As filed with the Securities and Exchange Commission on September 22, 2005
Registration No. 333-125544
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Colorado Transax International Limited 84-1304106
(State or Other (Name of Registrant (I.R.S. Employer
Jurisdiction of in Our Charter) Identification No.)
Incorporation or Organization)
Stephen Walters
5201 Blue Lagoon Drive, 5201 Blue Lagoon Drive,
8th Floor 8th Floor
Miami, Florida, 33126 Miami, Florida, 33126
(305) 629-3090 1040 (305) 629-3090
(Address and telephone (Primary Standard (Name, address
number of Principal Industrial and telephone number
Executive Offices and Classification Code Number) of agent for service)
Principal Place of Business)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart Kirkpatrick & Lockhart
Nicholson Graham LLP Nicholson Graham LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee(3)
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Common Stock, par value $0.0001 per share 31,379,143 shares (2) $0.109 $3,420,327 $403.00
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TOTAL 31,379,143 shares (2) $0.109 $3,420,327 $403.00
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of May 31, 2005.
(2) Of these shares, 22,909,507 are being registered under the Standby Equity
Distribution Agreement, 7,142,857 are being registered under convertible
debentures, 1,201,779 are being registered in connection with a one-time
commitment fee received under a now-terminated Standby Equity Distribution
Agreement and 125,000 are being registered as a placement agent fee under
a now-terminated Standby Equity Distribution Agreement.
(3) Registration fee has previously been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
Subject to completion, dated September 22, 2005
TRANSAX INTERNATIONAL LIMITED
31,379,143 shares of Common Stock
This prospectus relates to the sale of up to 31,379,143 shares of Transax
International Limited ("Transax" or the "Company") common stock by certain
persons who are stockholders of Transax, including Cornell Capital Partners, LP
("Cornell Capital Partners"), Scott and Heather Grimes - Joint Tenants with
Rights of Survivorship ("Grimes") and Monitor Capital, Inc. ("Monitor Capital").
Please refer to "Selling Stockholders" beginning on page 14. Transax is not
selling any shares of common stock in this offering and therefore will not
receive any proceeds from this offering.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On August 30, 2005, the last reported sale price of
our common stock was $0.190 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "TNSX.OB." These prices will
fluctuate based on the demand for the shares of common stock.
The selling stockholders consist of (i) Cornell Capital Partners, who
intends to sell up to 24,111,286 shares of common stock, 22,909,507 of which are
under the Standby Equity Distribution Agreement and 1,201,779 were received from
Transax on December 15, 2004 as a one-time commitment fee in the amount of
$200,000 under a now-terminated Standby Equity Distribution Agreement; (ii)
Grimes who may sell up to 7,142,857 shares of common stock, underlying
conversion of a $250,000 convertible debenture; and (iii) Monitor Capital, who
intends to sell up to 125,000 shares of common stock, which it received on
December 6, 2004 as a placement agent fee under a now-terminated Standby Equity
Distribution Agreement.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will purchase
shares of Transax common stock for a total discount of 8% of the common stock's
market price. Cornell Capital Partners also received a one-time commitment fee
in the form of 1,201,779 shares of common stock in the amount of $200,000 on
December 15, 2004 under a now-terminated Standby Equity Distribution Agreement.
The 8% discount and the $200,000 in compensation shares are underwriting
discounts payable to Cornell Capital Partners.
Transax engaged Monitor Capital, an unaffiliated registered broker-dealer,
to advise us in connection with the Standby Equity Distribution Agreement.
Monitor Capital was paid a fee equal to $10,000 by the issuance of 125,000
shares of Transax's common stock on December 6, 2004 under a now-terminated
Standby Equity Distribution Agreement.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 5.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer these securities in any state where the offer or sale
is not permitted.
With the exception of Cornell Capital Partners, which is an "underwriter"
within the meaning of the Securities Act of 1933, no other underwriter or person
has been engaged to facilitate the sale of shares of common stock in this
offering. This offering will terminate twenty-four months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ____ __, 2005.
2
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.....................................5
RISK FACTORS...................................................................6
FORWARD-LOOKING STATEMENTS....................................................14
SELLING STOCKHOLDERS..........................................................15
USE OF PROCEEDS...............................................................17
DILUTION......................................................................18
STANDBY EQUITY DISTRIBUTION AGREEMENT.........................................19
PLAN OF DISTRIBUTION..........................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................23
DESCRIPTION OF BUSINESS.......................................................31
MANAGEMENT....................................................................39
PRINCIPAL STOCKHOLDERS........................................................45
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS...................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................48
DESCRIPTION OF CAPITAL STOCK..................................................49
EXPERTS.......................................................................52
LEGAL MATTERS.................................................................52
HOW TO GET MORE INFORMATION...................................................52
FINANCIAL STATEMENTS.........................................................F-1
PART II.....................................................................II-1
i
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements
and the notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision.
Our Company
General
Subsidiaries
(1) TDS Telecommunication Data Systems LTDA. ("TDS") was incorporated
under the laws of Brazil on May 2, 1998, and is our wholly-owned subsidiary. TDS
assists us in providing information network solutions, products and services
within Brazil.
(2) Transax Australia Pty Ltd. was incorporated under the laws of New
Soutt 0 6 h Wales, Australia on January 19, 2003, and is our wholly-owned
subsidiary ("Transax Australia"). Transax Australia assists us in seeking
marketing opportunities to provide information network solutions, products and
services within Australia and regionally.
(3) Medlink Technologies, Inc. was incorporated under the laws of
Mauritius on January 17, 2003, and is our wholly-owned subsidiary ("Medlink").
Medlink holds the intellectual property developed by us and is responsible for
initiating research and development.
Current Business Operations
As of the date of this prospectus, through TDS, we are an international
provider of health information management products (collectively, the "Health
Information Management Products"), as described below, which are specifically
designed for the healthcare providers and health insurance companies. We are
dedicated to improving healthcare delivery by providing to hospitals, physician
practices and health insurance companies with innovative health information
management systems to manage coding, compliance, abstracting and record
management's processes.
Our strategic focus is to become a premier international provider of
health information management network solutions for the healthcare providers and
health insurance companies, enabling the real time automation of routine patient
transactions. We believe that our unique combination of complimentary solutions
is designed to significantly improve the business of healthcare. Our Health
Information Management Products and software solutions are designed to generate
operational efficiencies, improve cash flow and measure the cost and quality of
care. In general, the Health Information Management Products and software
solutions, including the MedLink Solution, fall into four main areas: (i)
compliance management; (ii) coding and reimbursement management; (iii)
abstracting; and (iv) record management.
We believe that hospitals and other healthcare providers must implement
comprehensive coding and compliance programs in order to minimize payer
submission errors and assure the receipt of anticipated revenues. We believe
that an effective program should include clear, defined guidelines and
procedures, which combined with our Health Information Management Products, will
enhance an organization's system and effectively increase revenues and reduce
costs. Our Health Information Management Products will include compliance
management and coding and reimbursement products and software, which are
designed to conduct automated prospective and retrospective reviews of all
in-patient and out-patient claims data. Management tools include internally
designed targets aimed to provide data quality, coding accuracy and appropriate
reimbursement. These tools work in conjunction with an organization's coding and
billing compliance program to (i) identify claims with potential errors prior to
billing; (ii) screen professional fees and services; and (iii) identify patterns
in coding and physician documentation. Results of the auditing and monitoring
activities are represented in executive reports summarizing clinical and
financial results as well as detailed reports providing information needed to
target specific areas for review. Billing practices for health care services are
under close scrutiny by governmental agencies as high-risk areas for Medicare
fraud and abuse. We believe that the Health Information Management Products will
increase an organization's progress in reducing improper payments and ensuring
that medical record documentation support services are provided.
The Health Information Management Products are also designed to include
abstracting solutions, which enable healthcare facilities to accurately collect
and report patient demographic and clinical information. We believe that the
Health Information Management Products will provide the organization with the
ability to calculate in-patient and out-patient hospital reimbursements and
customize data fields needed for state, federal or foreign governmental
regulatory requirements. Standard and custom reports will provide the customer
with the ability to generate facility-specific statistical reporting used for
benchmarking, outcomes and performance improvement, marketing and planning. We
believe that the Health Information Management Products will further provide
healthcare organizations the flexibility to customize abstracting workflow to
meet data collection reporting and analysis needs. The Health Information
Management Products will provide the organization with the ability to customize
workflow by creating fields and rules and designing screen navigation.
1
Going Concern
Since inception, the Company has incurred cumulative net losses of
$8,761,242, has a stockholders' deficit of $1,471,557 at June 30, 2005 and has a
working capital deficit of $1,798,720 at June 30, 2005. Since its inception, the
Company has funded operations through short-term borrowings and equity
investments in order to meet its strategic objectives. The Company's future
operations are dependent upon external funding and its ability to increase
revenues and reduce expenses. Management believes that sufficient funding will
be available from additional related party borrowings and private placements to
meet its business objectives, including anticipated cash needs for working
capital, for a reasonable period of time. Additionally, under the current roll
out schedules with its clients, the Company expects to increase its revenues
significantly during 2005 with the expectation of the Company becoming a
profitable entity. However, there can be no assurance that the Company will be
able to obtain sufficient funds to continue the development of its software
products and distribution networks.
Further, since fiscal 2000, the Company has been deficient in the payment
of Brazilian payroll taxes and Social Security taxes. At June 30, 2005, these
deficiencies (including interest and fines) amounted to approximately $762,000.
This payroll liability is included as part of the accounts payable and accrued
expenses (short-term and long-term) within the consolidated balance sheet.
As a result of the foregoing, there exists substantial doubt about the
Company's ability to continue as a going concern. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
About Us
Our principal executive offices are located at 5201 Blue Lagoon Drive, 8th
Floor, Miami, Florida, 33126. Our telephone number is (305) 629-3090.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are the selling stockholders consisting of (1) Cornell Capital Partners, who
intends to sell up to 24,111,286, shares of common stock, 22,909,507 of which
are under the Standby Equity Distribution Agreement and 1,201,779 were received
from Transax on December 15, 2004 as a one-time commitment fee under a
now-terminated Standby Equity Distribution Agreement in the amount of $200,000;
(2) Grimes, who may sell up to 7,142,857 shares of common stock, which may be
issuable upon conversion of $250,000 convertible debentures; and (3) Monitor
Capital, an unaffiliated broker-dealer retained by Transax in connection with
the Standby Equity Distribution Agreement, which intends to sell up to 125,000
shares of common stock issued as a placement agent fee on December 6, 2004 under
a now-terminated Standby Equity Distribution Agreement.
The commitment amount of the Standby Equity Distribution Agreement is $5
million. At an assumed price of $0.1358 per share, Transax would only be able to
receive gross proceeds of $3,111,111 using the 22,909,507 shares being
registered in this registration statement under the Standby Equity Distribution
Agreement. Transax would be required to register 13,909,345 additional shares at
this assumed price to obtain the entire $5.0 million available under the Standby
Equity Distribution Agreement.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
common stock for a total purchase price of $5 million. The amount of each
advance is subject to a maximum advance amount of $250,000, and we may not
submit any advance within five trading days of a prior advance. There is also a
monthly draw limit of $1,000,000. Cornell Capital Partners will pay Transax 97%
of, or a 3% discount to, the lowest closing bid price of the common stock during
the five consecutive trading day period immediately following the notice date.
Of each advance made by Transax, Cornell Capital Partners shall retain 5% of
each advance. In addition, Cornell Capital Partners received a one-time
commitment fee in the form of 1,201,779 shares of common stock in the amount of
$200,000 on December 15, 2004 under a now-terminated Standby Equity Distribution
Agreement. Cornell Capital Partners intends to sell any shares purchased under
the Standby Equity Distribution Agreement at the then prevailing market price.
Among other things, this prospectus relates to the shares of common stock to be
issued under the Standby Equity Distribution Agreement. There are substantial
risks to investors as a result of the issuance of shares of common stock under
the Standby Equity Distribution Agreement. These risks include dilution of
shareholders, significant decline in Transax's stock price and our inability to
draw sufficient funds when needed.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent price of $0.19 per share and 25%, 50% and 75% discounts to the recent
price.
Market Price: $0.19 $0.1425 $0.095 $0.0475
Purchase Price: $0.1843 $0.1382 $0.0921 $0.0461
No. of Shares(1): 22,909,507 22,909,507 22,909,507 22,909,507
Total Outstanding (2): 53,232,488 53,232,488 53,232,488 53,232,488
Percent Outstanding (3): 43.04% 43.04% 43.04% 43.04%
Net Cash to Transax:(4) $3,926,111 $2,922,789 $1,919,468 $918,322
(1) Represents the number of shares of common stock being registered in this
Registration Statement to be issued pursuant to the Standby Equity
Distribution Agreement at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners under the Standby
Equity Distribution Agreement, not including shares issued under the
convertible debenture.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
offering expenses.
3
Common Stock Offered 31,379,143 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding
Before the Offering(1) 30,322,981 shares as of August 30, 2005
Use of Proceeds We will not receive any proceeds of the shares offered
by the selling stockholders. Any proceeds we receive
from the sale of common stock under the Standby Equity
Distribution Agreement will be used for general
working capital purposes. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a high degree of
risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Over-the-Counter
Bulletin Board Symbol TNSX.OB
---------------
1 Excludes $250,000 of debentures convertible into 2,232,143 shares of
common stock (assuming a conversion price equal to 80% of $0.14), up to
22,909,507 shares of common stock to be issued under the Standby Equity
Distribution Agreement, up to 9,101,070 shares upon the exercises of
warrants and up to 3,350,000 shares upon the exercise of options.
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
For the Three Months Ended
June 30,
---------------------------------
2005 2004
------------ ------------
Statement of Operation Data:
Revenues $ 861,023 $
312,615
Total operating expenses 916,787 391,324
Loss from operations (55,764) (78,709)
Total other expenses (126,723) (33,505)
Net loss $ $
(182,487) (112,214)
Net loss per share: Basic and diluted $ $
(0.01) (0.01)
--------------------------------------------------------------------------------
As of As of
June 30, December 31,
Balance Sheet Data: 2005 2004
------------ ------------
Cash $ 64,22 $ 4,090
Accounts receivable - net 369,726 170,198
Prepaid expenses and other current assets 100,578 51,547
Total assets 1,737,561 789,137
Total liabilities 3,209,118 2,531,224
Common Stock and Paid in capital 7,353,088 6,894,696
Accumulated deficit $(8,761,242) $(8,479,936)
Total stockholders' deficit $(1,471,557) $(1,742,087)
5
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RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
Risks Related To Our Business
Risks Relating To Our Business
Transax Has Been The Subject Of A Going Concern Opinion From Its Independent
Auditors, Which Means That Transax May Not Be Able To Continue Operations Unless
Transax Obtains Additional Funding
Transax's independent auditors have added a "going concern" statement to
its audit report for the year ended December 31, 2004, which states that Transax
will need additional working capital to be successful and to service its current
debt for the coming year and, therefore, Transax's continuation as a going
concern is dependent upon obtaining the additional working capital necessary to
accomplish its objectives. Transax's inability to obtain adequate financing will
result in the need to curtail business operations and you could lose your entire
investment. Transax's financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Management anticipates that Transax will incur net losses for the
immediate future, and expect Transax's operating expenses to increase
significantly, and, as a result, Transax will need to generate monthly revenue
if it is to continue as a going concern. To the extent that we do not generate
revenue, that we do not obtain additional funding, that our stock price does not
increase, and that we are unable to adjust operating expense levels accordingly,
we may not have the ability to continue on as a going concern.
Transax Has A Working Capital Deficit And If We Are Unable to Raise Additional
Capital We Will Need to Curtail Business Operations
We had a working capital deficit of $1,798,720 at June 30, 2005, and
continue to need cash for operations. We have relied on significant external
financing to fund our operations. As of June 30, 2005, we had $64,221 of cash on
hand and total current assets were $534,525, and our total current liabilities
were $2,333,245. We will need to raise additional capital to fund our
anticipated operating expenses and future expansion. Among other things,
external financing may be required to cover our operating costs. Unless we
achieve profitable operations, it is unlikely that we will be able to secure
additional financing from external sources. If we are unable to secure
additional financing or we cannot draw down on the Standby Equity Distribution
Agreement, we believe that we will not have sufficient funds to continue
operations. We estimate that we will require $2,000,000 to $5,000,000 of
financing to fund our anticipated operating expenses for the next 12 months. The
sale of our common stock to raise capital may cause dilution to our existing
shareholders. Our inability to obtain adequate financing will result in the need
to curtail business operations. Any of these events would be materially harmful
to our business and may result in a lower stock price. Our inability to obtain
adequate financing will result in the need to curtail business operations and
you could lose your entire investment. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Transax Will Require Additional Funding, and Future Access to Capital Is
Uncertain And Transax May Have to Delay, Reduce or Eliminate Certain Business
Operations.
It is expensive to develop and commercialize Health Information Management
Products. Transax plans to continue to conduct research and development, which
is costly. Transax's product development efforts may not lead to new commercial
products, either because Transax's products fail to be found effective or
because Transax lacks the necessary financial or other resources or
relationships to pursue commercialization. Transax's capital and future revenues
may not be sufficient to support the expenses of its business operations and the
development of commercial infrastructure. Transax may need to raise additional
capital to: (i) fund operations; (ii) continue the research and development of
Health Information Management Products; and (iii) commercialize its products.
Management believes that the Standby Equity Distribution Agreement will provide
some of the necessary capital. However, Transax may need additional financing
within this time frame depending on a number of factors. Transax may not be able
to obtain additional financing on favorable terms or at all. If Transax is
unable to raise additional funds, Transax may have to delay, reduce or eliminate
certain business operations. If Transax raises additional funds by issuing
equity securities, further dilution to Transax's existing stockholders will
result.
6
Transax Owes the Brazilian Government Money for Payroll Taxes and Social
Security Taxes And Transax's Failure To Pay The Brazilian Authorities When
Required To Do So Could Result In Liability
Since fiscal 2000, the Company has been deficient in the payment of
Brazilian payroll taxes and Social Security taxes. At June 30, 2005, these
deficiencies (including interest and fines) amounted to approximately $762,000.
This payroll liability is included as part of the accounts payable and accrued
expenses (short-term and long-term) within the consolidated balance sheet.
During 2004 and 2005 , the Company has entered into a number of payment
programs with the Brazilian authorities whereby the Social Security taxes due,
Serverance Fund Taxes due, plus other taxes and applicable penalties and
interests will be repaid over a periods of between 18 and 60 months. At June 30,
2005, the Company's has negotiated some $546,422 of tax liabilities under these
programs. The payment program requires the Company to pay a monthly fixed amount
of the four taxes negotiated. Discussions are currently ongoing for the Company
to enter into a similar payment plan for the remainder of the payroll tax
liabilities. The Company made the first payment as per the plan in April 2004
and continues to make the required payments. However, there is no certainty that
the Brazilian authorities will enter into a similar plan in the future
Transax May Experience Price Reductions, Reduced Gross Margins And Loss Of
Market Share If Transax Is Unable To Successfully Compete
Competition for Transax's products and services is intense and is expected
to increase. Increased competition could result in reductions in Transax's
prices, gross margins and market share, and could have a material adverse effect
on Transax's business, financial condition and results of operations. Transax
competes with other providers of healthcare information software and services,
as well as healthcare consulting firms. Some competitors may have formed
business alliances with other competitors that may affect Transax's ability to
work with some potential customers. In addition, if some of Transax's
competitors merge, a stronger competitor may emerge. Some principal competitors
include: Polimed, Connectmed and Salutia, major software information systems
companies, including those specializing in the healthcare industry, may not
presently offer competing products but may in the future enter Transax's market.
Many of Transax's competitors and potential competitors have significantly
greater financial, technical, product development, marketing and other
resources, and market recognition than Transax has. Many of these competitors
also have, or may develop or acquire, substantial installed customer bases in
the healthcare industry. As a result of these factors, our competitors may be
able to respond more quickly to new or emerging technologies, changes in
customer requirements, and changes in the political, economic or regulatory
environment in the healthcare industry. These competitors may be in a position
to devote greater resources to the development, promotion and sale of their
products than Transax can. Transax may not be able to compete successfully
against current and future competitors, and such competitive pressures could
materially adversely affect Transax's business, financial condition and
operating results.
Market Volatility May Affect Transax's Stock Price, And The Value Of A
Shareholder's Investment In Transax's Common Stock May Be Subject To Sudden
Decreases
The trading price for the shares of common stock of Transax has been, and
Transax expects it to continue to be, volatile. The price at which Transax's
common stock trades depends on a number of factors, including the following,
many of which are beyond Transax's control: (i) Transax's historical and
anticipated operating results, including fluctuations in financial and operating
results; (ii) the market perception of the prospects for health information
management network solutions companies as an industry sector; (iii) general
market and economic conditions; (iv) changes in government regulations affecting
product approvals, reimbursement or other aspects of Transax's and/or
competitors' businesses; (v) announcements of technological innovations or new
commercial products by Transax or its competitors; (vi) developments concerning
Transax's contractual relations with its executive officers, executive
management and intellectual property rights; and (vii) announcements regarding
significant collaborations or strategic alliances.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may lower the
market price of Transax's common stock and affect the volume of trading in the
stock. During periods of stock market price volatility, share prices of many
health information management network solution companies have often fluctuated
in a manner not necessarily related to their individual operating performance.
Accordingly, Transax's common stock may be subject to greater price volatility
than the stock market as a whole.
7
The Healthcare Information Management And Technology Market Is Highly
Fragmented And Characterized By On-Going Technological Developments, Evolving
Industry Standards And Rapid Changes In Customer Requirements And Transax May
Not Successfully, Or In A Timely Manner, Develop, Acquire, Integrate, Introduce
Or Market New Products Or Product Enhancements
The healthcare information management and technology market is highly
fragmented and characterized by on-going technological developments, evolving
industry standards and rapid changes in customer requirements. Transax's success
depends on its ability to timely and effectively: (i) offer a broad range of
software products; (ii) enhance existing products and expand product offerings;
(iii) respond promptly to new customer requirements and industry standards; (iv)
remain compatible with popular operating systems and develop products that are
compatible with the new or otherwise emerging operating systems; and (v) develop
new interfaces with healthcare provider organizations to fully integrate
Transax's products and services in order to maximize features and functionality.
Transax's performance depends in large part on its ability to provide the
increasing functionality required by its customers through the timely
development and successful introduction of new products and enhancements to
existing products. Transax may not successfully, or in a timely manner, develop,
acquire, integrate, introduce or market new products or product enhancements.
Product enhancements or new products developed by Transax may not meet the
requirements of hospital or other healthcare providers or health insurance
companies or achieve or sustain market acceptance. Transax's failure to either
estimate accurately the resources and related expenses required for a project,
or to complete its contractual obligations in a manner consistent with the
project plan upon which a contract is based, could have a material adverse
effect on Transax's business, financial condition, and results of operations. In
addition, Transax's failure to meet a customer's expectations in the performance
of its services and products could damage Transax's reputation and adversely
affect its ability to attract new business.
Failure To Accurately Assess, Process Or Collect Healthcare Claims Or Administer
Contracts Could Subject Transax To Costly Litigation And Force Transax To Make
Costly Changes To Products
It is anticipated that some of Transax's products and services will be
used in the payment, collection, coding and billing of healthcare claims and the
administration of managed care contracts. If Transax's products and services
fail to accurately assess, possess or collect these claims, customers could file
claims against Transax. As of the date of this prospectus, Transax does not
carry insurance coverage to cover such claims or, if it does carry such
insurance coverage in the future, such insurance coverage may not be adequate to
cover such claims. A successful claim that is not covered by or is in excess of
insurance coverage could adversely affect Transax's business, financial
condition, and results of operations. Even a claim without merit could result in
significant legal defense costs and could consume management time and resources.
In addition, claims could increase insurance premiums such that appropriate
insurance cannot be found at commercially reasonable rates. Furthermore, if
Transax were found liable, Transax may have to significantly alter one or more
of its products, possibly resulting in additional unanticipated research and
development expenses.
The Nature Of Our Products Makes Our Company Vulnerable To Undetected Errors
That Could Reduce Revenues, Market Share Or Demand
Health Information Management Products may contain errors or failures,
especially when initially introduced or when new versions are released. Although
Transax conducts extensive testing of its products and services, software errors
could be discovered in certain enhancements and products after their
introduction. Despite such testing by Transax and by its current and potential
customers, products under development, enhancements or shipped products may
contain errors or performance failures resulting in, among other things: (i)
loss of customers and revenue; (ii) delay in market acceptance; (iii) diversion
of resources; (iv) damage to Transax's reputation; or (v) increased service
costs. Any of these consequences could have a material adverse effect on
Transax's business, financial condition and results of operations.
Transax May Be Required To Make Substantial Changes To Its Products If They
Become Subject To Governmental Regulation
None of Transax's Health Information Management Products are subject to
regulation by the United States' federal government. Computer products used or
intended for use in the diagnosis, cure, mitigation, treatment or prevention of
disease or other conditions or that affect the structure or function of the body
are subject to regulation by the US Department of Health. In the future,
however, the US Department of Health could determine that some of Transax's
products (because of their predictive aspects) may be clinical decision tools
and subject them to regulation. Compliance with US Department of Health
regulations such as HIPPA could be burdensome, time consuming and expensive.
Other new laws and regulations affecting healthcare software development and
marketing could also be enacted in the future. If so, it is possible that
Transax's costs and the length of time for product development and marketing
could increase and that other unforeseeable consequences could arise.
8
Government Regulation of Confidentiality of Patient Health Information Could
Result in Required Product Modifications Which Would Require Significant
Expenditure Of Capital Resources
There is substantial U.S. federal and state and foreign regulation of
confidentiality of patient health information and the circumstances under which
such information may be used by, disclosed to or processed by Transax as a
consequence of any contracts with various health care providers or insurance
companies. Although compliance with these laws and regulations is presently the
principal responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are dynamic and
rapidly evolving. Changes may be made which would require Transax to change its
products and systems and methods which could require significant expenditures of
capital and decrease future business prospects. Additional federal and state
legislation governing the dissemination of individually identifiable information
have been proposed in the United States and may be adopted, which may also
significantly affect Transax's business.
Government Regulation of Healthcare Information Delivery Systems May
Affect Healthcare Providers' Decisions Which Could Result In Unplanned Product
Enhancements, Delays, Or Cancellations Of Product Orders Or Shipments, Or Reduce
The Need For Certain Systems
During the past several years, the healthcare industry within the United
States and other countries has been subject to changing political, economic and
regulatory influences and to increasing levels of governmental regulation.
Certain proposals to reform the U.S. heathcare systems have been and are being
considered by Congress. These proposals, if enacted, could change the operating
environment for any of Transax's customers within the United States that could
have a negative impact on Transax's business, financial condition and results of
operations. However, the U.S. federal government recently mandated the use of
electronic transmissions for large Medicare providers, which may positively
affect the marketability of Transax's products in the U.S. Transax is unable to
predict what, if any, changes will occur.
Changes in current healthcare financing, reimbursement systems and
procurement practices could result in unplanned product enhancements, delays, or
cancellations of product orders or shipments, or reduce the need for certain
systems. A portion of Transax's revenues is expected to be derived from sales of
its Health Information Management Products to hospitals in the United States.
Consolidation in the healthcare industry, particularly in the hospital and
managed care markets, could decrease the number of potential purchasers of
Transax's Health Information Management Products and adversely affect Transax's
business. In addition, the decision to purchase such products generally involves
a committee approval. Consequently, it is difficult for Transax to predict the
timing or outcome of the buying decisions of Transax's potential customers.
There Are Political And Economic Risks In Foreign Marketplaces Which Could
Affect The Operations Of Transax
As of the date of this prospectus, the Health Information Management
Products are sold by Transax principally in Brazil. Transax intends to enter the
global marketplace which includes, but is not limited to, the marketplaces
within the United States, Australia, South America and Europe. During the fiscal
year ended December 31, 2004, international sales accounted for 100% of
Transax's total revenue. As a result, Transax faces certain risks associated
with international sales. International sales may be subject to political,
economic, legal and other uncertainties occurring within these countries.
Changes in policies by the respective governments may result in changes in laws,
regulations or the interpretation thereof, confiscatory taxation, restrictions
on imports and sources of supply, import duties, corruption, economic reforms,
and currency revaluation, all of which may materially and adversely affect
Transax. The continuation or increase of any such disparities could affect the
political and social stability of the country, and thus the operations of
Transax. Moreover, future controversies could arise which would threaten trade
relations between the United States and the respective country. In any of such
eventualities, the business of Transax could be adversely affected.
Transax May Face Scrutiny From Governmental Agencies
As a result of the rising healthcare costs, U.S. federal and state
governments and foreign governments have placed an increased emphasis on
detecting and eliminating fraud and abuse in healthcare programs. Numerous laws
and regulations now exist within the U.S. and other foreign countries to prevent
fraudulent or abusive billing, to protect patients' privacy rights, and to
ensure patients' access to healthcare. Violation of the laws or regulations
governing Transax's operations could result in the imposition of civil or
criminal penalties, including temporary or permanent exclusion from
participation in government healthcare programs, such as Medicare and Medicaid
in the U.S., the cancellation of any contracts with Transax to provide managed
care services, and the suspension or revocation of any of Transax's governmental
licenses. Transax intends to conduct routine internal audits in an effort to
ensure compliance with all applicable laws and regulations. If errors,
discrepancies or violations of laws are discovered in the course of these
internal audits or otherwise, Transax may be required by law to disclose the
relevant facts, once known, to the appropriate authorities.
9
The Inability To Protect Intellectual Property Could Lead To Unauthorized Use Of
Transax's Products
Transax relies on a combination of trade secrets, copyright and trademark
laws, nondisclosure, non-compete and other contractual provisions to protect its
proprietary rights. Measures taken by Transax to protect its intellectual
property may not be adequate, and its competitors could independently develop
products and services that are substantially equivalent or superior to Transax's
products and services. Any infringement or misappropriation of Transax's
proprietary software and databases could put Transax at a competitive
disadvantage in a highly competitive market and could cause Transax to lose
revenues, incur substantial litigation expense, and divert management's
attention from other operations. Intellectual property litigation is
increasingly common in the software industry. Therefore, the risk of an
infringement claim against Transax may increase over time as the number of
competitors in the industry segment grows and the functionality of products
overlaps. Third parties could asset infringement claims against Transax in the
future. Regardless of the merits, Transax could incur substantial litigation
expenses in defending any such asserted claim. In the event of an unfavorable
ruling on any such claim, such an infringement may result in significant
monetary liabilities that could have a material adverse effect on the business.
