2003, the related party agreed to forego the payment
of $75,250 due to him in exchange for options to purchase 20,926 shares of
common stock of the Company at an exercise price of $0.13. The related party
also agreed to the repayment of $150,500 due to him at $7,500 per month.
Included in accounts payable as at December 31, 2004 and December 31, 2003 are
$15,500 and $105,500, respectively, due to the related party.
On September 29, 2004, the Partnership, the Company's wholly-owned subsidiary,
signed a product purchase agreement with Rheo Therapeutics Inc. for the purchase
of 8,004 treatment sets from the Partnership over the period from October 2004
to December 2005, a transaction valued at $6,003,000, after introductory
rebates. Subject to availability, the purchaser may order up to an additional
2,000 treatment sets. Dr. Machat, who is an investor in and one of the directors
of Rheo Therapeutics Inc., was a co-founder and former director of TLC Vision.
As at December 31, 2004, the Partnership had received a total of $557,400 from
Rheo Therapeutics Inc. for the purchase of 660 treatment sets and 2 pumps.
Included in amounts receivable as at December 31, 2004 is $322,920 due from Rheo
Therapeutics Inc. for the purchase of 9 additional pumps on which Rheo
Therapeutics Inc. has negotiated payment terms extending the payment period to
June 2005.
14. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
------------
2004 2003
$ $
- ---------------------------------------------------------------
Deferred tax assets
Intangibles -- --
Fixed assets 3,754 --
Stock options 5,565,688 182,820
Accruals and other 60,914 6,592
Foreign tax credit 15,500 --
Net operating loss carryforwards 10,448,101 8,177,058
- ---------------------------------------------------------------
16,093,957 8,366,470
Valuation allowance (16,093,957) (8,366,470)
- ---------------------------------------------------------------
Deferred tax asset -- --
===============================================================
82
December 31,
------------
2004 2003
$ $
- ----------------------------------------------------------------
Deferred tax liabilities
Intangibles (other than goodwill) (9,488,229) --
- ----------------------------------------------------------------
Deferred tax liability (9,488,229) --
================================================================
The following is a reconciliation of the recovery of income taxes between those
that are expected, based on substantively enacted tax rates and laws, to those
currently reported:
Years ended December 31,
------------------------
2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------------------------
Net loss for the year before income taxes (21,803,373) (2,469,888) (2,881,597)
====================================================================================================
Expected recovery of income taxes [tax rate of 37%] (8,067,250) (913,859) (1,066,191)
Stock-based compensation 312,292 7,018 --
Non-deductible interest expense relating
to warrants -- -- 166,877
Return to provision -- 8,957 --
Non-deductible expenses 3,700 2,442 1,984
Change in valuation allowance 7,727,487 895,442 897,330
- ----------------------------------------------------------------------------------------------------
Recovery of income taxes (23,771) -- --
====================================================================================================
The Company and its subsidiaries have current and prior year losses available to
reduce taxable income and taxes payable in future years and, if not utilized,
will expire as follows:
$
- -------------------------------------------
2017 3,466,935
2018 4,500,400
2019 1,893,700
2020 4,488,361
2021 3,356,992
2022 2,497,602
2023 1,896,167
2024 6,137,952
===========================================
83
15. ACCRUED LIABILITIES
December 31,
------------
2004 2003
$ $
- -----------------------------------------------------------------------------------
Due to professionals 190,762 120,000
Due to MIRA-1 clinical trial sites 571,078 47,172
Due to MIRA-1 clinical trial specialists 526,848 --
Due to ATI [notes 13 and 22] 100,000 --
Due to employees and directors 79,329 --
Sales tax and capital tax payable 85,472 --
Legal and professional fees assoicated with
initial public offering and related reorganization 1,041,151 --
Miscellaneous 196,651 78,409
- -----------------------------------------------------------------------------------
2,791,291 245,581
===================================================================================
16. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases office space from a related party [note 13] under a lease
agreement expiring December 31, 2005. The Company may terminate the lease with
three months' notice and may also renew the lease for one additional year. The
future minimum obligation under the lease is $32,940 for 2005.
Rent paid amounted to $32,940, $5,580 and nil for the years ended December 31,
2004, 2003 and 2002, respectively.
The Company also leases office space from an unrelated party under a lease
agreement expiring January 29, 2006. The future minimum obligation under the
lease is Cdn $79,131 for 2005. Rent paid was Cdn $13,189, nil and nil for the
years ended December 31, 2004, 2003 and 2002, respectively.
In May and June 2002, the Company entered into two separate agreements with Dr.
Richard Brunner and Mr. Stock, respectively, to obtain the exclusive license to
U.S. Patent No. 6,245,038. The Company is required to make royalty payments
totalling 1.5% of product sales. The Company is required to make minimum advance
quarterly royalty payments of $25,000 and amounts credited against future
royalty payments to be made in accordance with the agreements. These agreements
may be terminated by the Company upon the first of:
[a] all patents of the patent rights expire, which is June 2017;
[b] all patent claims of the patent rights are invalidated; or
84
[c] the introduction of a similar competing technology deployed in the United
States which could not be deterred by enforcement of the patent.
