As filed with the Securities and Exchange Commission on September 15, 2006
Commission File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 3841 87-0459536
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification
organization) Number)
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal
executive offices and principal place of business)
Raymond P.L. Cannefax, President and Chief Executive Officer
Paradigm Medical Industries, Inc.
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
______________________
Copies to:
Randall A. Mackey, Esq.
Mackey Price Thompson & Ostler
350 American Plaza II
57 West 200 South
Salt Lake City, Utah 84101-3663
Telephone: (801) 575-5000
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 (the "Securities Act"), check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
___________________________
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
class of Number of maximum maximum Amount of
securities to be Shares to be offering price aggregate registration
registered registered(1) per Share(2) offering price fee
Common Stock, $.001 par value per share (3)....... 60,000,000 .006 $ 360,000 $ 38.52
================================================== ============== =============== =============== ===============
(1) Includes shares of our common stock, $.001 par value per share, which
may be offered pursuant to this registration statement, which shares
are issuable upon conversion of callable secured convertible notes and
the exercise of warrants held by the selling stockholders. In addition
to the shares set forth in the table, the amount to be registered
includes an indeterminate amount of shares issuable upon conversion of
the callable secured convertible notes and exercise of the warrants, as
such number may be adjusted as a result of stock splits, stock
dividends and similar transactions in accordance with Rule 416. The
number of shares of common stock registered hereunder represents a good
faith estimate by us of the number of shares of common stock issuable
upon conversion of the callable secured convertible notes and upon
exercise of the warrants.
For purposes of estimating, the number of shares of common stock to be
included in this registration statement, we calculated a good faith
estimate of the number of shares of common stock that we believe will
be issuable upon exercise of the callable secured convertible notes and
upon exercise of the warrants to account for market fluctuation, and
anti-dilution and price protection adjustments, respectively. Should
the conversion ratio result in our having insufficient shares, we will
not rely upon Rule 416, but will file a new registration statement to
cover the resale of such additional shares should that become
necessary. In addition, should a decrease in the exercise price as a
result of issuance or sale of shares below the then current market
price, result in our having insufficient shares, we would not rely upon
Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, as amended, using the last reported sale price on the OTC
Bulletin Board on September 6, 2006, which was $.006 per share.
(3) Includes a good faith estimate of shares underlying callable secured
convertible notes to account for market fluctuations.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER , 2006
-----------------------------------------------------------------------
Up to 60,000,000 Shares of Common Stock
PARADIGM MEDICAL INDUSTRIES, INC.
This prospectus relates to the resale by the selling stockholders of up
to 60,000,000 shares of our common stock issuable upon conversion of the
callable secured convertible notes in the principal amount of $1,500,000. The
$1,500,000 in callable secured convertible notes are convertible into our common
stock at the lower of $.02 or 60% of the average of the three lowest intraday
trading prices for our common stock on the OTC Bulletin Board for the 20 trading
days before but not including the conversion date. The selling stockholders may
sell common shares from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock
that they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, and is quoted on the Over-the-Counter Bulletin
Board under the symbol PMED.OB. On September 6, 2006, the last reported sale
price of our common stock was $.006 per share.
Investing in our common stock involves substantial risks that are
described in the "Risk Factors" section beginning on page 7 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
This prospectus is included in the registration statement that was filed by
Paradigm Medical Industries, Inc. with the U.S. Securities and Exchange
Commission. The selling stockholders may not sell these securities until the
registration statement becomes effective. This prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the sale is not permitted.
The date of this prospectus is September __, 2006.
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
The Company
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately two million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
As reflected in the results for the fiscal years ended December 31,
2005 and 2004, diagnostic products are currently our major focus and the
Photon(TM) laser system and other extensive research and development projects
have been put on hold pending future evaluation when our financial position
improves. Our focus is not on any specific diagnostic product or products, but
rather on our entire group of diagnostic products. We sell our products in all
countries of the world in which we are permitted to do so. The nature of the
regulatory approval processes in those countries vary by country but, in general
terms, follow the approach of the regulatory approval processes of the United
States Food and Drug Administration, or FDA, and the approval processes of the
countries in the European Union. The status of specific approvals is detailed in
the table in the Business section of this prospectus.
We market two cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the Photon(TM) laser system,
is a laser cataract surgery system marketed as the next generation of cataract
removal. The Photon(TM) product has yet to be approved by the Food and Drug
Administration. Except for the Photon(TM) laser system, which can only be sold
in countries outside of the United States, our products can be sold in the
United States and in foreign countries including but not limited to Argentina,
Australia, Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia, Egypt,
France, Germany, Greece, Hong Kong, India, Israel, Italy, Japan, Jordan, Korea,
Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Puerto Rico, Russia,
Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand, Turkey, United Kingdom, and
United Arab Emirates . Both the Photon(TM) laser system and the Precisionist
ThirtyThousand (TM) are manufactured as an Ocular Surgery Workstation(TM). At
present, because the Photon(TM) laser system has not received FDA approval, it
does not provide significant revenues to us. We estimate that the funds needed
to complete the clinical trials in order to obtain the necessary regulatory
approval on the Photon(TM) to be approximately $225,000. Any possible future
efforts to complete the clinical trials on the Photon(TM) would depend on our
obtaining adequate funding. Thus, due to the uncertainty surrounding the
timetable for obtaining FDA approval and the lack of significant revenues from
other surgical products, we have recorded an inventory reserve against the
majority of inventory associated with the Photon(TM) laser system and
Precisionist Thirty Thousand(TM).
Our diagnostic products include a P55 pachmetric analyzer, a P37
Ultrasonic A/B Scan, the P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37
A/B Scan, two perimeters, a corneal topographer and the Blood Flow Analyzer
(TM). The diagnostic ultrasonic products, including the P55 pachymetric
analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound Biomicroscope
were acquired from Humphrey Systems, a division of Carl Zeiss, Inc. in 1998. We
developed and offered for sale in the fall of 2000 the P45, which combines the
P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound Biomicroscope into one
machine. The perimeter and the corneal topographer were added when we acquired
the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June
2000. We acquired the Ocular Blood Flow, Ltd. in June of 2000, whose principal
product is the Blood Flow Analyzer(TM). This product is designed for the
measurement of intraocular pressure and pulsatile ocular blood flow volume for
detection and treatment of glaucoma. In March 2005, we developed and offered for
sale the P60 UBM Ultrasound Biomicroscope, the fourth generation of UBM devices,
which has better visual clarity and image flexibility than earlier versions. We
are currently developing additional applications for all of our diagnostic
products.
We rely upon several products for revenues. For the six months ended
June 30, 2006, 46% of our revenues were derived from the Dicon(TM) diagnostic
products sales (the perimeter and corneal topographer), 7% of revenues from
Blood Flow Analyzer(TM) sales, 22% of revenues from P40, P45 and P60 UBM
Ultrasound Biomicroscope sales, 12% of revenues from Humphrey Systems diagnostic
product sales (the P55 pachymetric analyzer and the P37 Ultrasonic A/B Scan),
and 13% of revenues from services, disposables and other sales.
2
For the fiscal year ended December 31, 2005, 31% of our revenues were
derived from the Dicon(TM) diagnostic products sales (the perimeter and the
corneal topographer), 4% of revenues from Blood Flow Analyzer(TM) sales, 43% of
revenues from the P40, P45 and P60 UBM Ultrasound Biomicroscope sales, 10% of
revenues from Humphrey systems diagnostic products sales (the P55 pachymetric
analyzer, the P20 A-Scan and the P37 A/B Scan), and 12% of revenues from
services, disposables and other sales.
For the fiscal year ended December 31, 2004, 34% of our revenues were
derived from the Dicon (TM) diagnostic products sales (the perimeter and corneal
topographer), 18% of revenues from Blood Flow Analyzer(TM) sales, 27% of
revenues from P40 and P45 UBM Ultrasound Biomicroscope sales, 12% of revenues
from Humphrey Systems diagnostic product sales (the P55 pachymetric analyzer,
the P20 A-Scan and the P37 A/B Scan), and 9% of revenues from services,
disposables and other sales. Our principal executive offices are located at 2355
South 1070 West, Salt Lake City, Utah 84119 and our telephone number is (801)
977-8970.
Audited revenues for the fiscal year ended December 31, 2005 were
$2,201,000 as compared to $3,062,000 for the comparable period for fiscal 2004.
Unaudited revenues for the six months ended June 30, 2006 were $1,182,000 as
compared to $1,413,000 for the comparable period of 2005.
On January 5, 2006, our Board of Directors appointed Raymond P.L.
Cannefax as President and Chief Executive Officer of the company, replacing John
Y. Yoon who served in those positions from March 18, 2004 to December 31, 2005.
Mr. Yoon resigned as President and Chief Executive Officer, effective December
31, 2005, to pursue other opportunities. On March 20, 2006, our Board of
Directors appointed Luis A. Mostacero as Vice President of Finance, Treasurer
and Secretary. Mr. Mostacero previously served as Controller from June 20, 2000
to September 15, 2005, when he resigned to pursue other opportunities. On April
10, 2006, Michael S. Austin was appointed as Vice President of Sales and
Marketing.
On November 15, 2005, Aziz A. Mohabbat resigned as Vice President of
Operations and Chief Operating Officer to pursue other opportunities. Mr.
Mohabbat served as Vice President of Operations and Chief Operating Officer from
March 22, 2004 to November 15, 2005, and as Chief Operating Officer from August
30, 2002 to March 2003. On January 20, 2006, Frederick D. Geiger resigned as
Vice President of Engineering to pursue other opportunities. Mr. Geiger served
as Vice President of Engineering from May 23, 2005 to January 20, 2006. The
Board of Directors has not yet appointed a new Chief Operating Officer since
Aziz A. Mohabbat resigned or a new Vice President of Engineering since Mr.
Geiger resigned in an effort to conserve our financial resources. Moreover,
since Mr. Mohabbat's and Mr. Geiger's resignations, we have endeavored to reduce
our operating expenditures, which has resulted in a reduction in the number of
our employees. It is our intention to appoint a new Chief Operating Officer and
a new Vice President of Engineering in the future when we have adequate funds to
do so.
The Offering
Common stock offered by
selling stockholders .....Up to 60,000,000 shares, based on current market
prices and assuming full conversion of the callable
secured convertible notes in the principal amount of
$1,500,000.
Common stock outstanding
prior to the offering(1) .99,956,828 shares.
Common stock outstanding
after the offering(1).....Up to 259,956,828 shares.
Use of proceeds............ We will not receive any proceeds from the sale of
the common stock hereunder. We received gross
proceeds of $1,000,000 from the sale of the callable
secured convertible notes on February 28, 2006,and
the investors are obligated to provide us with an
additional $500,000 within five days of a
registration statement being declared effective by
the Securities and Exchange Commission that
registers the shares of common stock underlying the
callable secured convertible notes. The proceeds
from the sale of the callable secured convertible
notes will be used for purchase of inventory,
marketing and sales, increasing the number of our
direct sales representatives, and working capital.
Risk Factors/Dilution.......The offering involves a high degree of risk.
OTC Bulletin Board symbols
Common stock...............PMED.OB
___________________________
3
(1) Does not include 6,753 shares of common stock issuable upon conversion of
5,627 shares of Series A preferred stock, 10,783 shares of common stock
issuable upon conversion of 8,986 shares of Series B preferred stock,
8,750 shares of common stock issuable upon conversion of 5,000 shares of
Series D preferred stock, 13,333 shares of common stock issuable upon
conversion of 250 shares of Series E preferred stock, 245,217 shares of
common stock issuable upon conversion of 4,598.75 shares of Series F
preferred stock, 588,235 shares of stock issuable upon conversion of
588,235 shares of Series G preferred stock, options to purchase a total of
7,107,500 shares of common stock issuable upon the exercise of stock
options at prices ranging from $.01 to $2.75 per share, and warrants to
purchase 29,059,392 shares of common stock issuable upon the exercise of
warrants at prices ranging from $.10 to $6.75 per share.
Callable Secured Convertible Notes and Warrants
April 27, 2005 Sale of $2,500,000 in Callable Secured Convertible
Notes: To obtain funding for our ongoing operations, we entered into a
securities purchase agreement with four accredited investors on April 27, 2005
for the sale of (i) $2,500,000 in callable secured convertible notes and (ii)
warrants to purchase 16,534,392 shares of our common stock. The sale of the
callable secured convertible notes and warrants occurred in three traunches and
the investors provided us with an aggregate of $2,500,000 as follows:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after we filed a
registration statement on June 22, 2005 to register the shares of
common stock underlying the callable secured convertible notes and
the warrants; and
o $850,000 was disbursed on June 30, 2005, the effective date of the
registration statement.
Under the terms of the securities purchase agreement, we agreed not,
without the prior written consent of a majority-in- interest of the investors,
to negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (A) 270 days from
April 27, 2005, and (B) 180 days from the date the registration statement is
declared effective.
In addition, we agreed not to conduct any equity financing (including
debt financing with an equity component) during the period beginning April 27,
2005 and ending two years after the end of the above lock-up period unless we
have first provided each investor an option to purchase its pro-rata share
(based on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The $2,500,000 in callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is computed on the basis of a
365-day year and is payable quarterly in cash, with six months of interest
payable up front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0945, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The callable secured convertible notes mature in three
years from the date of issuance, and are convertible into our common stock at
the selling stockholders' option, at the lower of (i) $.09 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted.
The $2,500,000 in callable secured convertible notes are secured by our
assets, including our inventory, accounts receivable and intellectual property.
Moreover, we have a call option under the terms of the notes. The call option
provides us with the right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no event of default by us and
our stock is trading at or below $.09 per share. An event of default includes
the failure by us to pay the principal or interest on the callable secured
convertible notes when due or to timely file a registration statement as
required by us or obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of the callable secured
convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; and (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the securities purchase agreement.
4
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes. As of August 31, 2006, a total of $842,830 in callable
secured convertible notes have been converted into 166,666,667 shares of our
common stock pursuant to conversion notices from The NIR Group.
February 28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes: To obtain additional funding for our ongoing operations, we entered into
a second securities purchase agreement on February 28, 2006 with the same four
accredited investors for the sale of (i) $1,500,000 in callable secured
convertible notes and (ii) warrants to purchase 12,000,000 shares of its common
stock. The sale of the callable secured convertible notes and warrants is to
occur in three traunches and the investors are obligated to provide us with an
aggregate of $1,500,000 as follows:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after we filed a
registration statement on June 15, 2006 to register the shares of
common stock underlying the callable secured convertible notes.
The registration statement was subsequently withdrawn on July 25,
2006; and
o $500,000 will be disbursed upon the effectiveness of a
registration statement to register 60,000,000 shares of common
stock issuable upon conversion of the callable secured convertible
notes.
Each closing under the securities purchase agreement is subject to the
following conditions:
o We deliver to the investors duly executed callable secured
convertible notes and warrants;
o No litigation, statute, regulation or order had been commenced,
enacted or entered by or in any court, governmental authority or
any self-regulatory organization that prohibits consummation of
the transactions contemplated by the securities purchase
agreement; and
o No event occurred that could reasonably be expected to have a
material adverse effect on our business.
We also agreed not, without the prior written consent of a
majority-in-interest of the investors, to negotiate or contract with any party
to obtain additional equity financing (including debt financing with an equity
component) that involves (i) the issuance of common stock at a discount to the
market price of the common stock on the date of issuance (taking into account
the value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants during the lock-up period beginning February 28, 2006 and ending on the
later of (a) 270 days from February 28, 2006, or (b) 180 days from the date the
registration statement is declared effective.
In addition, we agreed not to conduct any equity financing (including
debt financing with an equity component) during the period beginning February
28, 2006 and ending two years after the end of the above lock-up period unless
it first provided each investor an option to purchase its pro-rata share (based
on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The callable secured convertible notes bear interest at 8% per annum
from the date of issuance. Interest is computed on the basis of a 365-day year
and is payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock price
is greater than 125% of the initial market price, or $.0275, for each trading
day during that month. Any amount of principal or interest on the callable
secured convertible notes that is not paid when due will bear interest at the
rate of 15% per annum from the date due thereof until such amount is paid. The
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our common stock at the selling stockholders'
option, at the lower of (i) $.02 or (ii) 60% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for the
20 trading days before but not including the conversion date. Accordingly, there
is no limit on the number of shares into which the notes may be converted.
The callable secured convertible notes are secured by our assets,
including our inventory, accounts receivable and intellectual property.
Moreover, we have a call option under the terms of the notes. The call option
provides us with the right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no event of default by us and
our stock is trading at or below $.02 per share. An event of default includes
the failure by us to pay the principal or interest on the callable secured
convertible notes when due or to timely file a registration statement as
required by us or obtain effectiveness with the U.S. Securities and Exchange
Commission of the registration statement. Prepayment of the callable secured
convertible notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (b) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding principal
and accrued interest for prepayments occurring after the 60th day following the
issue date of the notes.
5
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes.
We are required to register 60,000,000 shares of our common stock
issuable upon the conversion of the callable secured convertible notes that were
issued to the noteholders pursuant to the securities purchase agreement we
entered into on February 28, 2006. The registration statement must be filed with
the Securities and Exchange Commission within 60 days of the February 28, 2006
closing date and the effectiveness of the registration is to be within 135 days
of such closing date. Penalties of 2% of the outstanding principal balance of
the callable secured convertible notes plus accrued interest are to be applied
for each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at our option.
Simple Conversion Calculation
The number of shares of common stock issuable upon conversion of the
callable secured convertible notes is determined by dividing that portion of the
principal of the notes to be converted and interest, if any, by the conversion
price. For example, assuming conversion of $1,500,000 of notes outstanding on
September 6, 2006 (representing the amount of the notes sold pursuant to the
second securities purchase agreement dated February 28, 2006) and a conversion
price of $.006 per share, the number of shares issuable upon conversion would
be:
$1,500,000/$.006 = 250,000,000 shares.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of common stock that are issuable upon conversion of $1,500,000
principal amount of callable secured convertible notes (excluding accrued
interest), based on market prices 25%, 50%, and 75% below the market price, as
of September 6, 2006 of $.006.
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------- --------- -------- --------------- ------------
25% $.0045 $.0027 555,555,556 277.8%
50% $.003 $.0018 833,333,333 416.8%
75% $.0015 $.0009 1,666,666,667 833.5%
*Based on 199,956,828 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of our callable secured convertible notes will increase if the market
price of our stock declines, which will cause dilution to our existing
stockholders.
See the "Risk Factors" and "Selling Stockholders" sections for a
complete description of the callable secured convertible notes and warrants.
6
Summary Financial Information
For the year ended For the six months ended
December 31, June 30,
Statement of Operations Data: 2004 2005 2005 2006
Net Sales.............................. $3,062,000 $2,201,000 $1,413,000 $1,182,000
Net cost of sales....................... 1,217,000 1,599,000 692,000 638,000
Operating expenses...................... 2,237,000 2,782,000 1,476,000 956,000
Operating loss.......................... (392,000) (2,180,000) (755,000) (412,000)
Other income (expense).................. 456,000 (3,209,000) (2,846,000) (1,099,000)
Net income (loss)....................... 64,000 (5,389,000) (3,601,000) (1,511,000)
Net income (loss) applicable to common
shareholders..................... 10,000 (5,389,000) (3,601,000) (1,511,000)
Net income (loss) per common share...... $0.00 $(0.13) $(0.13) $(0.01)
Shares used in computing net loss per share 25,405,000 42,033,000 27,745,000 150,164,000
As of As of
Balance Sheet Data: December 31, 2005 June 30, 2006
Current assets................... $1,331,000 $1,912,000
Current liabilities.............. 1,177,000 1,239,000
Working capital (deficit)........ 154,000 673,000
Total assets..................... 1,702,000 2,275,000
Accumulated deficit.............. (62,196,000) (63,705,000)
Stockholder's equity ............ (1,513,000) (1,634,000)
RISK FACTORS
Before you invest in our common stock, you should be aware of the risks
described below which constitute material risks to potential investors. You
should consider carefully these risk factors together with all of the other
information included in this prospectus before you decide to invest in our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our common stock could decline. No investment should be made by
any person who is not in a position to lose the entire amount of his investment.
Special Note Regarding Forward-Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
Our auditors have expressed substantial doubt about our ability to continue as a
going concern.
Due to our significant recurring losses and our inability to generate
sufficient cash flows from operations to satisfy our liabilities and sustain
operations, our auditors have expressed substantial doubt about our ability to
continue as a going concern. Although we have had success in raising working
capital from the sale of our common stock in the past, the going concern
language in our auditors' report could negatively affect our ability to raise
such funds in the future. Some investors are unwilling to invest with companies
that have going concern language in the auditors' report and others demand
substantial discounts from the market price. Unless we are able to raise
additional working capital through the sale of our common stock, we will not be
able to continue the development of our products nor will we be able to pay our
existing current liabilities, which could result in protection under bankruptcy
laws. Under certain conditions, including but not limited to having judgments
rendered against us in a court of law, a group of creditors could force us into
bankruptcy due to our inability to pay the liabilities arising out of such
judgments. At this time, we are unable to assess the likelihood that we would
seek bankruptcy protection in the near future. There can be no assurance that we
will be successful in raising working capital from the sale of our common stock.
We have limited working capital, have accumulated significant losses, and expect
our losses to continue.
As of December 31, 2005,we had working capital of $154,000. As of June
30, 2006, our working capital was $673,000. Our accumulated deficit was
$62,196,000 as of December 31,2005, and $63,705,000 as of June 30, 2006. We had
net income of $64,000 for the fiscal year ended December 31, 2004, a net loss of
$5,389,000 for the fiscal year ended December 31, 2005, and a net loss of
$1,511,000 for the six months ended June 30, 2006. Our losses have resulted
principally from costs incurred in connection with research and development,
including clinical trials, of the laser surgery system. We did not sell medical
products until late 1992. Our ability to become profitable largely depends on
7
successfully developing clinical applications and obtain regulatory approvals
for our laser surgery products, including the Photon(TM) laser system, and to
effectively market such products. The problems and expenses frequently
encountered in developing new products and the competitive industry in which we
operate will impact whether we are successful. We may never achieve
profitability. Furthermore, we may encounter substantial delays and unexpected
expenses related to research, development, production, marketing, regulatory
matters or other unforeseen difficulties.
Because our securities trade on the Over-the-Counter Bulletin Board, your
ability to sell your shares in the secondary market may be limited.
Since June 26, 2003, our shares have traded on the Over-the-Counter
Bulletin Board. As a result, it may be more difficult for an investor to dispose
of our securities, or to obtain accurate quotations on their market value.
Furthermore, the prices for our securities may be lower than might otherwise be
obtained. On October 8, 2002, we received a notice from Nasdaq's Listing
Qualifications staff that for the previous 30 consecutive trading days, the
price of our common stock closed below the minimum $1.00 per share requirement
for continued inclusion on Nasdaq. The notice further provided that if at
anytime before April 7, 2003, the bid price of our common stock closed at $1.00
or more for a minimum of 10 consecutive trading days, we would be notified by
the staff that we comply with such rule.
On April 15, 2003, we received notice of a determination by Nasdaq's
Listing Qualifications staff that we failed to comply with the minimum bid price
rules for continued listing set forth in Nasdaq's rules. Specifically, the
notice stated that we have not regained compliance with the minimum $1.00
closing bid price per share requirement (noting that pursuant to the October 8,
2002, notice from the Nasdaq Listing Qualifications staff, we were provided 180
calendar days, or until April 7, 2003, to regain compliance with this
requirement) and we do not qualify with the $5,000,000 shareholders equity,
$50,000,000 market value of listed securities or $750,000 net income from
continuing operations requirement for an additional 180 calendar day compliance
period to comply with Nasdaq's rules. The April 15, 2003, notice further stated
that as of December 31, 2002, we reported stockholders' equity of $2,847,000 and
net losses from continuing operations of approximately $11,155,000, and as of
April 14, 2003, the market value of our listed securities was $4,208,108.
Accordingly, our common stock would be delisted from the Nasdaq SmallCap Market
at the opening of business on April 24, 2003. Separately, Nasdaq informed us
that listing fees of $22,500 and $18,000 under Rule 4310(c)(13) are owed to the
Nasdaq SmallCap Market.
We requested an oral hearing before a Nasdaq Listing Qualifications
Panel to review the staff's determination. The request automatically stayed the
delisting of our common stock. On April 23, 2003, we received formal notice from
Nasdaq that a hearing to consider our appeal would be held on May 29, 2003. On
May 29, 2003, Dr. Jeffrey F. Poore, our former President and Chief Executive
Officer; Randall A. Mackey, our Chairman of the Board; and Dr. David M. Silver,
a director of the company, attended an oral hearing before a Nasdaq Listing
Qualifications Panel in Washington, D.C. At the hearing Dr. Poore presented to
the panel a definitive plan both for regaining compliance with the particular
deficiencies cited in the April 15, 2003, letter from the Nasdaq Listing
Qualifications staff and sustaining long-term compliance with the Nasdaq
Marketplace Rules, including all applicable maintenance criteria. On June 24,
2003 we received notification from the Nasdaq Listing Qualifications Panel that
we were to be delisted from the Nasdaq Stock Market effective June 26, 2003. Our
securities trade on the Over-the-Counter Bulletin Board effective June 26, 2003.
Because our securities are delisted from the Nasdaq SmallCap Market and now
trade on the Over-the-Counter Bulletin Board, additional sales requirements on
broker-dealers will adversely affect the ability of purchasers to sell our
securities and the trading price of our securities could decline.
Moreover, because our securities currently trade on the
Over-the-Counter Bulletin Board, they are subject to the rules promulgated under
the Securities Exchange Act of 1934, as amended, which impose additional sales
practice requirements on broker-dealers that sell securities governed by these
rules to persons other than established customers and "accredited investors"
(generally, individuals with a net worth in excess of $1,000,000 or annual
individual income exceeding $200,000 or $300,000 jointly with their spouses).
For such transactions, the broker-dealer must determine whether persons that are
not established customers or accredited investors qualify under the rule for
purchasing such securities and must receive that person's written consent to the
transaction prior to sale. Consequently, these rules may adversely affect the
ability of purchasers to sell our securities and otherwise affect the trading
market in our securities.
Because our shares may be deemed "penny stocks," you may have difficulty selling
them in the secondary trading market.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Securities
Exchange Act of 1934 require delivery, prior to a transaction in a penny stock,
of a risk disclosure document relating to the penny stock market. Disclosure is
also required to be made about compensation payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Furthermore, monthly statements are required to be sent disclosing recent price
information for the penny stocks.
8
There are a large number of shares underlying our callable secured convertible
notes and warrants that may be available for future sale, and the sale of these
shares may depress the market price of our common stock.
As of August 31, 2006, we had 199,956,828 shares of our common stock
issued and outstanding and $3,157,170 in callable secured convertible notes
outstanding that may be converted into an estimated 526,195,000 shares of common
stock at current market prices, and outstanding warrants to purchase 29,059,392
shares of our common stock. Additionally, we have an obligation to sell $500,000
callable secured convertible notes that may be converted into an estimated
83,333,333 shares of common stock at current market prices and issue warrants to
purchase 4,000,000 shares of common stock in the near future. In addition, the
number of shares of common stock issuable upon conversion of the outstanding
callable secured convertible notes may increase if the market price of our stock
declines. All the shares, including all of the shares issuable upon conversion
of the notes and upon exercise of our warrants, may be sold without restriction.