In the event of an unfavorable ruling on any such claim, a license or similar
agreement may also not be available to use on reasonable terms, if at all.
Transax may not be successful in the defense of these or similar claims.
Transax Is Dependent Upon The License Agreement To Further Develop And
Commercialize Its Products Effectively Or At All
To further develop and successfully commercialize the Health Information
Management Products and related services, Transax and TDS entered into a license
agreement (the "License Agreement") to carry out development and
commercialization of the MedLink Solution within Brazil. Under the terms of the
License Agreement, Transax will receive certain royalties once its subsidiary in
Brazil has entered cash flow status.
The risks associated with the License Agreement include, but are not
limited to, the following: (i) TDS may not apply the expected resources or
required expertise in developing the MedLink Solution resources and systems or
other systems necessary to successfully commercialize the MedLink Solution
products; and (ii) disputes may arise between Transax and TDS that delay the
commercialization of the MedLink Solution or adversely affect its sales or
profitability. Transax's success will depend on the successful introduction and
marketing of the MedLink Solution and other products which, in turn, is
dependent on the continued existence of favorable contractual relations with
TDS. Transax's business operations may be materially affected in the event TDS
fails to honor the terms and provisions of License Agreement.
Failure To Retain Key Personnel Could Impede Transax's Ability To Commercialize
Its Products, Maintain The License Agreement Or Obtain Sources Of Funds
Transax depends, to a significant extent, on the efforts of Mr. Stephen
Walters, our President, Chief Executive Officer and a director, and on the
efforts of its research and development personnel. The development of Health
Information Management Products requires expertise from a number of different
disciplines, some of which are not widely available. The quality and reputation
of Transax's research and development personnel, including its executive
officers, and their success in performing their responsibilities, may directly
influence the success of Transax. In addition, Mr. Walters is involved in a
broad range of critical activities, including providing strategic and
operational guidance. The loss of Mr. Walters, or Transax's inability to retain
or recruit other key management and research and development personnel, may
delay or prevent Transax from achieving its business objectives. Transax faces
intense competition for personnel from other companies, public and private
research institutions, government entities and other organizations. Transax does
not employ management on a full-time or part-time basis and does not have a
written employment agreement with Mr. Walters. In addition, Transax does not
maintain any key man life insurance policies on Mr. Walters.
10
Risks Related To This Offering
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 30,322,981 shares of common stock outstanding as of August 30, 2005,
6,539,663 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 23,783,318 shares of common stock which
will be held by existing stockholders, including the officers and directors, are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144. In addition, we shall issue convertible debentures
totaling $250,000, which are currently convertible into 1,644,737 shares of
common stock (assuming a conversion price equal to 80% of $0.19).
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement
The sale of shares pursuant to the Standby Equity Distribution Agreement
will have a dilutive impact on our stockholders. For example, if the offering
occurred on June 30, 2005 at an assumed offering price of $0.1843 per share (97%
of a recent closing bid price of $0.19 per share), the new stockholders would
experience an immediate dilution in the net tangible book value of $0.1380 per
share. Dilution per share at prices of $0.1382, $0.9220 and $0.0461 per share
would be $0.1218, $0.0946 and $0.675, respectively.
As a result, our net income per share could decrease in future periods,
and the market price of our common stock could decline. In addition, the lower
our stock price, the more shares of common stock we will have to issue under the
Standby Equity Distribution Agreement to draw down the full amount. If our stock
price is lower, then our existing stockholders would experience greater
dilution.
Under The Standby Equity Distribution Agreement Cornell Capital Partners Will
Pay Less Than The Then-Prevailing Market Price Of Our Common Stock
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 3% discount to the lowest closing bid price for
the five days immediately following the notice date of an advance. In addition,
Cornell Capital Partners will retain 5% from each advance. Based on this
discount, Cornell Capital Partners will have an incentive to sell immediately to
realize the gain on the 3% discount. These discounted sales could cause the
price of our common stock to decline, based on increased selling of Transax's
common stock.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market 31,379,143
shares of common stock being registered in this offering. That means that up to
31,379,143 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. The officers and directors of
Transax and those shareholders who are significant shareholders as defined by
the SEC will continue to be subject to the provisions of various insider trading
and rule 144 regulations.
The Sale Of Our Stock Under Our Standby Equity Distribution Agreement Could
Encourage Short Sales By Third Parties, Which Could Contribute To The Future
Decline Of Our Stock Price
In many circumstances the provision of a Standby Equity Distribution
Agreement for companies that are traded on the Over-the-Counter Bulletin Board
has the potential to cause a significant downward pressure on the price of
common stock. This is especially the case if the shares being placed into the
market exceed the market's ability to take up the increased stock or if Transax
has not performed in such a manner to show that the equity funds raised will be
used to grow Transax. Such an event could place further downward pressure on the
price of common stock. Under the terms of our Standby Equity Distribution
Agreement, Transax may request numerous draw downs pursuant to the terms of the
Standby Equity Distribution Agreement. Even if Transax uses the Standby Equity
Distribution Agreement to grow its revenues and profits or invest in assets
which are materially beneficial to Transax the opportunity exists for short
sellers and others to contribute to the future decline of Transax's stock price.
If there are significant short sales of stock, the price decline that would
result from this activity will cause the share price to decline more so which in
turn may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock the price will decline.
11
It is not possible to predict those circumstances whereby short sales
could materialize or to what the share price could drop. In some companies that
have been subjected to short sales the stock price has dropped to near zero.
This could happen to Transax's stock price.
The Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This Offering
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
We May Not Be Able To Access Sufficient Funds Under The Standby Equity
Distribution Agreement When Needed
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Standby Equity
Distribution Agreement. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part, because we are
limited to a maximum draw down of $250,000 during any seven trading day period
and $1,000,000 per month. In addition, the number of shares being registered may
not be sufficient to draw all funds available to us under the Standby Equity
Distribution Agreement. Based on the assumed offering price of $0.1843 and the
22,909,507 shares we are registering, we would not be able to draw the entire $5
million available under the Standby Equity Distribution Agreement. At this
assumed price, we will be able to draw gross proceeds $4,222,222 with the
22,909,507 shares being registered. Transax would be required to register
4,220,174 additional shares at this assumed price to obtain the entire $5
million available under the Standby Equity Distribution Agreement.
We May Not Be Able To Draw Down Under The Standby Equity Distribution Agreement
If The Investor Holds More Than 9.99% Of Our Common Stock
Under the Standby Equity Distribution Agreement, in the event Cornell
Capital holds more than 9.99% of the then-outstanding common stock of Transax,
we will be unable to draw down on the Standby Equity Distribution Agreement.
Currently, Cornell Capital has beneficial ownership of 3.96% of our common stock
and therefore we would be able to draw down on the Standby Equity Distribution
Agreement so long as Cornell Capital's beneficial ownership remains below 9.99%.
If Cornell Capital Partner's beneficial ownership becomes 9.99%, we would be
unable to draw down on the Standby Equity Distribution Agreement. In that event,
if we are unable to obtain additional external funding or generate revenue from
the sale of our products, we could be forced to curtail or cease our operations.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
o Nasdaq stocks that trade below $5.00 per share are deemed a "penny stock"
for purposes of Section 15(b)(6) of the Exchange Act
o In issuers with net tangible assets less than $2.0 million (if the issuer
has been in continuous operation for at least three years) or $5.0 million
(if in continuous operation for less than three years), or with average
revenues of less than $6.0 million for the last three years.
12
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
13
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Description of Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this prospectus
will in fact occur.
14
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The selling shareholders are the entities who have assisted in or
provided financing to Transax. A description of each selling shareholder's
relationship to Transax and how each selling shareholder acquired the shares to
be sold in this offering is detailed in the information immediately following
this table.
Percentage of
Outstanding
Percentage of Shares to be Shares to Be
Outstanding Acquired under Acquired under Percentage
Shares Shares the Standby the Standby of Shares
Beneficially Beneficially Equity Equity Shares to Beneficially
Owned Before Owned Before Distribution Distribution be Sold in Owned After
Selling Stockholder Offering Offering (1) Agreement Agreement the Offering Offering (1)
-------------------- ------------- ------------- ------------- -------------- ------------- ------------
Shares Acquired in Financing Transactions with Transax
Cornell Capital
Partners, LP 1,201,779(2) 3.96% 22,909,507 43.004% 24,111,286(3) 0%
Monitor Capital, Inc. 125,000 * -- -- 125,000 0%
Scott and Heather
Grimes - Joint
Tenants with Rights
of Survivorship 1,543,439 (4) 4.99% -- -- 7,142,857 (5) 0%
Total 2,870,218 8.95% 22,909,507 43.004% 31,379,143 0%
-------------------- ------------- ------------- ------------- -------------- ------------ ------------
----------
* Less than 1%.
(1) Applicable percentage of ownership is based on 30,322,981 shares of common
stock outstanding as of August 30, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
August 30, 2005, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of August 30, 2005 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(2) Consists of 1,201,779 shares of common stock received on December 15, 2004
as a one-time commitment fee under a now-terminated Standby Equity
Distribution Agreement.
(3) Includes the shares acquired by Cornell Capital Partners under the Standby
Equity Distribution Agreement and the 1,201,779 shares of common stock
received as a one-time commitment fee under a now-terminated Standby
Equity Distribution Agreement.
(4) Consists of the shares of common stock underlying conversion of a $250,000
convertible debenture, taking into account the 4.99% ownership limitation.
(5) Includes a good faith estimate of the number of shares needed as a result
of conversion of a total of $250,000 of the convertible debentures.
The following information contains a description of each selling
shareholder's relationship to Transax and how each selling shareholder acquired
the shares to be sold in this offering is detailed below. None of the selling
stockholders have held a position or office, or had any other material
relationship, with Transax, except as follows:
Shares Acquired In Financing Transactions With Transax
Cornell Capital Partners, LP. Cornell Capital Partners, LP is the investor
under the Standby Equity Distribution Agreement. All investment decisions of,
and control of, Cornell Capital Partners are held by its general partner,
Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors,
makes the investment decisions on behalf of and controls Yorkville Advisors.
Cornell Capital Partners acquired all shares being registered in this offering
in a financing transaction with Transax. This transaction is explained below:
o Standby Equity Distribution Agreement. On October 25, 2004, the
Company entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners. Pursuant to the Standby Equity
Distribution Agreement, the Company could, at its discretion,
periodically sell to Cornell Capital Partners shares of common stock
for a total purchase price of up to $5.0 million.
15
On May 17, 2005, Transax entered into a Termination Agreement with
Cornell Capital Partners, whereby that certain Standby Equity
Distribution Agreement, dated October 25, 2004, and the related
Registration Rights Agreement, Placement Agent Agreement and Escrow
Agreement of even date therewith were terminated. Upon execution of
the Termination Agreement, we entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, dated May 17,
2005. Pursuant to the Standby Equity Distribution Agreement, we may,
at our discretion, periodically sell to Cornell Capital Partners
shares of common stock for a total purchase price of up to $5.0
million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay
Transax 97% of, or a 3% discount to, the lowest closing bid price of
our common stock on the Over-the-Counter Bulletin Board or other
principal market on which our common stock is traded for the five
days immediately following the notice date. Further, Cornell Capital
Partners will retain 5% of each advance under the Standby Equity
Distribution Agreement. In connection with the Standby Equity
Distribution Agreement, Cornell Capital Partners received a one-time
commitment fee in the form of 1,201,779 shares of common stock in
the amount of $200,000, which were issued on December 15, 2004 under
a now-terminated Standby Equity Distribution Agreement. We are
registering 22,909,507 shares in this offering, which may be issued
under the Standby Equity Distribution Agreement. For Transax to
receive gross proceeds of $5 million using the 22,909,507 shares
being registered in this prospectus, the price of our common stock
would need to average $0.21825 per share.
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares will be issued based on discount to the
market rate. As a result, the lower the stock price around the time
Cornell is issued shares, the greater chance that Cornell gets more
shares. This could result in substantial dilution to the interests
of other holders of common stock.
o To the extent Cornell sells its common stock, the common stock price
may decrease due to the additional shares in the market. This could
allow Cornell to sell greater amounts of common stock, the sales of
which would further depress the stock price.
o The significant downward pressure on the price of the common stock
as Cornell sells material amounts of common stocks could encourage
short sales by third parties. This could place further downward
pressure on the price of the common stock.
On October 25, 2004, the Company and Cornell Capital Partners entered into
a Securities Purchase Agreement, pursuant to which Cornell Capital Partners
purchased two 2 five 5% secured convertible debentures. The initial convertible
debenture in the original principal amount of $125,000 was dated October 25,
2004 and the second convertible debenture in the original principal amount of
$125,000 was dated January 4, 2005 (collectively, the "Original Debentures"). On
May 17, 2005, the Company and Cornell Capital Partners entered into a $255,237
Promissory Note (the "Note"), whereby the Original Debentures were terminated.
This Note represents the outstanding principal balance of $250,000 on the
Original Debentures, plus accrued but unpaid interest through April 30, 2005
equal to $5,237. The Note bears interest at a rate of 12% per annum and is
secured by stock pledged by certain shareholders of the Company.
Monitor Capital, Inc. Monitor Capital, Inc. is an unaffiliated registered
broker-dealer that has been retained by us. For its services in connection with
the Standby Equity Distribution Agreement, Monitor Capital received a fee of
$10,000, which was paid by the issuance of 125,000 shares of common stock of
Transax on December 6, 2004 under a now-terminated Standby Equity Distribution
Agreement. These shares are being registered in this offering. All investment
decisions of Monitor Capital are made by its President, Hsiao-Wen Kao.
Scott and Heather Grimes - Joint Tenants With Rights of Survivorship.
Scott and Heather Grimes - Joint Tenants With Rights of Survivorship are the
holders of convertible debentures. Grimes acquired all shares being registered
in this offering in a financing transaction with Transax. This transaction is
explained below:
o Convertible Debentures. Pursuant to a Securities Purchase Agreement
entered into on April 1, 2005, Grimes purchased $250,000 of
convertible debentures from Transax. The debentures are convertible
at the holder's option any time up to maturity at a conversion price
equal to the lower of (i) 120% of the closing bid price of the
common stock on the date of the debentures or (ii) 80% of the lowest
closing bid price of the common stock for the five trading days
immediately preceding the conversion date. The debentures have a
two-year term and accrue interest at 5% per year. At maturity, the
debentures will automatically convert into shares of common stock at
a conversion price equal to the lower of (i) 120% of the closing bid
price of the common stock on the date of the debentures or (ii) 80%
of the lowest closing bid price of the common stock for five trading
days immediately preceding the conversion date. We are registering
7,142,857 shares of common stock under this prospectus under the
secured convertible debenture.
16
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 97% of the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board for the five days immediately
following the notice date. Transax will pay Cornell Capital 5% of each advance
as an additional fee.
Pursuant to the Standby Equity Distribution Agreement, Transax cannot draw
more than $250,000 every five trading days, more than $1,000,000 per month, or
more than $5 million over twenty-four months.
For illustrative purposes only, we have set forth below our intended use
of proceeds for the range of net proceeds indicated below to be received under
the Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $85,000, plus 5% retainage payable to Cornell Capital Partners under
the Standby Equity Distribution Agreement. The figures below are estimates only,
and may be changed due to various factors, including the timing of the receipt
of the proceeds.
Gross proceeds $ 1,000,000 $ 2,000,000 $ 4,222,222 $ 5,000,000
Net proceeds $ 865,000 $ 1,815,000 $ 3,926,111 $ 4,665,000
No. of shares needed to issue under the
Standby Equity Distribution Agreement at
an assumed offering price of $0.1843 to
receive the net proceeds 5,425,936 10,851,872 22,909,527 27,127,680
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT AMOUNT
----------- ----------- ----------- -----------
General Working Capital $ 865,000 $ 1,815,000 $ 3,926,111 $ 4,665,000
----------- ----------- ----------- -----------
Total $ 865,000 $ 1,815,000 $ 3,926,111 $ 4,665,000
=========== =========== =========== ===========
(1) Transax would be required to register 4,220,153 additional shares at
this price to obtain the entire $5 million available under the Standby Equity
Distribution Agreement.
The Standby Equity Distribution Agreement limits Transax's use of proceeds
to general corporate purposes and prohibits the use of proceeds to pay any
judgment or liability incurred by any officer, director or employee of Transax,
except under certain limited circumstances.
17
DILUTION
The net tangible book value of Transax as of June 30, 2005 was a deficit
of $(2,054,413) or $(0.0682) per share of common stock. Net tangible book value
per share is determined by dividing the tangible book value of Transax (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to Transax, our net tangible
book value will be unaffected by this offering. Our net tangible book value and
our net tangible book value per share, however, will be impacted by the common
stock to be issued under the Standby Equity Distribution Agreement. The amount
of dilution will depend on the offering price and number of shares to be issued
under the Standby Equity Distribution Agreement. The following example shows the
dilution to new investors at an offering price of $0.1843 per share, which is in
the range of the recent share price.
If we assume that we had issued 22,909,507 shares of common stock under
the Standby Equity Distribution Agreement at an assumed offering price of
$0.1843 per share (i.e., the number of shares registered in this offering under
the Standby Equity Distribution Agreement), less retention fees of $211,111 and
offering expenses of $85,000, our net tangible book value as of June 30, 2005
would have been $1,871,698 or $0.0463 per share. Note that at an offering price
of $0.1843 per share, we would receive net proceeds of $3,926,111 of the
$5,000,000 available under the Standby Equity Distribution Agreement. At an
assumed offering price of $0.1843, Cornell Capital Partners would receive a
discount of $211,111 on the purchase of 22,909,507 shares of common stock. Such
an offering would represent an immediate increase in net tangible book value to
existing stockholders of $0.1035 per share and an immediate dilution to new
stockholders of $0.1490 per share. The following table illustrates the per share
dilution:
Assumed public offering price per share ~ $0.1843
Net tangible book value per share before this offering $0.0682 ~
Increase attributable to new investors $0.1035 ~
Net tangible book value per share after this offering ~ $0.0353
Dilution per share to new stockholders ~ $0.1490
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION
ASSUMED NO. OF SHARES TO BE PER SHARE
OFFERING PRICE ISSUED TO NEW INVESTORS
-------------- ------------------- ----------------
$0.1843 22,909,507(1) $0.1490
$0.1382 22,909,507 $0.1218
$0.0873 22,909,507 $0.0946
$0.0461 22,909,507 $0.0675
(1) This represents the maximum number of shares of common stock that are
being registered under the Standby Equity Distribution Agreement at this
time.
18
STANDBY EQUITY DISTRIBUTION AGREEMENT
Summary
On May 17, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $5.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay 97% of, or a 3%
discount to, the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five days immediately following the notice date. The
number of shares purchased by Cornell Capital Partners for each advance is
determined by dividing the amount of each advance by the purchase price for the
shares of common stock. Further, Cornell Capital Partners will retain 5% of each
advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. The
effectiveness of the sale of the shares under the Standby Equity Distribution
Agreement is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission, among other things. The costs associated
with this registration will be borne by us. There are no other significant
closing conditions to draws under the Standby Equity Distribution Agreement.
Standby Equity Distribution Agreement Explained
Pursuant to the Standby Equity Distribution Agreement, we may periodically
sell shares of common stock to Cornell Capital Partners to raise capital to fund
our working capital needs. The periodic sale of shares is known as an advance.
We may request an advance every five trading days. A closing will be held six
trading days after such written notice at which time we will deliver shares of
common stock and Cornell Capital Partners will pay the advance amount. There are
no closing conditions imposed on Transax for any of the draws other than that we
have filed our periodic and other reports with the Securities and Exchange
Commission, delivered the stock for an advance, the trading of Transax common
stock has not been suspended, and we have given written notice and associated
correspondence to Cornell Capital Partners. We are limited however, on our
ability to request advances under the Standby Equity Distribution Agreement
based on the number of shares we have registered on this registration statement.
For example, at an assumed offering price of $0.1843, we would not be able to
draw the entire gross proceeds of $5,000,000 available under the Standby Equity
Distribution Agreement with the 22,909,507 shares we are registering. Transax
would be required to register 4,220,173 additional shares at this assumed price
to obtain the entire $5 million available under the Standby Equity Distribution
Agreement. In order to access all funds available to us under the Standby Equity
Distribution Agreement with the 22,909,507 shares being registered in this
offering, the average price of shares issued under the Standby Equity
Distribution Agreement would need to be $0.21825.
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $5.0 million or 24 months after the effective date
of the this registration statement, whichever occurs first.
The amount of each advance is subject to a maximum amount of $250,000, and
we may not submit an advance within five trading days of a prior advance. There
is also a monthly draw limit of $1,000,000. The amount available under the
Standby Equity Distribution Agreement is not dependent on the price or volume of
our common stock. Our ability to request advances is conditioned upon us
registering the shares of common stock with the Securities and Exchange
Commission. In addition, we may not request advances if the shares to be issued
in connection with such advances would result in Cornell Capital Partners owning
more than 9.99% of our outstanding common stock. Cornell Capital Partners'
beneficial ownership of Transax common stock is currently 3.96% and therefore we
would be permitted to make draws on the Standby Equity Distribution Agreement so
long as Cornell Capital Partners' beneficial ownership of our common stock
remains lower than 9.99%. A possibility exists that Cornell Capital Partners may
own more than 9.99% of Transax's outstanding common stock at a time when we
would otherwise plan to make an advance under the Standby Equity Distribution
Agreement.
We do not have any agreements with Cornell Capital Partners regarding the
distribution of such stock, although Cornell Capital Partners has indicated that
it intends to promptly sell any stock received under the Standby Equity
Distribution Agreement.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Standby Equity Distribution Agreement, in part, because
the purchase price of the shares will fluctuate based on prevailing market
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our common stock that
will be issued using certain assumptions. Assuming we issued the number of
shares of common stock being registered in the accompanying registration
statement at a recent stock price of $0.19 per share, we would issue 22,909,507
shares of common stock to Cornell Capital Partners for net proceeds of
$3,926,111. These shares would represent 43.04% our outstanding common stock
upon issuance. We will need to register additional shares of common stock in
order to fully utilize the $5.0 million available under the Standby Equity
Distribution Agreement if the average price at which we sell shares under the
Standby Equity Distribution Agreement is less than $0.21825 per share.
19
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following table, which shows the
number of shares to be issued under the Standby Equity Distribution Agreement at
a recent stock price of $0.19 per share and 25%, 50% and 75% discounts to the
recent price.
Market Price: $0.19 $0.1425 $0.095 $0.0475
Purchase Price: $0.1843 $0.1382 $0.0921 $0.0461
No. of Shares(1): 22,909,507 22,909,507 22,909,507 22,909,507
Total Outstanding (2): 53,232,488 53,232,488 53,232,488 53,232,488
Percent Outstanding (3): 43.04% 43.04% 43.04% 43.04%
Net Cash to Transax(4): $3,926,111 $2,922,789 $1,919,468 $918,322
(1) Represents the number of shares of common stock being registered in this
Registration Statement to be issued pursuant to the Standby Equity
Distribution Agreement at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners under the Standby
Equity Distribution Agreement, not including shares issued under the
convertible debenture.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
offering expenses.
Proceeds used under the Standby Equity Distribution Agreement will be used
in the manner set forth in the "Use of Proceeds" section of this prospectus. We
cannot predict the total amount of proceeds to be raised in this transaction
because we have not determined the total amount of the advances we intend to
draw. Cornell Capital Partners has the ability to permanently terminate its
obligation to purchase shares of common stock from Transax under the Standby
Equity Distribution Agreement if there shall occur any stop order or suspension
of the effectiveness of this registration statement for an aggregate of fifty
(50) trading days other than due to acts by Cornell Capital Partners or if
Transax fails materially to comply with certain terms of the Standby Equity
Distribution Agreement, which remain uncured for thirty (30) days after notice
from Cornell Capital Partners.
All fees and expenses under the Standby Equity Distribution Agreement will
be borne by Transax. We expect to incur expenses of approximately $85,000 in
connection with this registration, consisting primarily of professional fees. In
connection with the Standby Equity Distribution Agreement, Cornell Capital
Partners received a one-time commitment fee in the form of 1,201,779 shares of
common stock in the amount of $200,000 on December 15, 2004 under a
now-terminated Standby Equity Distribution Agreement.
20
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted or (ii) in transactions otherwise than on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay us 97%
of, or a 3% discount to, the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the five days immediately following the advance date.
In addition, Cornell Capital Partners will retain 5% of the proceeds received by
us under the Standby Equity Distribution Agreement, and received a one-time
commitment fee in the form of 1,201,779 shares of common stock in the amount of
$200,000 on December 15, 2004 under a now-terminated Standby Equity Distribution
Agreement. The 3% discount, the 5% retainage and commitment fee in the form of
1,201,779 shares of common stock in the amount of $200,000 are underwriting
discounts. In addition, Transax engaged Monitor Capital, a registered
broker-dealer, to advise us in connection with the Standby Equity Distribution
Agreement. For its services, Monitor Capital received 125,000 shares of
Transax's common stock on December 6, 2004 under a now-terminated Standby Equity
Distribution Agreement.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in our stock or to otherwise engage in stabilizing
or other transactions intended to help support the stock price. Prospective
investors should take these factors into consideration before purchasing our
common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. If
any of these other expenses exists, Transax expects the selling stockholders to
pay these expenses. We have agreed to indemnify Cornell Capital Partners and its
controlling persons against certain liabilities, including liabilities under the
Securities Act. We estimate that the expenses of the offering to be borne by us
will be approximately $85,000, as well as retention of 5% of the gross proceeds
received under the Standby Equity Distribution Agreement. In addition, Transax
engaged Monitor Capital, a registered broker-dealer, to advise us in connection
with the Standby Equity Distribution Agreement. For its services, Monitor
Capital received 125,000 shares of Transax's common stock on December 6, 2004
under a now-terminated Standby Equity Distribution Agreement. The offering
expenses consist of: a SEC registration fee of $403.00, printing expenses of
$2,500, accounting fees of $15,000, legal fees of $50,000 and miscellaneous
expenses of $17,097 We will not receive any proceeds from the sale of any of the
shares of common stock by the selling stockholders. We will, however, receive
proceeds from the sale of common stock under the Standby Equity Distribution
Agreement.
21
The selling stockholders are subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and its regulations, including,
Regulation M. Under Registration M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. Pursuant to the requirements of Item 512 of
Regulation S-B and as stated in Part II of this Registration Statement, the
Company must file a post-effective amendment to the accompanying Registration
Statement once informed of a material change from the information set forth with
respect to the Plan of Distribution.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Transax International Limited, a Colorado corporation (the "Company"),
currently trades on the Over-the-Counter Bulletin Board under the symbol
"TNSX.OB".
The Company was incorporated under the laws of the State of Colorado in
1999 under the name "Vega-Atlantic Corporation." Previously, the Company was
engaged in the business of minerals and oil and gas exploration, acquisition and
development within the United States and worldwide. During August 2003, the
Company completed the acquisition of Transax Limited, a Colorado privately-held
corporation ("Transax Limited"), pursuant to a reverse merger and changed its
name to "Transax International Limited" by filing an amendment to its articles
of incorporation.
The Company, through its wholly-owned subsidiary TDS Telecommunication
Data Systems LTDA. ("TDS") is an international provider of information network
solutions, products and services specifically designed for the healthcare
providers and health insurance companies (collectively, the "Health Information
Management Products").
Subsidiaries
TDS Telecommunication Data Systems LTDA
TDS was incorporated under the laws of Brazil on May 2, 1998, and is a
wholly-owned subsidiary of the Company. TDS assists the Company in providing
information network solutions, products and services within Brazil.
Transax Australia Pty Ltd.
Transax Australia Pty Ltd. ("Transax Australia") was incorporated under
the laws of the state of New South Wales, Australia on January 19, 2003, and is
a wholly-owned subsidiary of the Company. Transax Australia assists the Company
in seeking marketing opportunities to provide information network solutions,
products and services within Australia and regionally.
Medlink Technologies, Inc.
Medlink Technologies, Inc. ("Medlink") was incorporated under the laws of
Mauritius on January 17, 2003, and is a wholly-owned subsidiary of the Company.
Medlink holds the intellectual property developed by the Company and is
responsible for initiating research and development.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles or GAAP in
the United States. The preparation of those financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities at the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments
or uncertainties, and potentially result in materially different results under
different assumptions and conditions. The Company believes the following
accounting policies are our most critical accounting policies includes:
Revenue Recognition
We follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
23
Accounting for Stock-Based Compensation
We have chosen to account for stock- based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair market value of our stock at the date of the grant
over the amount an employee must pay to acquire the stock. We have adopted the
"disclosure only" alternative described in Statement of Financial Accounting
Standards ("SFAS") No. 123 and SFAS No. 148, which require pro forma disclosures
of net income and earnings per share as if the fair value method of accounting
had been applied. We account for stock options and stock issued to non-employees
for goods or services using the fair value method of SFAS 123
Effect of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an
Amendment of FASB Statement No. 123". SFAS No. 123R requires companies to
recognize, in the statement of operations, the grant-date fair value of stock
options and other equity-based compensation issued to employees. SFAS No. 123R
is effective for the Company on January 1, 2006. We are in process of evaluating
the impact of this pronouncement on our financial position.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non- monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. We believe that the adoption of this
standard will have no material impact on our financial statements.
Results Of Operations
Six-Month Period Ended June 30, 2005 Compared To Six-Month Period Ended
June 30, 2004
Our net losses during the six-month period ended June 30, 2005 were
$281,306 compared to a net loss of $544,384 during the six-month period ended
June 30, 2004. During the six month period ended June 30, 2005, we generated
$1,501,431 in net revenues compared to $450,199 in net revenues for the six
months ended June 30, 2004, an increase of $1,051,232 or 233.5%. The significant
increase in revenues is due to the continued rollout of software contracts in
Brazil. We undertook approximately 3.0 million "real-time" transactions during
the first and second quarter of 2005 compared to 1.1 million "real-time"
transactions during the same period in 2004. We installed a record 1043 Point of
Sales (POS) solutions during the six months ended June 30, 2005. At the end of
June 2005 we had 4,600 solutions operational in Brazil including 2345 Point of
Sales solutions.