On August 6, 2004, the Company entered into a patent license and royalty
agreement with Mr. Stock to obtain an exclusive license to U.S. Patent No.
6,245,038. The Company is required to make royalty payments totalling 1.5% of
product sales to Mr. Stock, subject to minimum advance royalty payments of
$12,500 per quarter. The advance payments are credited against future royalty
payments to be made in accordance with the agreement. This agreement replaces
the June 25, 2002 consulting agreement with Mr. Stock, which provided for a
royalty payment of 1% of product sales. This agreement effectively increases the
total royalty payments required to be made in respect of U.S. Patent No.
6,245,038 to 2% of product sales [note 13].
Future minimum royalty payments under the agreements as at December 31, 2004 are
approximately as follows:
$
- --------------------------------------------------------------------------
2005 100,000
2006 100,000
2007 100,000
2008 100,000
2009 and thereafter 850,000
- --------------------------------------------------------------------------
1,250,000
==========================================================================
In addition, the Company entered into a consultancy and non-competition
agreement on July 1, 2003 with a related party [note 13], which requires the
Company to pay a fee of $5,000 per month. The agreement expires on December 31,
2005. The monthly fee is fixed regardless of actual time incurred by the
consultant in performance of the services rendered to the Company. The agreement
allows either party to convert the payment arrangement to a fee of $2,500 daily.
In the event of such conversion, the consultant shall provide services on a
daily basis as required by the Company, and will invoice the Company for the
total number of days services were provided in that month.
The future minimum obligation under the consultancy and non-competition
agreement for 2005 is $60,000.
On July 22, 2004, the Company placed a purchase order with Asahi Medical for
9,600 filter sets [each filter set consists of one Plasmaflo filter and one
Rheofilter] representing a total commitment of $2,736,000. As at December 31
2004, a total payment of $410,400 has been made to Asahi Medical on the above
purchase order for 1,440 filter sets, all of which have been received as at
December 31, 2004.
Contingencies
During the ordinary course of business activities, the Company may be
contingently liable for litigation and a party to claims. Management believes
that adequate provisions have been made in the accounts where required. Although
it is not possible to estimate the extent of potential costs and losses, if any,
management believes that the ultimate resolution of any such contingencies will
not have a material adverse effect on the financial position and results of
operations of the Company.
Pursuant to the terms of the distribution agreement with MeSys GmbH, dated
January 1, 2002, the Company undertook a commitment to purchase a minimum of
twenty-five OctoNova pumps yearly beginning after FDA approval of the RHEO(TM)
System, representing an annual commitment of $538,000.
In July 2004, the Company placed a purchase order with Asahi Medical for 9,600
filter sets [each filter set consists of one Plasmaflo filter and one
85
Rheofilter], representing a total commitment of $2,736,000. As at December 31
2004, a total payment of $410,400 has been made to Asahi Medical on the above
purchase order for 1,440 filter sets, all of which have been received as at
December 31, 2004.
Pursuant to the terms of the distribution agreement with Asahi Medical, dated
January 1, 2002, the Company undertook a commitment to purchase a minimum of
9,000, 15,000, and 22,500 each of Plasmaflo filters and Rheofilters in years 1,
2 and 3, respectively, beginning six months after FDA approval of the RHEO(TM)
System. Minimum purchase orders for the fourth year shall be determined
immediately after the term of the first year by mutual consent but shall not be
less than that of the previous year. This same method shall be used in
subsequent years to determine future minimum purchase quantities such that
minimum purchase quantities are always fixed for three years. Future minimum
annual commitments after FDA approval are approximately as follows:
$
- --------------------------------------------------------------------
Year 1 2,565,000
Year 2 4,275,000
Year 3 6,412,500
====================================================================
17. CAPITAL STOCK
[a] Authorized share capital
The total number of authorized shares of common stock is 75,000,000. Each
share of common stock has a par value of $0.001 per share. The total
number of authorized shares of preferred stock is 10,000,000. Each share
of preferred stock has a par value of $0.001 per share.
[b] Reorganization
[i] On July 18, 2002, Old OccuLogix merged with the Company, which
was then a wholly-owned subsidiary of Old OccuLogix. Pursuant
to the merger, the Company effected a one for four stock split
of its common and convertible preferred stock pursuant to
which each share of Old OccuLogix common stock outstanding
immediately prior to the merger was converted into one-fourth
of one fully paid and non-assessable share of the Company's
common stock. Each outstanding share of Old OccuLogix Series A
preferred stock was converted into one-fourth of one fully
paid and non-assessable share of the Company's Series A
convertible preferred stock.
At the effective time of the merger, each outstanding warrant
and option to purchase common stock of Old OccuLogix was
assumed by the Company and converted into a warrant or option
to purchase common stock of the Company, with appropriate
adjustments to the exercise price and number of shares for
which such warrants or options were exercisable.
