As filed with the U.S. Securities and Exchange Commission on October 18, 2006
Registration No. 333-133937
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
TRANSAX
COLORADO INTERNATIONAL LIMITED 84-1304106
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(State or Other Jurisdiction of (Name of Registrant (I.R.S. Employer
Incorporation or Organization) in Our Charter) Identification No.)
STEPHEN WALTERS
5201 BLUE LAGOON DRIVE, 8TH FLOOR 5201 BLUE LAGOON DRIVE, 8TH FLOOR
MIAMI, FLORIDA, 33126 MIAMI, FLORIDA, 33126
(305) 629-3090 1040 (305) 629-3090
-------------- ---- --------------
(Address and telephone number of (Primary Standard Industrial (Name, address and telephone number
Principal Executive Classification Code Number) of agent for service)
Offices and Principal Place
of Business)
Copies to:
Clayton E. Parker, Esq. Matthew L. Ogurick, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP Kirkpatrick & Lockhart 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 (THE "REGISTRATION STATEMENT")
BECOMES EFFECTIVE.
If any of the securities being registered on this Form SB-2 are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box
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
TITLE OF EACH CLASS OF REGISTRATION AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF OFFERING
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) PRICE(1) FEE(2)
----------------------------------- -------------------- ------------------ ------------------ -------
Common stock, par value $0.00001 per share 33,631,429 shares (3) $0.12 $4,035,771.48 $431.83
TOTAL 33,631,429 shares (3) $0.12 $4,035,771.48 $431.83
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act. For the purposes of this
table, we have used the average of the bid and asking prices of our common
stock on October 16, 2006.
(2) Of this amount, $543.46 has previously been paid.
(3) Includes 25,000,000 shares being registered pursuant to an investment
agreement with Cornell Capital Partners, LP, 3,171,429 shares underlying a
convertible debenture, 5,400,000 shares underlying warrants and 60,000
shares previously issued as a one-time commitment fee to Cornell Capital
Partners, LP in connection with a now terminated Standby Equity
Distribution Agreement.
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE U.S. SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
PROSPECTUS
Subject to completion, dated October 18, 2006
TRANSAX INTERNATIONAL LIMITED
33,631,429 SHARES OF COMMON STOCK
This prospectus (this "Prospectus") relates to the sale of up to 33,631,429
shares of common stock, par value $0.0001 per share, of Transax International
Limited ("Transax" or the "Company") by certain persons who are stockholders of
Transax, including Cornell Capital Partners, LP ("Cornell Capital Partners") and
Scott and Heather Grimes - Joint Tenants with Rights of Survivorship
("Investor"). Please refer to the Section herein entitled "Selling Stockholders"
beginning on page 15. 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 October 16, 2006, average of the bid and asking
prices of our common stock was $0.12 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 25,000,000 shares of common stock which may be issued from time to
time upon the conversion of shares of preferred stock held by Cornell Capital
Partners pursuant to the Investment Agreement, dated January 13, 2006, up to
5,000,000 shares of common stock which may be issued upon the exercise of two
(2) common stock purchase warrants (the "Warrants", and together with the
Investment Agreement, the "Cornell Financing") and 60,000 shares previously
issued to Cornell Capital Partners in connection with a now terminated Standby
Equity Distribution Agreement; (ii) Investor, who may sell up to 3,171,429
shares of common stock which may be issued upon the conversion of a $250,000
convertible debenture (the "Debenture") and 400,000 shares underlying a warrant,
dated February 1, 2006 (the "SHG Warrant").
The holders of Series A Preferred Shares are entitled to receive dividends or
distribution on a pro rata basis in the amount of seven percent (7%) per year.
Dividends shall be paid in cash and shall be cumulative.
At the holders' election, the conversion price of the convertible instruments
will be at a fixed percentage of the market price at the time of conversion.
Please refer to the Section entitled "Selling Shareholders" beginning on page 16
for a detailed description of all conversion terms.
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 8.
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 U.S. SECURITIES AND EXCHANGE COMMISSION (THE "SEC") IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER OF THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
NO UNDERWRITER OR PERSON HAS BEEN ENGAGED TO FACILITATE THE SALE OF SHARES OF
COMMON STOCK IN THIS OFFERING. THIS OFFERING WILL TERMINATE TWENTY-FOUR (24)
MONTHS AFTER THE ACCOMPANYING REGISTRATION STATEMENT IS DECLARED EFFECTIVE BY
THE SEC. NONE OF THE PROCEEDS FROM THE SALE OF STOCK BY THE SELLING STOCKHOLDERS
WILL BE PLACED IN ESCROW, TRUST OR ANY SIMILAR ACCOUNT.
THE SEC 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 ___________ __, 2006.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
FORWARD-LOOKING STATEMENTS.....................................................3
THE OFFERING...................................................................4
RISK FACTORS...................................................................7
SELLING STOCKHOLDERS..........................................................15
USE OF PROCEEDS...............................................................17
PLAN OF DISTRIBUTION..........................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................20
DESCRIPTION OF BUSINESS.......................................................30
DESCRIPTION OF PROPERTIES.....................................................39
LEGAL PROCEEDINGS.............................................................39
MANAGEMENT....................................................................40
PRINCIPAL STOCKHOLDERS........................................................46
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
AND OTHER STOCKHOLDER MATTERS............................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................50
DESCRIPTION OF CAPITAL STOCK..................................................50
EXPERTS.......................................................................54
LEGAL MATTERS.................................................................54
HOW TO GET MORE INFORMATION...................................................54
FINANCIAL STATEMENTS.........................................................F-1
PART II ...................................................................II-1
SIGNATURES.................................................................II-11
EXHIBIT 5.1...............................................................EX 5-1
EXHIBIT 23.1.............................................................EX 23-1
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
thereto before making any investment decision.
OUR COMPANY
BUSINESS HISTORY AND DEVELOPMENT
Transax International Limited, was 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.
During August 2003, we completed the acquisition of Transax Limited, a
Colorado private-held corporation ("Transax Limited"), pursuant to a reverse
merger and changed our name to "Transax International Limited" by filing an
amendment to our Articles of Incorporation.
Together with our wholly-owned subsidiary, Medlink Conectividade em Saude
Ltda. f/k/a TDS Telecommunication Data Systems LTDA and referred to herein as
"Medlink"), we are 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
Our wholly-owned subsidiary Medlink was incorporated under the laws of
Brazil on May 2, 1998. Medlink assists us in providing information network
solutions, products and services within Brazil.
Our wholly-owned subsidiary Transax Australia Pty Ltd. ("Transax
Australia") was incorporated under the laws of New South Wales, Australia on
January 19, 2003. Transax Australia assists us in seeking marketing
opportunities to provide information network solutions, products and services
within Australia and regionally.
Our wholly-owned subsidiary MedLink Technologies, Inc. ("MedLink Tech") was
incorporated under the laws of Mauritius on January 17, 2003. MedLink Tech 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 Medlink, 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 (4) main areas: (i)
compliance management; (ii) coding and reimbursement management; (iii)
abstracting; and (iv) record management.
1
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.
GOING CONCERN
Since inception, the Company has incurred cumulative net losses of
$12,872,724, and at June 30, 2006 has a stockholders' deficit of $3,717,316 and
has a working capital deficit of $3,858,138. 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 2006 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, 2006, these deficiencies (including interest and fines) amounted to
approximately $816,000. 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
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this Prospectus include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, and (e) our anticipated needs for working capital. These statements
may be found under "Management's Discussion and Analysis Plan of Operation" and
"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.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that there will be no material adverse
competitive or technological change in conditions in our business, that demand
for our products and services will significantly increase, that our President
and Chief Executive Officer (one individual) will remain employed as such, that
our forecasts accurately anticipate market demand and that there will be no
material adverse change in our operations or business or in governmental
regulations affecting us or our manufacturers and/or suppliers. The foregoing
assumptions are based on judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Accordingly, although we believe that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the "Risk Factors" section of this
Prospectus, there are a number of other risks inherent in our business and
operations which could cause our operating results to vary markedly and
adversely from prior results or the results contemplated by the forward-looking
statements. Growth in absolute and relative amounts of cost of goods sold and
selling, general and administrative expenses or the occurrence of extraordinary
events could cause actual results to vary materially from the results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause us to alter marketing, capital investment and other expenditures, which
may also materially adversely affect our results of operations. In light of
significant uncertainties inherent in the forward-looking information included
in this Prospectus, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives or plans will be
achieved.
Some of the information in this Prospectus contains forward-looking
statements that involve substantial risks and uncertainties. Any statement in
this Prospectus and in the documents incorporated by reference into this
Prospectus that is not a statement of an historical fact constitutes a
"forward-looking statement". Further, when we use the words "may", "expect",
"anticipate", "plan", "believe", "seek", "estimate", "internal", and similar
words, we intend to identify statements and expressions that may be
forward-looking statements. We believe it is important to communicate certain of
our expectations to our investors. Forward-looking statements are not guarantees
of future performance. They involve risks, uncertainties and assumptions that
could cause our future results to differ materially from those expressed in any
forward-looking statements. Many factors are beyond our ability to control or
predict. You are accordingly cautioned not to place undue reliance on such
forward-looking statements. Important factors that may cause our actual results
to differ from such forward-looking statements include, but are not limited to,
the risk factors discussed below. Before you invest in our common stock, you
should be aware that the occurrence of any of the events described under "Risk
Factors" below or elsewhere in this Prospectus could have a material adverse
effect on our business, financial condition and results of operation. In such a
case, the trading price of our common stock could decline and you could lose all
or part of your investment.
3
THE OFFERING
This offering relates to the sale of 33,631,429 shares of our common stock
by certain persons who are selling stockholders, consisting of (1) Cornell
Capital Partners, who intends to sell up to 30,060,000, shares of common stock,
25,000,000 of which may be issued from time to time upon the conversion of
shares of preferred stock held by Cornell Capital Partners pursuant to the
Investment Agreement and up to 5,000,000 shares of common stock of which may be
issued upon the exercise of the Warrants; and (2) Investor, who may sell up to
3,571,429 shares of common stock, 3,171,429 of which may be issued upon the
conversion of the Debenture and 400,000 shares underlying the SHG Warrant.
On January 13, 2006, Transax entered into an Investment Agreement with
Cornell Capital Partners (Cornell Capital Partners and the Company are also
collectively referred to herein as the "Parties"), pursuant to which the Company
sold to Cornell Capital Partners up to 16,000 shares of Series A Convertible
Preferred Stock, no par value per share ("Series A Preferred Shares") which
shall be convertible, at Cornell Capital Partners' discretion, into shares of
the Company's common stock, par value $0.00001 per share, for a total price of
up to $1,600,000. The Series A Preferred Shares are senior to all common stock
and all series of preferred stock of the Company. The holders of Series A
Preferred Shares are entitled to receive dividends or distribution on a pro rata
basis in the amount of seven percent (7%) per year. Dividends shall be paid in
cash and shall be cumulative. Each share of Series A Preferred Shares may be
converted into shares of the Company's common stock equal to the sum of the
Liquidation Amount, defined as an amount equal to $100 per share of Series A
Preferred Shares, plus accrued but unpaid dividends thereon, divided by the
Conversion Price. The Conversion Price is defined to be equal to the lower of
(i) $0.192 or (ii) eighty percent (80%) of the lowest daily volume weighted
average price of the Company's common stock, as determined by price quotations
from Bloomberg, LP, during the ten (10) trading days immediately preceding the
date of conversion. Of the 16,000 Series A Preferred Shares sold to Cornell
Capital Partners, 8,000 Series A Preferred Shares equal a purchase price of
$800,000, which consists of $255,237 from the surrender of a promissory note
(the "Promissory Note") and $544,763 consisting of new funding.
The Company completed the Closing (as such term is defined in the
Investment Agreement) by issuing to Cornell Capital Partners the remaining 8,000
Series A Preferred Shares for a purchase price equal to $800,000 on May 8, 2006,
prior to the date that the registration statement of which this Prospectus is
made a part was initially filed with the SEC (the "Registration Statement").
In connection with the Investment Agreement, the Company and Cornell
Capital Partners entered into an Investor Registration Rights Agreement (the
"IRRA"), dated January 13, 2006, pursuant to which the parties agreed that, in
the event the Registration Statement is not filed within thirty (30) days from
the date the Company files its Annual Report 10-KSB for the year ended December
31, 2005 (the "Filing Deadline") or is not declared effective by the SEC within
ninety (90) days of the date of the IRRA (the "Effective Deadline"), or if after
the Registration Statement has been declared effective by the SEC, sales cannot
be made pursuant to the Registration Statement, then as relief for the damages
to any holder of Registrable Securities (as defined in the IRRA) by reason of
any such delay in or reduction of its ability to sell the underlying shares of
common stock (which remedy shall not be exclusive of any other remedies at law
or in equity), the Company will pay as liquidated damages to the holder, at the
holder's option, either a cash amount or shares of the Company's common stock
equal to two percent (2%) of the Liquidation Amount (as defined above)
outstanding as liquidated damages for each thirty (30) day period or any part
thereof after the Filing Deadline or the Effective Deadline as the case may be.
Any liquidated damages payable hereunder shall not limit, prohibit or preclude
the Investor from seeking any other remedy available to it under contract, at
law or in equity. The Company shall pay any liquidated damages hereunder within
three (3) business days of Cornell Capital Partners making written demand. It
shall also become an event of default under the IRRA if the Registration
Statement is not declared effective by the SEC within one-hundred twenty (120)
days from the date of the IRRA. The Company initially filed its Registration
Statement (of which this Prospectus is made a part) on May 9, 2006.
In connection with the sale of the Series A Preferred Shares, on January
13, 2006, Cornell Capital Partners surrendered the Promissory Note issued by the
Company to Cornell Capital Partners on May 17, 2005, in the principal amount of
$255,237, in exchange for $255,237 of Series A Preferred Shares. As of January
13, 2006, the full amount outstanding under the Promissory Note was $255,237,
plus accrued and unpaid interest of zero dollars ($0). As a result, the
Promissory Note was retired and cancelled. The Parties also agreed to terminate
the Securities Purchase Agreement and the Investor Registration Rights
Agreement, each dated as of October 25, 2004, as well as the Pledge and Escrow
Agreements, each dated as of October 21, 2004, that were entered into by the
Parties in connection with the issuance of the Promissory Note.
4
Certain negative covenants in the Investment Agreement could substantially
impact our ability to raise funds from alternative sources in the future. For
example, so long as any Series A Preferred Shares are outstanding, the Company
shall not, without the prior written consent of Cornell Capital Partners (a)
directly or indirectly consummate any merger, reorganization, restructuring,
reverse stock split consolidation, sale of all or substantially all of the
Company's assets or any similar transaction or related transactions; (b) incur
any indebtedness for borrowed money or become a guarantor or otherwise
contingently liable for any such indebtedness except for trade payables or
purchase money obligations incurred in the ordinary course of business; (c) file
any other registration statements on any form (including but not limited to
forms S-1, SB-2, S-3 and S-8); (d) issue or sell shares of common stock or
preferred stock without consideration or for a consideration per share less than
the bid price of the common stock determined immediately prior to its issuance
or issue any preferred stock, warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire common
stock without consideration or for a consideration per share less than the bid
price of the common stock determined immediately prior to the issuance of such
convertible security or (e) enter into any security instrument granting the
holder a security interest in any and all assets of the Company.
On January 13, 2006, the Company also issued to Cornell Capital Partners
the Warrants to purchase up to 5,000,000 shares of common stock. The first
Warrant issued to Cornell Capital Partners for 2,500,000 shares of common stock,
at an exercise price of $0.30, shall terminate after the five (5) year
anniversary of the date of issuance. The second Warrant issued to Cornell
Capital Partners for 2,500,000 shares of common stock, at exercise price of
$0.20, shall terminate after the five (5) year anniversary of the date of
issuance.
On April 1, 2005, Company entered into a Securities Purchase Agreement (the
"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 a convertible debenture to the Investor
in the original principal amount of $250,000 (the "Debenture"). The Debenture is
convertible at the holder's option any time up to maturity at a conversion price
equal to the lower of: (i) one hundred twenty percent (120%) of the closing bid
price of the common stock on the date of the Debenture or (ii) eighty percent
(80%) of the lowest closing bid price of the Company's common stock for the five
(5) trading days immediately preceding the conversion date. The Debenture has a
two (2) year term and accrues interest at five percent (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) one hundred twenty percent
(120%) of the closing bid price of the Company's common stock on the date of the
Debenture or (ii) eighty percent (80%) of the lowest closing bid price of the
common stock for five (5) trading days immediately preceding the conversion
date. On July 17, 2006, the Investor converted $15,000 of the Debenture into
104,167 shares of the Company's common stock.
Certain negative covenants in the Securities Purchase Agreement could
substantially impact our ability to raise funds from alternative sources in the
future. For example, for as long as the convertible debenture remains
outstanding and without the written consent of the debenture holder, the Company
(a) shall not directly or indirectly consummate any merger, reorganization,
restructuring, reverse stock split consolidation, sale of all or substantially
all of the Company's assets or any similar transaction or related transactions;
(b) shall not issue or sell shares of common stock or preferred stock without
consideration or for a consideration per share less than the bid price of the
common stock determined immediately prior to its issuance or issue any warrant,
option, right, contract, call, or other security or instrument granting the
holder thereof the right to acquire common stock without consideration or for a
consideration per share less than the bid price of the common stock determined
immediately prior to the issuance of such convertible security; (c) shall not
enter into any security instrument granting the holder a security interest in
any or all assets of the Company; (d) shall not file any registration statement
on Form S-8 except the Company may file one registration statement on Form S-8
for up to 2,500,000 shares of common stock and provided however, anyone
receiving shares pursuant to such permitted Form S-8 registration shall be
restricted from selling such shares for a period of ninety (90) days after the
registration statement becomes effective and (e) shall not, and shall cause each
of its subsidiaries not to, enter into, amend, modify or supplement, or permit
any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any of its
subsidiary's officers, directors, person who were officers or directors at any
time during the previous two years, stockholders who beneficially own five
percent (5%) or more of the Company's common stock, or Affiliates (as defined in
the Securities Purchase Agreement) or with any individual related by blood,
marriage, or adoption to any such individual or with any entity in which any
such entity or individual owns a five percent (5%) or more beneficial interest,
except for (i) customary employment arrangements and benefit programs on
reasonable terms, (ii) any investment in an Affiliate of the Company, (iii) any
5
agreement, transaction, commitment, or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such related party and (iv) any agreement transaction,
commitment, or arrangement which is approved by a majority of the disinterested
directors of the Company.
On February 1, 2006, the Company and the Investor mutually agreed to extend
the term of the Debentures until December 1, 2007. In addition, the Company
issued the SHG Warrant to purchase 400,000 shares of the Company's common stock.
The SHG Warrant has a term of two (2) years and is exercisable at $0.20 per
share. The Company is registering 3,171,429 shares of its common stock
underlying the conversion of the Debenture and 400,000 shares underlying the SHG
Warrant.
Cornell Capital Partners may from time to time convert its shares of
preferred stock under the Investment Agreement and Investors may from time to
time convert the Debenture into shares of our common stock at a discount to the
market price and each may, in turn, sell their shares of common stock to
investors in the market at the market price. This will likely cause our stock
price to decline and would result in substantial dilution to the interests of
other holders of common stock.
COMMON STOCK OFFERED 33,631,429 shares by selling stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING(1) 31,980,726 shares as of October 4, 2006
USE OF PROCEEDS We will not receive any proceeds of the
shares offered by the selling
stockholders except that we may receive
proceeds from the exercise of the
Warrants and the SHG Warrant. 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 3,171,429 shares underlying the Debenture, up to 25,000,000
shares of common stock to be issued pursuant to the Investment
Agreement with Cornell Capital Partners, up to 14,501,010 shares
underlying warrants and up to 3,175,000 shares underlying options.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE FISCAL YEAR ENDED DECEMBER 31,
------------------------------------- ------------------------------------------
STATEMENT OF OPERATIONS DATA: 2006 2005 2005 2004
------------- ------------- ---------------- ----------------
(Unaudited) (Unaudited)
Revenues
$ 1,034,844 $ 861,023 $ 3,380,150 $ 1,199,900
Total operating expenses 1,258,835 916,787 3,543,534 2,326,063
Loss from operations (223,991) (55,764) (163,384) (1,126,163)
Total other expenses (1,078,268) (111,277) (601,101) (666,092)
Net loss $ (1,302,259) $ (167,041) $ (764,484) $ (1,792,255)
Net loss per share: Basic and
diluted $ (0.04) $ (0.01) $ (0.03) $ (0.10)
AS OF AS OF
AS OF JUNE 30, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA: 2006 2005 2005 2004
------------- ------------- ---------------- ----------------
(Unaudited) (Unaudited)
Cash $ 482,813 $ 64,221 $ 7,875 $ 4,090
Accounts receivable - net 399,824 369,726 321,240 170,198
Prepaid expenses and other
current assets 202,893 100,578 165,129 51,547
Total assets 2,196,551 1,737,561 1,693,656 789,137
Total liabilities 5,913,867 3,209,118 3,321,296 2,531,224
Common stock and Paid in
capital 7,865,779 7,353,088 7,602,629 6,894,696
Accumulated deficit $ (12,872,724) $ 8,761,242 $ (9,244,420) $ (8,479,936)
Total stockholders' deficit $ (3,717,316) $ 1,471,557 $ (1,627,640) $ (1,742,087)
6
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 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
Our independent auditors have added a "going concern" statement to their
audit report for fiscal years ended December 31, 2005 and 2004, which states
that we will need additional working capital to be successful and to service our
current debt for the coming year and, therefore, our continuation as a going
concern is dependent upon obtaining the additional working capital necessary to
accomplish our objectives. 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.
Our management anticipates that we will incur net losses for the immediate
future, and expect our operating expenses to increase significantly, and, as a
result, we will need to generate monthly revenue if we are 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 $2,068,956 and $3,858,138 at December
31, 2005 and June 30, 2006, respectively, and continue to need cash for
operations. We have relied on significant external financing to fund our
operations. As of June 30, 2006, we had $482,813 of cash on hand and total
current assets were $1,085,530, and our total current liabilities were
$4,943,668. 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, we
believe that we will not have sufficient funds to continue operations. We
estimate that we will require $1,000,000 to $3,000,000 of financing to fund our
anticipated operating expenses for the next twelve (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.
7
MEDLINK, A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY, OWES TO THE BRAZILIAN
GOVERNMENT MONEY FOR PAYROLL TAXES AND SOCIAL SECURITY TAXES. FAILURE TO
PAY SUCH PAYROLL AND SOCIAL SECURITY TAXES TO 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 December 31, 2005, these
deficiencies (including interest and fines) amounted to approximately $755,100.
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 entered into a number of payment programs
with the Brazilian authorities whereby the social security taxes due, Severance
Fund Taxes due, plus other taxes and applicable penalties and interest will be
repaid over periods of between eighteen (18) and sixty (60) months. At December
31, 2005, the Company's has negotiated approximately $546,400 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.
8
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 U.S. Department of Health. In the future,
however, the U.S. 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 U.S. Department of Health
regulations such as HIPPA could be burdensome, time consuming and expensive.
9
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.
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. healthcare 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, 2005 and 2004, international sales accounted for one
hundred percent (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.
10
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.
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 Medlink 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) Medlink 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 Medlink 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
Medlink. Transax's business operations may be materially affected in the event
Medlink fails to honor the terms and provisions of License Agreement.
11
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.
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 31,980,726 shares of common stock outstanding as of October 4, 2006,
11,465,112 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates". The remaining 20,515,614 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 3,171,429 shares
underlying the Debenture, up to 5,400,000 shares underlying warrants (including
the SHG Warrant and the Warrants) and up to 25,000,000 shares pursuant to the
Investment Agreement with Cornell Capital Partners.
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 33,631,429
shares of common stock being registered in this offering. That means that up to
33,631,429 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 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.
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SERIES A PREFERRED SHARES
THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
As of October 4, 2006, we had 31,980,726 shares of common stock issued and
outstanding and 16,000 Series A Preferred Shares outstanding. In addition, the
number of shares of common stock issuable upon conversion of the outstanding
Series A Preferred Shares may increase if the market price of our stock
declines. All of the shares, including all of the shares issuable upon
conversion of the Series A Preferred Shares, may be sold without restriction.
The sale of these shares may adversely affect the market price of our common
stock.
12
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SERIES A
PREFERRED SHARES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER
OF SHARES, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS
The number of shares of common stock issuable upon conversion of our Series
A Preferred Shares will increase if the market price of our stock declines,
which will cause dilution to our existing stockholders. Our obligation to issue
shares upon conversion of our Series A Preferred Shares is essentially limitless
if the trading price per common share declines towards zero as the number of
Series A Preferred Shares convertible into common stock is based on the trading
price per common share of our Company.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SERIES A
PREFERRED SHARES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON
STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON
STOCK
The Series A Preferred Shares are convertible into common stock at any time
by dividing the dollar amount being converted by the lower of $0.192 or eighty
percent (80%) of the lowest daily volume weighted average of the Company's
common stock, as determined by price quotations from Bloomberg, LP, during the
ten (10) trading days immediately preceding the date of conversion.
The significant downward pressure on the price of the common stock as the
selling stockholder converts and sells material amounts of common stock could
encourage short sales by investors. This could place further downward pressure
on the price of the common stock. In addition, not only the sale of shares
issued upon conversion of preferred stock, but also the mere perception that
these sales could occur, may adversely affect the market price of the common
stock.
THE HOLDER OF THE DEBENTURE HAS THE OPTION OF CONVERTING THE PRINCIPAL
OUTSTANDING UNDER THE DEBENTURE INTO SHARES OF OUR COMMON STOCK. IF THE
HOLDER CONVERTS THE DEBENTURE, THERE WILL BE DILUTION OF YOUR SHARES OF OUR
COMMON STOCK
The conversion of the Debenture will result in dilution to the interests of
other holders of our common stock since the holder may ultimately convert the
full amount of the Debenture and sell all of these shares into the public
market.
The following table sets forth the number and percentage of shares of our
common stock that would be issuable if the holder of the Debenture converted at
conversion prices of $0.25, $0.20, $0.15, $0.10 and $0.05 (the conversion price
shall be equal to the lesser of (i) one hundred twenty percent (120%) of the
closing bid price of the Company's common stock on April 1, 2005 and (ii) eighty
percent (80%) of the lowest closing bid price of the common stock for five (5)
trading days immediately preceding the conversion date):
NUMBER OF SHARES
ISSUABLE
ON CONVERSION OF PERCENTAGE OF ISSUED
CONVERSION PRICE DEBENTURE(1) AND OUTSTANDING(2)
---------------- ------------ ------------------
$0.25 1,000,000 3.13%
$0.20 1,250,000 3.91%
$0.15 1,666,667 5.21%
$0.10 2,500,000 7.82%
$0.05 5,000,000 15.69%
----------
(1) Represents the number of shares issuable if the principal amount of the
Debenture was converted at the corresponding conversion price.
(2) Represents the percentage of the total outstanding common stock that the
shares issuable on conversion of the Debenture without regard to any
contractual or other restriction on the number of securities the
stockholder may own at any point in time (including a 4.99% ownership
limitation set forth in the Debenture). Based on 31,980,726 shares issued
and outstanding on October 4, 2006.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN
OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny
stock", for the purposes relevant to us, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require:
13
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the penny stock
market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
HISTORICAL DEFICIENCIES IN THE EFFECTIVENESS OF OUR DISCLOSURE CONTROLS AND
PROCEDURES MAY POSE A MATERIAL RISK TO INVESTORS
On July 6, 2006, we announced that we were restating our Consolidated Balance
Sheets at June 30, 2005, September 30, 2005, December 31, 2005 and March 31,
2006 and our Consolidated Statements of Operations and Statements of
Stockholders' Deficit as of and for the year ended December 31, 2005 and for the
periods ended June 30, 2005, September 30, 2005 and March 31, 2006 to properly
reflect an embedded derivative conversion liability related to our debenture
payable. The change in presentation of the Company's embedded derivative feature
associated with its debenture payable had the effect of increasing assets by
$19,131, increasing liabilities by $208,117, increasing the stockholders'
deficit by $188,986 as of March 31, 2006, and increasing the Company's net loss
by $30,038 for the three (3) months ended March 31, 2006. This change in
presentation of the Company's embedded derivative feature affected some of the
items within the Company's consolidated statement of cash flows for the three
(3) months ended March 31, 2006 but did not impact cash at the end of the year.
As a result of the restatement of our Consolidated Balance Sheet, Consolidated
Statement of operations and the Consolidated Statements of Stockholders'
Deficit, our management determined that there had been a significant deficiency
in our internal control over financial reporting as of December 31, 2005 and
March 31, 2006 related to the presentation of derivative liabilities.. Although
management believes that the Company has corrected our presentation and
recording of the derivative liabilities and have determined that such
significant deficiency did not rise to the level of a material weakness in our
internal control over financial reporting, a material risk to investors may
exist due to the fact that recent changes have been made to our disclosure
controls and procedures to address such significant deficiencies.
We have implemented additional measures as part of changes to our internal
controls to determine and ensure that information required to be disclosed in
reports filed under the exchange Act was recorded, processed, summarized and
reported within the time periods specified in the rules and forms including, but
not limited to, the following: (i) documentation of processes, performing
testing and reviewing our internal control over financial reporting in
connection with our assessment under Section 404 of the Sarbanes-Oxley Act; (ii)
evaluation and implementation of improvements to our accounting and management
information systems; and (iii) development and implementation of a remediation
plan to address any perceived deficiencies identified in our internal control
over financial reporting. The costs of these additional measures did not have a
material impact on our future results or operations liquidity.