Six-Month Period Ended June 30, 2005 Compared To Six-Month Period Ended
June 30, 2004
During the six-month period ended June 30, 2005, we incurred operating
expenses of $1,596,323 compared to operating expenses of $890,578 incurred
during the six-month period ended June 30, 2004, an increase of $705,745 or
79.3%. The increase in operating expenses during the six-month period ended June
30, 2005 from the same period in 2004 resulted from: (i) an increase of
$350,147, or approximately 141.8%, in cost of product support services resulting
from the increase in net revenues; (ii) an increase of $41,887, or approximately
25.3%, in payroll and related benefits due to an increase in employees needed to
handle our increased operations; (iii) an increase of $172,048, or 93%, in
general and administrative expenses resulting from increased operating costs
associated with increased operations; (iv) an increase of $80,042, or 100%, in
stock-based compensation and consulting fees as a result of an increase in stock
issuances to employees, officers and consultants; (v) an increase of $68,853, or
approximately 198%, in depreciation and amortization expense as a result of an
increase in property and equipment acquired for our TDS operations, (vi) an
increase in research and development costs of $42,041 related to increased
amortization of development costs associated with our software, and (vii) an
increase in professional fees of $37,564 related to our SEC filings and filing
of a registration statement of form SB-2.
Certain operating expenses, however, decreased during the six-month period
ended June 30, 2005 from the same period in 2004 as follows: (i) a decrease of
$82,835, or 52.5%, in management and consulting fees, which is attributable to a
decrease in the use of consultants; and (ii) a decrease of $4,002, or
approximately, 20.4%, in investor relation fees attributable to a decrease in
the use of investor relations services.
We reported a loss from operations of ($94,892) for the six-month period
ended June 30, 2005 as compared to a loss from operations of ($440,379) for the
six-month period ended June 30, 2004. Although there can be no assurances, we
anticipate that during the fiscal year 2005, our ongoing marketing efforts and
product roll-out will result in an increase in our net sales from those reported
in the six months ended June 30, 2005. To support these increased sales, we
anticipate that our operating expenses will also increase during the fiscal year
2005 as compared to the fiscal 2004. We are, however, unable to predict at this
time the amount of any such increase in operating expenses.
24
Total other expenses increased $82,409, or approximately 79.2%, for six
months ended June 30, 2005 as compared to the six months ended June 30, 2004.
Included in this change is: (i) an increase in other income of $29,717 due to
the income recognized upon settlement of accounts payable balances which were
settled for less than the original obligation.; (ii) an increase of $137,679 or
approximately 160.7%, in interest expense for the six months ended June 30, 2005
as compared to the six months ended June 30, 2004 which reflects an increase in
our borrowings during six months ended June 30, 2005, the recording of
beneficial interest of $62,500 and interest expense recorded in connection with
the grant of warrants upon debt conversion of $31,200; and (iii) an increase of
$25,553 in foreign exchange rate gains due to a favorable fluctuation in the
exchange rate between Brazil and the United States.
For the six months ended June 30, 2005, our net loss was ($281,306) or
($0.01) per common share compared to a net loss of ($544,384) or ($0.04) per
common share for the six month period ended June 30, 2004.
Three-Month Period Ended June 30, 2005 Compared To Three-Month Period
Ended June 30, 2004
Our net losses during the three-month period ended June 30, 2005 were
$182,487 compared to a net loss of $112,214 during the three-month period ended
June 30, 2004. During the three-month period ended June 30, 2005, we generated
$861,023 in net revenues compared to $312,615 in net revenues for the
three-months ended June 30, 2004, an increase of $548,408 or 175.4%. The
significant increase in revenues is due to the continued rollout of software
contracts in Brazil as discussed above. During the three-month period ended June
30, 2005, we incurred operating expenses of $916,787 compared to operating
expenses of $391,324 incurred during the three-month period ended June 30, 2004,
an increase of $525,463 or 134.3%. The increase in operating expenses during the
three-month period ended June 30, 2005 from the same period in 2004 resulted
from: (i) an increase of $232,534, or approximately 143.5%, in cost of product
support services resulting from the increase in net revenues; (ii) an increase
of $19,802, or approximately 23.8%, in payroll and related benefits due to an
increase in employees needed to handle our increased operations; (iii) an
increase of $98,929, or 119.2%, in general and administrative expenses resulting
from increased operating costs associated with increased operations; (iv) an
increase of $26,500, or 100%, in stock-based compensation and consulting fees as
a result of an increase in stock issuances to employees, officers and
consultants; (v) an increase of $42,273, or approximately 252.3%, in
depreciation and amortization expense as a result of an increase in property and
equipment acquired for our TDS operations, (vi) an increase in research and
development costs of $22,074 related to increased amortization of development
costs associated with our software, and (vii) an increase in professional fees
of $123,038 related to our SEC filings and the filing of a registration
statement, Form SB-2.
Certain operating expenses, however, decreased during the three-month
period ended June 30, 2005 from the same period in 2004 as follows: (i) a
decrease of $37,650, or 47.7%, in management and consulting fees, which is
attributable to a decrease in the use of consultants; and (ii) a decrease of
$2,037, or approximately, 72.1%, in investor relation fees attributable to a
decrease in the use of investor relations services.
We reported a loss from operations of ($55,764) for the three-month period
ended June 30, 2005 as compared to a loss from operations of ($78,709) for the
three-month period ended June 30, 2004.
Total other expenses increased $93,218, or approximately 278.2%, for three
months ended June 30, 2005 as compared to three months ended June 30, 2004.
Included in this change is: (i) a decrease in other expense of $11,372 as
reported for the three months ended June 30, 2004.; (ii) an increase of
$110,331, or approximately 273.6%, in interest expense for the three months
ended June 30, 2005 as compared to the three months ended June 30, 2004; and
(iii) an increase of $5,741 in foreign exchange rate gains due to a favorable
fluctuation in exchange rate between Brazil and the United States.
Therefore, our net loss during the three month period ended June 30, 2005
was ($182,487) or ($0.01) per common share compared to a net loss of ($112,214)
or ($0.01) per common share for the three month period ended June 30, 2004.
For Fiscal Year Ended December 31, 2004 Compared To Fiscal Year Ended
December 31, 2003
We incurred net losses of approximately ($1,792,300) for the fiscal year
ended December 31, 2004, compared to a net loss of approximately ($3,230,300)
for the fiscal year ended December 31, 2003 (an approximate decrease of
$1,438,000). Comparative results for fiscal year ended December 31, 2003 include
the results of Transax and TDS only from August 14, 2003 when the merger was
completed. The results for the current period include our operations. Analysis
of the operating losses for fiscal year ended December 31, 2004 compared to
fiscal year ended December 31, 2003 is as follows.
25
During the fiscal year ended December 31, 2004, we generated approximately
$1,199,900 in net revenues compared to approximately $309,589 in net revenues
during the fiscal year ended December 31, 2003 (an approximate increase of
$890,311). The significant increase in revenues is due to the rollout of new
software contracts in Brazil.
During the fiscal year ended December 31, 2004, we incurred approximately
$2,793,500 in operating expenses compared to approximately $3,352,000 in
operating expenses during the fiscal year ended December 31, 2003 (an
approximate decrease of $558,500). The decrease in operating expenses during the
fiscal year ended December 31, 2004 is primarily due to a decrease in stock
based compensation from $1,210,100 during the fiscal year ended December 31,
2003 to $502,369 during the fiscal year ended December 31, 2004 (although cost
of product support services increased and such decrease in operating expenses
may not be deemed proportional to the increase in revenues during the same
period due to the decrease in stock-based compensation expenses during such
period and as more particularly described below).
During the fiscal year ended December 31, 2004, payroll and related
benefits increased to approximately $364,500 (2003: $302,549) mostly due to
research and development expenditures. The cost of product support services
increased from approximately $397,900 to $603,586 for the fiscal year ended
December 31, 2004, due to the rollout of our newest contracts in Brazil.
During the fiscal year ended December 31, 2004, we incurred approximately
$127,374 in professional fees compared to approximately $385,563 during the
fiscal year ended December 31, 2003. This decrease in professional fees is
primarily due to a reduction in accounting and legal expenses relating to the
merger of Transax. During the fiscal year ended December 31, 2004, professional
fees consisted mainly of approximately: (i) $41,635 in audit and accounting fees
(2003: $89,860); (ii) $17,746 in legal fees (2003: $239,872); (iii) $0 in
financing fees (2003: $16,729); and (iv) $67,993 in other professional fees
(2003: $39,102).
During the fiscal year ended December 31, 2004, we incurred approximately
$338,900 (2003: $398,181) in related party management and consulting fees.
During the fiscal year ended December 31, 2004, we incurred general and
administrative expenses of approximately $584,800, compared to general and
administrative expenses of approximately $364,187 during the fiscal year ended
December 31, 2003. The higher costs are primarily due to an increase in support
services required to maintain operations.
During the fiscal year ended December 31, 2004, we incurred approximately
$109,000 (2003: $162,891) in investor relations costs. These costs consist
mainly of the production of promotional materials directed to shareholders and
communication programs and efforts directed to current and potential
shareholders.
During the fiscal year ended December 31, 2004, we incurred other expenses
as follows: (i) $90,956 (2003: $65,032) in interest expense - related party; and
(ii) $64,715 (2003: $-0-) in capital offering costs. The increase in interest
expense to related party during fiscal year ended December 31, 2004 is related
to an increase in receipt of cash advances from a related party and entering
into loan agreements with related parties.
Mr. Walters, our President, Chief Executive Officer and director, derives
remuneration from us as compensation for management and consulting services
rendered. On January 1, 2004, $38,000 was due to Mr. Waters for fees and
expenses incurred during the year ended December 31, 2003. During the fiscal
year ended December 31, 2004, $165,000 was incurred by us to Mr. Walters for
management and consulting services rendered. Furthermore, Mr. Walters has
advanced funds to us and incurred expenses on behalf of us. During fiscal year
ended December 31, 2004, Mr. Walters was paid $-0- by us for consulting fees.
During the fiscal year ended December 31, 2004, an aggregate of $135,000 in
consulting fees and expenses was settled by us by the issuances of 1,687,500
shares of our restricted common stock. At August 30, 2005, Mr. Walters was owed
approximately $149,000 for consulting/management fees and incurred expenses.
Ms. Pilon, our former Chief Financial Officer and Secretary, derived
remuneration from us as compensation for management and consulting services
rendered. On January 1, 2004, $27,400 was due to Ms. Pilon for fees and expenses
incurred during the year ended December 31, 2003. During the fiscal year ended
December 31, 2004, $73,800 was incurred by us to Ms. Pilon for management and
consulting services rendered. Ms. Pilon has also incurred expenses on behalf of
us. During the fiscal year ended December 31, 2004, Ms. Pilon was paid $14,000
by us. At August 30, 2005, Ms. Pilon was owed approximately $16,000 for
management/consulting fees and incurred expenses.
As discussed above, the decrease in net loss during the fiscal year ended
December 31, 2004, compared to the fiscal year ended December 31, 2003, is
attributable primarily to the increase in gross revenues and the decrease in
stock-based compensation expenses. Our net loss during the fiscal year ended
December 31, 2004 was approximately ($1,792,190) or ($0.10) per share compared
to a net loss of approximately ($3,230,276) or ($0.25) during the fiscal year
ended December 31, 2003. The weighted average number of shares outstanding was
17,879,799 for the fiscal year ended December 31, 2004 compared to 12,953,494
for the fiscal year ended December 31, 2003.
26
Liquidity And Capital Resources
As of June 30, 2005, our current assets were $534,525 and our current
liabilities were $2,333,244, which resulted in a working capital deficit of
$1,798,719. As of June 30, 2005, our total assets were $1,737,561 consisting of:
(i) $64,221 in cash; (ii) $100,578 in prepaid expenses and other assets; (iii)
$369,726 in accounts receivable; (iv) 279,878 in net software development costs;
(v) $720,758 in net valuation of property and equipment; and (vi) deferred debt
offering costs of $200,000 which will be amortized into interest expense over
time.
As of June 30, 2005, our total liabilities were $3,209,117 consisting of:
(i) $1,874,109 in long-term and current portion of accounts payable and accrued
expenses; (ii) $172,400 due to related parties; (iii) $274,836 in convertible
loans to related parties; (iv) $142,071 in loan payable to related parties; (v)
$71,051 in long-term and current portion of capital lease obligation; (vi)
$216,521 in convertible debenture payable; and (ix) $458,130 in long-term and
current portion of loan payable.
As at June 30, 2005, our current liabilities were $2,333,244 compared to
$2,121,551 at December 31, 2004. The increase in current liabilities is due
primarily to an increase in accounts payable and accrued expenses and additional
loans to fund operations.
For the six months ended June 30, 2005, net cash flow provided by
operating activities was $251,045 compared to net cash used in operating
activities of $114,525 for the six months ended June 30, 2004. The change in
cash flows used in operating activities is mainly due to the decrease in
operating loss for the period.
Net cash flows used in investing activities amounted to $484,404 for the
six months ended June 30, 2005 compared to $131,531 for the six months ended
June 30, 2004, an increase in cash used in investing activities of $352,873. The
increase is primarily attributable to an increase in the acquisition of property
and equipment in order to facilitate our growth in revenues.
Net cash flow provided by financing activities for the six months ended
June 30, 2005 was $407,674 resulting primarily from proceeds from a convertible
debenture and loans payable compared to $218,869 for the six months ended June
30, 2004 resulting from proceeds from related party loans of $139,500 and
advanced from related parties of $82,500.
In summary, based upon the cash flow activities as previously discussed,
for the six months ended June 30, 2005, our overall cash position increased by
$60,131.
For Fiscal Year Ended December 31, 2004
As of the fiscal year ended December 31, 2004, our current assets were
approximately $225,835 and our current liabilities were approximately
$2,121,600, which resulted in an approximate working capital deficit of
$1,895,700. As of the fiscal year ended December 31, 2004, our total assets were
approximately $789,137 consisting of: (i) $4,090 in cash; (ii) $51,547 in
prepaid expenses; (iii) $170,198 in accounts receivable; (iv) $243,044 in net
software development costs; and (v) $320,258 in net valuation of property and
equipment.
As of fiscal year ended December 31, 2004, our total liabilities were
approximately $2,531,224 consisting of: (i) $1,483,800 in long-term and current
portion of accounts payable and accrued expenses; (ii) $254,709 due to related
parties; (iii) $311,455 in convertible loans from related party; (iv) $168,331
in loan payable from related party; (v) $35,000 in advances payable; (vi)
$92,013 in long-term and current portion of capital lease obligation; (vii)
$125,000 in convertible debenture payable; and (viii) $60,911 in long-term and
current portion of loan payable.
As at December 31, 2004, our current liabilities were approximately
$2,121,600, compared to approximately $1,857,300 at December 31, 2003. The
increase in current liabilities is due primarily to an increase in accounts
payable and accrued expenses and additional loans and cash advances received
from a related party to fund operations.
For the fiscal year ended December 31, 2004, net cash flow used in
operating activities was approximately ($96,700) compared to ($1,097,738) for
the fiscal year ended December 31, 2003. The change in cash flows used in
operating activities is mainly due to the decrease in operating loss for fiscal
year ended December 31, 2004.
27
Net cash flows used in investing activities amounted to approximately
($490,300) during the fiscal year ended December 31, 2004, compared to
($178,413) for fiscal year ended December 31, 2003. During the fiscal year ended
December 31, 2004, we capitalized software research and development costs while
in fiscal year 2003 some of these costs were expenses as part of the costs of
product support services.
Net cash flow provided by financing activities during fiscal year ended
December 31, 2004 was approximately $554,625, resulting primarily from a loan
and cash advances from a related party and proceeds from a convertible debenture
compared to approximately $1,319,629 during fiscal year ended December 31, 2003.
The borrowings were used to fund operating activities.
In summary, based upon the cash flow activities as previously discussed,
during fiscal year ended December 31, 2004, our overall cash position decreased
by approximately $6,382.
Plan of Operation
Since our inception, we have funded operations through short-term
borrowings and equity investments in order to meet our strategic objectives. Our
future operations are dependent upon external funding and our ability to
increase revenues and reduce expenses. Management believes that sufficient
funding will be available from additional related party borrowings and private
placements to meet our business objectives including anticipated cash needs for
working capital, for a reasonable period of time. However, there can be no
assurance that we will be able to obtain sufficient funds to continue the
development of our software products and distribution networks.
As of June 30, 2005, there was substantial doubt regarding our ability to
continue as a going concern as we have not generated sufficient cash flow to
fund our business operations and material commitments. Our future success and
viability, therefore, are dependent upon our ability to develop, provide and
market our information network solutions to healthcare providers, health
insurance companies and other end-users, and the continuing ability to generate
capital financing. We are optimistic that we will be successful in our business
operations and capital raising efforts; however, there can be no assurance that
we will be successful in generating revenue or raising additional capital. The
failure to generate sufficient revenues or raise additional capital may have a
material and adverse effect upon us and our shareholders.
We anticipate an increase in operating expenses over the next three years
to pay costs associated with such business operations. We may need to raise
additional funds. We may finance these expenses with further issuances of our
common stock. We believe that any anticipated private placements of equity
capital and debt financing, if successful, may be adequate to fund our
operations over the next twelve months. Thereafter, we expect we will need to
raise additional capital to meet long-term operating requirements. If we raise
additional funds through the issuance of equity or convertible debt securities
other than to current shareholders, the percentage ownership of our current
shareholders would be reduced, and such securities might have rights,
preferences or privileges senior to our existing common stock. In addition,
additional financing may not be available upon acceptable terms, or at all. If
adequate funds are not available, or are not available with acceptable terms, we
may not be able to conduct our business operations successfully, which could
significantly and materially restrict our overall business operations.
Based upon a twelve-month work plan proposed by management, it is
anticipated that such a work plan would require approximately $2,000,000 to
$5,000,000 of financing designed to fund current debt commitments and business
operations. As of June 30, 2005, we entered into a financing agreement with
Scott and Heather Grimes, Joint Tenants with Right of Survivorship (the
"Investor"). Under the terms of the financing arrangement with the Investor, we
issued convertible debentures to the Investor in the original principal amount
of $250,000. The debentures are convertible at the Investor's option any time up
to maturity at a conversion price equal to the lower of: (i) 120% of the closing
bid price of our Common Stock on the date of the debentures, or (ii) 80% of the
lowest closing bid price of our Common Stock for the five trading days
immediately preceding the conversion date. The debentures have a two-year term
and accrue interest at 5% per year. At maturity, the debentures will
automatically convert into shares of our Common Stock at a conversion price
equal to the lower of: (i) 120% of the closing bid price of our Common Stock on
the date of the debentures, or (ii) 80% of the lowest closing bid price on our
Common Stock for five trading days immediately preceding the conversion date.
Additionally, we entered into a new Standby Equity Distribution Agreement
with Cornell Capital Partners on May 17, 2005. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price of up to $5.0
million.
We believe that we can satisfy our cash requirements for the next twelve
months based on our ability to enter into additional financing arrangement as
necessary. Our future success and viability are primarily dependent upon our
current management to generate revenues from business operations and raise
additional capital through further private offerings of our stock or loans from
private investors. There can be no assurance, however, that we will be able to
raise additional capital. Our failure to successfully raise additional capital
will have a material and adverse affect upon us and our shareholders.
28
Material Liabilities
Cornell Capital Partners, LP Financing Transactions
October 25, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the Standby Equity
Distribution Agreement, the Company could, at its discretion, periodically sell
to Cornell Capital Partners shares of common stock for a total purchase price of
up to $5.0 million.
On May 17, 2005, Transax entered into a Termination Agreement with Cornell
Capital Partners, whereby that certain Standby Equity Distribution Agreement,
dated October 25, 2004, and the related Registration Rights Agreement, Placement
Agent Agreement and Escrow Agreement of even date therewith were terminated.
Upon execution of the Termination Agreement, the Company entered into a
new Standby Equity Distribution Agreement with Cornell Capital Partners on May
17, 2005. Pursuant to the Standby Equity Distribution Agreement, the Company
may, at its discretion, periodically sell to Cornell Capital Partners shares of
common stock for a total purchase price of up to $5.0 million. For each share of
common stock purchased under the Standby Equity Distribution Agreement, Cornell
Capital Partners will pay the Company 97% of, or a 3% discount to, the lowest
closing bid price of the Company's common stock on the Over-the-Counter Bulletin
Board or other principal market on which the Company's common stock is traded
for the five days immediately following the notice date. Cornell Capital
Partners will also retain 5% of each advance under the Standby Equity
Distribution Agreement. Cornell Capital Partner's obligation to purchase shares
of the Company's common stock under the Standby Equity Distribution Agreement is
subject to certain conditions, including the Company obtaining an effective
registration statement for shares of common stock sold under the Standby Equity
Distribution Agreement and is limited to $200,000 per weekly advance and
$1,000,000 per 30 days.
Cornell Capital Partners received a one-time commitment fee in the form of
1,201,779 shares of common stock in the amount of $200,000 under the
now-terminated Standby Equity Distribution Agreement.
On October 25, 2004, the Company and Cornell Capital Partners entered into
a Securities Purchase Agreement, pursuant to which Cornell Capital Partners
purchased two 2 five 5% secured convertible debentures. The initial convertible
debenture in the original principal amount of $125,000 was dated October 25,
2004 and the second convertible debenture in the original principal amount of
$125,000 was dated January 4, 2005 (collectively, the "Original Debentures"). On
May 17, 2005, the Company and Cornell Capital Partners entered into a $255,237
Promissory Note (the "Note"), whereby the Original Debentures were terminated.
This Note represents the outstanding principal balance of $250,000 on the
Original Debentures, plus accrued but unpaid interest through April 30, 2005
equal to $5,237. The Note bears interest at a rate of 12% per annum and is
secured by stock pledged by certain shareholders of the Company.
Convertible Loans
A significant and estimated material liability for us for fiscal year 2005
is the aggregate amount of $311,455 in principal and interest due and owing to a
related party. At December 31, 2004, the loans for $200,000 and $100,000 due to
a related party were in default. Each principal amount loan is evidenced by a
convertible promissory note and is repayable on or before a six-month term. The
interest rate is 12% per annum compounded monthly. The related party as the
lender has the option during the term of the loan, and any extension thereto, to
convert the principal and interest into units in our capital at a conversion
price of $0.25 per unit (the "Unit"). Each Unit is comprised of one share of our
restricted common stock and one warrant, and each warrant entitles the holder
thereof to purchase one share of our restricted common stock at $0.20 per share
for a period of twelve months. On September 29, 2004, our Board of Directors
reduced the conversion price from $0.25 per unit to $0.08 per unit in order to
reflect the current depressed market price of our stock. On March 23, 2005 our
board of directors reset the conversion price of the convertible debentures to
$0.125 per share.
On September 29, 2004, $55,000 of the aggregate amount then due and owing
was settled pursuant to the issuance of 687,500 shares of our restricted common
stock and 687,500 warrants. Each warrant entitles the holder to purchase an
additional share of our common stock at a price of $ 0.20 until September 29,
2009. We also issued 871,425 shares of our restricted common stock to settle
$69,714 in interest due on these loans.
29
Loan
A significant and estimated material liability for us for fiscal year 2005
is the aggregate amount of $163,617 in principal and interest due and owing to a
related party. On March 5, 2004, we borrowed Euro115,000 (approximately
$140,000) from such related party. The loan is evidenced by a promissory note
and is repayable on or before a twelve-month term. The interest rate is 0.8% per
month, compounded. At March 31, 2005, approximately $15,084 in interest was
accrued on this loan. On May 16th 2004 interest of $15,084 was repaid. The loan
has been extended for a further 12 months.
Debenture
A significant and estimated material liability for us for fiscal year 2005
is the aggregate amount of $250,000. On April 1, 2005, we entered into a
financing agreement with the Investor. Under the terms of the financing
arrangement with the Investor, we issued convertible debentures to the Investor
in the original principal amount of $250,000. The debentures are convertible at
the Investor's option any time up to maturity at a conversion price equal to the
lower of: (i) 120% of the closing bid price of our common stock on the date of
the debentures, or (ii) 80% of the lowest closing bid price of our common stock
for the five trading days immediately preceding the conversion date. The
debentures have a two-year term and accrue interest at 5% per year. At maturity,
the debentures will automatically convert into shares of our common stock at a
conversion price equal to the lower of: (i) 120% of the closing bid price of our
common stock on the date of the debentures, or (ii) 80% of the lowest closing
bid price on our common stock for five trading days immediately preceding the
conversion date.
Accrued Payroll and Related Expenses
A significant and estimated material liability for us for fiscal year 2005
is the aggregate amount of approximately $700,000 due and owing for Brazilian
payroll taxes and Social Security taxes.
During 2004 and 2005 , the Company has entered into a number of payment
programs with the Brazilian authorities whereby the Social Security ("INSS")
taxes due, Serverance Fund Taxes ("FGTS") due plus other taxes and applicable
penalties and interests will be repaid over a periods of between 18 and 60
months. At March 31, 2005, the Company's has negotiated some $546,422 of tax
liabilities under these programs. The payment program requires the Company to
pay a monthly fixed amount of the four taxes negotiated. Discussions are
currently ongoing for the Company to enter into a similar payment plan for the
remainder of the payroll tax liabilities. The Company made the first payment as
per the plan in April 2004 and continues to make the required payments. However,
there is no certainty that the Brazilian authorities will enter into a similar
plan in the future
Purchase Of Significant Equipment
We do not intend to purchase any significant equipment during the next
twelve months.
Off Balance Sheet Arrangements
As of the date hereof, we do not have any off-balance sheet arrangements
that have or are reasonably like to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors. The term "off-balance sheet arrangement" generally
means any transaction, agreement or other contractual arrangement to which an
entity unconsolidated with us is a party, under which we have: (i) any
obligation arising under a guarantee contract, derivative instrument or variable
interest; or (ii) a retained or contingent interest in assets transferred to
such entity or similar arrangement that serves as credit, liquidity or market
risk support for such assets.
30
DESCRIPTION OF BUSINESS
Business History And Development
Transax International Limited, a Colorado corporation (the "Company"),
currently trades on the Over-the-Counter Bulletin Board under the symbol
"TNSX.OB."
We were incorporated under the laws of the State of Colorado in 1999 under
the name "Vega-Atlantic Corporation". Previously, we were engaged in the
business of minerals and oil and gas exploration, acquisition and development
within the United States and worldwide.
Our Board of Directors approved the execution of an agreement in principle
dated June 19, 2003 and a subsequent merger agreement and its ancillary
documents dated July 22, 2003 (collectively, the "Merger Agreement") among us
(then known as Vega Atlantic Corporation), Vega-Atlantic Acquisition
Corporation, our wholly-owned subsidiary ("Vega-Atlantic"), Transax Limited, a
Colorado corporation ("Transax"), and certain selling shareholders of Transax.
The Merger Agreement and our acquisition of Transax by way of merger was
completed effective as of August 14, 2003 (the "Effective Date").
In accordance with the completion of the terms and conditions of the
Merger Agreement: (i) Vega-Atlantic merged with Transax (so that Transax became
the surviving company and our wholly-owned subsidiary and, correspondingly, the
shareholders, warrantholders and optionholders of Transax became our
shareholders, warrantholders and optionholders; (ii) our business operations
became that of Transax, primarily consisting of the development, acquisition,
provider and marketing of information network solutions for healthcare providers
and health insurance companies world-wide; and (iii) we changed our name to
"Transax International Limited" and our trading symbol.
Subsidiaries
Tds Telecommunications Data Systems Ltda
TDS Telecommunication Data Systems LTDA. ("TDS") was incorporated under
the laws of Brazil on May 2, 1998, and is our wholly-owned subsidiary. TDS
assists us in providing information network solutions, products and services
within Brazil.
Transax Australia Pty Ltd.
Transax Australia Pty Ltd. was incorporated under the laws of New South
Wales, Australia on January 19, 2003, and is our wholly-owned subsidiary
("Transax Australia"). Transax Australia assists us in seeking marketing
opportunities to provide information network solutions, products and services
within Australia and regionally.
Medlink Technologies, Inc.
Medlink Technologies, Inc. was incorporated under the laws of Mauritius on
January 17, 2003, and is our wholly-owned subsidiary ("Medlink"). Medlink holds
the intellectual property developed by us and is responsible for initiating
research and development.
Current Business Operations
As of the date hereof, through TDS, we are an international provider of
health information management products (collectively, the "Health Information
Management Products"), as described below, which are specifically designed for
the healthcare providers and health insurance companies. We are dedicated to
improving healthcare delivery by providing to hospitals, physician practices and
health insurance companies with innovative health information management systems
to manage coding, compliance, abstracting and record management's processes.
Our strategic focus is to become a premier international provider of
health information management network solutions for the healthcare providers and
health insurance companies, enabling the real time automation of routine patient
transactions. We believe that our unique combination of complimentary solutions
is designed to significantly improve the business of healthcare. Our Health
Information Management Products and software solutions are designed to generate
operational efficiencies, improve cash flow and measure the cost and quality of
care. In general, the Health Information Management Products and software
solutions, including the MedLink Solution, fall into four main areas: (i)
compliance management; (ii) coding and reimbursement management; (iii)
abstracting; and (iv) record management.
31
We believe that hospitals and other healthcare providers must implement
comprehensive coding and compliance programs in order to minimize payer
submission errors and assure the receipt of anticipated revenues. We believe
that an effective program should include clear, defined guidelines and
procedures, which combined with our Health Information Management Products, will
enhance an organization's system and effectively increase revenues and reduce
costs. Our Health Information Management Products will include compliance
management and coding and reimbursement products and software, which are
designed to conduct automated prospective and retrospective reviews of all
in-patient and out-patient claims data. Management tools include internally
designed targets aimed to provide data quality, coding accuracy and appropriate
reimbursement. These tools work in conjunction with an organization's coding and
billing compliance program to (i) identify claims with potential errors prior to
billing; (ii) screen professional fees and services; and (iii) identify patterns
in coding and physician documentation. Results of the auditing and monitoring
activities are represented in executive reports summarizing clinical and
financial results as well as detailed reports providing information needed to
target specific areas for review. Billing practices for health care services are
under close scrutiny by governmental agencies as high-risk areas for Medicare
fraud and abuse. We believe that the Health Information Management Products will
increase an organization's progress in reducing improper payments and ensuring
that medical record documentation support services are provided.
The Health Information Management Products are also designed to include
abstracting solutions, which enable healthcare facilities to accurately collect
and report patient demographic and clinical information. We believe that the
Health Information Management Products will provide the organization with the
ability to calculate in-patient and out-patient hospital reimbursements and
customize data fields needed for state, federal or foreign governmental
regulatory requirements. Standard and custom reports will provide the customer
with the ability to generate facility-specific statistical reporting used for
benchmarking, outcomes and performance improvement, marketing and planning. We
believe that the Health Information Management Products will further provide
healthcare organizations the flexibility to customize abstracting workflow to
meet data collection reporting and analysis needs. The Health Information
Management Products will provide the organization with the ability to customize
workflow by creating fields and rules and designing screen navigation.