[ii] On December 8, 2004, the Company consummated certain
reorganization transactions, which is collectively referred to
as the "Reorganization" which consisted of the following:
o 4,622,605 shares of common stock issued upon the
automatic conversion of all outstanding shares of Series
A and Series B convertible preferred stock;
o 7,106,454 shares of common stock issued to TLC Vision
and Diamed upon conversion of $7,000,000 aggregate
principal amount of convertible debentures held by them.
The conversion price was $0.98502 per share; and
o 19,070,234 shares of common stock issued to TLC Vision
in connection with the purchase by the Company of TLC
86
Vision's 50% interest in the Partnership. This amount
includes 1,281,858 shares of common stock which was
issued upon the exchange of shares of OccuLogix
ExchangeCo ULC, one of the Company's Canadian
subsidiaries, issued for tax purposes to TLC Vision in
connection with the purchase of the Partnership.
Following the reorganization, the Partnership's U.S.
business will be carried on by OccuLogix LLC, a Delaware
limited liability company that is the Company's
wholly-owned, indirect subsidiary. The Partnership's
will continue to carry on the Canadian business.
The Company believes that its value resides solely in
the Partnership, to which it licensed all of the
distribution and marketing rights for the RHEO(TM)
System for ophthalmic indications to which it is
entitled. Prior to the reorganization the Company's only
profit stream came from its share of the Partnership's
earnings. The Company's acquisition of TLC Vision's 50%
ownership interest in OccuLogix, L.P. achieved through
the Reorganization will move the earnings potential for
sales of the RHEO(TM) System to the Company.
[c] Share conversion
On November 30, 2003, $500,000 of principal amount of the Asahi Medical
Note [less issuance costs of $18,985] was converted into 507,604 shares of
common stock at a conversion price of $0.98502 per share [note 11].
[d] Convertible preferred stock
Convertible preferred stockholders were entitled to one vote per share, on
an "as-converted to common stock" basis. Each share of Series A and Series
B Convertible Preferred Stock was entitled to receive a non-cumulative
dividend of $0.411216 and $0.34698, respectively, prior to the payment of
any dividend on common stock. Each share of Series A and Series B
Convertible Preferred Stock was entitled to a liquidation preference of
$4.836 and $3.5183, respectively, plus any declared but unpaid dividend
before any payment could be made to holders of common stock.
After giving effect to the anti-dilution adjustment resulting from the
issuance of the June 25, 2003 related party secured grid debenture [notes
2 and 12], each share of Series A and Series B Convertible Preferred Stock
was convertible into 1.678323 and 1.643683 shares of common stock,
respectively, at the option of the holder. Each share of Series A and B
Convertible Preferred Stock would automatically convert into shares of
common stock at the conversion rate previously described if the Company
obtained a firm underwriting commitment for an initial public offering.
The conversion rate would be adjusted for stock dividends, stock splits
and other dilutive events. Shares of Series A and B Convertible Preferred
Stock would automatically convert in the event of sale of all or
substantially all of the assets or capital stock of the Company.
[i] Series A Convertible Preferred Stock
On July 19, 2002, the Company and the holders of its Series B convertible
debentures, with a carrying value of $7,119,111 [note 12], agreed to
convert such Series B convertible debentures into 1,089,172 shares of
Series A convertible preferred stock immediately following the
consummation of the merger as described in notes 13 and 17[b][i]. As a
result of this conversion, an additional 97,243 shares of Series A
Convertible Preferred Stock were issued to the holders of the Series A
Convertible Preferred Stock in conjunction with anti-dilution provisions
included in the terms of the respective debentures.
[ii] Series B convertible preferred stock
On July 25, 2002, the Company issued 345,843 shares of Series B
Convertible Preferred Stock for gross cash proceeds of $2,000,000 [less
issuance costs of $725,941].
Simultaneously, Series B convertible debentures and accrued interest with
a carrying value of $1,030,684 were converted into 178,227 shares of
87
Series B Convertible Preferred Stock.
In addition, a previously issued subordinated convertible promissory note
and accrued interest with a carrying value of $499,921 was converted into
96,042 shares of Series B Convertible Preferred Stock.
[e] Common stock
On April 17, 2003, the Company issued 17,375 shares of common stock to two
consultants in exchange for services valued at $22,588. The common stock
was issued at what management believed to be the fair value of the
services received.
In connection with the conversion of a portion of the Asahi Medical Note
described in note 11 and pursuant to the June 25, 2003 Amended and
Restated Investors' Rights Agreement, the existing common stockholders
were allowed to exercise pre-emptive rights to purchase additional common
stock. In connection therewith, on December 31, 2003, the Company issued
613,292 shares of common stock at $0.98502 per share for gross cash
proceeds of $604,092.