The sale of these shares may adversely affect the market price of our common
stock.
The continuously adjustable conversion price feature of our callable secured
convertible notes could require us to issue a substantially greater number of
shares, which will cause dissolution to our existing stockholders.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of common stock that are issuable upon conversion of $1,500,000
principal amount of callable secured convertible notes (excluding accrued
interest), based on market prices 25%, 50%, and 75% below the market price, as
of September 6, 2006 of $.006.
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------- --------- -------- --------------- ------------
25% $.0045 $.0027 555,555,556 227.8%
50% $.003 $.0018 833,333,333 416.8%
75% $.0015 $.0009 1,666,666,667 833.5%
*Based on 199,956,828 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of our callable secured convertible notes will increase if the market
price of our stock declines, which will cause dilution to our existing
stockholders.
The continuously adjustable conversion price feature of our secured convertible
notes 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 callable secured convertible notes are convertible into shares of
our common stock at a 40% discount to the trading price of the common stock
prior to the conversion. The significant downward pressure on the price of the
common stock as the selling stockholders convert and sell material amounts of
common stock could encourage short sales by investors. This could place further
downward pressure on the price of the common stock. The selling stockholders
could sell common stock into the market in anticipation of covering the short
sale by converting their securities, which could cause the further downward
pressure on the stock price. In addition, not only the sale of shares issued
upon conversion or exercise of notes, warrants and options, but also the mere
perception that these sales could occur, may adversely affect the market price
of the common stock.
The issuance of shares upon conversion of the callable secured convertible notes
and exercise of outstanding warrants may cause immediate and substantial
dilution to our existing stockholders.
The issuance of shares upon conversion of callable secured convertible
notes and exercise of warrants may result in substantial dissolution to the
interests of other stockholders since the selling stockholders may ultimately
convert and sell the full amount issuable on conversion. Although the selling
stockholders may not convert their callable secured convertible notes and/or
exercise their warrants if such conversion or exercise price would cause them to
own more than 4.99% of our outstanding common stock, this restriction does not
prevent the selling stockholders from converting and/or exercising some of their
holdings and then converting the rest of their holdings. In this way, the
selling stockholders could sell more than this limit while never holding more
than this limit. There is no upper limit on the number of shares that may be
issued, which will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
In the event that our stock price declines, the shares of common stock allocated
for conversion of the callable secured convertible notes and registered under
this prospectus may not be adequate and we may be required to file a subsequent
registration statement covering additional shares. If the shares we have
allocated are not adequate and we are required to file an additional
registration statement, we may incur substantial costs in connection therewith.
9
Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
callable secured convertible notes, we have made a good faith estimate as the
amount of shares of common stock that we are required to register and allocate
for conversion of the callable secured convertible notes. Accordingly, we have
allocated and registered 60,000,000 shares to cover the conversion of the
callable secured convertible notes. In the event that our per share stock price
decreases below $.006, the shares of common stock we have allocated for
conversion of the callable secured convertible notes and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If we are required for any reason to repay our outstanding callable secured
convertible notes, we would be required to deplete our working capital, if
available, or raise additional funds. Our failure to repay the callable secured
convertible notes, if required, could result in legal action against us, which
could require us to curtail or cease our operations.
On April 27, 2005, we entered into a securities purchase agreement for
the sale of an aggregate of $2,500,000 principal amount of callable secured
convertible notes. These callable secured convertible notes are due and payable,
with 8% interest, three years from the date of issuance, unless sooner converted
into shares of our common stock. As of August 31, 2006, a total of $842,830 of
these callable secured convertible notes have been converted into 166,666,667
shares of our common stock, reducing the outstanding principal amount of the
notes to $1,657,170. On February 28, 2006, we entered into a securities purchase
agreement for the sale of an aggregate $1,500,000 in principal amount of
callable secured convertible notes. These callable secured convertible notes are
due and payable, with 8% interest, three years from the date of issuance, unless
sooner converted into shares of our common stock. Although we currently have
$1,000,000 in callable secured convertible notes outstanding pursuant to the
securities purchase agreement we entered into on February 28, 2006, we are
obligated to sell additional callable secured convertible notes to the
convertible noteholders in the aggregate amount of $500,000. Any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or to have such registration
statement declared effective, breach of any covenant, representation or warranty
in the securities purchase agreement or related convertible notes, the
assignment or appointment of a receiver to control a substantial part of our
property or business, the filing of a money judgment, writ or similar process
against us in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company, and the delisting
of our common stock could require the early repayment of the callable secured
convertible notes, including a default interest rate of 15% on the outstanding
principal balance of the notes if the default is not cured within the specified
grace period. We anticipate that the full amount of callable secured convertible
notes will be converted into shares of our common stock, in accordance with the
terms of the callable secured convertible notes. If we are required to repay the
callable secured convertible notes, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the notes
when required, the noteholders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.
If we are unable to obtain additional capital, we would be required to eliminate
certain activities that would adversely effect our operations.
We may require substantial funds for various purposes, including
continuing research and development, expanding clinical trials, completing the
FDA approval process for our products (including the Photon(TM) laser system),
and manufacturing and marketing our existing products. We will need to seek
additional capital, possibly through public or private sales of our securities,
in order to fund our activities on a long-term basis. Adequate funds may not be
available when needed or on terms acceptable to us. Insufficient funds may
require us to delay further, scale back or eliminate certain or all of our
research and development programs or to license third parties to commercialize
products or technologies that we would otherwise seek to develop ourselves,
which may materially adversely affect our continued operations.
Our research activities may not result in any commercially profitable products.
The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether our research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed products. There is also no guarantee that we will be able
to develop and sell a glaucoma surgery system.
10
We are uncertain of obtaining FDA approval for our Photon(TM) laser system and
further development of the Photon(TM) is on hold until our financial situation
improves, and we may lose our rights to manufacture or sell the Photon(TM) laser
system if we are unable to agree on the correct method of calculating royalty
payments under a license agreement.
We are subject to substantial regulation by the Food and Drug
Administration or FDA and other federal and state regulatory agencies. FDA
regulations require us to obtain either 510(k) clearance or premarketing
approval prior to marketing a product in the United States. We are also subject
to foreign regulation and must receive various types of approvals from foreign
government agencies prior to selling our products in some countries. The
clearance and approval processes for both the FDA and foreign regulatory
authorities are costly, time consuming and uncertain. In addition, we are
required to obtain FDA approval before exporting a device that has not received
FDA marketing clearance or approval. We may never be able to obtain these
required government approvals. Delays or failure to obtain such approvals would
materially and adversely effect us, as would changes in existing requirements.
We have received 510(k) clearance from the FDA for our ultrasonic surgery
systems allowing us to sell both devices in the United States. We have also
received 510(k) clearance to market our Blood Flow Analyzer(TM).
In May 1995, we were granted an investigational device exemption for
our Photon(TM) laser system allowing us to conduct clinical studies in support
of our application with the FDA to obtain approval to market the system. During
the clinical trials, we discovered that the Photon(TM) laser system may not
effectively remove hard (dense or impacted) cataracts. In May 1998, we received
FDA clearance to conduct clinical tests on soft cataracts. We believe the FDA
will approve our 510(k) predicate device application for the Photon(TM) laser
system because in the United States most cataracts are removed before tissue
hardens. We received an FDA warning letter in August 2000 concerning
deficiencies in the Phase I clinical trials and, after making several
submissions to the FDA, we received a letter from the FDA in February 2001
stating that the deficiencies had been corrected and the clinical trials could
continue.
We have completed the authorized clinical studies and, in October 2001,
made a supplemental submission to the FDA regarding the 510(k) application. We
received a preliminary review from the FDA of our supplemental submission in
December 2001 and submitted additional clinical information to the FDA on
February 6, 2002. On May 7, 2002, we received a letter from the FDA requesting
further clinical information. We have generated additional clinical information
in response to the letter and are uncertain if we will make a submission to the
FDA with the additional clinical information. Because of the "going concern"
status of the company, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the company. As reflected in the results for the fiscal
year ended December 31, 2003, diagnostic products are currently our major focus
and the Photon(TM) and other extensive research and development projects have
been put on hold pending future evaluation when our financial position improves.
Our focus is not on any specific diagnostic product or products, but rather on
our entire group of diagnostic products.
We have also received FDA approval to manufacture and export the
Photon(TM) laser system internationally. However, we have not yet obtained
approval from some foreign countries to market the laser product where approval
is necessary. We anticipate that many contemplated applications of our currently
existing and planned products will be subject to the lengthy regulatory approval
process, including preclinical studies, clinical trials and extensive regulatory
review. This process could take many years and require the expenditure of
substantial resources.
The Photon(TM) laser system is protected under a United States patent
issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to us in 1997. The
United States patent expired in September 2004. We secured the exclusive
worldwide rights to this patent from PhotoMed by means of a license agreement
dated July 7, 1993. The license agreement expired when the United States patent
rights expired in September 2004. PhotoMed and Dr. Eichenbaum brought legal
action against us on September 11, 2000 involving an amount of royalties that
are allegedly due and owing to them from the sale of equipment by us under the
license agreement. We have paid $15,717, which we believe brings all payments
current as of the date of the last payment on January 7, 2005. We have been
working with PhotoMed and Dr. Eichenbaum to insure that the royalty calculations
have been correctly made on the royalties paid as well as the proper method of
calculations for the future.
It is anticipated that once the parties agree on the correct royalty
calculations, the legal action will be dismissed. An issue in dispute concerning
the method of calculating royalties is whether royalties should be paid on
returned equipment. Since July 1, 2001, only one Photon(TM) laser system has
been sold and no systems returned. Thus, the amount of royalties due, according
to our calculations, is $981. We made payment of this amount of Photomed and Dr.
Eichenbaum on January 5, 2005 and, as a result, seek to have the legal action
dismissed. However, if the parties are unable to agree on a method of
calculating royalties, there is risk that PhotoMed and Dr. Eichenbaum may amend
the complaint to request termination of the license agreement and, if
successful, we would lose our rights to manufacture or sell the Photo(TM) laser
system.
11
Our products may become obsolete due to rapid technological change.
Our market is subject to rapid technological change. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development on our existing products and to develop new
products. Despite such investment, our current or proposed products may be
unsuccessful.
Our Photon(TM) laser system could receive competition from other laser systems
that are well financed with well- recognized trade names.
Our Photon(TM) laser system will potentially receive competition from
other laser systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttrium-Lithium-Fluoride) or lasers of other wave lengths.
Competition may also come from other medical devices and other surgical
techniques. Further, the cataract surgical device industry is dominated by a
small number of large competitors that are well established in the marketplace,
have experienced management, are well financed and have a well recognized trade
name related to their product lines. We may be unable to penetrate the existing
market and acquire a sufficient market share to be profitable. Significant
competitive factors that will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance.
Our new products may incur unexpected production problems, which would impact
our sales and profits.
New ventures, particularly those involved in a highly technical
industry such as the medical industry, have substantial inherent risks. These
risks are in three general areas: technical, mechanical and human.
Notwithstanding any pre-production planning, new products can incur unexpected
problems in full-scale production, which cannot always be foreseen or accurately
predicted. Designs can become unworkable, for unpredicted reasons. Quality
control and component sourcing failures can also be expected from time to time.
Any business, including ours, is substantially dependent upon the capabilities
and performance of both management, engineering and sales personnel. Mistakes in
judgment or performance can be costly and, in certain instances, disabling.
Therefore, management skill, experience, character and reliability are of
significant importance.
Mistakes may occur in the design and manufacture of our products, which could
prevent or limit the sales of such products.
The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers.
We are dependent upon a limited number of key suppliers for components and parts
used in our products and the interruption in the supply of these components and
parts could impede our ability to deliver our products to market.
We currently purchase components and parts used in our products from a
limited number of key suppliers. Although we maintain alternative suppliers, our
reliance on our principal suppliers could result in delays associated with
redesigning a product due to an inability to obtain an adequate supply of
required components and parts, and reduced control over pricing, quality and
timely delivery. The loss of any of these principal suppliers or the inability
of a supplier to meet performance and quality specifications, requested
quantities or delivery schedules could cause our revenues to decline. In
addition, any interruption or discontinuance in the supply of components or
parts could have an adverse effect on our business, results of operation and
financial condition. Further, a significant price increase from any of our
principal suppliers could cause our profitability to decline if we cannot
increase the prices of our products to our customers. Our principal suppliers
include Capistrano Labs, U.S. Ultrasound and Anello.
No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system, the Blood Flow Analyzer(TM), and the P40, P45
and P60 Ultrasound Biomicroscopes.
We believe that there is substantial commercial demand for our
Photon(TM) laser system, our Blood Flow Analyzer(TM), and our P40, P45 and P60
Ultrasound Biomicrocopes for the eyes at a profitable price. However, this
belief is solely based on our management's experience and judgment. At this
time, there have been no independent marketing studies by independent
12
professional marketing firms to reliably confirm the extent of this demand, the
price ranges within which it exists and the amount of promotion necessary to
exploit whatever demand does exist.
Our Photon(TM) laser system may not be accepted in the marketplace because it
does not remove hard cataracts.
Our products may not be accepted in the marketplace. Such acceptance
will depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our Photon(TM) laser system may never gain market acceptance
since the system does not effectively remove hard (dense or impacted) cataracts.
Further, we may be unable to successfully market our products even if they
perform successfully in clinical applications. Our Precisionist
ThirtyThousand(TM) Workstation(TM) may not gain acceptance unless we can reduce
or eliminate the vacuum surge and develop additional, complementary surgical
devices for installation in that host system. Vacuum surge is a phenomenon that
occurs when the tip of the ultrasonic needle is obstructed by target tissue,
allowing pressure to build up and, if the pressure is not released, a rush of
fluid goes from the chamber of the eye into the needle to equalize the pressure.
The result can be complications to the eye such as posterior capsule rupture,
iris capture and chamber collapse. We believe this phenomenon affects all other
ultrasonic cataract removal systems currently on the market.
Our pending patents may not be perfected and our present or future patents may
infringe upon the patents of others, which could restrict or prevent the
manufacture and sale of our products.
We depend on our ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. A United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. protects our laser probe.
These patent rights expired in September 2004. Patents have also been granted to
the Blood Flow Analyzer(TM) in the United States and the United Kingdom; to the
Dicon(TM) Topographer in the United States; and to the Dicon(TM) Perimeter in
the United States, the United Kingdom, Germany and Switzerland. The pending
patents may not be perfected. Also, our present or future products may be found
to infringe upon the patents of others. If our products are found to infringe on
the patents, or otherwise impermissibly utilize the intellectual property of
others, our development, manufacture and sale of such products could be severely
restricted or prohibited. We may be required to obtain licenses to utilize such
patents or proprietary rights of others and acceptable terms may be unavailable.
If we do not obtain such licenses, the development, manufacture or sale of
products requiring such licenses would be materially adversely affected. In
addition, we could incur substantial costs in defending ourselves against
challenges to our patents or infringement claims made by third parties or in
enforcing any patents we may obtain.
Because patents only provide limited protection, others could produce and
distribute products similar to the Photon(TM) laser system and the Blood Flow
Analyzer(TM).
We rely on the protections for our products that we hope to realize
under the United States and foreign patent laws. However, patents provide
limited protections. We have a United States and Japanese patent on the hand
held probe design and applications for various foreign patents are either
pending or planned, and the patents for the Blood Flow Analyzer(TM) for the eyes
are reported by Ocular Blood Flow, Ltd. to have been approved in the United
States and the United Kingdom. Similar devices, however, could be designed that
do not infringe on our patent rights, but that are similar enough to compete
against our patented products. Moreover, it is possible that an unpatented but
prior existing device or design may exist that has never been made public and
therefore is not known to us or the industry in general. Such a device could be
introduced into the market without infringing on our current patent. If any such
competing non-infringing devices are produced and dis tributed, our profit
potential would be seriously limited, which would seriously impair our
viability.
Some of our products may be denied reimbursement by third-party payors, such as
government programs and private insurance plans.
We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Certain
purchasers of our Blood Flow Analyzer,(TM), for example, have had difficulty in
obtaining reimbursement from insurance carriers. Even if we receive FDA
clearances for our products, third-party payors may nevertheless deny
reimbursement. Furthermore, third-party payors increasingly challenge the prices
charged for medical products and services. Reimbursement from third-party payors
may be unavailable or if available, that reimbursement may be limited when
compared with reimbursement for competitive procedures, thereby materially
adversely affecting our ability to profitably sell products. The market for our
products could also be adversely affected by recent federal legislation that
reduces reimbursements under the capital cost pass-through system utilized in
connection with the Medicare program. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products would have a material adverse effect on us.
13
Congress may introduce legislation that could result in price limits and
utilization controls on our products.
Members of Congress have introduced legislation to change aspects of
the delivery and financing of health care services. Such legislation to control
or reduce public (Medicare and Medicaid) and private spending on health care, to
reform the methods of payment for health care goods and services by both the
public and private sectors, and to provide universal access to health care may
be passed. We cannot predict what form this legislation may take or the effect
of such legislation on our business. It is possible that the legislation
ultimately enacted by Congress will contain provisions resulting in price limits
and utilization controls which may reduce the rate of increase in the growth of
the ophthalmic laser market or otherwise adversely affect our business. It is
also possible that future legislation could result in modifications to the
nation's public and private health care insurance systems that will affect
reimbursement policies in a manner adverse to us. We also cannot predict what
other legislation relating to our business or the health care industry may be
enacted, including legislation relating to third-party reimbursement, or what
effect legislation may have on the results of our operations.
Our product liability insurance could be inadequate to cover liabilities if we
face significant product liability claims against us.
The nature of our business exposes it to risk from product liability
claims and there can be no assurance that we can avoid significant product
liability exposure. We maintain product liability insurance providing coverage
up to $2,000,000 per claim with an aggregate policy limit of $2,000,000. There
is substantial doubt that this amount of insurance would be adequate to cover
liabilities should we face significant claims. A successful products liability
claim brought against us could have a material adverse effect on our business,
operating results and financial condition. Further, product liability insurance
is becoming increasingly expensive, and there can be no assurance that we will
successfully maintain adequate product liability insurance at acceptable rates,
or at all. Should we be unable to maintain adequate product liability insurance,
our ability to market our products would be significantly impaired. Any losses
that we may suffer from future liability claims or a voluntary or involuntary
recall of our products and the damage that any product liability litigation or
voluntary or involuntary recall may do to the reputation and marketability of
our products would have a material adverse effect on our business, operating
results and financial condition.
Our future products sales in foreign countries could be adversely affected by a
significant increase in value of the U.S. dollar against local currencies,
economic and political instability, and changes in the regulatory processes and
other regulations.
We anticipate that a significant portion of our future product sales
will be in foreign countries. Because we quote prices for our products and
accept payment on sales principally in U.S. dollars, any significant increase in
the value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used. In addition, other specific
risks in doing business in foreign countries include changes in the regulatory
processes affecting our products, in controls governing foreign payments by our
customers, and in regulations, taxes and customs duties or requirements that may
be imposed on the purchase of our products. The foreign countries where our
products are sold include but are not limited to Argentina, Australia,
Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia, Egypt, France,
Germany, Greece, Hong Kong, India, Israel, Italy, Japan, Jordan, Korea,
Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Puerto Rico, Russia,
Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand, Turkey, United Kingdom, and
United Arab Emirates. Certain of countries may experience political, economic or
social instability, which could adversely affect our sales.
The market price of our securities could fluctuate significantly.
Our common stock was delisted on The Nasdaq SmallCap Market, effective
June 26, 2003, and currently trades on the OTC Bulletin Board. Factors such as
announcements by us of the regulatory status of products, quarterly variations
in our financial results, the gain or loss of material contracts, changes in
management, regulatory changes, trends in the industry or stock market and
announcements by competitors, among other things, could cause the market price
of such securities to fluctuate significantly.
We may issue preferred shares with preferences in an equal or prior rank to
existing preferred shares.
Our certificate of incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as our board of directors may determine from time to time.
Accordingly, our Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our common stock. Those terms and conditions may include preferences on an equal
or prior rank to existing preferred stock. Those shares may be issued on such
14
terms and for such consideration as the board then deems reasonable and such
stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company. As of August 31, 2006, the following preferred shares
were issued and outstanding: 5,627 shares of Series A preferred stock
convertible into 6,753 common shares; 8,986 shares of Series B preferred stock
convertible into 10,783 common shares; no shares of Series C preferred stock;
5,000 shares of Series D preferred stock convertible into 8,750 common shares;
250 shares of Series E preferred stock convertible into 13,333 common shares;
4,598.75 shares of Series F preferred stock convertible into 245,267 common
shares; and 588,235 shares of Series G preferred stock convertible into 588,235
common shares.
Our preferred shares have rights that amount to a preference over the shares of
this offering.
Our preferred shares have dividend and liquidation rights that amount
to preferences over the shares of this offering. We must pay any cash dividends
to our holders of preferred shares before paying cash dividends to the holders
of the shares of this offering. The dividend rights of our preferred shares are
as follows: for Series A and Series B preferred shares, $.24 per share per annum
payable, at our option, in cash from surplus earnings; for Series C preferred
shares, 12% noncumulative preferred shares payable, at our option, in common
stock or cash from surplus earnings; and for Series D, E, F and G preferred
shares, 8% noncumulative preferred dividends payable, at our option, in common
stock or cash from surplus earnings. Upon our liquidation, we must pay
preferential distributions to our preferred shareholders before paying any
distributions to holders of the shares of this offering. The liquidation rights
of our preferred shares are as follows: for Series A preferred shares, $1.00 per
share, plus accrued and unpaid dividends; for Series B preferred shares, $4.00
per share, plus accrued and unpaid dividends; for Series C preferred shares, the
stated value of $100.00 per share, plus declared but unpaid dividends; for
Series D preferred shares, the stated value of $1.75 per share, plus declared
but unpaid dividends; for Series E, F, and G preferred shares, the greater of
(i) the amount of distributions such shares would have received had the holders
converted such preferred shares into common stock immediately prior to
liquidation, or (ii) the stated value of $100.00 per share, plus declared but
unpaid dividends.
Exercise of outstanding options and warrants will dilute existing stockholders
and could decrease the market price of our common stock
As of August 31, 2006, we had issued and outstanding 199,956,828 shares
of our common stock, shares of Series A, B, D, E, F and G preferred stock
convertible into 873,071 shares of common stock, and outstanding options and
warrants to purchase 36,166,892 additional shares of common stock. The existence
of the outstanding preferred shares, options and warrants may adversely affect
the market price of our common stock and the terms under which we could obtain
additional equity capital. Included in the outstanding options is 4,500,000
options issued to Raymond P.L. Cannefax, our President and Chief Executive
Officer, under the terms of his employment agreement with us. These options are
exercisable at $.01 per share and vest in 12 equal monthly installments of
375,000 shares, beginning on February 5, 2006 until such shares are fully
vested.
We do not expect to pay any cash dividends in the foreseeable future.
We issued a stock dividend on our Series A preferred stock and Series B
preferred stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our common shares and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock are entitled to noncumulative cash
dividends paid out of surplus earnings.
We may have continuing liability following our rescission offer in 1996 to
Series B preferred shareholders.
We issued 493,000 shares of Series B preferred stock in 1994 and 1995.
The Series B shares may not have been sold in compliance with certain aspects of
California corporate law and federal and state securities laws. Concurrently
with our July 1996 public offering, we provided the Series B shareholders with a
rescission offer to repurchase all Series B preferred shares or rescission
shares owned by the Series B shareholders. The Series B shareholders were
offered the right to rescind their purchases and receive a refund of the price
paid by them of $4.00 per share plus an amount equal to the interest thereon at
rates ranging from 6% to 12% per annum from the date the rescission shares were
purchased to July 25, 1996, the date our public offering closed and each
rescinding shareholder was paid by us. The original purchasers of approximately
93% of the Series B shares (460,250 shares) rejected the rescission offer by
responding as requested in the rescission offer or by failing to return a
response within 30 days of receiving the rescission offer. Two shareholders
owning a combined total of 32,750 shares accepted the rescission offer. We
purchased the 32,750 shares from the two shareholders accepting the rescission
offer from the proceeds from our public offering.
The rescission offer was designed to reduce any type of contingent
liability we may be subject to in connection with its private placement of
Series B preferred stock. However, the rescission offer may not have fully
relieved us from exposure to contingent liability under federal or state
securities laws. Not every state statutorily provides for voluntary rescission
offers. In addition, other states, although authorizing rescission offers, do
15
not completely limit the liability of the offeror. Thus, we may have continuing
liability in certain states following the rescission offer. Other than the
payments in 1996 to the two shareholders accepting the rescission offer, we have
made no additional payments thereunto as no other shareholder has accepted the
rescission offer. Moreover, there has been no litigation by a shareholder
involving the private offering of Series B preferred stock or the rescission
offer. As of August 31, 2006, a total of 484,014 shares of Series B preferred
stock have been converted into 580,817 shares of common stock. There are a total
of 8,986 shares of Series B preferred stock issued and outstanding, which are
convertible into 10,783 shares of common stock.
We have indemnification agreements with certain officers and directors that may
require us to indemnify them in a civil or criminal action.
Our certificate of incorporation eliminates in certain circumstances
the liability of directors for monetary damages for breach of their fiduciary
duty as directors. We have entered into indemnification agreements with certain
directors and officers. Each such indemnification agreement provides that we
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
The indemnification agreements will also require that we indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law. Each indemnification agreement will permit the director or
officer that is party thereto to bring suit to seek recovery of amounts due
under the indemnification agreement and to recover the expenses of such a suit
if he or she is successful.
Our Board of Directors has the right to issue additional shares of common stock
and to create a new series of preferred stock that could dilute holders of
common stock.
Our board of directors has the inherent right under applicable Delaware
law, for whatever value the board deems adequate, to issue additional common
shares up to the limit of shares authorized by the certificate of incorporation,
and, upon such issuance, all holders of shares of common stock, regardless of
when they are issued, thereafter generally rank equally in all aspects of that
class of stock, regardless of when issued. Our board of directors likewise has
the inherent right, limited only by applicable Delaware law and provisions of
the Certificate of Incorporation to increase the number of preferred shares in a
series, to create a new series of preferred shares and to establish preferences
and all other terms and conditions in regard to such newly-created series. Any
of those actions will dilute the holders of common shares and also affect the
relative position of the holders of any series of any class. Current
stockholders have no rights to prohibit such issuances nor inherent "preemptive"
rights to purchase any such stock when offered.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
In addition, we have received total gross proceeds of $1,000,000 from
the sale of the callable secured convertible notes on February 28, 2006 and the
investors are obligated to provide us with an additional $500,000 upon the
effectiveness of a registration statement to register the shares of common stock
underlying the callable secured convertible notes and the warrants. The $500,000
in additional proceeds to be provided by the investors after the registration
statement is declared effective will be used for the purchase of inventory,
marketing and sales, increasing the number of our direct sales representatives,
and working capital.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Dividends paid in cash pursuant to outstanding shares of our Series A,
Series C, Series D, Series E, Series F and Series G preferred stock are only
payable from our surplus earnings and are noncumulative and therefore, no
deficiencies in dividend payments from one year will be carried forward to the
next. We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that our board of directors deems
relevant.