We also believe that the Health Information Management Products will
provide record management, which will automate the record tracking and location
functions, monitor record completeness and facilitate the release of information
process within health information management departments. The Health Information
Management Products will assist healthcare organizations in properly completing
records pursuant to state, federal, foreign governmental and medical staff
requirements. The management tools are designed to monitor a facility's
adherence to patient privacy, disclosure and patient bill of rights
requirements, if applicable.
Medlink Solution
We have developed a proprietary software trademarked (Brazil only)
"MedLink Solution", which was specifically designed and developed for the
healthcare and health insurance industry enabling the real time automation of
routine patient eligibility, verifications, authorizations, claims processing
and payment functions that are currently performed manually (the "MedLink
Solution"). A transaction fee is charged to the insurer for use of the MedLink
Solution.
The MedLink Solution hosts its own network processing system (the "Total
Connectivity Solution"), whereby we are able to provide an insurer with the
ability to cost effectively process all of the transactions generated regardless
of location or method of generation. We believe that the MedLink Solution solves
technological and communication problems within the healthcare systems by
creating a virtual "paperless office" for the insurer and total connectivity,
regardless of method, for the health provider. The MedLink Solution replaces
manual medical claims systems and provides insurance companies and healthcare
providers significant savings through a substantial reduction in operational
costs. The MedLink Solution allows users to collect, authorize and process
transaction information in real-time for applications including, but not limited
to, patient and provider eligibility verification, procedure authorization and
claims and debit processing. Participants of the MedLink Solution include
private health insurance companies, group medical companies, and healthcare
providers.
During fiscal year ended December 31, 2003 and 2004, we installed
approximately 1,900 and 2,500 solutions into healthcare provider locations
throughout Brazil, respectively. During the first quarter of 2005, we installed
approximately 778 solutions.
32
Medlink Solution Architecture And Design
We believe that the MedLink Solution is the total connectivity system that
will allow hospitals, clinics, medical specialists and other healthcare
providers to easily capture, route, and authorize medical, hospital, and dental
claims in "real time". The MedLink Solution will address pre-existing
technological and communication problems by creating a universal virtual link
between the insurer and the care provider.
The MedLink Solution's architecture and design is as follows: (i) seven
capture methods; (ii) a network processor; and (iii) an authorizer. Capture
Methods. The MedLink Solution is tailored to the specific care provider's
environment and needs usage based upon its technological resources, physical
installation and volume of claims. The MedLink Solution offers seven different
methods to capture data. The health care provider can select which of these
seven methods best suit its operational needs and technological abilities.
Regardless of the capture method chosen, transactions are seamless and
efficient.
Capture Methods. The MedLink Solution's capture methods are:
- MedLink Solution POS Terminal;
- MedLink Solution Phone;
- MedLink Solution PC Windows
- MedLink Solution PC Net
- MedLink Solution Server Labs
- MedLink Solution Server Hospitals
- MedLink Solution Web
Network Processor. The MedLink Solution network processor routes the
transactions captured by the MedLink Solution (the "Network Processor") to the
authorization system of the healthcare plan (the "Authorization System"). For
example, in Brazil this process is carried out either using Embratel's Renpac
service or the Internet. The Network Processor offers uninterrupted 24-hour,
seven days a week operation and service.
The Network Processor is secured from the Renpac and Internet
communication channels to the communication channels with the Authorization
System, passing through the elements of local network, processors and unities of
storage of data. It is implemented on a RAID5 disk array architecture.
Authorization System. The Authorization System's software is composed of a
control module and a group of storage procedures that validate the specific
rules of the health plan or insurer. It is responsible for: (i) receiving and
decoding the messages sent by the Network Processor, containing the
solicitations of the MedLink Solution installed at the provider; (ii)
identification of the kind of the message (claim, refund, settlement, etc) and
of the service provider; (iii) validation or denial of the transaction; (iv)
updating the historical database of the claims; and (v) replying to the request
by sending a message to the Network Processor.
Product Target Market Strategy
Market Strategy
Our key marketing strategy is to position ourselves as a market leader in
providing total information management network processing solutions for the
healthcare industry worldwide. We believe that its Health Information Management
Products encompass a variety of solutions for healthcare provider locations, a
complete network processing service for the health insurance companies, and
in-house software and systems development to address specific and unique
customer requirements, and the ability to operate the systems through a variety
of communication methods.
The promotional and marketing strategy is based on creating a proactive
"push pull" effect on the demand for the Health Information Management Products
and services within the healthcare industry. We have been focusing on the
promotion and marketing of its products to the Brazilian healthcare providers
and insurance companies by demonstrating: (i) the benefits of the MedLink
Solution application and services; (ii) real-time cash visibility; (iii) nominal
to no capital investment; (iv) the established Network Processor facility; (v)
custom software development support; and (vi) option of immediate payment of
outstanding claims.
33
However, international marketing and promotional strategies will be
developed and adapted on a country-to-country basis to meet different market
environments and governmental requirements, build business and political
relationships, and obtain domestic media exposure and high visibility within the
local healthcare industry to establish credibility.
Product Target Market
We have identified two initial target markets for our products. They are:
(i) healthcare providers, such as physicians, clinics, hospitals, laboratories,
diagnosis centers, emergency centers, etc. and (ii) health insurance and group
medicine companies.
We have been successfully short-listed by the Australian Federal
Government through its Health Insurance Commission (the "HIC"), to supply an
authorization and eligibility solution for the Australian health insurance
market. We are currently engaged in negotiations with the HIC regarding the sale
and purchase of its Health Information Management products for use in
Australia's health insurance reimbursement system. On January 19, 2003, we
established our wholly- owned subsidiary, Transax Australia, to seek additional
opportunities within Australia.
We are currently focused primarily on the marketing and sale of our Health
Information Management products in Brazil. We believe that there is a
significant global market opportunity for our Healthcare Information Management
Products and services and software technology.
Strategic Alliances
We have developed key strategic alliances with the following technology
providers to support the MedLink Solution's unique system architecture and
design. We believe that the establishment of these strategic alliances has given
us a significant competitive advantage in Brazil.
GENS Information - PMS/ASP
On February 19, 2001, we entered into an operating agreement (the "GENS
Operating Agreement") with GENS Information ("GENS"). Pursuant to the terms and
provisions of the GENS Operating Agreement: (i) GENS will provide to us a basic
product called "Personal Med", which is a Windows client-server application,
running with Delphi front-end and Paradox and Oracle DB; and (ii) we will
incorporate the MedLink Solution transaction services within the Personal Med
allowing for its users to use the MedLink Solution services from within their
PMS.
We believe that GENS is the leading Brazilian developer of practice
management software with over 50% of the Brazilian market share. Personal Med is
the name of GENS basic product, with some thirty variations according to
doctor's specialization. The variations are designed around specific exams data
to be acquired and stored in each medical specialization.
We estimate that current installed basis is approximately 10,600 copies
sold directly to doctors, plus approximately 500 copies sold to corporations.
The current structure sells an average of 200 copies a month, plus special
events.
GENS is currently implementing versions to its Personal Med based on SQL
server, and is further developing a web enabled version, which will allow
doctors to select patients they want to have access through the InternetWeb, and
a tool to access the database of each patient for this centralized base. GENS is
also implementing access to doctor's agenda and some direct news to be directed
to Internet enabled doctors.
Vidalink, Inc. - Drug Management
On August 29, 2001, we entered into an operational agreement (the
"Vidalink Operational Agreement"), with Vidalink, Inc. ("Vidalink"), to allow
the Vidalink Health Portal access to the MedLink Solution connectivity services,
creating the first authorization and claims processing Internet service in
Brazil. The Vidalink Health Portal offers doctors, the most extensive set of
information on pathologies and medication practices, with complete drug
interaction analysis and alert functionality. It offers also extensive
continuous education programs, with selection of doctor's areas of interest and
automatic issuing news on selected subjects.
34
Pursuant to the terms and provisions of the Vidalink Operational
Agreement, the MedLink Solution connectivity capabilities will be added to the
Vidalink Health Portal, which will give the MedLink Solution access to
Vidalink's drug management services and Internet content, thus creating a
synergic relationship between the two portals and allow doctors access to each
portal reaching a much broader range of services.
Vidalink is a health portal focused in offering the premier drug
management service package in Latin America, with operations in Mexico and
Brazil. Through Vidalink, health plans have access to drug discount programs, as
well as an extensive drug usage management service, capable of monitoring
consumption of specific drugs by patients. We believe that the Vidalink programs
are supported by agreements with approximately twenty-two of the largest
pharmaceutical industries in Brazil, offering discount packages for drugs
covering over 85% of total chronic diseases. We further believe that Vidalink
also offers a drug delivery scheme from an extensive network of pharmacies
reaching over 5000 points of presence nationwide.
Mosaic Software, Inc. - Network Processor System
On November 25, 2002, we entered into supplier agreement (the "Mosaic
Supplier Agreement") with Mosaic Software, Inc. ("Mosaic"), to develop the
Network Processor software package, known as the "Positllion ", for use in the
MedLink Solution.
We believe that Mosaic is the supplier of the most modern technology for
network control software, based on a low cost hardware platform (PC's) and
Windows NT software. Management believes the Position software is the best
cost/effect solution for this kind of system.
Hypercom Corporation
On December 1, 2003, we entered into a servicing agreement (the "Hypercom
Service Agreement") with Hypercom Corporation, a publicly traded multinational
Company ("Hypercom'"). Pursuant to the terms and provisions of the Hypercom
Service Agreement Hypercom would provide leasing arrangements for POS (Point of
Sale) terminals in Brazil. We subsequently entered into lease for 255 POS units
and currently have outstanding leases for a further 1000 POS units.
On April 30, 2002, we entered into a service agreement with Netset, Inc.
("Netset"), a wholly-owned subsidiary of Hypercom (the "Service Agreement").
Pursuant to the terms and provisions of the Service Agreement, Netset will (i)
provide to us installation, servicing, training, customer service and technical
support (Call Center) for its terminal network in Brazil; and (ii) allow us to
use the entire Hypercom structure to serve its clients.
Research And Development
Our research and development department is responsible for the definition,
design and implementation of our products. This comprises three main areas of
activity: research of electronic transaction product trends both in Brazil and
internationally as it applies to the healthcare industry, definition of products
and services required for MedLink Solution services and implementation of the
hardware and software products to support MedLink Solution services. Products to
be offered by MedLink iSolution involves interactive discussions with the
marketing and sales team in order to identify the market needs, costs and timing
to introduce such products and solutions.
We have entered into agreements with Hypercom and Dione PLC, of the United
Kingdom, to utilize their terminals for the MedLink Solution.
Material Agreements
Golden Cross
On August 9, 2002, TDS and Golden Cross, one of Brazil's largest health
insurance companies ("Golden Cross") entered into an agreement (the "Golden
Cross Agreement"). The agreememt was extended in August 2004 for a period of two
years. Pursuant to the terms and conditions of the Golden Cross Agreement, we
have committed to supply to Golden Cross a total of 5,500 installations
consisting of more than 500 MedLink Solution POS terminals with the balance
being MedLink PC and MedLink Solution servers. The Golden Cross Agreement also
provides for MedLink Solution WEB and MedLink Solution phone solutions, which
will be used as appropriate by the healthcare provider. We have approximately
2,800 Medlink Solutions in Golden Cross Provider's locations. During fiscal year
ended December 31, 2004, we processed 1.9 million transactions for Golden Cross.
During the first quarter of 2005, we processed approximately 635,000
transactions for Golden Cross.
35
Camed
On October 17, 2002, TDS and Camed, a self-insured company based in
northern Brazil ("Camed"), entered into an agreement (the "Camed Agreement")
pursuant to which we installed MedLink Solution POS terminals for pilot testing.
During fiscal year ended December 3,1 2004, we completed the installation of
more then 120 MedLink Solution POS terminals and 250 IVR Phone. The Camed
Agreement also provides for MedLink Solution WEB and MedLink Server Solution
solutions which will be used as appropriate by the healthcare providers. We have
approximately 400 Medlink Solutions in Camed providers' locations. During fiscal
year ended December 31, 2004, we processed 220,000 transactions for Camed.
During the first quarter of 2005, we processed approximately 82,000 transactions
for Camed.
Bradesco Health
On October 17, 2002 TDS and Bradesco Insurance ("Bradesco"), Brazil's
largest health insurance company, entered into an agreement for the provision of
a four month pilot program contract for the testing of its "Medlink" Solution.
Subsequently, in February 2003, the pilot program was extended for a further six
months at the request of Bradesco. On October 1, 2003, TDS and Bradesco entered
into a contract pursuant to which we would undertake and install its "Medlink"
Solution into the Bradesco healthcare provider's network. In order to undertake
this program, Bradesco agreed to set up a stand alone processing facility to
hold its database, which was subsequently contracted to a third party. Phase one
of the program went live during March 2004. Current roll out plans indicate that
we will install up to 5,000 solutions into the Bradesco provider's network in
order to achieve Bradesco's initial target of 1,000,000 transactions per month.
During fiscal year ended December 31, 2004, we processed 570,000 transactions
for Bradesco. During the first quarter of 2005, we processed approximately
581,000 transactions for Bradesco
Competition
The information network solutions market for the healthcare providers and
health insurance companies is characterized by rapidly evolving technology and
intense competition. Many companies of all sizes, including a number of large
technology companies, such as IBM, siemens, Visanet and EDS, as well as several
specialized healthcare information management companies, are developing various
products and services. There may be products on the market that do or will
compete directly with the products and services that we are seeking to develop.
These companies may also compete with us in recruiting qualified personnel. Many
of our potential competitors have substantially greater financial, research and
development, human and other resources than we do. Furthermore, the larger
companies may have significantly more experience than we do in developing such
products and services. Such competitors may: (i) develop more efficient and
effective products and services; (ii) obtain patent protection or intellectual
property rights that may limit our ability to commercialize our products or
services; or (iii) commercialize products and services earlier than we do.
We expect technology developments in the healthcare information management
and technology industry to continue to occur at a rapid pace. Commercial
developments by any competitors may render some or all of our potential products
or services obsolete or non-competitive, which could materially harm our
business and financial condition.
We believe that the following Brazilian companies, which have developed or
are developing various types of similar products or services, could be our major
competitors: (i) Polimed, which offers two modalities for the authorization
software; (ii) Connectmed, which offers Internet connectivity services; and
(iii) Salutia, which offers a connectivity system with software to be installed
and integrated to the management systems, similar to our MedLink Solution Web
and MedLink Solution Server and related technologies.
We believe, however, that our Health Management information Products and
related services and solutions for the healthcare providers and health insurance
companies represent an unique approach and has certain competitive advantages as
follows: (i) the MedLink Solution significantly reduces medical administrative
procedures and costs through connecting in real time individual healthcare
provider locations to health insurance companies; (ii) irrespective of the
choice of connectivity or the method of transmission, MedLink provides a secure
and reliable service where healthcare providers can automatically verify patient
eligibility, receive authorization for the performance of approved medical
procedures and process a paperless claim electronically with each insurance
provider it interacts with, provided they are subscribed to the network; (iii)
once connected to the network, MedLink Solution provides numerous benefits to
doctors and private health insurance companies including the automation of their
paper-based clerical duties; and (iv) by using MedLink Solution, many of these
cumbersome tasks can be processed electronically in seconds, virtually
eliminating processing costs, paperwork, and the high risks associated with
fraud.
36
Government Regulation
As of the date of this prospectus, none of our software products or
services are regulated by the U.S. Department of Health. However, there is
substantial state and federal regulation of the confidentiality of patient
medical records and the circumstances under which such records may be used,
disclosed to or processed by us as a consequence of our contacts with various
healthcare providers and health insurance companies. Although compliance with
these laws and regulations is presently the principal responsibility of covered
entities, including hospitals, physicians or other healthcare providers,
regulations governing patient confidentiality rights are rapidly evolving.
Additional federal and state legislation governing the dissemination of medical
record information may be adopted which could have a material affect on our
business. Those laws, including HIPAA and ICD 10 implementation, may
significantly affect our future business and materially impact our product and
service development, revenue and working capital. During the past several years,
the healthcare industry also has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates and certain
capital expenditures. We are unable to predict what, if any, changes will occur
as a result of such regulation.
Intellectual Property, Patents And Trademarks
Patents and other proprietary rights are vital to our business operations.
Our policy is to seek appropriate copyright and patent protection both in the
United States and abroad for our proprietary technologies and products. We have
acquired the license to certain intellectual property as follows:
(i)"Medlink" registered trade name in Brazil Registration number 820986160
filed on August 17, 1998 with INPI Brazil; and
(ii)source code for all of the Medlink Solutions, source nodes and Network
processor source code.
We have hired appropriate counsel in the United States to apply for
copyright protection of our products in the United State. We intend to apply for
a process patent in the near future.
Employees
Our subsidiary, TDS, employs approximately 34 staff and contract
personnel.
As of the date of hereof, we do not employ management on a full- time or
on a part-time basis. Our President, Chief Executive Officer and Chief Financial
Officer are primarily responsible for all day-to-day operations. Other services
are provided by outsourcing and verbal management contracts. As the need arises
and funds become available, however, management may seek employees as necessary
in our best interests.
Description Of Property
Except as described above, the Company does not own any other real estate
or other properties. The Company leases office space in several locations:
1. United States: 8th Floor, 5201 Blue Lagoon Drive, Miami, Florida,33126,
USA
2. Brazil: Praia de Botafogo # 440, 4 andar, Botafogo 22250 - 040, Rio de
Janeiro, RJ Brazil;
3. Asia-Pacific: Level 30, Six Battery Road, Singapore, 049909
4. Australia: Level 66 & 67, MLC Centre Martin Place, Sydney NSW 2000,
Australia
The premises are adequate to serve its current staffing levels.
37
Legal Proceedings
On March 14, 2005, X-Clearing Corp, a Colorado corporation ("X-Clearing"),
our former transfer agent, initiated legal proceedings against us by filing a
complaint and verified motion for replevin and for temporary order to preserve
property in the District Court of the City and County of Denver, State of
Colorado, civil action no. 05 CV 1980 (the "Complaint"). During September 2001,
we had entered into an agreement with X-Clearing Corp. regarding the engagement
of X-Clearing as our transfer agent, registrar and disbursing agent in
connection with our shares of common stock (the "Transfer Agent Agreement"). The
Complaint generally alleges that: (i) we have breached and wrongfully attempted
to terminate the Transfer Agent Agreement; (ii) X-Clearing has a valid and
perfected security interest in our books and records in accordance with the
terms of the Transfer Agent Agreement; and (iii) X-Clearing is entitled to an
order from the District Court replevining and preventing us from altering,
destroying or otherwise interfering with the valid and perfected security
interest and liquidated damages.
On April 5, 2005, we filed an answer to Complaint, counterclaims and jury
demand (the "Answer"). The Answer generally denies that: (i) we breached and
attempted to wrongfully terminate the Transfer Agent Agreement; (ii) X-Clearing
Corp. has a valid and perfected security interest in our books and records;
(iii) X-Clearing is entitled to an order of replevin and liquidated damages. Our
Answer further states that: (i) X-Clearing Corp. has failed to take reasonable
steps to minimize or mitigate its claimed damages; and (ii) X- Clearing Corp.'s
claims are barred by the statute of frauds, doctrine of laches, doctrine of
accord and satisfaction. Our Answer further counterclaims that: (i) despite
X-Clearing Corp. being paid all administrative fees, share transfer fees and
fees for new issuances, X-Clearing Corp. has refused to produce and provide us
with our stock transfer records, which has caused us irreparable harm; (ii)
X-Clearing Corp. has continued undertaking stock transfers on our behalf and
illegally issuing fraudulent stock certificates; and (iii) X-Clearing Corp. has
improperly and illegally used our records, which included stock certificates
that X-Clearing Corp. has fraudulently created and issued to make stock
transfers without notification to us.
On April 7, 2005, we filed a stipulated motion for testimony by telephone
and for an expedited ruling by the court. A hearing was set for April 12, 2005.
X- Clearing Corp.'s replevin action was dismissed by the District Court. As of
the date hereof, we intend to aggressively pursue all such legal actions and
review further legal remedies against X-Clearing Corp.
The parties, through legal counsel, are currently in negotiations for
settlement by mutual agreement.
Other than as disclosed above, we are not aware of any legal proceedings
contemplated by any governmental authority or other party involving us or our
subsidiaries or our properties. None of our directors, officers or affiliates
are: (i) a party adverse to us in any legal proceedings; or (ii) has an adverse
interest to us in any legal proceedings. We are not aware of any other legal
proceedings pending or that have been threatened against us, our subsidiaries or
our properties.
38
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth the names, ages, and titles of each of our
directors and executive officers and employees expected to make a significant
contribution to Transax.
NAME AGE TITLE
---- --- -----
Stephen Walters 46 President, Chief Executive Officer
and Director
Adam Wasserman 40 Chief Financial Officer
Laurie Bewes, BBA 52 Director
David M. Bouzaid 49 Director
Certain biographical information of our directors and officers is set forth
below.
STEPHEN WALTERS has been the President, Chief Executive Officer and a director
of Transax since its inception in 2001. Mr. Walters currently is the President,
Chief Executive Officer and a director of Transax. Mr. Walters has more than 15
years of business experience in the Asia-Pacific Region. He is responsible for
corporate development initiatives that have seen a successful restructuring of
the predecessor company. Mr. Walters is also the founder and principal of the
Carlingford Group of companies based in Singapore. The Carlingford Group focuses
on companies in the biomedical, computer network and wireless telecommunications
industries. Mr. Walters possesses an in depth knowledge of the public markets
having previously acted as President and Chief Executive Officer of a US public
company. Mr. Walters currently is a director of a number of private companies in
Canada and Singapore.
ADAM WASSERMAN has been the Chief Financial Officer of Transax since May 2005.
Mr. Wasserman has over 15 years of public and private market experience in
financial reporting, accounting, budgeting and planning, mergers and
acquisitions, auditing, automated systems, baking relations, internal control,
and corporate governance. Throughout his career, Mr. Wasserman has been a member
of executive management responsible for financial and accounting. Previously,
Mr. Wasserman was an audit manager of American Express Tax & Business in Ft.
Lauderdale, Florida. During his tenure as audit manager, Mr. Wasserman acted as
an outsourced chief financial officer and advisory to a diversified clientele in
the wholesale, technology, distribution, medical, retain and service industries
in both the private and public sectors. Mr. Wasserman was also with Deloitte &
Touche, LLP in New York City. Mr. Wasserman's responsibilities at Deloitte &
Touche, LLP included audits of public and private companies, tax preparation and
planning, management consulting, systems design, staff instruction and
recruiting. Mr. Wasserman holds a Bachelor of Administration from the State
University at Albany in Albany, New York. He is a Certified Public Accountant
(New York) and a member of the American Institute of Certified Public
Accountants. Currently, Mr. Wasserman is also a director and the treasurer of
Gold Coast Venture Capital Club and a former officer of Toastmasters
International.
LAURIE BEWES has been a director of Transax since its inception in 2001. Mr.
Bewes holds a Bachelor of Business Administration and is a member of the
Australian Institute of Company Directors. His business background over the past
20 years includes joint ventures, business development, mergers, infrastructure
privatization and start-ups across South America (Argentina and Brazil), Asia
(Indonesia, Singapore and Malaysia) and Australia/New Zealand. During the last
five years Mr. Bewes was the past Chairman and Consulting Director to Interlinx
Logistics Pty Ltd. an Australian company providing refrigerated warehousing and
distribution of FMCG on a national basis. Mr. Bewes was responsible for
development of the strategic business and marketing plan and was instrumental in
growing revenue in order for company to be sold to the Rand Group. Mr. Bewes has
also acted as General Manager - Bus. Dev. & Strategy for Advance Energy, a NSW
government owned Power Company. Mr. Bewes is a Director of Willarong Holdings
Pty Ltd. a privately owned family company engaged in the provision of
consulting/ management services to various companies
DAVID BOUZAID has been a director of the Transax since 2002. Mr. Bouzaid holds
an MBA and is a member of the Insurance Institute of New Zealand - AIINZ. Mr.
Bouzaid has accumulated 30 years experience in the health insurance industry
within Asia and the Australasia region. Mr. Bouzaid specializes in New Business
Development. From 1997 through 2000, Mr. Bouzaid established PT Cipta Integra
Duta in Indonesia as a specialist consultant in personal, commercial,
bancasurance and financial insurance products as well as employee benefits
-medical, accident and life for large companies as well as providing TPA
solutions. From 2001 through 2003, Mr. Bouzaid established InterGlobal
Healthcare Insurance in Thailand acting as its General manager and established a
strategic marketing alliance with Royal & Sun Alliance. Since 2004, Mr. Bouzaid
is the Technical Advisor - Healthcare Insurance to InterGlobal healthcare
insurance in Indonesia. Mr. Bouzaid is a Director of Interglobal (South East
Asia) Limited, and Interglobal (Thailand) Limited.
39
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
As of the date of this prospectus, none of our directors or executive
officers is or has been involved in any legal proceeding concerning (i) any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time; (ii) any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses) within the past five years; (iii) being
subject to any order, judgment or decree permanently or temporarily enjoining,
barring, suspending or otherwise limiting involvement in any type of business,
securities or banking activity; or (iv) being found by a court, the Securities
and Exchange Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law (and the judgment has
not been reversed, suspended or vacated).
AUDIT COMMITTEE
As of the date hereof, we have not appointed members to an audit committee
and, therefore, the respective role of an audit committee has been conducted by
our Board of Directors. When established, the audit committee's primary function
will be to provide advice with respect to our financial matters and to assist
our Board of Directors in fulfilling its oversight responsibilities regarding
finance, accounting, tax and legal compliance. The audit committee's primary
duties and responsibilities will be to: (i) serve as an independent and
objective party to monitor our financial reporting process and internal control
system; (ii) review and appraise the audit efforts of our independent
accountants; (iii) evaluate our quarterly financial performance as well as its
compliance with laws and regulations; (iv) oversee management's establishment
and enforcement of financial policies and business practices; and (v) provide an
open avenue of communication among the independent accountants, management and
our Board of Directors.
Our Board of Directors has considered whether the regulatory provision of
non-audit services is compatible with maintaining the principal independent
accountant's independence.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of Transax has determined that Transax does not
have an audit committee financial expert nor does Transax have an audit
committee.
CODE OF ETHICS
On December 9, 2004, the Board of Directors adopted a written Code of
Ethics designed to deter wrongdoing and promote honest and ethical conduct,
full, fair and accurate disclosure, compliance with laws, prompt internal
reporting and accountability to adherence to the Code of Ethics.
EXECUTIVE COMPENSATION
Certain of our executive officers are compensated for their roles as
executive officers. Officers and directors are reimbursed for any out-of-pocket
expenses incurred by them on behalf of us. None of our directors or executive
officers are party to written employment or consulting agreements with us. We
have, however, informal month-to-month verbal agreements with certain executive
officers. As of the date of hereof, Mr. Walters derives remuneration from us as
compensation for consulting services rendered. See "Summary Compensation Table."
We presently do not have any pension, health, annuity, insurance, profit sharing
or similar benefit plans.
WALTERS CONSULTING AGREEMENT
We entered into a verbal month-to-month consulting services agreement with
Stephen Walters, our President and Chief Executive Officer (the "Walters
Consulting Agreement"). Pursuant to the terms and provisions of the Walters
Consulting Agreement: (i) Mr. Walters provides managerial services to us; and
(ii) Mr. Walters shall be paid a monthly fee of $11,000 Dollars for a potential
annual salary of $132,000 and reimbursement of expenses.
40
During the fiscal year ended December 31, 2004, an aggregate of $165,000
in consulting fees was incurred to Mr. Walters for services rendered by Mr.
Walters to us under the Walters Consulting Agreement, including a bonus of
$33,000. During the fiscal year ended December 31, 2004, we paid $-0- to Mr.
Walters as compensation for services rendered to us under the Walters Consulting
Agreement. On December 30, 2004, we agreed to issue 500,000 shares of restricted
common stock to Mr. Walters for settlement of $75,000 of the amount due and
owing to Mr. Walters. These shares were issued on March 8, 2005. As of the date
hereof, a further $50,500 of the amount due and owing was settled by us by the
issuance of 400,000 shares of our restricted common stock at $0.12625 per share.
As of August 30, 2005, an aggregate amount of approximately $149,000 remains due
and owing to Mr. Walters by us. In January 2005, we amended the terms of the
Walters Consulting Agreement to a monthly fee of $13,750 per month for a
potential annual salary of $165,000.
SMITH CONSULTING AGREEMENT
We entered into a verbal month-to-month consulting services agreement with
Graeme Smith, our prior Vice President and director (the "Smith Consulting
Agreement"). Pursuant to the terms and provisions of the Smith Consulting
Agreement: (i) Mr. Smith agreed to provide technical and managerial services to
us; and (ii) Mr. Smith shall be paid a per diem fee of $450.00, and
reimbursement of expenses.
During the fiscal year ended December 31, 2003, an aggregate of $30,755 in
consulting fees was incurred to Mr. Smith for services rendered by Mr. Smith to
us under the Smith Consulting Agreement. During the fiscal year ended December
31, 2003, we paid $24,355 to Mr. Smith as compensation for services rendered to
us under the Smith Consulting Agreement. As of May 23 2005, an aggregate amount
of $5,191 in consulting fees and expenses remain due and owing to Mr. Smith by
us. Mr. Smith tendered his resignation as our Vice President and a director
effective November 10 2004.
PILON CONSULTING AGREEMENT
We entered into a verbal month-to-month consulting services agreement with
Nathalie Pilon, our prior Chief Financial Officer (the "Pilon Consulting
Agreement"). Pursuant to the terms and provisions of the Pilon Consulting
Agreement: (i) Ms. Pilon agreed to provide financial, administrative and
managerial services to us; and (ii) Ms. Pilon shall be paid a monthly fee of
$7,500 for a potential annual salary of $82,500, and reimbursement of expenses.
During the fiscal year ended December 31, 2004, an aggregate of $73,800 in
fees was incurred to Ms. Pilon for services rendered by Ms. Pilon to us under
the Pilon Consulting Agreement. During the fiscal year ended December 31, 2004,
we paid $-0- to Ms. Pilon as compensation for services rendered to us under the
Pilon Consulting Agreement. On December 30, 2004, we agreed to issue 166,667
shares of restricted common stock to Ms. Pilon for settlement of $25,000 of the
amount due and owing to Ms. Pilon. These shares were issued on March 8, 2005.