In December 2004, 5,600,000 shares of common stock of the Company at
$12.00 per share were issued in connection with the initial public
offering for gross cash proceeds of $67,200,000 [less issuance costs of
$7,770,075].
As at December 31, 2004, the number of shares of common stock of the
Company reserved for issuance is as follows:
Range of exercise prices Expiry date
$ #
- -------------------------------------------------------------------------------
0.04 - 4.00 January - December 2008 75,000
2.00 - 4.00 January - December 2009 217,625
2.00 - 4.00 January - December 2010 119,375
0.80 - 2.00 January - December 2012 147,973
0.13 - 1.30 January - December 2013 1,361,226
12.00 January - December 2014 828,000
- -------------------------------------------------------------------------------
2,749,199
===============================================================================
[f] Stock option plan
Under the 2002 Stock Option Plan [the "Stock Option Plan"] up to 4,456,000
options are available for grant to employees, directors and consultants.
Options granted under the Stock Option Plan may be either incentive stock
options or non-statutory stock options. Under the terms of the Stock
Option Plan, the exercise price per share for an incentive stock option
shall not be less than the fair market value of a share of stock on the
effective date of grant and the exercise price per share for non-statutory
stock options shall not be less than 85% of the fair market value of a
share of stock on the date of grant. No option granted to a holder of more
than 10% of the Company's common stock shall have an exercise price per
share less than 110% of the fair market value of a share of stock on the
effective date of grant.
Generally, options expire 10 years after the grant. No incentive stock
options granted to a 10% owner optionee shall be exercisable after the
88
expiration of five years after the effective date of grant of such option,
no option granted to a prospective employee, prospective consultant or
prospective director may become exercisable prior to the date on which
such person commences service, and with the exception of an option granted
to an officer, director or a consultant, no option shall become
exercisable at a rate less than 20% per annum over a period of five years
from the effective date of grant of such option unless otherwise approved
by the Board of Directors.
The Company has also issued options outside of the Stock Option Plan.
These options were issued before the establishment of the Stock Option
Plan or when the authorized limit of the Stock Option Plan was exceeded.
In addition, options issued to companies for the purpose of settling
amounts owing were issued outside of the Stock Option Plan, as the Stock
Option Plan prohibited the granting of options to companies. The issuance
of such options were approved by the Board of Directors and were granted
on terms and conditions similar to those options issued under the Stock
Option Plan.
A summary of the options issued under the Stock Option Plan and outside of
the Stock Option Plan outstanding at December 31, 2004 and the changes
since December 31, 2001 is as follows:
Weighted
average
exercise price
# $
- ----------------------------------------------------------------------------------------
Outstanding, December 31, 2001 449,500 3.04
Granted 204,224 1.13
Conversion of non-voting common stock options
to voting common stock options [i] 476,729 1.24
- ----------------------------------------------------------------------------------------
Outstanding, December 31, 2002 1,130,453 1.95
Granted 1,420,676 0.96
Forfeited (161,168) 0.82
- ----------------------------------------------------------------------------------------
Outstanding, December 31, 2003 2,389,961 1.45
Granted 828,000 12.00
Exercised (272,200) 0.48
Forfeited (196,562) 2.48
- ----------------------------------------------------------------------------------------
Outstanding, December 31, 2004 2,749,199 4.64
========================================================================================
[i] During the year ended December 31, 2002, the Company converted 476,729
non-voting common stock options into voting common stock options.
Included in the total options outstanding as at December 31, 2004 are 344,083
options issued outside of the Stock Option Plan.
89
Included in the total options outstanding as at December 31, 2004 of 2,749,199
are 1,330,300 options issued to employees, directors and certain executives in
December 2003 which were issued into a voting trust. Upon the exercise of these
options, the Board of Directors controls the voting privileges associated with
the common stock underlying these options. Upon the completion of the Company's
initial public offering, the voting trust was dissolved with all options
returning to each respective individual.
The Company estimated the intrinsic value of 1,352,500 stock options granted in
December 2003 to be $15,905,400 of which $15,392,323 and $513,077 has been
expensed for the years ended December 31, 2004 and 2003, respectively. All of
these options became fully vested upon the Company's initial public offering and
therefore the remaining $15,392,323 of stock-based compensation charges as at
December 31, 2003 was expensed during the year ended December 31, 2004.
Management estimated the fair value of these options retrospectively based on a
range of then expected offering prices of the Company's initial public offering.
Compensation expense associated with non-employee stock options was $47,637,
$196,685 and $134,948 for the years ended December 31, 2004, 2003 and 2002,
respectively. The fair value of these options was determined using the
Black-Scholes option pricing model using the same assumptions described above
and is included in general and administrative expenses within the consolidated
statements of operations.