14
Our management, including our CEO and CFO, do not expect that our disclosure
controls and internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving our objectives and our certifying officers have concluded that our
disclosure controls and procedures are effective at a reasonable assurance level
as of June 30, 2006.
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 Percentage
of Percentage of of
Outstanding Shares to be Shares to be Outstanding
Shares Shares Acquired Acquired Shares
Beneficially Beneficially Pursuant to Pursuant to Shares to be Beneficially
Owned Before Owned Before the Cornell the Cornell Sold in the Owned After
Selling Stockholder Offering Offering Offering(1) Offering(1) Offering Offering(2)
------------------- ------------ ------------- ------------ ------------- ------------ -------------
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH TRANSAX
Cornell Capital Partners, LP 1,052,246(3) 3.03% 30,000,000 48.40% 30,060,000(4) 0%
Scott and Heather Grimes -
Joint Tenants with Rights
of Survivorship 3,571,429(5) 11.17% -- -- 3,571,429(5) 0%
--------- ------ ---------- ------ ---------- ---
TOTAL 4,623,675 14.02% 30,000,000 48.40% 33,631,429 0%
========= ====== ========== ====== ========== ===
--------------
* Less than one percent (1%).
(1) Applicable percentage of ownership is based on 31,980,726 shares of common
stock outstanding as of October 4, 2006, together with securities
exercisable or convertible into shares of common stock within sixty (60)
days of October 2, 2006, for each stockholder. Beneficial ownership is
determined in accordance with the rules of the SEC 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 sixty
(60) days of October 2, 2006 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) Includes the 5,000,000 shares which may be issued upon the exercise of the
Warrants, 3,171,429 shares underlying the Debenture and 400,000 shares
underlying the SHG Warrant.
(3) Consists of 60,000 shares of common stock and 992,246 shares of common
stock issuable upon conversion of Series A Preferred Shares. For purposes
of calculating Cornell Capital Partners' beneficial ownership, this figure
does not include 29,007,754 shares registered on behalf of this person, as
follows: (i) 24,007,754 shares issuable upon conversion of the Series A
Preferred Shares and (ii) 5,000,000 shares issuable upon exercise of the
Warrants. Pursuant to provisions in the Investment Agreement and the
warrants, Cornell Capital Partners does not have the right to acquire
within sixty (60) days, through the conversion of the Series A Preferred
Shares or through the exercise of the warrants such number of shares which
after giving effect to such exercise or conversion would cause the
aggregate number of shares beneficially owned by Cornell Capital Partners
and its affiliates to exceed 4.99% of the total outstanding shares of the
Company. As a result of this limitation on its percentage beneficial
ownership, we do not consider Cornell Capital Partners to be an affiliate.
(4) Includes 60,000 shares which were received as a commitment fee under a now
terminated Standby Equity Distribution Agreement.
(5) Consists of 3,171,429 shares of common stock underlying the Debenture and
400,000 shares underlying the SHG Warrant.
15
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). Cornell Capital
Partners is the investor under the Investment 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. The transaction is explained
below:
o THE INVESTMENT AGREEMENT. On January 13, 2006, Transax entered into an
Investment Agreement with Cornell Capital Partners (Cornell Capital Partners and
the Company are collectively referred to herein as the "Parties"), pursuant to
which the Company sold to Cornell Capital Partners up to 16,000 Series A
Preferred Shares, no par value per share, which shall be convertible, at Cornell
Capital Partners' discretion, into shares of the Company's common stock, par
value $0.00001 per share, for a total price of up to $1,600,000. The Series A
Preferred Shares are senior to all common stock and all series of preferred
stock of the Company. The holders of Series A Preferred Shares are entitled to
receive dividends or distribution on a pro rata basis in the amount of seven
percent (7%) per year. Dividends shall be paid in cash and shall be cumulative.
Each share of Series A Preferred Shares may be converted into shares of the
Company's common stock equal to the sum of the Liquidation Amount, defined as an
amount equal to $100 per share of Series A Preferred Shares, plus accrued but
unpaid dividends thereon, divided by the Conversion Price. The Conversion Price
is defined to be equal to the lower of (i) $0.192 or (ii) eighty percent (80%)
of the lowest daily volume weighted average price of the Company's common stock,
as determined by price quotations from Bloomberg, LP, during the ten (10)
trading days immediately preceding the date of conversion. Of the 16,000 Series
A Preferred Shares to be sold to Cornell Capital Partners, 8,000 Series A
Preferred Shares equal a purchase price of $800,000, which consists of $255,237
from the surrender of the Promissory Note (as described below) and $544,763
consisting of new funding. The Company completed the Closing (as such term is
defined in the Investment Agreement) by issuing to Cornell Capital Partners the
remaining 8,000 Series A Preferred Shares for a purchase price equal to $800,000
on May 8, 2006, prior to the date that the Registration Statement (which this
Prospectus is made part) was initially filed with the SEC.
In connection with the Investment Agreement, the Company and Cornell
Capital Partners entered into an Investor Registration Rights Agreement (the
"IRRA"), dated January 13, 2006, pursuant to which the parties agreed that, in
the event the Registration Statement is not filed within thirty (30) days from
the date the Company files its Annual Report on Form 10-KSB for the year ended
December 31, 2005 (the "Filing Deadline") or is not declared effective by the
SEC within ninety (90) days of the date of the IRRA (the "Effective Deadline"),
or if after the Registration Statement has been declared effective by the SEC,
sales cannot be made pursuant to the Registration Statement, then as relief for
the damages to any holder of Registrable Securities (as defined in the IRRA) by
reason of any such delay in or reduction of its ability to sell the underlying
shares of common stock (which remedy shall not be exclusive of any other
remedies at law or in equity), the Company will pay as liquidated damages to the
holder, at the holder's option, either a cash amount or shares of the Company's
common stock equal to two percent (2%) of the Liquidation Amount (as defined
above) outstanding as liquidated damages for each thirty (30) day period or any
part thereof after the Filing Deadline or the Effective Deadline as the case may
be. Any liquidated damages payable hereunder shall not limit, prohibit or
preclude the holder from seeking any other remedy available to it under
contract, at law or in equity. The Company shall pay liquidated damages
hereunder within three (3) business days of the holder making written demand. It
shall also become an event of default under the IRRA if the Registration
Statement is not declared effective by the SEC within one-hundred twenty (120)
days from the date of the IRRA. The Company initially filed its Registration
Statement (of which this Prospectus is made a part) with the SEC on May 9, 2006.
In connection with the sale of the Series A Preferred Shares, on January
13, 2006, Cornell Capital Partners surrendered the Promissory Note issued by the
Company to Cornell Capital Partners on May 17, 2005, in the principal amount of
$255,237, in exchange of $255,237 of Series A Preferred Shares. As of January
13, 2006, the full amount outstanding under the Promissory Note was $255,237,
plus accrued and unpaid interest of zero dollars ($0). As a result, the
Promissory Note was retired and cancelled. The Parties also terminated the
Securities Purchase Agreement and the Investor Registration Rights Agreement,
each dated as of October 25, 2004, as well as the Pledge and Escrow Agreements,
each dated as of October 21, 2004, that were entered into by the Parties in
connection with the issuance of the Promissory Note.
16
o WARRANTS. On January 13, 2006, the Company issued to Cornell Capital
Partners two (2) Warrants to purchase up to 5,000,000 shares of the Company's
common stock. The first Warrant issued to Cornell Capital Partners for 2,500,000
shares of common stock at an exercise price of $0.30, shall terminate after the
five (5) year anniversary of the date of issuance. The second warrant issued to
Cornell Capital Partners for 2,500,000 shares of common stock at exercise price
of $0.20, shall terminate after the five (5) year anniversary of the date of
issuance.
o SCOTT AND HEATHER GRIMES - JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP
(INVESTOR). Investor is the holder of the convertible Debentures. Investor
acquired all shares being registered in this offering in a financing transaction
with Transax. This transaction is explained below:
o CONVERTIBLE DEBENTURES. On April 1, 2005, Company entered into a
Securities Purchase Agreement with Investor. Pursuant to the Securities Purchase
Agreement, the Company issued the convertible Debenture to Investor in the
original principal amount of $250,000.
The Debenture is convertible at the holder's option any time up to maturity
at a conversion price equal to the lower of: (i) one hundred twenty percent
(120%) of the closing bid price of the common stock on the date of the Debenture
or (ii) eighty percent (80%) of the lowest closing bid price of the Company's
common stock for the five (5) trading days immediately preceding the conversion
date. The Debenture has a two (2) year term and accrues interest at five percent
(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 Company's common stock on the date of the
Debentures or (ii) eighty percent (80%) of the lowest closing bid price of the
common stock for five (5) trading days immediately preceding the conversion
date. On July 17, 2006, the Investor converted $15,000 of the Debenture into
104,167 shares of common stock. The Company is registering 3,171,429 shares of
its common stock underlying the conversion of the Debenture in this offering.
o SHG WARRANT. On February 1, 2006, the Company and the Investor mutually
agreed to extend the term of the Debenture through December 1, 2007. In
addition, the Company issued the SHG Warrant to purchase 400,000 shares of the
Company's common stock. The SHG Warrant has a term of two (2) years and is
exercisable at $0.20 per share. The Company is registering 400,000 shares
underlying the SHG Warrant.
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. Therefore, there
will be no proceeds to us from the sale of shares of common stock in this
offering.
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 (1) or more
underwriters, brokers, dealers or agents from time to time in one (1) 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).
17
On January 13, 2006, Transax entered into an Investment Agreement with
Cornell Capital Partners (Cornell Capital Partners and the Company are also
collectively referred to herein as the "Parties"), pursuant to which the Company
sold to Cornell Capital Partners up to 16,000 of Series A Preferred Shares, no
par value per share which shall be convertible, at Cornell Capital Partners'
discretion, into shares of the Company's common stock, for a total price of up
to $1,600,000. The Series A Preferred Shares are senior to all common stock and
all series of preferred stock of the Company. The holders of Series A Preferred
Shares are entitled to receive dividends or distribution on a pro rata basis in
the amount of seven percent (7%) per year. Dividends shall be paid in cash and
shall be cumulative. Each share of Series A Preferred Shares may be converted
into shares of the Company's common stock equal to the sum of the Liquidation
Amount, defined as an amount equal to $100 per share of Series A Preferred
Shares, plus accrued but unpaid dividends thereon, divided by the Conversion
Price. The Conversion Price is defined to be equal to the lower of (i) $0.192 or
(ii) eighty percent (80%) of the lowest daily volume weighted average price of
the Company's common stock, as determined by price quotations from Bloomberg,
LP, during the ten (10) trading days immediately preceding the date of
conversion. Of the 16,000 Series A Preferred Shares sold to Cornell Capital
Partners, 8,000 Series A Preferred Shares equal a purchase price of $800,000,
which consists of $255,237 from the surrender of the Promissory Note (as
described below) and $544,763 consisting of new funding. The Company completed
the Closing (as such term is defined in the Investment Agreement) by issuing to
Cornell Capital Partners the remaining 8,000 Series A Preferred Shares for a
purchase price equal to $800,000 on May 7, 2006, prior to the date that the
Registration Statement (of which this Prospectus is made a part) was initially
filed with the SEC.
In connection with the Investment Agreement, the Parties entered into an
Investor Registration Rights Agreement (the "IRRA"), dated January 13, 2006,
pursuant to which the parties agreed that, in the event the Registration
Statement is not filed within thirty (30) days from the date the Company files
its Annual Report on Form 10-KSB for the year ended December 31, 2005 (the
"Filing Deadline") or is not declared effective by the SEC within ninety (90)
days of the date of the IRRA (the "Effective Deadline"), or if after the
Registration Statement has been declared effective by the SEC, sales cannot be
made pursuant to the Registration Statement, then as relief for the damages to
any holder of Registrable Securities by reason of any such delay in or reduction
of its ability to sell the underlying shares of common stock (which remedy shall
not be exclusive of any other remedies at law or in equity), the Company will
pay as liquidated damages to the holder, at the holder's option, either a cash
amount or shares of the Company's common stock equal to two percent (2%) of the
Liquidation Amount (as defined above) outstanding as liquidated damages for each
thirty (30) day period or any part thereof after the Filing Deadline or the
Effective Deadline as the case may be. Any liquidated damages payable hereunder
shall not limit, prohibit or preclude the holder from seeking any other remedy
available to it under contract, at law or in equity. The Company shall pay
liquidated damages hereunder within three (3) business days of the holder making
written demand. It shall also become an event of default under the IRRA if the
Registration Statement is not declared effective by the SEC within one-hundred
twenty (120) days from the date of the IRRA. The Company initially filed its
Registration Statement (of which this Prospectus is made a part) with the SEC on
May 9, 2006.
In connection with the sale of the Series A Preferred Shares, on January
13, 2006, Cornell Capital Partners surrendered the Promissory Note issued by the
Company to Cornell Capital Partners on May 17, 2005, in the principal amount of
$255,237, in exchange of $255,237 of Series A Preferred Shares. As of January
13, 2006, the full amount outstanding under the Promissory Note was $255,237,
plus accrued and unpaid interest of zero dollars ($0). As a result, the
Promissory Note was retired and canceled. The Parties also agreed to terminate
the Securities Purchase Agreement and the Investor Registration Rights
Agreement, each dated as of October 25, 2004, as well as the Pledge and Escrow
Agreements, each dated as of October 21, 2004, that were entered into by the
Parties in connection with the issuance of the Promissory Note.
On January 13, 2006, the Company also issued to Cornell Capital Partners
the Warrants to purchase up to 5,000,000 shares of common stock. The first
Warrant issued to Cornell Capital Partners for 2,500,000 shares of common stock,
at an exercise price of $0.30, shall terminate after the five (5) year
anniversary of the date of issuance. The second Warrant issued to Cornell
Capital Partners was 2,500,000 shares of common stock, at exercise price of
$0.20, shall terminate after the five (5) year anniversary of the date of
issuance.
18
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.
On April 1, 2005, Company entered into the 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 a
convertible debenture to Investor in the original principal amount of $250,000
(the "Debenture"). The Debenture is convertible at the holder's option any time
up to maturity at a conversion price equal to the lower of: (i) one hundred
twenty percent (120%) of the closing bid price of the common stock on the date
of the Debentures or (ii) eighty percent (80%) of the lowest closing bid price
of the Company's common stock for the five (5) trading days immediately
preceding the conversion date. The Debenture has a two (2) year term and accrue
interest at five percent (5%) per year. At maturity, the Debenture will
automatically convert into shares of common stock at a conversion price equal to
the lower of: (i) one hundred twenty percent (120%) of the closing bid price of
the Company's common stock on the date of the Debenture or (ii) eighty percent
(80%) of the lowest closing bid price of the common stock for five (5) trading
days immediately preceding the conversion date. On July 17, 2006, the Investor
converted $15,000 of the Debenture into 104,167 shares of the Company's common
stock.
Certain negative covenants in the Securities Purchase Agreement could
substantially impact our ability to raise funds from alternative sources in the
future. For example, for as long as the convertible debenture remains
outstanding and without the written consent of the debenture holder, the Company
(a) shall not directly or indirectly consummate any merger, reorganization,
restructuring, reverse stock split consolidation, sale of all or substantially
all of the Company's assets or any similar transaction or related transactions;
(b) shall not issue or sell shares of common stock or preferred stock without
consideration or for a consideration per share less than the bid price of the
common stock determined immediately prior to its issuance or issue any warrant,
option, right, contract, call, or other security or instrument granting the
holder thereof the right to acquire common stock without consideration or for a
consideration per share less than the bid price of the common stock determined
immediately prior to the issuance of such convertible security; (c) shall not
enter into any security instrument granting the holder a security interest in
any or all assets of the Company; (d) shall not file any registration statement
on Form S-8 except the Company may file one registration statement on Form S-8
for up to 2,500,000 shares of common stock and provided however, anyone
receiving shares pursuant to such permitted Form S-8 registration shall be
restricted from selling such shares for a period of ninety (90) days after the
registration statement becomes effective and (e) shall not, and shall cause each
of its subsidiaries not to, enter into, amend, modify or supplement, or permit
any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any of its
subsidiary's officers, directors, person who were officers or directors at any
time during the previous two years, stockholders who beneficially own five
percent (5%) or more of the Company's common stock, or Affiliates (as defined in
the Securities Purchase Agreement) or with any individual related by blood,
marriage, or adoption to any such individual or with any entity in which any
such entity or individual owns a five percent (5%) or more beneficial interest,
except for (i) customary employment arrangements and benefit programs on
reasonable terms, (ii) any investment in an Affiliate of the Company, (iii) any
agreement, transaction, commitment, or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such related party and (iv) any agreement transaction,
commitment, or arrangement which is approved by a majority of the disinterested
directors of the Company.
On February 1, 2006, the Company and Investor mutually agreed to extend the
term of the Debentures until December 1, 2007. In addition, the Company issued
the SHG Warrant to purchase 400,000 shares of the Company's common stock. The
SHG Warrant has a term of two (2) years and is exercisable at $0.20 per share.
The Company is registering 3,171,429 shares of its common stock underlying the
conversion of the Debenture and 400,000 shares underlying the SHG Warrant.
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.
19
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 of 1933, as amended (the "Securities Act"). We estimate that the
expenses of the offering to be borne by us will be approximately $85,000. The
estimated offering expenses consist of: an SEC registration fee of $545,
printing expenses of $2,500, accounting fees of $15,000, legal fees of $50,000
and miscellaneous expenses of $16,955. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders.
The selling stockholders are subject to applicable provisions of the
Exchange Act, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Transax International Limited, 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.
Through our wholly-owned subsidiary Medlink Conectividade em Saude Ltda.
(f/k/a TDS Telecommunication Data Systems Ltda. and referred to herein as
"Medlink"), we are an international provider of health information management
products (collectively, the "Health Information Management Products"), which are
specifically designed for the healthcare providers and health insurance
companies. We are dedicated to improving healthcare delivery by providing
hospitals, physician practices and health insurance companies with innovative
health information management systems to manage coding, compliance, abstracting
and record management processes. 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 were previously performed manually
(the "MedLink Solution").
SUBSIDIARIES
MEDLINK CONECTIVIDADE EM SAUDE LTDA
Medlink (f/k/s TDS Telecommunication Data Systems Ltda.)
was incorporated under the laws of Brazil on May 2, 1998, and is a
wholly-owned subsidiary of the Company. Medlink 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 Tech") was incorporated under the laws
of Mauritius on January 17, 2003, and is a wholly-owned subsidiary of the
Company. MedLink Tech holds the intellectual property developed by the Company
and is responsible for initiating research and development.
20
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance
with generally accepted accounting principles in the United States. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. These
estimates and assumptions are affected by management's applications of
accounting policies. Critical accounting policies for Transax International
Limited include the useful lives of property and equipment, accounting for stock
based compensation and revenue recognition.
We review the carrying value of property and equipment for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets is measured by comparison of its carrying amount to the undiscounted cash
flows that the asset or asset group is expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the property, if any, exceeds its fair
market value.
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. We regularly
review 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.
Accounting for Stock Based Compensation - Effective January 1, 2006, we
adopted Statement of Financial Accounting Standards No. 123 ("SFAS No. 123R")
(revised 2004), Share Based Payment. SFAS No. 123R establishes the financial
accounting and reporting standards for stock-based compensation plans. As
required by SFAS No. 123R, we recognize the cost resulting from all stock-based
payment transactions including shares issued under its stock option plans in the
financial statements. The adoption of this pronouncement may have a material
effect on our results of operations.
Revenue Recognition - Our revenues, 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.
Substantially all of our revenues are derived from the processing of
applications by healthcare providers for approval of patients for healthcare
services from insurance carriers. Our software or hardware devices containing
our software are installed at the healthcare provider's location. We offer
transaction services to authorize and adjudicate identity of the patient and
obtain "real time" approval for any necessary medical procedure from the
insurance carrier. Our transaction-based solutions provide remote access for
healthcare providers to connect with contracted insurance carriers. Transaction
services are provided through contracts with insurance carriers and others,
which specify the services to be utilized and the markets to be served. Our
clients are charged for these services on a per transaction basis. Pricing
varies depending type of transactions being processed under the terms of the
contract for which services are provided. Transaction revenues are recognized in
the period in which the transactions are performed.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 155, "Accounting for
Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133
and 140" ("SFAS 155"). SFAS 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation and clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement 133. SFAS 155
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation
and clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. Lastly, SFAS 155 amends SFAS 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective in the first fiscal year
that begins after September 15, 2006. We are still assessing the impact, if any,
on its consolidated financial position, results of operations and cash flows.
21
Management does not believe that any recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
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. The adoption of this standard
did not have a material impact on our financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non- monetary Assets". The Statement is an amendment of Accounting Principles
Board ("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
FOR THE SIX (6) MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO SIX (6) MONTH
PERIOD ENDED JUNE 30, 2005
Our net losses during the six (6) month period ended June 30, 2006 were
$1,994,090 compared to a net loss of $265,860 during the six (6) month period
ended June 30, 2005, an increase of $1,728,230.
During the six (6) month period ended June 30, 2006 we generated $2,015,902 in
revenues compared to $1,501,431 in revenues for the six (6) month period ended
June 30, 2005, an increase of $514,471 or 34.3%. The significant increase in
revenues is due to the continued installation of our software and/or hardware
devices containing our software at the healthcare providers' locations in
Brazil. Upon installation, we begin the processing of applications submitted by
healthcare providers for approval of patients for healthcare services from the
insurance carrier. We charge for these services on a per transaction basis. We
undertook approximately 3.75 million "real time" transactions during the six (6)
month period ended June 30, 2006 compared to 3.00 million "real time"
transactions during the period ended June 30, 2005.
During the six (6) month period ended June 30, 2006, we incurred operating
expenses of $2,361,794 compared to operating expenses of $1,596,323 incurred
during the six (6) month period ended June 30, 2005, an increase of $765,471 or
48.0%. The increase in operating expenses during the six (6) month period ended
June 30, 2006 from the same period in 2005 resulted from: (i) an increase of
$248,440 or 43.6% in cost of product support services resulting from the
increase in revenues; (ii) an increase of $150,621 or 200.9% in management and
consulting fees-related parties due to an increase in use of management and a
director/consultant needed to handle our increased operations; (iii) an increase
of $128,964 or 34.3% in general and administrative expenses resulting from an
increase in operating costs associated with increased operations and increased
travel expenses; (iv) an increase of $18,324 or 17.7% in depreciation and
amortization expense as a result of an increase in property and equipment
acquired for our Medlink operations; (v) an increase of $127,764 in investor
relations fees primarily resulting from the issuance of common stock and
warrants to a consultant for investor relations services; (vi) an increase of
$44,401 or 62.4% in professional fees relating to legal and accounting costs
associated with our financings and the filing of this registration statement on
Form SB-2 and (vii) an increase of $46,957 or 12.2% in compensation and related
benefits associated with the increased operations at our Medlink operations.
We reported a loss from operations of $345,892 for the six (6) month period
ended June 30, 2006 as compared to a loss from operations of $94,892 for the six
(6) month period ended June 30, 2005, an increase of $251,000. Although there
can be no assurances, we anticipate that during fiscal year 2006, our ongoing
marketing efforts and product roll-out will result in an increase in our net
sales from those reported during fiscal year 2005. To support these increased
sales, we anticipate that our operating expenses will also increase during
fiscal year 2006 as compared to fiscal year 2005. We are, however, unable to
predict at this time the amount of any such increase in operating expenses.
22
Total other expenses increased $1,477,230 or 864.0% for the six (6) month period
ended June 30, 2006 as compared to the six (6) month period ended June 30, 2005.
Included in this change is: (i) an increase in other expense of $58,989 from
$10,514 of other income recognized during the six (6) month period ended June
30, 2005; (ii) an increase of $153,671 in debt settlement and offering costs
from $-0- during the six (6) month period ended June 30, 2005, which relates to
the issuance of warrants to the debenture holder and amortization of certain
debt offering costs; (iii) an increase of $1,168,930 in loss from derivative
liabilities from $15,804 during the six (6) month period ended June 30, 2005,
which relates to the classification of the embedded conversion feature and
related warrants issued in connection with our Series A preferred stock and
debenture payable as a derivative instrument; and (iv) an increase of $59,738 in
interest expense from $192,112 for the six (6) month period ended June 30, 2005,
which reflects the amortization of debt discounts and debt offering costs of
$72,066 for the six (6) months ended June 30, 2006 offset by a decrease in our
borrowings during the six (6) months ended June 30, 2006.
For the six (6) month period ended June 30, 2006 our net loss was $1,994,090
compared to a net loss of $265,860 for the six (6) month period ended June 30,
2005.
During the six (6) months ended June 30, 2006, we recorded a deemed preferred
stock dividend of $1,600,000 which relates to our Series A Convertible Preferred
Stock. This non-cash item related to the embedded beneficial conversion features
of those securities and fair value of warrants of those securities. Additional,
for the six (6) months ended June 30, 2006, we recorded cumulative preferred
stock dividends of $34,214.
We reported a net loss attributable to common shareholders of $3,628,304 for the
six (6) months ended June 30, 2006 as compared to a net loss attributable to
common shareholders of $265,860 for the six (6) months ended June 30, 2005. This
translates to an overall per-share loss available to shareholders of ($0.06) and
($0.01) for the six (6) months ended June 30, 2006 and 2005, respectively.
FOR THE THREE (3) MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO THREE (3)
MONTH PERIOD ENDED JUNE 30, 2005
Our net losses during the three (3) month period ended June 30, 2006 were
$1,302,259 compared to a net loss of $167,041 during the three (3) month period
ended June 30, 2005, an increase of $1,135,218.
During the three (3) month period ended June 30, 2006 we generated $1,034,844 in
revenues compared to $861,023 in revenues for the three (3) month period ended
June 30, 2005, an increase of $173,821 or 20.2%. The significant increase in
revenues is due to the continued installation of our software and/or hardware
devices containing our software at the healthcare provider's locations in
Brazil. Upon installation, we begin the processing of applications submitted by
the healthcare provider for approval of patients for healthcare services from
the insurance carrier. We charge for these services on a per transaction basis.
We undertook approximately 1.84 million "real time" transactions during the
three (3) month period ended June 30, 2006 compared to 1.33 million "real time"
transactions during the period ended June 30, 2005.
During the three (3) month period ended June 30, 2006, we incurred operating
expenses of $1,258,835 compared to operating expenses of $916,787 incurred
during the three (3) month period ended June 30, 2005, an increase of $342,048
or 37.3%. The increase in operating expenses during the three (3) month period
ended June 30, 2006 from the same period in 2005 resulted from: (i) an increase
of $71,284 or 20.0% in cost of product support services resulting from the
increase in revenues; (ii) an increase of $75,495 or 183.0% in management and
consulting fee-related parties due to an increase in use of management and a
director/consultant needed to handle our increased operations; (iii) an increase
of $88,296 or 47.6% in general and administrative expenses resulting from a
increase in operating costs associated with increased operations and increased
travel expenses; (iv) a decrease of $2,812 or 4.8% in depreciation and
amortization expense; (v) an increase of $118,247 in investor relations fees
primarily resulting from the issuance of common stock and warrants to a
consultant for investor relations services; (vi) a decrease of $13,154 or 22.3%
in professional fees relating to certain accounting costs incurred in 2005; and
(vii) an increase of $4,692 or 2.2% in compensation and related benefits
associated with the increased operations at our Medlink operations.
We reported a loss from operations of $223,991 for the three (3) month period
ended June 30, 2006 as compared to a loss from operations of $55,764 for the
three (3) month period ended June 30, 2005, an increase of $168,227. Although
there can be no assurances, we anticipate that during fiscal year 2006, our
ongoing marketing efforts and product roll-out will result in an increase in our
net sales from those reported during fiscal year 2005. To support these
increased sales, we anticipate that our operating expenses will also increase
during fiscal year 2006 as compared to fiscal year 2005. We are, however, unable
to predict at this time the amount of any such increase in operating expenses.
23
Total other expenses increased $966,991 or 869.0% for the three (3) month period
ended June 30, 2006 as compared to the three (3) month period ended June 30,
2005. Included in this change is: (i) an increase in other expense of $26,126
from $0 of other expenses recognized during the three (3) month period ended
June 30, 2005; (ii) an increase of $919,827 in loss from derivative liabilities
from $15,804 during the three (3) month period ended June 30, 2005, which
relates to the classification of the embedded conversion feature and related
warrants issued in connection with our Series A preferred stock and debenture
payable as a derivative instrument; and (iii) a decrease of $9,487 in interest
expense from $119,405 for the three (3) month period ended June 30, 2005, which
reflects a decrease in our borrowings offset by the amortization of debt
discounts and debt offering costs of $36,033 during the three (3) month period
ended June 30, 2006. Additionally, during the three (3) months ended June 30,
2005, we recorded interest expense of $31,200 related to the granting of
warrants which is not reflected in the 2006 period.
For the three (3) month period ended June 30, 2006 our net loss was $1,302,259
compared to a net loss of $167,041 for the three (3) month period ended June 30,
2005.
During the three (3) months ended June 30, 2006, we recorded a deemed preferred
stock dividend of $800,000 which is related to our Series A Convertible
Preferred Stock. This non-cash expense related to the embedded beneficial
conversion features of those securities and fair value of warrants of those
securities. Additionally, for the three (3) months ended June 30, 2006, we
recorded cumulative preferred stock dividends of $34,214.
We reported a net loss attributable to common shareholders of $2,136,473 for the
three (3) months ended June 30, 2006 as compared to a net loss attributable to
common shareholders of $167,041 for the three (3) months ended June 30, 2005.
This translates to an overall per-share loss available to shareholders of
($0.04) and ($0.01) for the three (3) months ended June 30, 2006 and 2005,
respectively.