16
CAPITALIZATION
The following table sets forth our capitalization on an actual basis as
of December 31, 2005 and June 30, 2006.
December 31, June 30,
2005 2006
------------ -------------
Long-term obligations............................ $ 2,038,000 $ 2,670,000
Stockholders' equity:
Series A Preferred Stock, $.001 par value per
share; 500,000 shares authorized, 5,627
issued and outstanding........................ - -
Series B Preferred Stock, $.001 par value per
share; 500,000 shares authorized, 8,986 issued
and outstanding............................... - -
Series C Preferred Stock, $.001 par value per
share; 30,000 shares authorized, 0 issued and
outstanding.....................,,,.......... - -
Series D Preferred Stock, $.001 par value per
share; 1,140,000 shares authorized, 5,000
issued and outstanding........................ - -
Series E Preferred Stock, $.001 par value per
share; 50,000 shares authorized, 250 issued
and outstanding............................... - -
Series F Preferred Stock, $.001 par value per
share; 50,000 shares authorized, 5,623.75 and
4,597 issued and outstanding, respectively.... - -
Series G Preferred Stock, $.001 par value per
share; 2,000,000 shares authorized, 588,235
issued and outstanding........................ 1,000 1,000
Common Stock, $.001 par value per share;
60,000,000 shares authorized, 96,389,295 and
199,956,828 issued and outstanding,
respectively.................................. 96,000 197,000
Additional paid-in-capital, common stock...... 60,586,000 61,873,000
Accumulated deficit........................... (62,196,000) (63,705,000)
Total stockholders' equity ...................... (1,513,000) (634,000)
Total capitalization............................. $ 525,000 $ 673,000
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our authorized capital stock consists of 800,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share. We have created seven classes of preferred stock,
designated as Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock.
Our common stock and Class A warrants trade on the Over-the-Counter
Bulletin Board under the respective symbols of "PMED.OB" and "PMEDW.OB." Prior
to July 22, 1996, there was no public market for the common stock. From July 22,
1996 to June 25, 2003, our common stock and Class A warrants were listed on the
Nasdaq SmallCap Market. Since June 25, 2003, our common stock has traded on the
Over-the-Counter Bulletin Board. As of September 6, 2006, the closing sale price
of the common stock was $.006 per share. The following are the high and low sale
prices for the common stock by quarter as reported by Nasdaq from January 1,
2000 to June 25, 2003 and by the Over-the-Counter Bulletin Board since June 25,
2003.
17
Common Stock
Price Range
-----------------
Period (Calendar Year) High Low
---- ---
2004
First Quarter ................................. $ .21 $ .15
Second Quarter................................. .16 .07
Third Quarter.................................. .12 .09
Fourth Quarter................................. .12 .08
2005
First Quarter ................................. .10 .08
Second Quarter ................................ .09 .07
Third Quarter.................................. .10 .001
Fourth Quarter................................. .048 .001
2006
First Quarter ................................. .047 .001
Second Quarter .014 .006
Third Quarter (through September 8, 2006) .... .007 .004
Our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, Series F
preferred stock and Series G preferred stock are not publicly traded. As of
August 31, 2006, there were 4,781 record holders of common stock, six record
holders of Series A preferred stock, four record holders of Series B preferred
stock, no record holders of Series C preferred stock, one record holder of
Series D preferred stock, one record holder of Series E preferred stock, 18
record holders of Series F preferred stock, and one record holder of Series G
preferred stock.
We have never paid any cash dividends on our common stock and does not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We must pay cash dividends to holders of our Series A preferred, Series
B preferred, Series C preferred, Series D preferred stock, Series E preferred,
Series F preferred stock and Series G preferred stock before it can pay any cash
dividend to holders of our common stock. Dividends paid in cash pursuant to
outstanding shares of our Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock are only payable from our surplus
earnings, and are noncumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next.
We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that our board of directors deems
relevant. We issued 6,764 shares of our Series A preferred and 6,017 shares of
our Series B preferred on January 8, 1996 as a stock dividend to Series A and
Series B preferred shareholders of record as of December 31, 1994.
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for the
years ended December 31, 2004 and 2005, and the six months ended June 30, 2005
and 2006. The selected financial data as of and for the six months ended June
30, 2005 and 2006 are derived from our unaudited quarterly financial statements,
which have been reviewed by Chrisholm, Bierwolf & Nilson. The following
financial information should be read in conjunction with the Financial
Statements, and related notes thereto.
18
Summary Financial Information
For the year ended For the six months ended
December 31, June 30,
--------------------------- ---------------------------
Statement of Operations Data: 2004 2005 2005 2006
----------------------------- ---- ---- ---- ----
Net Sales............................... $3,062,000 $2,201,000 $1,413,000 $1,182,000
Net cost of sales........................ 1,217,000 1,599,000 692,000 638,000
Operating expenses....................... 2,237,000 2,782,000 1,476,000 956,000
Operating loss........................... (392,000) (2,180,000) (755,000) (412,000)
Other income (expense)................... 456,000 (3,209,000) (2,846,000) (1,099,000)
Net income (loss)........................ 64,000 (5,389,000) (3,601,000) (1,511,000)
Net income (loss) applicable to common
shareholders...................... 10,000 (5,389,000) (3,601,000) (1,511,000)
Net income (loss) per common share....... $0.00 $(0.13) $(0.13) $(0.01)
Shares used in computing net loss per share 25,405,000 42,033,000 27,745,000 150,164,000
As of As of
Balance Sheet Data: December 31, 2005 June 30, 2006
------------------- ------------------ -------------
Current assets..................... $1,331,000 $1,912,000
Current liabilities................ 1,177,000 1,239,000
Working capital (deficit).......... 154,000 673,000
Total assets....................... 1,702,000 2,275,000
Accumulated deficit................ (62,196,000) (63,705,000)
Stockholder's equity .............. (1,513,000) (1,634,000)
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
This report contains forward-looking statements and information
relating to the Company that is based on beliefs of management as well as
assumptions made by, and information currently available to management. These
statements reflect its current view respecting future events and are subject to
risks, uncertainties and assumptions, including the risks and uncertainties
noted throughout the document. Although the Company has attempted to identify
important factors that could cause the actual results to differ materially,
there may be other factors that cause the forward-looking statements not to come
true as anticipated, believed, projected, expected or intended. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those
described herein as anticipated, believed, projected, estimated, expected or
intended.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exits. Prior to shipment of
product, the Company required a signed purchase order and, depending upon the
customer, a down payment toward the final invoiced price or full payment in
advance with certain international product distributors.
2. Delivery and performance have occurred. Unless the purchase order
requires specific installation or customer acceptance, the Company recognizes
revenue when the product ships. If the purchase order requires specific
installation or customer acceptance, the Company recognizes revenue when such
installation or acceptance has occurred. Title to the product passes to its
customer upon shipment. This revenue recognition policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when received by the
customer, the Company either makes the necessary repairs on site or has the
product shipped to the Company for the repair work. Once the product has been
repaired and retested for functionality, it is re-shipped to the customer. The
Company provides warranties that generally extend for one year from the date of
sale. Such warranties cover the necessary parts and labor to repair the product
as well as any shipping costs that may be required. The Company maintains a
reserve for estimated warranty costs based on its historical experience and
management's current expectations.
3. The sales price is fixed or determinable. The purchase order
received from the customer includes the agreed-upon sales price. The Company
does not accept customer orders, and therefore does not recognize revenue, until
the sales price is fixed.
19
4. Collectibility is reasonably assured. With limited exceptions, the
Company requires down payments on product prior to shipment. In some cases the
Company requires payment in full prior to shipment. The Company also performs
credit checks on new customers and ongoing credit checks on existing customers.
The Company maintains an allowance for doubtful accounts receivable based on
historical experience and management's current expectations.
Recoverability of Inventory. Since its inception, the Company has
purchased several complete lines of inventory. In some circumstances the Company
has been able to utilize certain items acquired and others remain unused. On a
quarterly basis, the Company attempts to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced.
Recoverability of Goodwill and Other Intangible Assets. The Company's
intangible assets consist of goodwill, product and technology rights,
engineering and design costs, and patent costs. Intangibles with a determined
life are amortized on a straight-line basis over their determined useful life
and are also evaluated for potential impairment if events or circumstances
indicate that the carrying amount may not be recoverable. Intangibles with an
indefinite life, such as goodwill, are not amortized but are tested for
impairment on an annual basis or when events and circumstances indicate that the
asset may be impaired. Impairment tests include comparing the fair value of a
reporting unit with its carrying net book value, including goodwill. To date,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
General
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the three months ended June 30,
2006, diagnostic products have been the major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the Company's financial position improves. The Company does not
focus on a specific diagnostic product or products but, instead, on the entire
diagnostic product group.
Results of Operations
Six Months Ended June 30, 2006, Compared to Six Months Ended June 30,
2005
Net sales for the six months ended June 30, 2006 decreased by $231,000,
or 16%, to $1,182,000 as compared to $1,413,000 for the same period of 2005.
This reduction in sales was primarily due to reduced sales of the P40, P45 and
P60 UBM Ultrasound Biomicroscopes and the P37 A/B Scan Ocular Ultrasound
Diagnostics.
For the six months ended June 30, 2006, sales from our diagnostic
products totaled $1,026,000, or 87% of total revenues, compared to $1,172,000,
or 83% of total revenues for the same period of 2005. The remaining 13% of
sales, or $156,000 during the six months ended June 30, 2006 was from parts,
disposables, and service revenue.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes decreased
to $253,000 during the six months ended June 30, 2006, or 21% of total quarterly
revenues for the period, compared to $677,000, or 48% of total revenues, for the
same period last year. Sales of the Blood Flow Analyzer(TM) increased by $23,000
to $85,000, or 7% of total revenues, for the six months ended June 30, 2006,
compared to net sales of $63,000, or 4% of total revenues, during the same
20
period in 2005. Sales from the P37 A/B Scan Ocular Ultrasound Diagnostic
increased to $120,000, or 10% of total revenues, for the six month period ended
June 30, 2006, down compared to $80,000, or 6% of total revenues, for the same
period last year. Combined sales of the LD 400 and TKS 5000 autoperimeters and
the CT 200 Corneal Topographer were $540,000, or 46% of the total revenues, for
the six months ended June 30, 2006, compared to $352,000, or 25% of total
revenues, for the same period of 2005.
Our sales have been lower during the six months ended June 30, 2006 due
to a variety of reasons. Sales of the P40, P45 and P60 UBM Ultrasound
Biomicroscope decreased primarily as a result of ongoing software development
and hardware configuration problems with the new P60, which received FDA 510(k)
premarket approval on May 26, 2005 that allows the device to be sold in the
United States. The hardware configuration problems have since been resolved and
we continue to work on resolving the software development problems. We
anticipate reversing the downward trend in sales through additional efforts to
gain more widespread support for the P60 as a result of increased clinical
awareness, product development and improved marketing plans.
Sales of surgical products are at a standstill pending FDA approval of
the Photon(TM) laser system. In the six month period ended June 30, 2006, we
realized no sales in the surgical line consisting of the Precissionist Thirty
Thousand(TM) and the Photon(TM) laser system. There were also no sales in the
surgical line for the comparable period of 2005.
Gross profit for the six months ended June 30, 2006 decreased by 5% to
46% of total revenues, compared to 51% of total revenues for the same period in
2005. The decrease in gross profit was mainly due to the ongoing development
expenses of the new P60 UBM and the costs associated with the physical move of
our production and warehouse operations and corporate offices into a reduced
area in our leased office and warehouse space in order to realize savings in the
monthly rent of such facilities. There was no increase or decrease to cost of
sales as a result of a change to the reserve for obsolete inventory in 2006.
Marketing and selling expenses decreased by $180,000, or 49%, to
$185,000, for the six months ended June 30, 2006, from $365,000 for the
comparable period in 2005. The reduction was due primarily to a reduced number
of sales representatives and lower travel related and associated sales expenses.
General and administrative expenses decreased by $138,000, or 21%, to
$514,000 for the six months ended June 30, 2006, from $652,000 for the
comparable period in 2005. The decrease in general and administrative expenses
was primarily due to the expenses associated with the financing obtained in June
2006.
In addition, during the first quarter of 2005, we issued 515,206 shares
of common stock to two shareholders that had purchased shares of our Series G
convertible preferred stock in a private offering. Under the terms of the
private offering, the Company was required to file a registration statement with
the Securities and Exchange Commission for the purpose of registering the common
shares issuable to the Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their warrants. The shares were issued
as a penalty for the Company not having a registration statement declared
effective within 120 days of the initial closing of the private offering.
Also during 2005, we collected $1,000 in receivables that were
previously allowed in the allowance for doubtful accounts. During 2005, we
increased allowance for doubtful accounts by $100,000.
Research, development and service expenses decreased by $202,000, or
44%, to $257,000 for the six months ended June 30, 2006, compared to $459,000 in
the same period of 2005. Most of the increase was due to the costs of
development and compliance with regulatory requirements in releasing the new P60
UBM.
Due to our ongoing cash flow difficulties, most of our vendors and
suppliers were contacted during 2004 and 2005 with attempts to negotiate reduced
payments and settlement of outstanding accounts payable. While some vendors
refused to negotiate and demanded payment in full, some vendors were willing to
settle for a reduced amount. The accounts payable forgiven by vendors and
suppliers resulted in a gain of $12,000 and $206,000 during the years ended
December 31, 2005 and 2004, respectively. In 2006 we are continuing our
negotiations with some vendors and suppliers.
Liquidity and Capital Resources
We used $445,000 in cash in operating activities for the six months
ended June 30, 2006, compared to $1,665,000 for the six months ended June 30,
2005. The decrease in cash used for operating activities for the six months
ended June 30, 2006 was primarily attributable to our net loss and decreases in
accounts payable and accrued liabilities and an increase in inventory,
specifically for the P60 UBM. We used $16,000 in investing activities for the
six months ended June 30, 2006, compared to zero for the six months ended June
30, 2005. Net cash received in financing activities was $986,000 for the six
months ended June 30, 2006, versus cash provided from financing activities of
$2,622,000 in the same period in 2005. We had working capital of $673,000 as of
June 30, 2006, compared to working capital of $1,565,000 as of June 30, 2005. In
January 2005, we sold 2,000,000 shares of our common stock to an accredited
investor for $150,000 in cash. In the past, we have relied heavily upon sales of
our common and preferred stock to fund operations. There can be no assurance
that such equity funding will be available on terms acceptable to us in the
future.
21
As of June 30, 2006, we had net operating loss carry-forwards (NOLs) of
approximately $53 million. These loss carry- forwards are available to offset
future taxable income, if any, and have begun to expire in 2001 and extend for
twenty years. Our ability to use net operating loss carryforwards (NOLs) to
offset future income is dependant upon certain limitations as a result of the
pooling transaction with Vismed and the tax laws in effect at the time of the
NOLs can be utilized. The Tax Reform Act of 1986 significantly limits the annual
amount that can be utilized for certain of these carryforwards as a result of
change of ownership.
As of June 30, 2006, we had accounts payable of $390,000, a significant
portion of which was over 90 days past due, compared to accounts payable of
$346,000 as of June 30, 2005. We have contacted many of the vendors or companies
that have significant amounts of payables past due in an effort to delay
payment, renegotiate a reduced settlement payment, or establish a longer-term
payment plan. While some companies have been willing to renegotiate the
outstanding amounts, others have demanded payment in full. Under certain
conditions, including but not limited to judgments rendered against us in a
court of law, a group of creditors could force us into bankruptcy due to our
inability to pay the liabilities arising out of such judgments at that time. In
addition to the accounts payable noted above, we also have non-cancelable
capital lease obligations and operating lease obligations that required the
payment of approximately $194,000 in 2005, and $14,000 in 2006.
We have taken numerous steps to reduce costs and increase operating
efficiencies. These steps consist of the following:
1. We closed our San Diego facility. In so doing, numerous
manufacturing, accounting and management responsibilities were consolidated. In
addition, such closure resulted in significant headcount reductions as well as
savings in rent and other overhead costs.
2. We have significantly reduced the use of consultants, which has
resulted in a large decrease to these expenses.
3. We have reduced its direct sales force to four representatives,
which has resulted in less payroll, travel and other selling expenses.
Because we have significantly fewer sales representatives, our ability
to generate sales has been reduced.
We have taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct communication
with the customer subsequent to delivery of the system. The allowance for
doubtful accounts was 17% of total outstanding receivables as of June 30, 2006
and 20% as of December 31, 2005 compared to 3% of total outstanding receivables
as of June 30, 2005. The allowance for doubtful accounts increased from $100,000
at December 31, 2005 to $101,000 at June 30, 2006.
We intend to continue our efforts to reduce the allowance for doubtful
accounts as a percentage of accounts receivable. We have ongoing efforts to
collect a significant portion of the sales price in advance of the sale or in a
timely manner after delivery. During the six months ended June 30, 2006, we
added a net of $1,000 to the allowance for doubtful accounts. We believe that by
requiring a large portion of payment prior to shipment, we have greatly improved
the collectibility of our receivables.
We carried an allowance for obsolete or estimated non-recoverable
inventory of $1,324,000 at June 30, 2006 and $1,371,000 at June 30, 2005, or 63%
and 65% of total inventory, respectively. Our means of expansion and development
of product has been largely from acquisition of businesses, product lines,
existing inventory, and the rights to specific products. Through such
acquisitions, we have acquired substantial inventory, some of which the eventual
use and recoverability was uncertain. In addition, we have a significant amount
of inventory relating to the Photon(TM) laser system, which does not yet have
FDA approval in order to sell the product domestically. Therefore, the allowance
for inventory was established to reserve for these potential eventualities.
On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if we
identify products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. We intend to make
efforts to sell these items at significantly discounted prices. If items are
sold, the cash received would be recorded as revenue, but there would be no cost
of sales on such items due to the reserve that has been recorded. At the time of
sale, the inventory would be reduced for the item sold and the corresponding
inventory reserve would also be reduced.
At this time, our Photon(TM) Laser Ocular Surgery Workstation requires
regulatory FDA approval in order to be sold in the United States. Any possible
future efforts to complete the clinical trials on the Photon(TM) in order to
file for FDA approval would depend on our obtaining adequate funding. We
estimate that the funds needed to complete the clinical trials in order to
obtain the necessary regulatory approval on the Photon(TM) to be approximately
$225,000.
22
Effect of Inflation and Foreign Currency Exchange
We have not realized a reduction in the selling price of our products
as a result of domestic inflation. Nor have we experienced unfavorable profit
reductions due to currency exchange fluctuations or inflation with our foreign
customers. All sales transactions to date have been denominated in U.S. dollars.
Impact of New Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. This statement replaces APB Opinion No. 20 and SFAS No. 3. APB
Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including the cumulative effect of changing to the
new accounting principle in the net income of the period of the change. SFAS No.
154 requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, this statement requires that
the accounting principle be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings for that period, rather than being reported in an income
statement. The new standard will be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
believe the adoption of new standard will not have a material effect on our
financial position, results of operations, cash flows, or previously issued
financial reports.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. This statement is an amendment of FASB Statements
Nos. 133 and 140 to address what had been characterized as a temporary exemption
from the application of the bifurcation requirements of Statement No. 133 to
beneficial interests in securitized financial assets. Prior to the effective
date of Statement No. 133, the FASB received inquiries on the application of the
exception in paragraph 14 of Statement No. 133 to beneficial interests in
securitized financial assets. In response to the inquiries, Implementation Issue
D1 indicated that, pending issuance of further guidance, entities may continue
to apply the guidance related to accounting for beneficial interests in
paragraphs 14 and 362 of Statement No. 140. Those paragraphs indicate that any
security that can be contractually prepaid or otherwise settled in such a way
that the holder of the security would not recover substantially all of its
recorded investment should be subsequently measured like investments in debt
securities classified as available-for-sale or trading under FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, and may
not be classified as held-to-maturity. Further, Implementation Issue D1
indicated that holders of beneficial interests in securitized financial assets
that are not subject to paragraphs 14 and 362 of Statement No. 140 are not
required to apply Statement No. 133 to those beneficial interests until further
guidance is issued. We believe the adoption of new standards will not have a
material effect on our financial position, results of operations, cash flows, or
previously issued financial reports.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets. This statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing
assets and servicing liabilities. In this statement the board decided to broaden
the scope of the project to include all servicing assets and servicing
liabilities. Servicing assets and servicing liabilities may be subject to
significant interest rate and prepayment risks, and many entities use financial
instruments to mitigate those risks. Currently, servicing assets and servicing
liabilities are amortized over the expected period of estimated net servicing
income or loss and assessed for impairment or increased obligation at each
reporting date. The board acknowledged that the application of the lower of
carrying amount or fair value measurement attribute to servicing assets results
in asymmetrical recognition of economic events, because it requires recognition
of all decreases in fair value but limits recognition of increases in fair value
to the original carrying amount.
Statement No. 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. The board concluded that fair value is the most relevant
measurement attribute for the initial recognition of all servicing assets and
servicing liabilities, because it represents the best measure of future cash
flows. This statement permits, but does not require, the subsequent measurement
of servicing assets and servicing liabilities at fair value. An entity that uses
derivative instruments to mitigate the risks inherent in servicing assets and
servicing liabilities is required to account for those derivative instruments at
fair value. Under this statement, an entity can elect subsequent fair value
23
measurement of its servicing assets and servicing liabilities by class, thus
simplifying its accounting and providing for income statement recognition of the
potential offsetting changes in fair value of the servicing assets, servicing
liabilities, and related derivative instruments. An entity that elects to
subsequently measure servicing assets and servicing liabilities at fair value is
expected to recognize declines in fair value of the servicing assets and
servicing liabilities at fair value is expected to recognize declines in fair
value of the servicing assets and servicing liabilities more consistently than
by reporting other-than- temporary impairments. We believe the adoption of new
standards will not have a material effect on our financial position, results of
operations, cash flows, or previously issued financial reports.
BUSINESS
General
We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. We market two cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the PhotonTM laser system, is
a laser cataract surgery system marketed as the next generation of cataract
removal. Because of the "going concern" status of the company, management has
focused efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the company. As
reflected in the results for the fiscal year ended December 31, 2005, diagnostic
products are currently our major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves.
At present, the Photon(TM) has not received FDA approval to be sold in
the United States. Any possible future efforts to complete the clinical trials
on the Photon(TM) in order to file for FDA approval would depend on our
obtaining adequate financing. We estimate that the funds needed to complete the
clinical trials in order to obtain the necessary regulatory approval on the
Photon(TM) to be approximately $225,000. Due to the lack of FDA approval and the
lack of current evidence to support recoverability, we have recorded an
inventory reserve to offset the majority of the inventory associated with the
Photon(TM). In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) has been reserved for due to the estimated lack of recoverability.
Our focus is not on any specific diagnostic product or products, but rather on
our entire group of diagnostic products. The Photon(TM) can be sold in markets
outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM).
Our diagnostic products include a P55 pachymetric analyzer, a P37 A/B
Scan, the P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37 A/B Scan, two
perimeters, a corneal topographer and the Blood Flow Analyzer(TM). The
diagnostic ultrasound products including the P55 pachymeter analyzer, the P37
A/B Scan, and the P40 UBM Ultrasound Biomicroscope were acquired from Humphrey
Systems, a division of Carl Zeiss in 1998. We developed and offered for sale in
the fall of 2000 the P45 Plus biomicroscope, which combines the P37 Ultrasonic
A/B Scan and the P40 UBM Ultrasound Biomicroscope into one machine. The
perimeter and the corneal topographer were added when we acquired the
outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June 2000.
We purchased the Ocular Blood Flow, Ltd. in June 2000, whose principal product
is the Blood Flow Analyzer(TM). This product is designed for the measurement of
intraocular pressure and pulsatile ocular blood flow volume for detection and
treatment of glaucoma. In March 2005, we developed and offered for sale the P60
UBM Ultrasound Biomicroscope, the fourth generation of UBM devices, which has
better vision clarity and image flexibility than earlier versions. We are
currently developing additional applications for all of our diagnostic products.
A cataract is a condition that largely affects the elderly population,
in which the natural lens of the eye hardens and becomes cloudy, thereby
reducing visual acuity. Treatment consists of removal of the cloudy lens and
replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately two million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.
In June 1997, we received FDA clearance to market the Blood Flow
Analyzer(TM) for measurement of intraocular pressure and pulsatile ocular blood
flow for the detection of glaucoma and other retina related diseases. Ocular
blood flow is critical, the reduction of which may cause nerve fiber bundle
death through oxygen deprivation, thus resulting in visual field loss associated
with glaucoma. Our Blood Flow Analyzer(TM) is a portable automated in office
system that presents an affordable method for ocular blood flow testing for the
ophthalmic and optometric practitioner. In June 2000, we purchased Occular Blood
Flow, Ltd., the manufacturer of the Blood Flow Analyzer(TM). The terms and
conditions of the sale were $100,000 in cash and 100,000 shares of common stock.
In April 2001, we received authorization to use a common procedure terminology
or CPT code from the American Medical Association for procedures performed with
the Blood Flow Analyzer(TM) , for reimbursement purposes for doctors using the
device. However, certain payers have elected not to reimburse doctors using the
Blood Flow Analyzer(TM).
24
On July 23, 1998, we entered into an agreement for purchase and sale of
assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire the
ownership and manufacturing rights to certain assets of Humphrey Systems that
are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound
Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of $500,000, payable in the form of 78,947 shares of common
stock which were issued to Humphrey Systems and 26,316 shares of common stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, we would be required to issue
additional shares of common stock, or pay additional funds to Humphrey Systems
as would be necessary to increase the net proceeds from the sale of the assets
to $375,000. Because Humphrey Systems realized only $162,818 from the sale of
78,947 shares of our common stock, we issued 80,000 additional shares in January
1999 to enable Humphrey Systems to receive its guaranteed amount. The amount of
$21,431 was paid to us as excess proceeds from the sale of this additional
stock.
The rights to the ophthalmic diagnostic instruments, which have been
purchased from Humphrey Systems, complement both our cataract surgical equipment
and our ocular Blood Flow Analyzer(TM). The Ultrasonic Biometer calculates the
prescription for the intraocular lens to be implanted during cataract surgery.
The P55 pachymetric measures corneal thickness for the new refractive surgical
applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting. The P37 Ultrasonic A/B Scan
combines the Ultrasonic Biometer and ultrasound imaging for advanced diagnostic
testing throughout the eye and is a viable tool for retinal specialists. The P40
UBM Ultrasound Biomicroscope utilizes microscopic digital ultrasound resolution
for detection of tumors and improved glaucoma management. We introduced the P45
UBM Ultrasound Biomicroscope in the fall of 2000, which combines the P37
Ultrasonic A/B Scan, and the Ultrasonic Biometer into one machine.