The following table summarizes information relating to stock options outstanding
at December 31, 2004:
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual exercise exercise
prices Outstanding life price Exercisable price
$ # [years] $ # $
- --------------------------------------------------------------------------------------------------
0.04 50,000 3.00 0.04 50,000 0.04
0.13 20,926 8.25 0.13 20,926 0.13
0.80 - 0.99 1,364,883 8.49 0.99 1,339,571 0.98
1.30 110,890 7.70 1.30 78,158 1.30
2.00 87,500 4.82 2.00 87,500 2.00
4.00 287,000 4.92 4.00 274,500 4.00
12.00 828,000 9.96 12.00 -- --
- --------------------------------------------------------------------------------------------------
2,749,199 8.31 4.64 1,850,655 1.46
==================================================================================================
90
The following table summarizes information relating to stock options outstanding
at December 31, 2003:
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
remaining average average
Range of exercise contractual exercise exercise
prices Outstanding life price Exercisable price
$ # [years] $ # $
- --------------------------------------------------------------------------------------------------
0.04 204,125 4.15 0.04 204,125 0.04
0.13 58,176 9.27 0.13 58,176 0.13
0.80 - 0.99 1,438,833 9.15 0.99 281,715 0.99
1.30 110,890 8.70 1.30 63,622 1.30
2.00 222,937 5.49 2.00 222,937 2.00
4.00 355,000 6.03 4.00 331,943 4.00
- --------------------------------------------------------------------------------------------------
2,389,961 8.07 1.45 1,162,518 1.88
==================================================================================================
[g] Warrants
Purchasers of Series A convertible preferred stock received warrants to purchase
shares of common stock at an exercise price of $1.00 per share. The warrants
were exercisable for the purchase of one share of common stock for each share of
Series A convertible preferred stock owned. In February 1998, an additional
voluntary warrant was granted to each Series A convertible preferred stockholder
to purchase an equal number of voting common stock at an exercise price of $2.00
per share. Additionally, warrants to purchase 50,000 shares of voting common
stock at an exercise price of $1.00 per share were granted to an officer and
certain directors and stockholders of the Company in exchange for providing
certain private credit guarantees.
91
Weighted
average
exercise price
Common stock warrants # $
- --------------------------------------------------------------------------
Outstanding, December 31, 2000 and 2001 87,500 4.00
Granted 62,500 1.20
- --------------------------------------------------------------------------
Outstanding, December 31, 2002 and 2003 [i] 150,000 2.83
Exercised [ii] (102,369) 2.29
Expired (47,631) 4.00
- --------------------------------------------------------------------------
Outstanding, December 31, 2004 -- --
==========================================================================
Weighted
average
exercise price
Series A convertible preferred stock warrants # $
- ---------------------------------------------------------------------------------------------
Outstanding, December 31, 2001 90,780 5.55
Granted on adjustment for anti-dilution provision 40,026 --
Converted from Series B convertible preferred stock warrants 157,631 7.83
- ---------------------------------------------------------------------------------------------
Outstanding, December 31, 2002 288,437 6.80
Granted on adjustment for anti-dilution provision 195,097 --
Cancelled (824) 7.83
- ---------------------------------------------------------------------------------------------
Outstanding, December 31, 2003 [i] 482,710 6.80
Exercised [ii] (379,284) 6.73
Expired (103,426) 7.04
- ---------------------------------------------------------------------------------------------
Outstanding, December 31, 2004 -- --
=============================================================================================
[i] As a result of the issuance of Series B convertible preferred stock on
July 25, 2002 at a price lower than the exercise price of the Series A
convertible preferred stock warrants, anti-dilution adjustments were
applied to reduce the exercise price of the Series A convertible preferred
stock warrants and to increase the number of shares issuable upon the
exercise of the Series A convertible preferred stock warrants.
As a result of the TLC Vision and Diamed convertible grid note debenture
agreements entered into on June 25, 2003 at a conversion price lower than
92
the exercise price of the Series A convertible preferred stock warrants,
further anti-dilution adjustments were applied to reduce the exercise
price of the Series A convertible preferred stock warrants and to increase
the number of shares issuable upon the exercise of the Series A
convertible preferred stock warrants.
[ii] Of the 102,369 warrants exercised to purchase shares of common stock,
24,999 shares of common stock were issued on a cashless basis [note 18].
The remaining 77,370 shares of common stock were issued for total cash
proceeds of $134,480.
Of the 379,284 warrants exercised to purchase shares of Series A
convertible preferred stock, 165,189 shares of Series A convertible
preferred stock were issued on a cashless basis
[note 18]. The remaining 214,095 shares of Series A convertible preferred
stock were issued for total cash proceeds of $1,281,841 of which $221,661
has yet to be received as at December 31, 2004.
Weighted
average
exercise price
Series B convertible preferred stock warrants # $
- -----------------------------------------------------------------------------------------
Outstanding, December 31, 2000 and 2001 479,000 8.00
Granted on adjustment for anti-dilution provision 5,556 7.83
Converted fiom Series A convertible preferred stock warrants (264,556) 8.00
Expired (220,000) 8.00
- -----------------------------------------------------------------------------------------
Outstanding, December 31, 2002, 2003 and 2004 -- --
=========================================================================================
All warrants to purchase shares of common stock and Series A convertible
preferred stock at exercise prices between $1.20 per share and $7.83 per share
expired on July 17, 2004, other than 379,284 warrants to purchase shares of
Series A convertible preferred stock and 102,369 warrants to purchase shares of
common stock which were exercised prior to expiration of the warrants.