FOR FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 2004
Our net losses during fiscal year ended December 31, 2005 were $764,464
compared to a net loss of $1,792,255 for fiscal year ended December 31, 2004, a
decrease of $1,027,771. During fiscal year ended December 31, 2005, we generated
$3,380,150 in revenues compared to $1,199,900 in revenues during fiscal year
ended December 31, 2004, an increase of $2,180,250 or 181.7%. The significant
increase in revenues is due to the continued installation of our software and/or
hardware devices containing our software at the healthcare provider's locations
in Brazil. Upon installation, we begin the processing of applications submitted
by the healthcare provider for approval of patients for healthcare services from
the insurance carrier. We charge for these services on a per transaction basis.
We undertook approximately 6,500,000 "real time" transactions during fiscal year
2005 compared to 2,800,000 "real time" transactions during fiscal year 2004. At
December 31, 2005, we had 5,350 MedLink Solutions operational in Brazil,
including 2,750 Point of Sales ("POS") solutions.
During fiscal year ended December 31, 2005, we incurred operating expenses
of $3,543,534 compared to operating expenses of $2,326,063 during fiscal year
ended December 31, 2004, an increase of $1,217,471 or 52.34%. The increase in
operating expenses during fiscal year ended December 31, 2005 from fiscal year
ended December 31, 2004 resulted from: (i) an increase of $910,337 or 128.15% in
cost of product support services resulting from the increase in net revenues;
(ii) an increase of $49,757 or 13.65% in payroll and related benefits due to an
increase in employees needed to handle our increased operations; (iii) an
increase of $143,980 or 23.23% in general and administrative expenses resulting
from increased operating costs associated with increased operations; (iv) an
increase of $194,300 or 345.66% in depreciation and amortization expense as a
result of an increase in property and equipment acquired for our Medlink
operations; (v) an increase of $19,347 or 17.75% in investor relation fees
attributable to an increase in the use of investor relations services; and (vi)
an increase of $3,562 or 2.80% in professional fees related to legal fees
associated with our SEC filings.
Certain operating expenses, however, decreased during fiscal year ended
December 31, 2005 from fiscal year ended December 31, 2004. Management fees -
related parties decreased $103,812 or 30.63% attributable to a decrease in
amounts paid to our management.
We reported a loss from operations of $163,384 for fiscal year ended
December 31, 2005 as compared to a loss from operations of $1,126,163 for fiscal
year ended December 31, 2004. Although there can be no assurances, we anticipate
that during fiscal year 2006, our ongoing marketing efforts and product roll-out
will result in an increase in our net sales from those reported during fiscal
year 2005. To support these increased sales, we anticipate that our operating
expenses will also increase during fiscal year 2006 as compared to fiscal year
2005. We are, however, unable to predict at this time the amount of any such
increase in operating expenses.
24
Total other expenses decreased $64,991 or 9.76% for fiscal year ended
December 31, 2005 as compared to fiscal year ended December 31, 2004. Included
in this change is: (i) a decrease in other income (expenses) of $69,139 or
135.31% during fiscal year ended December 31, 2005 compared to fiscal year ended
December 31, 2004, which results from income recognized during fiscal year ended
December 31, 2004 upon settlement of accounts payable balances, which were
settled for less than the original obligation; (ii) a decrease of $197,685 or
32.64% in interest expense for fiscal year ended December 31, 2005 compared to
fiscal year ended December 31, 2004 which reflects an increase in our borrowing
during fiscal year 2005 offset by a decrease in interest expense recorded in
connection with warrants granted upon debt conversion;; (iii) an increase of
$88,347 or 97.13% in interest expense - related party during fiscal year ended
December 31, 2005 compared to fiscal year ended December 31, 2004, which
reflects an increase due to the granting of warrants in connection with debt
conversions and an increase in our borrowing from related parties; and (iv) an
increase of $43,304, or 210.52% in foreign exchange rate gains due to a
favorable fluctuation in the exchange rate between Brazil and the United States
and (v) the recording of a loss from derivative liability of $18,512 in 2005
related to our debenture payable.
For the fiscal year ended December 31, 2005, our net loss was $764,484 or
$0.03 per common share compared to a net loss of $1,792,255 or $0.10 per common
share for the fiscal year ended December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED JUNE 30, 2006
As of June 30, 2006, our current assets were $1,085,530 and our current
liabilities were $4,943,668, which resulted in a working capital deficit of
$3,858,138. As of June 30, 2006, our total assets were $2,196,551 consisting of:
(i) $482,813 in cash; (ii) $202,893 in prepaid expenses and other current
assets; (iii) $399,824 in accounts receivable; (iv) $358,514 in net software
development costs; (v) $733,359 in net property and equipment; (vi) $4,800 in
other assets; and (vii) $14,348 in deferred debt offering costs.
As of June 30, 2006, our total liabilities were $5,913,867 consisting of: (i)
$1,774,974 in long-term and current portion of accounts payable and accrued
expenses; (ii) $229,766 due to related parties; (iii) $207,035 in convertible
loans to related parties; (iv) $147,791 in loan payable to related parties; (v)
$156,250 in net convertible debenture payable; (vi) $298,119 in loans payable;
(vii) $1,000,783 in warrant liability; and (viii) $2,099,149 in convertible
feature liability. As at June 30, 2006, our current liabilities were $4,943,668
compared to $2,563,200 at December 31, 2005. The increase in current liabilities
is due primarily to the recording of warrant and convertible feature liabilities
offset by the repayment of loans and related loans payable.
Stockholders' deficit increased from $1,627,640 for fiscal year ended December
31, 2005 to $3,717,316 for the six-month period ended June 30, 2006.
For the six-month period ended June 30, 2006, net cash flow used in operating
activities was $310,974 compared to net cash provided by operating activities of
$251,045 for the six-month period ended June 30, 2005. The change in cash flows
used by operating activities is due to the increase in net loss for the
six-month period ended June 30, 2006 as well as the repayment of accounts
payable.
Net cash flows used in investing activities amounted to $344,813 for the
six-month period ended June 30, 2006 compared to $484,404 for the six-month
period ended June 30, 2005, a decrease of $139,591. During the six-month period
ended June 30, 2006, we capitalized software development costs and acquired
equipment for our hardware and software installations while in the six-month
period ended June 30, 2005, these costs were higher.
Net cash flows provided by financing activities for the six-month period ended
June 30, 2006 were $1,129,059, resulting primarily from net proceeds from the
sale of shares of Series A Preferred Stock of $1,223,734 and proceeds from loans
in the amount of $6,614, offset by repayment of capital lease obligations of
$16,289 and the repayment of related party loans of $85,000. Net cash flows
provided by financing activities were $407,674 for the six-month period ended
June 30, 2005 resulting from proceeds from a convertible debenture of $336,738,
proceeds from loans payable of $141,982 offset by repayment of related party
advances of $35,000, repayment of capital lease obligations of $20,962 and the
repayment of related party loans of $15,084.
In summary, based upon the cash flow activities as previously discussed, for the
six-month period ended June 30, 2006, our overall cash position increased by
$474,939.
25
FOR FISCAL YEAR ENDED DECEMBER 31, 2005
For fiscal year ended December 31, 2005, net cash flow provided by
operating activities was $214,657 compared to $46,655 for fiscal year ended
December 31, 2004. The change in cash flows provided by operating activities is
mainly due to the decrease in operating loss for fiscal year ended December 31,
2005.
Net cash flows used in investing activities amounted to $662,355 during
fiscal year ended December 31, 2005 as compared to $490,334 for fiscal year
ended December 31, 2004, an increase of $172,021. During the year ended December
31, 2005, we capitalized software development costs and acquired equipment for
our hardware and software installations while in fiscal year ended December 31,
2004, these costs were less.
Net cash flows provided by financing activities during the fiscal year
ended December 31, 2005 were $526,524, resulting primarily from a loan and cash
advances from a related party of $85,000, net proceeds from convertible
debentures of $336,738 and proceeds from loans of $230,594, offset by the
repayment of capital lease obligations of $75,724 and related party advances and
loans of $50,084 compared to approximately $475,880 during fiscal year ended
December 31, 2004. The borrowings were used to fund operating activities.
In summary, based upon the cash flow activities as previously discussed,
during the fiscal year ended December 31, 2005, our overall cash position
increased by approximately $3,800.
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.
On January 13, 2006, we entered into an Investment Agreement with Cornell
Capital Partners, LP ("Cornell") and together with the Company, (the "Parties"),
pursuant to which we shall sell to Cornell up to 16,000 shares of Series A
Convertible Preferred Stock, no par value per share, (the "Series A Preferred
Shares") which shall be convertible, at Cornell's discretion, into shares of the
Company's common stock, par value $0.00001 per share (the "Common Stock") for a
total price of up to $1,600,000.
Of the 16,000 Series A Preferred Shares to be sold to Cornell, 8,000 Series
A Preferred Shares had a purchase price of $800,000, which consisted of $255,237
from the surrender of a Promissory Note (as described below) and $544,763
consisting of new funding of which the Company received net proceeds of $470,734
after the payment of placement fees and expenses of $74,029. On May 8, 2006, we
sold the remaining 8,000 shares of Series A Preferred Shares to Cornell, for the
purchase price of $800,000 and received net proceeds of $728,000 (net of
placement fees of $72,000).
In connection with the Investment Agreement, the Parties entered into an
Investor Registration Rights Agreement (the "IRRA"), dated January 13, 2006,
pursuant to which the parties agreed that, in the event the Registration
Statement is not filed within thirty (30) days from the date the Company files
its Annual Report on Form 10-KSB for the year ended December 31, 2005 (the
"Filing Deadline") or is not declared effective by the SEC within ninety (90)
days of the date of the IRRA (the "Effective Deadline"), or if after the
Registration Statement has been declared effective by the SEC, sales cannot be
made pursuant to the Registration Statement, then as relief for the damages to
any holder of Registrable Securities (as defined in the IRRA) by reason of any
such delay in or reduction of its ability to sell the underlying shares of
common stock (which remedy shall not be exclusive of any other remedies at law
or in equity), the Company will pay as liquidated damages to the holder, at the
holder's option, either a cash amount or shares of the Company's common stock
equal to two percent (2%) of the Liquidation Amount (as defined in the
Certificate of Designation of Series A Convertible Preferred Shares) outstanding
as liquidated damages for each thirty (30) day period or any part thereof after
the Filing Deadline or the Effective Deadline as the case may be. Any liquidated
damages payable hereunder shall not limit, prohibit or preclude the holder from
seeking any other remedy available to it under contract, at law or in equity.
The Company shall pay any liquidated damages hereunder within three (3) business
days of the holder making written demand. It shall also become an event of
default under the IRRA if the Registration Statement is not declared effective
by the SEC within one-hundred twenty (120) days from the date of the IRRA. The
Company initially filed its Registration Statement (of which this Prospectus is
made a part) with the SEC on May 9, 2006.
26
In connection with the sale of the Series A Preferred Shares, on January
13, 2006, the Parties agreed that Cornell Capital Partners will surrender the
Promissory Note issued by us to Cornell on May 17, 2005, in the principal amount
of $255,237, in exchange for $255,237 of Series A Preferred Shares. As of
January 13, 2006, the full amount outstanding under the Promissory Note was
$255,237, plus accrued and unpaid interest of $0. As a result of the Parties'
agreement, the Promissory Note was retired and canceled. The Parties also agreed
to terminate the Securities Purchase Agreement and the Investor Registration
Rights Agreement, each dated as of October 25, 2004, as well as the Pledge and
Escrow Agreements, each dated as of October 21, 2004, that were entered into by
the Parties in connection with the issuance of the Promissory Note.
Certain negative covenants in the Investment Agreement could substantially
impact our ability to raise funds from alternative sources in the future. For
example, so long as any Series A Preferred Shares are outstanding, the Company
shall not, without the prior written consent of Cornell Capital Partners (a)
directly or indirectly consummate any merger, reorganization, restructuring,
reverse stock split consolidation, sale of all or substantially all of the
Company's assets or any similar transaction or related transactions; (b) incur
any indebtedness for borrowed money or become a guarantor or otherwise
contingently liable for any such indebtedness except for trade payables or
purchase money obligations incurred in the ordinary course of business; (c) file
any other registration statements on any form (including but not limited to
forms S-1, SB-2, S-3 and S-8); (d) issue or sell shares of common stock or
preferred stock without consideration or for a consideration per share less than
the bid price of the common stock determined immediately prior to its issuance
or issue any preferred stock, warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire common
stock without consideration or for a consideration per share less than the bid
price of the common stock determined immediately prior to the issuance of such
convertible security or (e) enter into any security instrument granting the
holder a security interest in any and all assets of the Company.
On January 13, 2006, the Company also issued to Cornell warrants to
purchase up to 5,000,000 shares of Common stock. The first warrant issued to
Cornell for 2,500,000 shares of Common Stock at an exercise price of $0.30 per
share, shall terminate after the five (5) year anniversary of the date of
issuance. The second warrant issued to Cornell was for 2,500,000 shares of
Common Stock at an exercise price of $0.20 per share, and shall terminate after
the five (5) year anniversary of the date of issuance.
As of the date of this Registration Statement, there is 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. This
eventuality could significantly and materially restrict our overall business
operations.
Based upon a twelve (12) month work plan proposed by management, it is
anticipated that such a work plan would require approximately $1,000,000 to
$3,000,000 of financing designed to fund various commitments and business
operations.
27
In April 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. On July 17, 2006, the Investor
converted $15,000 of the Debenture into 104,167 shares of the Company's common
stock.
Certain negative covenants in the Securities Purchase Agreement could
substantially impact our ability to raise funds from alternative sources in the
future. For example, for as long as the convertible debenture remains
outstanding and without the written consent of the debenture holder, the Company
(a) shall not directly or indirectly consummate any merger, reorganization,
restructuring, reverse stock split consolidation, sale of all or substantially
all of the Company's assets or any similar transaction or related transactions;
(b) shall not issue or sell shares of common stock or preferred stock without
consideration or for a consideration per share less than the bid price of the
common stock determined immediately prior to its issuance or issue any warrant,
option, right, contract, call, or other security or instrument granting the
holder thereof the right to acquire common stock without consideration or for a
consideration per share less than the bid price of the common stock determined
immediately prior to the issuance of such convertible security; (c) shall not
enter into any security instrument granting the holder a security interest in
any or all assets of the Company; (d) shall not file any registration statement
on Form S-8 except the Company may file one registration statement on Form S-8
for up to 2,500,000 shares of common stock and provided however, anyone
receiving shares pursuant to such permitted Form S-8 registration shall be
restricted from selling such shares for a period of ninety (90) days after the
registration statement becomes effective and (e) shall not, and shall cause each
of its subsidiaries not to, enter into, amend, modify or supplement, or permit
any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any of its
subsidiary's officers, directors, person who were officers or directors at any
time during the previous two years, stockholders who beneficially own five
percent (5%) or more of the Company's common stock, or Affiliates (as defined in
the Securities Purchase Agreement) or with any individual related by blood,
marriage, or adoption to any such individual or with any entity in which any
such entity or individual owns a five percent (5%) or more beneficial interest,
except for (i) customary employment arrangements and benefit programs on
reasonable terms, (ii) any investment in an Affiliate of the Company, (iii) any
agreement, transaction, commitment, or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such related party and (iv) any agreement transaction,
commitment, or arrangement which is approved by a majority of the disinterested
directors of the Company.
On February 1, 2006, we and the debenture holder mutually agreed to extend
the term of the debentures until December 1, 2007. In addition, we granted a
warrant to purchase 400,000 shares of our common stock to the debenture holder.
The warrant has a term of 2 years and is exercisable at $0.20 per share. We
agreed to register 3,571,429 shares of our common stock underlying the
conversion of the Debentures and the exercise of the warrant on a best efforts
basis not later than 30 days after we filed our Annual Report on Form 10-KSB/A
for the fiscal year ended December 31, 2005. On May 9, 2006 a registration
statement was filed with the Securities and Exchange Commission.
We believe that we can satisfy our cash requirements for the next twelve
(12) months based on our ability to enter into additional financing arrangements
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 COMMITMENTS
CONVERTIBLE LOANS - RELATED PARTY
A significant material liability for us for fiscal year 2006 is the aggregate
principal amount of $175,000 and $32,035 in accrued interest due and owing to a
related party in accordance with two convertible promissory notes (collectively,
the "Convertible Promissory Note(s)"). Previously, the aggregate principal
amounts of the Convertible Promissory Notes were $200,000 and $100,000,
respectively. During March 2005, we modified the terms of the Convertible
Promissory Notes: (i) $200,000 is due on March 31, 2007 and convertible into
shares of our common stock at $0.125 per share together with a warrant per share
to purchase our common stock at $0.25 per share for a period of two years; and
(ii) $100,000 is due on April 30, 2007 and convertible into shares of our common
stock at $0.125 per shares together with a warrant per share to purchase our
common stock at $0.25 per share for a period of two years. On June 28, 2005 and
September 30, 2005, the holders of the Convertible Promissory Notes partially
exercised the respective conversion rights. As at June 30, 2006, an aggregate
principal amount of $175,000 and interest in the amount of $32,035 remains due
and owing under the Convertible Promissory Notes.
LOAN - RELATED PARTY
A significant material liability for us for fiscal year 2006 is the aggregate
amount of $144,336 in principal due and owing to a related party (the "Loan").
The $144,336 Loan is evidenced by a promissory note with an interest rate of
0.8% per month compounded and was repayable during March 2006. As of the date of
this Quarterly Report, the Loan due date is being negotiated. Additionally,
during 2005, we borrowed $85,000 from this officer, which amount was repaid
during the six-month period ended June 30, 2006. At June 30, 2006, $3,455 in
interest was accrued on this loan.
CONSULTING AGREEMENT
A significant and estimated material liability for us for fiscal year 2006 is
the aggregate amount of $209,869 due and owing to Stephen Walters, our
President. In accordance with the terms of an agreement, effective April 2006,
we pay monthly to Mr. Walters an aggregate amount of $15,000 as compensation for
managerial and consulting services he provides.
CONVERTIBLE DEBENTURE
A significant material liability for us for fiscal year 2006 is the convertible
debenture payable in the amount of $250,000. On April 1, 2005, we entered into a
financing agreement with 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. On February 1, 2006 we agreed to extend the term of the
debentures to December 1, 2007 and issued 400,000 warrants at 0.20 per share
valid for two (2) years.
ACCRUED TAXES AND RELATED EXPENSES
A significant and estimated material liability for us for fiscal year 2006
is the aggregate amount of approximately $755,100 due and owing for Brazilian
payroll taxes and Social Security taxes.
Effective April 1, 2004, we entered into a payment program with the
Brazilian authorities whereby the Social Security ("INSS") taxes due and
applicable penalties and interests will be repaid over a period of up to 60
months. At December 31, 2005, approximately $297,000 of our INSS taxes are to be
repaid over periods from 20-50 months. The payment program requires us to pay a
monthly fixed amount of approximately $9,000. During February 2006 we entered
into a payment program for $30,000 of other taxes to be repaid over a period of
60 months. Discussions are currently ongoing for us to enter into a similar
payment plan for approximately $213,000 of tax liabilities. We made the first
payment as per the plan in April 2004 and have continued to make the required
payments.
29
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next
twelve (12) months with the exception of replacing and upgrading hardware during
the normal course of business.
OFF BALANCE SHEET ARRANGEMENTS
As of the date of this Registration Statement, 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.
DESCRIPTION OF BUSINESS
BUSINESS HISTORY AND DEVELOPMENT
Transax International Limited 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 (the "Board") 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
MEDLINK CONECTIVADE EM SAUDE LTDA
Medlink Conectividade Em Saude LTDA (f/k/s TDS Telecommunication Data
Systems Ltda "Medlink") was incorporated under the laws of Brazil on May 2,
1998, and is our wholly-owned subsidiary. Medlink 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 Tech"). MedLink
Tech holds the intellectual property developed by us and is responsible for
initiating research and development.
30
CURRENT BUSINESS OPERATIONS
Through our wholly-owned subsidiary Medlink Conectividade em Saude Ltda
(formerly f/k/a Telecommunication Data Systems Ltda. and referred to herein as
"Medlink"), we are an international provider of health information management
products (collectively, the "Health Information Management Products"), which are
specifically designed for the healthcare providers and health insurance
companies. We are dedicated to improving healthcare delivery by providing
hospitals, physician practices and health insurance companies with innovative
health information management systems to manage coding, compliance, abstracting
and record management processes. 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 were previously performed manually
(the "MedLink Solution").
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.
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.
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MEDLINK SOLUTION/MEDLINK WEB 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.
During fiscal year 2005, we released a new version of MedLink Solution that
is Health Insurance Portability and Accountability Act ("HIPAA") compliant,
which was developed in-house by our professional using the Microsoft.NET
platform (the "MedLink Web Solution"). Medlink became a member of the Microsoft
Partnership program, therefore, the initial design and specification of the
MedLink Web Solution was undertaken in collaboration with engineers from the
Microsoft Development and Training Center in Brazil. Our new MedLink Web
Solution offers all functionalities already available in our other capture
solutions, but in an Internet-based application that can be accessed by
providers through a standard Internet browser. The MedLink Web Solution allows
providers to capture medical and dental exams, procedures, therapies, visits,
laboratory tests and doctor referrals without complicated software conversion,
utilizing an existing Internet connection. MedLink Web Solution contains a
number of important security procedures following international standards,
utilizing an intrusion detection system and SSL security to encrypt
transactions. Additional security features are available at the application
level to individual users.
We believe that the MedLink Solution and the MedLink Web 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, 2005 and 2004, we installed
approximately 1,850 and 2,500 MedLink Solutions, respectively, into healthcare
provider locations throughout Brazil. At the end of 2005 we had approximately
5,350 solutions installed into healthcare provider locations throughout Brazil.
We anticipate that upon completion of compliance testing by an independent
third-party in the United States and subsequent certification, we will launch
our MedLink Web Solution to the United States market under our current
arrangements with Union Dental Corp. and to the general market. See "--Product
Market Target Strategy - Product Target Market - Union Dental Corp."
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.
32
Regardless of the capture method chosen, transactions are seamless and
efficient. The MedLink Solution's capture methods are:
o MedLink Solution POS Terminal;
o MedLink Solution Phone;
o MedLink Solution PC Windows
o MedLink Solution PC Net
o MedLink Solution Server Labs
o MedLink Solution Server Hospitals
o 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 twenty-four
(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.
We believe that this commonly used marketing and promotional model will be
suitable and used for initial market penetration. 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.
During fiscal year 2005, we attended the ValueRich Small Cap Financial Expo
held at the Jacob Javits Center in New York City. Our management made a
presentation during which our current operations, proprietary technology,
including our new cost-saving software MedLink Web Solutions, and growth
strategies were discussed. We believe that investment conferences are also an
important opportunity to connect with potential clients and the financial
community in a way that allows them to appreciate the benefits of our software
solutions up close. In addition, as of the date of this Prospectus, we are in
the process of scripting and producing a feature to be aired on CNN's Lou Dobbs
Show for a "Business Odyssey/Business & Beyond" and on Alexander Haig's Health
Journal Television series.
33
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 previously 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. On January 19, 2003, we established our wholly-owned subsidiary, Transax
Australia, to seek additional opportunities within Australia and New Zealand.
We are currently focused primarily on the marketing and sale of our Health
Information Management products in Brazil and have commenced to seek other
opportunities in certain South American countries. We believe that there is a
significant global market opportunity for our Healthcare Information Management
Products and services and software technology.
UNION DENTAL CORP.
During fiscal year 2005, we developed and demonstrated a "real time"
solution for authorization and adjudication of dental claims for Union Dental
Corp. ("UDC"), for the United States market. The solution we demonstrated in
association with UDC and on behalf of the Communication Workers of America Union
will be developed in three phases. Phase I consisted of: (i) processing of
certain business rules in order to guarantee that error free claims are
generated; (ii) real time calculation of the proper co-pay according to the
existing and future schedules as negotiated; and (iii) generation of the
electronic claims files to be submitted to the insurer in real-time transactions
standards. The final stage of the project is expected to lead to a real time
payment option for union dental providers following the adjudication process. As
of the date of this Prospectus, UDC is testing our product and, when completed,
we anticipate that it may lead to contract in the United State to provide "real
time" authorization and auto-adjudication of health claims within the expanding
union dental network of dental providers throughout the United States.
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.
CENTRO BRASILERIO DE INFORMATICA MEDICA S/A
On February 14, 2006, we entered into an agreement (the "CEBIM Agreement")
with Centro Brasilerio De Informatica Medica S/A, a Brazilian company ("CEBIM").
CEBIM is the developer of Brazil's Amigo premier medical practice management
system ("Amigo PMS"). Pursuant to the terms and provisions of the CEBIM
Agreement, CEBIM will integrate our MedLink Web Solution real time online claims
adjudication with the Amigo PMS software to provide users with a new version of
the Amigo PMS, including connectivity. As of the date of this Prospectus, we
anticipate that integration of the MedLink Web Solution is expected to be
completed by the end of second quarter 2006. We anticipate significant benefits
as a result of this strategic relationship. We believe we will obtain a minimum
of 2,000 additional capture solutions, which would represent an approximate 40%
increase. As a result of the anticipated increased solutions, we estimate up to
400,000 transaction per month may be generated through the Amigo PMS once the
integration is complete and rollout becomes fully operational. We believe that
this strategic partnership will generate additional revenue of approximately
$2,000,000 annually.
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 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.
34
We estimate that current installed basis is approximately 10,600 copies
sold directly to doctors, plus approximately 500 copies sold to corporations. We
believe that GENS has approximately 50% of the Brazilian market in practice
management systems. 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 Internet, 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 in
selected subjects.
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. During 2005 Mosaic Software,
Inc. was acquired by S1 Corporation of Atlanta, Georgia.
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.
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
around the world 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 Solution 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.
35
During fiscal year 2005, we developed a biometric (fingerprint reader)
version of our MedLink Solution on behalf of a major health insurance group in
Brazil, which is currently piloting the solution in that region (the "Biometric
Solution"). The Biometric Solution is a new biometric security technology, which
is rendered from the first time a patient visits a medical provider location.
The patient passes a magnetic card through a reader for verification and
then provides a fingerprint and his/her biometric identity is stored in the
MedLink Solution authorizer. The Biometric Solution will be used in conjunction
with magnetic stripe or smart cards issued by the heath insurer to its
policyholders in such a way that through the MedLink Solution real time
adjudication system, information on the magnetic stripe card and fingerprint
recognition must match each time a patient requires authorization and
adjudication of medical claims. We believe that this additional security for the
MedLink Solution will expedite patient authentication processes while
significantly enhancing the security of customer information transfer between
the health care provider and the insurer. As of the date of this Prospectus,
upon certification of the Biometric Solution, we will make the Biometric
Solution available as an option to our current and future clients.
MATERIAL AGREEMENTS
GOLDEN CROSS
On August 9, 2002, Medlink and Golden Cross, ("Golden Cross"), one of
Brazil's largest health insurance companies entered into an agreement (the
"Golden Cross Agreement"). The agreement 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 1500 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 3,900 MedLink Solutions in Golden Cross Provider's locations.
During fiscal years ended December 31, 2005 and 2004, we processed
2,800,000 and 1,900,000 transactions, respectively, for Golden Cross.
CAMED
On October 17, 2002, Medlink 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 31, 2005, we completed the installation
of more then 330 MedLink Solution POS terminals and 250 IVR Phone solutions. 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 six hundred (600) MedLink Solutions in Camed
providers' locations. During fiscal years ended December 31, 2005 and 2004, we
processed 400,000 and 220,000 transactions, respectively, for Camed.
BRADESCO HEALTH
On October 17, 2002 Medlink 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 (6) months at the request of Bradesco. On October 1, 2003, Medlink
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.During Fiscal
year ended December 31, 2005 we had installed over 1,000 POS terminals. Current
roll out plans indicate that we will install up to 3,500 solutions into the
Bradesco provider's network in order to achieve Bradesco's initial target of
1,000,000 transactions per month. During fiscal years ended December 31, 2005
and 2004, we processed 3,200,000 and 570,000 transactions, respectively, for
Bradesco.
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CORNELL CAPITAL PARTNERS
On October 13, 2004 and May 17, 2005, we entered into two (2) respective
Standby Equity Distribution Agreements, (collectively, the "Standby Equity
Distribution Agreements"), and associated documentation, including a promissory
note, with Cornell Capital Partners. The Standby Equity Distribution Agreements
were terminated on May 17, 2005 and January 13, 2006, respectively
(collectively, the "Termination Agreement(s)"). In accordance with the terms and
provisions of the Standby Equity Distribution Agreements we: (i) issued to
Cornell Capital Partners 1,202,779 shares of our common stock; and (ii) issued
to Monitor Capital, Inc. ("Monitor Capital") 125,000 shares of our common stock
as compensation for placement services. During fiscal year 2006, and in
accordance with the terms and provisions of the Termination Agreements: (i)
Cornell Capital Partners returned to us 601,884 shares of our common stock,
which have been returned to treasury, and had retained 600,889 shares of our
common stock, of which 60,000 are being registered in this offering; and (ii)
Monitor Capital returned to us 62,500 shares of our common stock, which have
been returned to treasury, and shall retain 62,500 shares of our common stock.