Ms. Pilon tendered her resignation as our Chief Financial Officer effective
January 28 2005. In March 2005, we entered into a settlement agreement with Ms.
Pilon regarding payment of $38,300 in settlement of all amounts due. As of
August 30 2005, an aggregate amount of $16,000 for consulting fees remains due
and owing to Ms. Pilon by us.
BEWES CONSULTING AGREEMENT
We entered into a verbal month-to-month consulting services agreement with
Laurie Bewes, one of our directors (the "Bewes Consulting Agreement"). Pursuant
to the terms and provisions of the Bewes Consulting Agreement: (i) Mr. Bewes
agreed to provide managerial and developmental services to us; and (ii) Mr.
Bewes shall be paid a monthly fee of AUD $10,000 (USD approximately $6,600) for
a potential annual salary of AUD $120,000 (USD approximately $79,200) and
reimbursement of expenses.
During the fiscal years ended December 31, 2004 and 2003, an aggregate of
USD $25,600 and $58,724, respectively, in fees was incurred to Mr. Bewes for
services rendered by Mr. Bewes to us under the Bewes Consulting Agreement.
During the fiscal year ended December 31, 2004, we paid $43,064 to Mr. Bewes as
compensation for services rendered to us under the Bewes Consulting Agreement.
As of August 30 2005, an aggregate amount of $11,423 remains due and owing to
Mr. Bewes by us.
41
DE CASTRO CONSULTING AGREEMENT
We entered into a consulting services agreement with Americo De Castro, an
executive officer of our subsidiary (the "De Castro Consulting Agreement").
Pursuant to the terms and provisions of the De Castro Consulting Agreement: (i)
Mr. De Castro agreed to provide technical, research and developmental services
to our subsidiary; and (ii) Mr. De Castro shall be paid a monthly fee of $8,000
for an aggregate annual salary of $96,000, and reimbursement of expenses.
During the fiscal years ended December 31, 2004 and 2003,, an aggregate of
$62,535 and $96,000, respectively, in fees was incurred to Mr. De Castro for
services rendered by Mr. De Castro to our subsidiary under the De Castro
Consulting Agreement. During the fiscal year ended December 31, 2004, we paid
$88,465 to Mr. De Castro as compensation for services rendered to our subsidiary
under the De Castro Consulting Agreement. As of August 30, 2005, an aggregate
amount of $0 remains due and owing to Mr. De Castro.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below reflects those amounts received as
compensation by our executive officers and directors during fiscal years ended
December 31, 2002, 2003 and 2004 from us.
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------- ---------------- ---------------
NAME AND POSITION YEAR SALARY $ BONUS $ OTHER $ RSA $ OPTIONS # LTIP $ OTHER $
----------------- ---- -------- ------- ------- ----- --------- ------ -------
Stephen Walters
President/CEO and
Director 2002 0 0 120,000(1) 0 0 0 0
2003 0 0 132,000(1) 0 750,000 0 0
2004 165,000(1) 0 250,000 0 0
Nathalie Pilon
Chief Financial
Officer and
Secretary 2002 0 0 0(1) 0 0 0 0
2003 0 0 69,700(1) 0 100,000 0 0
2004 0 0 73,800(1) 150,000 0 0
(1) Pursuant to verbal contractual arrangements between us and the respective
officer.
STOCK OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF
SECURITIES PERCENT OF TOTAL
NAME UNDERLYING OPTIONS OPTIONS GRANTED EXERCISE PRICE DATE OF EXPIRATION
----- ------------------ ---------------- -------------- ------------------
Stephen Walters 250,000 5.00% $ 0.20 30-Dec-09
Nathalie Pilon 100,000 0.01% $ 0.20 30-Dec-09
Laurie Bewes 200,000 1.50% $ 0.20 30-Dec-09
David Bouzaid 200,000 0.01% $ 0.20 30-Dec-09
42
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have one equity compensation plan, the Transax International Limited
Stock Option Plan. The table set forth below presents the securities authorized
for issuance with respect to the Stock Option Plan under which equity securities
are authorized for issuance as of May 23, 2005
EQUITY COMPENSATION PLAN INFORMATION
NUMBER
NUMBER OF SECURITIES
OF REMAINING
SECURITIES AVAILABLE
TO BE WEIGHTED- FOR FUTURE
ISSUED AVERAGE ISSUANCE
UPON EXERCISE UNDER EQUITY
EXERCISE PRICE COMPENSATION
OF OF PLANS
OUTSTANDING OUTSTANDING (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS WARRANTS AND REFLECTED
AND RIGHTS RIGHTS IN COLUMN (A))
(A) (B) (C)
----------- ------------ --------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
Stock Option Plan 3,175,000 $ 0.33 768,270
Merger Agreement - Warrants 4,100,000 $ 1.00 -0-
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS
Warrants 373,570 $ 0.50 -0-
Warrants 2,402,500 $ 0.20 -0-
Warrants 2,000,000 $ 0.30 -0-
----------- ------------ --------------
TOTAL 12,051,070 $0.001 \,768,270
=========== ============ ==============
STOCK OPTION PLAN
On July 22, 2003, our Board of Directors unanimously approved and adopted
a stock option plan, and during fiscal year 2004, our Board of Directors
unanimously approved and adopted a 2004 incentive stock option plan
(collectively, the "Stock Option Plan"). The purpose of the Stock Option Plan is
to advance our interests and those of our shareholders by affording our key
personnel an opportunity for investment and the incentive advantages inherent in
stock ownership. Pursuant to the provisions of the Stock Option Plan, stock
options (the "Stock Options") will be granted only to our key personnel,
generally defined as a person designated by our Board of Directors upon whose
judgment, initiative and efforts we may rely including any of our directors,
officers, employees or consultants. The Stock Option Plan provides authorization
to our Board of Directors to grant Stock Options to purchase a total number of
shares of our common stock not to exceed 4,500,000 shares and, in accordance
with the provisions of the 2004 incentive stock option plan, a further 7,000,000
shares.
The Stock Option Plan is to be administered by our Board of Directors,
which shall determine (i) the persons to be granted Stock Options under the
Stock Option Plan; (ii) the number of shares subject to each option, the
exercise price of each Stock Option; and (iii) whether the Stock Option shall be
exercisable at any time during the option period of ten (10) years or whether
the Stock Option shall be exercisable in installments or by vesting only. At the
time a Stock Option is granted under the Stock Option Plan, our Board of
Directors shall fix and determine the exercise price at which shares of our
common stock may be acquired; provided, however, that any such exercise price
shall not be less than that permitted under the rules and policies of any stock
exchange or over-the-counter market which are applicable.
43
In the event an optionee who is one of our directors or officers ceases to
serve in that position, any Stock Option held by such optionee generally may be
exercisable within up to 90 calendar days after the effective date that his
position ceases, and after such 90-day period any unexercised Stock Option shall
expire. In the event an optionee who is one of our employees or consultants
ceases to be employed by us, any Stock Option held by such optionee generally
may be exercisable within up to 60 calendar days (or up to 30 calendar days
where the optionee provided only investor relations services to us) after the
effective date that his employment ceases, and after such 60- or 30-day period
any unexercised Stock Option shall expire.
No Stock Options granted under the Stock Option Plan will be transferable
by the optionee, and each Stock Option will be exercisable during the lifetime
of the optionee subject to the option period of ten 10 years or limitations
described above. Any Stock Option held by an optionee at the time of his death
may be exercised by his estate within 1 year of his death or such longer period
as our Board of Directors may determine.
Unless restricted by the option agreement, the exercise price shall by
paid by any of the following methods or any combination of the following
methods: (i) in cash; (ii) by cashier's check, certified check, or other
acceptable banker's note payable to us; (iii) by net exercise notice whereby the
option holder will authorize the return to the Stock Option Plan pool, and
deduction from the option holder's Stock Option, of sufficient Stock Option
shares whose net value (fair value less option exercise price) is sufficient to
pay the option price of the shares exercised (the fair value of the shares of
the Stock Option to be returned to the pool as payment will be determined by the
closing price of our shares of common stock on the date notice is delivered);
(iv) by delivery to us of a properly executed notice of exercise together with
irrevocable instructions (referred to in the industry as `delivery against
payment') to a broker to deliver to us promptly the amount of the proceeds of
the sale of all or a portion of the stock or of a loan from the broker to the
option holder necessary to pay the exercise price; of (v) such other method as
the option holder and our Board of Directors may determine as adequate including
delivery of acceptable securities (including our securities), set-off for wages
or invoices due, property, or other adequate value. In the discretion of our
Board of Director, we may grant a loan or guarantee a third-party loan obtained
by an option holder to pay part of all of the exercise option price of the
shares provided that such loan or our guaranty is secured by the shares of
common stock.
INCENTIVE STOCK OPTIONS
The Stock Option Plan further provides that, subject to the provisions of
the Stock Option Plan and prior shareholder approval, our Board of Directors may
grant to any one of our key personnel who is an employee eligible to receive
options one or more incentive stock options to purchase the number of shares of
common stock allotted by our Board of Directors (the "Incentive Stock Options").
The option price per share of common stock deliverable upon the exercise of an
Incentive Stock Option shall be no less than fair market value of a share of
common stock on the date of grant of the Incentive Stock Option. In accordance
with the terms of the Stock Option Plan, "fair market value" of the Incentive
Stock Option as of any date shall not be less than the closing price for the
shares of common stock on the last trading day preceding the date of grant. The
option term of each Incentive Stock Option shall be determined by our Board of
Directors, which shall not commence sooner than from the date of grant and shall
terminate no later than ten (10) years from the date of grant of the Incentive
Stock Option, subject to possible early termination as described above.
FORM S-8 - REGISTRATION STATEMENT
On November 16, 2004, we filed with the Securities and Exchange Commission
a registration statement on "Form S-8 - For Registration Under the Securities
Act of 1933 of Securities to Be Offered to Employees Pursuant to Employee
Benefit Plans" registering the Stock Options and Incentive Stock Options under
the Stock Option Plan in the amount of up to 2,500,000 at an exercise price of
$0.25.
STOCK OPTIONS GRANTED AND EXERCISED
As of August 30, 2005, we have granted 9,599,040 Stock Options and
cancelled 3,367,310 Stock Options. As of May 23, 2005, 3,056,730 Stock Options
were exercised. As of May 23, 2005, 3,175,000 Stock Options were outstanding.
44
PRINCIPAL STOCKHOLDERS
As of August 30, 2005, there were 30,322,981 shares of common stock issued
and outstanding. The following table sets forth information as of the date of
this prospectus concerning: (i) each person who is known by Transax to own
beneficially more than 5% of Transax's outstanding common stock; (ii) each of
Transax's executive officers, directors and key employees; and (iii) all
executive officers and directors as a group. Common stock not outstanding but
deemed beneficially owned by virtue of the right of an individual to acquire
shares within 60 days is treated as outstanding only when determining the amount
and percentage of common stock owned by such individual. Except as noted, each
person or entity has sole voting and sole investment power with respect to the
shares of common stock shown.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ------------------------------------ ---------- --------
Common Stock Stephen Walters
Bali View Block A4/7
Jl. Cirendeu Raya 40
Jakarta Selatan 13419 Indonesia 11,553,607(1)(2) 33.5%
Common Stock Carlingford Investments Limited
80 Raffles Place
#16-20 UOB Plaza II
Singapore 048624 8,718,788(1)(3) 26.4%
Common Stock Laurie Bewes
429 Willawrong Road
Caringbah, Australia NSW 2229 958,333(1)(4) 3.1%
Common Stock David Bouzaid
Jl. Bangka Selaton
12730
Indonesia 630,000(1)(5) 2.0%
Common Stock Adam Wasserman
1643 Royal Grove Way
Weston,
FL 33327 USA 150,000(6) *
Common Stock ALL OFFICERS AND DIRECTORS AS A GROUP (4
PERSONS) 13,291,940(1)(7) 37.3%
* Represents less than 1%.
(1) These are restricted shares of common stock.
(2) Mr. Walters is the President, Chief Executive Officer and a director of
the Company. This figure includes: (i) 1,434,819 shares of common stock
held of record by Mr. Walters; (ii) an assumption of the exercise by Mr.
Walters of an aggregate of 750,000 Stock Options granted to Mr. Walters to
acquire 750,000 shares of common stock at $0.50 per share expiring on
August 14, 2008 and 250,000 stock options to acquire 250,000 shares of
common stock at $0.20 per share expiring on December 30, 2009, and 400,000
stock options to acquire 400,000 shares of common stock at $0.15 per share
expiring on May 4, 2010 and (iii) all of the shares of common stock held
by record by Carlingford Investments and shares of common stock underlying
warrants held by Carlingford Investments.
45
(3) This figure includes: (i) 5,970,455 shares of common stock held of record
by Carlingford Investments Limited; (ii) an assumption of the exercise by
Carlingford Investments Limited of an aggregate of 2,700,000 warrants held
of record by Carlingford Investments Limited, over which Mr. Walters has
sole voting and disposition rights, into 2,700,000 shares of common stock
at a price of $1.00 per share expiring on August 14, 2008; and (iii) an
assumption of the exercise by Carlingford Investments Limited of an
aggregate of 48,333 warrants held of record by Carlingford Investments
Limited, over which Mr. Stephen Walters has sole voting and disposition
rights, into 48,333 shares of common stock at a price of $0.20 per share
expiring on September 29, 2009. Mr. Stephen Walters has sole control and
disposition rights over these shares and warrants.
(4) This figure includes: (i) 458,333 shares of common stock held of record
and (ii) an assumption of the exercise by Mr. Bewes of an aggregate of
200,000 Stock Options granted to Mr. Bewes to acquire 200,000 shares of
common stock at $0.50 per share expiring on August 14, 2008 and 125,000
stock options to acquire 125,000 shares of common stock at $0.20 per share
expiring on December 30, 2009, and 175,000 stock options to acquire
175,000 shares of common stock at $0.15 per share expiring on May 4, 2010.
(5) This figure includes: (i) 130,000 shares of common stock held of record
and (ii) an assumption of the exercise by Mr. Bouzaid of an aggregate of
200,000 Stock Options granted to Mr. Bouzaid to acquire 200,000 shares of
common stock at $0.50 per share expiring on August 14, 2008 and 125,000
stock options to acquire 125,000 shares of common stock at $0.20 per share
expiring on December 30, 2009 and 175,000 stock options to acquire 175,000
shares of common stock at $0.15 per share expiring on May 4, 2010.
(6) This figure includes: (i) 150,000 Stock Options granted to Mr. Wasserman
to acquire 150,000 shares of common stock at $0.15 per share expiring on
May 4, 2010.
(7) This figure includes: (i) 7,693,607 shares of common stock held of record;
(ii) an assumption of the exercise of an aggregate of 2,748,333 Warrants
to acquire 2,748,333 shares of common stock; and (iii) an assumption of
the exercise of an aggregate of 2,550,000 Stock Options to acquire
2,550,000 shares of common stock.
46
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Transax's common stock is traded on the Over-the-Counter Bulletin Board
under the symbol "TNSX.OB". The market for Transax's common stock is limited,
volatile and sporadic. The following table sets forth the high and low sales
prices relating to Transax's common stock for the last two fiscal years. These
quotations reflect inter-dealer prices without retail mark-up, mark-down, or
commissions, and may not reflect actual transactions.
2005 HIGH BID LOW BID
-------- --------
First Quarter $ 0.18 $ 0.12
Second Quarter $ $
[K&L HAS ORDERED]
2004 HIGH BID LOW BID
-------- --------
First Quarter $ 0.45 $ 0.16
Second Quarter $ 0.62 $ 0.07
Third Quarter $ 0.16 $ 0.03
Fourth Quarter $ 0.17 $ 0.07
2003 HIGH BID LOW BID
-------- --------
First Quarter $ 5.20 $ 2.00
Second Quarter $ 5.00 $ 1.25
Third Quarter $ 3.90 $ 1.25
Fourth Quarter $ 2.80 $ 0.23
As of August 30, 2005, Transax had approximately 278 shareholders of
record.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors of Transax
on its common stock. Transax's previous losses do not currently indicate the
ability to pay any cash dividends, and Transax does not indicate the intention
of paying cash dividends on its common stock in the foreseeable future.
47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of the current month-to-month contractual relations
between Transax and Messrs. Walters, Bewes and De Castro and Ms. Pilon as
described above, Transax has not entered into any contractual arrangements with
related parties other than those transactions resulting primarily from advances
made by related parties to Transax, which are also described below. The Board of
Directors of Transax has not adopted or approved any policy regarding possible
future transactions with related third parties.
The executive officers and directors of Transax may be engaged in other
businesses, either individually or through partnerships and corporations in
which they may have an interest, hold an office or serve on the boards of
directors. The executive officers and directors of Transax may have other
business interests to which they may devote a portion of their time. Certain
conflicts of interest, therefore, may arise between Transax and its executive
officers and directors. Such conflicts can be resolved through the exercise by
such executive officers and directors of judgment consistent with their
fiduciary duties to Transax. The executive officers and directors intend to
resolve such conflicts in the best interests of Transaxs. Moreover, the
executive officers and directors will devote his time to the affairs of Transax
as they deem necessary.
48
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Transax is authorized to issue 100,000,000 shares of common stock,
$0.00001, of which 30,322,981 shares were issued and outstanding at August 30,
2005. The securities being offered hereby are common stock, with one vote per
share on all matters to be voted on by shareholders, without any right to
accumulate their votes. Shareholders have no preemptive rights and have no
liability for further calls or assessments on their shares. The shares of common
stock are not subject to repurchase by Transax or conversion into any other
security. All outstanding shares of common stock are, and those issued pursuant
to the Standby Equity Distribution Agreement will be fully paid and non
assessable.
Shareholders are entitled to receive such dividends as may be declared by
the Board of Directors of Transax out of funds legally available therefore and,
upon the liquidation, dissolution or winding up Transax, are entitled to share
ratably in all net assets available for distribution to such holders after
satisfaction of all of our obligations, including stock preferences. It is not
anticipated that we will pay any dividends in the foreseeable future since we
intend to follow the policy of retaining our earnings to finance the growth of
our business. Future dividend policies will depend upon Transax's earnings,
financial needs and other pertinent factors.
PREFERRED STOCK
Transax is authorized to issue 20,000,000 shares of Preferred Stock, of
which no shares were issued and outstanding at August 30, 2005. All rights and
preferences of any series of preferred stock are to be set by the Board of
Directors upon issue.
The issuance of preferred stock may have the effect of delaying or
preventing a change in control of Transax. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the common stock. As of the date of
this prospectus, no shares of preferred stock will be outstanding and we
currently have no plans to issue any shares of preferred stock.
CONVERTIBLE DEBENTURES
Transax has outstanding convertible debentures, which were issued in the
original principal amount of $250,000. These debentures accrue interest at a
rate of 5% per year and mature two years from the issuance date. The debentures
are convertible at the holder's option any time up to maturity at a conversion
price equal to the lower of (i) 120% of the closing bid price of the common
stock on the date of the debentures or (ii) 80% of the lowest closing bid price
of the common stock for the five trading days immediately preceding the
conversion date. At maturity, the debentures will automatically convert into
shares of common stock at a conversion price equal to the lower of (i) 120% of
the closing bid price of the common stock on the date of the debentures or (ii)
80% of the lowest closing bid price of the common stock for five trading days
immediately preceding the conversion date.
CONVERTIBLE PROMISSORY NOTE
A significant and estimated material liability for us for fiscal year 2005
is the aggregate amount of $311,455 in principal and interest due and owing to a
related party. At December 31, 2004, the loans for $200,000 and $100,000 due to
a related party were in default. Each principal amount loan is evidenced by a
convertible promissory note and is repayable on or before a six-month term. The
interest rate is 12% per annum compounded monthly. The related party as the
lender has the option during the term of the loan, and any extension thereto, to
convert the principal and interest into units in our capital at a conversion
price of $0.25 per unit (the "Unit"). Each Unit is comprised of one share of our
restricted Common Stock and one warrant, and each warrant entitles the holder
thereof to purchase one share of our restricted common stock at $0.20 per share
for a period of twelve months. On September 29, 2004, our Board of Directors
reduced the conversion price from $0.25 per unit to $0.08 per unit in order to
reflect the current depressed market price of our stock. On March 23, 2005 our
Board of Directors reset the conversion price of the convertible debentures to
$0.125 per share and agreed with the related party to extend the maturity date
of the loans to March 31, 2007 ($200,000) and April 30, 2007 ($100,000).
On September 29, 2004, $55,000 of the aggregate amount then due and owing
was settled pursuant to the issuance of 687,500 shares of our restricted common
stock and 687,500 warrants. Each warrant entitles the holder to purchase an
additional share of our common stock at a price of $0.20 until September 29,
2009. We also issued 871,425 shares of our restricted Common Stock to settle
$69,714 in interest due on these loans.
49
WARRANTS
As of August 30, 2005, there were an aggregate of 9,101,070 share purchase
warrants issued and outstanding as follows: (i) 4,100,000 warrants convertible
into 4,100,000 shares of common stock at the price of $1.00 per share expiring
on August 14, 2008; (ii) 225,000 warrants convertible into 225,000 shares of
common stock at the price of $1.00 per share expiring on November 20, 2005;
(iii) 373,570 warrants convertible into 373,570 shares of common stock at the
price of $0.50 per share expiring on December 31, 2005; (iv) 2,402,500 warrants
convertible into 2,402,500 shares of common stock at the price of $0.20 per
share expiring on September 29, 2009; and (v) 2,000,000 Warrants convertible
into 2,000,000 shares of common stock at $0.30 per share expiring on December
30, 2006.
OPTIONS
As of August 30 2005, there were an aggregate of 3,175,000 options
outstanding.
TRANSFER AGENT
Transax's transfer agent is Transfer Online, Inc., 227 S.W. Pine Street,
Suite 300, Portland, Oregon 97204; telephone 503.227.2950 and facsimile
503.227.6874.
REPORTS TO SHAREHOLDERS
We intend to furnish our shareholders with annual reports which will
describe the nature and scope of our business and operations for the prior year
and will contain a copy of our audited financial statements for its most recent
fiscal year.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY
Under Section 7-109-102 of the Colorado Business Corporations Act (the
"Colorado Act") a corporation may indemnify a person made a party to a
proceeding because the person is or was a director, against liability incurred
in the proceeding. Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Indemnification is only possible under this section 7-109-102, however,
if: (a) the person conducted him/herself in good faith; and (b) the person
reasonably believed: (i) in the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best interests;
and (ii) in all other cases, that his or her conduct was at least not opposed to
the corporation's best interests; and (c) in the case of any criminal
proceeding, the person had no reasonable cause to believe his or her conduct was
unlawful.
It should be noted, however, that under Section 7-109-102(4), a
corporation may not indemnify a director: (i) in connection with a proceeding by
or in the right of the corporation in which the director is adjudged liable to
the corporation; or (ii) in connection with any other proceeding in which a
director is adjudged liable on the basis that he or she derived improper
personal benefit.
Under Section 7-109-103 a director is entitled to mandatory
indemnification, when he/she is wholly successful in the defense of any
proceeding to which the person was a party because the person is or was a
director, against reasonable expenses incurred in connection to the proceeding.
Under Section 7-109-105, unless restricted by a corporation's Articles of
Incorporation, a director who is or was a party to a proceeding may apply for
indemnification to a court of competent jurisdiction. The court, upon receipt of
the application, may order indemnification after giving any notice the court
considers necessary. The court, however, is limited to awarding the reasonable
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
Under Section 7-109-107, unless restricted by the corporation's Articles
of Incorporation, an officer of a corporation is also entitled to mandatory
indemnification and to apply for court-ordered indemnification to the same
extent as a director.
50
A corporation may also indemnify an officer, employee, fiduciary or agent
of the corporation to the same extent as a director.
Under Section 7-109-108 a corporation may purchase and maintain insurance
on behalf of a person who is or was a director, officer, employee, fiduciary or
agent of the corporation against liability asserted against or incurred by the
person in that capacity, whether or not the corporation would have the power to
indemnify such person against the same liability under other sections of the
Colorado Act.
The officers and directors of Transax are accountable to the shareholders
of Transax as fiduciaries, which means such officers and directors are required
to exercise good faith and integrity in handling Transax's affairs. A
shareholder may be able to institute legal action on behalf of himself and all
other similarly situated shareholders to recover damages where Transax has
failed or refused to observe the law. Shareholders may, subject to applicable
rules of civil procedure, be able to bring a class action or derivative suit to
enforce their rights, including rights under certain federal and state
securities laws and regulations. Shareholders who have suffered losses in
connection with the purchase or sale of their interest in Transax due to a
breach of a fiduciary duty by an officer or director of Transax in connection
with such sale or purchase including, but not limited to, the misapplication by
any such officer or director of the proceeds from the sale of any securities,
may be able to recover such losses from Transax. Transax and its affiliates may
not be liable to its shareholders for errors in judgment or other acts or
omissions not amounting to intentional acts.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Transax
pursuant to the foregoing provisions, or otherwise, Transax has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Transax of expenses incurred
or paid by a director, officer or controlling person of Transax in the
successful defense or any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Transax will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Transax has no agreements with any of its directors or executive officers
providing for indemnification of any such persons with respect to liability
arising out of their capacity or status as officers and directors.
At present, there is no pending litigation or proceeding involving a
director or executive officers of Transax as to which indemnification is being
sought.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
There are no provisions in our Articles of Incorporation or Bylaws related
to preventing or restricting takeovers, mergers or acquisitions of Transax by
another company.
51
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement for the fiscal years ended December 31, 2004 and
December 31, 2003 have been audited by Moore Stephens, P.C. The reports of Moore
Stephens, P.C. are included in this prospectus in reliance upon the authority of
this firm as experts in accounting and auditing. The report of Moore Stephens,
P.C. contained elsewhere in this prospectus contain an explanatory paragraph
regarding our ability to continue as a going concern.
LEGAL MATTERS
The validity of the shares offered herein will be opined on for us by
Diane D. Dalmy, Esq., which has acted as our outside legal counsel in relation
to certain, restricted tasks.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
52
FINANCIAL STATEMENTS
AUDITED PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet at December 31, 2004 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the Years Ended December 31, 2004 and 2003 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003 F-6
Notes to the Consolidated Financial Statements F-7
UNAUDITED
Consolidated Balance Sheet (Unaudited) as of June 30, 2005 F-23
Consolidated Statements of Operations (Unaudited) For the
Three Months and Six Months Ended June 30, 2005 and 2004 F-24
Consolidated Statements of Cash Flows (Unaudited) For the
Three Months and Six Months Ended June 30, 2005 and 2004 F-25
Notes to the Consolidated Financial Statements F-26
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders'
of Transax International Limited.