On October 21, 1999, we purchased Mentor's surgical product line,
consisting of the Phaco SIStem(TM), the Odyssey(TM) and the Surg-E-Trol(TM).
This acquisition was an attempt to round out our cataract surgery product line
by adding entry-level, moderately priced cataract surgery products. The
transaction was paid for with $1.5 million worth of our common stock. Due to the
lack of sales volume of these products, they were determined to be obsolete and
a reserve was established to offset all inventory associated with these
products. During the fourth quarter of 2003, we sold all inventory and rights
associated with the SIStem(TM) and Odyssey(TM) for $125,000 in cash.
On June 5, 2000, we purchased Vismed Inc. d/b/a Dicon(TM) under a
pooling of interest accounting treatment. The purchase included the Dicon(TM)
perimeter product line consisting of the LD 400, the TKS 5000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal topographer
product line, the CT 200(TM), the CT 50 and an ongoing service and software
business. Perimeters are used to determine retinal sensitivity testing the
visual pathway. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Corneal topographers
are used for the refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.
In January 2002, we purchased the Innovatome(TM) microkeratome of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of our common stock at $5.00
per share, exercisable over a period of three years from the closing date, and
$100,000 in cash. The transaction was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards No. 141. We acquired from
Innovative Optics raw materials, work in process and finished goods inventories.
Additionally, we acquired the furniture and equipment used in the manufacturing
process of the microkeratome console and the inspection and packaging of the
disposable blades.
We were unsuccessful in supplying the disposable blades. We
discontinued the marketing and sales efforts of this product during the third
quarter of 2002. On April 1, 2002, we entered into a consulting agreement with
John Charles Casebeer, M.D. to develop and promote the microkeratome. For Dr.
Casebeer's services during the period from April 1, 2002 to September 30, 2002,
we issued him a total of 43,684 shares of our common stock, representing payment
of $100,000 in stock for his services. On October 9, 2003, an additional 300,000
shares of our common stock was issued to Dr. Casebeer in settlement of a lawsuit
he brought against us for additional consideration due under the consulting
agreement. All assets acquired from Innovative Optics, including remaining
inventory with a book value of $160,000 and equipment and intangible assets with
a book value of $2,082,000, were written off during 2002.
On September 19, 2002, we completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation , in which we acquired
2,663,254 shares, or 19.9% of the outstanding shares of its common stock, and
warrants to purchase 1,200,000 shares of its common stock of at $2.50 per share
for a period of two years, through the exchange and issuance of 736,945 shares
of our common stock, the lending of 300,000 shares of our common stock to the
company and the payment of certain of its expenses through the issuance of an
aggregate of 94,000 shares of our common stock to the company and its counsel.
During 2004, we sold all 2,663,254 shares of International Bio-Immune Systems
stock for net proceeds of $505,000.
25
International Bio-Immune Systems, Inc. may sell the 300,000 shares of
our common stock loaned by us and the proceeds therefrom shall be deemed a loan
from us payable on the earlier of September 19, 2002, or the closing of any
private placement or public offering of the securities of International
Bio-Immune Systems, any merger involving more than 50% of the outstanding shares
of International Bio-Immune Systems, or any sale, dissolution, transfer, or
assignment of corporate assets other than in the ordinary course of business.
Interest shall accrue on the unpaid principal of the loan at the rate of 10% per
annum. If International Bio-Immune Systems did not sell the shares by September
19, 2004, it was required to return the shares, or any amount which has not been
sold, to us. International Bio-Immune Systems currently controls the voting
decisions regarding these shares. The President and Chief Executive Officer of
International Bio-Immune Systems is Leslie F. Stern, who exercises sole voting
and investment powers regarding the shares.
On December 3, 2003, we executed a purchase agreement with American
Optisurgical, Inc. for the sale of the Mentor surgical products line, consisting
of the Phaco SlStem(TM) and the Odyssey(TM). The assets sold in the transaction
included patents, trademarks, software codes and programs, supplies, work in
process, finished goods, and molds related to the equipment. The purchase price
paid to us by American Optisurgical for the assets was $125,000. The purchase
agreement also contained a noncompete provision in which we agreed for a period
of three years from the closing date not to own, manage, operate or control any
business that competes with cataract removal equipment substantially the same as
the proprietary technology of the Phaco SlStem(TM) and the Odyssey(TM).
On September 28, 2004, we entered into an Investment Banking Agreement
with Alpha Advisory Services, Inc. Under the terms of the agreement, Alpha
Advisory Services is to use its best efforts to provide the following services
to us: (i) review of and make recommendations regarding our business plan and
promotional materials; (ii) identify and contact potential investors in the
United States and Europe for potential investment in our securities; (iii)
organize meetings with potential investors and participate in such meetings; and
(iv) assist us in future financings, mergers, acquisitions and potential
buyouts.
The term of the agreement was for a period of three months, which was
to be automatically renewed for successive one year terms. Following the initial
three month period, either party may terminate the agreement upon 15 days
written notice to the other party. In consideration for the services to be
performed under the agreement, Alpha Advisory Services is to be paid a fee of
$3,000 per month, plus reasonable travel and other expenses, and warrants to
purchase 25,000 shares of our common stock at $.15 per share. The warrants are
exerciseable, on a cashless basis, over a two year period from the date of
issuance. We provided notice to Alpha Advisory Services of our intention to
terminate the agreement, effective as of January 28, 2006. During the four month
period the agreement was in effect, we paid Alpha Advisory Services a total of
$12,000 pursuant to the terms of the agreement.
In March 2005, we introduced the P60 UBM Ultrasound Biomicroscope. The
P60 UBM Ultrasound Biomicroscope represents the fourth generation of UBM devices
and has better visual clarity and image flexibility than earlier versions. On
March 1, 2005, we were awarded the CE Mark for the P60, which enables us to
market the device in 19 Western European countries, most of the Middle East and
India, and some parts of Asia and the Pacific Rim. On May 26, 2005, we received
FDA 510(k) premarket approval for the P60, which allows it to be sold in the
United States. On February 9, 2006, we received a Canadian device license for
the P60, which allows it to be sold in Canada.
On June 12, 2006, we entered into a Worldwide OEM Agreement with MEDA
Co., Ltd., one of China's leading developers and producers of ultrasound
devices. Under the terms of the agreement, MEDA agrees to jointly engineer,
develop and manufacture our next generation of the Ultrasound BioMicroscope, as
well as other proprietary new products and enhancement of our current products.
The products to be manufactured by MEDA, at agreed upon costs, and supplied to
us for resale include the following new products: an Ultrasound BioMicroscope,
two Ultrasound A/B Scans, a Biometric A-Scan and a pachymeter.
The agreement provides that we and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of our products and, in the
interest of product development, enhancement and differentiation, MEDA agrees to
give consideration to potential software development or enhancements made
available to us for our products. Moreover, in the interest of product
improvement, MEDA agrees to collaborate with us and our designated engineers,
employees and consultants to consider and potentially implement jointly or
individually the development of product enhancements on our products to be
manufactured by MEDA.
The software and hardware modifications designed jointly by us and MEDA
will be considered the joint intellectual property of us and MEDA and may be
used, without restriction, unless otherwise previously agreed to, by either
party. MEDA also agrees to provide a 12 month warranty on all products that it
manufactures for us. If defects cannot be corrected at our facilities, the
products may be returned to MEDA for the purposes of carrying out such repairs
as required, and MEDA agrees to return the repaired products to us or our
designated agent or distributor within ten working days from the date of
receiving such products, at no cost to us, and MEDA will pay return freight
costs.
MEDA further agrees to endeavor to answer any technical inquiries
concerning the products it has manufactured. MEDA also agrees to train the
Company's technical service engineers and designated international distributors
as soon as possible after the signing of this agreement, and as future needs
arise and as MEDA can reasonably fit such training into the regular schedules of
its employees. MEDA agrees to determine the need for future training on new
products as necessary and will offer such training in Tiangin, China. For
training conducted outside China, the Company or its designated distributors
and/or service centers will be responsible for the traveling, living and hotel
expenses for MEDA's engineers. Training is at no charge to the Company. The
26
training will also be made available to the Company's designated repair agencies
in order to provide service and repair on a worldwide basis. Such agencies will
be considered authorized repair facilities for the products manufactured by
MEDA.
The agreement shall be effective for three years from date of
execution. At the end of the three year term, representatives of us and MEDA
will confer to determine whether to extend the term of the agreement. This will
have a practical effect of extending the term of the agreement for an additional
120 days. If mutual agreement for extending the term of the agreement is not
reached within 120 days after the end of the three year term, then the agreement
will be deemed terminated. However, if within the 120 day period, we and MEDA
mutually agree to extend the term of the agreement, then thereafter either party
may terminate the agreement by providing 12 months prior written notice to the
other party. All outstanding orders at the time of notification will be supplied
under the terms of the agreement, and MEDA will continue to fulfill all orders
from us until the 12 month notice period has expired.
Background
Corporate History: Our business originated with Paradigm Medical, Inc.,
a California corporation formed in October 1989. Paradigm Medical, Inc.
developed our present ophthalmic business and was operated by our founders
Thomas F. Motter and Robert W. Millar. In May 1993, Paradigm Medical, Inc.
merged with Paradigm Medical Industries, Inc. At the time of the merger, we were
a dormant public shell existing under the name French Bar Industries, Inc.
French Bar had operated a mining and tourist business in Montana. Prior to its
merger with Paradigm Medical, Inc. in 1993, French Bar had disposed of its
mineral and mining assets in a settlement of outstanding debt and had returned
to the status of a dormant entity. Pursuant to the merger, we caused a
1-for-7.96 reverse stock split of our shares of common stock. We then acquired
all of the issued and outstanding shares of common stock of Paradigm Medical,
Inc. using shares of our own common stock as consideration. As part of the
merger, we changed our name from French Bar Industries, Inc. to Paradigm Medical
Industries, Inc. and the management of Paradigm Medical, Inc. assumed control of
the company. In April 1994, we caused a 1-for-5 reverse stock split of our
shares of common stock. In February 1996, we re-domesticated to Delaware
pursuant to a reorganization.
Overview
Disorders of the Eye: The human eye is a complex organ which functions
much like a camera, with a lens in front and a light-sensitive screen, the
retina, in the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera and
cornea, helps the eyeball to maintain its shape. Light enters through the
cornea, a transparent domed window at the front of the eye. The size of the
pupil, an aperture in the center of the iris, controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal optical component of the eye and is responsible for adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million light-receptor cells. These cells convert light into nerve
impulses that are transmitted right-side up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.
Birth defects, trauma from accidents, disease and age related
deterioration of the components of the eye could all contribute to eye
disorders. The most common eye disorders are either pathological or refractive.
Many pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated pressure in the eye),
corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.
Ultrasound Technology: Ultrasound devices have been used in
ophthalmology since the late 1960's for diagnostic and surgical applications
when treating or correcting eye disorders. In diagnostics, ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound
waves through a hand held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.
Surgical use of ultrasonics in ophthalmology is limited to treatment of
cataract lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataract) lens through an incision that is as small as possible. The
opacified lens is then replaced by a new synthetic lens intraocular implant.
Phaco technology involves a process by which a cataract is broken into small
pieces using ultrasonic shock waves delivered through a hollow, open-ended metal
needle attached to a hand held probe. The fragments of cataracts tissue are then
removed through aspiration. Phaco systems were first designed in the late 1960's
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after various attempts by surgeons to use other techniques to remove opacified
lenses, including crushing, cutting, freezing, drilling and applying chemicals
to the cataract. By the mid-1970's, ultrasound had proven to be the most
effective technology to fragment cataracts. Market Scope's (Manchester,
Missouri), The 2001 Report on the Worldwide Cataract Market, January 2001
indicates that phaco cataract treatment was the technology for cataract removal
used in over 80% of surgeries in the United States and over 20% of all foreign
surgeries.
Laser Technology: The term "laser" is an acronym for Light
Amplification by Stimulated Emission of Radiation. Lasers have been commonly
used for a variety of medical and ophthalmic procedures since the 1960's. Lasers
emit photons into a highly intense beam of energy that typically radiates at a
single wavelength or color. Laser energy is generated and intensified in a laser
tube or solid-state cavity by charging and exciting photons of energy contained
within material called the lazing medium. This stored light energy is then
delivered to targeted tissue through focusing lenses by means of optical mirrors
or fiber optics. Most laser systems use solid-state crystals or gases as their
lazing medium. Differing wavelengths of laser light are produced by the
selection of the lazing medium. The medium selected determines the laser
wavelength emitted, which in turn is absorbed by the targeted tissue in the
body. Different tissues absorb different wavelengths or colors of laser light.
The degree of absorption by the tissue also varies with the choice of wavelength
and is an important variable in treating various tissues. In a surgical laser,
light is emitted in either a continuous stream or in a series of short duration
"pulses", thus interacting with the tissue through heat and shock waves,
respectively. Several factors, including the wavelength of the laser and the
frequency and duration of the pulse or exposure, determine the amount of energy
that interacts with the targeted tissue and thus, the amount of surgical effect
on the tissue.
Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively noninvasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser is used in
corneal refractive surgery. The Nd:YAG pulsed laser is used to perforate clouded
posterior capsules (posterior capsulotomy) and to relieve glaucoma-induced
elevated pressure in the eye (iridotomy, trabeulorplasty, transcleral
cyclophotocoagulation). Argon, Nd:YAG and excimer lasers are primarily used for
one or two clinical applications each. In contrast to these conventional laser
systems, our Photon(TM) laser cataract system is designed to be used for
multiple ophthalmic applications, including certain new applications that may be
made possible with our proprietary technology. Such new applications, however,
must be tested in clinical trials and be approved by the FDA.
Products
Our principal proprietary surgical products are systems for use by
ophthalmologists to perform surgical treatment procedures to remove cataracts.
We have complete ownership of each product with no technological licensing
limitations.
Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM)
was placed into production and offered for sale in 1997. As a phaco cataract
surgery system, we believe the Precisionist(TM) with its new fluidics panel is
equal or superior to the present competitive systems in the United States.
However, due to the lack of recent sales, the majority of our inventory
associated with the Precisionist Thirty Thousand(TM) has been estimated to be
obsolete and therefore a reserve for such inventory has been recorded. The
system features a graphic color display and unique proprietary on board computer
and graphic user interface linked to a soft key membrane panel for flexible
programmable operation. The system provides real-time "on-the-fly" adjustment
capabilities for each surgical parameter during the surgical procedure for high
volume applications. In addition, the Precisionist(TM) provides one hundred
pre-programmable surgery setups, with a second level of subprogrammed custom
modes within each major surgical screen (i.e., ultrasound phaco and
irrigation/aspiration modes).
The Precisionist(TM) also features our newly developed proprietary
fluidics panel which is completely non-invasive for improved sterility and to
provide a surgical environment in the eye that virtually eliminates fluidic
surge and solves chamber maintenance problems normally associated with phaco
cataract surgery. This new fluidics system provides greater control for the
surgeon and allows the safe operation at much higher vacuum settings by sampling
changes in aspiration 100 times per second. Greater vacuum in phaco surgery
means less use of ultrasound or laser energy to fragment the cataract and less
chance for surrounding tissue damage. In addition to the full complement of
surgical modalities (e.g., irrigation, aspiration, bipolar coagulation and
anterior vitrectomy), system automation includes "dimensional" audio feedback of
vacuum levels and voice confirmation for major system functions, providing an
intuitive environment in which the advanced phaco surgeon can concentrate on the
surgical technique rather than the equipment. Sales of the Precisionist(TM) and
related accessories were 0% of the total revenues in both 2005 and 2004, and 0%
of the total revenues for the three months ended March 31, 2006.
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist ThirtyThousand(TM) and is the
first system to our knowledge, which uses the expansive capabilities of today's
advanced computer technology to offer seamless open architecture expandability
of the system hardware and software modules. The Workstation(TM) utilizes an
embedded open architecture computer developed for us and controlled by a
proprietary software system developed by us that interfaces with all components
of the system. Ultrasound, fluidics (irrigation), aspiration, venting,
28
coagulation and anterior vitrectomy (pneumatic) are all included in the base
model. Each component is controlled as a peripheral module within this fully
integrated system. This approach allows for seamless expansion and refinement of
the Workstation(TM) with the ability to add other hardware and software
features. Expansion such as our Photon(TM) laser system and hardware for
additional surgical applications are easily implemented by means of a
preexisting expansion rack, which resides in the base of the Workstation(TM).
These expanded capabilities could include, but would not be limited to laser
systems, video surgical fiber optic imaging, cutting and electrosurgery
equipment. However, there is no guarantee that the Workstation(TM) will be
accepted in the marketplace. If the FDA approves the Photon(TM), we will refer
to the Workstation(TM) as the Photon(TM) Ocular Surgery Workstation(TM). To
date, we have not commercially developed or offered for sale any other added
hardware or software features to its Workstation(TM).
Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our Precisionist(TM) Ocular Surgery Workstation(TM). The
plug-in platform concept is unique in the ophthalmic surgical market for systems
of this magnitude and presents a unique market opportunity for us. The main
elements of the laser system are the Nd:YAG laser module, Photon(TM) laser
software package and interchangeable disposable hand held fiber optic laser
cataract probe. The Photon(TM) laser utilizes the on board microprocessor
computer of the Workstation(TM) to generate short pulse laser energy developed
through the patented LCP)(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build up in the eye.
Our Phase I clinical trials demonstrated that this probe could easily reduce the
size of the cataract incision from 3.0 mm to under 2.0 mm thereby reducing
surgical trauma and complementing current foldable intraocular implant
technology.
The laser probe may also eliminate any possibility for burns around the
incision or at the cornea and may therefore be used with cataract surgery
techniques that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the
Precisionist(TM). Because of our "going concern" status, management has focused
efforts on those products and activities that will, in its opinion, achieve the
most resource efficient short-term cash flow to us. As reflected in the results
for the fiscal year ended December 31, 2005 and the three months ended March 31,
2006, diagnostic products are currently our major focus and the Photon(TM) and
other extensive research and development projects have been put on hold pending
future evaluation when our financial position improves. Due to the uncertainty
surrounding the timetable for obtaining FDA approval and the lack of significant
revenue from the other surgical products, we have recorded an inventory reserve
against the majority of the inventory associated with the Photon(TM) and the
Precisionist Thirty Thousand(TM). Our focus is not on any specific diagnostic
product or products, but rather on our entire group of diagnostic products.
At some point in the future, we may intend, subject to economic
feasibility and the availability of adequate funds, to refine the laser delivery
system and laser cataract surgical technique used on soft cataracts through
expanded research and clinical studies. Subject to the aforementioned
constraints, we intend to refine the fluidics management system by improving
chamber maintenance during surgical procedures and to develop techniques to
optimize time and improve invasive techniques through expanded research and
clinical studies. As far as we can determine, no integrated single laser
photofragmenting probe is presently available on the market that uses laser
energy directly, contained in an enclosed probe, to denature cataract tissue at
a precise location inside the eye while simultaneously irrigating and aspirating
the site.
Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and can present risk of complication both during and after
surgery. In contrast, our laser system, which utilizes short centralized energy
bursts, should permit the delivery of the laser beam with less trauma to
adjacent tissue. Therefore, unlike ultrasonic systems, whose vibrations and
shock waves affect (and can damage) non-cataracts tissues within the eye, our
Photon(TM) laser cataract system should only affect tissues with which it comes
into direct contact.
In October of 2000, we received FDA approval for the Photon(TM)
Workstation(TM) to be used with a 532mm green laser which is effective for
medical procedures other than cataract removal, such as photocoagulation of
retinal and venous anomalies within or outside the eye, pigmented lesions around
the orbital socket, posterior or anterior procedures associated with glaucoma or
diabetes and general photocoagulation for various dermatological venous
anomalies including telangiectasia (surface veins), or commonly referred to as
"spider veins". The goal is to be able to integrate multiple laser wavelengths
into one system or workstation that can be used for multiple medical
specialties. This approval represents only one of the potential applications
that could represent substantial growth opportunities including additional sales
of equipment, instruments, accessories and disposables.
29
The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed with any other added hardware or software features. There is no
guarantee that the ophthalmic surgery market will accept the laser in this
capacity or that the FDA will grant approval. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the FDA. Because of our "going concern" status,
management has focused efforts on those products and activities that will, in
its opinion, achieve the most resource efficient short-term cash flow to us. As
reflected in the results for the fiscal year ended December 31, 2005, diagnostic
products consisting mainly of the P40, P45 and P60 UBM Ultrasound
Biomicroscopes, P37 A/B Scan, perimeter, CT 50 Corneal Topographer, and Blood
Flow Analyzer(TM) are currently our major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Our focus is not
on any specific diagnostic product or products, buy rather on the entire group
of diagnostic products.
On March 31, 2005, Joseph W. Spadafora filed a complaint against us in
the United States District Court, District of Utah, in which he alleges that he
was a clinical investigator in the study for the FDA involving our Photon(TM)
laser system where he performed numerous surgeries using the Photon(TM). Dr.
Spadafora contends that in meetings with our personnel he suggested ways in
which the handpiece on the Photon(TM) could be improved. Dr. Spadafora further
contends that on August 5, 1999, when we filed a patent application for an
improved handpiece with the United States Patent and Trademark Office, he was
not named as one of the inventors or a co-inventor on the patent application. On
September 24, 2004, we were issued a patent entitled, "Laser Surgical Handpiece
with Photon Trap." Because we did not list Dr. Spadafora as one of the inventors
or a co-inventor on the patent, Dr. Spadafora requests in his complaint that a
court order be entered declaring that he is the inventor or co-inventor of the
patent and, as a result, is entitled to all or part of the royalties and profits
that we earned or will earn from the sale of any product incorporating or using
the improved handpiece.
On June 2, 2006, we entered into a settlement agreement with Dr.
Spadafora for the dismissal of the lawsuit. Under the terms of the settlement
agreement, we agree to provide Dr. Spadafora with the exclusive right over a
three-year period to market and sell our Photon(TM) laser system and its
components, including the inventory and intellectual property rights. If Dr.
Spadafora is successful in finding a prospective purchaser to acquire the
Photon(TM) laser system upon terms acceptable to us, we agree to pay him a
commission equal to 10% of the total purchase price. If the purchase price for
the Photon(TM) laser system includes a royalty or other payments payable to us
on later sales of the Photon(TM) laser system other than its handpiece
component, we agree to pay Dr. Spadafora 8% of such royalties or other payments
on such later sales through the full term of the purchase agreement. We further
agree that if a purchase price includes a royalty or other payments payable to
us on later sales of the handpiece component of the Photon(TM) laser system, we
agree to pay Dr. Spadafora 15% of such royalties or other payments through the
full term of the purchase agreement.
Additionally, the settlement agreement provides that if we are
successful through our sole efforts, without any assistance from Dr. Spadafora,
in finding a purchaser to acquire the Photon(TM) laser system or its components
during the second or third year of Dr. Spadafora's exclusive rights, we agree to
pay Dr. Spadafora a commission equal to 1.7% of the total purchase price and of
our royalties or other payments on subsequent sales of the Photon(TM) laser
system or its components through the full term of the purchase agreement.
Finally, the settlement agreement provides for mutual releases by Dr. Spadafora
and us for the benefit of each other, and that we each agree to pay our own
costs, expenses and attorney's fees incurred in connection with the lawsuit and
the preparation of the settlement agreement.
Surgical Instruments and Disposables: In addition to the cataract
surgery equipment, our surgical systems utilize or will utilize accessory
instruments and disposables, some of which are proprietary to us. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument
drapes and laser cataract probes. We intend to expand our disposable accessories
as it further penetrates the cataract surgery market and expands the treatment
applications for its Workstation(TM). These products contributed approximately
0% of the total revenues for both 2005 and 2004, and 0% of the total revenues
for the three months ended June 30, 2006.
Diagnostic Eye Care Products: Glaucoma is a second leading cause of
adult blindness in the world. Glaucoma is described as a partial or total loss
of visual field resulting from certain progressive disease or degeneration of
the retina, macula or nerve fiber bundle. The cause and mechanism of the
glaucoma pathology is not completely understood. Present detection methods focus
on the measurement of intraocular pressure in the eye, visual field and
observation of the optic nerve head to determine the possibility of pressure
being exerted upon the retina, and optic nerve fiber bundle, which can diminish
visual field. Recently, retinal blood circulation has been indicated as a key
component in the presence of glaucoma. Some companies produce color Doppler
equipment in the $80,000 price range intended to provide measurement of ocular
blood flow activity in order to diagnose and treat glaucoma at an earlier stage.
Blood Flow Analyzer(TM): In June 1997, we received FDA clearance to
market the Blood Flow Analyzer(TM) for early detection and treatment management
of glaucoma and other retina related diseases. The device measures not only
intraocular pressure but also pulsatile ocular blood flow, the reduction of
which may cause nerve fiber bundle death through oxygen deprivation thus
resulting in visual field loss associated with glaucoma. Our Blood Flow
Analyzer(TM) is a portable automated in office system that presents an
affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. This was our first diagnostic eye care device. The
device is a portable desktop system that utilizes a proprietary and patented
30
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM), which can be attached
to any model of standard examination slit lamp, which is then placed on the
cornea of the patient's eye to measure the intraocular pressure within the eye.
The device is unique in that it reads a series of intraocular pressure pulses
over a short period of time (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins University, calculates the blood flow volume. The device presents a
numerical intraocular pressure reading and blood flow analysis rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.
We market the Blood Flow Analyzer(TM) as a stand-alone model packaged
with a custom built computer system. The Blood Flow Analyzer(TM) utilizes a
single use disposable cover for the Air Membrane Applanation Probe(TM), a
corneal probe which is shipped in sterile packages. The probe tip cover provides
accurate readings and acts as a prophylactic barrier for the patient. The device
has been issued a patent in the European Economic Community and the United
States and has a patent pending in Japan. The FDA cleared the Blood Flow
Analyzer(TM) for marketing in June 1997 and we commenced selling the system in
September 1997. In addition to the Humphrey products, this diagnostic product
allowed us to expand its market to approximately 35,000 optometry practitioners
in the United States in addition to the approximately 18,000 ophthalmic
practitioners who currently perform eye surgeries and are candidates for our
surgical systems.
In April 2001, we received written authorization from the CPT Editorial
Research and Development Department of the American Medical Association to use
common procedure terminology or CPT code number 92120 for our Blood Flow
Analyzer(TM), for reimbursement purposes for doctors using the device. However,
certain payers have elected not to reimburse doctors using the Blood Flow
Analyzer(TM). We are continuing our aggressive campaign to educate the payers
about the Blood Flow Analyzer(TM), its purposes and the significance of its
performance in patient care in order to achieve reimbursements to the doctors.
Currently, there is reimbursement by insurance payors to doctors using the Blood
Flow Analyzer(TM) in 22 states and partial reimbursement in four other states.
The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. We are
endeavoring to obtain reimbursement by insurance payors in other states where
there is currently no reimbursement being made.