18. CONSOLIDATED STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances related to operations
consists of the following:
Years ended
December 31,
------------
2004 2003 2002
$ $ $
- ----------------------------------------------------------------------------------
Due from related parties 110,749 52,034 (52,142)
Amounts receivable (222,218) 39,746 12,254
Inventory (136,527) 24,399 8,971
Prepaid expenses (324,353) (134,844) (21,616)
Deposit (8,996) 4,326 (4,326)
Accounts payable and accrued liabilities 2,538,445 (681,181) (548,638)
Deferred revenue and rent inducements (152,153) -- --
Due to stockholders (931,652) 4,418 2,392
- ----------------------------------------------------------------------------------
873,295 (691,102) (603,105)
==================================================================================
93
The following table lists those items that have been excluded from the
consolidated statements of cash flows as they relate to non-cash transactions
and additional cash flow information:
Years ended
December 31,
-----------------------------------
2004 2003 2002
$ $ $
- -------------------------------------------------------------------------------------------------
Non-cash investing and financing activities
Convertible preferred stock issued
to reduce borrowings from stockholder -- 500,000 --
Common stock issued to pay consulting fees -- 22,588 2,800
Bridge notes issued for services -- -- 22,500
Conversion of debentures 7,000,000 -- 8,649,716
Conversion of debt -- 481,015 --
Cashless exercise of warrants to purchase
shares of Series A convertible
preferred stock 1,269,845 -- --
Cashless exercise of warrants to purchase
shares of common stock 99,996 -- --
Free inventory 146,905 66,300 155,141
Common stock issued on acquisition 228,842,808 -- --
Additional cash flow information
Interest paid (26,575) (85,000) (152,375)
===================================================================================================
94
19. FINANCIAL INSTRUMENTS
Currency risk
The Company's activities which result in exposure to fluctuations in foreign
currency exchange rates consist of the purchase of equipment from suppliers
billing in foreign currencies. The Company does not use derivative financial
instruments to reduce its currency risk.
Credit risk
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash and cash equivalents and amount receivable. The
Company maintains its accounts for cash with large low credit risk financial
institutions in United States and Canada in order to reduce its exposure.
The Company derives all of its revenue from three customers, the RHEO Clinic
Inc., which is a subsidiary of TLC Vision, RHEO Therapeutics, Inc. and Canadian
Retinal Institute.
20. SEGMENT INFORMATION
The Company operates in a single reportable segment, the ophthalmic therapeutic
industry, focused on the treatment of eye diseases, including Dry AMD.
For all years presented, the Company's revenue was earned in Canada.
Although the Company has generated all of its revenue in Canada, the Company's
fixed assets and patents and trademarks are primarily located in the United
States.
21. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the current
year's presentation.
22. SUBSEQUENT EVENTS
[a] On January 11, 2005, the Company entered into a medical director agreement
with David Wong, M.D. FRCS for the provision of consulting services. The
term of the agreement is for one year from August 1, 2004. The Company is
required to pay consulting fees of Cdn $50,000 annually, payable monthly
on the last day of each month throughout the term of the agreement and a
one time bonus of Cdn $50,000 upon receipt of a fully executed agreement.
In addition, David Wong will receive 25,000 options with an exercise price
equal to the price of the shares issued in the initial public offering.
[b] On January 13, 2005, the Company paid Asahi Medical $713,070 for the
purchase of 2,502 filter sets [each filter set consists of one Rheofilter
and one Plasmaflo filter]. This order is part of the purchase order signed
with Asahi Medical in July 2004 for 9,600 filter sets.
[c] On January 18, 2005, the Company paid New ATI $100,000 as provided for in
the amendment to the distribution services agreement dated July 30, 2004
[note 13].
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
95
ITEM 9A. CONTROLS AND PROCEDURES
(a) Management's Report on Internal Control Over Financial Reporting
and Evaluation of Disclosure Controls and Procedures. As of the end of our
fiscal year ended December 31, 2004, an evaluation of the effectiveness of our
"disclosure controls and procedures" (as such term is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) was carried out by our principal executive officer and principal
financial officer. Based upon that evaluation, our principal executive officer
and principal financial officer have concluded that as of the end of that fiscal
year, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
It should be noted that while our management believes that our
disclosure controls and procedures provide a reasonable level of assurance, they
do not expect that our disclosure controls and procedures or internal financial
controls will prevent all errors and fraud. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
(b) Changes in Internal Control Over Financial Reporting. During the
last quarter of the fiscal year ended December 31, 2004, there were no changes
in our internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
96
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required with respect to directors is incorporated herein
by reference to the information contained in the General Proxy Information for
our 2005 Annual Meeting of Stockholders (the "Proxy Statement"). The information
with respect to our audit committee financial expert is incorporated herein by
reference to the information contained in the sections captioned "Appointment of
Auditors" and "Audit Committee Report" of the Proxy Statement.