On January 13, 2006, we entered into the Investment Agreement with Cornell
Capital Partners. In accordance with the terms and provisions of the Investment
Agreement: (i) we sold to Cornell Capital Partners 16,000 shares of our Series A
Preferred for a total price of up to $1,600,000; (ii) the Series A Preferred
Shares are senior to all common stock and all series of preferred stock; (iii)
the holders of Series A Preferred Shares are entitled to receive dividends or
distribution on a pro rata basis in the amount of seven percent (7%) per year
which shall be paid in cash and shall be cumulative; and (iv) each Series A
Preferred Share can be converted into shares of our common stock equal to the
sum of the Liquidation Amount, which is defined as an amount equal to $100 per
shares of Series A Preferred, plus accrued but unpaid dividends thereon, divided
by the conversion price (which conversion price is defined to be equal to the
lower of (a) $0.192 or (b) eighty percent (80%) of the lowest daily volume
weighted average price of our common stock as determined by price quotations
from Bloomberg, LP during the ten (10) trading days immediately preceding the
date of conversion.
In connection with the Investment Agreement, the Parties entered into an
Investor Registration Rights Agreement (the "IRRA"), dated January 13, 2006,
pursuant to which the parties agreed that, in the event the Registration
Statement is not filed within thirty (30) days from the date the Company files
its Annual Report on Form 10-KSB for the year ended December 31, 2005 (the
"Filing Deadline") or is not declared effective by the SEC within ninety (90)
days of the date of the IRRA (the "Effective Deadline"), or if after the
Registration Statement has been declared effective by the SEC, sales cannot be
made pursuant to the Registration Statement, then as relief for the damages to
any holder of Registrable Securities (as defined in the IRRA) by reason of any
such delay in or reduction of its ability to sell the underlying shares of
common stock (which remedy shall not be exclusive of any other remedies at law
or in equity), the Company will pay as liquidated damages to the holder, at the
holder's option, either a cash amount or shares of the Company's common stock
equal to two percent (2%) of the Liquidation Amount (as defined above)
outstanding as liquidated damages for each thirty (30) day period or any part
thereof after the Filing Deadline or the Effective Deadline as the case may be.
Any liquidated damages payable hereunder shall not limit, prohibit or preclude
the holder from seeking any other remedy available to it under contract, at law
or in equity. The Company shall pay any liquidated damages hereunder within
three (3) business days of the holder making written demand. It shall also
become an event of default under the IRRA if the Registration Statement is not
declared effective by the SEC within one-hundred twenty (120) days from the date
of the IRRA. The Company initially filed its Registration Statement (of which
this Prospectus is made a part) with the SEC on May 9, 2006.
Certain negative covenants in the Investment Agreement could substantially
impact our ability to raise funds from alternative sources in the future. For
example, so long as any Series A Preferred Shares are outstanding, the Company
shall not, without the prior written consent of Cornell Capital Partners (a)
directly or indirectly consummate any merger, reorganization, restructuring,
reverse stock split consolidation, sale of all or substantially all of the
Company's assets or any similar transaction or related transactions; (b) incur
any indebtedness for borrowed money or become a guarantor or otherwise
contingently liable for any such indebtedness except for trade payables or
purchase money obligations incurred in the ordinary course of business; (c) file
any other registration statements on any form (including but not limited to
forms S-1, SB-2, S-3 and S-8); (d) issue or sell shares of common stock or
preferred stock without consideration or for a consideration per share less than
the bid price of the common stock determined immediately prior to its issuance
or issue any preferred stock, warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire common
stock without consideration or for a consideration per share less than the bid
price of the common stock determined immediately prior to the issuance of such
convertible security or (e) enter into any security instrument granting the
holder a security interest in any and all assets of the Company.
37
In connection with the Standby Equity Distribution Agreements, we entered
into the Promissory Note with Cornell Capital Partners in the principal amount
of $255,237. On January 13, 2006, Cornell Capital Partners surrendered to us the
Promissory Note in exchange for the issuance by us to Cornell Capital Partners
of $255,237 of Series A Preferred Shares. Thus, as of the date of this
Prospectus, the Promissory Note has been terminated and canceled.
ROI GROUP ASSOCIATES INC.
On March 20, 2006, we entered into a one-year consulting contract for
business development services with ROI Group Associates Inc. In connection with
the agreement, we agreed to issue 900,000 shares of common stock. We valued
these common shares at the fair market value on the dates of grant or $0.12 per
share based on the quoted trading price and recorded deferred consulting expense
of $108,000 to be amortized over the service period. In addition, we granted a
warrant to purchase 2,000,000 shares of the Company's common stock. The warrant
has a term expiring January 31, 2009. 1,000,000 of the warrants are exercisable
at $0.20 per share and 1,000,000 of the warrants are exercisable at $0.25 per
share. On May 17, 2006, the Company issued 600,000 common shares and on June 28,
2006, the Company issued 300,000 common shares in connection with this
consulting contract.
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.
38
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, Medlink, employs approximately thirty-six (36) staff and
contract personnel. As of the date of this Registration Statement, 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 PROPERTIES
Except as described above, we do not own any other real estate or other
properties. We lease office space in several locations as follows:
(i) United States: 8th Floor, 5201 Blue Lagoon Drive, Miami, Florida,33126
USA;
(ii) Brazil: Praia de Botafogo # 440, 4 andar, Botafogo 22250 - 040, Rio de
Janeiro, RJ Brazil;
(iii) Asia-Pacific: Level 30, Six Battery Road, Singapore, 049909;
(iv) Australia: Suite 22, Old Northern Road, Baulkham Hills, NSW 2153,
Australia; and
(v) Brazil: Av, Paulista, 726, conj. 1707, Bela Vista Sao Paulo, Brazil.
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").
On August 9, 2006, we entered into a Settlement Agreement with X-Clearing,
releasing all claims and counterclaims of the complaint without any admission of
liability for an out of court settlement of $37,250.
39
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.
Management has instructed counsel to vigorously defend all claims against
Transax and to aggressively pursue all counterclaims on behalf of the company.
While the result of litigation is difficult to predict, counsel has advised
Transax that the likelihood of sustaining any significant damages at trial is
minimal. Counsel has further advised management that there is a significant
likelihood that the case could settle prior to trial without significant
financial exposure to Transax.
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.
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
Mr. Stephen Walters 47 President, Chief Executive Officer
and Director
Ms. Laurie Bewes, BBA 54 Director
Mr. David M. Bouzaid 50 Director
Mr. Adam Wasserman 41 Chief Financial Officer
Mr. David Sasso 32 Vice-President
Investor Relations
Certain biographical information of our directors and officers is set forth
below.
STEPHEN WALTERS is our President/Chief Executive Officer and a director.
Mr. Walters currently is the President/Chief Executive Officer and a director of
Transax. Mr. Walters has more than fifteen (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. In the past thirty-six (36) months, Mr. Walters has raised
over $6,000,000 for investment in promising early stage technology companies
principally from North America and to expand their operations to the
Asia-Pacific region through the establishment of joint ventures with strategic
partners and licensing arrangements. 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 publicly traded company in
Canada.
LAURIE BEWES is one of our directors. Mr. Bewes currently is a director of
Transax. Mr. Bewes has a Bachelor of Business Administration (RMIT) and is a
member of the Australian Institute of Company Directors (MAICD). His business
background over the past twenty (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. Mr. Bewes has worked in various senior executive
positions for companies such as P & O, ANL and TNT.
DAVID BOUZAID is one of our directors. Mr. Bouzaid currently is a director
of Transax. Mr. Bouzaid has accumulated twenty-eight (28) years of experience in
the health insurance industry within Asia and the Australasia region. Mr.
Bouzaid specializes in New Business Development within the health insurance
industry and over the past four years he has gained a wealth of experience in
Global Healthcare Insurance. Mr. Bouzaid is currently regional director
(Asia-Pacific) for Interglobal Insurance Services Ltd. based in Bangkok,
Thailand.
40
ADAM WASSERMAN is our Chief Financial Officer. Mr. Wasserman has over
fifteen (15) years of public and private market experience in financial
reporting, accounting, budgeting and planning, mergers and acquisitions,
auditing, automated systems, banking relations, internal control, and corporate
governance. Throughout his career, Mr. Wasserman has been an integral member of
executive management responsible for financial reporting 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 successfully acted as an outsourced chief financial officer and
advisor to a diversified clientele in the wholesale, technology, distribution,
medical, retail and service industries in both the private and public sectors.
His responsibilities included supervising, training and evaluating senior staff
members, work paper review, auditing, maintaining client relations, preparation
of tax returns and preparation of financial statements and related footnotes.
Mr. Wasserman also has experience with filings under both the Securities Act and
the Exchange Act, including initial public offerings, annual reports, and
quarterly reports. 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 of New York 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.
DAVID SASSO is our Vice-President Investor Relations. Mr. Sasso has over
ten (10) years of public and private market experience in investor relations and
corporate governance. Throughout his career, Mr. Sasso has been an integral
member of executive management responsible for investor relations. Previously,
Mr. Sasso was the managing director of Marketing Services Group in New York
City, New York, as well as managing director of investor relations at KCSA
Public Relations Worldwide, representing several emerging growth companies.
Prior to KCSA Public Relations Worldwide, he was vice president at the Abernathy
MacGregor Group, a financial communications agency. Earlier in his career, Mr.
Sasso worked with Merrill Lynch in their worldwide headquarters. Mr. Sasso
earned a degree from the State University of New York at Albany, New York.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
As of the date of this Registration Statement, 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
SEC 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 of this Registration Statement, 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.
Our Board has considered whether the regulatory provision of non-audit
services is compatible with maintaining the principal independent accountant's
independence.
AUDIT COMMITTEE FINANCIAL EXPERT
As of the date of this Registration Statement, our Board has determined
that we do not have an audit committee financial expert nor do we have an audit
committee.
41
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, requires our directors and officers, and
the persons who beneficially own more than ten percent of our Common Stock, to
file reports of ownership and changes in ownership with the SEC. Copies of all
filed reports are required to be furnished to us pursuant to Rule 16a-3
promulgated under the Exchange Act. Based solely on the reports received by us
and on the representations of the reporting persons, we believe that these
persons have complied with all applicable filing requirements during the fiscal
year ended December 31, 2005.
COMPENSATION OF OFFICERS AND DIRECTORS
As of the date of this Registration Statement, 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 this Registration Statement, Mr. Walters derives remuneration from us as
compensation for consulting services rendered, Mr. Wasserman derived
remuneration from us as compensation for financial services rendered, and since
November 2005 Mr. Sasso derives remuneration from us as compensation for
investor service relations 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/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 $13,750 for a potential annual salary of
$165,000 plus reimbursement of expenses.
Mr. Walters derived remuneration from us as compensation under the terms
and provisions of the Walters Consulting Agreement. During fiscal year ended
December 31, 2005 and for the three months ended March 31, 2006, $190,000 and
$41,250 was incurred by us to Mr. Walters for management and consulting services
rendered, respectively, including a bonus of $25,000 in fiscal 2005. During
fiscal year ended December 31, 2005, Mr. Walters was paid $-0- by us for
consulting fees. During fiscal year ended December 31, 2005, an aggregate of
$162,000 in accrued consulting fees was settled by us by the issuance of
1,200,000 shares of our restricted common stock. During the three (3) months
ended March 31, 2006, Mr. Walters was paid $13,750 by us for management and
consulting fees. As of the date of this Registration Statement, an aggregate of
$195,819 remains due and owing to Mr. Walters for management and consulting fees
and expenses.
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) plus reimbursement of expenses.
Mr. Bewes derived remuneration from us as compensation under the terms and
provisions of the Bewes Consulting Agreement. As at December 31, 2004, an
aggregate of $10,565 in consulting fees was due and owing to Mr. Bewes which was
paid in 2006. During fiscal year ended December 31, 2005, $6,000 was incurred by
us to Mr. Bewes for consulting services rendered. During fiscal year ended
December 31, 2005 and for the three (3) months ended March 31, 2006,, Mr. Bewes
was paid $-0- and $24,000 by us, respectively, for consulting fees. As of the
date of this Registration Statement, an aggregate of $0 remains due and owing to
Mr. Bewes.
SASSO INVESTOR RELATIONS AGREEMENT
On January 17th 2006 we entered into a twelve month Consulting Agreement
with David Sasso for provision of Investor Relations services.
Pursuant to the terms of the Agreement Mr. Sasso is paid a monthly fee of
$7,000. Mr. Sasso agreed to act as our Vice President of Investor Relations and
Corporate Communications.
42
WASSERMAN FINANCIAL SERVICES AGREEMENT
We entered into an engagement letter with Adam Wasserman. Pursuant to the
terms of this engagement Letter, Mr. Wasserman is paid a monthly retainer fee of
$2,500 plus hourly fees at a standard rate of $95 per hour for services
performed. Mr. Wasserman agreed to act as our Chief Financial Officer and
principal accounting office. During fiscal year ended December 31, 2005 and for
the three (3) months ended March 31, 2006, accounting fees amounted to $40,616
and $11,157, respectively. As of the date of this Registration Statement, an
aggregate of $13,592 remains due and owing to Mr. Wasserman.
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 U.S. Dollars for an aggregate annual salary of $96,000, and
reimbursement of expenses. During fiscal year ended December 31, 2005 the
consulting services agreement was assigned to our Brazil subsidiary. An
aggregate of $96,000 in fees was incurred and paid to Mr. De Castro for services
rendered.
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, 2003, 2004 and 2005 from us.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY OTHER(1) UNDERLYING OPTIONS
--------------------------- ---- ------ -------- ------------------
Stephen Walters 2005 -- $190,000 500,000
(President and Chief 2004 -- $165,000 250,000
Executive Officer) 2003 -- $132,000 750,000
Laurie Bewes (Director) 2005 -- $ 6,000 225,000
2004 -- $ 25,600 125,000
2003 -- $ 0(1) 200,000
Adam Wasserman
(Chief Financial Officer) 2005 -- $ 40,616 150,000
2004 -- -- --
2003 -- -- --
----------
(1) Pursuant to contractual arrangements, either verbal or written, between us
and the respective officer.
STOCK OPTION/SAR GRANTS IN LAST FISCAL YEAR
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 400,000 -- $ 0.15 05/04/2010
100,000 41.66% 0.15 12/25/2010
Laurie Bewes 175,000 -- $ 0.15 05/04/2010
50,000 18.75% 0.15 12/25/2010
David Bouzaid 175,000 -- $ 0.15 05/04/2010
50,000 18.75% 0.15 12/25/2010
Adam Wasserman 150,000 12.50% $ 0.15 05/04/2010
43
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 March 31, 2006:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF NUMBER OF
SECURIITES TO BE SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OUTSTANDING UNDER EQUIPTY
PLAN CATEGORY OPTIONS, WARRANTS OPTIONS, WARRANTS COMPENSATION PLANS
EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS (A) (B) (C)
Stock Option Plan 1,425,000 $0.50 268,270
600,000 0.20
1,400,000 0.15 50,000
--------- ---------- ----------
Merger Agreement - Warrants 4,100,000 $1.00 --
--------- ---------- ----------
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS (A) (B) (C)
Warrants 2,000,000 $0.25 --
Warrants 6,302,500 $0.20 --
Warrants 4,500,000 $0.30 --
Total 20,327,500
==========
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 2,500,000
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.
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 ninety (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 sixty (60) calendar days (or up to
thirty (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 one (1) year of his death or such longer
period as our Board of Directors may determine.
44
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 exercise (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 of 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 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 SEC a registration statement on
Form S-8 for the registration of 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 December 31, 2005, we have granted 10,224,040 Stock Options and
cancelled 3,524,040 Stock Options. As of December 31, 2005, 4,450,000 Stock
Options were exercised. As at December 31, 2005, 3,225,000 Stock Options were
outstanding. During the three (3) months ended March 31, 2006, we granted
200,000 options. As at March 31, 2006, 3,425,000 Stock Options were outstanding.
As of the date of this Registration Statement, there are 31,980,726 shares
of common stock issued and outstanding. The following table sets forth
information as of the date of this Registration Statement, concerning: (i) each
person who is known by us to own beneficially more than five percent (5%) of our
outstanding common stock; (ii) each of our 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 sixty (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.
45
PRINCIPAL STOCKHOLDERS
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS(9)
-------------- ------------------------------------ --------- --------
Common Stock Stephen Walters 3,434,819(1)(2) 10.78%
Bali View Block A4/7
Jl. Cirendeu Raya 40 Jakarta Selatan
13419 Indonesia
Common Stock Laurie Bewes 1,008,333(1) 3.16%
429 Willawrong Road
Caringbah, Australia NSW 2229
Common Stock David Sasso 150,000(1)(5) *
1330 West Avenue #1703
Miami Beach, FL 33139
Common Stock David Bouzaid 720,000(1)(6) 2.26%
Jl. Bangka Selaton
12730
Indonesia
Common Stock Adam Wasserman 150,000(1)(7) *
1643 Royal Grove Way
Weston,
FL 33327 USA
COMMON STOCK ALL OFFICERS AND DIRECTORS AS A GROUP
(5 PERSONS) 14,181,940(1)(8) 44.49%
Common Stock Carlingford Investments Limited 8,718,788(1)(3) 27.35%
80 Raffles Place
#16-20 UOB Plaza II
Singapore 048624
-----------------
* Less than one percent (1%).
(1) These are restricted shares of common stock.
(2) This figure includes: (i) 1,934,819 shares of common stock held of record
by Mr. Walters; (ii) an assumption of the exercise by Mr. Walters 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; (iii) an
assumption of the exercise by Mr. Walters of 250,000 Stock Options to
acquire 250,000 shares of common stock at $0.20 per share expiring on
December 30, 2009; (iv) an assumption of the exercise by Mr. Walters of
400,000 Stock Options to acquire 400,000 shares of common stock at $0.15
per share expiring on May 4, 2010; (v) an assumption of the exercise by Mr.
Walters of 100,000 Stock Options to acquire 100,000 shares of common stock
at $0.15 per share expiring on December 25, 2010. As of the date of this
Prospectus, no Stock Options have been exercised.
(3) This figure includes: (i) 5,970,455 shares of common stock held of record
by Carlingford Investments Limited, over which Mr. Walters has sole voting
and disposition rights; (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.
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.
As of the date of this Prospectus, no warrants have been exercised.
(4) This figure includes: (i) 458,333 shares of common stock held of record;
(ii) an assumption of the exercise by Mr. Bewes of 200,000 Stock Options to
acquire 200,000 shares of common stock at $0.50 per share expiring on
August 14, 2008; (iii) an assumption of the exercise by Mr. Bewes of
125,000 Stock Options to acquire 125,000 shares of common stock at $0.20
per share expiring on December 30, 2009; (iv) an assumption of the exercise
by Mr. Bewes of 175,000 Stock Options to acquire 175,000 shares of common
stock at $0.15 per share expiring on May 4, 2010; and (v) an assumption of
the exercise by Mr. Bewes of 50,000 Stock Options to acquire 50,000 shares
of common stock at $0.15 per share expiring on December 25, 2010. As of the
date of this Prospectus, no Stock Options have been exercised.
46
(5) This figure includes: (i) 50,000 shares of common stock held of record; and
(ii) an assumption of the exercise by Mr. Sasso of 100,000 Stock Options to
acquire 100,000 shares of common stock at $0.15 per share expiring on
February 5, 2011.
(6) This figure includes: (i) 170,000 shares of common stock held of record;
and (ii) an assumption of the exercise by Mr. Bouzaid of 200,000 Stock
Options to acquire 200,000 shares of common stock at $0.50 per share
expiring on August 14, 2008; (iii) an assumption of the exercise by Mr.
Bouzaid of 125,000 Stock Options to acquire 125,000 shares of common stock
at $0.20 per share expiring on December 30, 2009; (iv) an assumption of the
exercise by Mr. Bouzaid of 175,000 Stock Options to acquire 175,000 shares
of common stock at $0.15 per share expiring on May 4, 2010; and (v) an
assumption of the exercise by Mr. Bouzaid of 50,000 Stock Options to
acquire 50,000 shares of common stock at $0.15 per share expiring on
December 25, 2010.
(7) This figure includes an assumption of the exercise by Mr. Wasserman of
150,000 Stock Options to acquire 150,000 shares of common stock at $0.15
per share expiring on May 4, 2010.
(8) This figure includes: (i) 8,583,607 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 2,850,500 Stock Options to acquire 2,850,000
shares of common stock.
(9) Applicable percentage of ownership is based on 31,980,726 shares of common
stock outstanding as of October 4, 2006, together with securities
exercisable or convertible into shares of common stock within sixty (60)
days of October 2, 2006, for each stockholder. Beneficial ownership is
determined in accordance with the rules of the SEC 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 sixty
(60) days of October 2, 2006 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.
There are no arrangements or understandings among the entities and
individuals referenced above or their respective associates concerning election
of directors or any other matters which may require shareholder approval.
MARKET PRICE OF AND DIVIDENDS
ON THE COMPANY'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
MARKET INFORMATION
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 bid
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.
2006 HIGH BID LOW BID
First Quarter $ 0.16 $ 0.10
Second Quarter $ 0.21 $ 0.10
Third Quarter $ 0.19 $ 0.12
2005 HIGH BID LOW BID
First Quarter $ 0.18 $ 0.12
Second Quarter $ 0.14 $ 0.10
Third Quarter $ 0.26 $ 0.10
Fourth Quarter $ 0.20 $ 0.13
2004 HIGH BID LOW BID
First Quarter $ 0.38 $ 0.16
Second Quarter $ 0.26 $ 0.07
Third Quarter $ 0.11 $ 0.03
Fourth Quarter $ 0.17 $ 0.07
HOLDERS
As of October 4, 2006, Transax had approximately two hundred seventy-seven
(277) shareholders of record.
47
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.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Prospectus and during fiscal year ended December 31,
2005, to provide capital, we sold stock in private placement offerings, issued
stock in exchange for our debts or pursuant to contractual agreements as set
forth below.
CORNELL CAPITAL PARTNERS
On January 13, 2006, in accordance with the terms and provisions of the
Investment Agreement, we issued to Cornell Capital Partners: (i) 8,000 Series A
Preferred Shares in exchange for the surrender of the Promissory Note; (ii) a
five (5) year Warrant exercisable into 2,500,000 shares of our common stock at
an exercise price of $0.30; and (iii) a five (5) year Warrant exercisable into
2,500,000 shares of our common stock at an exercise price of $0.20. On May 8,
2006, the Company issued the remaining 8,000 shares of Series A Preferred for a
purchase price equal to $800,000 in accordance with the Investment Agreement.
DIRECTOR COMPENSATION
On December 26, 2005, we entered into a settlement agreement with David
Bouzaid, one of our officers/directors, regarding the settlement of an aggregate
amount of $6,000 due and owing pursuant to services provided by Mr. Bouzaid (the
"Director Settlement Agreement"). Pursuant to the terms and provisions of the
Settlement Agreement: (i) we agreed to settle $6,000 due and owing to Mr.
Bouzaid by issuing 40,000 shares of our restricted common stock at $0.15 per
share; and (ii) Mr. Bouzaid agreed to accept the issuance of the aggregate
40,000 shares of restricted common stock as full and complete satisfaction of
the debt due and owing. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
INVESTOR RELATION CONTRACT
On December 8, 2005, we entered into an investor relations contract (the
"Investor Relations Contract") with David Sasso, one of our directors.
Pursuant to the terms and provisions of the Investor Relations Contract, we
agreed to issue 50,000 shares of our restricted common stock at $0.15 per share
to Mr. Sasso as compensation for investor related services provided and valued
at $7,500. The issuance was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of the Securities Act.
CONVERTIBLE LOANS
On September 30, 2005, the holder of certain convertible loans exercised
the conversion right. Accordingly, we issued 600,000 shares of our restricted
common stock at the conversion price of $0.125 per share and 600,000 warrants to
purchase shares of our restricted common stock at $0.25 per share for the
conversion of principal balance of $75,000. We also issued an additional 77,968
shares of restricted common stock to settle $9,746 in interest due on the
convertible loans. The recipients are sophisticated investors who have such
knowledge and experience in financial, investment and business matters that they
are capable of evaluating the merits and risks of the prospective investment in
our securities. The recipients are accredited investors. The issuance was exempt
from registration under the Securities Act in reliance on an exemption provided
by Section 4(2) of the Securities Act.
DIRECTOR SETTLEMENT AGREEMENTS
On December 26, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $45,000 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $45,000 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 300,000
shares of our restricted common stock at $0.15 per share; and (ii) Mr. Walters
agreed to accept the issuance of an aggregate of 300,000 shares of our
restricted common stock as full and complete satisfaction of the aggregate
amount of $45,000. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
48
On September 27, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $34,000 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $34,000 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 200,000
shares of our restricted common stock at $0.17 per share; and (ii) Mr. Walters
agreed to accept the issuance of an aggregate of 200,000 shares of our
restricted common stock as full and complete satisfaction of the aggregate
amount of $34,000. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On June 28, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $33,000 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $33,000 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 300,000
shares of our restricted common stock at $0.11 per share; and (ii) Mr. Walters
agreed to accept the issuance of an aggregate of 300,000 shares of our
restricted common stock as full and complete satisfaction of the aggregate
amount of $33,000. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On March 28, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $50,500 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $50,500 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 400,000
shares of our restricted common stock at $0.126 per share; and (ii) Mr. Walters
agreed to accept the issuance of an aggregate of 400,000 shares of our
restricted common stock as full and complete satisfaction of the aggregate
amount of $50,500. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
CONSULTING AGREEMENTS
On July 15, 2005, we entered into a consulting services agreement (the
"Consulting Agreement A") with Geoff Eiten ("Eiten"). Pursuant to the terms and
provisions of the Consulting Agreement A, we agreed to issue 200,000 shares of
our restricted common stock at $0.15 per share to Eiten as compensation for
consulting services provided and valued at $30,000. The issuance was exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of the Securities Act.
On March 21, 2005, we entered into a consulting services agreement (the
"Consulting Agreement B") with Aiden Capital Management ("ACM").Pursuant to the
terms and provisions of the Consulting Agreement B, we agreed to issue 150,000
shares of our restricted common stock at $0.14 per share to ACM as compensation
for consulting services provided and valued at $21,000. The issuance was exempt
from registration under the Securities Act in reliance on an exemption provided
by Section 4(2) of the Securities Act.
On January 14, 2005, we entered into a consulting services agreement (the
"Consulting Agreement C") with Empire Relations Group ("ERG"). Pursuant to the
terms and provisions of the Consulting Agreement C, we agreed to issue 100,000
shares of our restricted common stock at $0.16 per share to ERG as compensation
for consulting services provided and valued at $16,000. The issuance was exempt
from registration under the Securities Act in reliance on an exemption provided
by Section 4(2) of the Securities Act.
On January 14, 2005, we entered into a six (6) month consulting services
agreement (the "Consulting Agreement D") with Mirador Consulting Ltd.
("Mirador"). Pursuant to the terms and provisions of the Consulting Agreement D,
we agreed to issue 400,000 shares of our restricted common stock at $0.16 per
share to Mirador as compensation for consulting services provided and valued at
$42,667. The issuance was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of the Securities Act.
However, we terminated the Consulting Agreement D and cancelled 200,000 of
the 400,000 shares of restricted common stock that were previously issued under
the terms of the Consulting Agreement D.
49
On March 20, 2006, we entered into a one (1) year consulting contract for
business development services with ROI Group Associates Inc. In connection with
the agreement, we agreed to issue 900,000 shares of common stock. We valued
these common shares at the fair market value on the dates of grant or $0.12 per
share based on the quoted trading price and recorded deferred consulting expense
of $108,000 to be amortized over the service period. In addition, we granted a
warrant to purchase 2,000,000 shares of the Company's common stock. The warrant
has a term expiring January 31, 2009. 1,000,000 of the warrants are exercisable
at $0.20 per share and 1,000,000 of the warrants are exercisable at $0.25 per
share. On May 17, 2006, the Company issued 600,000 common shares and on June 28,
2006, the Company issued 300,000 shares in connection with this consulting
contract.
RELATED PARTY LOANS
On December 31, 2005 we issued 50,000 shares of restricted common stock to
settle $6,250 in interest due on certain related party notes. The recipients are
sophisticated investors who have such knowledge and experience in financial,
investment and business matters that they are capable of evaluating the merits
and risks of the prospective investment in our securities. The recipients are
accredited investors. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On June 28, 2005, the holder of certain related party notes exercised the
conversion feature at a conversion price of $0.125 per share. Accordingly, we
issued 400,000 shares of our restricted common stock and 400,000 warrants to
purchase shares of our restricted common stock at $0.25 per share for conversion
of the principal balance of $50,000. We also issued an additional 35,770 shares
of our restricted common stock to settle $4,471 in interest due on these related
party notes. The issuance was exempt from registration under the Securities Act
in reliance on an exemption provided by Section 4(2) of the Securities Act.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of the current month-to-month contractual relations
between us and certain of our executive officers as described above, as of the
date of this Prospectus, we have not entered into any contractual arrangements
with related parties other than those transactions resulting primarily from
advances made by related parties to us. Our Board has not adopted or approved
any policy regarding possible future transactions with related third parties.
Our executive officers and directors 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. Our
executive officers and directors may have other business interests to which they
may devote a portion of their time. Certain conflicts of interest, therefore,
may arise between us and our 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 us.
Our executive officers and directors intend to resolve such conflicts in
the best interests of us. Moreover, the executive officers and directors will
devote his time to our affairs as they deem necessary.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Transax is authorized to issue 100,000,000 shares of common stock, par
value $0.0001 per share, of which 31,980,726 shares were issued and outstanding
on October 4, 2006. The securities being offered hereby are common stock, with
one (1) 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 Cornell Financing will be, fully paid and non assessable.
Shareholders are entitled to receive such dividends as may be declared by
the Board 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.
50
PREFERRED STOCK
Transax is authorized to issue 20,000,000 shares of preferred stock, of
which 16,000 Series A Preferred Shares were issued and outstanding at October 2,
2006.