The manufacturing activities for the Blood Flow Analyzer(TM) have been
moved to the Salt Lake City facility from the outsourced plant located in
England. On October 21, 2002, we received FDA approval on our 510(k) application
for additional indications of use for the Blood Flow Analyzer(TM). The
additional indications include pulsatile ocular blood flow and pulsatile ocular
blood volume. These are diagnostic measurements that assess the hemodynamic and
vascular health of the eye. Also, we are continuing our aggressive campaign to
educate the insurance payers about the Blood Flow Analyzer(TM), its purposes and
the significance of its performance in patient care in order to achieve
reimbursements to the doctors using our Blood Flow Analyzer(TM). Sales of the
Blood Flow Analyzer(TM) and related accessories accounted for approximately 4%
and 18% of total revenues for the fiscal years ended December 31, 2005 and 2004,
respectively, and 7% of total revenues for the six months ended June 30, 2006.
Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, FieldLink(TM), FieldView(TM) and Advanced FieldView. Perimeters are
used to determine retinal sensitivity testing the visual pathway. Perimeters
have become a standard of care in the detection and monitoring of glaucoma
worldwide. Perimetry is reimbursable worldwide. The Dicon(TM) perimeters feature
patented kinetic fixation and voice synthesis now in 27 different languages.
Software programs are sold to assist in the analysis of the test results. Sales
of the perimeters and related accessories generated approximately 28% and 27% of
the total revenues for both 2005 and 2004, respectively, and 41% of the total
revenues for the six months ended June 30, 2006.
The LD 400FT, or Fast Threshold Autoperimeter, is the successor to the
LD 400. The device is an autoperimeter used to measure patient visual fields.
The LD 400FT is identical in hardware to the LD 400 but it uses new software to
enable a fast threshold test. This test reduces the time required by
ophthalmologists and optometrists conducting autoperimetry tests by more than
40% by running an abbreviated test at light levels determined to be sufficient
to be seen in normal patients. The procedure currently takes more than 15
minutes. The fast threshold test by the LD 400FT is similar to tests by other
devices on the market. Healthy patients will pass the test. Patients with
reduced visual fields will be flagged by the test enabling the device to
automatically run a more comprehensive examination to determine the extent of
the visual field loss. All existing LD 400s can be upgraded to support the new
fast threshold test through the purchase of a software package.
Dicon(TM) Corneal Topographers: Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50. Corneal topographers are used to determine the
shape and integrity of the cornea, the anterior surface of the eye. Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for eyeglasses and optometric applications including contact lens
fitting. Revenues from the topographer and related accessories were 3% and 7% of
the total revenues for 2005 and 2004, respectively, and 5% of the total revenues
for the six months ended June 30, 2006. An enhanced version of the CT 200(TM)
was introduced during the first quarter of 2004. We have completed upgrades to
the CT 200(TM) and the CT 50 Corneal Topographer, which are now operating with
Windows XP software rather than the former Windows 95 operating systems.
31
P55 Pachymetric Analyzer: The ultrasonic pachymeter is used for
measurement of corneal thickness. The Model P55 is positioned as a standard
office pachymeter. This device is targeted to the refractive surgery market and
contributed approximately 2% and 3% of the total revenues for 2005 and 2004,
respectively, and 2% of the total revenues for the six months ended June 30,
2006.
P37 A/B Scan Ocular Ultrasound Diagnostic: The A/B Scan is used by
retinal subspecialists to identify foreign bodies in the posterior chamber of
the eye and to evaluate the structural integrity of the retina. The A/B Scan is
attractive to the general ophthalmic community at large because of its lower
price point. Sales from this product were approximately 8% and 9% of the total
revenues for 2005 and 2004, respectively, and 10% of the total revenues for the
six months ended June 30, 2006.
P40, P45 and P60 UBM Ultrasound Biomicroscopes: Humphrey Systems
developed the P40 UBM Ultrasound Biomicroscope in conjunction with the New York
Eye and Ear Infirmary in Manhattan and the University of Toronto. The P40
biomicroscope and its intellectual property were included in the purchase from
Humphrey Systems and gives us the proprietary rights to this device. The P40
biomicroscope creates a high resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The P40 biomicroscope is an
"enabling technology" for the ophthalmologist, one that we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma subspecialty
practitioners, we reintroduced the P40 biomicroscope at a price point targeted
for the average practitioners seeking to add glaucoma filtering surgical
procedures and income to their cataract surgical practice.
The P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions us with our proprietary P40 biomicroscope and to our knowledge, the
only commercially viable product of this type on the market, as a leader in the
rapidly expanding glaucoma imaging and treatment segment. In the fall of 2000,
we introduced the P45 UBM Ultrasound Biomicroscope, which combines the P40
biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic in one
instrument. We believe that by combining functions, the P45 biomicroscope will
appeal to a broader market. The P40 biomicroscope and related accessories sales
were 9% and 11% of the total revenues for 2005 and 2004, respectively, and 6% of
the total revenues for the six months ended June 30, 2006. The P45 UBM
Ultrasound Biomicroscope and related accessories sales contributed 13% and 16%
of the total revenues for 2005 and 2004, respectively, and 6% of the total
revenues for the six months ended June 30, 2006.
On October 25, 2004, we entered into a Manufacturing and Distribution
Agreement with E-Technologies, Inc., a Iowa based developer of software and
related technology for technical applications. Under the terms of the agreement,
E- Technologies granted to us the exclusive right to manufacture, market, sell
and distribute the P60 UBM Ultrasound Biomicroscope. Upon execution of the
agreement, we paid $30,000 to E-Technologies for engineering costs associated
with the development of the P60. When the P60 received FDA approval on May 26,
2005, we paid E-Technologies an additional fee of $45,000.
In consideration for the exclusive right to manufacture and distribute
the P60 biomicroscope, we agree to pay E-Technologies the sum of $5,000 for each
of the first 25 P60 biomicroscopes sold by us. Thereafter, we agree to pay
E-Technologies the sum of $4,000 for each P60 biomicroscope sold. As an
additional condition, we agree to sell 25 P60 biomicroscopes during the first 12
months after the P60 receives FDA approval. The agreement is effective for a
term of two years. After the expiration of the two year period, the agreement is
to automatically renew for additional one year periods, unless either party
elects to terminate the agreement upon at least 30 days prior written notice to
the other party before the end of any term of the agreement.
In March 2005, we introduced the P60 UBM Ultrasound Biomicroscope. The
P60 biomicroscope represents the fourth generation of UBM devices and has better
visual clarity and image flexibility than earlier versions. On March 1, 2005, we
were awarded the CE Mark for the P60, which enables us to market the device in
19 Western European countries and some parts of the Pacific Rim. On May 26,
2005, we received FDA 510(k) premarket approval for the P60, which allows us to
sell the P60 in the United States. On February 9, 2006, we received a Canadian
device license for the P60, which allows it to be sold in Canada. The P60
biomicroscope and related accessories sales were 21% and 0% of total revenues
for 2005 and 2004, respectively, and 10% of the total revenues for the six
months ended June 30, 2006.
In July of 2000, we received ISO 9001 and EN 46001 certification using
TUV Essen as the notified body. Under ISO 9001 certification, our products are
now CE marked. The CE mark allows us to ship product for revenue into the
European Community. We successfully retained our certification in 2005 and
retained ISO 13485 in December 2005 from TUV Essen.
32
On June 12, 2006, we entered into a Worldwide OEM Agreement with MEDA
Co., Ltd., one of China's leading developers and producers of ultrasound
devices. Under the terms of the agreement, MEDA agrees to jointly engineer,
develop and manufacture our next generation of the Ultrasound BioMicroscope, as
well as other proprietary new products and enhancement of our current products.
The products to be manufactured by MEDA, at agreed upon costs, and supplied to
us for resale include the following new products: an Ultrasound BioMicroscope,
two Ultrasound A/B Scans, a Biometric A-Scan and a pachymeter.
The agreement provides that we and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of our products and, in the
interest of product development, enhancement and differentiation, MEDA agrees to
give consideration to potential software development or enhancements made
available to us for our products. Moreover, in the interest of product
improvement, MEDA agrees to collaborate with us and our designated engineers,
employees and consultants to consider and potentially implement jointly or
individually the development of product enhancements on our products to be
manufactured by MEDA.
Parts and Services: The parts and services revenue from the repair and
service of equipment sold accounted for 12% and 9% of the total revenues in both
2005 and 2004, and 13% of the total revenues for the six months ended June 30,
2006.
The following table identifies each product class, status of commercial
development, the percentage of sales contributed by that class, reimbursement
status, and status of applicable United States and foreign regulatory approvals:
Commercial Reimbursement % 2005 %2006 Regulatory
Product (1) Product Class Development Status Sales Sales(2) Approvals
P55 Pachymetric System, Imaging, Pulsed Complete Yes 2% 2% FDA 510(K) K844299*
Analyzer Echo Diagnostic ISO 9001: 1994, EN
ISO 9001**
P37 A/B Scan Transducer, Ultrasound Complete Yes 8% 10% FDA 510(K) K844299*
Ocular Ultrasound Diagnostic ISO 9001: 1994,
Diagnostic EN ISO 9001**
P40 UBM System, Imaging, Pulsed Complete Yes 9% 6% FDA 510(K) K844299*
Ultrasound Echo Ultrasound ISO 9001: 1994,
Biomicroscope Diagnostic EN ISO 9001**
P45 UBM System, Imaging, Pulsed Complete Yes 13% 6% FDA 510(K) K844299*
Ultrasound Echo Ultrasound ISO 9001: 1994,
Biomicroscope, Diagnostic EN ISO 9001**
Workstation Plus
P60 UBM System, Imaging, Pulsed Complete Yes 21% 10% FDA 510(K) K844299*
Ultrasound Echo Ultrasound ISO 9001: 1994,
Biomicroscope, Diagnostic EN ISO 9001**
Workstation Plus
BFA Ocular Blood Tonometer, Manual Complete Yes**** 4% 7% FDA 510(K) K844299*
Flow Analyzer(TM) Diagnostic ISO 9001: 1994,
and Disposables EN ISO 9001**
CT 200 Corneal Topographer Corneal Complete Yes 3% 5% FDA 510(K) K844299*
Topography System AC-Powered ISO 9001: 1994,
Diagnostic EN ISO 9001**
LD 400 Perimeter, Automatic Complete Yes 23% 41% FDA 510(K) K844299*
Autoperimetry AC-Powered ISO 9001: 1994,
System Diagnostic EN ISO 9001**
TKS 5000 Perimeter, Automatic Complete Yes 5% 0% FDA 510(K) K844299*
Autoperimetry AC-Powered, Diagnostic ISO 9001: 1994,
System EN ISO 9001**
33
Precisionist Thirty Phacofragmentation Complete Yes 0% 0% FDA 510(K) K844299*
Thousand(TM), Ocular ISO 9001: 1994,
Surgery EN ISO 9001**
Workstation with
Surgical Equipment
and
Disposables
Photon(TM) Laser,
Ocular Surgery Phacoemulsification In-Process (4) No 0% 0% IDE G940151
ISO 9001: 1994,
EN ISO 9001
Parts and Services Perimeter, BFA, Complete Yes 12% 13% FDA 510(K) K844299*
Tonometer, ISO 9001: 1994,
Topographer, Ultrasound EN ISO 9001**
Workstations, Systems,
Imaging
_____________________________
(1) Except for the Photon(TM) Ocular Surgery Workstation, which can only be
sold in countries outside the United States, these products can be sold
in the United States and in foreign countries including but not limited
to Argentina, Australia, Bangladesh, Borneo, Brazil, Canada, China,
Czechoslovakia, Egypt, France, Germany, Greece, Hong Kong, India,
Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand,
Pakistan, Peru, Poland, Puerto Rico, Russia, Saudi Arabia, Spain, Sri
Lanka, Taiwan, Thailand, Turkey, United Kingdom, and United Arab
Emirates.
(2) Sales for 2006 are for the six months ended June 30, 2006.
(3) Due to the lack of recent sales volume, the inventory associated with
the Precisionist Thirty Thousand (TM), the SIStem(TM) and the
Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
offset such inventory.
(4) Due to the lack of recent evidence to support the recoverability of
inventory associated with the Photon(TM), the Company has recorded a
reserve to offset the majority of such inventory on hand.
(5) The Photon(TM) is in-process and not complete because the Company has
not completed the clinical trials in order to obtain FDA regulatory
approval.
* FDA 510(K) K844299 represents domestic approval by U.S. Food and Drug
Administration
** ISO 9001: 1994, EN ISO 9001 represents international approval
*** IDE G940151 represents approval for international distribution only
**** Represents full reimbursement in 22 states and partial reimbursement in
four other states.
As detailed in the table above, except for the Photon(TM) Laser Ocular
Surgery Workstation, which requires additional development and regulatory
approvals, our current products are developed and available for sale in footnote
(1) of the table. Any possible future efforts to complete development of the
Photon(TM) laser system and obtain the necessary regulatory approvals would
depend on adequate funding. If these efforts were undertaken but proved to be
unsuccessful, the impact would include the costs associated with these efforts
and the anticipated future revenues that we would not receive as expected. We
estimate that the liquidity needed to complete the clinical trials on the
Photon(TM) in order to obtain the necessary FDA regulatory approval to be
approximately $225,000.
We currently purchase components and parts used in our products from a
limited number of key suppliers. Our reliance on our principal suppliers could
result in delays associated with redesigning a product due to an inability to
obtain an adequate supply of required components and parts, and reduced control
over pricing, quality and timely delivery. The loss of any of these principal
suppliers or the inability of a supplier to meet performance and quality
specifications, requested quantities or delivery schedules could cause our
revenues to decline. In addition, any interruption or discontinuance in the
supply of components or parts could have an adverse effect on our business,
results of operation and financial condition. Our principal suppliers include
Capistrano Labs, US Ultrasound and Anello.
Marketing and Sales
Ophthalmologists are mainly office based and perform their surgeries in
local hospitals or surgical centers that provide the necessary surgical
equipment and supplies. Ophthalmologists are generally involved in decisions
relating to the purchase of equipment and accessories for their independent
ambulatory surgical centers and for the hospitals with which they are
affiliated. This provides the opportunity for direct, targeted, personal
selling, responsive high quality customer service and short buying cycles to
achieve a product sale in the office or hospital. Hospitals also comprise a
significant market, as recent demand for ultrasonic surgery technology has put
pressure on the ophthalmologist, who in turn persuades the hospital to install
the latest technology system so that he can offer this procedure to his patients
and the community.
34
Industry analysts report that the United States ophthalmic surgical
device market has been characterized by slower growth in recent years. This has
apparently been caused by the potential reforms associated with the health care
industry. Further, hospitals have been inclined to keep their older phaco
machines longer than expected as they have been forced to mind budgets more
carefully and have become less willing to invest in capital equipment until more
information on health care reform becomes available. However, analysts predict
that the ophthalmic surgical device market will see renewed growth in the coming
years as the health care environment stabilizes and as the growing elderly
population produces an increased number of cataract surgeries. As a consequence
of these factors, the market should see a greater rate of replacement of older
machines that hospitals and surgeons have been postponing for longer than usual.
Current Market Acceptance and Potential: The principal purchasers of
our products have been ophthalmologists, optometrists and clinics in many
countries throughout the world. We believe that the market for our products is
being driven by: (i) the aging of the population, which is evidenced by the
domestic and international cataract surgery volume growth trend over the past
ten years, (The National Eye Institute reported in March 2002 that the number of
blind or visually impaired Americans is likely to double over the next 30
years.) (ii) the entry by emerging countries (including China, Russia, and other
countries in Asia, Eastern Europe and Africa) into advanced technology medical
care for their populations, (iii) increased awareness worldwide of the benefits
of the minimally invasive phaco cataract procedure and (iv) the introduction of
technology improvements such as our laser system.
Marketing Organization: We market our products internationally through
a network of dealers and domestically through direct sales representatives,
independent sales representatives, and ophthalmic product distributors. As of
August 31, 2006, we had four direct domestic sales representatives in the United
States and 57 ophthalmic and medical product distributors outside the United
States. These sales representatives are assigned exclusive territories and have
entered into contracts with us that contain performance quotas. Domestic sales
channels have been expanded to include independent sales representatives and
distributors who began training with our products in August 2003. We also plan
to continue to market our products by identifying customers through internal
market research, trade shows and direct marketing programs.
Product advertising is intended to be focused in the major industry
trade newspapers. Most of the ophthalmologists or optometrists in the United
States receive one or more of these magazines through professional subscription
programs. The media has shown strong interest in our technology and products, as
evidenced by several recent front-page articles in these publications.
Manufacturing and Raw Materials: Currently, we maintain a 16,926 square
foot facility in Salt Lake City. We transferred the manufacturing activities for
the Blood Flow Analyzer(TM) to San Diego from Ocular Blood Flow, Ltd. in England
during 2001. During the second quarter of 2002, we consolidated and closed the
San Diego operations into the Salt Lake City facility. The facility accommodates
our manufacturing, marketing and engineering capabilities. We manufacture under
systems of quality control and testing, which comply with the Quality System
Requirements established by the FDA, as well as similar guidelines established
by foreign governments, including the CE Mark and IS0-9001.
We subcontract the manufacturing of some of its ancillary instruments,
accessories and disposables through specified vendors in the United States.
These products are contracted in quantities and at costs consistent with our
financial purchasing capabilities and pricing needs. We manufacture certain
accessories and fluidics surgical tubing sets at our facility in Salt Lake City.
Product Service and Support: Service for our products is overseen from
our Salt Lake City location and is augmented by our international dealer
network, which provides technical service and repair. Installation, on-site
training and a limited product warranty are included as the standard terms of
sale. We provide distributors with replacement parts at no charge during the
warranty period. International distributors are responsible for installation,
repair and other customer service to installed systems in their territory. All
systems parts are modular sub-components that are easily removed and replaced.
We maintain adequate parts inventory and provides overnight replacement parts
shipments to its dealers.
Research and Development
Our primary market for our surgical products is the cataract surgery
market. However, we believe that our laser systems may potentially have broader
ophthalmic applications. Consequently, we believe that a strong research and
development capability is important for our future. In addition to our expanded
in-house research and development capabilities, we have enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities.
We believe our research and development capabilities provide us with
the ability to respond to regulatory developments, including new products, new
product features devised from our users and new applications for our products on
35
a timely and proprietary basis. We intend to continue investing in research and
development and to strengthen our ability to enhance existing products and
develop new products.
Research, development and service expenses (which includes production
and manufacturing support and the service department expenses) increased by
$87,000, or 11%, to $855,000 for the twelve months ended December 31, 2005, from
$768,000 for the same period in 2004. None of the costs of research and
development activities during 2005 and 2004 was borne directly by customers.
From December 1, 2000 to November 30, 2002, we entered into a series of
consulting agreements with Michael B. Limberg, M.D., in which he agreed to
evaluate new technologies and instruments for us. For his services during that
period, we issued Dr. Limberg a total of 48,000 shares of our common stock and
warrants to purchase 300,000 shares of common stock at exercise prices ranging
from $4.00 to $6.75 per share.
During the period in which Thomas F. Motter served as Chairman and
Chief Executive Officer, he formed a clinical advisory board and met from time
to time with the board. Jeffrey F. Poore, who served as our President and Chief
Executive Officer from March 19, 2003 to March 18, 2004, and John Y. Yoon, who
served as President and Chief Executive Officer from March 13, 2004 to December
31, 2005, decided not to utilize the clinical advisory board. Instead, they
consulted with former members of the advisory board on an informal basis.
Raymond P.L. Cannefax, who currently serves as our President and Chief Executive
Officer, has also decided not to utilize the clinical advisory board. We
currently have no agreements with any former members of the clinical advisory
board and none of these former members hold or own any rights to our products or
technologies.
Competition
General. We are subject to competition in the cataract surgery and the
glaucoma diagnostic markets from two principal sources: (i) manufacturers of
competing ultrasound systems used when performing cataract treatments and (ii)
developers of technologies for ophthalmic diagnostic and surgical instruments
used for treatment. A few large companies that are well established in the
marketplace have experienced management, are well financed and have well
recognized trade names and product lines dominate the surgical equipment
industry. We believe that the combined sales of five entities account for over
90% of the cataract surgery market. The remaining market is fragmented among
emerging smaller companies, some of which are foreign. The ophthalmic diagnostic
market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. The major manufacturers
utilizing ultrasonic technology offer products currently in use. Those systems
rely on accessories including single use cassette packs and other ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits. The cassette packs are required for fluid and tissue collection
during the surgical procedure. The cassette packs are generally unique and
proprietary to their respective systems and represent a barrier to entry for
third party, lower cost aftermarket suppliers. While there is growing market
resistance in the United States and internationally to single use cassettes, it
is anticipated that manufacturers of ultrasound equipment will continue to
develop and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. Our Precisionist Thirty Thousand(TM)
ultrasonic phaco system has the ability to use either reusable or single use
disposable components. The Photon(TM) laser cataract system will utilize probes
and cassette packs designed for single use and semi-disposable instruments
priced at a level consistent with the demands of health care cost containment.
This will allow the health care providers a substantial measure of cost
containment, while providing us with the quality control and income capability
of cassette sales.
The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, we are
establishing ourself and, as yet, do not hold a significant share of the market.
We currently recognize Bausch & Lomb, Alcon Laboratories, and Allergan Medical
Optics as our primary competitors in the ultrasound phaco cataract equipment
market.
Laser Equipment Manufacturers. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:YAG
36
wavelength used by the Photon(TM). One competitor uses a Nd:YAG wavelength,
however the laser is used only to vibrate an ultrasonic needle. Thus the device
remains an ultrasonic system subject to the same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. We also
believe that our product is sufficiently distinctive and, if properly marketed,
can capture a significant share of the cataract surgical device market. However,
there are substantial risks in undertaking a new venture in an established and
already highly competitive industry. In the short-term, we are seeking to
exploit these opportunities. Depending upon further developments, we may
ultimately exploit those opportunities through a merger with a stronger entity
already established or one that desires to enter the medical industry.
We believe that our ability to compete successfully will depend on our
capability to create and maintain advanced technology, develop proprietary
products, attract and retain scientific personnel, obtain patent or other
proprietary protection for our products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.
The Retinal Diagnostic Market. The Glaucoma Research Foundation
suggests that with the aging of the so-called baby boom generation, there will
be an increase of macular degeneration and glaucoma in the United States, the
leading causes of adult blindness worldwide. The National Eye Institute stated
in 2002 that the number of visually impaired Americans is likely to double over
the next three decades. Their report estimated that 2.4 million people suffer
some visual impairment in this country. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very nearsighted. The Glaucoma Research Foundation recommends
that these high-risk individuals be tested regularly for glaucoma. According to
the U.S. Census Bureau, in 1995 there were over 30 million adults 65 years of
age and older and 8 million African Americans 45 years of age and older. The
Glaucoma Research Foundation reports that glaucoma currently accounts for more
than 7 million visits to physicians annually.
We are subject to intense competition in the ophthalmic diagnostic
market from well financed, established companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by several large entities which we believe account for the majority of
diagnostic equipment sales. We continue to derive revenues from the sale of its
ultrasound diagnostic equipment and blood flow analyzer. The blood flow analyzer
is designed to detect glaucoma in an earlier stage than is presently possible.
In addition, the device performs tonometry and blood flow analysis. Other
ophthalmic diagnostic devices that do not detect glaucoma in the early stages of
the disease as does our analyzer retail at comparable prices. Thus, we believe
that we can compete in the diagnostic market place based upon the lower price
and improved diagnostic functions of the analyzer.
Intellectual Property Protection
Our cataract surgical products are proprietary in design, engineering
and performance. Our surgical ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
We acquired proprietary intellectual property in the transaction with
Humphrey Systems when we purchased the diagnostic ultrasonic product line in
1999. This technology uses ultrasound to create a high resolution computer image
of the unseen parts of the eye that is a "map" for the practitioner. The P40 UBM
Ultrasound Biomicroscope, one of the ultrasonic products we purchased, is
subject to a license agreement dated September 27, 1990, with Sunnybrook Health
Science Center. Under the terms of the license agreement, we have the exclusive
worldwide rights to manufacture and sell the P40 UBM biomicroscope, for which we
are required to pay a royalty of $150 for each licensed product sold. The
license agreement was automatically terminated by its terms on September 27,
2002, at which time we had a royalty free worldwide license to use and sell the
P40 UBM Ultrasound Biomicroscope. However, we have a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.
The Photon(TM) laser cataract probe is protected under a United States
patent issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to us in 1997 for the
utility and methods of laser ablation, aspiration and irrigation of tissue
through a hand held probe of a unique design. The United States patent expired
in September 2004.
We secured the exclusive worldwide rights to this patent shortly after
its issue, and to the international patents pending, from PhotoMed by means of a
license agreement dated July 7, 1993. The license agreement provides us with the
rights to manufacture, distribute and sell a laser system using the Photon(TM)
laser cataract probe and related components to customers on a worldwide basis,
for which PhotoMed is to receive a 1% royalty on all net sales of such systems
and related components sold worldwide.
37
Under the license agreement PhotoMed is entitled to all royalty
payments from net sales at the time of billing to the purchaser or within 30
days of the date of shipment, whichever occurs first. We are required each
quarter to prepare a summary of sales and the royalties to which PhotoMed is
entitled to be paid. The sales summary must list the number of surgical systems
and disposable units sold in each country, the dollar value of gross and net
sales, the amount of the royalty to which PhotoMed is entitled, and any other
information requested by PhotoMed from time to time. Under the terms of the
agreement, we have agreed to be actively engaged in either research and
development of a salable product utilizing the patent or in marketing and
selling such a product.
The license agreement was amended on December 5, 1997 to allow PhotoMed
the right to conduct research, development and marketing utilizing the patent in
certain medical subspecialties other than ophthalmology for which we would
receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent. The license agreement expired when the United
States patent rights expired in September 2004, but the license agreement could
be automatically extended or renewed for any term of extension or renewal
awarded for the patent rights. In addition, we have the right to terminate the
license agreement at any time after July 7, 2003 upon 90 days prior written
notice to PhotoMed.
PhotoMed and Dr. Eichenbaum brought legal action against us on
September 11, 2000 involving an amount of royalties that were allegedly due and
owing to them from the sale of equipment by us. We have paid $15,717 to bring
all royalty payments up to date through January 5, 2005. We have been working
with PhotoMed and Dr. Eichenbaum to ensure that the royalty calculations have
been correctly made. It is anticipated that once the parties agree on the
correct royalty calculations, the legal action will be dismissed.
An issue in dispute concerning the method of calculating royalties is
whether royalties should be paid on returned equipment. Since July 1, 2001, only
one Photon (TM) laser system has been sold and no systems returned. Thus, the
amount of royalties due, according to our calculations is $981. We made payment
of this amount to Photomed and Dr. Eichenbaum on January 5, 2005 and, as a
result, seek to have the legal action dismissed. However, if the partes are
unable to agree on a method for calculating royalties, there is a risk that
PhotoMed and Dr. Eichenbaum might amend the complaint to request termination of
the license agreement and, if successful, we would lose our rights to
manufacture or sell the Photon(TM) laser system.
The Photon(TM) laser cataract probe is also protected under a United
States patent issued to us in 2002 for a laser surgical device for the removal
of intraocular tissue including a handpiece and a trap. The patent is due to
expire in August 2019. There are also two pending United States patents relating
to the Photon(TM) laser cataract probe.