We have audited the accompanying consolidated balance sheet of Transax
International Limited and Subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Transax
International Limited and subsidiaries as of December 31, 2004 and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company has accumulated losses from
operations of approximately $8.5 million, a working capital deficiency of
approximately $1.9 million and a net capital deficiency of approximately $1.8
million at December 31, 2004. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
April 15, 2005
F-2
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2004
Current Assets:
Cash $ 4,090
Accounts receivable (Net of
allowance for doubtful accounts of $0) 170,198
Prepaid expenses and other current assets 51,547
-----------
Total Current Assets 225,835
Software Development Costs, net 243,044
-----------
Property and Equipment, net 320,258
-----------
Total Assets $ 789,137
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of capital lease obligation $ 75,405
Convertible debenture payable 125,000
Current portion of loan payable 60,911
Accounts payable and accrued expenses 1,090,740
Due to related parties 254,709
Advances payable 35,000
Loan payable - related party 168,331
Convertible loans from related party 311,455
-----------
Total Current Liabilities 2,121,551
Accounts payable and accrued expenses, net of current portion 393,065
Capital Lease Obligation, net of current portion 16,608
-----------
Total Liabilities 2,531,224
-----------
COMMITMENTS and CONTINGENCIES (Notes 11 and 12)
Stockholders' Deficit:
Preferred stock $.0001 par value; 20,000,000 shares authorized;
No shares issued and outstanding --
Common stock $.00001 par value; 100,000,000 shares authorized;
28,537,211 shares issued and outstanding 285
Paid-in capital 6,894,411
Accumulated deficit (8,479,936)
Deferred compensation (94,195)
Other comprehensive loss -
Cumulative foreign currency adjustment (62,652)
-----------
Total Stockholders' Deficit (1,742,087)
===========
Total Liabilities and Stockholders' Deficit $ 789,137
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2004 2003
---- ----
REVENUES $ 1,199,900 $ 309,589
------------ ------------
OPERATING EXPENSES:
Cost of product support services 603,586 397,942
Payroll and related benefits 364,465 302,549
Research & development costs 106,807 24,449
Professional fees 127,374 385,563
Management & consulting fees - related party 338,893 398,181
Stock based compensation 502,369 1,210,100
Investor relations 108,985 162,891
Depreciation and amortization 56,211 106,177
General & administrative 584,843 364,187
------------ ------------
TOTAL OPERATING EXPENSES 2,793,532 3,352,039
------------ ------------
LOSS FROM OPERATIONS (1,593,632) (3,042,450)
------------ ------------
OTHER INCOME (EXPENSES):
Loss on disposal of fixed assets -- (2,588)
Other income (expense) 51,095 (27,616)
Foreign exchange losses (20,570) (6,531)
Interest expense (138,192) (86,059)
Interest expense - related party (90,956) (65,032)
------------ ------------
TOTAL OTHER EXPENSES (198,623) (187,826)
------------ ------------
NET LOSS $ (1,792,255) $ (3,230,276)
============ ============
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (.10) $ (.25)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 17,879,799 12,953,494
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2004 and 2003
TOTAL
OTHER STOCKHOLDERS'
COMMON STOCK SHARE PAID-IN ACCUMULATED DEFERRED COMPREHENSIVE EQUITY
STOCK AMOUNT SUBSCRIPTIONS CAPITAL DEFICIT COMPENSATION INCOME (LOSS) (DEFICIT)
---------- -------- ------------- ------------ ------------ ------------ -------------- --------------
BALANCE JANUARY 1, 2003 12,472,917 $125 - $2,793,854 $(3,457,405) - $133,469 $(529,957)
Issuance of stock for
options exercised for
settlement of debt,
August 28, 2003 1,206,730 12 - 652,058 - - - 652,070
Issuance of stock for
settlement of debt,
August 28, 2003 100,000 1 - 99,999 - - - 100,000
Issuance of stock for
options exercised for
settlement of debt,
October 22, 2003 87,500 1 - 43,749 - - 43,750
Unissued shares
(450,000) - for
settlement of debt,
November 21, 2003 - - 225,000 - - - - 225,000
Unissued shares
(45,000) - for
finders' fees on cash
advances, November 21,
2003 - - 27,900 - - - - 27,900
Issuance of stock for
options exercised for
settlement of debt,
December 3, 2003 162,500 2 - 40,623 - - 40,625
Unisssued shares
[300,000] for options
exercised,
December 31, 2003 - - 75,000 - - - - 75,000
Unisssued shares
[373,570] for loan
conversion - Related
Party, December 31,
2003 - - 93,393 - - - - 93,393
Stock options and
warrants issued - - - 959,811 - - - 959,811
Comprehensive Income
(Loss): - - - - -
Net loss for year - - - - (3,230,276) - - -
Foreign currency
translation
adjustments - - - - - - (78,793) -
Total
comprehensive
income (loss) - - - - - - - (3,309,069)
---------- -------- ------------- ------------ ------------ ------------ -------------- --------------
BALANCE, DECEMBER 31,
2003 14,029,647 141 421,293 4,590,094 (6,687,681) - 54,676 (1,621,477)
---------- -------- ------------- ------------ ------------ ------------ -------------- --------------
Issuance of stock for
settlement of share
subscriptions 1,168,570 12 (421,293) 421,281 - - - -
Common stock issued
for debt 10,147,881 101 - 1,107,253 - - - 1,107,354
Common stock issued
for services 2,163,334 21 - 222,979 - - - 223,000
Cancellation of
previously issued
shares (300,000) (3) - (74,997) - - - (75,000)
Common stock issued
for future services 1,327,779 13 - 94,182 - $ (94,195) - -
Stock options and
warrants granted - - - 502,369 - - - 502,369
Beneficial conversion - - - 31,250 - - - 31,250
Comprehensive Income
(Loss):
Net loss for year - - - - (1,792,255) - - -
Foreign currency
translation
adjustments - - - - - - (117,328) -
Total
comprehensive
income (loss) - - - - - - - (1,909,583)
---------- -------- ------------- ------------ ------------ ------------ -------------- --------------
BALANCE, DECEMBER 31,
2004 28,537,211 $ 285 $ - $6,894,411 $ (8,479,936) $ (94,195) $ (62,652) $ (1,742,087)
========== ======== ============= ============ ============ ============ ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,792,255) $(3,230,276)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 56,211 106,177
Amortization of development costs 83,829 24,449
Beneficial interest 31,250 -
Stock based compensation 650,369 1,210,100
Gain from foreign currency exchange - -
Changes in assets and liabilities:
Accounts receivable (170,198) -
Prepaid expenses and other current assets (25,916) (20,477)
Accounts payable and accrued expenses 249,393 435,451
Accrued interest payable, related party 92,573 14,686
Accrued interest payable - 10,474
Due to related parties 478,333 196,104
Accrued payroll and related expenses - 153,548
Accounts payable and accrued expenses - long-term 393,065 2,026
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 46,655 (1,097,738)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (216,537) (102,861)
Acquisition of property and equipment (273,797) (75,552)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (490,334) (178,413)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related party 82,500 484,045
Advances from non-related company 114,000 526,500
Repayments under capital lease obligations 32,714 (45,916)
Proceeds from convertible debenture 125,000 -
Proceeds from loan payable 60,911
Proceeds from loan - related party 139,500 -
Proceeds from convertible loans - related party - 355,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 554,625 1,319,629
EFFECT OF EXCHANGE RATE CHANGES ON CASH (117,328) (64,113)
----------- -----------
NET DECREASE IN CASH (6,382) (20,635)
CASH, BEGINNING OF YEAR 10,472 31,107
----------- -----------
CASH, END OF YEAR $ 4,090 $ 10,472
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 96,000 $ 22,683
=========== ===========
Cash paid for income taxes $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
204,000 shares issued for finders' fees [pre merger] $ - $ 51,000
=========== ===========
5,000,000 shares issued for cash advances [pre merger] $ - $ 250,000
=========== ===========
Common stock issued for debt and accrued interest $ 1,107,354 $ -
=========== ===========
Common stock issued for services $ 148,000 $ -
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Transax International Limited ("TNSX" or the "Company") (formerly
Vega-Atlantic Corporation) was incorporated in the State of Colorado in 1999.
The Company currently trades on the OTC Bulletin Board under the symbol "TNSX"
and the Frankfurt and Berlin Stock Exchanges under the symbol "TX6".
On June 19, 2003, as amended on July 22, 2003 and effective August 14, 2003, the
Company entered into a Merger Agreement (referred to as the "Agreement" or the
"Merger") with Transax Limited ("Transax"), a Colorado private corporation,
whereby the Company issued 11,066,207 restricted common shares of the Company in
exchange for all of its outstanding shares of Transax. For financial accounting
purposes, the exchange of stock was treated as a recapitalization of Transax
with the former shareholders of the Company retaining 1,406,710 or approximately
11% of the outstanding stock. The stockholders' equity section reflects the
change in the capital structure of Transax due to the recapitalization and the
consolidated financial statements reflect the operations of Transax for the
periods presented and the operations of TNSX from the acquisition date.
On August 8, 2003, the shareholders of both TNSX and Transax held meetings.
TNSX's shareholders approved the following ratifications: (i) name change from
Vega-Atlantic Corporation to Transax International Limited; (ii) the Stock
Option Plan, and; (iii) the reverse Stock Split. Moreover, on August 8, 2003,
the shareholders of Transax approved the terms and conditions of the Agreement
in Principle and of the Merger Agreement.
Pursuant to the terms of the Merger Agreement and a corresponding contribution
agreement, Transax has contributed to the Company 4,500,000 stock options and
4,100,000 share purchase warrants. Pursuant to further terms of the Agreement,
the Company; (i) exchanged with the Transax option holders an aggregate of
4,500,000 stock options to acquire up to 4,500,000 shares of TNSX's common stock
to replace all stock options outstanding in Transax; and (ii) exchanged with the
Transax warrant holders an aggregate of 4,100,000 share purchase warrants to
acquire up to 4,100,000 shares of TNSX's common stock to replace all share
purchase warrants that were outstanding in Transax.
On September 22, 2003, the Board of Directors of the Company approved a change
in fiscal year end of the Company from March 31st to a calendar year-end of
December 31st. The Board of Directors' decision to change the fiscal year end
was based upon consummation of the Merger and the resulting continuation of the
corporate entity TNSX under the Merger, which has a calendar year end.
The Company, primarily through its wholly-owned subsidiary TDS Telecommunication
Data Systems Ltda. ("TDS"), is an international provider of information network
solutions specifically designed for the healthcare providers and health
insurance companies. The MedLink Solution {trademark} enables the real time
automation of routine patient eligibility, verification, authorizations, claims
processing and payment functions. The Company also has offices located in Miami,
Florida, Australia and Brazil.
F-7
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of presentation
The accompanying consolidated financial statements of the Company present the
accounts of Transax for the years ended December 31, 2004 and 2003, including
TNSX from the effective date of the merger (August 14, 2003) to December 31,
2003 and all of 2004 (See Note 2). All material intercompany accounts and
transactions between the Company and its subsidiaries have been eliminated. In
prior years the Company was in the development stage.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Estimates used in the
preparation of the accompanying financial statements include the allowance for
doubtful accounts receivable, the useful lives of property, equipment and
software development costs and variables used to determine stock based
compensation.
Fair Value of Financial Instruments
The fair value of our cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate carrying values due to their short
maturities. The values of our debt instruments approximate their carrying values
based on rates currently available to us.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations
of credit risk consist principally of cash and accounts receivable. The Company
performs certain credit evaluation procedures and does not require collateral
for financial instruments subject to credit risk. The Company believes that
credit risk is limited because the Company routinely assesses the financial
strength of its customers, and based upon factors surrounding the credit risk of
its customers, establishes an allowance for uncollectible accounts and, as a
consequence, believes that its accounts receivable credit risk exposure beyond
such allowances is limited.
F-8
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk (continued)
The Company recognizes an allowance for doubtful accounts to ensure accounts
receivable are not overstated due to uncollectibility and are maintained for all
customers based on a variety of factors, including the length of time the
receivables are past due, significant one-time events and historical experience.
An additional reserve for individual accounts is recorded when the Company
becomes aware of a customer's inability to meet its financial obligation, such
as in the case of bankruptcy filings or deterioration in the customer's
operating results or financial position. If circumstances related to customers
change, estimates of the recoverability of receivables would be further
adjusted. As of December 31, 2004, the allowance for doubtful accounts was $NIL.
The Company's principal business activities are located in Brazil. Although
Brazil is considered to be economically stable, it is always possible that
unanticipated events in foreign countries could disrupt the Company's
operations.
The Company had net sales to 2 major customers during each of the years ended
December 31, 2004 and 2003. These sales accounted for approximately 91% or
$1,100,000 and 95% or $294,100 of the total sales for the years 2004 and 2003,
respectively.
The Company maintains its cash in accounts with a major financial institution in
the United States and Brazil in the form of demand deposits and money market
accounts. Deposits in this bank may exceed the amounts of insurance provided on
such deposits. As of December 31, 2004, we had no deposits subjected to such
risk. We have not experienced any losses on our deposits of cash and cash
equivalents.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company had no
cash equivalents at December 31, 2004.
Property and Equipment, net
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is recorded on a straight-line basis
over the estimated useful lives (approximately 2 - 10 years) of the assets.
Expenditures for maintenance and repairs that do not improve or extend the life
of the expected assets are expensed to operations, while major repairs are
capitalized.
F-9
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
The Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When such factors and
circumstances exist, we compare the projected undiscounted future cash flows
associated with the future use and disposal of the related asset or group of
assets to their respective carrying amounts. Impairment, if any, is measured as
the excess of the carrying amount over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. As of December 31,
2004, management expects those assets related to its continuing operations to be
fully recoverable.
Income Taxes
The Company files federal and state income tax returns in the United States for
its domestic operations, and files separate foreign tax returns for the
Company's foreign subsidiaries in the jurisdictions in which those subsidiaries
operate. The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between their financial statement
carrying amounts and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at the year-end exchange rates, equity is converted
historically and all revenue and expenses are translated into U.S. dollars at
the average exchange rates prevailing during the periods in which these items
arise. Translation gains and losses are deferred and accumulated as a component
of other comprehensive income or loss in stockholders' deficit.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency (TDS -
Brazilian Real, Transax Australia, - Australian dollar and Transax and the
Company - USD) are included in the Statement of Operations as incurred.
F-10
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue from the sale of software products, which do not require any significant
production, modification or customization for the Company's targeted customers
and do not have multiple elements, is recognized when: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred; (3) the Company's fee is
fixed and determinable, and; (4) collectibility is probable.
Loss per Share
Basic loss per share is computed by dividing net loss by weighted average number
of shares of common stock outstanding during each period. Diluted loss per share
is computed by dividing net loss by the weighted average number of shares of
common stock, common stock equivalents and potentially dilutive securities
outstanding during each period. Diluted loss per common share is not presented
because it is anti-dilutive. The weighted average number of common shares
outstanding has been retroactively restated for all the periods presented to
reflect the effects of the merger. At December 31, 2004, there were options and
warrants to purchase 11,526,070 shares of common stock, which could potentially
dilute future earnings per share.
Stock Based Compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-
Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
F-11
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (continued)
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
the years ended December 31, 2004 and 2003:
Year ended December 31,
2004 2003
----------- -----------
Net loss as reported $(1,792,255) $(3,230,276)
Add: total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effect (109,568) (1,258,700)
----------- -----------
Pro forma net loss $(1,901,823) $(4,488,976)
=========== ===========
Basic loss per share:
As reported $ (.10) $ (.25)
=========== ===========
Pro forma $ (.11) $ (.35)
=========== ===========
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
Comprehensive Loss
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. Other
comprehensive loss, which currently includes only foreign currency translation
adjustments, is shown net of tax in the Statement of Changes in Stockholders'
Deficit.
Advertising
Advertising costs are expensed when incurred. For the years ended December 31,
2004 and 2003, advertising expense was not material.
F-12
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment, an Amendment of SFAS No. 123" SFAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. SFAS No. 123R is effective beginning in the Company's first quarter
of fiscal 2006. The Company is in process of evaluating the impact of this
pronouncement on its financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non- monetary
Assets." The Statement is an amendment of APB Opinion No. 29. SFAS No. 153
eliminates the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2004:
Computer Equipment $ 516,023
Software 75,515
Office Furniture and Equipment 13,288
Vehicle 20,833
Other 13,410
------
639,069
Accumulated Depreciation and Amortization (318,811)
---------
$ 320,258
=========
In 2003, the Company changed the estimated useful lives of certain assets in
order to reflect better current circumstances. For the years ended December 31,
2004 and 2003, depreciation expense amounted to approximately $56,000 and
$106,000, respectively.
F-13
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 3 - GOING CONCERN
Since inception, the Company has incurred cumulative net losses of $8,479,936,
has a stockholders' deficit of $1,742,087 at December 31, 2004 and has a working
capital deficit of $1,895,716. Since its inception, the Company has funded
operations through short-term borrowings and equity investments in order to meet
its strategic objectives. The Company's future operations are dependent upon
external funding and its ability to increase revenues and reduce expenses.
Management believes that sufficient funding will be available from additional
related party borrowings and private placements to meet its business objectives,
including anticipated cash needs for working capital, for a reasonable period of
time. Additionally, under the current roll out schedules with its clients, the
Company expects to increase its revenues significantly during 2005 with the
expectation of the Company becoming a profitable entity. However, there can be
no assurance that the Company will be able to obtain sufficient funds to
continue the development of its software products and distribution networks.
Further, since fiscal 2000, the Company has been deficient in the payment of
Brazilian payroll taxes and Social Security taxes. At December 31, 2004, these
deficiencies (including interest and fines) amounted to approximately $700,000.
This payroll liability is included as part of the accounts payable and accrued
expenses (short-term and long-term) within the consolidated balance sheet.
As a result of the foregoing, there exists substantial doubt about the Company's
ability to continue as a going concern. These consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
NOTE 4 - SOFTWARE DEVELOPMENT COSTS
The Company established the technological feasibility of its MedLink Solutions
in the year ended December 31, 2002. Therefore, from Inception to December 31,
2002, all costs incurred in establishing the technological feasibility of the
MedLink Solutions were charged to expense when incurred, as required by SFAS No.
2, Accounting for Research and Development Costs.
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the software. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Capitalized software
development costs are amortized utilizing the straight-line method over the
estimated economic life of the software not to exceed three years. The Company
regularly reviews the carrying value of software development assets and a loss
is recognized when the unamortized costs are deemed unrecoverable based on the
estimated cash flows to be generated from the applicable software.
For the years ended December 31, 2004 and 2003, amortization expense of
development costs amounted to $83,829 and $24,449, respectively.
F-14
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 5 - RELATED PARTY TRANSACTIONS
Convertible Loans Payable
At December 31, 2004, the loans for $200,000 and $100,000, due to a related
party whose officer is an officer of the Company, were in default. In September
2004, the related party converted principal of $55,000 into 687,500 units of the
Company, each unit consisting of one share of common stock of the Company and
one warrant exercisable at $0.20 until September 29, 2009. Additionally, in
September 2004, the Company re-priced the conversion to reflect the Company's
current share price. Therefore, the lender carries the option during the term of
the loan, and any extension thereto, to convert the principal and interest into
common stock of the Company at a conversion price of $0.08 per unit. Each unit
is comprised of one common share and one warrant. Each warrant entitles the
holder to purchase an additional share of the Company's common stock at $0.20
for a period of five years. The interest rate of the loan is 12% per annum
compounded monthly. On September 29, 2004, the holder of the notes exercised the
conversion feature.
Accordingly, the Company issued 687,500 shares and 687,500 warrants to purchase
common stock of the Company at $.20 per share for the conversion of principal
balance of $55,000. The Company also issued 871,425 shares of common stock to
settle $69,714 in interest due on these loans. At December 31, 2004, interest
due on these two loans amounted to $11,455 and the principal amount due was
$300,000. During the years ended December 31, 2004 and 2003, the Company
incurred $48,351 and $41,337, respectively, in interest related to these two
loans. The Company did not incur beneficial conversion charges because the
conversion price was equivalent to the average offering price for equity when
these loans became convertible.
Due to Related Parties
As of January 1, 2004 the Company had approximately $188,400 of advances payable
and accrued interest due to a related party whose officer is an officer of the
Company. During the year ended December 31, 2004, this related party advanced
the Company an additional $82,500, for working capital purposes.
These advances accrue interest at 1% per month (12% per annum). For the year
ended December 31, 2004, the Company accrued $40,744 of interest related to
these advances. On September 29, 2004, the Company issued 374,848 shares of
common stock to settle $28,114 in interest due to this related party. On
December 30, 2004, the Company agreed to issue 1,633,333 shares of common stock
and 1,633,333 warrants to purchase 1,633,333 shares of common stock at $.30 per
share to settle debt of $245,000 and 53,575 shares of common stock for the
settlement of related interest of $8,036. These shares were issued on March 8,
2005 and are included in outstanding shares at December 31, 2004. At December
31, 2004, advances due amounting to $20,905 are included in due to related
parties on the accompanying balance sheet.
For each of the years ended December 31, 2004 and 2003, the Company incurred
$165,000 and $132,000 in management fees to an officer/director of the Company,
respectively, including an accrual of a bonus in 2004 of $33,000 that was
approved by the board of directors on January 14, 2005. On December 30, 2004,
the Company agreed to issue 500,000 shares of common stock at $.15 per share to
this officer/director for settlement of $75,000 of this debt. These shares were
issued on March 8, 2005 and are included in outstanding shares at December 31,
2004. At December 31, 2004, $142,238 in management fees were outstanding to this
officer/director and are included in due to related parties on the accompanying
balance sheet. The amounts due are unsecured, non-interest bearing and are
payable on demand.
F-15
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Due to Related Parties (continued)
For the years ended December 31, 2004 and 2003, the Company incurred
approximately $25,600 and $58,700 in consulting fees, respectively, to company
whose director is a director of the Company. On December 30, 2004, the Company
agreed to issue 233,333 shares of common stock at $.15 per share to this
officer/director for settlement of $35,000 of this debt. These shares were
issued on March 8, 2005 and are included in outstanding shares at December 31,
2004. At December 31, 2004, $17,049 in management fees was outstanding to this
officer/director and are included in due to related parties on the accompanying
balance sheet. The amounts due are unsecured, non-interest bearing and are
payable on demand.
For the years ended December 31, 2004 and 2003, the Company incurred $62,535 and
$96,000 in management fees to a company whose officer is an officer of the
operating subsidiary of the Company. At December 31, 2004, $13,535 in management
fees was outstanding to this officer and are included in due to related parties
on the accompanying balance sheet.
The Company incurred approximately $0 and $30,800 in consulting and management
fees in 2004 and 2003, respectively to a former director of the Company who
resigned in November 2004. At December 31, 2004, $5,191 in consulting fees and
expenses were outstanding to this former director and are included in due to
related parties on the accompanying balance sheet.
For the years ended December 31, 2004 and 2003, the Company incurred
approximately $73,800 and $69,700 in management fees to a company whose officer
is a former officer of the Company. On December 30, 2004, the Company agreed to
issue 166,667 shares of common stock at $.15 per share to this officer/director
for settlement of $25,000 of this debt. These shares were issued on March 8,
2005 and are included in outstanding shares at December 31, 2004. At December
31, 2004, $55,791 in management fees and expenses were outstanding to this
former officer and are included in due to related parties on the accompanying
balance sheet. The Company paid $6,000 in January 2005 and in March 2005 entered
into a settlement agreement, whereby the Company will pay $38,300 over 9 months.
F-16
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Loans Payable
On March 5, 2004, the Company borrowed Euro 115,000 ($156,860 at December 31,
2004) from an officer of the Company for working capital purposes. The loan
accrues 0.8% compounded interest per month, has a term of twelve months, and the
debt is repayable quarterly in arrears. As at December 31, 2004, $11,471 in
interest was accrued on this loan. As of March 31, 2005, the loan had not been
repaid.
NOTE 6 - DEBENTURE PAYABLE
Pursuant to a Securities Purchase Agreement entered into on October 25, 2004,
Cornell Capital Partners is obligated to purchase $250,000 of convertible
debentures. The $250,000 will be disbursed as follows: (i) $125,000 was
disbursed on October 30, 2004 and (ii) $125,000, within five days of the filing
of a Registration Statement that occurred on January 5, 2005. The debentures are
convertible at the holder's option any time up to maturity at a conversion price
equal to the lower of (i) 120% of the closing bid price of the common stock on
the date of the debentures or (ii) 80% of the lowest closing bid price of the
common stock for the five trading days immediately preceding the conversion
date. The debentures are secured by stock pledged by certain shareholders of the
Company. The debentures have a two-year term and accrue interest at 5% per year.
At maturity, the debentures will automatically convert into shares of common
stock at a conversion price equal to the lower of (i) 120% of the closing bid
price of the common stock on the date of the debentures or (ii) 80% of the
lowest closing bid price of the common stock for five trading days immediately
preceding the conversion date. In October 2004, the Company issued $125,000 of
debentures under this agreement for net proceeds of $100,000. As of December 31,
2004, the Company accrued interest payable of $1,302 related to this debenture
which is included in accounts payable and accrued expenses on the accompanying
balance sheet. For the year ended December 31, 2004, the Company recorded an
imbedded beneficial conversion amount of $31,250 as interest expense since the
debentures were immediately convertible.
On October 25, 2004, in connection with a Standby Equity Distribution Agreement
(see Note 10), the Company issued a convertible Compensation Debenture to
Cornell Capital Partners in the principal amount of $200,000. On December 15,
2004, the Company and Cornell Capital Partners entered into an amendment (the
"Amendment") to the Standby Equity Distribution Agreement dated October 25, 2004
by and between the Company and Cornell Capital Partners. Pursuant to the
Amendment, the Company issued to Cornell Capital Partners 1,202,779 shares of
the Company's common stock as a commitment fee, in lieu of the compensation
debenture. As a result, the compensation debenture has been terminated. Cornell
Capital Partners will be permitted to sell up to $50,000 of the commitment fee
shares in any 30 day period. In connection with issuance of these shares, the
Company valued these common shares at the fair market value on the dates of
grant of $.07 per shares or $84,195 based on the quoted trading price and
recorded deferred compensation in this amount which will be amortized over the
equity funding commitment period of 24 months or less if funded earlier. The
commitment period begins once the registration statement for the underlying
conversion shares is declared effective or at an earlier date if agreed upon by
the parties.
F-17
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 7 - ADVANCES PAYABLE
As of January 1, 2004 the Company had approximately $152,600 of advances payable
and accrued interest outstanding to a non-related company and individual. During
the year ended December 31, 2004, the Company received $114,000 in cash advances
from this non-related party, accrued interest payable of $15,391, and recorded
capitalized development costs of $37,500. The advances accrue interest at 1% per
month (12% per annum). In February 2004, the Company issued 300,000 shares of
its common stock for the settlement of $37,500 of advances payable and $37,500
of accrued expenses to this non-related company. On September 29, 2004, the
Company issued 1,715,000 units and 286,200 shares of common stock to settle
$128,625 in advances and $21,465 in interest, respectively, due to this
non-related party. Each unit is comprised of one common share and one warrant.
Each warrant entitles the holder to purchase an additional share of the
Company's common stock at $0.20 until September 29, 2009.
On December 30, 2004, the Company agreed to issue 176,667 units and 16,633
shares of common stock to settle $26,500 in advances and $2,495 in interest due
to this non-related company and individual. Each unit is comprised of one common
share and one warrant. Each warrant entitles the holder to purchase an
additional share of the Company's common stock at $0.30 until December 30, 2006.
These share were issued on March 8, 2005 and are included in outstanding shares
at December 31, 2004. As at December 31, 2004, advances payable amounted to
$35,000.
NOTE 8 - INCOME TAXES
As of December 31, 2004, the Company had approximately $3,600,000 of U.S.
federal and state net operating loss carryforwards available to offset future
taxable income which begin expiring in 2011, if not utilized. In addition, the
Company has approximately $3,625,000 of foreign net operating loss carryforwards
related to the Company's Brazilian subsidiary.Current Brazilian tax legislation
imposes no time period for the utilization of the losses, although it does limit
the annual usage of the losses to 30% of taxable profits. Transax files its
income tax return on a consolidated company basis with TNSX, its legal parent,
as U.S. tax rules prohibit the consolidation of its foreign subsidiaries.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to prior transactions, the Company's net operating loss carry
forwards are subject to an annual limitation. Any unused annual limitation may
be carried forward to future years for the balance of the net operating loss
carryforward period. The Company has not yet determined the limitation as
defined by the Tax Reform Act of 1986. Additionally, because U.S. tax laws limit
the time during which these carryforwards may be applied against future taxes,
the Company may not be able to take full advantage of these attributes for
Federal income tax purposes.
F-18
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 8 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of operating loss and tax
credit carryforwards and temporary differences between carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future
deductible amounts become deductible. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax assets, the deferred tax
assets are fully offset by a valuation allowance at December 31, 2004 and 2003.
The Company's tax expense differs from the "expected" tax expense for the years
ended December 31, 2004 and 2003 as follows:
2004 2003
----------- -----------
Computed "expected" tax benefit $ (636,000) $(1,098,000)
State income taxes benefit (44,000) (129,000)
Other (75,000) (147,000)
Change in valuation allowance 755,000 1,374,000
----------- -----------
$ - $ -
=========== ===========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2004 are as follows:
Deferred tax assets:
Net operating loss carry $ 2,600,500
forward
-----------
Total gross deferred tax assets 2,600,500
Less valuation
allowance (2,600,500)
-----------
Net deferred tax $ -
assets
===========
The valuation allowance at December 31, 2004 was $2,600,500. The increase during
2004 was approximately $755,000.
F-19
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 9- FOREIGN OPERATIONS
The Company identifies its operating segments based on its business activities
and geographical locations. The Company operates within a single operating
segment, being a provider of information network solutions specifically designed
for healthcare providers and health insurance companies. The Company operates in
Brazil, Australia and Mauritius, and has a registered mailing address in
Singapore and in the USA. All of the Company's assets are located in Brazil.
Year ended December 31,
--------------------------
2004 2003
----------- -----------
Net sales to Unaffiliated Customers
Brazil $ 1,199,899 $ 309,589
USA - -
Singapore -
Australia -
Mauritius -
----------- -----------
1,199,900 309,589
----------- -----------
Loss from operations
Brazil (1,420,343) (1,446,721)
USA (1,299,072) (1,753,628)
Singapore - (33,256)
Australia (32,429) (108,934)
Mauritius (41,688) (9,500)
----------- -----------
(2,793,532) 3,352,039)
----------- -----------
(1,593,632) 3,042,450)
----------- -----------
Other income (expenses)
Brazil (90,249) (105,687)
USA (105,133) (90,758)
Australia (3,241) 8,620
----------- -----------
(198,623) (187,826)
----------- -----------
Net loss as reported in the accompanying statements $(1,792,255) $(3,230,276)
----------- -----------
F-20
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT
Common Stock
On August 14, 2003, pursuant to the terms of the Merger, the Company issued
11,066,207 shares of restricted common stock in exchange of all the outstanding
shares of Transax limited, including 300,000 shares issued for finder's fees.
Nine (9) additional shares were issued pursuant to the Merger, to satisfy
rounding of the 2:1 reverse split. On August 28, 2003, the
Company issued 1,206,730 shares of common stock for options exercised for net
proceeds of $652,071. The proceeds were utilized for the settlement of existing
debt.
On August 28, 2003, the Company issued 100,000 units, at $ 1.00 per unit, in
settlement of $100,000 of debt. Each unit is comprised of one common share and
one-half warrant. Each warrant entitles the holder to purchase an additional
share of the Company's common stock at $1.50, for a period of 12 months.
On October 22, 2003, the Company issued 87,500 shares of common stock for
options exercised, for net proceeds of $43,750. The proceeds were utilized for
the settlement of advances payable.
On November 21, 2003, the Company agreed to issue 450,000 units for the
conversion of $225,000 of advances payable. Each unit is comprised of one common
share and one-half warrant. Each warrant entitles the holder to purchase an
additional share of the Company's common stock at $1.00, for a period of 24
months. At December 31, 2003, these units had not yet been issued and were
issued on April 18, 2004.
On November 21, 2003, the Company agreed to issue 45,000 shares of common stock
for finders' fees for advances. $27,900 is included as stock based compensation
in the statement of operations. At December 31, 2003, these shares had not yet
been issued and were issued on June 2, 2004.
On December 3, 2003, the Company issued 162,500 shares of common stock for
options exercised, for net proceeds of $40,625. The proceeds were utilized for
the settlement of advances payable. On December 31, 2003, the Company agreed to
issue 300,000 shares of common stock for options exercised, for net proceeds of
$75,000. The proceeds were utilized for the settlement of advances payable.
These shares were issued on January 7, 2004.
On December 31, 2003, the Company agreed to issue 373,570 units for the
conversion of a $66,195 loan and accrued interest of $27,198 from a related
party whose officer is an officer of Company. Each unit is comprised of one
common share and one warrant. Each warrant entitles the holder to purchase an
additional share of the Company's common stock at $0.50 for a period of 12
months. These units were issued on January 7, 2004.
F-21
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On January 26, 2004, the Company issued 300,000 shares of restricted common
stock for services rendered, for net value of $75,000, included in the statement
of operations for the three-month period ended March 31, 2004 as professional
fees. On May 5, 2004, the Company returned to treasury 300,000 restricted shares
that had been issued for services rendered on January 26, 2004. The shares were
returned for non-performance and the expense was reversed during the three month
period ended June 30, 2004.
On February 12, 2004, the Company issued 300,000 shares of common stock for
options exercised, for net proceeds of $75,000. The proceeds were utilized for
the settlement of advances payable.
On June 11, 2004, the Company issued 150,000 shares of common stock a consultant
for services rendered. The Company valued these common shares at the fair market
value on the dates of grant or $0.25 based on the quoted trading price and
recorded consulting expense of $37,500.
On July 26, 2004, May 2002, in connection with the exercise of stock options,
the Company issued 600,000 shares to consultants for services rendered. Since
the Company did not receive any cash for the exercise of these options, the
Company recorded consulting expense of $36,000 based on the exercise price of
the stock options granted ($0.06 per share).
On August 12, 2004, the Company issued 600,000 shares of common stock a
consultant for services rendered. The Company valued these common shares at the
fair market value on the dates of grant or $0.06 based on the quoted trading
price and recorded investor relation expense of $36,000.