With respect to the payment of dividends and other distributions on the
capital stock of the Company, including distribution of the assets of the
Company upon liquidation, the Series A Preferred Shares shall be senior to the
common stock of the Company and senior to all other series of preferred shares.
The holders of Series A Preferred Shares shall be entitled to receive
dividends or distributions on a pro rata basis according to their holdings of
shares of Series A Preferred Shares in the amount of seven percent (7%) per year
(computed on the basis of a 365-day year and the actual days elapsed). Dividends
shall be paid in cash and shall be cumulative.
Upon any liquidation, dissolution, or winding up of the Company, whether
voluntary or involuntary (collectively, a "Liquidation"), before any
distribution or payment shall be made to any of the holders of common stock or
any series of preferred shares, the holders of Series A Preferred Shares shall
be entitled to receive out of the assets of the Company, whether such assets are
capital, surplus or earnings, an amount equal to One Hundred Dollars ($100) per
share of Series A Preferred Shares (the "Liquidation Amount") plus all
accumulated and unpaid dividends thereon, for each share of Series A Preferred
Shares held by them.
The Series A Preferred Shares shall have registration rights pursuant to
the Investor Registration Rights Agreement (the "IRRA"), dated January 13, 2006,
by and between the Company and Cornell Capital. Pursuant to the IRRA, the
Parties agreed that, in the event the Registration Statement is not filed within
thirty (30) days from the date the Company files its Annual Report on Form
10-KSB for the year ended December 31, 2005 (the "Filing Deadline") or is not
declared effective by the SEC within ninety (90) days of the date of the IRRA
(the "Effective Deadline"), or if after the Registration Statement has been
declared effective by the SEC, sales cannot be made pursuant to the Registration
Statement, then as relief for the damages to any holder of Registrable
Securities (as defined in the IRRA) by reason of any such delay in or reduction
of its ability to sell the underlying shares of common stock (which remedy shall
not be exclusive of any other remedies at law or in equity), the Company will
pay as liquidated damages to the holder, at the holder's option, either a cash
amount or shares of the Company's common stock equal to two percent (2%) of the
Liquidation Amount (as defined above) outstanding as liquidated damages for each
thirty (30) day period or any part thereof after the Filing Deadline or the
Effective Deadline as the case may be. Any liquidated damages payable hereunder
shall not limit, prohibit or preclude the holder from seeking any other remedy
available to it under contract, at law or in equity. The Company shall pay
liquidated damages hereunder within three (3) business days of the holder making
written demand. It shall also become an event of default under the IRRA if the
Registration Statement is not declared effective by the SEC within one-hundred
twenty (120) days from the date of the IRRA. The Company initially filed its
Registration Statement (of which this Prospectus is made a part) with the SEC on
May 9, 2006.
Each Series A Preferred Share shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share (subject to
certain adjustments), at the office of the Company's transfer agent, pursuant to
the Irrevocable Transfer Agent Instructions dated January 13, 2006 ("Transfer
Agent Instructions") for the Series A Preferred Shares into such number of fully
paid and non-assessable shares of common stock equal to the sum of (i) the
Liquidation Amount of the Series A Preferred Shares plus (ii) all accrued but
unpaid dividends thereon, divided by the Conversion Price. The "Conversion
Price" shall be equal to the lower of (i) $0.192 (the "Fixed Conversion Price"),
or (ii) eighty percent (80%) of the lowest daily volume weighted average price
("VWAP") of the common stock during the ten (10) trading days immediately
preceding the date of conversion. The VWAP shall be determined using price
quotations from Bloomberg, L.P.
The Company at its option shall have the right to redeem (unless otherwise
prevented by law), with three (3) business days advance written notice (the
"Redemption Notice", any shares of Series A Preferred Shares provided that the
closing bid price of the Company's common stock, as reported by Bloomberg, LP,
is less than the Fixed Conversion Price at the time of the Redemption Notice.
The Company shall pay an amount equal to one hundred fifteen percent (115%) of
the Liquidation Amount, plus accrued but unpaid dividends thereon.
The Series A Preferred Shares shall not have any voting rights except as
provided under the laws of the State of Colorado.
51
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 a convertible Debenture, were issued in the
original principal amount of $250,000 to Investor. The Debenture accrues
interest at a rate of five percent (5%) per year and mature two (2) years from
the issuance date. The Debenture is convertible at the holder's option any time
up to maturity at a conversion price equal to the lower of (i) one hundred
twenty percent (120%) of the closing bid price of the common stock on the date
of the Debenture or (ii) eighty (80%) of the lowest closing bid price of the
common stock for the five (5) trading days immediately preceding the conversion
date.
At maturity, the Debenture will automatically convert into shares of common
stock at a conversion price equal to the lower of (i) one hundred twenty (120%)
of the closing bid price of the common stock on the date of the debentures or
(ii) eighty (80%) of the lowest closing bid price of the common stock for five
(5) trading days immediately preceding the conversion date.
CONVERTIBLE PROMISSORY NOTE
At June 30, 2006, the Company had aggregate loans payable for $175,000 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, $75,000 of principal due under the convertible loans is due
on March 31, 2007 and is convertible into the Company's common stock at $0.125
per share. The remaining principal of $100,000 is due on April 30, 2007 and is
convertible into the Company's common stock at $0.125 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 $0.25
per share for a period of two years from the conversion date. The interest rate
of the loan is 12% per annum compounded monthly. At March 31, 2006, interest due
on these two loans amounted to $26,799 and the aggregate principal amount due is
$175,000. During the three (3) months ended March 31, 2006 and 2005, the Company
incurred $5,178 and $8,877, respectively, in interest expense related to these
two loans. In the 2005 period, the Company did not incur beneficial conversion
charges on these convertible loans because the conversion price was equivalent
to the average offering price for equity when these loans became convertible.
COMMON STOCK PURCHASE WARRANTS
As of October 2, 2006, there were an aggregate of 16,902,500 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) 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;
(iii) 2,000,000 warrants convertible into 2,000,000 shares of common stock at
$0.30 per share expiring on December 30, 2006; (iv) 2,500,000 Warrants
convertible into 2,500,000 shares of common stock at $0.30 per share expiring
January 13, 2011, (v) 400,000 Warrants convertible into 400,000 shares of common
stock at $0.25 per share expiring June 27, 2007, (vi) 600,000 Warrants
convertible into 600,000 shares of common stock at $0.25 per share expiring
September 30, 2007, (vii) 2,500,000 Warrants convertible into 2,500,000 shares
of common stock at $0.20 per share expiring January 13, 2011; (viii) 400,000 SHG
Warrants convertible into 400,000 shares of common stock at $0.20 per share; and
(ix) 2,000,000 warrants convertible into 2,000,000 shares of common stock
expiring January 31, 2009, 1,000,000 of which are exercisable at $0.20 per share
and 1,000,000 of which are exercisable at $0.25 per share.
OPTIONS
As of October 4, 2006, there was an aggregate of 3,625,000 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.
52
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. 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.
Our officers and directors are accountable to our shareholders as
fiduciaries, which means such officers and directors are required to exercise
good faith and integrity in handling our affairs. A shareholder may be able to
institute legal action on behalf of himself and all other similarly situated
shareholders to recover damages where we have 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 equity interest due to a breach of a fiduciary duty by one of our
officers or directors 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 us. We 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 our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the 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 us of
expenses incurred or paid by one of our directors, officers or controlling
persons 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, we 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.
53
We have has no agreements with any of our 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 any of
our directors or executive officers as to which indemnification is being sought.
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.
EXPERTS
The audited Financial Statements included in this Prospectus and elsewhere
in this Registration Statement for the fiscal years ended December 31, 2005 and
December 31, 2004 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 SEC 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 SEC. 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 SEC's
Public Reference Room at 100 F Street N.E., Washington, D.C. 20549-0213. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC 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 SEC.
54
FINANCIAL STATEMENTS
CONTENTS
Page
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Consolidated Balance Sheet (Unaudited) As of June 30, 2006.......... F-2
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2006 and 2005.......... F-3
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2006 and 2005.................... F-4
Notes to Unaudited Consolidated Financial Statements................. F-5 - 19
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
Report of Independent Registered Public Accounting Firm.............. F-20
Consolidated Balance Sheet........................................... F-21
Consolidated Statements of Operations and Comprehensive Income....... F-22
Consolidated Statements of Changes in Stockholders' Deficit.......... F-23
Consolidated Statements of Cash Flows................................ F-24
Notes to Consolidated Financial Statements...........................F-25 - F-55
F-1
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash .......................................................................... $ 482,813
Accounts receivable (net of allowance for doubtful accounts of $0) ............ 399,824
Prepaid expenses and other current assets ..................................... 202,893
------------
TOTAL CURRENT ASSETS ....................................................... 1,085,530
SOFTWARE DEVELOPMENT COSTS, net ................................................. 358,514
PROPERTY AND EQUIPMENT, net ..................................................... 733,359
DEFERRED DEBT OFFERING COSTS .................................................... 14,348
OTHER ASSETS .................................................................... 4,800
------------
TOTAL ASSETS ............................................................... $ 2,196,551
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of loans payable .............................................. $ 261,291
Accounts payable and accrued expenses ......................................... 1,266,771
Due to related parties ........................................................ 229,766
Warrant liability ............................................................. 1,000,783
Convertible feature liability ................................................. 1,830,231
Loan payable - related party .................................................. 147,791
Convertible loan - related party .............................................. 207,035
------------
TOTAL CURRENT LIABILITIES .................................................. 4,943,668
LOANS PAYABLE, NET OF CURRENT PORTION ........................................... 36,828
CONVERTIBLE DEBENTURE PAYABLE, NET .............................................. 156,250
CONVERTIBLE FEATURE LIABILITY ................................................... 268,918
ACCOUNTS PAYABLE AND ACCRUED EXPENSES, NET OF CURRENT PORTION ................... 508,203
------------
TOTAL LIABILITIES .......................................................... 5,913,867
------------
STOCKHOLDERS' DEFICIT:
Series A convertible preferred stock, no par value; 16,000 shares authorized;
16,000 shares issued and outstanding; liquidation preference $1,600,000 ....... 1,478,971
Common stock $.00001 par value; 100,000,000 shares authorized;
31,876,559 shares issued and outstanding ...................................... 318
Paid-in capital ............................................................... 7,865,461
Accumulated deficit ........................................................... (12,872,724)
Deferred compensation ......................................................... (238,332)
Other comprehensive income - Cumulative foreign currency translation adjustment 48,990
------------
TOTAL STOCKHOLDERS' DEFICIT ................................................ (3,717,316)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................ $ 2,196,551
============
The accompanying notes are an integral part of these unaudited consolidated financial statements
F-2
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES .............................................. $ 1,034,844 $ 861,023 $ 2,015,902 $ 1,501,431
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of product support services .................... 426,864 355,580 818,416 569,976
Compensation and related benefits ................... 220,263 215,571 431,509 384,552
Professional fees ................................... 45,826 58,980 115,546 71,145
Management and consulting fees - related parties .... 116,745 41,250 225,586 74,965
Investor relations .................................. 119,037 790 143,399 15,635
Depreciation and amortization ....................... 56,215 59,027 121,928 103,604
General and administrative .......................... 273,885 185,589 505,410 376,446
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ......................... 1,258,835 916,787 2,361,794 1,596,323
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS .................................. (223,991) (55,764) (345,892) (94,892)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Other income (expense) .............................. (26,126) - (48,475) 10,514
Foreign exchange gain (loss) ........................ (6,593) 23,932 (9,468) 26,434
Debt settlement and offering costs .................. - - (153,671) -
Loss from derivative liabilities .................... (935,631) (15,804) (1,184,734) (15,804)
Interest expense .................................... (101,227) (75,617) (233,478) (135,835)
Interest expense - related party .................... (8,691) (43,788) (18,372) (56,277)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES ............................. (1,078,268) (111,277) (1,648,198) (170,968)
------------ ------------ ------------ ------------
NET LOSS .............................................. (1,302,259) (167,041) (1,994,090) (265,860)
DEEMED AND CUMULATIVE PREFERRED STOCK DIVIDEND ........ (834,214) - (1,634,214) -
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS .......... $ (2,136,473) $ (167,041) $ (3,628,304) $ (265,860)
============ ============ ============ ============
COMPREHENSIVE LOSS:
NET LOSS ............................................ $ (1,302,259) $ (167,041) $ (1,994,090) $ (265,860)
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain (loss) 3,100 (75,051) 34,839 8,874
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS .................................. $ (1,299,159) $ (242,092) $ (1,959,251) $ (256,986)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED ..................................... $ (0.04) $ (0.01) $ (0.06) $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 31,876,559 29,491,294 31,530,852 29,240,092
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements
F-3
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
---------------------------
2006 2005
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(1,994,090) $ (265,860)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 121,928 103,604
Amortization of software maintenance costs ................ 104,110 66,524
Beneficial interest ....................................... - 31,250
Stock-based compensation and consulting ................... 117,833 80,041
Grant of warrants in connection with debt extension ....... 46,686 31,200
Foreign exchange gain ..................................... - (18,100)
Amortization of deferred debt issuance costs .............. 116,551 4,783
Amortization of debt discount ............................. 62,500 31,250
Loss from derivative liabilities .......................... 1,184,734 15,804
Changes in assets and liabilities:
Accounts receivable ....................................... (53,182) (199,528)
Prepaid expenses and other current assets ................. (37,764) (49,031)
Other assets .............................................. (2,400) (2,400)
Accounts payable and accrued expenses ..................... (100,579) 379,253
Accrued interest payable, related party ................... 9,495 24,777
Accrued interest payable .................................. - 5,237
Due to related parties .................................... 834 1,191
Accounts payable and accrued expenses - long-term ......... 112,369 11,050
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............ (310,975) 251,045
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs ....................... (137,060) (103,358)
Acquisition of property and equipment ........................ (207,753) (381,046)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .......................... (344,813) (484,404)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Series A preferred stock ........... 1,223,734 -
Repayment of advances from related party ..................... - (35,000)
Repayments under capital lease obligations ................... (16,289) (20,962)
Proceeds from convertible debenture .......................... - 336,738
Proceeds from loan payable ................................... 6,614 141,982
Proceeds from loan - related party ........................... (85,000) -
Repayment of loan - related party ............................ - (15,084)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................... 1,129,059 407,674
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................ 1,667 (114,184)
----------- -----------
NET INCREASE IN CASH ........................................... 474,938 60,131
CASH, BEGINNING OF PERIOD ...................................... 7,875 4,090
----------- -----------
CASH, END OF PERIOD ............................................ $ 482,813 $ 64,221
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ....................................... $ 95,656 $ 15,084
=========== ===========
Cash paid for income taxes ................................... $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt and accrued interest ............ $ - $ 50,500
=========== ===========
Common stock and options issued for services ................. $ 35,334 $ 101,000
=========== ===========
Loan paid with preferred stock proceeds ..................... $ 255,237 $ -
=========== ===========
Derivative liabilities recorded for deemed preferred
stock dividend .............................................. $ 800,000 $ -
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements
F-4
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
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, 2005 and notes thereto
contained in the Report on Form 10-KSB/A 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,
2006 are not necessarily indicative of the results for the full fiscal year
ending December 31, 2006.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America. The consolidated
financial statements include the Company and its wholly-owned subsidiaries,
Transax Limited, Medlink Conectividade em Saude Ltda ("Medlink") (formerly TDS
Telecommunication Data Systems Ltda.), Transax (Australia) Pty Ltd., and Medlink
Technologies, Inc. All material intercompany balances and transactions have been
eliminated in the consolidated financial statements.
Organization
------------
Transax International Limited was incorporated in the State of Colorado in 1999.
The Company, primarily through its wholly-owned subsidiary, Medlink
Conectividade em Saude Ltda ("Medlink") (formerly TDS Telecommunication Data
Systems Ltda. through April 4, 2006), 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, variables used to determine stock-based
compensation, and the valuation of derivative liabilities.
F-5
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Revenue recognition
-------------------
The Company's revenues, 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.
Substantially all of the Company's revenues are derived from the processing of
applications by healthcare providers for approval of patients for healthcare
services from insurance carriers. The Company's software or hardware devices
containing the Company's software are installed at the healthcare provider's
location. The Company offers transaction services to authorize and adjudicate
identity of the patient and obtains "real time" approval for any necessary
medical procedure from the insurance carrier. The Company's transaction-based
solutions provide remote access for healthcare providers to connect with
contracted insurance carriers. Transaction services are provided through
contracts with insurance carriers and others, which specify the services to be
utilized and the markets to be served. The Company's clients are charged for
these services on a per transaction basis. Pricing varies depending type of
transactions being processed under the terms of the contract for which services
are provided. Transaction revenues are recognized in the period in which the
transactions are performed.
Comprehensive Loss
------------------
Other comprehensive loss currently includes only foreign currency translation
adjustments.
F-6
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 (Medlink -
Brazilian Real, Transax Australia, - Australian dollar and Transax and the
Company - USD) are included in the Statement of Operations as incurred.
Stock-based compensation
------------------------
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognizes the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements. The recognition of this cost will be made on the modified
prospective basis, which applies to new stock-based awards issued after December
31, 2005, and for awards modified, purchased or cancelled after that date.
Prior to January 1, 2006, the Company accounted for stock-based employee
compensation plans (including shares issued under its stock option plans) in
accordance with APB Opinion No. 25 and followed the pro forma net income, pro
forma income per share, and stock-based compensation plan disclosure
requirements set forth in the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"). 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:
Six months ended
June 30, 2005
----------------
Net loss as reported ...................... $(265,860)
Less: total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effect .................................... (50,871)
---------
Pro forma net loss ........................ $(316,731)
=========
Basic and diluted loss per share:
As reported ......................... $ (.01)
=========
Pro forma ........................... $ (.01)
=========
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%.
F-7
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Loss per common share
---------------------
Basic loss per share is computed by dividing net 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. Diluted loss per common share is not
presented because it is anti-dilutive, although the common stock equivalents may
dilute earnings in the future. The Company's common stock equivalents at June
30, 2006 include the following:
Options ........................................ 3,425,000
Warrants ....................................... 16,902,500
Preferred stock ................................ 10,204,082
Convertible loans payable - related party ...... 1,400,000
Debenture payable .............................. 1,644,737
----------
Total ..................................... 33,576,319
==========
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. 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 June 30, 2006,
the allowance for doubtful accounts was $0.
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 revenues to two major customers during each of the six month
periods ended June 30, 2006 and 2005. These revenues accounted for approximately
91%, or $1,844,500 and 94% or $1,414,000 of the total revenues for the six
months ended June 30, 2006 and 2005, respectively. For the six months ended June
30, 2006, these two major customers accounted for 52% and 39% of net revenues,
respectively. At June 30, 2006, these two major customers accounted for 52% and
39%, respectively, of the total accounts receivable balance outstanding.
F-8
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Concentrations of Credit Risk (continued)
-----------------------------------------
The Company maintains its cash in accounts with major financial institutions in
the United States, Australia and Brazil in the form of demand deposits and money
market accounts. Deposits in these banks may exceed the amounts of insurance
provided on such deposits. As of June 30, 2006, the Company had no deposits
subjected to such risk. We have not experienced any losses on our deposits of
cash and cash equivalents.
Accounting for Conversion Features and Warrants Issued with Preferred Stock
---------------------------------------------------------------------------
The Company issued $1,600,000 of convertible series A preferred stock, which
contained an Embedded Conversion Feature ("ECF") and warrants to purchase common
stock. In accordance with the guidance in paragraph 12 of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," it was necessary to evaluate separation of the
conversion option from the debt host and account for it separately as a
derivative if the conversion option met certain criteria. The Conversion option
met all three criteria of paragraph 12: (1) the conversion feature is not
clearly and closely related to the host component, (2) the convertible
instrument is not accounted for at fair value, and (3) the embedded conversion
option meets the definition of a derivative in paragraph 6 of SFAS No. 133.
To assess whether or not the ECF would be classified as stockholders' equity if
it were freestanding, management considered the guidance in EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock." In assessing whether or not the conversion
option would be classified as equity or a liability if it were freestanding,
management determined whether or not the series A convertible preferred stock is
considered "conventional." EITF 00-19 and EITF 05-2, "The Meaning of
Conventional Convertible Debt Instruments in issue No. 00-19," defines
conventional convertible debt as debt whereby the holder will, at the issuer's
option, receive a fixed amount of shares or the equivalent amount of cash as
proceeds when he exercises the conversion option. Management determined that
series A convertible preferred stock was not "conventional," and the Company
considered all aspects of EITF 00-19, paragraphs 12-33.
This caused the ECF of the series A convertible preferred stock to be classified
as a derivative financial instrument under SFAS No. 133. In addition, all
warrants to purchase common stock issued with the preferred stock were then
deemed to be classified as derivative instruments under SFAS No. 133. The
accounting treatment of derivative financial instruments requires that the
Company record the ECF and warrants at their fair values as of each reporting
date. Any change in fair value is recorded as non-operating, non-cash income or
expense at each reporting date. The derivatives were valued using the
Black-Scholes option pricing model and are classified in the consolidated
balance sheet as current liabilities at June 30, 2006.
Reclassifications
-----------------
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported financial position, results of operations or cash flows.
F-9
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Recent accounting pronouncements
--------------------------------
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140" ("SFAS 155"). SFAS 155 permits fair value
re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation and clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of Statement 133. SFAS 155 establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation and clarifies that concentrations
of credit risk in the form of subordination are not embedded derivatives.
Lastly, SFAS 155 amends SFAS 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective in the first fiscal year that begins after
September 15, 2006. The Company is still assessing the impact, if any, on its
consolidated financial position, results of operations and cash flows.
NOTE 2 - RELATED PARTY TRANSACTIONS
Convertible Loans Payable
-------------------------
At June 30, 2006, the Company had aggregate loans payable for $175,000 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, $75,000 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. At June 30, 2006, interest due
on these two loans amounted to $32,035 and the aggregate principal amount due is
$175,000. During the six months ended June 30, 2006 and 2005, the Company
incurred $10,414 and $17,852, respectively, in interest expense related to these
two loans. In the 2005 period, the Company did not incur beneficial conversion
charges on these convertible loans because the conversion price was equivalent
to the average offering price for equity when these loans became convertible.
Due to Related Parties
----------------------
For the six months ended June 30, 2006 and 2005, the Company incurred $86,250
and $82,500 in management fees to an officer/director of the Company,
respectively. Effective April 2006, the Company's board of directors agreed to
increase the compensation of this officer/director from $13,750 per month to
$15,000 per month. At June 30, 2006, $209,869 in management fees and other
expenses was outstanding to this officer/director and is included in due to
related parties on the accompanying balance sheet. The amounts due is unsecured,
non-interest bearing and is payable on demand.
For the six months ended June 30, 2006, the Company incurred $25,902 in
accounting fees to a company whose officer is an officer of the Company. At June
30, 2006, $12,552 in these fees was outstanding to this officer and is included
in due to related parties on the accompanying balance sheet. The amount due is
unsecured, non-interest bearing and is payable on demand.
F-10
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
Due to Related Parties (continued)
----------------------------------
For the six months ended June 30, 2006, the Company incurred $40,600 in
consulting fees to an officer of the Company. At June 30, 2006, $7,345 in these
fees was outstanding to this officer and is included in due to related parties
on the accompanying balance sheet. The amount due is unsecured, non-interest
bearing and is payable on demand. Additionally, the Company granted this officer
100,000 options to purchase 100,000 shares of the Company's common stock at
$0.15 per share. The options expire on February 5, 2011. The fair value of this
option grant was estimated at $12,834 on the date of grant using the
Black-Scholes option-pricing model. In connection with these options, the
Company recorded stock-based compensation expense of $12,834, which has been
included in management and consulting fees - related party on the accompanying
consolidated statement of operations (See note 4).
For the six months ended June 30, 2006, the Company incurred $60,000 in
consulting fees to a director of the Company.
Loan Payable - Related Party
----------------------------
On March 5, 2004, the Company borrowed Euro 115,000 ($144,366 at June 30, 2006)
from an officer of the Company for working capital purposes. The loan accrues
0.8% interest compounded monthly, had an initial term of twelve months, and is
repayable quarterly in arrears. The officer agreed to extend this loan for an
additional twelve months until March 2006. The due date of this loan is
currently being negotiated and is payable on demand. Additionally, during 2005,
the Company borrowed $85,000 from this officer, which was repaid in 2006. This
loan accrued interest at 9.6% per annum. For the six months ended June 30, 2006
and 2005, the Company incurred $7,330 and $7,425, respectively, in interest
related to these loans. At June 30, 2006, $3,455 in interest was accrued on
these loans and the aggregate principal and interest amount due is $144,336 and
is included in loan payable - related party on the accompanying balance sheet.
NOTE 3 - FINANCING ARRANGEMENTS
Loan Payable
------------
On October 25, 2004, the Company and Cornell Capital Partners ("Cornell")
entered into a Securities Purchase Agreement, pursuant to which Cornell
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 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. In January 2006, in connection with a preferred stock offering, this
note was repaid.
The Company's subsidiary, Medlink, has several loans and credit lines with
financial institutions. The loans require monthly installments, bear interest at
rates ranging from 30% to 50% per annum, are secured by certain receivables and
assets of Medlink, and are due through November 2007. At June 30, 2006, loans
payable to these financial institutions aggregated $298,119.
F-11
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 3 - FINANCING ARRANGEMENTS (CONTINUED)
Convertible 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.
The Company determined that the conversion feature of the convertible debentures
represents an embedded derivative since the debentures are convertible into a
variable number of shares upon conversion. Accordingly, the convertible
debentures are not considered to be conventional debt under EITF 00-19 and the
embedded conversion feature must be bifurcated from the debt host and accounted
for as a derivative liability. The Company believes that the aforementioned
embedded derivative meets the criteria of SFAS 133 and EITF 00-19, and should be
accounted for as separate derivative with a corresponding value recorded as a
liability. Accordingly, the fair value of this derivative instrument has been
recorded as a liability on the consolidated balance sheet with the corresponding
amount recorded as a discount to the debentures. Such discount will be accreted
from the date of issuance to the maturity date of the debentures. The change in
the fair value of the liability for derivative contracts will be credited to
other income/(expense) in the consolidated statements of operations. On February
1, 2006, the Company and the debenture holder mutually agreed to extend the term
of the debentures until December 1, 2007. In addition, the Company granted a
warrant to purchase 400,000 shares of the Company's common stock to the
debenture holder. The warrant has a term of 2 years and is exercisable at $0.20
per share. The fair value of this warrant grant was estimated at $46,686 on the
date of grant using the Black-Scholes option-pricing model. In connection with
these warrants, on February 1, 2006, the Company initially recorded debt
settlement expense of $46,686 and a warrant liability of $46,686. At the end of
each reporting period, the Company revalues the warrant and convertible feature
derivative liabilities. For the six months ended June 30, 2006, after
adjustment, the Company recorded a loss on valuation of the derivative liability
of $19,022. Amortization of debt discount for the six months ended June 30, 2006
was $62,500 and is included in interest expense. Amortization of debt offering
costs for the six months ended June 30, 2006 was $9,566 and is included in
interest expense. At June 30, 2006, the estimated fair values of the convertible
feature derivative liabilities and warrants were $268,918 and $65,302,
respectively, and are reflected as liabilities on the accompanying consolidated
balance sheet.
The Company agreed to register, on a best efforts basis, 3,571,429 shares of its
common stock underlying the conversion of the Debentures and the exercise of the
warrant not later than 30 days after the Company files its annual report on Form
10-KSB for the fiscal year ended December 31, 2005.
The convertible debenture liability is as follows at June 30, 2006:
Convertible debentures payable .................. $ 250,000
Less: unamortized discount on debentures ........ (93,750)
---------
Convertible debentures, net ..................... $ 156,250
=========
F-12
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 3 - FINANCING ARRANGEMENTS (CONTINUED)
Standby Equity Distribution Agreement
-------------------------------------
On October 25, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell. Pursuant to the Standby Equity Distribution Agreement,
the Company could, at its discretion, periodically sell to Cornell 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, whereby the
Standby Equity Distribution Agreement, dated October 25, 2004, and the related
Registration Rights Agreement, Placement Agent Agreement and Escrow Agreement
were terminated.
Upon execution of the Termination Agreement, the Company entered into a new
Standby Equity Distribution Agreement with Cornell on May 17, 2005. On January
13, 2006, the Company entered into a Termination Agreement with Cornell (the
"SEDA Termination Agreement") pursuant to which the Parties terminated the
Standby Equity Distribution Agreement, the Registration Rights Agreement and the
Placement Agent Agreement, each dated as of May 17, 2005. In connection with the
Standby Equity Distribution Agreement, in December 2004, the Company issued to
Cornell 1,202,779 shares of the Company's Common Stock (the "Investor's Shares")
and in connection with the Placement Agent Agreement, the Company issued to
Monitor Capital, Inc., as Placement Agent, 125,000 shares of the Company's
Common Stock (the "Placement Agent's Shares").
In December 2004, the Company valued the common shares issued to Cornell at the
fair market value on the dates of grant of $0.1664 per share, or $200,000, based
on the quoted trading price for the stock. At December 31, 2005, the commitment
fee was deemed to be a deferred offering cost on the accompanying balance sheet.
Pursuant to the SEDA Termination Agreement, Cornell shall retain 600,889 of the
Investor's Shares and return the other 601,890 of the Investor's Shares to the
Company to be cancelled. Monitor Capital, Inc. shall retain 62,500 of the
Placement Agent's Shares and return the other 62,500 of the Placement's Agent's
Shares to the Company to be cancelled. In connection with the termination of the
SEDA, the Company received and cancelled 664,390 shares of its common stock with
a fair market value of $93,015 and for the six months ended June 30, 2006,
recorded debt offering cost expense of $106,985 on the accompanying consolidated
statement of operations.