The Blood Flow Analyzer(TM) was granted a patent in the United Kingdom
in 1998 and in the United States in 1999, and has a patent pending in Japan.
These patents relate to pneumatic pressure probes for use in measuring change in
intraocular pressure and in measuring pulsatile ocular blood flow. The United
States patent rights expire in January 2019 and the United Kingdom patent rights
expire in November 2015.
The Dicon(TM) Perimeter and the Dicon(TM) Corneal Topographer each have
a U.S. patent with a wide scope of claims. The United States patent for the
Dicon(TM) Perimeter was issued in 1991 and the patent rights expire in March
2010. The United States patent for the Dicon(TM) Corneal Perimeter was issued in
2002 and the patent rights expire in January 2018.
Our trademarks are important to our business. It is our policy to
pursue trademark registrations for its trademarks associated with its products
as appropriate. Also, we rely on common law trademark rights to protect its
unregistered trademarks, although common law trademark rights do not provide us
with the same level of protection as would U.S. federal registered trademarks.
Common law trademark rights only extend to the geographical area in which the
trademark is actually used while U.S. federal registration prohibits the use of
the trademark by any party anywhere in the United States.
We also rely on trade secret law to protect some aspects of our
intellectual property. All of our key employees, consultants and advisors are
required to enter into a confidentiality agreement with us. Most of our
third-party manufacturers and formulators are also bound by confidentiality
agreements with us.
Regulation
The FDA under the Food, Drug and Cosmetics Act regulates our surgical
and diagnostic systems as medical devices. As such, these devices require
Premarket clearance or approval by the FDA prior to their marketing and sale.
Such clearance or approval is premised on the production of evidence sufficient
for us to show reasonable assurance of safety and effectiveness regarding our
products. Pursuant to the Food, Drug and Cosmetics Act, the FDA regulates the
manufacture, distribution and production of medical devices in the United States
and the export of medical devices from the United States. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production, denial
of Premarket clearance or approval for devices. Recommendations by the FDA that
we not be allowed to enter into government contracts in order to avoid criminal
prosecution may also be made.
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Following the enactment of the Medical Device Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III. This
classification is based on the controls that are perceived to be necessary to
reasonably ensure the safety and effectiveness of medical devices. Class I
devices are those devices, the safety and effectiveness of which can reasonably
be ensured through general controls, such as adequate labeling, advertising,
premarketing notification and adherence to the FDA's Quality System Requirements
regulations. Some Class I devices are exempt from some of the general controls.
Class II devices are those devices the safety and effectiveness of which can
reasonably be assured through the use of special controls, such as performance
standards, postmarket surveillance, patient registries and FDA guidelines. Class
III devices are devices that must receive premarketing approval by the FDA to
ensure their safety and effectiveness. Generally, Class III devices are limited
to life sustaining, life supporting or implantable devices, or to new devices
that have been found not to be substantially equivalent to legally marketed
devices.
There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a premarketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics Act. If a manufacturer or
distributor of a medical device can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a pre-1976 Class III medical device for which the FDA has not
called for a premarketing approval, the manufacturer or distributor may seek FDA
Section 510(k) premarketing clearance for the device by filing a Section 510(k)
premarketing notification. The Section 510(k) notification and the claim of
substantial equivalence will likely have to be supported by various types of
data and materials, possibly including clinical testing results, obtained under
an Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting premarketing clearance for the device. There can be
no assurance that we will obtain Section 510(k) premarketing clearance for any
of the future devices for which we seek such clearance including the Photon(TM)
laser system.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a premarketing approval, and allow the proposed
device to be marketed in the United States. The FDA may determine, however, that
the proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. A "not substantially
equivalent" determination or a request for additional information could delay
our market introduction of our products and could have a material adverse effect
on our business, operating results and financial condition.
The alternate method to seek approval is to obtain premarketing
approval from the FDA. If a manufacturer or distributor of a medical device
cannot establish that a proposed device is substantially equivalent to another
legally marketed device, whether or not the FDA has made a determination in
response to a Section 510(k) notification, the manufacturer or distributor will
have to seek premarketing approval for the proposed device. A premarketing
approval application would have to be submitted and be supported by extensive
data, including preclinical and clinical trial data to prove the safety and
efficacy of the device. If human clinical trials of a proposed device are
required and the device presents a significant risk, the manufacturer or the
distributor of the device will have to file an Investigational Device Exemption
application with the FDA prior to commencing human clinical trials. The
Investigational Device Exemption application must be supported by data,
typically including the results of animal and mechanical testing. If the
Investigational Device Exemption application is approved, human clinical trials
may begin at a specific number of investigational sites, and the approval letter
could include the number of patients approved by the FDA.
An Investigational Device Exemption clinical trial can be divided into
several parts or phases. Sometimes a company will conduct a feasibility study
(Phase I) to confirm that a device functions according to its design and
operating parameters. This is a usual clinical trial site. If the Phase I
results are promising, the applicant may, with the FDA's permission, expand the
number of clinical trial sites and the number of patients to be treated to
assure reasonable stability of clinical results. Phase II studies are performed
to confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
premarketing approval are derived primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study, provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Although both approval methods may require
clinical testing of the device in question under an approved Investigational
Device Exemption, the premarketing approval procedure is more complex and time
consuming.
Upon receipt of the premarketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the premarketing
approval is sufficiently complete to permit a substantive review, the FDA will
39
"file" the application. Once the submission is filed, the FDA has by regulation
90 days to review it; however, the review time is often extended significantly
by the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee may
also evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Quality System
Requirements prior to approval of a premarketing application. While the FDA has
responded to premarketing approval applications within the allotted time period,
premarketing approval reviews generally take approximately 12 to 18 months or
more from the date of filing to approval. The premarketing approval process is
lengthy and expensive, and there can be no assurance that such approval will be
obtained for any of our products determined to be subject to such requirements.
A number of devices for which other companies have sought premarketing approval
have never been approved for marketing.
Any products manufactured or distributed by us pursuant to a premarket
clearance notification or premarketing approval are or will be subject to
pervasive and continuing regulation by the FDA. The Food, Drug and Cosmetics Act
also requires that our products be manufactured in registered establishments and
in accordance with Quality System Requirements regulations. Labeling,
advertising and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The export of medical
devices is also subject to regulation in certain instances. In addition, the use
of our products may be regulated by various state agencies. All lasers
manufactured for us are subject to the Radiation Control for Health and Safety
Act administered by the Center for Devices and Radiological Health of the FDA.
The law requires laser manufacturers to file new product and annual reports and
to maintain quality control, product testing and sales records, to incorporate
certain design and operating features in lasers sold to end users pursuant to
specific performance standards, and to comply with labeling and certification
requirements. Various warning labels must be affixed to the laser, depending on
the class of the product, as established by the performance standards.
Although we believe that we currently comply and will continue to
comply with all applicable regulations regarding the manufacture and sale of
medical devices, such regulations are always subject to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in review guidelines, regulations or administrative interpretations by
the FDA or other regulatory bodies, with possible retroactive effect, will not
materially adversely affect us. In addition to the foregoing, we are subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of potentially hazardous substances. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business.
We and the manufacturers of our products may be inspected on a routine
basis by both the FDA and individual states for compliance with current quality
system requirements regulations and other requirements.
Congress has considered several comprehensive federal health care
programs designed to broaden coverage and reduce the costs of existing
government and private insurance programs. These programs have been the subject
of criticism within Congress and the health care industry, and many alternative
programs and features of programs have been proposed and discussed. Therefore,
we cannot predict the content of any federal health care program, if any is
passed by Congress, or its effect on us and our business. Some measures that
have been suggested as possible elements of a new program, such as government
price ceilings on non-reimbursable procedures and spending limitations on
hospitals and other healthcare providers for new equipment, could have an
adverse effect on our business, operating results or financial condition.
Uncertainty concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on our
business could result in volatility of the market price of our common stock.
Furthermore, the introduction of our products in foreign countries may
require us to obtain foreign regulatory clearances. We believe that only a
limited number of foreign countries have extensive regulatory requirements,
including France, Germany, Korea, China and Japan. The time involved for
regulatory approval in foreign countries varies and can take a number of years.
A number of European and other economically advanced countries, including Italy,
Norway, Spain and Sweden, have not developed regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a premarketing approval, Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine the
nature of devices that they will use in medical procedures. Our two ultrasound
systems, the Photon(TM) laser cataract system we are developing and the ocular
blood flow analyzer are all devices that require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the our
effectiveness in obtaining the necessary approvals. Having an approved
Investigational Device Exemption allows us to export a product to qualified
investigational sites.
Regulatory Status of Products
All of our products, with the exception of the Photon(TM), are approved
for sale in the U.S. by the FDA under a 510(k). All of our products have been
accepted for import into CE countries and various non-CE countries.
40
We acquired permission from the FDA to export the Photon(TM) Laser
Cataract System outside the United States under an open Investigational Device
Exemption granted by the FDA in September 1994. Although the Photon(TM) laser
cataract system is uniquely configured in an original and proprietary manner,
the laser system, a Nd:YAG laser, is not proprietary to the device or us and is
widely used in the medical industry and other industries as well. Of particular
significance is the fact that this particular component has received previous
market clearance from the FDA for other ophthalmic and medical applications.
Also of significance is our belief that the surgical treatment method used with
the Photon(TM) laser is similar to the current ultrasound cataract treatment
employed by ophthalmologists.
We submitted a Premarket Notification 510(k) application to the FDA for
the Photon(TM) laser cataract system in September 1993. The FDA requested
clinical support data for claims made in the 510(k), and in October 1994 we
submitted an Investigational Device Exemption application to provide for a
"modest clinical study" in order to collect the data required by the FDA for
clearance of the Photon(TM) laser cataract system. The FDA granted this
Investigational Device Exemption in May 1995 for a Phase I Feasibility Study. We
began human clinical trials in April 1996 and completed the Phase I study in
November 1997. We started Phase II trials in September 1998 and completed
numerous cases of treatment group and control group patients, which were
included in our submission to the FDA.
We received a warning letter dated August 30, 2000 from the Office of
Compliance, Center for Devices and Radiological Health of the Food and Drug
Administration relating to certain deficiencies in the human clinical trials for
our Photon(TM) Laser Cataract System. The warning letter concerned the
conditions found by the FDA during several audits at our clinical sites. The
FDA's comments were isolated to the administrative procedures of compiling data
from the clinical sites. We responded to the warning letter in a submission
dated September 27, 2000. In the submission we took corrective action that
included submitting a revised clinical protocol and case report forms and
procedures for the collection and control of data. In a subsequent letter dated
November 2, 2000 to us, the FDA granted conditional approval provided that we
correct certain deficiencies. After providing several additional submissions to
the FDA, we received a letter dated February 13, 2001 from the FDA stating that
the deficiencies had been corrected and the clinical trials could continue.
Subsequent to the warning letter, we received approval to continue our
clinical trials, the results of which were included in our supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate device
application for the Photon(TM) laser system. In December 2001, we received a
preliminary review from the FDA regarding the supplemental submission. As a
result of that preliminary review, we submitted additional clinical information
to the FDA on February 6, 2002. The application is receiving ongoing review by
the FDA. On May 7, 2002, we received a letter from the FDA requesting further
clinical information. We have generated additional clinical information in
response to the letter and are uncertain if we will make a submission to the FDA
with the additional clinical information. Because of the "going concern" status
of the company, management has focused efforts on those products and activities
that will, in its opinion, achieve the most resource efficient short-term cash
flow to the company. Our diagnostic products are currently our major focus and
the Photon(TM) and other extensive research and development prospects have been
put on hold pending future evaluation until our financial position improves. Our
focus is not on any specific diagnostic product or products, but rather on our
entire group of diagnostic products.
Facilities
Our corporate offices are currently located at 2355 South 1070 West,
Salt Lake City, Utah. This facility consists of approximately 16,926 square feet
of leased office space and warehouse space. This facility is leased from Eden
Roc, a California partnership, at a base monthly rate of $7,109 plus a $1,690
monthly common area maintenance fee. In January 2003, we renegotiated a
three-year lease with Eden Roc at a monthly rate of $9,295 plus a $1,859 common
area maintenance fee for the year 2003, with the rate increases to $11,433
(including a $1,859 common area maintenance fee) for 2004 and to $11,720
(including a $1,859 common area maintenance fee) for 2005. Pursuant to the
lease, we pay all real estate and personal property taxes and the insurance
costs on the premises. Since January 1, 2006, we have leased 16,926 square feet
of space in the facility on a month to month basis at a monthly rate of $7,109
plus a $1,690 common area maintenance fee.
We believe that these facilities are adequate and satisfy our needs for
the foreseeable future.
Employees
As of August 31, 2006, we had 27 full-time employees. This number does
not include our manufacturer's representatives who are independent contractors
rather than our employees. We also utilize several consultants and advisors.
There can be no assurance that we will be successful in recruiting or retaining
key personnel. None of our employees are a member of a labor union and we have
never experienced any business interruption as a result of any labor disputes.
In December 2001 we initiated the first phase of a corporate downsizing
program to reduce our operating expenses. We implemented the second phase of our
downsizing program in the second quarter of 2002, by closing and transferring
our manufacturing from our site in San Diego, California to Salt Lake City,
resulting in further reductions in operating expenses. As a result of the
downsizing program and some resignations, the number of our employees has been
41
reduced by 75% from 112 to 30 employees. The estimated cost savings from the
downsizing program will be in excess of $2,000,000 annually. The costs of
downsizing have included onetime expenses of approximately $43,000 for moving
and travel. In addition, we incurred additional onetime expenses of
approximately $18,000 for housing accommodations for key employees working in
Salt Lake City. We realized a net cost savings from downsizing in excess of $2
million during each of the years 2003 and 2002.
Legal Proceedings
An action was brought against us in March 2000 by George Wiseman, a
former employee, in the Third District Court of Salt Lake County, State of Utah.
The complaint alleges that we owe Mr. Wiseman 6,370 shares of our common stock
plus costs, attorney's fees and a wage penalty (equal to 1,960 additional shares
of our common stock) pursuant to Utah law. The action is based upon an extension
of a written employment agreement. We dispute the amount allegedly owed and
intend to vigorously defend against the action.
An action was brought against us on September 11, 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum, M.D. in the Third District Court
of Salt Lake County, State of Utah. The action involves an amount of royalties
that are allegedly due and owing to PhotoMed International, Inc. and Dr.
Eichenbaum under a license agreement dated July 7, 1993, with respect to the
sale of certain equipment, plus costs and attorneys' fees. Certain discovery has
taken place and we have paid royalties of $15,717, which we believe brings all
payments current as of the date of last payment on January 7, 2005. We have been
working with PhotoMed and Dr. Eichenbaum to ensure that the calculations have
been correctly made on the royalties paid as well as the proper method of
calculation for the future.
It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to our calculations, is $981. We made payment of this
amount to Photomed and Dr. Eichenbaum on January 7, 2005 and, as a result, seek
to have the legal action dismissed.
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of three copy machines that were
delivered to our Salt Lake City facilities in or about April of 2000. The action
also seeks an award of attorney's fees and costs incurred in the collection. We
filed an answer to the complaint disputing the amounts allegedly owed due to
machine problems and a claimed understanding with the vendor. We returned two of
the machines. We were engaged in settlement discussions with CitiCorp until
counsel for CitiCorp withdrew from the case. New counsel for CitiCorp was
appointed. After an initial meeting with new counsel, we provided initial
disclosures to the new counsel.
On August 20, 2003, a complaint was filed against us by Corinne Powell,
a former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030918364). Defendants consist of us and Randall A. Mackey,
Dr. David M. Silver, Keith D. Ignotz and John Does I through V. The complaint
alleges that at the time we laid off Ms. Powell on March 25, 2003, she was owed
$2,030 for business expenses, $11,063 for accrued vacation days, $12,818 for
unpaid commissions, the fair market value of 50,000 stock options in early 2000
(ranging from a low of $7.00 per share to a high of $13.21 per share)
exercisable at $5.00 per share that she claims she was prevented from
exercising, attorney's fees and a continuing wage penalty under Utah law. On
March 29, 2005, we agreed to a settlement with Ms. Powell of her claims for
unpaid business expenses, accrued vacation days, and unpaid commissions by
agreeing to pay her the sum of $13,000. We made payment to Ms. Powell for the
agreed upon settlement amount. As to the remaining claims, the trial is set for
March 12, 2007. We filed a motion for summary judgment on August 21, 2006. If
the motion is denied, we still believe the remaining claims are without merit
and intend to vigorously defend against such claims.
On September 10, 2003, an action was filed against us by Larry Hicks in
the Third Judicial District Court, Salt Lake County, State of Utah, (Civil No.
030922220), for payments due under a consulting agreement with us. The complaint
claims that monthly payments of $3,083 are due for the months of October 2002 to
October 2003 under the consulting agreement and, if the agreement is terminated,
for the sum of $110,000 minus whatever we have paid Mr. Hicks prior to such
termination, plus costs, attorney's fees and a wage penalty pursuant to Utah
law. We have filed an answer in which it denies any liability to Mr. Hicks.
Formal discovery in the matter has commenced. A case schedule is to be set. We
dispute the amount allegedly owed and intend to vigorously defend against such
action.
On November 7, 2003, a complaint was filed against us by Todd Smith, a
former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030924951 CN). Defendants consist of us and Randall Mackey, a
director of the company. The first amended complaint alleges that while an
employee of the company, Mr. Smith was granted stock options to purchase 16,800
shares of common stock exercisable at $5.00 per share. Mr. Smith claims unpaid
42
wages in the amount of the fair market value of the stock options that claims he
was prevented from exercising, which in the first amended complaint is alleged
to be $86,250, attorney's fees, and a continuing wage penalty under Utah law.
The court, upon stipulation of the parties, struck the case schedule and
scheduled a hearing on October 23, 2006 to set new dates for discovery cutoff
and the trial. We believe the claims are without merit and intend to vigorously
defend against such action.
We are not a party to any other material legal proceedings outside the
ordinary course of our business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on our financial
condition or results of operations.
MANAGEMENT
Directors and Executive Officers
As of August 31, 2006, our executive officers and directors, their ages
and their positions are set forth below:
Name Age Position
Raymond P.L. Cannefax 58 President and Chief Executive Officer
Randall A. Mackey, Esq. 60 Chairman of the Board
David M. Silver, PhD. 64 Director
Keith D. Ignotz 59 Director
John C. Pingree 65 Director
The directors are elected for one year terms that expire at the next
annual meeting of shareholders. Executive officers are elected annually by the
Board of Directors to hold office until the first meeting of the board following
the next annual meeting of shareholders and until their successors have been
elected and qualified.
Raymond P.L. Cannefax has served as President and Chief Executive
Officer since January 5, 2006. Mr. Cannefax previously served as our Vice
President of Sales and Marketing from January 2003 to May 2005. From May 2005 to
January 2006, Mr. Cannefax served as Vice President of the Asia/Pacific Region
for Sonomed, Inc., a manufacturer of ophthalmic products and a wholly owned
subsidiary of Escalon Medical Corp. From January 2002 to January 2003, Mr.
Cannefax was Vice President of Business Development and Sales for Vermax, Inc.,
a manufacturer of products for hotel properties. From 1996 to January 2002, he
was President, Chief Operating Officer and founder of Aspen Network, Inc., a
software development and ecommerce company. From 1992 to 1996, Mr. Cannefax was
President and Chief Executive Officer of Apollo Telecom, Inc., a
telecommunications company. From 1986 to 1992, he was a Regional Sales Director
and a Senior District Manager of Sprint Communications Corporation. Mr. Cannefax
received a B.S. degree in Psychology and Zoology from the University of Utah in
1976.
Randall A. Mackey, Esq. has been Chairman of the Board since August 20,
2002, and a director since January 2000. He had served as a director of the
company from November 1995 to September 1998. Mr. Mackey has been President of
the Salt Lake City law firm of Mackey Price Thompson & Ostler since 1992, and a
shareholder and director of the firm and its predecessor firms since 1989. Mr.
Mackey received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A. degree from the Harvard Business School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L. degree from Oxford University in 1977.
Mr. Mackey has also served as Chairman of the Board from June 2001 to May 2003,
and as a director from 1998 to May 2003 of Cimetrix, Incorporated, a software
development company. Mr. Mackey has additionally served as Chairman of the Board
from July 2000 to July 2003 and as a trustee from 1993 to July 2003 of Salt Lake
Community College.
David M. Silver, Ph.D. has been a director since January 2000. He had
served as a director of the company from November 1995 to September 1998. Dr.
Silver is a Principal Senior Scientist in the Milton S. Eisenhower Research and
Technology Development Center at the Johns Hopkins University Applied Physics
Laboratory, where he has been employed since 1970. He served as the J. H.
Fitzgerald Dunning Professor of Ophthalmology in the Johns Hopkins Wilmer Eye
Institute in Baltimore during 1998-99. He received a B.S. degree from Illinois
Institute of Technology, an M.A. degree from Johns Hopkins University and a
Ph.D. degree from Iowa State University before holding a postdoctoral fellowship
at Harvard University and a visiting scientist position at the University of
Paris.
Keith D. Ignotz has been a director since November 2000. Since March
2005, Mr. Ignotz has been President and Chief Executive Officer of Diakine
Therapeutics, Inc., a pharmaceutical therapeutics company. From 1992 to 2004,
Mr. Ignotz was with SpectRx, Inc., a medical technology company that he founded,
which develops, manufactures and markets alternatives to traditional blood based
medical tests, serving from 2002 to 2004 as the Chief Executive Officer of
Guided Therapeutics, Inc., a wholly-owned subsidiary of SpectRx, Inc., and from
1992 to 2002 as President and Chief Operating Officer of SpectRx, Inc. From 1986
to 1992, Mr. Ignotz was Senior Vice President of Allergan Humphrey, Inc., a
medical electronics company. From 1985 to 1986, he was President of Humphrey
Instruments Limited-SKB, a medical electronics company, and from 1980 to 1985,
Mr. Ignotz was President of Humphrey Instruments GmbH, also a medical
electronics company. Mr. Ignotz also served on the Board of Directors of Vismed,
43
Inc., d/b/a Dicon from 1992 to June 2000. Mr. Ignotz received a B.A. degree in
Sociology and Political Science from San Jose University and an M.B.A. degree
from Pepperdine University. Mr. Ignotz has served as a trustee of Pennsylvania
College of Optometry and Audiology since 1990, a director of AeroVectrix, Inc.,
a drug delivery company, since August 2005, and as a member of the American
Diabetes Association and the American Marketing Association of the American
Association of Diabetes Education.
John C. Pingree has been a director since April 2004. From August 2001
to March 2004, Mr. Pingree was the Executive Director of the Semnani Foundation,
which funds projects to assist women and children in developing countries. From
July 1998 to July 2001, Mr. Pingree was a Mission President for the Church of
Jesus Christ of Latter-day Saints, serving in Mexico City, Mexico. From 1977 to
1997, Mr. Pingree was General Manager and Chief Executive Officer of Utah
Transit Authority. From 1970 to 1975, he was Director of Marketing for Memorex
Corporation. From 1967 to 1970, Mr. Pingree was Regional Manager, Sales Planning
at Xerox Corporation. He also currently serves as a member of the Utah State
Board of Education. Mr. Pingree received a B.A. degree in Economics from the
University of Utah and an M.B.A. degree from the Harvard Business School.
Appointment of New President and Chief Executive Officer
On January 5, 2006, Raymond P.L. Cannefax was appointed as President
and Chief Executive Officer, replacing John Y. Yoon who had served in those
positions from March 18, 2004 to December 31, 2005. Mr. Yoon resigned as
President and Chief Executive Officer, effective December 31, 2005, to pursue
other opportunities.
Appointment of New Vice President of Finance and New Vice President of Sales and
Marketing
On March 20, 2006, Luis A. Mostacero was appointed as Vice President of
Finance. Mr. Mostacero previously served as Controller from June 20, 2000 to
September 15, 2005, when he resigned to pursue other opportunities. On April 10,
2006, Michael S. Austin was appointed as Vice President of Sales and Marketing.
Board Meetings and Committees
The Board of Directors held a total of four meetings during the fiscal
year ended December 31, 2005. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2005 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey, Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year. The Audit Committee is primarily responsible
for reviewing the services performed by its independent public accountants and
internal audit department and evaluating its accounting principles and its
system of internal accounting controls. The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree. The Compensation Committee met one time during
the fiscal year. The Compensation Committee is primarily responsible for
reviewing compensation of executive officers and overseeing the granting of
stock options.
The Board of Directors has determined that Keith D. Ignotz and John C.
Pingree, who currently serve as directors of the company as well as a member of
our audit committee, are independent audit committee financial experts.
Director Nominating Process
The process for identifying and evaluating nominees for directors
include the following steps: (1) the Nominating and Corporate Governance
Committee, Chairman of the Board or other board members identify a need to fill
vacancies or add newly created directorships; (2) the Chairman of the Nominating
and Corporate Governance Committee initiates a search and seeks input from board
members and senior management and, if necessary, obtains advice from legal or
other advisors (but does not hire an outside search firm); (3) director
candidates, including any candidates properly proposed by stockholders in
accordance with our bylaws, are identified and presented to the Nominating and
Corporate Governance Committee; (4) initial interviews with candidates are
conducted by the Chairman of the Nominating and Corporate Governance Committee;
(5) the Nominating and Corporate Governance Committee meets to consider and
approve final candidate(s) and conduct further interviews as necessary; and (6)
the Nominating and Corporate Governance Committee makes recommendations to the
board for inclusion in the slate of directors at the annual meeting. The
evaluation process will be the same whether the nominee is recommended by a
stockholder or by a member of the Board of Directors.
The Nominating and Corporate Governance Committee operates pursuant to
a written charter. The full text of the charter is published on the Company's
website at www.paradigm-medical.com. A copy of the charter may also be obtained
without charge by written request to the attention of Luis A. Mostacero,
Controller, Paradigm Medical Industries, Inc., 2355 South 1070 East, Salt Lake
City, Utah 84119.
44
Meetings of Non-Management Directors
Our non-management directors regularly meet without management
participation. In addition, an executive session including only the independent
directors is held at least annually.
Corporate Governance
Corporate Governance Guidelines. Our Board of Directors has adopted the
Paradigm Medical Industries, Inc. Corporate Governance Guidelines. These
guidelines outline the functions of the board, director qualifications and
responsibilities, and various processes and procedures designed to insure
effective and responsive governance. The guidelines are reviewed from time to
time in response to regulatory requirements and best practices and are revised
accordingly. The full text of the guidelines is published on our website at
www.paradigm-medical.com. A copy of the Corporate Governance Guidelines may also
be obtained at no charge by written request to the attention of Luis A.
Mostacero, Controller, Treasurer and Secretary, Paradigm Medical Industries,
Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.