On September 29, 2004, the Company issued 374,848 shares of common stock to
settle approximately $28,100 in interest due to a related party in relation to
cash advances.
On September 29, 2004, the Company issued 346,667 shares of common stock a
company related an officer of the Company for services rendered. The Company
valued these common shares at the fair market value on the dates of grant or
$0.075 based on the quoted trading price and recorded consulting expense of
$26,000.
On September 29, 2004, the Company issued 1,687,500 shares of common stock to
settle $135,000 of debt owed to a related party.
On September 29, 2004, the Company granted 1,715,000 units to settle $128,625 in
cash advances. Each unit is comprised of one common share and one warrant. Each
warrant entitles the holder to purchase an additional share of the Company's
common stock at $0.20 until September 29, 2009.
F-22
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On September 29, 2004, the Company issued 166,667 shares of common stock a
consultant for services rendered. The Company valued these common shares at the
fair market value on the dates of grant or $0.075 based on the quoted trading
price and recorded consulting expense of $12,500.
On September 29, 2004, the Company issued 286,200 shares of common stock to
settle $21,465 in interest due in relation to cash advances. On September 29,
2004, the Company issued 562,500 shares of common stock to settle $45,000 of
debt.
On September 29, 2004, the Company granted 687,500 units for conversion of
$55,000 of a convertible loan to a related party. Each unit is comprised of one
common share and one warrant. Each warrant entitles the holder to purchase an
additional share of the Company's common stock at $0.20 until September 29,
2009.
On September 29, 2004, the Company issued 871,425 shares of common stock to
settle $69,714 in interest due to a related party in relation to a convertible
loan.
On October 25, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at the Company's discretion,
periodically sell to Cornell Capital Partners shares of common stock for a total
purchase price of up to $5.0 million. For each share of common stock purchased
under the Standby Equity Distribution Agreement, Cornell Capital Partners will
pay Transax 97% of, or a 3% discount to, the lowest closing bid price of our
common stock on the Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five days immediately following the
notice date. Further, Cornell Capital Partners will retain 5% of each advance
under the Standby Equity Distribution Agreement. In December 2004, the Company
issued to Cornell Capital Partners 1,202,779 shares of the Company's common
stock as a commitment fee, in lieu of the compensation debenture. As a result,
the compensation debenture has been terminated. Cornell Capital Partners will be
permitted to sell up to $50,000 of the commitment fee shares in any 30-day
period. In connection with the issuance of these shares, the Company valued
these common shares at the fair market value on the dates of grant of $.07 per
share, or $84,195, based on the quoted trading price and recorded deferred
compensation in this amount which will be amortized over the equity funding
commitment period of 24 months or less if funded earlier. The unamortized
portion is included in Stockholders' Deficit at December 31, 2004. The
commitment period begins once the registration statement for the underlying
conversion shares is declared effective or at an earlier date if agreed upon by
the parties.
F-23
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
In October 2004, the Company issued 125,000 shares of common stock to Monitor
Capital, Inc. (Monitor), an unaffiliated registered broker-dealer that has been
retained by the Company in connection with the Standby Equity Distribution
Agreement. In connection with the issuance of these shares, the Company valued
these common shares at the fair market value on the date of grant of $.08 per
share, or $10,000, based on the quoted trading price and recorded deferred
compensation in this amount which will be amortized over the equity funding
commitment period of 24 months or less if funded earlier. The unamortized
portion is included in Stockholders' Deficit at December 31, 2004. The
commitment period begins once the registration statement for the underlying
conversion shares is declared effective or at an earlier date if agreed upon by
the parties.
On December 30, 2004, the Company agreed to grant 2,000,000 units for conversion
of $300,000 of loans payable to unrelated parties. Each unit is comprised of one
common share and one warrant. Each warrant entitles the holder to purchase an
additional share of the Company's common stock at $0.30 until December 30, 2006.
Additionally, in connection with these loans, the Company issued 82,908 common
shares as settlement of accrued interest payable amounting to $12,436.
On December 30, 2004, the Company agreed to issue 1,580,000 shares of common
stock to settle $237,000 in amounts due to related parties.
All shares that the Company agreed to issue on December 30, 2004 for the
conversion of debt to equity were issued on March 8, 2005 and are included in
outstanding shares at December 31, 2004.
Stock Options
On January 14, 2005, the board of directors elected to extend the expiration
date of 373,570 warrants from December 31, 2004 to December 31, 2005.
On November 28, 2004, the Company adopted a 2004 Incentive Stock Option Plan
(the "Plan"). The Plan provides options to be granted, exercisable for a maximum
of 2,500,000 shares of common stock. Both incentive and nonqualified stock
options may be granted under the Plan. The exercise price of options granted,
the expiration date, and the vesting period, pursuant to this plan is determined
by a committee.
On July 26, 2004, the Company granted options to purchase 600,000 shares of
common stock to a consultant for serviced rendered. The options expire on August
14, 2008 and are exercisable at $0.06 per share, which was the fair market value
of the common stock at the grant date. These options were valued using the
Black-Scholes pricing method at a fair value of $0.058 per option. Accordingly,
the Company recorded stock-based compensation expense of $34,900.
F-24
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On December 31, 2004, the Company granted options to purchase 750,000 shares of
common stock to certain employees of the Company with an exercise price of
$0.20. The exercise price on the date of grant exceeded the fair market value of
the common stock at the grant date. Accordingly, under APB 25, no compensation
expense was recognized. These stock options expire on December 30, 2009.
A summary of the status of the Company's outstanding stock options as of
December 31, 2004 and 2003 and changes during the years then ended is as
follows:
Shares Weighted Average
Exercise Price
--------- ----------------
Outstanding at December 30, 2002 4,500,000 $ 0.36
Granted 2,774,040 0.37
Exercised (2,200,000) (0.37)
Cancelled (2,799,040) (2.30)
--------- ----------------
Outstanding at December 31, 2003 2,275,000 0.43
Granted 1,800,000 0.14
Exercised (1,050,000) (0.14)
Forfeited (600,000) (0.50)
--------- ----------------
Outstanding at December 31, 2004 2,425,000 $ 0.41
========= ================
Options exercisable at end of year 2,425,000 $ 0.41
========= ================
2004 2003
---------- -----------
Weighted-average fair value of options granted during the year $ 0.14 $ 0.57
The following information applies to options outstanding at December 31, 2004:
Options Outstanding
---------------------------- -- Options Exercisable ---
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ----------- -------------- ----------
$0.50 1,675,000 3.62 $ 0.50 1,675,000 $ 0.50
$0.20 750,000 5.00 $ 0.20 750,000 $ 0.20
The exercise price of all options granted by the Company equals or exceeded the
market price at the date of grant. Accordingly, no compensation expense has been
recognized on options granted to employees and directors.
F-25
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On September 29, 2004, in connection with a conversion of debt, the Company
granted 2,402,500 warrants to purchase 2,402,500 shares of common stock at $0.20
per share. The warrants expire on September 29, 2009. The fair value of this
warrant grant was estimated at $0.096 per warrant on the date of grant using the
Black-Scholes option-pricing model with the following weighted- average
assumptions dividend yield of -0- percent; expected volatility of 191 percent;
risk-free interest rate of 3.15 percent and an expected holding periods of 5.00
years. In connection with these warrants, the Company recorded stock-based
compensation expense of $230,111 for the year ended December 31, 2004.
On December 31, 2004, in connection with a conversion of debt, the Company
granted 2,000,000 warrants to purchase 2,000,000 shares of common stock at $0.30
per share. The warrants expire on December 30, 2006. The fair value of this
warrant grant was estimated at $0.118 per warrant on the date of grant using the
Black-Scholes option-pricing model with the following weighted- average
assumptions dividend yield of -0- percent; expected volatility of 201 percent;
risk-free interest rate of 3.50 percent and an expected holding periods of 2.00
years. In connection with these warrants, the Company recorded stock-based
compensation expense of $237,358 for the year ended December 31, 2004.
A summary of the status of the Company's outstanding stock warrants as of
December 31, 2004 and 2003 and changes during the years is as follows:
Shares Weighted Average
Exercise Price
------------- -------------------
Outstanding at December 30, 2002 - $ -
Granted 4,748,570 0.95
Exercised - -
Forfeited - -
Outstanding at December 31, 2003 4,748,570 0.95
Granted 4,402,500 0.25
Exercised (50,000) (1.50)
Forfeited
Outstanding at December 31, 2004 9,101,070 $ 1.00
============== ==================
Warrants exercisable at end of year 9,101,070 $0.61
============== ==================
2004 2003
------------ ---------------
Weighted-average fair value of warrants $0.25 $0.95
granted during the year
F-26
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
The following information applies to all warrants outstanding at December 31,
2004:
Warrants Outstanding Warrants Exercisable
------------------------------------ ------------------------------------------------------------
Weighted Average
Range of Exercise Prices Shares Life (Years) Exercisel Price Shares Price
---------------------------- ----------------- ----------------- -------------------- --------------------- ---------------
$1.00 4,325,000 3.61 $1.00 4,325,000 1.00
$0.50 373,570 1.00 $0.50 373,570 0.50
$0.30 2,000,000 2.00 $0.30 2,000,000 0.30
$0.20 2,402,500 4.75 0.20 2,402,500 0.20
In 2003, for financial statement purposes, the fair market value of each stock
option and stock warrant grant is estimated on the date of grant using the
Black-Scholes option-pricing model, in accordance with SFAS No. 123 using the
following weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 2.44%, volatility of 136.11% and expected term of 5 years. In
the year ended December 31, 2003, under SFAS No 123, the Company incurred a
stock based compensation cost of $919,500 for the issuance of options, and
$211,700 for the issuance of warrants.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Rent
The Company has an operating lease for rental of office space in Brazil,
renewable on an annual basis. Rent expense amounted to approximately $62,300 and
$46,000 and is classified as part of general and administrative expenses in the
statement of operations for each of the years ended December 31 2004 and 2003,
respectively.
Leases
The Company acquired Point-of-Sale terminals and computer equipment under
capital leases that have been capitalized for approximately $270,800, and are
included in property and equipment. During 2004, the Company leased additional
computer equipment amounting to approximately $130,000 under capital ease
arrangements. Depreciation expense included in the statement of operations is
approximately $45,000 and $29,600 for each of the years ended December 31, 2004
and 2003, respectively.. Interest expense related to these leases for the years
ended December 31, 2004 and 2003 was approximately $16,800 and $22,700,
respectively.
The minimum lease payments under these capital leases are as follows:
For the year ending December 31,
2005 $75,405 (included in current liabilities)
2006 $16,608
F-27
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 12 - LITIGATION
An action has been brought against the Company by its former stock transfer
agent which alleges, among other items, that the Company breached its contract
with the transfer agent. The Company has filed an answer to the action and a
portion of the action has been dismissed by the court. The Company intends to
vigorously defend itself against the remainder of the action. Counsel has
advised the Company that there is a better than fifty percent chance that a
potential loss will be incurred. Accordingly, an accrual of $50,000 has been
recorded at December 31, 2004.
NOTE 13 - SUBSEQUENT EVENTS
On January 14, 2005, the Company entered into a six-month consulting contract
for business development services. In connection with the agreement, the Company
issued 400,000 shares of common stock. The Company valued these common shares at
the fair market value on the dates of grant or $0.16 based on the quoted trading
price and recorded deferred consulting expense of $64,000 to be amortized over
the service period.
On January 14, 2005, the Company entered into a consulting contract for business
development services. In connection with the agreement, the Company issued
100,000 shares of common stock. The Company valued these common shares at the
fair market value on the dates of grant or $0.16 based on the quoted trading
price and recorded deferred consulting expense of $16,000 to be amortized over
the service period. On January 14, 2005, the board of directors voted to
increase the compensation paid to a Company owned by the Company's Chief
Executive Officer from $11,000 per month to $13,750 per month. Additionally, the
board approved a bonus to the CEO of 25% of 2004 payments made ($33,000).
On March 23, 2005, the Company entered into a consulting contract for business
development services. In connection with the agreement, the Company issued
150,000 shares of common stock. The Company valued these common shares at the
fair market value on the dates of grant or $0.14 based on the quoted trading
price and recorded deferred consulting expense of $21,000 to be amortized over
the service period.
On March 23, 2005, the Company modified the terms of its convertible loans to a
related party. Under the modified terms, $200,000 of principal due under the
convertible loans is due on March 31, 2007 and is convertible into the Company's
common stock at $.125 per share. The remaining principal of $100,000 is due on
April 30, 2007 and is convertible into the Company's common stock at $.125 per
share. For each common share received upon conversion of the principal balance,
the related party is entitled to receive one warrant to purchase the Company's
common stock at $.25 per share for a period of two years from the conversion
date.
On March 28, 2005, the Company issued 400,000 shares of common stock to settle
approximately $50,500 in debt due to a related party.
F-28
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
On April 1, 2005, the Company entered into a Securities Purchase Agreement with
Scott and Heather Grimes, Joint Tenants - with Rights of Survivorship (the
"Investor"). Pursuant to the Securities Purchase Agreement, the Company issued
convertible debentures to the Investor in the original principal amount of
$250,000. The debentures are convertible at the holder's option any time up to
maturity at a conversion price equal to the lower of (i) 120% of the closing bid
price of the common stock on the date of the debentures or (ii) 80% of the
lowest closing bid price of the common stock for the five trading days
immediately preceding the conversion date. The debentures have a two-year term
and accrue interest at 5% per year. At maturity, the debentures will
automatically convert into shares of common stock at a conversion price equal to
the lower of (i) 120% of the closing bid price of the common stock on the date
of the debentures or (ii) 80% of the lowest closing bid price of the common
stock for five trading days immediately preceding the conversion date. In April
2005, Company recorded an imbedded beneficial conversion amount of $62,500 as
interest expense since the debentures were immediately convertible.
F-29
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ........................................................... $ 64,221
Accounts receivable (Net of allowance for doubtful accounts
of $0) ....................................................... 369,726
Prepaid expenses and other current assets ...................... 100,578
-----------
TOTAL CURRENT ASSETS ........................................ 534,525
SOFTWARE DEVELOPMENT COSTS, net .................................. 279,878
PROPERTY AND EQUIPMENT, net ...................................... 720,758
DEFERRED DEBT OFFERING COSTS ..................................... 200,000
OTHER ASSETS ..................................................... 2,400
-----------
TOTAL ASSETS ................................................ $ 1,737,561
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligation .................... $ 71,051
Current portion of loan payable ................................ 202,893
Accounts payable and accrued expenses .......................... 1,469,994
Due to related parties ......................................... 172,400
Loan payable - related party ................................... 142,071
Convertible loans from related party ........................... 274,836
-----------
TOTAL CURRENT LIABILITIES ................................... 2,333,245
LOAN PAYABLE ..................................................... 255,237
DEBENTURE PAYABLE, NET ........................................... 216,521
ACCOUNTS PAYABLE AND ACCRUED EXPENSES, net of current portion .... 404,115
-----------
TOTAL LIABILITIES ........................................... 3,209,118
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock $.0001 par value; 20,000,000 shares authorized;
No shares issued and outstanding ............................. -
Common stock $.00001 par value; 100,000,000 shares authorized;
30,122,981 shares issued and outstanding ..................... 300
Paid-in capital ................................................ 7,352,788
Accumulated deficit ............................................ (8,761,242)
Deferred compensation .......................................... (9,625)
Other comprehensive loss - Cumulative foreign currency
adjustment ................................................... (53,778)
-----------
TOTAL STOCKHOLDERS' DEFICIT ................................. (1,471,557)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................. $ 1,737,561
===========
The accompanying notes are an integral part of these
consolidated financial statements.
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 30, 2005 and 2004
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES $ 861,023 $ 312,615 $ 1,501,431 $ 450,199
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of product support services 394,533 161,999 596,996 246,849
Payroll and related benefits 103,073 83,271 207,100 165,213
Research &development costs 50,690 28,616 90,022 47,981
Professional fees 58,980 (64,058) 71,145 33,581
Management &consulting fees - related
parties 41,250 78,900 74,965 157,800
Stock based compensation 26,500 -- 80,042 --
Investor relations 790 2,827 15,635 19,637
Depreciation and amortization 59,027 16,754 103,604 34,751
General & administrative 181,944 83,015 356,814 184,766
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 916,787 391,324 1,596,323 890,578
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (55,764) (78,709) (94,892) (440,379)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Other income (expense) -- (11,372) 10,514 (19,203)
Foreign exchange gains (losses) 23,932 18,191 26,434 881
Interest expense (106,867) (17,514) (167,085) (42,651)
Interest expense - related party (43,788) (22,810) (56,277) (43,032)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (126,723) (33,505) (186,414) (104,005)
------------ ------------ ------------ ------------
NET LOSS (182,487) (112,214) (281,306) (544,384)
Other Comprehensive Income:
Unrealized foreign currency
translation gain (loss) (75,051) 1,496 8,874 19,054
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (257,538) (110,718) $ (272,432) $ (525,330)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.01) $ (0.01) $ (0.01) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 29,491,294 15,720,910 29,240,092 15,374,472
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-30
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(281,306) $(544,384)
Adjustments to reconcile net loss to net cash
to net cash provided by (used in)
operating activities:
Depreciation and amortization 103,604 75,651
Amortization of development costs 66,524 --
Beneficial interest 93,750 --
Stock based compensation 80,041 --
Grant of warrants 31,200 ~
Foreign exchange gain (18,101) --
Gain on sale of fixed assets -- (251)
Amortization of deferred debt issuance costs 4,783 ~
Changes in assets and liabilities:
Accounts receivable (199,528) (80,114)
Prepaid expenses and other current assets (49,031) (13,899)
Other assets (2,400) --
Accounts payable and accrued expenses 379,253 98,250
Accrued interest payable, related party 24,777 43,032
Accrued interest payable 5,237 7,133
Due to related parties 1,191 162,316
Accrued payroll and related expenses -- 130,660
Other -- 7,081
Accounts payable and accrued expenses - long-term 11,050 --
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 251,045 (114,525)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (216,537) (102,861)
Proceeds from disposal of property and equipment
--------- ---------
Acquisition of property and equipment (273,797) (75,552)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (490,334) (178,413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related party -- 82,500
Advances from non-related company -- 24,000
Repayment of advances from related party (35,001) --
Repayments under capital lease obligations (20,962) (27,131)
Proceeds from convertible debenture 336,738 --
Proceeds from loan payable 141,982 --
Proceeds from loan - related party -- 139,500
Proceeds from convertible loans - related party (15,084) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 407,674 218,869
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (114,184) 23,096
--------- ---------
NET INCREASE (DECREASE) IN CASH 60,131 (4,091)
CASH, BEGINNING OF PERIOD 4,090 10,472
--------- ---------
CASH, END OF PERIOD $ 4,090 $ 10,472
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 15,084 $ 31,564
========= =========
Cash paid for income taxes $ -- $ --
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt and accrued interest $ 137,971 $ 112,500
========= =========
Common stock issued for services $ 80,041 $ --
========= =========
Grant of common stock warrants in connection
debt conversion $ 31,200 $ --
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-31
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary to make the interim financials not misleading
have been included and such adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the
financial statements for the year ended December 31, 2004 and notes thereto
contained in the Report on Form 10-KSB of Transax International Limited ("our
Company" or the "Company") as filed with the Securities and Exchange Commission
(the "Commission"). The results of operations for the six months ended June 30,
2005 are not necessarily indicative of the results for the full fiscal year
ending December 31, 2005.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The consolidated financial statements of the Company include the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.
ORGANIZATION
Transax International Limited was incorporated in the State of Colorado in
1999. The Company, primarily through its wholly-owned subsidiary TDS
Telecommunication Data Systems Ltda. ("TDS"), is an international provider of
information network solutions specifically designed for healthcare providers and
health insurance companies. The Company's MedLink Solution (TM) enables the real
time automation of routine patient eligibility, verification, authorizations,
claims processing and payment functions. The Company has offices located in
Miami, Florida and Rio de Janeiro, Brazil.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
Actual results could differ from those estimates. Estimates used in the
preparation of the accompanying financial statements include the allowance for
doubtful accounts receivable, the useful lives of property, equipment and
software development costs and variables used to determine stock-based
compensation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of our cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate carrying values due to their
short maturities. The fair values of our debt instruments approximate their
carrying values based on rates currently available to us.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and accounts
receivable.
The Company performs certain credit evaluation procedures and does not
require collateral for financial instruments subject to credit risk. The Company
believes that credit risk is limited because the Company routinely assesses the
financial strength of its customers, and based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited.
F-32
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
REVENUE RECOGNITION
Revenue from the sale of software products, which do not require any
significant production, modification or customization for the Company's targeted
customers and do not have multiple elements, is recognized when: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the Company's
fee is fixed and determinable, and; (4) collectibility is probable.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the year-end exchange rates, equity is converted
historically and all revenue and expenses are translated into U.S. dollars at
the average exchange rates prevailing during the periods in which these items
arise. Translation gains and losses are deferred and accumulated as a component
of other comprehensive income or loss in stockholders' deficit. Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency (TDS - Brazilian
Real, Transax Australia, - Australian dollar and Transax and the Company - USD)
are included in the Statement of Operations as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
The exercise prices of all options granted by the Company exceeded the
market price at the dates of grant. No compensation expense has been recognized.
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123,
"Accounting for Stock Based Compensation", the Company's net income and
income per share would have been changed to the pro forma amounts indicated
below for the six months ended June 30, 2005 and 2004:
SIX MONTHS ENDED JUNE 30,
2005 2004
--------- -----------
Net loss as reported $(281,306) $ (544,384)
Less: total stock-based employee
compensation expense determined
under fair value based method, net of related
tax effect (50,871) --
--------- -----------
Pro forma net loss $(332,177) $ (544,384)
========= ===========
Basic and diluted loss per share:
As reported $ (.01) $ (.04)
========= ===========
Pro forma $ (.01) $ (.04)
========= ===========
F-33
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
The option grants are estimated as of the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants as of June 30, 2005: expected volatility of 205%; risk free interest rate
of 3.25%; expected life of 5 years and annual dividend rate of 0%.
LOSS PER COMMON SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period. Diluted income per share is computed by dividing net income by the
weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. At June 30,
2005, there were options and warrants to purchase 12,926,070 shares of common
stock, which could potentially dilute future earnings per share, but which are
anti-dilutive for the periods presented above.
COMPREHENSIVE LOSS
Other comprehensive loss, which currently includes only foreign currency
translation adjustments, is shown in the Statement of Changes in Stockholders'
Deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective for the first fiscal year beginning after
December 15, 2005. The Company is in the process of evaluating the impact of
this pronouncement on its financial position.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment to APB Opinion No. 29 which
eliminates the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In May 2005, FASB issued FASB Statement 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("FAS 154"). FAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. The provisions of FAS 154
require, unless impracticable, retrospective application to prior periods'
financial statements of (1) all voluntary changes in principles and (2) changes
required by a new accounting pronouncement, if a specific transition is not
provided. FAS 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for as a
change in accounting estimate, which requires prospective application of the new
method. FAS 154 is effective for all accounting changes made in fiscal years
beginning after December 15, 2005.
NOTE 2 - RELATED PARTY TRANSACTIONS
CONVERTIBLE LOANS PAYABLE
At December 31, 2004, the Company had loans payable for $200,000 and
$100,000 to a related party whose officer is an officer of the Company. On March
23, 2005, the Company modified the terms of its convertible loans to this
related party.
Under the modified terms, $200,000 of principal due under the convertible
loans is due on March 31, 2007 and is convertible into the Company's common
stock at $.125 per share. The remaining principal of $100,000 is due on April
30, 2007 and is convertible into the Company's common stock at $.125 per share.
For each common share received upon conversion of the principal balance, the
related party is entitled to receive one warrant to purchase the Company's
common stock at $.25 per share for a period of two years from the conversion
date. The interest rate of the loan is 12% per annum compounded monthly. On June
28, 2005, the holder of the notes partially exercised the conversion feature.
Accordingly, the Company issued 400,000 shares and 400,000 warrants to purchase
common stock of the Company for the conversion of principal balance of $50,000.
The Company also issued 35,770 shares of common stock to settle $4,471 in
interest due on these loans. At June 30, 2005, interest due on these two loans
amounted to $24,836 and the aggregate principal amount due is $250,000. During
the six months ended June 30, 2005 and 2004, the Company incurred $17,852 and
$24,132, respectively, in interest related to these two loans. The Company did
not incur beneficial conversion charges because the conversion price was
equivalent to the average offering price for equity when these loans became
convertible.
F-34
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
DUE TO RELATED PARTIES
As of June 30, 2005 the Company had $20,905 of advances payable and
accrued interest due to a related party whose officer is an officer of the
Company.
For the six months ended June 30, 2005 and 2004, the Company incurred
$82,500 and $66,000, respectively, in management fees to an officer/director of
the Company. On January 14, 2005, the board of directors voted to increase the
compensation paid to this officer/director from $11,000 per month to $13,750 per
month, effective January 1, 2005. On March 28, 2005, the Company issued 400,000
shares of common stock at $.126 per share to this officer/director for
settlement of $50,500 of this debt. On June 28, 2005, the Company issued 300,000
shares of common stock at $.11 per share to this officer/director for settlement
of $33,000 of this debt.. The fair market value of these shares were based on
the average price of the Company's shares traded between June 14 and June 27,
2005. At June 30, 2005, $137,343 in management fees and other expenses were
outstanding to this officer/director and are included in due to related parties
on the accompanying balance sheet. The amounts due are unsecured, non-interest
bearing and are payable on demand.
At June 30, 2005, $14,152 in management fees and expenses payable was due
to a director of the Company and is included in due to related parties on the
accompanying balance sheet. The amounts due are unsecured, non-interest bearing
and are payable on demand.
LOAN PAYABLE - RELATED PARTY
On March 5, 2004, the Company borrowed Euro 115,000 ($138,759 at June 30,
2005) from an officer of the Company for working capital purposes. The loan
accrues 0.8% compounded interest per month, has a term of twelve months, and the
debt is repayable quarterly in arrears. During the six months ended June 30,
2005 and 2004, the Company incurred $7,225 and $3,721, respectively, in interest
related to this loan. As at June 30, 2005, $3,312 in interest was accrued on
this loan and is included in loan payable - related party on the accompanying
balance sheet. The officer agreed to extend the loan for an additional twelve
months until March 2006.
NOTE 3 - FINANCING ARRANGEMENTS
LOAN PAYABLE
On October 25, 2004, the Company and Cornell Capital Partners entered into
a Securities Purchase Agreement, pursuant to which Cornell Capital Partners
purchased two 5% secured convertible debentures. The initial convertible
debenture in the original principal amount of $125,000 was dated October 25,
2004 and the second convertible debenture in the original principal amount of
$125,000 was dated January 4, 2005 (collectively, the "Original Debentures"). In
connection with the terms of the original debentures, for the six months ended
June 30, 2005, the Company recorded a beneficial conversion amount of $31,250 as
interest expense since the debentures were immediately convertible. On May 17,
2005, the Company and Cornell Capital Partners entered into a $255,237
Promissory Note (the "Note"), whereby the Original Debentures were terminated.
This Note represents the outstanding principal balance of $250,000 on the
Original Debentures, plus accrued but unpaid interest through April 30, 2005
equal to $5,237. The Note bears interest at a rate of 12% per annum and is
secured by stock pledged by certain shareholders of the Company. As of June 30,
2005, the Company has accrued interest payable of $2,552 related to this Note
which is included in accounts payable and accrued expenses on the accompanying
balance sheet.
DEBENTURE PAYABLE
On April 1, 2005, the Company entered into a Securities Purchase Agreement
with Scott and Heather Grimes, Joint Tenants - with Rights of Survivorship (the
"Investor"). Pursuant to the Securities Purchase Agreement, the Company issued
convertible debentures to the Investor in the original principal amount of
$250,000. The debentures are convertible at the holder's option any time up to
maturity at a conversion price equal to the lower of (i) 120% of the closing bid
price of the common stock on the date of the debentures or (ii) 80% of the
lowest closing bid price of the common stock for the five trading days
immediately preceding the conversion date. The debentures have a two-year term
and accrue interest at 5% per year. At maturity, the debentures will
automatically convert into shares of common stock at a conversion price equal to
the lower of (i) 120% of the closing bid price of the common stock on the date
of the debentures or (ii) 80% of the lowest closing bid price of the common
stock for five trading days immediately preceding the conversion date. In April
2005, Company recorded a beneficial conversion amount of $62,500 as interest
expense since the debentures were immediately convertible. Additionally, the
Company paid fees of $38,262 in connection with this debenture. These fees were
treated as a discount on the convertible debenture and are being amortized over
the debenture term. Amortization expense for the six months ended June 30, 2005
was $4,783 and is included in interest expense.
F-35
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
The convertible debenture liability is as follows at June 30, 2005:
Convertible debentures payable $ 250,000
Less: unamortized discount on debentures (33,479)
------------
Convertible debentures, net $ 216,521
============
STANDBY EQUITY DISTRIBUTION AGREEMENT
On October 25, 2004, the Company entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners. Pursuant to the Standby
Equity Distribution Agreement, the Company could, at its discretion,
periodically sell to Cornell Capital Partners shares of common stock for a total
purchase price of up to $5.0 million.
On May 17, 2005, the Company entered into a Termination Agreement with
Cornell Capital Partners, whereby that certain Standby Equity Distribution
Agreement, dated October 25, 2004, and the related Registration Rights
Agreement, Placement Agent Agreement and Escrow Agreement of even date therewith
were terminated.
Upon execution of the Termination Agreement, the Company entered into a
new Standby Equity Distribution Agreement with Cornell Capital Partners on May
17, 2005. Pursuant to the Standby Equity Distribution Agreement, the Company
may, at its discretion, periodically sell to Cornell Capital Partners shares of
common stock for a total purchase price of up to $5.0 million. For each share of
common stock purchased under the Standby Equity Distribution Agreement, Cornell
Capital Partners will pay the Company 97% of, or a 3% discount to, the lowest
closing bid price of the Company's common stock on the Over-the-Counter Bulletin
Board or other principal market on which the Company's common stock is traded
for the five days immediately following the notice date. Cornell Capital
Partners will also retain 5% of each advance under the Standby Equity
Distribution Agreement.