Information about our Code of Ethics appears under the heading "Code of
Business Conduct and Ethics" in the Proxy Statement. That portion of the Proxy
Statement is incorporated by reference into this report.
Information about compliance with Section 16(a) of the Exchange Act
appears is under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement. That portion of the Proxy Statement is
incorporated by reference into this report.
In addition, to our knowledge, based solely on a review of the copies of
such reports furnished to us, the Form 4 filings for Thomas P. Reeves, Stephen
J. Kilmer, Julie A. Fotheringham, Richard L. Lindstrom, Jay T. Holmes and Thomas
N. Davidson, disclosing the options granted to them by us upon the closing of
the initial public offering, were not filed on a timely basis. In addition, the
Form 4 filing for Joseph Zawaideh, disclosing options granted to him upon the
closing of the initial public offering and his acquisition and disposition of
our Common Stock was not filed on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
Information about compensation of our named executive officers appears
under the headings "Executive Officers" and "Information on Executive
Compensation" in the Proxy Statement. Information about compensation of our
directors appears under the heading "Compensation of Directors" in the Proxy
Statement. These portions of the Proxy Statement are incorporated by reference
into this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information about security ownership of certain beneficial owners and
management and information regarding securities authorized for issuance under
equity compensation plans appears under the headings "Information on Executive
Compensation", "Employee Benefit Plans" and "Principal Stockholders" in the
Proxy Statement. These portions of the Proxy Statement are incorporated by
reference to this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information about certain relationships and related transactions appears
under the heading "Certain Relationships and Related Party Transactions" in the
Proxy Statement. That portion of the Proxy Statement is incorporated by
reference into this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information about the principal accountant fees and services as well as
related pre-approval policies and procedures appears under the headings
"Appointment of Auditors" and "Audit Committee Report" in the Proxy Statement.
These portions of the Proxy Statement are incorporated by reference into this
report.
97
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
Included in PART II of this report: Page
----
Reports of Independent Auditors......................... 64
Consolidated Balance Sheets at December 31, 2004 and
December 31, 2003....................................... 65
Consolidated Statements of Operations for the three years
in the period ended December 31, 2004................... 67
Consolidated Statements of Changes in Stockholders'
Deficiency for the three years in the period ended
December 31, 2004 ...................................... 68
Consolidated Statements of Cash Flows for the three years
in the period ended December 31, 2004................... 71
Notes to Consolidated Financial Statements.............. 74
(a) 2. Financial Statement Schedules:
All financial statement schedules have been omitted because they are
inapplicable, not required by the instructions or because the required
information is either incorporated herein by reference or included in the
financial statements or notes thereto included in this report.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on
Form 10-K are listed in the attached Index to Exhibits.
(b) Exhibits
The exhibits required to be filed as part of this Annual Report on
Form 10-K are listed in the attached Index to Exhibits.
(c) Financial Statement Schedules
All financial statement schedules have been omitted because they are
inapplicable, not required by the instructions or because the required
information is either incorporated herein by reference or included in the
financial statements or notes thereto included in this report.
* * *
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to stockholders of the Registrant. The Registrant will furnish a copy of any of
such exhibits to any stockholder requesting the same for a nominal charge to
cover duplicating costs.
98
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint Elias Vamvakas and William G. Dumencu as attorney-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to this Annual Report on Form 10-K, which amendments may
make such changes in this Annual Report as the attorney-in-fact acting in the
premises deems appropriate and to file any such amendment(s) to this Annual
Report with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 14, 2005 OCCULOGIX, INC.
By: /s/ Elias Vamvakas
-----------------------
Elias Vamvakas
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
99
Dated: March 14, 2005 By: /s/ Elias Vamvakas
------------------------------
Elias Vamvakas
Chief Executive Officer and
Chairman of Board of Directors
Dated: March 14, 2005 By: /s/ William G. Dumencu
------------------------------
William G. Dumencu
Chief Financial Officer
Dated: March 14, 2005 By: /s/ Jay T. Holmes
------------------------------
Jay T. Holmes
Director
Dated: March 14, 2005 By: /s/ Thomas N. Davidson
------------------------------
Thomas N. Davidson
Director
Dated: March 14, 2005 By: /s/ Richard L. Lindstrom
------------------------------
Richard L. Lindstrom, M.D.
Director
Dated: March 14, 2005 By: /s/ Georges Noel
------------------------------
Georges Noel
Director
100
Index to Exhibits
2.1 Form of Plan of Reorganization (incorporated by reference to Exhibit 2.1
to the Registrant's Registration Statement on Form S-1/A No. 4, filed with
the Commission on December 6, 2004 (file no. 333.-118024)).