Code of Business Conduct. All of our officers, employees and directors
are required to comply with our Code of Business Conduct and Ethics to help
insure that our business is conducted in accordance with appropriate standards
of ethical behavior. Our Code of Business Conduct and Ethics covers all areas of
professional conduct, including customer relationships, conflicts of interest,
insider trading, financial disclosures, intellectual property and confidential
information, as well as requiring adherence to all laws and regulations
applicable to our business. Employees are required to report any violations or
suspected violations of the Code. The Code includes an anti-retaliation
statement. The full text of the Code of Business Conduct and Ethics is published
on our website at www.paradigm-medical.com. A copy of the Code of Business
Conduct and Ethics may also be obtained at no charge by written request to the
attention of Luis A. Mostacero, Controller, Treasurer and Secretary, Paradigm
Medical Industries, Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.
Executive Compensation
The following table sets forth, for each of the last three fiscal
years, the compensation received by John Y. Yoon, former President and Chief
Executive Officer, and other executive officers whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal years ended December
31, 2005, 2004 and 2003.
45
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compen- Stock Options/ Incentive Compensa-
Principal Position Year Salary$ Bonus($) sation($) Awards($) SARs(#) Payouts($) tion($)
------------------ ---- ------- -------- --------- ----------- ----------- ---------- ----------
John Y. Yoon 2005(1) $165,881(5) 0 $ 2,257(5) 0 0 0 $5,927(8)
Former President and 2004(2) $110,961(6) 0 $18,494(6) 0 1,000,000(7 ) 0 0
Chief Executive
Officer(4)
Aziz A. Mohabbat 2005(1) $126,328 0 0 0 0 0 $2,113(11)
Former Vice 2004(2) $106,244 0 0 0 200,000(10) 0 0
President of 2003(3) $ 24,219 0 0 0 0 0 $9,634(12)
Operations and Chief
Operating Officer(9)
____________________
(1) For the fiscal year ended December 31, 2005
(2) For the fiscal year ended December 31, 2004
(3) For the fiscal year ended December 31, 2003
(4) Mr. Yoon served as President and Chief Executive Officer from March 18,
2004 to December 31, 2005, at which time he resigned to pursue other
opportunities.
(5) Of the salary payable to Mr. Yoon in 2005 pursuant to his employment
agreement, $165,881 was paid to him during 2005 and the remaining
amount of $2,257 was deferred until 2006. This deferred salary of
$2,257 was paid to Mr. Yoon on January 17, 2006.
(6) Of the salary payable to Mr. Yoon pursuant to his employment agreement,
$110,961 was paid to him during 2004 and the remaining amount of
$18,494 payable in 2004 was deferred until the Board of Directors
determined that its financial condition had improved. The deferred
salary of $18,494 was paid to Mr. Yoon in June and July of 2005.
(7) On March 18, 2004, the Board of Directors granted Mr. Yoon options to
purchase 1,000,000 shares of our common stock at an exercise price of
$.13 per share. Mr. Yoon resigned as President and Chief Executive
Officer on December 31, 2005 and, as a result, the options terminated
on March 31, 2006.
(8) The amounts under All Other Compensation for 2005 consist of payments
to Mr. Yoon for accrued vacation days prior to his resignation on
December 31, 2005.
(9) Mr. Mohabbat served a Vice President of Operations and Chief Operating
Officer from March 22, 2004 to November 15, 2005, at which time he
resigned to pursue other opportunities. Mr. Mohabbat also served as
Chief Operating Officer from August 30, 2002 to March 2003. He was not
an officer in prior years.
(10) On September 30, 2004, the Board of Directors granted Mr. Mohabbat
options to purchase 200,000 shares of our common stock at an exercise
price of $.12 per share, effective as of March 23, 2004. Mr. Mohabbat
resigned as Vice President of Operations and Chief Operating Officer on
November 15, 2005 and, as a result, the options terminated on February
13, 2006.
(11) The amounts under All Other Compensation for 2005 consist of a payment
to Mr. Mohabbat for accrued vacation days prior to his resignation from
the Company on November 15, 2005.
(12) The amounts under All Other Compensation for 2004 consist of payments
to Mr. Mohabbat for accrued vacation days prior to his resignation from
us in March 2003.
46
Options
The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2005, to each named executive
officer.
Option Grants in Last Fiscal Year
Individual Grants
----------------------------------------------------------------------------
Percentage of
Total Options
Number of Securities Granted to Exercise Price
Name Underlying Options Employees in Per Share Expiration
Granted (#) Fiscal Year(%) ($/Sh) Date
John Y. Yoon.......... 0 0 N/A N/A
Aziz A. Mohabbat...... 0 0 N/A N/A
The following table sets forth information regarding unexercised
options to acquire shares of our common stock held as of December 31, 2005, by
each named executive officer.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 2005(#) at December 31, 2004($)
Shares Acquired Value ----------------------- -----------------------
Name on Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ----------- ------------ ------------- ----------- -------------
John Y. Yoon.............. 0 0 583,338 416,662 0 0
Aziz A. Mohabbat............ 0 0 105,564 94,436 0 0
Director Compensation
On April 19, 2004, John C. Pingree, a director of our company, was
granted options to purchase 125,000 shares of our common stock at an exercise
price of $.12 per share. On September 30, 2004, Messrs. Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of our company, were each granted
options to purchase 125,000 shares of our common stock at an exercise price of
$.13 per share. The options were not issued at a discount to the then market
price. The directors were not granted any options to purchase shares of common
stock during 2005. Moreover, we paid no other form of compensation to the
directors other than stock options during 2005 and 2004. In addition, outside
directors are also reimbursed for their expenses in attending board and
committee meetings. Directors are not precluded from serving us in any other
capacity and receiving compensation therefore.
Employee 401(k) Plan
In October 1996, our board of directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of November 1,
1996, we may make discretionary employer matching contributions to our employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the beginning of each year. The Board adopted
a contribution formula specifying that such discretionary employer matching
contributions would equal 100% of the participating employee's contribution to
the plan up to a maximum discretionary employee contribution of 3% of a
participating employee's compensation, as defined by the plan. All persons who
have completed at least six months' service with us and satisfy other plan
requirements are eligible to participate in the plan.
1995 Stock Option Plan
We adopted a 1995 Stock Option Plan for the officers, employees,
directors and consultants of our company on November 7, 1995. The plan
authorized the granting of stock options to purchase an aggregate of not more
than 300,000 shares of our common stock. On February 16, 1996, options for
substantially all 300,000 shares were granted. On June 9, 1997, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 300,000 shares to 600,000 shares. On
September 3, 1998, our shareholders approved an amendment to the plan to
increase the number of shares of common stock reserved for issuance thereunder
47
from 600,000 shares to 1,200,000 shares. On November 29, 2000, our shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 1,200,000 shares to 1,700,000
shares. On September 11, 2001, our shareholders approved an amendment to the
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares. On June 13, 2003, our
shareholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares. On July 11, 2005, our stockholders approved an amendment to
the plan to increase the number of shares of common stock reserved for issuance
thereunder from 3,700,000 to 5,000,000 shares.
The compensation committee administers the 1995 Stock Option Plan. In
general, the compensation committee will select the person to whom options will
be granted and will determine, subject to the terms of the plan, the number,
exercise, and other provisions of such options. Options granted under the plan
will become exercisable at such times as may be determined by the compensation
committee. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal Revenue Code, or non-incentive stock
options. Incentive stock options may only be granted to persons who are our
employees. Non-incentive stock options may be granted to any person, including,
but not limited to, our employees, independent agents, consultants as the
compensation committee believes has contributed, or will contribute, to our
success. The compensation committee determines the exercise price of options
granted under the 1995 Stock Option Plan, provided that, in the case of
incentive stock options, such price is not less than 100% (110% in the case of
incentive stock options granted to holders of 10% of voting power of our stock)
of the fair market value (as defined in the plan) of the common stock on the
date of grant. The aggregate fair market value (determined at the time of option
grant) of stock with respect to which incentive stock options become exercisable
for the first time in any year cannot exceed $100,000.
The term of each option shall not be more than ten years (five years in
the case of incentive stock options granted to holders of 10% of the voting
power of our stock) from the date of grant. The Board of Directors has a right
to amend, suspend or terminate the 1995 Stock Option Plan at any time; provided,
however, that unless ratified by our shareholders, no amendment or change in the
plan will be effective that would increase the total number of shares that may
be issued under the plan, materially increase the benefits accruing to persons
granted under the plan or materially modify the requirements as to eligibility
and participation in the plan. No amendment, supervision or termination of the
plan shall, without the consent of an employee to whom an option shall
heretofore have been granted, affect the rights of such employee under such
option.
Employment Agreements
We entered into an employment agreement with Raymond P.L. Cannefax,
which commenced on January 5, 2006 and expires on January 5, 2007. The
employment agreement requires Mr. Cannefax to devote substantially all of his
working time as President and Chief Executive Officer, providing that he may be
terminated for "cause" (as provided in the agreement) and prohibits him from
competing with us for two years following the termination of his employment
agreement. The employment agreement provides for the payment of an initial base
salary of $125,000. The employment agreement also provides for salary increases
and bonuses as shall be determined at the discretion of the Board of Directors,
with the first review of the annual salary to be made as of June 30, 2006. The
employment agreement further provides for the issuance of stock options to
purchase 4,500,000 shares of our common stock at $.01 per share. The options
vest in twelve equal monthly installments of 375,000 shares, beginning on
February 5, 2006 until such shares are vested.
In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Cannefax shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of our outstanding
shares; (ii) we shall be merged or consolidated with another corporation and, as
a result, less than 25% of the outstanding common shares of the surviving
corporation shall be owned in the aggregate by our former shareholders, as the
same shall have listed prior to such merger or consolidation; (iii) we shall
sell all or substantially all of its assets to another corporation that is not a
wholly owned subsidiary or affiliate; (iv) as a result of any contested election
for the Board of Directors, or any tender or exchange offer, merger of business
combination or sale of assets, the persons who were our directors before such a
transaction shall cease to constitute a majority of the Board of Directors; or
(v) a person other than our officer or director shall acquire more than 20% of
the outstanding shares of our common stock.
We entered into an employment agreement with John Y. Yoon, which
commenced on March 18, 2004 and was to expire on March 18, 2007. The employment
agreement requires Mr. Yoon to devote substantially all of his working time as
our President and Chief Executive Officer, provided that he may be terminated
for "cause" (as provided in the agreement) and prohibits him from competing with
us for two years following the termination of the employment agreement. The
employment agreement provides for the payment of an initial base salary of
$175,000, effective as of April 1, 2004. The employment agreement also provides
for salary increases and bonuses as shall be determined at the discretion of our
Board of Directors. The employment agreement further provides for the issuance
of stock options to purchase 1,000,000 shares of our common stock at $.13 per
share. These options vest in 36 equal monthly installments of 27,778 shares,
beginning on April 30, 2004, until such shares are vested. Mr. Yoon resigned as
President and Chief Executive Officer on December 31, 2005 to pursue other
opportunities. At the time of his resignation, stock options to purchase 583,338
shares of our common stock were vested. Under the terms of the 1995 Stock Option
Plan, the vested options terminated on March 31, 2006.
48
We entered into an employment agreement with Aziz A. Mohabbat on
October 5, 2004, which was effective as of April 1, 2004, and was to expire on
March 18, 2006. The employment agreement required Mr. Mohabbat to devote
substantially all of his working time as our Vice President of Operations and
Chief Operating Officer, provided that he could be terminated for "cause" (as
defined in the agreement) and prohibited him from competing with us for two
years following the termination of the employment agreement. The employment
agreement provided for the payment of an initial base salary of $144,500,
effective as of April 1, 2004. The employment agreement also provided for salary
increases and bonuses as shall be determined at the discretion of our Board of
Directors. The employment agreement further provided for the issuance of stock
options to purchase 200,000 shares of our common stock at $.12 per share. These
options were to vest in 36 equal monthly installments of 5,556 shares, beginning
on April 30, 2004, until such shares are vested. Mr. Mohabbat resigned as Vice
President of Operations and Chief Operating Officer on November 15, 2005 to
pursue other opportunities. At the time of his resignation, stock options to
purchase 105,564 shares of our common stock were vested. Under the terms of the
1995 Stock Option Plan, the vested options terminated on February 13, 2006.
Consulting Agreement
On April 3, 2003, we entered into a consultant agreement with Kinexsys
Corporation. Under the terms of the agreement, Kinexsys through its Senior
Partner, Timothy R. Forstrom, was to prepare a capital markets plan and a
corporate positioning and communications plan for us, for which Kinexsys was to
receive warrants to purchase up to 200,000 shares of our common stock at an
exercise price of $.16 per share. The capital markets plan was to include a
detailed analysis of our capital market structure in relation to current
investors, market trends and projected equity movements, and recommendations on
capital management strategies. The corporate positioning and communications plan
was to include a corporate positioning matrix for markets, analysts, customers
and partners, and a communications plan. The agreement was for a one-year term
but could be renewed at the option of both parties. The agreement expired on
April 3, 2004 as we elected not to exercise its renewal option.
Retirement Agreement
On May 6, 1999, our Board of Directors approved resolutions relating to
the retirement of John M. Hemmer, then our Vice President of Finance and Chief
Financial Officer. The board resolutions provided that Mr. Hemmer's annual
salary of $120,000 per annum was to continue until June 1, 1999, at which time
his employment contract and change of control agreement with us would terminate
and he would become an independent consultant to us. As a consultant, Mr. Hemmer
was to receive an initial payment of $12,500 with annual payments thereafter of
$25,000 payable on January 1, 2000, 2001 and 2002, and a final payment of
$12,500 payable on January 1, 2003, for a total consulting contract of $100,000.
In addition, the board resolutions provided that we were to issue to
Mr. Hemmer warrants to purchase 125,000 shares of common stock at $2.63 per
share, exerciseable for a period of five years, and warrants to purchase 75,000
shares of common stock at $7.50 per share, exerciseable for a period of five
years, but such warrants were not to be issued until Mr. Hemmer exercises all of
the warrants to purchase 125,000 common shares at $2.63 per share. We have paid
a total of $87,500 to Mr. Hemmer under the consulting agreement.
On May 30, 2006, we entered into an agreement with Mr. Hemmer in which
he acknowledged that we owed him a total of $12,500 for past services he
rendered to us, including as a consultant, and we agreed to pay him the sum of
$12,500 in twelve monthly installments of $1,000 each and a final monthly
payment of $500. We have paid $2,000 to Mr. Hemmer under this agreement.
Limitation of Liability and Indemnification
We reincorporated in Delaware in February 1996, in part, to take
advantage of certain provisions in Delaware's corporate law relating to
limitations on liability of corporate officers and directors. We believe that
the reincorporation into Delaware, the provisions of its Certificate of
Incorporation and Bylaws and the separate indemnification agreements outlined
below are necessary to attract and retain qualified persons as directors and
officers. Our Certificate of Incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. This provision is intended to
allow our directors the benefit of Delaware General Corporation Law that
provides that directors of Delaware corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
certain circumstances, including breach of their duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, unlawful payments of dividends or unlawful stock repurchases
or redemptions or any transaction from which the director derived an improper
personal benefit. Our Bylaws provide that we shall indemnify our officers and
directors to the fullest extent provided by Delaware law. Our Bylaws authorize
the use of indemnification agreements and we have entered into such agreements
with each of our directors and executive officers.
49
Except for these litigation matters, there is no pending litigation or
proceedings involving a director, officer, employee or other agent of our
company as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers, directors and persons who own more than 10% of
any class of our common stock to file initial reports of ownership and reports
of changes of ownership of common stock with the Securities and Exchange
Commission. Such persons are also required to furnish us with all Section 16(a)
reports they file. Based solely on our review of the copies of such reports
received by us with respect to fiscal 2005, or written representations from
certain reporting persons, we believe that all filing requirements applicable to
its directors, officers and greater than 10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of August 31, 2006 for (i) each
executive officer (ii) each director, (iii) each person known to us to be the
beneficial owner of more than 5% of the outstanding shares, and (iv) all
directors and officers as a group.
Name and Address(1) Number of Shares Percent of Ownership
------------------- ---------------- --------------------
Raymond P.L. Cannefax (2) 3,375,000 1.7%
Dr. David M. Silver (2) 761,166 *
Randall A. Mackey (2) 725,000 *
Keith D. Ignotz (2) 525,709 *
John C. Pingree (2) 431,500 *
Executive officers and
directors as a group
(five persons) 5,818,375 2.9%
_________________
*Less than 1%.
(1) Unless otherwise indicated, the address of each listed stockholder
is c/o Paradigm Medical Industries, Inc., 2355 South 1070 West,
Salt Lake City, Utah, 84119.
(2) The amounts shown include shares that may be acquired currently,
or within 60 days after August 31, 2006 through the exercise of
stock options are follows: Mr. Cannefax, 2,625,000 shares; Dr.
Silver, 725,000 shares; Mr. Mackey, 725,000 shares; Mr. Ignotz,
525,000 shares; and Mr. Pingree, 275,000 shares.
CERTAIN TRANSACTIONS
The information set forth herein describes certain transactions between
us and certain affiliated parties. Future transactions, if any, will be approved
by a majority of the disinterested members and will be on terms no less
favorable to us than those that could be obtained from unaffiliated parties.
Randall A. Mackey, a director since January 21, 2000, and from
September 1995 to September 3, 1998 and Chairman of the Board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price Thompson &
Ostler, which rendered legal services in connection with various corporate
matters. Legal fees and expenses paid to Mackey Price Thompson & Ostler for the
fiscal years ended December 31, 2005 and 2004, totaled $220,000 and $100,000,
respectively, and for the six months ended June 30, 2006 were $83,000. In
addition, on April 7, 2005 we issued 250,000 shares of common stock to Mackey
Price Thompson & Ostler in payment of $22,500 in legal services. As of December
31, 2005, we owed this firm $93,000, which is included in accounts payable.
50
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants unless the selling
stockholders exercise the warrants on a cashless basis. Assuming all of the
shares registered below are sold by the selling stockholders, none of the
selling stockholders will continue to own any shares of our common stock.
The following table sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering, and the number of shares of common
stock each person will own after the offering, assuming they sell all of the
shares offered.
Shares Beneficially
Owned Prior to Number of Shares Beneficially
Offering Shares Being Owned After Offering(2)
Shareholders Number Percent(1) Offered Number Percent
------------ ------ ---------- ------------ ------ -------
AJW Offshore Ltd (3). 2,994,000 4.99% 30,000,000 0 *
AJW Qualified Partners (3) 2,994,000 4.99% 20,400,000 0 *
AJW Partners, LLC (3) 2,994,000 4.99% 8,400,000 0 *
New Millennium Capital Partners, LLC (3) 2,994,000 4.99% 1,200,000 0 *
(1) Applicable percentage ownership is based on 199,956,828 shares of
common stock outstanding as of August 31, 2006, together with
securities exercisable or convertible into shares of common stock
within 60 days of August 31, 2006 for each stockholder. Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally include voting or
investment power with respect to securities. Shares of common
stock that are currently exercisable within 60 days of August 31,
2006 are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the percentage
ownership of such person, but are not for the purpose of computing
the percentage ownership of any other person.
(2) Assumes that all securities registered will be sold and that all
securities of common stock underlying the callable secured
convertible notes and warrants will be issued.
(3) Represents shares underlying callable secured convertible notes
and warrants, up to the maximum permitted ownership under the
callable secured convertible notes and warrants of 4.99% of our
outstanding common stock. The selling stockholders or affiliates
of each other because they are under common control. AJW Partners,
LLC is a private investment fund that is owned by its investors
and managed by SMS Group, LLC. SMS Group, LLC, of which Corey S.
Ribotsky is the fund manager, has voting and investment control
over the securities owned by AJW Partners, LLC. AJW Offshore, Ltd.
is a private investment fund that is owned by its investors and
managed by First Street Manager II, LLC. First Street Manager II,
LLC, of which Corey S. Ribotsky is the fund manager, has voting
and investment control over the securities owned by AJW Offshore,
Ltd. AJW Qualified Partners, LLC is a private investment fund that
is owned by its investors and managed by AJW Manager, LLC, of
which Corey S. Ribotsky and Lloyd A. Groveman are the fund
managers, have voting and investment control over the securities
owned by AJW Qualified Partners, LLC. New Millennium Capital
Partners II, LLC is a private investment fund that is owned by its
investors and managed by First Street Manager II, LLC. First
Street Manager II, LLC, of which Corey S. Ribotsky is the fund
manager, has voting and investment control over the securities
owned by New Millennium Capital Partners II, LLC. We have been
notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers.
Callable Secured Convertible Notes and Warrants
April 27, 2005 Sale of $2,500,000 in Callable Secured Convertible
Notes: To obtain funding for our ongoing operations, we entered into a
securities purchase agreement with four accredited investors on April 27, 2005
for the sale of (i) $2,500,000 in callable secured convertible notes and (ii)
warrants to purchase 16,534,392 shares of our common stock. The sale of the
callable secured convertible notes and warrants occurred in three traunches and
the investors provided us with an aggregate of $2,500,000 as follows:
51
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after we filed a
registration statement on June 22, 2005 to register the shares of
common stock underlying the callable secured convertible notes and
the warrants; and
o $850,000 was disbursed on June 30, 2005, the effective date of the
registration statement.
Under the terms of the securities purchase agreement, we agreed not,
without the prior written consent of a majority-in- interest of the investors,
to negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (A) 270 days from
April 27, 2005, and (B) 180 days from the date the registration statement is
declared effective.
In addition, we agreed not to conduct any equity financing (including
debt financing with an equity component) during the period beginning April 27,
2005 and ending two years after the end of the above lock-up period unless we
have first provided each investor an option to purchase its pro-rata share
(based on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The $2,500,000 in callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is computed on the basis of a
365-day year and is payable quarterly in cash, with six months of interest
payable up front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0945, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The callable secured convertible notes mature in three
years from the date of issuance, and are convertible into our common stock at
the selling stockholders' option, at the lower of (i) $.09 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted.
The $2,500,000 in callable secured convertible notes are secured by our
assets, including our inventory, accounts receivable and intellectual property.
Moreover, we have a call option under the terms of the notes. The call option
provides us with the right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no event of default by us and
our stock is trading at or below $.09 per share. An event of default includes
the failure by us to pay the principal or interest on the callable secured
convertible notes when due or to timely file a registration statement as
required by us or obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of the callable secured
convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; and (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes. As of August 31, 2006, a total of $842,830 in callable
secured convertible notes have been converted into 166,666,667 shares of our
common stock pursuant to conversion notices from The NIR Group.
February 28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes: To obtain additional funding for our ongoing operations, we entered into
a second securities purchase agreement on February 28, 2006 with the same four
accredited investors for the sale of (i) $1,500,000 in callable secured
52
convertible notes and (ii) warrants to purchase 12,000,000 shares of its common
stock. The sale of the callable secured convertible notes and warrants is to
occur in three traunches and the investors are obligated to provide us with an
aggregate of $1,500,000 as follows:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after we filed a
registration statement on June 15, 2006 to register the shares of
common stock underlying the callable secured convertible notes.
The registration statement was subsequently withdrawn on July 25,
2006; and
o $500,000 will be disbursed upon the effectiveness of a
registration statement to register 60,000,000 shares of common
stock issuable upon conversion of the callable secured convertible
notes.
Each closing under the securities purchase agreement is subject to the
following conditions:
o We deliver to the investors duly executed callable secured
convertible notes and warrants;
o No litigation, statute, regulation or order had been commenced,
enacted or entered by or in any court, governmental authority or
any self-regulatory organization that prohibits consummation of
the transactions contemplated by the securities purchase
agreement; and
o No event occurred that could reasonably be expected to have a
material adverse effect on our business.
We also agreed not, without the prior written consent of a
majority-in-interest of the investors, to negotiate or contract with any party
to obtain additional equity financing (including debt financing with an equity
component) that involves (i) the issuance of common stock at a discount to the
market price of the common stock on the date of issuance (taking into account
the value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants during the lock-up period beginning February 28, 2006 and ending on the
later of (a) 270 days from February 28, 2006, or (b) 180 days from the date the
registration statement is declared effective.
In addition, we agreed not to conduct any equity financing (including
debt financing with an equity component) during the period beginning February
28, 2006 and ending two years after the end of the above lock-up period unless
it first provided each investor an option to purchase its pro-rata share (based
on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The callable secured convertible notes bear interest at 8% per annum
from the date of issuance. Interest is computed on the basis of a 365-day year
and is payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock price
is greater than 125% of the initial market price, or $.0275, for each trading
day during that month. Any amount of principal or interest on the callable
secured convertible notes that is not paid when due will bear interest at the
rate of 15% per annum from the date due thereof until such amount is paid. The
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our common stock at the selling stockholders'
option, at the lower of (i) $.02 or (ii) 60% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for the
20 trading days before but not including the conversion date. Accordingly, there
is no limit on the number of shares into which the notes may be converted.
The callable secured convertible notes are secured by our assets,
including our inventory, accounts receivable and intellectual property.
Moreover, we have a call option under the terms of the notes. The call option
provides us with the right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no event of default by us and
our stock is trading at or below $.02 per share. An event of default includes
the failure by us to pay the principal or interest on the callable secured
convertible notes when due or to timely file a registration statement as
required by us or obtain effectiveness with the U.S. Securities and Exchange
Commission of the registration statement. Prepayment of the callable secured
convertible notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (b) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding principal
and accrued interest for prepayments occurring after the 60th day following the
issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the securities purchase agreement.
53
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes.
We are required to register 60,000,000 shares of our common stock
issuable upon the conversion of the callable secured convertible notes and the
exercise of the warrants that were issued to the noteholders pursuant to the
securities purchase agreement we entered into on February 28, 2006. The
registration statement must be filed with the Securities and Exchange Commission
within 60 days of the February 28, 2006 closing date and the effectiveness of
the registration is to be within 135 days of such closing date. Penalties of 2%
of the outstanding principal balance of the callable secured convertible notes
plus accrued interest are to be applied for each month the registration is not
effective within the required time. The penalty may be paid in cash or stock at
our option.
Simple Conversion Calculation
The number of shares of common stock issuable upon conversion of the
callable secured convertible notes is determined by dividing that portion of the
principal of the notes to be converted and interest, if any, by the conversion
price. For example, assuming conversion of $1,500,000 of notes outstanding on
September 6, 2006 (representing the amount of the notes sold pursuant to the
second securities purchase agreement on February 28, 2006) and a conversion
price of $.006 per share, the number of shares issuable upon conversion would
be:
$1,500,000/$.006 = 250,000,000 shares.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of common stock that are issuable upon conversion of $1,500,000
principal amount of callable secured convertible notes (excluding accrued
interest), based on market prices 25%, 50%, and 75% below the market price, as
of September 6, 2006 of $.006.
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
-------- --------- -------- --------------- ------------
25% $.0045 $.0027 555,555,556 277.8%
50% $.003 $.0018 833,333,333 416.8%
75% $.0015 $.0009 1,666,666,667 833.5%
*Based on 199,956,828 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of our callable secured convertible notes will increase if the market
price of our stock declines, which will cause dissolution to our existing
stockholders.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 800,000,000 shares of common
stock, $.001 par value per share, of which 199,956,828 shares were issued and
outstanding as of August 31, 2006, and 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. We have created seven classes of
preferred stock, designated as Series A preferred stock, Series B preferred
stock, Series C convertible preferred stock, Series D convertible preferred
stock, Series E convertible preferred stock, Series F convertible preferred
stock and Series G convertible preferred stock. The following is a summary of
the material terms and provisions of our capital stock and related securities.