Cornell Capital Partner's obligation to purchase shares of the Company's
common stock under the Standby Equity Distribution Agreement is subject to
certain conditions, including the Company obtaining an effective registration
statement for shares of common stock sold under the Standby Equity Distribution
Agreement and is limited to $200,000 per weekly advance and $1,000,000 per 30
days. Under the now-terminated Standby Equity Distribution Agreement (SEDA)
originally dated October 25, 2004 and the terminated compensation debenture in
December 2004, Cornell Capital Partners received a one-time commitment fee in
the form of 1,201,779 shares of common stock in the amount of $200,000. In
December 2004, the Company valued the common shares issued to Cornell at the
fair market value on the dates of grant or $0.1664 per share or $200,000 based
on the quoted trading price for the stock. From December 2004 through May 27,
2005, the Company renegotiated the terms of the SEDA and the related agreements
and did not amortize the commitment fee. At June 30, 2005, the commitment fee
was deemed to be a deferred debt offering cost on the accompanying balance sheet
and will be amortized as a financing expense over the effective period of 24
months or less if funded earlier. Since as of June 30, 2005, the Company's
registration was not yet declared effective, the Company did not begin
amortizing the commitment fee.
NOTE 4 - STOCKHOLDERS' DEFICIT
COMMON STOCK
On January 14, 2005, the Company entered into a six-month consulting
contract for business development services. In connection with the agreement,
the Company issued 400,000 shares of common stock. On May 10, 2005, the Company
cancelled this contract and cancelled 200,000 shares that were due on this
contract. The Company valued these common shares at the fair market value on the
date of grant of $0.16 based on the quoted trading price and recorded
stock-based consulting expense of $42,667 through the date of cancellation.
F-36
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
On January 14, 2005, the Company entered into a consulting contract for
business development services. In connection with the agreement, the Company
issued 100,000 shares of common stock. The Company valued these common shares at
the fair market value on the date of grant of $0.16 based on the quoted trading
price and recorded stock-based compensation expense of $16,000. On March 21,
2005, the Company entered into a consulting contract for business development
services. In connection with the agreement, the Company issued 150,000 shares of
common stock. The Company valued these common shares at the fair market value on
the dates of grant or $0.14 or $21,000 based on the quoted trading price and
recorded stock-based consulting expense of $11,375 and deferred consulting
expense of $9,625 to be amortized over the remaining service period.
On March 28, 2005, the Company issued 400,000 shares of common stock to
settle $50,500 in debt due to an officer/director of the Company. The Company
valued these common shares at the fair market value on the date of grant of
$0.126.
On June 28, 2005, the holder of the related party loans (see note 2)
exercised the conversion feature. Accordingly, the Company issued 400,000 shares
and the conversion price of $.125 per share and 400,000 warrants to purchase
common stock of the Company at $.25 per share (see note 3) for the conversion of
principal balance of $50,000. The Company also issued 35,770 shares of common
stock to settle $4,471 in interest due on these loans. On June 28, 2005, the
Company issued 300,000 shares of common stock at $.11 per share, the fair market
value on the date of grant, to this officer/director for settlement of $33,000
of this debt.
STOCK OPTIONS
On January 14, 2005, the board of directors elected to extend the
expiration date of 373,570 warrants from December 31, 2004 to December 31, 2005.
On November 28, 2004, the Company adopted a 2004 Incentive Stock Option
Plan (the "Plan"). The Plan provides options to be granted, exercisable for a
maximum of 2,500,000 shares of common stock. Both incentive and nonqualified
stock options may be granted under the Plan. The exercise price of options
granted, the expiration date, and the vesting period, pursuant to this plan is
determined by a committee. On May 5, 2005, the Company granted options to
purchase an aggregate of 1,000,000 shares of common stock to employees, officers
and directors of the Company. The options are exercisable at $0.15 per share,
which exceeds the fair market value of the common stock at the grant date.
Accordingly, under APB 25, no compensation expense was recognized. The options
expire on May 5, 2010.
A summary of the status of the Company's outstanding stock options as of
June 30, 2005 and changes during the period then ended is as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at December 31, 2004 2,425,000 0.41
Granted 1,000,000 0.15
Exercised -- --
Forfeited -- --
Outstanding at June 30, 2005 3,425,000 $0.33
========= =====
Options exercisable at end of period 3,425,000 $0.33
========= =====
Weighted-average fair value of options
granted during the period 2005 $0.15
F-37
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
The following information applies to options outstanding at June 30, 2005:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE LIFE EXERCISE EXERCISE
PRICES SHARES (YEARS) PRICE SHARES PRICE
-------- --------- ----------- -------- --------- --------
$ 0.50 1,675,000 3.62 $ 0.50 1,675,000 $ 0.50
$ 0.20 750,000 5.00 $ 0.20 750,000 $ 0.20
$ 0.15 1,000,000 4.80 $ 0.15 1,000,000 $ 0.15
STOCK WARRANTS
A summary of the status of the Company's outstanding stock warrants as of
June 30, 2005 and 2004 and changes during the period then ended is as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at December 31, 2004 9,101,070 0.61
Granted 400,000 0.25
Exercised -- --
Forfeited -- --
--------- --------
Outstanding at June 30, 2005 9,501,070 $0.60
========= ========
Warrants exercisable at end of period 2005 9,501,070 $0.60
========= ========
Weighted-average fair value of warrants
granted during the period $0.25
The following information applies to all warrants outstanding at June 30,
2005:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE LIFE EXERCISE EXERCISE
PRICES SHARES (YEARS) PRICE SHARES PRICE
-------- --------- ----------- -------- --------- --------
$ 1.00 4,325,000 3.61 $ 1.00 4,325,000 $ 1.00
$ 0.50 373,570 1.00 $ 0.50 373,570 $ 0.50
$ 0.30 2,000,000 2.00 $ 0.30 2,000,000 $ 0.30
$ 0.20 2,402,500 4.75 $ 0.20 2,402,500 $ 0.20
$ 0.25 400,000 2.00 $ 0.25 400,000 $ 0.25
NOTE 5 - LITIGATION
An action has been brought against the Company by its former stock
transfer agent who alleges, among other items, that the Company breached its
contract with the transfer agent. The Company has filed an answer to the action
and a portion of the action has been dismissed by the court. The Company intends
to vigorously defend itself against the remainder of the action. Counsel has
advised the Company that there is a better than fifty percent chance that a
potential loss will be incurred. Accordingly, as of December 31, 2004, an
accrual of $50,000 was recorded which, as of June 30, 2005, is included in
accounts payable and accrued expenses on the accompanying balance sheet.
F-38
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 6 - FOREIGN OPERATIONS
The Company identifies its operating segments based on its business
activities and geographical locations. The Company operates within a single
operating segment, being a provider of information network solutions
specifically designed for healthcare providers and health insurance companies.
The Company operates in Brazil, Australia and Mauritius, and has a registered
mailing address in Singapore and in the USA. All of the Company's assets are
located in Brazil.
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004
-------------- --------------
Net sales to Unaffiliated Customers:
Brazil $ 1,501,431 $ 450,199
USA -- --
Singapore -- --
Australia -- --
Mauritius -- --
-------------- --------------
Total Sales 1,501,431 450,199
-------------- --------------
Operating Expenses:
Brazil 1,216,321 662,392
USA 336,595 206,871
Singapore -- --
Australia 7,176 85
Mauritius 36,231 21,230
-------------- --------------
Total Operating Expenses 1,596,323 890,578
-------------- --------------
Loss from operations (94,892) (440,379)
-------------- --------------
Other income (expenses):
Brazil (59,242) (54,722)
USA (135,122) (49,709)
Australia 7,950 426
-------------- --------------
(186,414) (104,005)
-------------- --------------
Net loss as reported in the accompanying
statements $ (281,306) $(544,384)
============== ==============
NOTE 7 - GOING CONCERN
Since inception, the Company has incurred cumulative net losses of
$8,761,242, has a stockholders' deficit of $1,471,557 at June 30, 2005 and has a
working capital deficit of $1,798,720. Since its inception, the Company has
funded operations through short-term borrowings and equity investments in order
to meet its strategic objectives. The Company's future operations are dependent
upon external funding and its ability to increase revenues and reduce expenses.
Management believes that sufficient funding will be available from additional
related party borrowings and private placements to meet its business objectives,
including anticipated cash needs for working capital, for a reasonable period of
time. Additionally, under the current roll out schedules with its clients, the
Company expects to increase its revenues significantly during 2005 with the
expectation of the Company becoming a profitable entity. However, there can be
no assurance that the Company will be able to obtain sufficient funds to
continue the development of its software products and distribution networks.
Further, since fiscal 2000, the Company has been deficient in the payment of
Brazilian payroll taxes and Social Security taxes. At June 30, 2005, these
deficiencies (including interest and fines) amounted to approximately $762,000.
This payroll liability is included as part of the accounts payable and accrued
expenses (short-term and long-term) within the consolidated balance sheet.
F-39
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
As a result of the foregoing, there exists substantial doubt about the
Company's ability to continue as a going concern. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 8 - SUBSEQUENT EVENTS
On July 15, 2005, the Company entered into a one-year consulting contract
for public relations services. For services rendered, the Company shall pay
$5,000 per month payable in cash and/or free-trading common stock. In connection
with this agreement, the Company issued 200,000 shares of common stock. The
Company valued these common shares at the fair market value on the dates of
grant of $0.15 per share or $30,000 based on the quoted trading price and
recorded deferred consulting expense of $30,000 to be amortized over the service
period.
F-40
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT TRANSAX INTERNATIONAL LIMITED
EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU
SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
--------------------------------------
----------------------
PROSPECTUS
---------------------
31,379,143 SHARES OF COMMON STOCK
TRANSAX INTERNATIONAL LIMITED
September 22, 2005
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
|_| except the common stock offered by this prospectus;
|_| in any jurisdiction in which the offer or solicitation is not
authorized;
|_| in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitation;
|_| to any person to whom it is unlawful to make the offer or
solicitation; or
|_| to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
|_| there have been no changes in the affairs of Transax
International Limited after the date of this prospectus; or
|_| the information contained in this prospectus is correct after
the date of this prospectus.
--------------------------------------
Until _________, 2005, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 7-109-102 of the Colorado Business Corporations Act (the
"Colorado Act") a corporation may indemnify a person made a party to a
proceeding because the person is or was a director, against liability incurred
in the proceeding. Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Indemnification is only possible under this section 7-109-102, however,
if: (a) the person conducted him/herself in good faith; and (b) the person
reasonably believed: (i) in the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best interests;
and (ii) in all other cases, that his or her conduct was at least not opposed to
the corporation's best interests; and (c) in the case of any criminal
proceeding, the person had no reasonable cause to believe his or her conduct was
unlawful.
It should be noted, however, that under Section 7-109-102(4), a
corporation may not indemnify a director: (i) in connection with a proceeding by
or in the right of the corporation in which the director is adjudged liable to
the corporation; or (ii) in connection with any other proceeding in which a
director is adjudged liable on the basis that he or she derived improper
personal benefit.
Under Section 7-109-103 a director is entitled to mandatory
indemnification, when he/she is wholly successful in the defense of any
proceeding to which the person was a party because the person is or was a
director, against reasonable expenses incurred in connection to the proceeding.
Under Section 7-109-105, unless restricted by a corporation's Articles of
Incorporation, a director who is or was a party to a proceeding may apply for
indemnification to a court of competent jurisdiction. The court, upon receipt of
the application, may order indemnification after giving any notice the court
considers necessary. The court, however, is limited to awarding the reasonable
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
Under Section 7-109-107, unless restricted by the corporation's Articles
of Incorporation, an officer of a corporation is also entitled to mandatory
indemnification and to apply for court-ordered indemnification to the same
extent as a director.
A corporation may also indemnify an officer, employee, fiduciary or agent
of the corporation to the same extent as a director.
Under Section 7-109-108 a corporation may purchase and maintain insurance
on behalf of a person who is or was a director, officer, employee, fiduciary or
agent of the corporation against liability asserted against or incurred by the
person in that capacity, whether or not the corporation would have the power to
indemnify such person against the same liability under other sections of the
Colorado Act.
The officers and directors of the Company are accountable to the
shareholders of the Company as fiduciaries, which means such officers and
directors are required to exercise good faith and integrity in handling the
Company's affairs. A shareholder may be able to institute legal action on behalf
of himself and all other similarly situated shareholders to recover damages
where the Company has failed or refused to observe the law. Shareholders may,
subject to applicable rules of civil procedure, be able to bring a class action
or derivative suit to enforce their rights, including rights under certain
federal and state securities laws and regulations. Shareholders who have
suffered losses in connection with the purchase or sale of their interest in the
Company due to a breach of a fiduciary duty by an officer or director of the
Company in connection with such sale or purchase including, but not limited to,
the misapplication by any such officer or director of the proceeds from the sale
of any securities, may be able to recover such losses from the Company. The
Company and its affiliates may not be liable to its shareholders for errors in
judgment or other acts or omissions not amounting to intentional acts.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense or any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-1
The Company has no agreements with any of its directors or executive
officers providing for indemnification of any such persons with respect to
liability arising out of their capacity or status as officers and directors.
At present, there is no pending litigation or proceeding involving a
director or executive officers of the Company as to which indemnification is
being sought.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. Transax will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $ 403.00
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 17,097.00
TOTAL $ 85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following securities
without registration under the Securities Act of 1933:
On August 14, 2003, pursuant to the terms of the Merger, the Company issued
11,066,207 shares of restricted common stock in exchange of all the outstanding
shares of Transax Limited, including 300,000 shares issued for finder's fees.
Nine (9) additional shares were issued pursuant to the Merger, to satisfy
rounding of the 2:1 reverse split. The shares were issued to the following:
Allied Kapital AG 355,710
Atlas Alpha Corp 25,532
Bull, House & Tupper 2,107
Carlingford Investments Limited 377,424
Engetech Inc. 31,705
Executive Suite Management 1,236
John Farlinger 6,683
Lines Overseas Management 153,572
LOM Nominees 34,011
Shafiq Nazerali 3,003
T. Pottharst 80,028
Rahn & Bodmer 59,602
John T. Ramsay 12,750
H. Saltiel 143,000
Willabeth Capital Corp 2,737
George E. Chisa 11,080
Concord Consulting Corporation 243
J. Davidson 36,401
Hans Kuppers 15,261
J. Maloney 34,756
J. McElderry 30,061
Michael Bayback & Company, Inc. 32,805
Olshan, Grundman & Frome 642
Cade E. Willis 73,989
Cardlink Worldwide Inc. 1,191,870
Carlingford Investments Limited 5,050,000
Stephen Walters 4
Laurie Bewes 2
Carlingford Investments Limited 2,500,000
Carlingford Investments Limited 800,001
Shares issued for finder's fees
Thomas J. Deutsch 120,000
P.C. Devlin 60,000
Peter K. Jensen 60,000
David Lunny 60,000
II-2
On August 28, 2003, the Company issued 1,206,730 shares of common stock for
options exercised, for net proceeds of $652,071. The proceeds were utilized for
the settlement of existing debt. the shares were issued to the following
entities: (i) 300,000 shares to Alexander Cox; (ii) 49,730 shares to Richard
Elliott Square; (iii) 757,000 to Brent Pierce; (iv) 20,000 to Robert Stevens;
(v) 40,000 to Kelly Kelner; and (vi) 40,000 to Len Braumberger.
On August 28, 2003, the Company issued 100,000 units to Alexander Cox at $1.00
per unit, in settlement of $100,000 of debt. Each unit is comprised of one
common share and one half warrant. Each warrant entitles the holder to purchase
an additional share of Transax's common stock at $1.50, for a period of 12
months.
On October 22, 2003, the Company issued 87,500 shares of common stock to Bren
Tedder for options exerciFsed, for net proceeds of $43,750. The proceeds were
utilized for the settlement of advances payable.
On November 21, 2003, the Company agreed to issue 200,000 units to Samuel Gordon
Atkinson and 250,000 units to Euan Ross for the conversion of $225,000 of
advances payable. Each unit is comprised of one common share and one half
warrant. Each warrant entitles the holder to purchase an additional share of
Transax's common stock at $1.00, for a period of 24 months.
On November 21, 2003, the Company agreed to issue 45,000 shares of common stock
to Rejoice International for finders' fees for advances. $27,900 is included as
stock based compensation on the statement of operations.
On December 3, 2003, the Company issued 162,500 shares of common stock to Adrian
Rollke for options exercised, for net proceeds of $40,625. The proceeds were
utilized for the settlement of advances payable.
On December 31, 2003, the Company agreed to issue 300,000 shares of common to
Erwin Liem stock for options exercised, for net proceeds of $75,000. The
proceeds were utilized for the settlement of advances payable.
On December 31, 2003, the Company agreed to issue 373,570 units to Erwin Liem
for the conversion of a $66,195 loan from a related party whose officer is an
officer of Company. Each unit is comprised of one common share and one warrant.
Each warrant entitles the holder to purchase an additional share of Transax's
common stock at $0.50, for a period of 12 months.
On January 7, 2004, the Company issued 300,000 shares of common stock to Erwin
Liem for share subscriptions received in 2003 of $75,000.
On January 7, 2004, the Company issued 373,570 units to Erwin Liem for share
subscriptions received in 2003 of approximately $93,400 owed to a related party
whose officer is an officer of the Company. The units were issued to assignees
of the debt holder. Each unit is comprised of one common share and one warrant.
Each warrant entitles the holder to purchase an additional share of Transax's
common stock at $0.50, for a period of 12 months.
On January 26, 2004, the Company issued 300,000 shares of restricted common
stock to E-Comm Capital for services rendered, for net value of $75,000 included
in the statement of operations for the three-month period ended March 31, 2004
as professional fees.
II-3
On February 12, 2004, the Company issued 300,000 shares of common stock for
options exercised, for net proceeds of $75,000. The proceeds were utilized for
the settlement of advances payable.
On May 5, 2004, the Company returned to treasury 300,000 restricted shares that
had been issued to E-Comm Capital for services rendered on January 26, 2004. The
shares were returned for non-performance during the three-month period ended
June 30, 2004
On February 12, 2004, the Company issued 300,000 shares of common to Stephen
Taylor stock for options exercised, for net proceeds of $75,000. The proceeds
were utilized for the settlement of advances payable.
On April 18, 2004, the Company issued 200,000 units to Samuel Gordon Atkinson
and 250,000 units to Evan Ross for options exercised during the year ended
December 31, 2003. Each unit is comprised of one common share and one half
warrant. Each warrant entitles the holder to purchase an additional share of
Transax's common stock at $1.00 until November 20, 2005. The proceeds, totaling
$225,000, were utilized to reduce existing debt.
On June 2, 2004, the Company issued 45,000 shares to Rejoice International of
common stock to settle share subscriptions for finders' fees, for a net value of
$27,900.
On June 11, 2004, the Company issued 150,000 shares of common stock to Empire
Capital Group for options exercised, for net proceeds of $37,500. The proceeds
were utilized for the settlement of accounts payable related to financing fees.
On July 26, 2004, the Company issued 600,000 shares of common stock to Blaine
Riley for options exercised, for net proceeds of $36,000. The proceeds were
utilized for the settlement of accounts payable related to professional
services.
On August 12, 2004, the Company issued 600,000 shares of restricted common stock
to Mirador Consulting to settle share subscriptions for services, for a net
value of $36,000.
On September 29, 2004, the Company received subscriptions for 1,687,500 shares
of common stock to settle approximately $135,000 of debt owed to a related
party, at a conversion of $0.08 per share. Pursuant to an assignment of debt,
the shares were issued on October 19, 2004, as follows: (i) 1,250,000 to
Carlingford Investments Limited; (ii) 437,500 to Silsastri Yani.
On September 29, 2004, the Company received subscriptions for 687,500 units for
conversion of $55,000 of a convertible loan to a related, at a conversion rate
of $0.08 per share. Each unit is comprised of one share of common stock and one
warrant. Each warrant entitles the holder to purchase an additional share of
Transax's common stock at $0.20 until September 29, 2009. Pursuant to assignment
of debt, the units were issued on October 19, 2004, as follows: (i) 687,500
shares to Stephen Taylor; (ii) 500,000 warrants to Richard AH. Siagian and;
(iii) 187,500 warrants to Antonius LM. Pakpahan .
On September 29, 2004, the Company received subscriptions for 871,425 shares of
common stock to settle approximately $69,714 in interest due to a related party,
at a conversion rate $0.08 per share. Pursuant to an assignment of debt, the
shares were issued on October 19, 2004, as follows: (i) 234,806 shares to
Stephen Walters; (ii) 269,835 shares to Carlingford Investments Limited and
(iii) 366,784 shares to Stephen Taylor.
On September 29, 2004, the Company received subscriptions for 721,515 shares to
settle approximately $54,113 in interest and finder's fees due to a related
party, at a conversion rate of $0.075 per share. Pursuant to an assignment of
debt, the shares were issued to Richard AH. Siagian on October 19, 2004.
On September 29, 2004, the Company received subscriptions for 562,500 shares to
settle approximately $54,113 of debt, at a conversion rate of $0.075 per share.
Pursuant to an assignment of debt, the shares were issued on October 19, 2004,
as follows: (i) 312,500 shares to Silsastri Yani ; and (ii) 250,000 shares to
Antonius LM. Pakpahan.
On September 29, 2004, the Company received subscriptions for 548,333 units for
conversion of $41,125 of advances, at a conversion rate of $0.075 per share.
Each unit is comprised of one share of common stock and one warrant. Each
warrant entitles the holder to purchase an additional share of Transax's common
stock at $0.20 until September 29, 2009. Pursuant to assignment of debt, the
units were issued on October 19, 2004, as follows: (i) 312,500 units to Antonius
LM. Pakpahan ; (ii) 48,333 units to Carlingford Investments Limited; (iii)
187,500 units to Adhe D. Silviani; and (iv) 187,500 shares to Antonius LM.
Pakpahan.
On September 29, 2004, the Company received subscriptions for 270,200 shares to
settle approximately $20,265 of debt, at a conversion rate of $0.075 per share.
Pursuant to an assignment of debt, the shares were issued on October 19, 2004,
as follows: (i) 28,485 shares to Richard AH. Siagian; (ii) 1,450 shares to
Carlingford Investments Limited; (iii) 187,500 shares to Siagian and (iv) 52,765
shares to Adhe D. Silviani.
On September 29, 2004, the Company received subscriptions for 1,166,667 units
for conversion of $87,500 of advances, at a conversion rate of $0.075 per share.
Each unit is comprised of one share of common stock and one warrant. Each
warrant entitles the holder to purchase an additional share of Transax's common
stock at $0.20 until September 29, 2009. Pursuant to assignment of debt, the
units were issued on October 19, 2004, as follows: (i) 312,500 to Adhe D.
Silviani ; (ii) 354,167 units to Harmusial; (iii) 500,000 warrants to Silsastri
Yani ; (iv) 197,235 shares to Adhe D. Silviani; (v) 302,765 shares to Thomas A.
Harmusial.
II-4
On September 29, 2004, the Company received subscriptions for 182,667 shares to
settle approximately $13,700 of debt, at a conversion rate of $0.075 per share.
Pursuant to an assignment of debt, the shares were issued to Thomas A. Harmusial
on October 19, 2004.
On September 19, 2004, the Board of Directors, pursuant to unanimous written
consent, authorized and approved the execution of various settlement agreements
and the issuance of an aggregate of 6,698,307 shares of its restricted common
stock and 2,402,500 warrants.
On December 6, 2004, Monitor Capital, Inc. was paid a fee equal to $10,000 by
the issuance of 125,000 shares of the Company's common stock, under a
now-terminated Standby Equity Distribution Agreement.
On December 15, 2004, Cornell Capital Partners received 1,201,779 shares of
common stock of the Company as a one-time commitment fee in the amount of
$200,000 under a now-terminated Standby Equity Distribution Agreement. Cornell
Capital Partners is permitted to sell up to $50,000 in value of the 1,202,779
shares of common stock in any thirty-day period.
On January 14, 2005, the Company issued 200,000 shares of restricted common
stock to Mirador Consulting to settle share subscriptions for services, for a
net value of $36,000.
On January 14, 2005, the Company issued 100,000 shares of common stock to Empire
Capital Group for options exercised, for net proceeds of $16,000. The proceeds
were utilized for the settlement of accounts payable related to financing fees.
On January 24, 2005, the Board of Directors of the Company, pursuant to
unanimous written consent, authorized and approved the execution of various
settlement agreements and the issuance of an aggregate of 3,662,908 shares of
its restricted Common Stock, to be effective as of December 31, 2004.
On March 23, 2005, the Company issued 150,000 shares of common stock to Aidan
Capital Management for options exercised, for net proceeds of $20,125. The
proceeds were utilized for the settlement of accounts payable related to
financing fees.
On March 28, 2005, we agreed to issue 400,000 shares of common stock to settle
$50,500 in debt due to an officer/director of the Company. The shares were
issued on May 11, 2005.
Pursuant to a Securities Purchase Agreement entered into on April 1, 2005, Scott
and Heather Grimes - Joint Tenants With Rights of Survivorship purchased
$250,000 of convertible debentures. The debentures are convertible at the
holder's option any time up to maturity at a conversion price equal to the lower
of (i) 120% of the closing bid price of the common stock on the date of the
debentures or (ii) 80% of the lowest closing bid price of the common stock for
the five trading days immediately preceding the conversion date. The debentures
have a two-year term and accrue interest at 5% per year. At maturity, the
debentures will automatically convert into shares of common stock at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock on the date of the debentures or (ii) 80% of the lowest closing bid
price of the common stock for five trading days immediately preceding the
conversion date.
On May 17, 2005, the Company and Cornell Capital Partners entered into a Standby
Equity Distribution Agreement. Pursuant to the Standby Equity Distribution
Agreement, the Company may, at its discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price of up to $5.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay the Company 97% of, or
a 3% discount to, the lowest closing bid price of the Company's common stock on
the Over-the-Counter Bulletin Board or other principal market on which the
Company's common stock is traded for the five days immediately following the
notice date. Cornell Capital Partners will also retain 5% of each advance under
the Standby Equity Distribution Agreement. Cornell Capital Partner's obligation
to purchase shares of the Company's common stock under the Standby Equity
Distribution Agreement is subject to certain conditions, including the Company
obtaining an effective registration statement for shares of common stock sold
under the Standby Equity Distribution Agreement and is limited to $200,000 per
weekly advance and $1,000,000 per 30 days.
II-5
Transax believes that all of the above transactions were transactions not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, as amended, since (a) each of the transactions involved
the offering of such securities to a substantially limited number of persons;
(b) each person took the securities as an investment for his/her/its own account
and not with a view to distribution; (c) each person had access to information
equivalent to that which would be included in a registration statement on the
applicable form under the Securities Act of 1933, as amended; (d) each person
had knowledge and experience in business and financial matters to understand the
merits and risk of the investment; therefore no registration statement needed to
be in effect prior to such issuances.
On June 28, 2005, the holder of the related party notes partially exercised the
conversion feature. Accordingly, we issued 400,000 shares at the conversion
price of $.125 per share and 400,000 warrants to purchase common stock of the
Company at $.25 per share (see note 2 to the unaudited consolidated financial
statements included elsewhere in this filing) for the conversion of principal
balance of $50,000. We also issued 35,770 shares of common stock to settle
$4,471 in interest due on these loans.
On June 28, 2005, we issued 300,000 shares of common stock at $.11 per share,
the fair market value on the date of grant for settlement of $33,000 of this
debt.
On July 15, 2005, we issued 200,000 shares of common stock to Geoffrey Eiten for
options exercised, for net proceeds of $30,000. The proceeds were utilized for
the settlement of accounts payable related to financing fees.
ITEM 26. EXHIBITS
Exhibit No. Description of Exhibit
3.1(1) Articles of Incorporation
3.2(2) By-Laws
3.3(2) Code of Ethics
3.4(3) 2004 Stock Option Plan effective January 1, 2004
5.1(2) Opinion of Counsel
10.1(4) Termination Agreement dated May 17, 2005, related to the
Standby Equity Distribution Agreement between the Company and
Cornell Capital Partners, LP
10.2(4) Standby Equity Distribution Agreement dated May 17, 2005
between the Company and Cornell Capital Partners, LP
10.3(4) Registration Rights Agreement dated May 17, 2005between the
Company and Cornell Capital Partners, LP
10.4(4) Placement Agent Agreement dated May 17, 2005 between the
Company and Monitor Capital, Inc
10.5(5) Securities Purchase Agreement dated October 25, 2005 between
the Company and Cornell Capital Partners, LP
10.6(4) Promissory Note issued to Cornell Capital Partners, LP on May
17, 2005
10.7(6) Securities Purchase Agreement dated April 1, 2005 between the
Company and Scott and Heather Grimes - Joint Tenants With
Rights of Survivorship
10.8(6) Secured Convertible Debenture dated April 1, 2005 issued to
Scott and Heather Grimes - Joint Tenants With Rights of
Survivorship
II-6
10.9(6) Investors Registration Rights Agreement dated April 1, 2005
between the Company and Scott and Heather Grimes - Joint
Tenants With Rights of Survivorship
10.10(7) Merger Agreement dated July 22, 2003 among the Company,
Vega-Atlantic Acquisition Corporation, Transax Limited and
certain selling shareholders of Transax International Limited
10.11(2) Amended and Restated Escrow Agreement dated September 14,
2005, by and among the Company, Cornell Capital Partners, LP
and David Gonzalez
23.1(8) Consent of Diane D. Dalmy, Esq.
23.2(2) Consent of Moore & Stephens, P.C.
-------------------------
(1) Incorporated by reference to the Company's Report filed on Form 10-SB
filed on October 27, 1999.
(2) Provided herewith.
(3) Incorporated by reference to the Company's Report filed on Form 10-KSB for
the year ended December 31, 2004.
(4) Incorporated by reference to the Company's Report filed on Form 8-K on May
20, 2005.
(5) Incorporated by reference to the Company's Report filed on Form 8-K on
November 3, 2004.
(6) Incorporated by reference to the Company's Report filed on Form 8-K on
April 6, 2005.
(7) Incorporated by reference to the Company's Report filed on Form 10-KSB for
the year ended December 31, 2003.
(8) Involved in Exhibit 5.1.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) Reft 12 lect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering.
II-7
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on September 22, 2005.
Date: September 22, 2005 TRANSAX INTERNATIONAL LIMITED
By: /s/ Stephen Walters
-------------------------------------
Name: Stephen Walters
Title: President and
Chief Executive Officer
By: /s/ Adam Wasserman
-------------------------------------
Name: Adam Wasserman
Title: Chief Financial Officer and
Principal Accounting Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: September 22, 2005 By: /s/ Stephen Walters
-------------------------------------
Name: Stephen Walters
Title: Director
Date: September 22, 2005 By: /s/ Laurie Bewes
-------------------------------------
Name: Laurie Bewes
Title: Director
Date: September 22, 2005 By: /s/ David M. Bouzaid
-------------------------------------
Name: David M. Bouzaid
Title: Director
II-9