NOTE 4 - STOCKHOLDERS' DEFICIT
Preferred Stock
---------------
On January 13, 2006, the Company's Board of Directors approved the creation of
16,000 shares of Series A Convertible Preferred Stock having the following
rights, preferences and limitations:
(a) each share has a stated value of $100 per share and no par value;
(b) With respect to the payment of dividends and other distributions on the
capital stock of the Company, including distribution of the assets of
the Company upon liquidation, the Series A Preferred Shares shall be
senior to the common stock of the Company, par value $.00001 per share
and senior to all other series of Preferred Shares (the "Junior
Stock").
F-13
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (continued)
---------------------------
(c) The holders of Series A Preferred Shares shall be entitled to receive
dividends or distributions on a pro rata basis according to their
holdings of shares of Series A Preferred Shares in the amount of seven
percent (7%) per year (computed on the basis of a 365-day year and the
actual days elapsed). Dividends shall be paid in cash. Dividends shall
be cumulative. No cash dividends or distributions shall be declared or
paid or set apart for payment on the Common Stock in any calendar year
unless cash dividends or distributions on the Series A Preferred Shares
for such calendar year are likewise declared and paid or set apart for
payment. No declared and unpaid dividends shall bear or accrue
interest.
(d) Each share of Series A Preferred Shares shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of
such shares, into such number of fully paid and non-assessable shares
of Common Stock equal to the sum of (i) the Liquidation Amount of the
Series A Preferred Shares plus (ii) all accrued but unpaid dividends
thereon, divided by the Conversion Price, as defined. The Conversion
Price" shall be equal to the lower of (i) $0.192 ( the "Fixed
Conversion Price"), or (ii) eighty percent (80%) of the lowest daily
volume weighted average price ("VWAP") of the Common Stock during the
ten (10) Trading Days immediately preceding the date of conversion (the
"Market Conversion Price"). The VWAP shall be determined using price
quotations from Bloomberg, LP. "Trading Day" shall mean any day during
which the Nasdaq OTC Bulletin Board shall be open for trading.
Additionally, each share of Series A Preferred Shares shall
automatically convert into shares of Common Stock at the Conversion
Price then in effect immediately upon the consummation of the
occurrence of a stock acquisition, merger, consolidation or
reorganization of the Company into or with another entity through one
or a series of related transactions, or the sale, transfer or lease of
all or substantially all of the assets of the Company. Each share of
Series A Preferred Shares shall automatically convert into shares of
Common Stock at the Conversion Price then in effect immediately upon
the third anniversary of the date of Investment Agreement.
(e) The Series A Preferred Shares shall not have any voting rights except
as provided under the laws of the state of Colorado.
(f) The shares are not subject to redemption. However, the Company, at its
option, shall have the right to redeem (unless otherwise prevented by
law), with three (3) business days advance written notice (the
"Redemption Notice"), any shares of Series A Preferred Shares provided
that the closing bid price of the of the Company's Common Stock, as
reported by Bloomberg, LP, is less than the Fixed Conversion Price at
the time of the Redemption Notice. The Company shall pay an amount
equal to One Hundred Fifteen percent (115%) of the Liquidation Amount,
plus accrued but unpaid dividends thereon (the "Redemption Amount").
The Company shall deliver to the holder the Redemption Amount on the
third (3rd) business day after the Redemption Notice. After receipt of
a Redemption Notice, the holder shall be entitled to continue to
convert outstanding shares of Series A Preferred Shares until the
Redemption Price is received, subject to the conversion limitations as
defined.
F-14
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (continued)
---------------------------
On January 13, 2006, the Company entered into an Investment Agreement with
Cornell and, together with the Company, (the "Parties"), pursuant to which the
Company shall sell to Cornell up to 16,000 shares of Series A Convertible
Preferred Stock, no par value per share, (the "Series A Preferred Shares") which
shall be convertible, at Cornell's discretion, into shares of the Company's
common stock, par value $.00001 per share (the "Common Stock") for a total price
of up to $1,600,000.
Of the 16,000 Series A Preferred Shares to be sold to Cornell, 8,000 Series A
Preferred Shares were sold to Cornell on January 13, 2006 and had a purchase
price of $800,000, which consisted of $255,237 from the surrender of a
Promissory Note (as described below) and $544,763 consisting of new funding,
from which the Company received net proceeds of $470,734 after the payment of
placement fees and expenses of $74,029. On May 8, 2006, the Company sold the
remaining 8,000 shares of Series A Preferred Shares to Cornell, at the purchase
price of $800,000 and received net proceeds of $728,000 (net of placement fees
of $72,000).
In connection with the sale of the Series A Preferred Shares, on January 13,
2006, the Parties agreed that Cornell would surrender the Promissory Note issued
by the Company to Cornell on May 17, 2005, in the principal amount of $255,237,
in exchange for $255,237 of Series A Preferred Shares. As of January 13, 2006,
the full amount outstanding under the Promissory Note was $255,237, plus accrued
and unpaid interest of $0. As a result of the Parties' agreement, the Promissory
Note was retired and canceled. The Parties also agreed to terminate the
Securities Purchase Agreement and the Investor Registration Rights Agreement,
each dated as of October 25, 2004, as well as the Pledge and Escrow Agreements,
each dated as of October 21, 2004, that were entered into by the Parties in
connection with the issuance of the Promissory Note.
On January 13, 2006, the Company also issued to Cornell warrants to purchase up
to 5,000,000 shares of Common stock. The first warrant issued to Cornell for
2,500,000 shares of Common Stock at an exercise price of $0.30 per share, shall
terminate after the five (5) year anniversary of the date of issuance. The
second warrant issued to Cornell was for 2,500,000 shares of Common Stock at an
exercise price of $0.20 per share, and shall terminate after the five (5) year
anniversary of the date of issuance.
Subject to the terms and conditions of an Investor Registration Rights
Agreement, the Company was required to prepare and file, no later than the
earlier of 30 days from the date the Company files its Form 10-KSB for the year
ended December 31, 2005 or the date that such filing is due (the "Scheduled
Filing Deadline"), with the SEC, a registration statement on Form S-1 or SB-2
under the 1933 Act (the "Initial Registration Statement") for the registration
for the resale by the Investor of the underlying common stock and warrants,
including at least 25,000,000 shares underlying the Series A Preferred Shares
and 5,000,000 Warrant Shares. The Company shall cause the Registration Statement
to remain effective until all of the Registerable Securities have been sold. The
Company shall use its best efforts (i) to have the Initial Registration
Statement declared effective by the SEC no later than ninety (90) days from the
date hereof (the "Scheduled Effective Deadline") and (ii) to insure that the
Initial Registration Statement and any subsequent Registration Statement remains
in effect until all of the Registerable Securities have been sold, subject to
the terms and conditions of this Agreement. It shall be an event of default
hereunder if the Initial Registration Statement is not declared effective by the
SEC within one hundred twenty (120) days (July 29, 2006). The Company filed its
initial registration statement on Form SB-2 on May 9, 2006.
In the event the Registration Statement is not declared effective by the SEC on
or before the Scheduled Effective Deadline, or if after the Registration
Statement has been declared effective by the SEC, sales cannot be made pursuant
to the Registration Statement, the Company will pay as liquidated damages (the
F-15
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT (CONTINUED)
Preferred Stock (continued)
---------------------------
"Liquidated Damages") to the holder, at the holder's option, either a cash
amount or shares of the Company's Common Stock equal to two percent (2%) of the
Liquidation Amount (as defined in the Certificate of Designation of Series A
Convertible Preferred Shares) outstanding as Liquidated Damages for each thirty
(30) day period or any part thereof after the Scheduled Filing Deadline or the
Scheduled Effective Deadline as the case may be.
In accordance with SFAS No. 133, the Company is required to record the fair
value of the ECF and warrants as a liability. In connection with the initial
sale of the Series A Preferred Stock, the initial estimated fair value of the
ECF and warrants was $588,363 and $689,000, respectively, which reduced the
carrying value of the Series A Preferred Stock to zero. The $477,363 excess
value of the fair values of the ECF and warrants over the gross proceeds
received from the Preferred Stock was charged to other expense upon recording.
The initial fair values of the ECF and warrants were estimated using the
Black-Scholes option pricing model with the following assumptions: estimated
volatility of 222%; risk-free interest rate of 4.26%; estimated life of 5 years
and no dividends. In connection with the final sale of the Series A Preferred
Stock on May 8, 2006, the initial estimated fair value of the ECF was
$1,003,135, which reduced the carrying value of the Series A Preferred Stock to
zero. The $203,135 excess value of the fair values of the ECF over the gross
proceeds received from the Preferred Stock was charged to other expense upon
recording. The initial fair value of this ECF was estimated using the
Black-Scholes option pricing model with the following assumptions: estimated
volatility of 228%; risk-free interest rate of 5.13%; estimated life of 2.7
years and no dividends. At June 30, 2006, the Company revalued the EFC and
warrants resulting in an additional loss on derivative liability of $485,214 due
to an increase in the Company's stock price. At June 30, 2006, the fair value of
the ECF and warrants were estimated using the Black-Scholes option pricing model
with the following assumptions: estimated volatility of 228%; risk-free interest
rate of 5.16%; estimated life of 1.5 to 4.55 years and no dividends. At June 30,
2006, the estimated fair value of the ECF and warrants was $1,830,231 and
$935,481, respectively, and are reflected as derivative liabilities on the
accompanying consolidated balance sheet.
At June 30, 2006, cumulative and unpaid Series A preferred dividends amounted to
$34,214 and are in included in accounts payable and accrued expenses on the
accompanying consolidated balance sheet.
Common Stock
------------
In connection with the termination of the SEDA, the Company received and
cancelled 664,390 shares of its common stock with a fair market value of
$93,015.
On March 20, 2006, the Company entered into a one-year consulting contract for
business development services. In connection with the agreement, the Company
issued 900,000 shares of common stock. The Company valued these common shares at
the fair market value on the dates of grant or $0.12 per share based on the
quoted trading price and recorded deferred consulting expense of $108,000 to be
amortized over the service period. In addition, the Company granted a warrant to
purchase 2,000,000 shares of the Company's common stock. The warrant has a term
expiring January 31, 2009. 1,000,000 of the warrants are exercisable at $0.20
per share and 1,000,000 of the warrants are exercisable at $0.25 per share. The
fair value of this warrant grant was estimated at $221,998 or $.11 per warrant
on the date of grant using the Black-Scholes option-pricing model. In connection
with these warrants, the Company recorded deferred consulting expense, which
will be amortized over the contract period. For the six months ended June 30,
2006, the Company recorded consulting expense of $91,666 in connection with the
issuance of these common shares and warrants.
F-16
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Options
-------------
On January 26, 2006, the Company's Board of Directors, pursuant to written
unanimous consent, appointed David Sasso as the Vice President of Investor
Relations and Corporate Communications of the Company effective January 26,
2006. On January 26, 2006, the Company granted Mr. Sasso 100,000 options to
purchase 100,000 shares of the Company's common stock at $0.15 per share. The
options expire on February 5, 2011. The fair value of this option grant was
estimated at $12,834 on the date of grant using the Black-Scholes option-pricing
model. In connection with these options, the Company recorded stock-based
compensation expense of $12,834, which has been included in management and
consulting fees - related party on the accompanying consolidated statement of
operations.
On February 5, 2006, the Company granted options to purchase 100,000 shares of
common stock to a consultant for business development services rendered. The
options are exercisable at $0.15 per share and expire on February 5, 2011. The
fair value of this option grant was estimated at $13,333 on the date of grant
using the Black-Scholes option-pricing model. In connection with these options,
the Company recorded consulting expense of $13,333.
A summary of the status of the Company's outstanding stock options as of June
30, 2006 and changes during the period then ended are as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Balance at December 31, 2005 ......... 3,225,000 $ 0.31
Granted .............................. 200,000 0.15
Exercised ............................ - -
Forfeited ............................ - -
--------- ------
Balance at June 30, 2006 ............. 3,425,000 $ 0.30
========= ======
Options exercisable at end of period 3,425,000 $ 0.30
========= ======
Weighted average fair value of options
granted during the period ............ $ 0.15
The following table summarizes information about employee and consultants stock
options outstanding at June 30, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price June 30, 2006 Life (Years) Price June 30, 2006 Price
-------- -------------- ------------ -------- -------------- --------
$ 0.50 1,425,000 2.12 $ 0.50 1,425,000 $ 0.50
$ 0.20 600,000 3.50 0.20 600,000 0.20
$ 0.15 1,400,000 4.16 0.15 1,400,000 0.15
-------------- -------- -------------- --------
3,425,000 $ 0.30 3,425,000 $ 0.30
============== ======== ============== ========
As of June 30, 2006, there are no unrecognized compensation costs since all
options granted under the stock option plans are completely vested.
F-17
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Options (continued)
-------------------------
The valuation of the option grants is estimated as of the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants during the six months ended June 30, 2006: expected volatility of 222%;
risk free interest rate ranging from 3.75% to 4.26%; expected life of 5 years
and annual dividend rate of 0%.
In utilizing the Black-Scholes, the Company calculates volatility using the
historical volatility of our stock, the expected term is based on our estimate
of when the options will be exercised, and the risk free interest rate is based
on the U.S. Treasury yield in effect at the time of the grant.
Stock Warrants
--------------
On February 1, 2006, the Company and the debenture holder (See Note 3 -
Debenture Payable) mutually agreed to extend the term of the debentures until
December 1, 2007. In addition, the Company granted a warrant to purchase 400,000
shares of the Company's common stock to the debenture holder. The warrant has a
term of 2 years and is exercisable at $0.20 per share. The Company agreed to
register 3,571,429 shares of its common stock underlying the conversion of the
Debentures and the exercise of the warrant not later than 30 days after the
Company files its annual report on Form 10-KSB for the fiscal year ended
December 31, 2005. The fair value of this warrant grant was estimated at $46,686
on the date of grant using the Black-Scholes option-pricing model. In connection
with these warrants, the Company recorded debt settlement expense of $46,686.
A summary of the status of the Company's outstanding stock warrants as of June
30, 2006 and changes during the period then ended is as follows:
Number of Weighted Average
Warrants Exercise Price
--------- ----------------
Balance at December 31, 2005 ......... 9,502,500 $ 0.57
Granted .............................. 7,400,000 0.24
Exercised ............................ - -
Forfeited ............................ - -
---------- ------
Balance at June 30, 2006 ............. 16,902,500 $ 0.43
========== ======
Options exercisable at end of period . 16,902,500 $ 0.43
========== ======
Weighted average fair value of options
granted during the period ............ $ 0.24
The following information applies to all warrants outstanding at June 30, 2006:
Warrants Outstanding Warrants Exercisable
------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ------------ -------- --------- --------
$ 1.00 4,100,000 2.13 $ 1.00 4,100,000 $ 1.00
$ 0.30 4,500,000 2.75 $ 0.30 4,500,000 $ 0.30
$ 0.20 6,302,500 3.55 $ 0.20 6,302,500 $ 0.20
$ 0.25 2,000,000 1.87 $ 0.25 2,000,000 $ 0.25
F-18
TRANSAX INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 5 - 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 ended June 30,
2006 2005
----------- -----------
Net revenues to unaffiliated customers:
Brazil ........................ $ 2,015,902 $ 1,501,431
----------- -----------
Operating Expenses:
Brazil ........................ 1,664,023 1,216,321
USA ........................... 666,595 336,595
Australia ..................... 2,315 7,176
Mauritius ..................... 28,861 36,231
----------- -----------
2,361,794 1,596,323
----------- -----------
Loss from operations .................. (345,892) (94,892)
----------- -----------
Other income (expenses):
Brazil ........................ (203,689) (59,242)
USA ........................... (1,444,509) (119,676)
Australia ..................... - 7,950
----------- -----------
(1,648,198) (170,968)
----------- -----------
Net loss as reported .................. $(1,994,090) $ (265,860)
----------- -----------
NOTE 6 - GOING CONCERN
Since inception, the Company has incurred cumulative net losses of $12,872,724,
and at June 30, 2006 has a stockholders' deficit of $3,717,316 and has a working
capital deficit of $3,858,138. 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 2006 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.
Furthermore, since fiscal 2000, the Company has been deficient in the payment of
Brazilian payroll taxes and Social Security taxes. At June 30, 2006, these
deficiencies (including interest and fines) amounted to approximately $815,850.
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 7 - SUBSEQUENT EVENT
On July 17, 2006, in connection with the conversion of $15,000 of the
convertible debenture outstanding, the Company issued 104,167 shares of common
stock.
F-19
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, 2005 and the related
consolidated statements of operations and comprehensive income, stockholders'
deficit, and cash flows for each of the two years in the period then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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, 2005 and the results
of their operations and their cash flows for each of the two years in the period
then ended 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 $9.2 million, a working capital deficiency of
approximately $2.1 million and a net capital deficiency of approximately $1.6
million at December 31, 2005. 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.
As described in Note 14 to the consolidated financial statements, the Company
restated its consolidated financial statements as of and for the year ended
December 31, 2005.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
March 24, 2006, except for Note 14
as to which the date is June 26, 2006.
F-20
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
(As Restated - See Note 14)
ASSETS
CURRENT ASSETS:
Cash ........................................................... $ 7,875
Accounts receivable (Net of allowance for doubtful
accounts of $0) ............................................... 321,240
Prepaid expenses and other current assets ...................... 165,129
-----------
TOTAL CURRENT ASSETS ........................................ 494,244
SOFTWARE DEVELOPMENT COSTS, net .................................. 325,564
PROPERTY AND EQUIPMENT, net ...................................... 647,534
DEFERRED DEBT OFFERING COSTS ..................................... 223,914
OTHER ASSETS ..................................................... 2,400
-----------
TOTAL ASSETS ................................................ $ 1,693,656
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligation .................... $ 16,289
Current portion of loan payable ................................ 546,742
Accounts payable and accrued expenses .......................... 1,340,906
Due to related parties ......................................... 228,932
Loan payable - related party ................................... 233,710
Convertible loans from related party ........................... 196,621
-----------
TOTAL CURRENT LIABILITIES ................................... 2,563,200
DEBENTURE PAYABLE, NET OF UNAMORTIZED DISCOUNT OF $156,250 ....... 93,750
CONVERSION FEATURE LIABILITY ..................................... 268,512
ACCOUNTS PAYABLE AND ACCRUED EXPENSES, net of current portion .... 395,834
-----------
TOTAL LIABILITIES ........................................... 3,321,296
-----------
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;
31,640,949 shares issued and outstanding ....................... 316
Paid-in capital ................................................ 7,602,313
Accumulated deficit ............................................ (9,244,420)
Other comprehensive income - Cumulative foreign currency
translation adjustment ........................................ 14,151
-----------
TOTAL STOCKHOLDERS' DEFICIT ................................. (1,627,640)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................. $ 1,693,656
===========
The accompanying notes are an integral part of these
audited consolidated financial statements
F-21
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(As Restated - See Note 14)
FOR THE YEAR ENDED DECEMBER 31,
2005 2004
------------ ------------
REVENUES ................................... $ 3,380,150 $ 1,199,900
------------ ------------
OPERATING EXPENSES:
Cost of product support services ......... 1,620,730 710,393
Payroll and related benefits ............. 414,222 364,465
Professional fees ........................ 130,936 127,374
Management fees - related parties ........ 235,081 338,893
Investor relations ....................... 128,332 108,985
Depreciation and amortization ............ 250,511 56,211
General & administrative ................. 763,722 619,742
------------ ------------
TOTAL OPERATING EXPENSES .............. 3,543,534 2,326,063
------------ ------------
LOSS FROM OPERATIONS ....................... (163,384) (1,126,163)
------------ ------------
OTHER INCOME (EXPENSES):
Other income (expense) ................... (18,044) 51,095
Foreign exchange gain (loss) ............. 22,734 (20,570)
Loss on derivative liability ............. (18,512)
Interest expense ......................... (407,976) (605,661)
Interest expense - related party ......... (179,303) (90,956)
------------ ------------
TOTAL OTHER EXPENSES .................. (601,101) (666,092)
------------ ------------
NET LOSS ................................... (764,484) (1,792,255)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized foreign currency
translation gain (loss) ................. 76,803 (117,328)
------------ ------------
COMPREHENSIVE LOSS ......................... $ (687,681) $ (1,909,583)
============ ============
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED .......................... $ (0.03) $ (0.10)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
- BASIC AND DILUTED ....................... 30,008,516 17,879,799
============ ============
The accompanying notes are an integral part of these
audited consolidated financial statements
F-22
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2005 and 2004
(As Restated - See Note 14)
Accumulated Total
Common Stock Other Stockholders'
------------------- Share Paid-in Accumulated Deferred Comprehensive Equity
Shares Amount Subscriptions Capital Deficit Compensation Income (Loss) [Deficit]
---------- ------ ------------- ----------- ----------- ------------ ------------- -------------
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 in
connection with
financing arrangements 1,327,779 13 - 94,182 - (94,195) - -
Stock options and
warrants granted ..... - - - 502,369 - - - 502,369
Beneficial conversion - - - 31,250 - - - 31,250
Comprehensive Loss:
Net loss for period - - - - (1,792,255) - - -
Foreign currency
translation
adjustments ...... - - - - - - (117,328) -
Total comprehensive
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)
Common stock issued for
debt ................. 1,163,738 12 - 145,455 - - - 145,467
Common stock issued
for services ......... 2,140,000 21 - 306,978 - (21,333) - 285,666
Stock warrants granted
upon debt conversion . - - - 129,745 - - - 129,745
Cancellation of shares (200,000) (2) - (21,331) - 21,333 - -
Beneficial conversion - - - 93,750 - - - 93,750
Reclassification and
recalculation of
deferred offering
costs ................ - - - 115,805 - 84,195 - 200,000
Amortization of
deferred compensation - - - - - 10,000 - 10,000
Comprehensive Loss:
Net loss for period - - - - (764,484) - - -
Foreign currency
translation
adjustments ..... - - - - - - 76,803 -
Total comprehensive
loss ............ - - - - - - - (687,681)
---------- ----- --------- ----------- ----------- -------- --------- -----------
BALANCE,
DECEMBER 31, 2005 .... 31,640,949 $ 316 $ - $ 7,664,813 $(9,244,420) $ - $ 14,151 $(1,627,640)
=========== ===== ========= =========== =========== ======== ========= ===========
The accompanying notes are an integral part of these
audited consolidated financial statements
F-23
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(As Restated - See Note 14)
For the Year
Ended December 31,
-------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (764,484) $(1,792,255)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ........................... 250,512 56,211
Amortization of software maintenance costs .............. 153,884 83,829
Beneficial interest ..................................... 31,250 31,250
Stock-based compensation and consulting ................. 295,666 182,900
Grant of warrants in connection with debt conversion .... 129,745 467,469
Amortization of deferred debt issuance costs ............ 14,348 -
Amortization of discount on debenture payable............ 93,750 -
Loss on derivative liability ............................ 18,512 -
Changes in assets and liabilities:
Accounts receivable ..................................... (151,042) (170,198)
Prepaid expenses and other current assets ............... (113,582) (25,916)
Other assets ............................................ (2,400) -
Accounts payable and accrued expenses ................... 217,281 249,393
Accrued interest payable, related party ................. 26,096 92,573
Accrued interest payable ................................ 14,655 -
Due to related parties .................................. (2,311) 478,333
Accounts payable and accrued expenses - long-term ...... 2,769 393,066
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 214,649 46,655
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs ..................... (236,404) (216,537)
Acquisition of property and equipment ...................... (425,951) (195,052)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ........................ (662,355) (411,589)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related party ................................ - 82,500
Advances from non-related company .......................... - 114,000
Repayment of advances from related party ................... (35,000) -
Repayments under capital lease obligations ................. (75,724) 32,714
Proceeds from convertible debenture ........................ 336,738 125,000
Proceeds from loan payable ................................. 230,594 60,911
Proceeds from loan - related party ......................... 85,000 139,500
Repayment of from loan - related party ..................... (15,084) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 526,524 475,880
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... (75,033) (117,328)
----------- -----------
NET INCREASE (DECREASE) IN CASH .............................. 3,785 (6,382)
CASH, BEGINNING OF YEAR ...................................... 4,090 10,472
----------- -----------
CASH, END OF YEAR ............................................ $ 7,875 $ 4,090
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ..................................... $ 20,188 $ 96,000
=========== ===========
Cash paid for income taxes ................................. $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt and accrued interest .......... $ 256,717 $ 1,107,354
=========== ===========
Common stock issued for services ........................... $ 295,666 $ 182,900
=========== ===========
Grant of common stock warrants in connection debt conversion $ 129,745 $ 467,469
=========== ===========
Equipment acquired under capital leases .................... $ - $ 78,745
=========== ===========
The accompanying notes are an integral part of these
audited consolidated financial statements
F-24
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
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.
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.
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 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.
F-25
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of presentation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America. The
consolidated financial statements include the Company and its wholly-owned
subsidiaries, Transax Limited, TDS Telecommunication Data Systems Ltda., Transax
(Australia) Pty Ltd., and Medlink Technologies, Inc. All material intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
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,
debenture and loans payable, accounts payable and accrued expenses approximate
carrying values due to their short maturities. The fair value 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-26
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
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, 2005, the allowance for doubtful accounts
was $0.
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 revenues to 2 major customers during each of the
years ended December 31, 2005 and 2004. These revenues accounted for
approximately 94%, or $3,100,000 and 91% or $1,100,000 of the total revenues for
the years 2005 and 2004, respectively. In 2005, these 2 major customers
accounted for 50% and 44% of net revenues, respectively. At December 31, 2005,
these 2 major customers accounted for 52% and 40%, respectively, of the total
accounts receivable balance outstanding.
The Company maintains its cash in accounts with major financial
institutions in the United States, Australia and Brazil in the form of demand
deposits and money market accounts. Deposits in these banks may exceed the
amounts of insurance provided on such deposits. As of December 31, 2005, the
Company 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, 2005.
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 lives of the related assets are expensed to operations, while major repairs
are capitalized.
F-27
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
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,
2005, 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
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are converted into U.S. dollars in accordance with SFAS No. 52,
"Foreign Currency Translation," and are included in determining net income or
loss.
For foreign operations with the local currency as the functional
currency, assets and liabilities are translated from the local currencies into
U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues
and expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss. As
of December 31, 2005, the exchange rate for the Brazilian Real (R$) was $1.00 US
for 2.3407 R$.
F-28
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation (continued)
Although the economic situation in Brazil has remained relatively
stable in recent years, a return to higher levels of inflation, and currency
fluctuations could adversely affect the Company's operations. The devaluation or
valuation of the Brazilian Real in relation to the U.S. dollar may have
significant effects on the Company's consolidated financial statements.
Revenue Recognition
The Company's revenues, 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.
Substantially all of the Company's revenues are derived from the
processing of applications by healthcare providers for approval of patients for
healthcare services from insurance carriers. The Company's software or hardware
devices containing the Company's software are installed at the healthcare
provider's location. The Company offers transaction services to authorize and
adjudicate identity of the patient and obtains "real time" approval for any
necessary medical procedure from the insurance carrier. The Company's
transaction-based solutions provide remote access for healthcare providers to
connect with contracted insurance carriers. Transaction services are provided
through contracts with insurance carriers and others, which specify the services
to be utilized and the markets to be served. The Company's clients are charged
for these services on a per transaction basis. Pricing varies depending type of
transactions being processed under the terms of the contract for which services
are provided. Transaction revenues are recognized in the period in which the
transactions are performed.
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. At December 31, 2005, there were options
and warrants to purchase 13,726,070 shares of common stock and 1,400,000 shares
issuable upon conversion of outstanding debt, which could potentially dilute
future earnings per share.
F-29
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 2005 and 2004:
Year ended December 31,
---------------------------
2005 2004
---------- ------------
Net loss as reported .................. $ (764,484) $ (1,792,255)
Add: total stock-based employee
compensation expense determined under
fair value based method, net of related
tax effect ............................ (156,786) (109,568)
---------- ------------
Pro forma net loss .................... $ (921,270) $ (1,901,823)
========== ============
Basic loss per share:
As reported ..................... $ (.03) $ (.10)
========== ============
Pro forma ....................... $ (.03) $ (.11)
========== ============
The valuation of the option grants is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants during the year ended December 31, 2005: expected volatility of 205%
to 218%; risk free interest rate ranging from 3.25% to 3.75%; expected life of
2-5 years and annual dividend rate of 0%.
F-30
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
Advertising costs are expensed when incurred. For the years ended
December 31, 2005 and 2004, advertising expense was not material.
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.
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R, "Share-Based Payment, an Amendment of FASB Statement No.
123" ("SFAS No. 123R"). 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. The Company believes the adoption of this
pronouncement may have a material impact on its financial statements.
In May 2005, FASB issued SFAS 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3".
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. The provisions of SFAS 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. SFAS 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. SFAS 154 is
effective for all accounting changes made in fiscal years beginning after
December 15, 2005. Management does not believe the adoption of this
pronouncement will have a material effect on its financial statements.
Reclassifications
Certain prior periods' balances have been reclassified to conform to
the current period's financial statement presentation. These reclassifications
had no impact on previously reported results of operations or stockholders'
equity.
F-31
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2005:
Computer Equipment ......................... $ 916,208
Software ................................... 196,338
Office Furniture and Equipment ............. 15,068
Vehicle .................................... 24,345
Other ...................................... 14,020
-----------
1,165,979
Accumulated Depreciation ................... (518,445)
-----------
$ 647,534
===========
For the years ended December 31, 2005 and 2004, depreciation expense
amounted to approximately $250,000 and $56,000, respectively.