3.1 Amended and Restated Certificate of Incorporation of the Registrant as
currently in effect (incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1/A No. 3, filed with the
Commission on November 16, 2004 (file no. 333.-118024)).
3.2 Amended and Restated By-Laws of the Registrant as currently in effect
(incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1/A No. 3, filed with the Commission on
November 16, 2004 (file no. 333.-118024)).
10.1 2004 Memorandum dated July 18, 2004, by and between Asahi Medical Co.,
Ltd. and the Registrant (incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1/A No. 1, filed with the
Commission on October 7, 2004 (file no. 333.-118024)).
10.2 Amended and Restated Marking and Distribution Agreement dated October
25,2004 between Diamed Medizintechnik GmbH and the Registrant
(incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1/A No. 1, filed with the Commission on
October 7, 2004 (file no. 333.-118024)).
10.3 Amended and Restated Patent License and Royalty Agreement dated October
25, 2004 between the Registrant and Dr. Richard Brunner (incorporated by
reference to Exhibit 10.8 to the Registrant's Registration Statement on
Form S-1/A No. 1, filed with the Commission on October 7, 2004 (file no.
333.-118024)).
10.4 Amendment to the Distribution Services Agreement dated July 30, 2004
between the Registrant and Apheresis Technologies, Inc. (incorporated by
reference to Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1/A No. 1, filed with the Commission on October 7, 2004 (file no.
333.-118024)).
10.5 Amendment to the 2002 Stock Option Plan (incorporated by reference to
Exhibit 10.22 to the Registrant's Registration Statement on Form S-1/A No.
3, filed with the Commission on November 16, 2004 (file no. 333.-118024)).
10.6 Amended and Restated Patent License and Royalty Agreement dated October
25, 2004 between the Registrant and Hans Stock (incorporated by reference
to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1/A
No. 1, filed with the Commission on October 7, 2004 (file no.
333.-118024)).
10.7 Employment Agreement between the Registrant and Elias Vamvakas dated
September 1, 2004 (incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-1/A No. 1, filed with the
Commission on October 7, 2004 (file no. 333.-118024)).
10.8 Employment Agreement between the Registrant and Thomas P. Reeves dated
August 1, 2004 (incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1/A No. 1, filed with the
Commission on October 7, 2004 (file no. 333.-118024)).
10.9 Employment Agreement between the Registrant and Stephen Kilmer dated July
30, 2004 (incorporated by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-1/A No. 1, filed with the Commission on
October 7, 2004 (file no. 333.-118024)).
10.10 Employment Agreement between the Registrant and Julie Fotheringham dated
September 1, 2004 (incorporated by reference to Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1/A No. 1, filed with the
Commission on October 7, 2004 (file no. 333.-118024)).
101
10.11 Employment Agreement between the Registrant and Joseph Zawaideh dated
September 7, 2004 (incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1/A No. 1, filed with the
Commission on October 7, 2004 (file no. 333.-118024)).
10.12 Product Purchase Agreement dated September 29, 2004 between the Registrant
and Promedica International (incorporated by reference to Exhibit 10.20 to
the Registrant's Registration Statement on Form S-1/A No. 2, filed with
the Commission on November 2, 2004(file no. 333.-118024)).
10.13 Employment Agreement between the Registrant and Dr. David Eldridge dated
November 9, 2004((incorporated by reference to Exhibit 10.23 to the
Registrant's Registration Statement on Form S-1/A No. 3, filed with the
Commission on November 16, 2004 (file no. 333.-118024)).
10.14 Consulting Agreement between the Registrant and Richard Davis dated May 1,
2004 (incorporated by reference to Exhibit 10.24 to the Registrant's
Registration Statement on Form S-1/A No. 4, filed with the Commission on
December 6, 2004 (file no. 333.-118024)).
10.15 Rental Agreement between the Registrant and Cornish Properties Corporation
dated January 1, 2004 (incorporated by reference to Exhibit 10.27 to the
Registrant's Registration Statement on Form S-1/A No. 4, filed with the
Commission on December 6, 2004 (file no. 333.-118024)).
10.16 Sub-sublease between Echo Online Internet, Inc. and the Registrant dated
September 29, 2004 (incorporated by reference to Exhibit 10.28 to the
Registrant's Registration Statement on Form S-1/A No. 4, filed with the
Commission on December 6, 2004 (file no. 333.-118024)).
21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 to
the Registrant's Registration Statement on Form S-1/A No. 1, filed with
the Commission on October 7, 2004 (file no. 333.-118024)).
24.1 Power of Attorney (included on signature page).
31.1 CEO's Certification required by Rule 13A-14(a) of the Securities Exchange
Act of 1934.
31.2 CFO's Certification required by Rule 13A-14(a) of the Securities Exchange
Act of 1934.
32.1 CEO's Certification of periodic financial reports pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
32.2 CFO's Certification of periodic financial reports pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350.
102