NOTE 3 - GOING CONCERN
Since inception, the Company has incurred cumulative net losses of
$9,244,420 has a stockholders' deficit of $1,627,640 at December 31, 2005 and
has a working capital deficit of $2,068,956. 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. In January 2006, the Company entered into an
investment agreement to sell 16,000 shares of its preferred stock for
approximately $1,600,000. As of the filing of these financial statements 8,000
of the preferred shares have been sold (see Note 13). Additionally, under the
current roll out schedules with its clients, the Company expects to continue to
increase its revenues during 2006. 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,
2005, these deficiencies (including interest and fines) amounted to
approximately $732,000. 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.
F-32
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
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, 2005 and 2004, amortization of
development costs amounted to approximately $154,000 and $84,000, respectively,
and has been included in cost of product support services on the accompanying
consolidated statements of operations.
NOTE 5 - RELATED PARTY TRANSACTIONS
Convertible Loans Payable - Related Party
-----------------------------------------
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. The
interest rate of the loan is 12% per annum compounded monthly
F-33
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 5 - RELATED PARTY TRANSACTIONS
Convertible Loans Payable - Related Party (continued)
-----------------------------------------------------
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 $0.125 per share. The remaining principal of $100,000
is due on April 30, 2007 and is convertible into the Company's common stock at
$0.125 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 $0.25 per share for a period of two years
from the conversion date.
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 at $0.25 per share 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. The fair
value of these warrant grants were estimated at $0.078 per warrant on the date
of grant using the Black-Scholes option-pricing model. In connection with these
warrants, for the year ended December 31, 2005, the Company recorded interest
expense of $31,200.
On September 30, 2005, the holder of the notes partially exercised the
conversion feature. Accordingly, the Company issued 600,000 shares and 600,000
warrants to purchase common stock of the Company for the conversion of principal
balance of $75,000. The Company also issued 77,968 shares of common stock to
settle $9,746 in interest due on these loans. The fair value of these warrant
grants were estimated at $0.164 per warrant on the date of grant using the
Black-Scholes option-pricing model. In connection with these warrants, for the
year ended December 31, 2005, the Company recorded interest expense of $98,545.
On December 31, 2005, the Company issued 50,000 shares of common stock
to settle $6,250 in interest due on these loans.
At December 31, 2005, interest due on these two loans amounted to
$21,621 and the aggregate principal amount due is $175,000. During the year
ended December 31, 2005 and 2004, the Company incurred $160,377 (including the
fair value of warrants granted upon conversion of $129,745) and $114,200
(including the fair value of warrants granted upon conversion of $65,849),
respectively, in interest expense related to these two loans. In 2005, the
Company did not incur beneficial conversion charges on these convertible loans
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 the Consolidated Financial Statements
December 31, 2005
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
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 years
ended December 31, 2005 and 2004, the Company accrued $2,509 and $31,134 of
interest, respectively, 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 issued 1,633,333 shares
of common stock and 1,633,333 warrants to purchase 1,633,333 shares of common
stock at $0.30 per share to settle debt of $245,000 and 53,575 shares of common
stock for the settlement of related interest of $8,036. 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. In connection with these warrants, for the
year ended December 31, 2004, the Company recorded interest expense of $193,842.
At December 31, 2005, advances and interest due amounting to $23,414
are included in due to related parties on the accompanying balance sheet.
For each of the years ended December 31, 2005 and 2004, the Company
incurred $190,000 and $165,000, respectively, in management fees to an
officer/director of the Company, including an accrual of a bonus in 2005 and
2004 of $25,000 and $33,000, respectively, which were approved by the board of
directors. On December 30, 2004, the Company issued 500,000 shares of common
stock at $0.15 per share to this officer/director for settlement of $75,000 of
this debt. On March 28, 2005, the Company issued 400,000 shares of common stock
at $0.126 per share, or $50,000, to this officer/director as payment for
management services rendered. The fair market value of these shares was based on
the average price of the Company's shares traded between March 14 and March 27,
2005. On June 28, 2005, the Company issued 300,000 shares of common stock at
$0.11 per share, or $33,000, to this officer/director as payment for management
services rendered. The fair market value of these shares was based on the
average price of the Company's shares traded between June 14 and June 27, 2005.
On September 27, 2005, the Company issued 200,000 shares of common stock at
$0.17 per share, or $34,000, to this officer/director for management services
rendered. The fair market value of these shares was based on the average price
of the Company's shares traded between August 29 and September 26, 2005. On
December 26, 2005, the Company issued 300,000 shares of common stock at $0.15
per share, or $45,000, to this officer/director for management services
rendered. The fair market value of these shares was based on the average price
of the Company's shares traded between December 1 and December 26, 2005. At
December 31, 2005, $177,799 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.
F-35
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Due to Related Parties (continued)
----------------------------------
For the years ended December 31, 2005 and 2004, the Company incurred
approximately $6,000 and $25,600 in consulting fees, respectively, to a company
whose director is a director of the Company. On December 30, 2004, the Company
issued 233,333 shares of common stock at $0.15 per share to this
officer/director for settlement of $35,000 of this debt. At December 31, 2005,
$10,570 in management fees was outstanding to this officer/director 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.
For the years ended December 31, 2004, the Company incurred $62,535 in
management fees to a company whose officer is an officer of the operating
subsidiary of the Company.
For the years ended December 31, 2005, the Company incurred $40,616 in
accounting fees to a company whose officer is an officer of the Company. At
December 31, 2005, $17,149 in accounting fees were outstanding to this officer
and are included in due to related parties on the accompanying balance sheet.
Loans Payable - Related Party
-----------------------------
On March 5, 2004, the Company borrowed Euro 115,000 ($136,206 at
December 31, 2005) from an officer of the Company for working capital purposes.
The loan accrues 0.8% compounded interest per month, is repayable quarterly in
arrears and had an initial term of twelve months. . The officer agreed to extend
this loan for an additional twelve months until March 2006. The due date of this
loan is currently being negotiated. Additionally, during 2005, the Company
borrowed $85,000 from this officer, which was repaid in 2006. This loan accrues
interest at 9.6% per annum and is payable on demand. For the years ended
December 31, 2005 and 2004, the Company incurred $16,417 and $11,471,
respectively, in interest related to these loans. At December 31, 2005, $12,504
in interest was accrued on these loans and the aggregate principal amount due is
$221,206 and is included in loan payable - related party on the accompanying
balance sheet.
NOTE 6 - FINANCING ARRANGEMENTS
Loans Payable
-------------
On October 25, 2004, the Company and Cornell Capital Partners
("Cornell") 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 year ended December 31, 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.
F-36
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 6 - FINANCING ARRANGEMENTS (CONTINUED)
Loans Payable (continued)
-------------------------
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 for a total principal balance due at December 31, 2005 of
$255,237. The Note bears interest at a rate of 12% per annum and is secured by
stock pledged by certain shareholders of the Company. In January 2006, this Note
was cancelled (see Note 13).
The Company's subsidiary, TDS, has several loans with financials
institutions. The loans require monthly installments, bear interest at rate
ranging from 30% to 71% per annum, are secured by certain receivables and assets
of TDS, and are due through December 2006. At December 31, 2005 loans payable to
these financial institutions aggregated $291,505.
Standby Equity Distribution Agreement
-------------------------------------
On October 25, 2004, the Company entered into a Standby Equity
Distribution Agreement with Cornell. Pursuant to the Standby Equity Distribution
Agreement, the Company could, at its discretion, periodically sell to Cornell
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, whereby
the Standby Equity Distribution Agreement, dated October 25, 2004, and the
related Registration Rights Agreement, Placement Agent Agreement and Escrow
Agreement were terminated.
Upon execution of the Termination Agreement, the Company entered into a
new Standby Equity Distribution Agreement with Cornell on May 17, 2005. On
January 13, 2006 (see Note 13), the Company entered into a Termination Agreement
with Cornell (the "SEDA Termination Agreement") pursuant to which the Parties
terminated the Standby Equity Distribution Agreement, the Registration Rights
Agreement and the Placement Agent Agreement, each dated as of May 17, 2005. In
connection with the Standby Equity Distribution Agreement, in December 2004, the
Company issued to Cornell 1,202,779 shares of the Company's Common Stock (the
"Investor's Shares") and in connection with the Placement Agent Agreement, the
Company issued to Monitor Capital, Inc., as Placement Agent, 125,000 shares of
the Company's Common Stock (the "Placement Agent's Shares"). 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. At December 31, 2005, the commitment fee was deemed
to be a deferred offering cost on the accompanying balance sheet. Pursuant to
the SEDA Termination Agreement, Cornell shall retain 600,889 of the Investor's
Shares and return the other 601,890 of the Investor's Shares to the Company to
be cancelled. Monitor Capital, Inc. shall retain 62,500 of the Placement Agent's
Shares and return the other 62,500 of the Placement's Agent's Shares to the
Company to be cancelled.
F-37
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 6 - FINANCING ARRANGEMENTS (CONTINUED)
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.
The Company determined that the conversion feature of the convertible debentures
represents an embedded derivative since upon conversion the debentures are
convertible into a variable number of shares. Accordingly, the convertible
debentures are not considered to be conventional debt under EITF 00-19 and the
embedded conversion feature must be bifurcated from the debt host and accounted
for as a derivative liability in accordance with SFAS 133 and EITF 00-19.The
change in the fair value of the liability for derivative contracts will be
credited to other income/ (expense) in the consolidated statements of
operations.
The embedded derivative included in this debenture resulted in an initial debt
discount of $250,000 and an initial loss on the valuation of derivative
liabilities of $44,299. The debt discount is being amortized over the term of
the debenture. At the end of each reporting period, the Company revalues this
derivative liability. For the year ended December 31, 2005, after adjustment,
the Company recorded a loss on valuation of derivative liability of $18,512.
The amount allocated as a discount on the debenture for the value of the
conversion option is being amortized to interest expense, using the effective
interest method, over the term of the debenture. Additionally, the Company paid
fees of $38,262 in connection with this debenture. These fees are recorded as
deferred offering costs on the balance sheet and are being amortized over the
debenture term.
Amortization expense for the year ended December 31, 2005 for both the discount
on the debenture and the deferred offering costs was approximately $108,100 and
is included in interest expense.
At the date of inception and at the valuation date of December 31, 2005, the
following assumptions were applied to all convertible debt and warrants:
At Inception At December 31, 2005
--------------------- -----------------------
Market Price: $0.14 $0.14
Exercise prices $0.104 $0.106
Term 2 years 1.25 years
Volatility: 203% 219%
Risk-free interest rate 3.25% 3.75%
F-38
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 6 - FINANCING ARRANGEMENTS (CONTINUED)
The convertible debenture liability is as follows at December 31, 2005:
Convertible debentures payable ................. $ 250,000
Less: unamortized discount on debentures ....... (156,250)
---------
Convertible debentures, net .................... $ 93,750
=========
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
accrued 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.
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. In
connection with these warrants, for the year ended December 31, 2004, the
Company recorded interest expense of $164,262.
On December 30, 2004, the Company issued 366,667 units and 29,333
shares of common stock to settle $55,000 in advances and $4,400 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.
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. In connection with
these warrants, for the year ended December 31, 2004, the Company recorded
interest expense of $43,516. As at December 31, 2004, advances payable amounted
to $35,000, which was repaid in 2005.
NOTE 8 - INCOME TAXES
As of December 31, 2005, the Company had approximately $3,800,000 of
U.S. federal and state net operating loss carry forwards available to offset
future taxable income which, if not utilized, begin expiring in 2011. In
addition, the Company has approximately $4,097,000 of foreign net operating loss
carry forwards 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.
F-39
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 8 - INCOME TAXES (CONTINUED)
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss carry forward 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
carry forward 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 carry forwards may be applied against future taxes,
the Company may not be able to take full advantage of these attributes for
Federal income tax purposes.
Deferred income taxes reflect the net tax effects of operating loss and
tax credit carry forwards 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, 2005 and 2004.
The Company's tax expense differs from the "expected" tax expense for
the years ended December 31, 2005 and 2004 as follows:
2005 2004
--------- ---------
Computed "expected" tax benefit .... $ (59,700) $(636,000)
State income taxes benefit ......... (7,800) (44,000)
Other .............................. - (75,000)
Change in valuation allowance ...... 67,500 755,000
--------- ---------
$ - $ -
========= =========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 2005 are as
follows:
Deferred tax assets:
Net operating loss carry forward ........... $ 2,668,000
-----------
Total gross deferred tax assets ............ 2,668,000
Less valuation allowance ................... (2,668,000)
-----------
Net deferred tax assets .................... $ -
===========
The valuation allowance at December 31, 2005 was $2,668,000. The
increase during 2005 was approximately $676,500.
F-40
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
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 the United States, Brazil, Australia and Mauritius, and
has a registered mailing address in Singapore. Substantially all of the
Company's assets are located in Brazil.
Year ended December 31,
-------------------------
2005 2004
----------- -----------
Net revenues to unaffiliated customers:
Brazil ........................ $ 3,380,150 $ 1,199,900
----------- -----------
Operating Expenses:
Brazil ........................ 2,707,410 1,420,343
USA ........................... 758,542 831,603
Australia ..................... 12,257 32,429
Mauritius ..................... 65,324 41,688
----------- -----------
3,543,533 2,326,063
----------- -----------
Loss from operations .................. (163,383) (1,126,163)
----------- -----------
Other income (expenses):
Brazil ........................ (301,748) (90,249)
USA ........................... (306,764) (572,602)
Australia ..................... 7,411 (3,241)
----------- -----------
(601,101) (666,092)
----------- -----------
Net loss as reported .................. $ (764,484) $(1,792,255)
----------- -----------
NOTE 10 - STOCKHOLDERS' DEFICIT
Common Stock
------------
On January 26, 2004, the Company issued 300,000 shares of restricted
common stock for services rendered, for net value of $75,000. 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 year ended December 31,
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 to
a consultant for services rendered. The Company valued these common shares at
the fair market value on the dates of grant, or $0.25 per share, based on the
quoted trading price and recorded consulting expense of $37,500.
F-41
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On July 26, 2004, 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
to a consultant for services rendered. The Company valued these common shares at
the fair market value on the dates of grant, or $0.06 per share, 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 to a company related to 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 per share, 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 per share until September 29, 2009.
On September 29, 2004, 2004, the Company issued 166,667 shares of
common stock to a consultant for services rendered. The Company valued these
common shares at the fair market value on the dates of grant, or $0.075 per
share, 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 upon
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 per share
until September 29, 2009.
F-42
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
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. Pursuant to the Standby Equity Distribution
Agreement, the Company could, at its discretion, periodically sell to Cornell
shares of common stock for a total purchase price of up to $5.0 million. On May
17, 2005, the Company entered into its first Termination Agreement with Cornell,
whereby the Standby Equity Distribution Agreement, dated October 25, 2004, and
the related Registration Rights Agreement, Placement Agent Agreement and Escrow
agreement were terminated. Upon execution of this Termination Agreement, the
Company entered into a new Standby Equity Distribution Agreement with Cornell on
May 17, 2005. On January 13, 2006 (see Note 13), the Company entered into a new
Termination Agreement with Cornell (the "SEDA Termination Agreement") pursuant
to which the Parties terminated the Standby Equity Distribution Agreement, the
Registration Rights Agreement and the Placement Agent Agreement, each dated as
of May 17, 2005. In connection with the Standby Equity Distribution Agreement,
in December 2004, the Company issued to Cornell 1,202,779 shares of the
Company's Common Stock (the "Investor's Shares") and in connection with the
Placement Agent Agreement, the Company issued to Monitor Capital, Inc., as
Placement Agent, 125,000 shares of the Company's Common Stock (the "Placement
Agent's Shares"). In December 2004, the Company valued the common shares issued
to Cornell at their initial fair market value on the dates of grant at $0.07 per
share, or $84,195, based on the quoted trading price for the stock. These shares
were revalued in October 2005 to $0.166 per share, or $200,000. At December 31,
2005, the commitment fee of $200,000 was deemed to be a deferred offering cost
on the accompanying balance sheet. Subsequent to December 31, 2005, pursuant to
the SEDA Termination Agreement, Cornell shall retain 600,889 of the Investor's
Shares and return the other 601,890 of the Investor's Shares to the Company to
be cancelled.
In October 2004, the Company issued 125,000 shares of common stock to
Monitor Capital, Inc. (Monitor), an unaffiliated registered broker-dealer that
had been retained by the Company in connection with the terminated 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 at $0.08 per share, or $10,000, based on the quoted trading price and
recorded deferred compensation in this amount which was to be amortized over the
equity funding commitment period of 24 months or less if funded earlier. In
2005, in connection with the termination of the Standby Equity Distribution
Agreement, the Company amortized the previously recorded deferred compensation
and recorded consulting expense of $10,000. Subsequent to December 31, 2005, in
connection with a SEDA Termination Agreement, Monitor shall retain 62,500 of
these Placement Agent's Shares and return the other 62,500 of the Placement's
Agent's Shares to the Company to be cancelled.
F-43
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On December 30, 2004, the Company granted 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 per share
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 issued 1,580,000 shares of common
stock to settle $237,000 in amounts due to related parties.
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 pursuant to the terms of the contract. The Company valued these common
shares at the fair market value on the date of grant at $0.16 per share based on
the quoted trading price and recorded stock-based consulting expense of $42,667
through the date of cancellation.
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 at $0.16 per share based on the
quoted trading price and recorded stock-based consulting 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 at $0.14 per share or $21,000 based
on the quoted trading price and recorded stock-based consulting expense of
$21,000.
On March 28, 2005, the Company issued 400,000 shares of common stock
for services rendered of $50,500 to an officer/director of the Company. The
Company valued these common shares at the fair market value on the date of grant
at $0.126 per share. On June 28, 2005, the Company issued 300,000 shares of
common stock at $0.11 per share, the fair market value on the date of grant, to
an officer/director for management services rendered of $33,000. On September
27, 2005, the Company issued 200,000 shares of common stock at $0.17 per share,
or $34,000, the average fair market value on the date of grant, to an
officer/director for management services rendered. On December 26, 2005, the
Company issued 300,000 shares of common stock at $0.15 per share, or $45,000,
the average fair market value on the date of grant, to an officer/director for
management services rendered. (See note 5).
On June 28, 2005, the holder of the related party loans exercised the
conversion feature. Accordingly, the Company issued 400,000 shares at the
conversion price of $0.125 per share and 400,000 warrants to purchase common
stock of the Company at $0.25 per share (see note 5) 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.
F-44
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
On July 15, 2005, the Company entered into a six month 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
date of grant at $0.15 per share, or $30,000, based on the quoted trading price
and recorded stock-based consulting expense of $30,000.
On September 30, 2005, the holder of the related party loans (see note
5) exercised the conversion feature. Accordingly, the Company issued 600,000
shares at the conversion price of $0.125 per share and 600,000 warrants to
purchase common stock of the Company at $0.25 per share for the conversion of
principal balance of $75,000. The Company also issued 77,968 shares of common
stock to settle $9,746 in interest due on these loans.
On December 8, 2005, the Company issued 50,000 shares of common stock
for investor relations services rendered. The Company valued these common shares
at the fair market value on the dates of grant of $0.15 per share, or $7,500,
based on the quoted trading price and recorded investor relations fees of
$7,500.
On December 26, 2005, the Company issued 40,000 shares of common stock
to a director for services rendered. The Company valued these common shares at
the fair market value on the dates of grant of $0.15 per share, or $6,000, based
on the quoted trading price and recorded compensation expense of $6,000.
On December 31, 2005, the Company issued 50,000 shares of common stock
to a related party to settle $6,250 of interest due on related party debt.
Stock Options
-------------
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, are
determined by a committee.
On July 26, 2004, the Company granted options to purchase 600,000
shares of 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 consulting expense of $34,900.
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 per share. 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 options expire on December 30,
2009.
F-45
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
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.
On December 26, 2005, the Company granted options to purchase an
aggregate of 200,000 shares of common stock to an officer 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 December 25, 2010.
A summary of the status of the Company's outstanding stock options as
of December 31, 2005 and 2004 and changes during the years then ended is as
follows:
Weighted
Average
Exercise
Shares Price
---------- --------
Outstanding at December 31, 2003 ...... 2,725,000 $ 0.43
Granted ............................... 1,350,000 0.14
Exercised ............................. (1,050,000) (0.14)
Cancelled ............................. (600,000) (0.50)
---------- --------
Outstanding at December 31, 2004 ...... 2,425,000 0.41
Granted ............................... 1,200,000 0.15
Exercised ............................. - -
Forfeited ............................. (400,000) (0.39)
---------- --------
Outstanding at December 31, 2005 ...... 3,225,000 $ 0.31
========== ========
Options exercisable at end of year .... 3,225,000 $ 0.31
========== ========
2005 2004
Weighted-average fair value of ........ ---------- --------
options granted during the year ...... $ 0.15 $ 0.14
The following information applies to options outstanding at December
31, 2005:
Options Outstanding Options Exercisable
---------------------------- ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ---------------- -------- --------- --------
$0.50 1,425,000 3.37 $ 0.50 1,425,000 $ 0.50
$0.20 600,000 4.75 $ 0.20 600,000 $ 0.20
$0.15 1,200,000 4.65 $ 0.15 1,200,000 $ 0.15
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-46
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
Warrants
--------
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. In connection with these warrants,
the Company recorded interest 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. In connection with these warrants,
the Company recorded interest expense of $237,358 for the year ended December
31, 2004.
In 2005, in connection with a conversion of debt, the Company granted
1,000,000 warrants to purchase 1,000,000 shares of common stock at $0.25 per
share. Of the 1,000,000 warrants, 400,000 expire on June 28, 2007 and 600,000
expire on September 30, 2007. The fair value of these warrant grants was
estimated on the date of grant using the Black-Scholes option-pricing model (see
note 5). In connection with these warrants, the Company recorded interest
expense of $129,745 for the year ended December 31, 2005.
A summary of the status of the Company's outstanding stock warrants as
of December 31, 2005 and 2004 and changes during the years is as follows:
Weighted
Average
Exercise
Shares Price
---------- --------
Outstanding at December 31, 2003 ...... 4,748,570 $ 0.95
Granted ............................... 4,402,500 0.25
Forfeited ............................. (50,000) (1.50)
---------- --------
Outstanding at December 31, 2004 ...... 9,101,070 1.00
Granted ............................... 1,000,000 0.25
Exercised ............................. - -
Forfeited ............................. (598,570) (0.69)
---------- --------
Outstanding at December 31, 2005 ...... 9,502,500 $ 0.57
========== ========
Warrants exercisable at end of year ... 9,502,500 $ 0.57
========== ========
2005 2004
---------- --------
Weighted-average fair value of
warrants granted during the year ..... $ 0.25 $ 0.25
F-47
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 10 - STOCKHOLDERS' DEFICIT (CONTINUED)
The following information applies to all warrants outstanding at
December 31, 2005:
Warrants Outstanding Warrants Exercisable
---------------------------- ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ---------------- -------- --------- --------
$1.00 4,100,000 2.62 $ 1.00 4,100,000 $ 1.00
$0.30 2,000,000 1.00 $ 0.30 2,000,000 $ 0.30
$0.20 2,402,500 3.75 $ 0.20 2,402,500 $ 0.20
$0.25 1,000,000 1.65 $ 0.25 1,000,000 $ 0.25
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Rent
The Company has an operating lease for rental of office space in
Brazil, renewable on an annual basis. Additionally, the Company leases office
space in Miami, Florida and Singapore, on a month-to-month basis. Rent expense
amounted to approximately $104,045 and $62,300 and is classified as part of
general and administrative expenses in the statement of operations for each of
the years ended December 31 2005 and 2004, respectively.
Accrued Taxes and Social Contribution
Since fiscal year 2000, the Company has been deficient in the payment
of Brazilian payroll taxes and Social Security taxes. At December 31, 2005,
these deficiencies, plus interest and fines, amounted to approximately $732,000.
This liability is included as part of the accounts payable and accrued expenses
(short-term and long-term) within the consolidated balance sheet. During fiscal
years 2005 and 2004, the Company entered into a number of payment programs with
the Brazilian authorities whereby the Social Security ("INSS") taxes due, plus
applicable penalties and interests are to be repaid over a period of up to 60
months. At December 31, 2005, $297,218 of the Company's INSS taxes are to be
repaid over periods from 20-50 months. The payment program requires the Company
to pay a monthly fixed amount of approximately $9,000 During February 2006, the
Company entered into a payment program for $30,000 of other taxes due that will
be repaid over a period of 60 months. Discussions are currently ongoing for the
Company to enter into similar payment plans for the remaining tax liabilities.
The Company made the first payment as per the plan in April 2004 and have
continued to make the required payments. However, there is no certainty that the
Brazilian authorities will enter into a similar plan in the future.
F-48
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Accrued Taxes and Social Contribution (continued)
Future payments due to the Brazilian authorities are follows:
2006 $549,700
2007 72,300
2008 71,300
2009 32,500
2010 6,100
The current portion due, which is included in current liabilities, also includes
amounts whose payment terms have not been negotiated with the Brazilian
authorities.
Leases
The Company acquired Point-of-Sale terminals and computer equipment
under capital leases. The minimum lease payments under these capital leases are
$16,289, are due in 2006, and are included in current liabilities at December
31, 2005.
NOTE 12 - 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. A trial date has
been set for May 22, 2006. While the result of litigation is difficult to
predict, counsel has advised the Company that the likelihood of sustaining any
significant damages at trial is minimal. An accrual of $50,000 was recorded at
December 31, 2004.
NOTE 13 - SUBSEQUENT EVENTS
On January 13, 2006, the Company entered into an Investment Agreement
with Cornell Capital Partners, LP ("Cornell") and together with the Company,
(the "Parties"), pursuant to which the Company shall sell to Cornell up to
16,000 shares of Series A Convertible Preferred Stock, no par value per share,
(the "Series A Preferred Shares") which shall be convertible, at Cornell's
discretion, into shares of the Company's common stock, par value $.00001 per
share (the "Common Stock") for a total price of up to $1,600,000. The Series A
Preferred Shares are senior to all Common Stock and any other series of
preferred stock of the Company. The holders of Series A Preferred Shares are
entitled to receive dividends or distributions on a pro rata basis in the amount
of seven (7) percent per year. Each share of Series A Preferred Shares can be
converted into shares of the Company's Common Stock equal to the sum of the
Liquidation Amount, defined as an amount equal to $100 per share of Series A
Preferred Shares, plus accrued but unpaid dividends thereon, divided by the
Conversion Price. The Conversion Price is defined to be equal to the lower of
(i) $0.192 or (ii) 80% of the lowest daily volume weighted average price of the
Company's Common Stock, as determined by price quotations from Bloomberg, LP,
during the ten (10) trading days immediately preceding the date of conversion.
F-49
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
Of the 16,000 Series A Preferred Shares to be sold to Cornell, 8,000
Series A Preferred Shares had a purchase price of $800,000, which consisted of
$255,237 from the surrender of a Promissory Note (as described below) and
$544,763 of new funding. The purchase of the additional 8,000 Series A Preferred
Shares, at the purchase price of $800,000, shall close two (2) business days
prior to the date that a registration statement is filed with the United States
Securities and Exchange Commission
In connection with the sale of the Series A Preferred Shares, on
January 13, 2006, the Parties agreed that Cornell Capital Partners would
surrender the Promissory Note issued by the Company to Cornell on May 17, 2005,
in the principal amount of $255,237, in exchange for $255,237 of Series A
Preferred Shares. As of January 13, 2006, the full amount outstanding under the
Promissory Note was $255,237, plus accrued and unpaid interest of $0. As a
result of the Parties' agreement, the Promissory Note was retired and canceled.
The Parties also agreed to terminate the Securities Purchase Agreement and the
Investor Registration Rights Agreement, each dated as of October 25, 2004, as
well as the Pledge and Escrow Agreements, each dated as of October 21, 2004,
that were entered into by the Parties in connection with the issuance of the
Promissory Note.
On January 13, 2006, the Company also issued to Cornell warrants to
purchase up to 5,000,000 shares of Common stock. The first warrant issued to
Cornell for 2,500,000 shares of Common Stock at an exercise price of $0.30 per
share, shall terminate after the five (5) year anniversary of the date of
issuance. The second warrant issued to Cornell was for 2,500,000 shares of
Common Stock at an exercise price of $0.20 per share, and shall terminate after
the five (5) year anniversary of the date of issuance.
THE PREFERRED STOCK AND RELATED ITEMS WILL BE RECORDED IN FISCAL 2006
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPALS. THIS MAY REQUIRE
SOME PORTION TO BE RECORDED OUTSIDE OF PERMANENT EQUITY.
On January 13, 2006, the Company entered into a Termination Agreement
with Cornell, (the "SEDA Termination Agreement") pursuant to which the Parties
terminated the Standby Equity Distribution Agreement, the Registration Rights
Agreement and the Placement Agent Agreement, each dated as of May 17, 2005. In
connection with the Standby Equity Distribution Agreement, the Company issued to
Cornell 1,202,779 shares of the Company's Common Stock (the "Investor's Shares")
and in connection with the Placement Agent Agreement, the Company issued to
Monitor Capital, Inc., as Placement Agent, 125,000 shares of the Company's
Common Stock (the "Placement Agent's Shares"). Pursuant to the SEDA Termination
Agreement, Cornell retained 600,889 of the Investor's Shares and returned the
other 601,890 of the Investor's Shares to the Company to be cancelled. Monitor
Capital, Inc. retained 62,500 of the Placement Agent's Shares and returned the
other 62,500 of the Placement's Agent's Shares to the Company to be cancelled.
F-50
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
On January 26, 2006, the Company's Board of Directors , pursuant to
written unanimous consent, appointed David Sasso as the Vice President of
Investor Relations and Corporate Communications of the Company effective January
26, 2006. On February 6, 2006, the Company granted Mr. Sasso 100,000 options to
purchase 100,000 shares of the Company's common stock at $0.15 per share. The
options expire on February 5, 2011. The fair value of this option grant was
estimated at $12,834 on the date of grant using the Black-Scholes option-pricing
model. In connection with these warrants, the Company recorded stock-based
compensation expense of $12,834.
On February 1, 2006, the Company and the debenture holder (See Note 6 -
Debenture Payable) mutually agreed to extend the term of the debentures until
December 1, 2007. In addition, the Company granted a warrant to purchase 400,000
shares of the Company's common stock to the debenture holder. The warrant has a
term of 2 years and is exercisable at $0.20 per share. The Company agreed to
register 3,571,429 shares of its common stock underlying the conversion of the
Debentures and the exercise of the warrant not later than 30 days after the
Company files its annual report on Form 10-KSB for the fiscal year ended
December 31, 2005. The fair value of this warrant grant was estimated at $46,650
on the date of grant using the Black-Scholes option-pricing model. In connection
with these warrants, the Company recorded interest expense of $46,650.
On February 1, 2006, the Company's board of directors passed a
resolution allowing the Company enter into a consulting agreement with Steve
Nichols for business development services in New Zealand and granted Mr. Nichols
100,000 options to purchase 100,000 shares of the Company's common stock at
$0.15 per share. The options expire on February 5, 2011. The fair value of this
option grant was estimated at $13,331 on the date of grant using the
Black-Scholes option-pricing model. In connection with these warrants, the
Company recorded deferred consulting expense, which will be amortized over the
contract period.
On March 20, 2006, the Company entered into a one-year consulting
contract for business development services. In connection with the agreement,
the Company issued 900,000 shares of common stock. The Company valued these
common shares at the fair market value on the dates of grant or $0.11 per share
based on the quoted trading price and recorded deferred consulting expense of
$99,000 to be amortized over the service period. In addition, the Company
granted a warrant to purchase 2,000,000 shares of the Company's common stock.
The warrant has a term expiring January 31, 2009. 1,000,000 of the warrants are
exercisable at $0.20 per share and 1,000,000 of the warrants are exercisable at
$0.25 per share. The fair value of this warrant grant was estimated at $212,345
or $.106 per warrant on the date of grant using the Black-Scholes option-pricing
model. In connection with these warrants, the Company recorded deferred
consulting expense, which will be amortized over the contract period.
F-51
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
Registration Rights Agreement
-----------------------------
Subject to the terms and conditions of an Investor Registration Rights
Agreement, the Company shall prepare and file, no later than the earlier of 30
days from the date the Company files its Form 10-KSB for the year end December
31, 2005 or the date that such filing is due (the "Scheduled Filing Deadline"),
with the SEC, a registration statement on Form S-1 or SB-2 (or, if the Company
is then eligible, on Form S-3) under the 1933 Act (the "Initial Registration
Statement") for the registration for the resale by the Investor of the
underlying common stock and warrants, including at least 25,000,000 shares
underlying the Series A Preferred Shares and 5,000,000 Warrant Shares. The
Company shall cause the Registration Statement to remain effective until all of
the Registerable Securities have been sold.
The Company shall use its best efforts (i) to have the Initial
Registration Statement declared effective by the SEC no later than ninety (90)
days from the date hereof (the "Scheduled Effective Deadline") and (ii) to
insure that the Initial Registration Statement and any subsequent Registration
Statement remains in effect until all of the Registerable Securities have been
sold, subject to the terms and conditions of this Agreement. It shall be an
event of default hereunder if the Initial Registration Statement is not declared
effective by the SEC within one hundred twenty (120) days from the date hereof.
In the event the Registration Statement is not filed by the Scheduled
Filing Deadline or is not declared effective by the SEC on or before the
Scheduled Effective Deadline, or if after the Registration Statement has been
declared effective by the SEC, sales cannot be made pursuant to the Registration
Statement, the Company will pay as liquidated damages (the "Liquidated Damages")
to the holder, at the holder's option, either a cash amount or shares of the
Company's Common Stock equal to two percent (2%) of the Liquidation Amount (as
defined in the Certificate of Designation of Series A Convertible Preferred
Shares) outstanding as Liquidated Damages for each thirty (30) day period or any
part thereof after the Scheduled Filing Deadline or the Scheduled Effective
Deadline as the case may be.
NOTE 14 - RESTATEMENT
After reviewing certain accounting principles the Company has applied in
previously issued financial statements, management has determined that the
Company's accounting for the embedded derivative option related to the Company's
debenture payable should have been classified as a liability on the accompanying
balance sheet and revalued at the end of each period in accordance with SFAS No.
133 and EITF 00-19. Consequently, management is restating its annual financial
statements as of December 31, 2005 and for year then ended. The change in
presentation of the Company's embedded derivative feature associated with its
debenture payable has the effect of increasing total assets by $23,914,
increasing liabilities by $136,176, increasing the stockholders' deficit by
$112,262 as of December 31, 2005, and increasing the Company's net loss by
$49,762 for the year ended December 31, 2005. This change in presentation of the
Company's embedded derivative feature affected some of the items within the
Company's consolidated statement of cash flows for the year ended December 31,
2005 but did not impact cash at the end of the year. Accordingly, the
adjustments to the balance sheet, statement of operations, and statement of cash
flows are summarized as follows:
F-52
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 14 - RESTATEMENT (continued)
CONSOLIDATED BALANCE SHEET
December 31, 2005
ASSETS
Initial As
Filing Restatement Restated
----------- ----------- -----------
Current Assets:
Cash .............................................................. $ 7,875 $ - $ 7,875
Accounts receivable (Net of allowance for doubtful accounts of $0) 321,240 - 321,240
Prepaid expenses and other current assets ......................... 165,129 - 165,129
----------- ----------- -----------
Total Current Assets ........................................... 494,244 - 494,244
Software Development Costs, net ..................................... 325,564 - 325,564
Property and Equipment, net ......................................... 647,534 - 647,534
Deferred Debt Offering Costs ........................................ 200,000 23,914 223,914
Other Assets ........................................................ 2,400 - 2,400
----------- ----------- -----------
Total Assets ................................................... $ 1,669,742 $ 23,914 $ 1,693,656
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of capital lease obligation ....................... $ 16,289 $ - $ 16,289
Current portion of loan payable ................................... 546,742 - 546,742
Accounts payable and accrued expenses ............................. 1,340,906 - 1,340,906
Due to related parties ............................................ 228,932 - 228,932
Loan payable - related party ...................................... 233,710 - 233,710
Convertible loans from related party .............................. 196,621 - 196,621
----------- ----------- -----------
Total Current Liabilities ...................................... 2,563,200 - 2,563,200
Debenture payable, net .............................................. 226,086 (132,336) 93,750
Conversion feature liability ........................................ - 268,512 268,512
Accounts payable and accrued expenses, net of current portion ....... 395,834 - 395,834
----------- ----------- -----------
Total Liabilities .............................................. 3,185,120 136,176 3,321,296
----------- ----------- -----------
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;
31,640,949 shares issued and outstanding .......................... 316 - 316
Paid-in capital ................................................... 7,664,813 (62,500) 7,602,313
Accumulated deficit ............................................... (9,194,658) (49,762) (9,244,420)
Other comprehensive income - Cumulative foreign currency
translation adjustment ........................................... 14,151 - 14,151
----------- ----------- -----------
Total Stockholders' Deficit .................................... (1,515,378) (112,262) (1,627,640)
----------- ----------- -----------
Total Liabilities and Stockholders' Deficit .................... $ 1,669,742 $ 23,914 $ 1,693,656
=========== =========== ===========
F-53
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 14 - RESTATEMENT (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31, 2005
--------------------------------------------
Initial As
Filing Restatement Restated
------------ ------------ ------------
LOSS FROM OPERATIONS .......................................... $ (163,384) $ - $ (163,384)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Other expense ............................................... (18,044) - (18,044)
Foreign exchange gain ....................................... 22,735 - 22,734
Loss on derivative liability ................................ - (18,512) (18,512)
Interest expense ............................................ (376,726) (31,250) (407,976)
Interest expense - related party ............................ (179,303) - (179,303)
------------ ------------ ------------
Total Other Expenses ..................................... (551,338) (49,762) (601,101)
------------ ------------ ------------
NET LOSS ...................................................... (714,722) (49,762) (764,484)
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain ............... 76,803 - 76,803
------------ ------------ ------------
COMPREHENSIVE LOSS ............................................ $ (637,919) $ (49,762) $ (687,681)
============ ============ ============
Net loss per Common Share - Basic and diluted ................. $ (0.02) $ (0.03)
============ ============
Weighted Average Shares Outstanding - Basic and Diluted ....... 30,008,516 30,008,516
============ ============
F-54
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005
NOTE 14 - RESTATEMENT (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Initial As
Filing Restatement Restated
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (714,722) $ (49,762) $ (764,484)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ............................ 250,511 - 250,511
Amortization of software maintenance costs ............... 153,884 - 153,884
Beneficial interest ...................................... 93,750 (62,500) 31,250
Stock-based compensation and consulting .................. 295,666 - 295,666
Grant of warrants in connection with debt conversion ..... 129,745 - 129,745
Amortization of deferred debt issuance costs ............. 14,348 - 14,348
Amortization of discount of debenture payable ............ - 93,750 93,750
Loss on derivative liability ............................. - 18,512 18,512
Changes in assets and liabilities:
Accounts receivable ...................................... (151,042) - (151,042)
Prepaid expenses and other current assets ................ (113,582) - (113,582)
Other assets ............................................. (2,400) - (2,400)
Accounts payable and accrued expenses .................... 217,282 - 217,282
Accrued interest payable, related party .................. 26,096 - 26,096
Accrued interest payable ................................. 14,655 - 14,655
Due to related parties ................................... (2,311) - (2,311)
Accounts payable and accrued expenses - long-term ........ 2,769 - 2,769
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... $ 214,649 $ - $ 214,649
------------ ------------ ------------
F-55
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
o except the common stock offered by this Prospectus;
o in any jurisdiction in which the offer or
solicitation is not authorized;
o in any jurisdiction where the dealer or other
salesperson is not qualified to make the offer or
solicitation;
o to any person to whom it is unlawful to make the
offer or solicitation; or
o 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:
o there have been no changes in the affairs of Transax International
Limited after the date of this Prospectus; or
o the information contained in this Prospectus is
correct after the date of this Prospectus.
PROSPECTUS
33,631,429 SHARES OF COMMON STOCK
TRANSAX INTERNATIONAL LIMITED
____________ __, 2006
Until _________, 2006, 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 SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
II-1
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.
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.
SEC Registration Fee $ 545
Printing and Engraving Expenses $ 2,500
Accounting Fees and Expenses $ 15,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 16,955
--------
TOTAL $ 85,000
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three (3) years, the Company has issued the following
securities without registration under the Securities Act:
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
PC 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 $652,070. 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 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 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 on cash 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 $93,393 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 $93,393 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 (3) month period ended March 31,
2004 as professional fees.
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 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 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 (3) month
period ended June 30, 2004.
On June 2, 2004, the Company issued 45,000 shares of common stock to
Rejoice International 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.
II-3
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 $54,114 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 $45,000 of debt, at a conversion rate of $0.08
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; and (iii)
187,500 units to Adhe D. Silviani.
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) 197,235 shares to Adhe D.
Silviani; and (iv) 302,765 shares to Thomas A. Harmusial.
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 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.
II-4
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 December 31, 2004, the Company issued 500,000 shares to settle $75,000
of debt at a conversion price of $0.15 per share. Pursuant to a settlement
agreement, the shares were issued to Stephen Walters.
On December 31, 2004, the Company issued 233,333 shares to settle $35,000
of debt at a conversion price of $0.15 per share. Pursuant to a settlement
agreement, the shares were issued to Laurie Bewes.
On December 31, 2004, the Company issued 166,667 shares to settle $25,000
of debt at a conversion price of $0.15 per share. Pursuant to a settlement
agreement, the shares were issued to Nathalie Pilon.
On December 31, 2004, the Company issued 80,000 shares to settle $12,000 of
debt at a conversion price of $0.15 per share. Pursuant to a settlement
agreement, the shares were issued to David Bouzaid.
On December 31, 2004, the Company issued 600,000 shares to settle $90,000
of debt at a conversion price of $0.15 per share. Pursuant to a settlement
agreement, the shares were issued to Devlin Jensen.
On December 31, 2004, the Company issued 1,686,9080 shares in respect of
cash advances of $245,000 and $8,036.20 of interest payable at a conversion
price of $0.15 per share. Pursuant to a subscription agreement, the shares were
issued to nominees of Carlingford Investments Limited. In addition, the Company
issued a warrant for 1,633,333 shares at $0.20 per share expiring on December
30, 2006.
On December 31, 2004, the Company issued 202,700 shares in respect of cash
advances of $28,500 and $1,905 of interest payable at a conversion price of
$0.15 per share. Pursuant to a subscription agreement, the shares were issued to
nominees of Asia Pacific Limited. In addition, the Company issued a warrant for
190,000 shares at $0.30 per share expiring on December 30, 2006.
On December 31, 2004, the Company issued 193,300 shares in respect of cash
advances of $26,500 and $2,495 of interest payable at a conversion price of
$0.15 per share. Pursuant to a subscription agreement, the shares were issued to
Stephen Taylor. In addition the company issued a warrant for 176,667 shares at
$0.30 per share expiring on December 30, 2006.
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 $32,000.
On January 14, 2005, the Company issued 100,000 shares of common stock to
Empire Capital Group for net proceeds of $16,000. The proceeds were utilized for
the settlement of accounts payable related to financing fees.
On March 21, 2005, the Company issued 150,000 shares of common stock to
Aidan Capital Management for net proceeds of $21,000. 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.
On April 1, 2005, Company entered into the Securities Purchase Agreement
with Scott and Heather Grimes, Joint Tenants - with Rights of Survivorship
(hereinafter referred to as "Investor"). Pursuant to the Securities Purchase
Agreement, the Company issued a convertible Debenture is to the Investor in the
original principal amount of $250,000. The Debentures is convertible at the
holder's option any time up to maturity at a conversion price equal to the lower
of: (i) one hundred twenty percent (120%) of the closing bid price of the common
stock on the date of the Debenture or (ii) eighty percent (80%) of the lowest
closing bid price of the Company's common stock for the five (5) trading days
immediately preceding the conversion date. The Debentures was a two (2) year
term and accrue interest at five percent (5%) per year. At maturity, the
Debenture will automatically convert into shares of common stock at a conversion
price equal to the lower of: (i) one hundred twenty percent (120%) of the
closing bid price of the Company's common stock on the date of the Debentures or
(ii) eighty percent (80%) of the lowest closing bid price of the common stock
for five (5) trading days immediately preceding the conversion date.
II-5
On May 17, 2005, the Company entered into a Standby Equity Distribution
Agreement (the "SEDA") with Cornell Capital Partners pursuant to which: (a)
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 ("Commitment Shares")
which were issued on December 15, 2004 and (b) Monitor Capital, an unaffiliated
registered broker-dealer, received a fee of $10,000 by the issuance of 125,000
shares of common stock of Transax on December 6, 2004. Pursuant to that certain
Termination Agreement, dated January 13, 2006: (c) Cornell Capital Partners
retained 600,889 Commitment Shares and returned to Transax the remaining 601,890
Commitment Shares for cancellation and (d) Monitor Capital retained 62,500 of
these shares and returned the remaining 62,500 shares for cancellation.
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 $0.125 per share and 400,000 warrants to purchase common stock of the
Company at $0.25 per share 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 $0.11 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 net proceeds of $30,000. The proceeds were utilized for the settlement
of accounts payable related to financing fees.
On September 26, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $34,000 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $34,000 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 200,000
shares of our restricted common stock at $0.17 per share; and (ii) Mr.
Walters agreed to accept the issuance of an aggregate of 200,000 shares of
our restricted common stock as full and complete satisfaction of the aggregate
amount of $34,000. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On September 30, 2005, the holder of certain convertible loans exercised
the conversion right. Accordingly, we issued 600,000 shares of our restricted
common stock at the conversion price of $0.125 per share and 600,000 warrants to
purchase shares of our restricted common stock at $0.25 per share for the
conversion of principal balance of $75,000. We also issued an additional 77,968
shares of restricted common stock to settle $9,746 in interest due on the
convertible loans. The recipients are sophisticated investors who have such
knowledge and experience in financial, investment and business matters that they
are capable of evaluating the merits and risks of the prospective investment in
our securities. The recipients are accredited investors. The issuance was exempt
from registration under the Securities Act in reliance on an exemption provided
by Section 4(2) of the Securities Act.
On December 8, 2005, we entered into an investor relations contract (the
"Investor Relations Contract") with David Sasso, one of our directors. Pursuant
to the terms and provisions of the Investor Relations Contract, we agreed to
issue 50,000 shares of our restricted common stock at $0.15 per share to Mr.
Sasso as compensation for investor related services provided and valued at
$7,500. The issuance was exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of the Securities Act.
On December 26, 2005, we entered into a settlement agreement with David
Bouzaid, one of our officers/directors, regarding the settlement of an aggregate
amount of $6,000 due and owing pursuant to services provided by Mr. Bouzaid (the
"Director Settlement Agreement II"). Pursuant to the terms and provisions of the
Settlement Agreement II: (i) we agreed to settle $6,000 due and owing to Mr.
Bouzaid by issuing 40,000 shares of our restricted common stock at $0.15 per
share; and (ii) Mr. Bouzaid agreed to accept the issuance of the aggregate
40,000 shares of restricted common stock as full and complete satisfaction of
the debt due and owing. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
II-6
On December 26, 2005, we entered into a settlement agreement with Stephen
Walters (the "Walters Settlement Agreement"), regarding the settlement of an
aggregate amount of $45,000 due and owing to Mr. Walters pursuant to managerial
services performed. Pursuant to the terms and provisions of the Walters
Settlement Agreement: (i) we agreed to settle $45,000 representing a partial
amount of the aggregate amount due and owing to Mr. Walters by issuing 300,000
shares of our restricted common stock at $0.15 per share; and (ii) Mr. Walters
agreed to accept the issuance of an aggregate of 300,000 shares of our
restricted common stock as full and complete satisfaction of the aggregate
amount of $34,000. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On December 31, 2005 we issued 50,000 shares of restricted common stock to
settle $6,250 in interest due on certain related party notes. The recipients are
sophisticated investors who have such knowledge and experience in financial,
investment and business matters that they are capable of evaluating the merits
and risks of the prospective investment in our securities. The recipients are
accredited investors. The issuance was exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act.
On January 13, 2006, in accordance with the terms and provisions of the
Investment Agreement, we issued to Cornell Capital Partners: (i) 8,000 Series A
Preferred Shares in exchange for the sum of $800,000 less the surrender of a
Promissory Note of $255,237; (ii) a five (5) year warrant exercisable into
2,500,000 shares of our common stock at an exercise price of $0.30; and (iii) a
five (5) year warrant exercisable into 2,500,000 shares of our common stock at
an exercise price of $0.20.
On January 13, 2006, Transax entered into an Investment Agreement with
Cornell Capital Partners (Cornell Capital Partners and the company are
collectively referred to herein as the "Parties"), pursuant to which the Company
sold to Cornell Capital Partners up to 16,000 Series A Preferred Shares, which
shall be convertible, at Cornell Capital Partners' discretion, into shares of
the Company's common stock for a total price of up to $1,600,000. Series A
Preferred Shares may be converted into shares of the Company's common stock
equal to the sum of the Liquidation Amount, defined as an amount equal to $100
per share of Series A Preferred Shares, plus accrued but unpaid dividends
thereon, divided by the Conversion Price. The Conversion Price is defined to be
equal to the lower of (i) $0.192 or (ii) eighty percent (80%) of the lowest
daily volume weighted average price of the Company's common stock, as determined
by price quotations from Bloomberg, LP, during the ten (10) trading days
immediately preceding the date of conversion.
On January 13, 2006, the Company issued to Cornell Capital Partners two (2)
Warrants to purchase up to 5,000,000 shares of the Company's common stock. The
first Warrant issued to Cornell Capital Partners for 2,500,000 shares of common
stock at an exercise price of $0.30, shall terminate after the five (5) year
anniversary of the date of issuance. The second warrant issued to Cornell
Capital Partners was 2,500,000 shares of common stock at exercise price of
$0.20, shall terminate after the five (5) year anniversary of the date of
issuance.
On February 1, 2006, the Company and the Investor mutually agreed to extend
the term of the Debentures until December 1, 2007. In addition, the Company
issued the SHG Warrant to purchase 400,000 shares of the Company's common stock.
The SHG Warrant has a term of two (2) years and is exercisable at $0.20 per
share.
On March 20, 2006, we entered into a one (1) year consulting contract for
business development services with ROI Group Associates Inc. In connection with
the agreement, we agreed to issue 900,000 shares of common stock. We valued
these common shares at the fair market value on the dates of grant or $0.12 per
share based on the quoted trading price and recorded deferred consulting expense
of $108,000 to be amortized over the service period. In addition, we granted a
warrant to purchase 2,000,000 shares of the Company's common stock. The warrant
has a term expiring January 31, 2009. 1,000,000 of the warrants are exercisable
at $0.20 per share and 1,000,000 of the warrants are exercisable at $0.25 per
share. As of March 31, 2006 these shares had not been issued and are included in
common stock issuable on the accompanying balance sheet.
On May 7, 2006, the Company issued to Cornell Capital Partners the
remaining 8,000 Series A Preferred Shares for a purchase price equal to $800,000
in accordance with the Investment Agreement.
On May 17, 2006, the Company issued 600,000 common shares in connection
with a consulting contract.
On June 28, 2006, the Company issued 300,000 common shares in connection
with a consulting contract.
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On July 17, 2006, the Investor converted $15,000 of the Debenture into
104,167 shares of the Company's common stock.
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, as amended (the "Securities Act") 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; (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.
ITEM 26. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT LOCATION
----------- ---------------------- --------
3.1 Articles of Incorporation Incorporated by reference to the Company's Report
filed on Form 10-SB filed on October 27, 1999
3.2 ByLaws Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 as
filed with the SEC on May 9, 2006
3.3 Certificate of Designation of Series A Convertible Incorporated by reference to Exhibit 10.3 to the
Preferred Stock of Transax International, Ltd. Company's Current Report on Form 8-K as filed with
the SEC on January 20, 2006
4.1 2004 Stock Option Plan, effective January 1, 2004 Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December
31, 2004 as filed with the SEC on April 18, 2005
5.1 Opinion of Colorado Counsel Provided herewith
10.1 Merger Agreement, dated July 22, 2003, by and Incorporated by reference to the Company's Annual
among the Company, Vega-Atlantic Acquisition Report filed on Form 10-KSB for the year ended
Corporation, Transax Limited and certain selling December 31, 2003 as filed with the SEC on April
shareholders of Transax International Limited 14, 2004
10.2 Securities Purchase Agreement, dated April 1, Incorporated by reference to the Company's Current
2005, by and between the Company and Scott and Report on Form 8-K as filed with the SEC on April
Heather Grimes - Joint Tenants With Rights of 6, 2005
Survivorship
10.3 Investors Registration Rights Agreement, dated Incorporated by reference to the Company's Current
April 1, 2005, by and between the Company and Report on Form 8-K as filed with the SEC on April
Scott and Heather Grimes - Joint Tenants With 6, 2005
Rights of Survivorship
10.4 Secured Convertible Debenture, dated April 1, Incorporated by reference to the Company's Current
2005, issued to Scott and Heather Grimes - Joint Report on Form 8-K as filed with the SEC on April
Tenants With Rights of Survivorship 6, 2005
10.5 Termination Agreement, dated May 17, 2005, related Incorporated by reference to the Company's Current
to the 2004 Standby Equity Distribution Agreement Report on Form 8-K as filed with the SEC on May
by and between the Company and Cornell Capital 20, 2005
Partners, LP
10.6 Standby Equity Distribution Agreement, dated May Incorporated by reference to the Company's Current
17, 2005, by and between the Company and Cornell Report on Form 8-K as filed with the SEC on May
Capital Partners, LP 20, 2005
10.7 Registration Rights Agreement, dated May 17, 2005, Incorporated by reference to the Company's Current
by and between the Company and Cornell Capital Report on Form 8-K as filed with the SEC on May
Partners, LP 20, 2005
10.8 Placement Agent Agreement, dated May 17, 2005, by Incorporated by reference to the Company's Current
and between the Company and Monitor Capital, Inc. Report on Form 8-K as filed with the SEC on May
20, 2005
10.9 Promissory Note, dated May 17, 2005, issued by the Incorporated by reference to the Company's Current
Company to Cornell Capital Partners, LP Report on Form 8-K as filed with the SEC on May
20, 2005
10.10 Securities Purchase Agreement, dated October 25, Incorporated by reference to the Company's Current
2005, by and between the Company and Cornell Report on Form 8-K as filed with the SEC on
Capital Partners, LP November 3, 2004
10.11 Termination Agreement, dated as of January 13, Incorporated by reference to Exhibit 10.9 to the
2006, by and between Transax International, Ltd. Company's Current Report on Form 8-K as filed with
and Cornell Capital Partners, LP the SEC on January 20, 2006
10.12 Letter from Cornell Capital Partners, LP, Incorporated by reference to Exhibit 10.8 to the
regarding the surrender of a Promissory Note Company's Current Report on Form 8-K as filed with
the SEC on January 20, 2006
10.13 Investment Agreement, dated as of January 13, Incorporated by reference to Exhibit 10.1 to the
2006, by and between Transax International, Ltd. Company's Current Report on Form 8-K as filed with
and Cornell Capital Partners, LP the SEC on January 20, 2006
10.14 Investor Registration Rights Agreement, dated as Incorporated by reference to Exhibit 10.2 to the
of January 13, 2006, by and between Transax Company's Current Report on Form 8-K as filed with
International, Ltd. and Cornell Capital Partners, the SEC on January 20, 2006
LP
II-8
EXHIBIT NO. DESCRIPTION OF EXHIBIT LOCATION
----------- ---------------------- --------
10.15 Warrant, dated as of January 13, 2006, issued to Incorporated by reference to Exhibit 10.4 to the
Cornell Capital Partners, LP Company's Current Report on Form 8-K as filed with
the SEC on January 20, 2006
10.16 Warrant, dated as of January 13, 2006, issued to Incorporated by reference to Exhibit 10.5 to the
Cornell Capital Partners, LP Company's Current Report on Form 8-K as filed with
the SEC on January 20, 2006
10.17 Escrow Agreement dated January 13, 2006, by and Incorporated by reference to Exhibit 10.6 to the
among Transax International, Ltd., Cornell Capital Company's Current Report on Form 8-K as filed
Partners, LP and David Gonzalez, Esq. with the SEC
on January 20, 2006
10.18 Irrevocable Transfer Agent Instructions, dated as Incorporated by reference to Exhibit 10.7 to the
of January 13, 2006, by and between Transax Company's Current Report on Form 8-K as filed with
International, Ltd. and Cornell Capital Partners, the SEC on January 20, 2006
LP
10.19 Investor Relations Agreement, dated January 17, Incorporated by reference to Exhibit 10.11 to the
2006, by and between Transax International Limited Company's Amended Annual Report on Form 10-KSB/A
and David Sasso as filed with the SEC on July 10, 2006
10.20 Consulting Agreement, dated July 15, 2005, by and Incorporated by reference to Exhibit 10.12 to the
between Transax International Limited and Geoff Company's Amended Annual Report on Form 10-KSB/A
Eiten as filed with the SEC on July 10, 2006
10.21 Consulting Agreement, dated March 31, 2005, by and Incorporated by reference to Exhibit 10.13 to the
between Transax International Limited and Aiden Company's Amended Annual Report on Form 10-KSB/A
Capital Management as filed with the SEC on July 10, 2006
10.22 Consulting Agreement, dated January 14, 2005, by Incorporated by reference to Exhibit 10.14 to the
and between Transax International Limited and Company's Amended Annual Report on Form 10-KSB/A
Mirador Consulting Inc. as filed with the SEC on July 10, 2006
10.23 Service Agreement and Proposal, dated March 20, Provided herewith
2006 by and Between the Company and ROI Group
Associates, Inc.
14.1 Code of Ethics Incorporated by reference to Exhibit 14.1 to the
Company's Registration Statement on Form SB-2 as
filed with the SEC on May 9, 2006
23.1 Consent of Independent Registered Public Provided herewith
Accounting Firm
23.2 Consent of Colorado Counsel Provided herewith (contained in Exhibit 5.1
provided herewith)
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ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a twenty percent (20%) change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule
424 (ss.230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned small business issuer or used or referred to by
the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small
business issuer; and
(iv) Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
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.
(c) Each prospectus filed pursuant to Rule 424(b)(ss.230.424(b) of this
chapter) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A (ss.230.430A of this chapter), shall be deemed to be part
of and included in the registration statement as of the date it is first used
after effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act, the Company
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, October 18, 2006.
TRANSAX INTERNATIONAL LIMITED
Date: October 18, 2006 By: /s/ Stephen Walters
-------------------
Name: Stephen Walters
Title: President and
Chief Executive Officer
Date: October 18, 2006 By: /s/ Adam Wasserman
------------------
Name: Adam Wasserman
Title: Chief Financial Officer and
Principal Accounting Officer
In accordance with the 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.
SIGNATURE TITLE DATE
By: /s/ Stephen Walters Director October 18, 2006
-------------------
Stephen Walters
By: /s/ Laurie Bewes Director October 18, 2006
----------------
Laurie Bewes
By: /s/ David M. Bouzaid Director October 18, 2006
--------------------
David M. Bouzaid
II-11