Because it is a summary, it does not include all of the information that is
included in our certificate of incorporation. The text of our certificate of
incorporation, which is attached as an exhibit to this registration statement,
is incorporated into this section by reference.
Common Stock
Voting Rights. The holders of our common stock will have one vote per
share and are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority or, in the case of election of directors, by plurality of the votes
cast at a meeting at which a quorum is present and voting together as single
class, subject to any voting rights granted to the holders of any then
outstanding preferred stock.
Dividends. Holders of common stock are entitled to receive any
dividends declared by our board of directors, subject to the preferential rights
of any preferred stock then outstanding. Dividends consisting of shares of
common stock may be paid to holders of shares of common stock.
54
Other Rights. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled preferential to share ratably in any assets
available for distribution to holders of shares of common stock. No holders of
shares are subject to redemption or have preemptive rights to purchase
additional shares of common stock.
Preferred Stock
Our certificate of incorporation provides that 5,000,000 shares of
preferred stock may be issued from time to time in one or more series. Our board
of directors is authorized to fix the voting rights, if any, designations,
powers, preferences, qualifications, limitations and restrictions, applicable to
the shares of each series. Our board of directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the common
stock and could have anti-takeover effects, including preferred stock or rights
to acquire preferred stock in connection with implementing a stockholder rights
plan. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control with respect to our company or the removal of existing
management. As of August 31, 2005, we have created and issued shares of seven
classes of preferred stock.
Series A, B, C, D, E, F and G Preferred Stock.
The Board of Directors has authorized the issuance of 500,000 shares of
Series A Preferred Stock, 500,000 shares of Series B Preferred Stock, 30,000
shares of Series C Preferred Stock, 1,140,000 shares of Series D Preferred
Stock, 50,000 shares of Series E Preferred Stock, 50,000 shares of Series F
Preferred Stock, and 2,000,000 shares of Series G Preferred Stock. Each of the
shares of preferred stock are convertible into shares of common stock at a
different conversion price. As of May 31, 2006, there were issued and
outstanding 5,627 shares of Series A Preferred Stock convertible into 6,753
shares of our common stock; 8,986 shares of Series B Preferred Stock convertible
into 10,783 shares of our common stock; no shares of Series C Preferred Stock;
5,000 shares of Series D Preferred Stock; 250 shares of Series E Preferred Stock
convertible into 13,333 shares of common stock; 4,598.75 shares of Series F
Preferred Stock convertible into 245,267 shares of our common stock; and 588,235
shares of Series G Preferred Stock convertible into 588,235 shares of our common
stock The voting rights, dividends, conversion rights, redemption rights, and
liquidation rights of the Series A, Series B, Series C, Series D, Series E,
Series F and Series G Preferred Stock are more fully described below.
Series A Preferred Stock
Voting Rights. Except as provided by applicable law, the Series A
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series A preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series A preferred stock is entitled to noncumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series A preferred stockholder may convert
each share of Series A preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series A preferred stockholders are
entitled to distributions equal to $1.00 per share, plus accrued and unpaid
dividends. The shares of Series A preferred stock are subject to redemption but
have no preemptive rights to purchase additional shares of Series A preferred
stock or our common stock.
Series B Preferred Stock
Voting Rights. Except as provided by applicable law, the Series B
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series B preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series B preferred stock is entitled to noncumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.
Conversion. At any time the Series B preferred stockholder may convert
each share of Series B preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.
55
Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series B preferred stockholders are
entitled to distributions equal to $4.00 per share, plus accrued and unpaid
dividends. The Series B preferred stockholders are entitled to preferential
distributions over all other classes of capital stock, other than Series A
preferred stock. The shares of Series B preferred stock are subject to
redemption but have no preemptive rights to purchase additional shares of Series
B preferred stock or our common stock.
Series C Preferred Stock
Voting Rights. Except as provided by applicable law, the Series C
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series C preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series C preferred stock is entitled to 12%
noncumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.
Conversion. At any time the Series C preferred stockholder may convert
each share of Series C preferred stock into 57.14 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series C
preferred stock outstanding after January 1, 2002, are automatically converted
into our shares to common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series C preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series C preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series C preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A and Series B
preferred stock. No shares of Series C preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series C preferred
stock or our common stock.
Series D Preferred Stock
Voting Rights. Except as provided by applicable law, the Series D
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series D preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series D preferred stock is entitled to 8%noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series D preferred stockholder may convert
each share of Series D preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series D preferred stock
outstanding after January 1, 2002, are automatically converted into our shares
of common stock at the conversion price then in effect.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series D preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series D preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $1.75 per share, plus declared but unpaid dividends.
The Series D preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B and
Series C preferred stock. No shares of Series D preferred stock are subject to
redemption or have preemptive rights to purchase additional shares of Series D
preferred stock or our common stock.
Series E Preferred Stock
Voting Rights. Except as provided by applicable law, the Series E
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series E preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series E preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series E preferred stockholder may convert
each share of Series E preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series E
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
56
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series E preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series E preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series E preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B, Series C
and Series D preferred stock. No shares of Series E preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
E preferred stock or our common stock.
Series F Preferred Stock
Voting Rights. Except as provided by applicable law, the Series F
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series F preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series F preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series F preferred stockholder may convert
each share of Series F preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series F
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series F preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series F preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $1.00
per share, plus declared but unpaid dividends. The Series F preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D and Series E
preferred stock. No shares of Series F preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series F preferred
stock or our common stock.
Series G Preferred Stock
Voting Rights. Except as provided by applicable law, the Series G
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series G preferred stockholders is not required or authorized to
take any corporate action.
Dividends. Our Series G preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.
Conversion. At any time the Series G preferred stockholder may convert
each share of Series G preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series G preferred stock
outstanding are automatically converted into shares of our common stock (i)
after August 1, 2005, or (ii) after a registration statement registering our
common shares issuable upon conversion has been effective for a least 30 days
and the average closing price of our common stock for the 20-day period is at
least $.50 per share.
Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series G preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series G preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $.25
per share, plus declared but unpaid dividends. The Series G preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D, Series E
and Series F preferred stock. No shares of Series G preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
G preferred stock or our common stock. Under the terms of the private offering
of Series G preferred shares, we are required to file a registration statement
with the Securities and Exchange Commission to register the common shares
issuable to the Series G preferred stockholders upon conversion of their Series
G preferred shares and exercise of their warrants. If the registration statement
has not been declared effective within 120 days of the initial closing of such
offering on August 29, 2003, there is a penalty of 2% per month payable to the
Series G preferred stockholders in common shares (or 39,631 common shares per
month) until the registration statement is declared effective. As of September
30, 2004, we had recorded a liability of $43,000 related to the 356,682 common
shares to be issued to the Series G preferred stockholders because the
registration statement had not been declared effective as of that date.
57
Warrants
Between June 10, 1997 and August 31, 2006, we issued warrants to
individuals and entities that are currently outstanding to purchase a total of
29,059,392 shares of our common stock at exercise prices ranging from $.10 per
share to $6.75 per share. The warrants all contain provisions that protect the
holders against dilution by adjustment of the exercise price per share and the
number of shares issuable upon exercise thereof upon the occurrence of certain
events, including stock splits, stock dividends, mergers, and the sale of
substantially all of our assets. We are not required to issue fractional shares
of common stock, and in lieu thereof we will make a cash payment based upon the
current market value of such fractional shares. A holder of these warrants will
not possess any rights as a shareholder unless and until the holder exercises
the warrants.
The warrants that are currently issued and have not been exercised, and
the exercise price and expiration date of such warrants are as follows:
o Warrants issued to Dr. Michael B. Lindberg to purchase 300,000
shares of common stock at exercise prices ranging from $4.00 to
$6.75 per share, exercisable during the period of from December 1,
2008 through June 1, 2011.
o Warrants issued to Alpha Advisory Services, Inc. to purchase
25,000 shares of common stock at an exercise price of $.15 per
share, exerciseable through September 28, 2007.
o Warrants issued to Valvidia Trading, Inc. to purchase 200,000
shares of common stock at an exercise price of $.15 per share,
exerciseable through January 14, 2008.
o Warrants issued to AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC and New Millennium Capital Partners II,
LLC to purchase 16,534,392 shares of common stock at an exercise
price of $.20 per share, exercisable through the period from April
27, 2010 to June 30, 2010.
o Warrants issued to AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, and New Millennium Capital Partners II, LLC to
purchase 8,000,000 shares of common stock at an exercise price of
$.10 per share, exercisable through February 28, 2011.
The Class A Warrants to purchase 1,000,000 shares of common stock at an
exercise price of $7.50 per share expired on July 11, 2006.
Convertible Notes and Warrants
April 27, 2005 Sale of $2,500,000 in Callable Secured Convertible
Notes: To obtain funding for our ongoing operations, we entered into a
securities purchase agreement with four accredited investors on April 27, 2005
for the sale of (i) $2,500,000 in callable secured convertible notes and (ii)
warrants to purchase 16,534,392 shares of our common stock. The sale of the
callable secured convertible notes and warrants occurred in three traunches and
the investors provided us with an aggregate of $2,500,000 as follows:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after we filed a
registration statement on June 22, 2005 to register the shares of
common stock underlying the callable secured convertible notes and
the warrants; and
o $850,000 was disbursed on June 30, 2005, the effective date of the
registration statement.
The $2,500,000 in callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is computed on the basis of a
365-day year and is payable quarterly in cash, with six months of interest
payable up front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0945, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The callable secured convertible notes mature in three
years from the date of issuance, and are convertible into our common stock at
the selling stockholders' option, at the lower of (i) $.09 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
Over-the-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted.
As of June 22, 2005, the average of the three lowest intraday trading
prices of our common stock during the preceding 20 trading days as reported on
the Over-the-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the callable secured convertible notes was $.03. Based on this
conversion price, the $2,500,000 in callable secured convertible notes,
58
excluding interest, would be convertible into 83,333,333 shares of our common
stock. As of June 26, 2006, a total of $842,830 in callable secured convertible
notes have been converted into 166,666,667 shares of our common stock pursuant
to conversion notices from The NIR Group.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the Securities Purchase Agreement.
February 28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes: To obtain additional funding for our ongoing operations, we entered into
a second securities purchase agreement on February 28, 2006 with the same four
accredited investors for the sale of (i) $1,500,000 in callable secured
convertible notes and (ii) warrants to purchase 12,000,000 shares of its common
stock. The sale of the callable secured convertible notes and warrants is to
occur in three traunches and the investors are obligated to provide us with an
aggregate of $1,500,000 as follows:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after we filed a
registration statement on June 15, 2006 to register the shares of
common stock underlying the callable secured convertible notes.
The registration statement was subsequently withdrawn on July 25,
2006; and
o $500,000 will be disbursed upon the effectiveness of a
registration statement to register 60,000,000 shares of common
stock issuable upon conversion of the callable secured convertible
notes.
The callable secured convertible notes bear interest at 8% per annum
from the date of issuance. Interest is computed on the basis of a 365-day year
and is payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock price
is greater than 125% of the initial market price, or $.0275, for each trading
day during that month. Any amount of principal or interest on the callable
secured convertible notes that is not paid when due will bear interest at the
rate of 15% per annum from the date due thereof until such amount is paid. The
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our common stock at the selling stockholders'
option, at the lower of (i) $.02 or (ii) 60% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for the
20 trading days before but not including the conversion date. Accordingly, there
is no limit on the number of shares into which the notes may be converted.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then we will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event we issue common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the callable secured convertible notes issued pursuant
to the securities purchase agreement.
See the "Offering -- Callable Secured Convertible Notes and Warrants,"
"Risk Factors" and "Selling Stockholders" sections for a complete description of
the callable secured convertible notes and warrants.
Certain Provisions of Certificate of Incorporation. Our Certificate of
Incorporation provides that to the fullest extent permitted by Delaware law, our
directors shall not be liable to us and our stockholders. The Certificate of
Incorporation also contains provisions entitling the officers and directors to
indemnification by us to the fullest extent permitted by the Delaware General
Corporation Law.
Indemnification Agreements. We have entered into indemnification
agreements with our officers and directors. Such indemnification agreements
provide that we will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.
Transfer and Warrant Agent. Our transfer agent and registrar for our
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
59
o Ordinary brokerage transactions and transaction in which the
broker-dealer solicits the purchaser;
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by a
broker-dealer for its account;
o An exchange distributions in accordance with the rules of the
applicable exchange;
o Privately-negotiated transactions;
o Short sales that are not violations of laws and regulations of any
state or the United States;
o Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o Through the writing of options on the shares;
o A combination of any such method of sales; and
o Any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase order or make any sale of sales if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the
box, puts and calls, and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees,
transferees or other successors-in-interest, may also sell the shares directly
to market makers acting a principals and/or broker-dealers acting as agents for
themselves or the customers. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their risk. It is possible that a selling stockholder will attempt to sell
shares of common stock at block transaction to market makers or other purchasers
at a price per share which may be below the then market price.
The selling stockholders cannot assure that all or any of the shares
offered in this prospectus will be issued to, or sold by, the selling
stockholders. The selling stockholders and any brokers, dealers or agents, upon
effecting the sale of any of the shares offered in this prospectus, may be
deemed to be "underwriters" as that term is defined in the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or the
rules and regulations under such acts. In such event, any commissions received
by any such broker dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act of 1933, as amended.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to the brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, the persons engaged in a distribution
of securities are prohibited from simultaneously engaging in market making and
certain other activities with respect to such securities for a specified period
of time prior to the commencement of such distributions, subject to specified
exceptions or exemptions. In regards to short sales, the selling stockholder can
only cover its short position with the securities it receives from us upon
conversion. In addition, if such short sale is deemed to be a stabilizing
activity, then the selling stockholder will not be permitted to engage in a
short sale of our common stock. All of these limitations will affect the
marketability of the shares.
We agreed to indemnity the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments to selling
stockholders or their respective pledgees, donees, transferees or other
successors-in-interest, may be required to make in respect to such liabilities.
60
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
will be required to amend the registration statement of which this prospectus is
a part, and file a prospectus supplement to describe the agreements between the
selling stockholders and the broker-dealer.
From time to time this prospectus will be supplemented and amended as
required by the Securities Act of 1933, as amended. During any time when a
supplement or amendment is so required, the Selling Securityholders are to cease
sales until the prospectus has been supplemented or amended. Pursuant to the
registration rights granted to certain of the Selling Securityholders, we have
agreed to update and maintain the effectiveness of this prospectus. Certain of
the Selling Securityholders also may be entitled to sell their shares without
the use of this prospectus, provided that they comply with the requirements of
Rule 144 promulgated under the Securities Act.
EXPERTS
Our consolidated financial statements for the years ended December 31,
2004 and 2005 included in this prospectus have been audited by Chisholm,
Bierwolf & Nilson, independent auditors, as stated in their report appearing
herein. We have included consolidated financial statements in this prospectus in
reliance on such report given upon their authority s experts in auditing and
accounting.
LEGAL MATTERS
The validity of the shares of common stock in this offering will be
passed upon for us by Mackey Price Thompson & Ostler, Salt Lake City, Utah.
Randall A. Mackey, the President, a director and a shareholder of the law firm
of Mackey Price Thompson & Ostler is our Chairman of the Board. Legal fees and
expenses paid to Mackey Price Thompson & Ostler for legal services during the
fiscal years ended December 31, 2005 and 2004 totaled $220,000 and $100,000,
respectively. Legal fees and expenses paid to Mackey Price Thompson & Ostler for
legal services during the six months ended June 30, 2006 totaled $83,000. As of
December 31, 2005, we owed the firm $93,000, which is included in the accounts
payable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form SB-2 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy the registration statement and the exhibits
and schedules thereto at the public reference facility maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at 233 Broadway, New York, New York 10279, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at
1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly available through the SEC's site on the Internet at
www.sec.gov.
We also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at www.sec.gov. We furnish to our
stockholders annual reports containing audited financial statements for each
fiscal year.
61
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 1
Condensed Balance Sheet (unaudited) - June 30, 2006................. 1
Condensed Statements of Operations (unaudited)
for the six months ended June 30, 2006 and June 30,
2005............................................................. 2
Condensed Statements of Cash Flows (unaudited)
for the six months ended June 30, 2006
and June 30, 2005 ............................................... 3
Notes to Condensed Financial Statements (unaudited)................. 4
i
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 2006
--------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 591,000
Receivables, Net 486,000
Inventory 786,000
Prepaid Expenses 49,000
--------------
Total Current Assets 1,912,000
Intangibles, Net 339,000
Property and Equipment, Net 24,000
--------------
Total Assets $ 2,275,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable $ 390,000
Accrued Expenses 848,000
Current Portion of Long-term Debt 1,000
--------------
Total Current Liabilities 1,239,000
Convertible Notes Payable 2,670,000
--------------
Total Long-term Liabilities 2,670,000
--------------
Total Liabilities 3,909,000
--------------
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at June 30, 2006 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at June 30, 2006 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at June 30, 2006 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at June 30, 2006 -
Series E
Authorized: 50,000 shares; issued and
outstanding: 250 shares at June 30, 2006 -
Series F
Authorized: 50,000 shares; issued and
outstanding: 4,598.75 shares at June 30, 2006 -
Series G
Authorized: 2,000,000 shares; issued and
outstanding: 588,235 shares at June 30, 2006 1,000
Common Stock, Authorized:
250,000,000 shares, $.001 par value; issued and
outstanding: 196,956,828 at June 30, 2006 197,000
Additional Paid-in-capital 61,873,000
Accumulated Deficit (63,705,000)
--------------
Total Stockholders' Equity (1,634,000)
--------------
Total Liabilities and Stockholders' Equity $ 2,275,000
==============
The accompanying notes are an integral part
to these condensed financial statements
1
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 20, June 20,
2006 2005 2006 2005
-------------- ------------- -------------- --------------
Sales $ 718,000 $ 885,000 $ 1,182,000 $ 1,413,000
Cost of Sales 416,000 478,000 638,000 692,000
-------------- ------------- -------------- --------------
Gross Profit 302,000 407,000 544,000 721,000
Operating Expenses:
Marketing and Selling 108,000 187,000 185,000 365,000
General and Administrative 263,000 390,000 514,000 652,000
Research, development and service 132,000 248,000 257,000 459,000
-------------- ------------- -------------- --------------
Total Operating Expenses 503,000 825,000 956,000 1,476,000
-------------- ------------- -------------- --------------
Operating Income (Loss) (201,000) (418,000) (412,000) (755,000)
Other Income and (Expenses):
Interest Expense (1,000) (16,000) (4,000) (20,000)
Financing Costs (553,000) (2,851,000) (1,097,000) (2,854,000)
Other Income -- (9,000) 2,000 28,000
-------------- ------------- -------------- --------------
Total Other Income and Expenses (554,000) (2,858,000) (1,099,000) (2,846,000)
-------------- ------------- -------------- --------------
Net income (Loss) Before Provision
for Income Taxes (755,000) (3,276,000) (1,511,000) (3,601,000)
Provision (Benefit for Income Taxes) -- -- -- --
-------------- ------------- -------------- --------------
Net Loss $ (755,000) $ (3,276,000) $ (1,511,000) $ 3,601,000
============== ============= ============== ==============
Net Loss Per Common Share - Basic and Diluted $ (0.00) $ (0.12) $ (0.01) $ (0.13)
-------------- ------------- -------------- --------------
Weighted Average Outstanding Shares - Basic
and Diluted 175,402,000 28,362,000 150,164,000 27,745,000
-------------- ------------- -------------- --------------
The accompanying notes are an integral part to these condensed financial statements
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2006 2005
------------ -------------
Cash Flows from Operating Activities
------------------------------------
Net Loss $ (1,511,000) $ (3,601,000)
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 24,000 43,000
Issuance of Common Stock for Satisfaction
of Penalty - 52,000
Issuance of Common Stock for Services - 22,000
Stock option valuation 23,000 -
Beneficial Conversion Interest 964,000 2,009,000
Issuance of Stock Options and Warrants
for Services 36,000 491,000
Provision for Losses on Receivables 1,000 (81,000)
(Increase) Decrease from Changes is:
Accounts Receivable (86,000) (36,000)
Inventories 67,000 (27,000)
Prepaid and Other Expenses (38,000) (35,000)
Increase (Decrease) from Changes in:
Trade Accounts Payable (69,000) (406,000)
Accrued Liabilities 144,000 (96,000)
------------ -------------
Net Cash Provided By (Used in)
Operating Activities (445,000) (1,665,000)
------------ -------------
Cash Flow from Investing Activities:
------------------------------------
Cash proceeds from sales of investment (16,000) --
------------ -------------
Net Cash Provided by (Used in)
Investing Activities (16,000) --
------------ -------------
Cash Flows from Financing Activities:
-------------------------------------
Principal Payments on Notes Payable and
Long-term Debt (14,000) (28,000)
Proceeds from Issuance of Common Stock - 150,000
Proceeds from Issuance of Convertible Notes 1,000,000 2,500,000
------------ -------------
Net Cash Provided by (Used in)Financing
Activities 986,000 2,622,000
------------ -------------
Net Change in Cash 525,000 957,000
Cash and Cash Equivalents,
Beginning of Period 66,000 131,000
Cash and Cash Equivalents,
End of Period $ 591,000 $ 1,088,000
============ =============
Supplemental Disclosure of Cash
Flow Information:
Cash Paid for Interest $ 2,000 $ 7,000
============ =============
Cash Paid for Income Taxes $ - $ -
============ =============
The accompanying notes are an integral part
to these condensed financial statements
3
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies
-------------------------------
The accompanying condensed financial statements of the Company have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary to
present fairly the results of operations of the Company for the periods
presented. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 2005. The results of operations for
the six months ended June 30, 2006, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2006.
Going Concern
-------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Historically, the Company has
not demonstrated the ability to generate sufficient cash flows from operations
to satisfy its liabilities and sustain operations, and the Company has incurred
significant losses. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's continuation as a going concern is dependent on its
ability to generate sufficient income and cash flow to meet its obligations on a
timely basis and/or obtain additional financing as may be required. The Company
is actively seeking options to obtain additional capital and financing.
In addition, the Company has taken significant steps to reduce costs
and increase operating efficiencies. Specifically, the Company has significantly
reduced the use of consultants, which has resulted in a large decrease in
expenses. In addition, the Company has reduced the number of its direct sales
representatives, which has resulted in less payroll, travel and other expenses.
Although these cost savings have significantly reduced the Company's losses and
ongoing cash flow needs, if the Company is unable to obtain equity or debt
financing, it may be unable to continue development of its products and may be
required to substantially curtail or cease operations.
Net Loss Per Share
------------------
Net loss per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents consisting of options
and warrants to purchase 32,878,595 and 25,295,000 shares of common stock and
preferred stock convertible into 869,000 and 2,047,000 shares of common stock at
June 30, 2006 and 2005, respectively, have not been included in loss periods
because they are anti-dilutive.
For the three months ended June 30, 2006, the options and warrants to
purchase 32,878,595 shares of common stock were excluded because of the treasury
stock method.
The following table is a reconciliation of the net loss numerator of
basic and diluted net loss per common share for the three and six month periods
ended June 30, 2006 and June 30, 2005:
4
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
----------- ---------- ----------- ----------
Basic weighted average
shares outstanding 175,402,000 28,362,000 150,164,000 27,745,000
Common stock equivalents -
convertible preferred stock 869,000 2,047,000 -- --
----------- ---------- ----------- ----------
Diluted weighted average
shares outstanding 176,271,000 30,049,000 150,164,000 27,745,000
=========== ========== =========== ==========
Convertible Notes
-----------------
April 27, 2005 Sale of $2,500,000 in Callable Secured Convertible
Notes. To obtain funding for the Company's ongoing operations, the Company
entered into a securities purchase agreement with four accredited investors on
April 27, 2005 for the sale of (i) $2,500,000 in callable secured convertible
notes and (ii) warrants to purchase 16,534,392 shares of its common stock. The
sale of the callable secured convertible notes and warrants occurred in three
traunches and the investors provided the Company with an aggregate of $2,500,000
as follows:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after the Company filed a
registration statement that registered the shares of common stock
issuable upon conversion of the callable secured convertible notes
and exercise of the warrants; an
o $850,000 was disbursed on June 30, 2005, the effective date of the
registration statement.
Under the terms of the securities purchase agreement, the Company also
agreed not, without the prior written consent of a majority-in-interest of the
investors, to negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) that involves (i)
the issuance of common stock at a discount to the market price of the common
stock on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (a) 270 days from
April 27, 2005, or (b) 180 days from the date the registration statement is
declared effective.
In addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period beginning
April 27, 2005 and ending two years after the end of the above lock-up period
unless it first provided each investor an option to purchase its pro-rata share
(based on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The $2,500,000 in callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is computed on the basis of a
365-day year and is payable quarterly in cash, with six months of interest
payable up front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0945, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The callable secured convertible notes mature in three
years from the date of issuance, and are convertible into our common stock at
the selling stockholders' option, at the lower of (i) $.09 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted.
The $2,500,000 in callable secured convertible notes are secured by the
Company's assets, including the Company's inventory, accounts receivable and
intellectual property. Moreover, the Company has a call option under the terms
of the notes. The call option provides the Company with the right to prepay all
of the outstanding callable secured convertible notes at any time, provided
there is no event of default by the Company and the Company's stock is trading
at or below $.09 per share. An event of default includes the failure by the
Company to pay the principal or interest on the callable secured convertible
notes when due or to timely file a registration statement as required by the
Company or obtain effectiveness with the Securities and Exchange Commission of
the registration statement. Prepayment of the callable secured convertible notes
is to be made in cash equal to either (a) 125% of the outstanding principal and
accrued interest for prepayments occurring within 30 days following the issue
date of the notes; (b) 130% of the outstanding principal and accrued interest
5
for prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then the Company
will not receive any proceeds therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the callable secured convertible
notes issued pursuant to the Securities Purchase Agreement.
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes. As of June 30, 2006, a total of $842,830 in callable secured
convertible notes have been converted into 166,666,667 shares of the Company's
common stock pursuant to conversion notices from the four accredited investors.
February 28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes. To obtain additional funding for the Company's ongoing operations, the
Company entered into a second securities purchase agreement on February 28, 2006
with the same four accredited investors for the sale of (i) $1,500,000 in
callable secured convertible notes and (ii) warrants to purchase 12,000,000
shares of its common stock. The sale of the callable secured convertible notes
and warrants is to occur in three traunches and the investors are obligated to
provide the Company with an aggregate of $1,500,000 as follows:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after the Company filed a
registration statement on June 15, 2006 to register the shares of
common stock issuable upon conversion of the callable secured
convertible notes and exercise of the warrants. The Company filed
an application for withdrawal of the registration statement on
July 26, 2006, with the intention of filing another registration
to register shares issuable upon conversion of the notes and
exercise of the warrants if the Company's shareholders approve at
the Annual Shareholders Meeting the amendment to the Company's
Certificate of Incorporation to increase the number of authorized
shares of common stock to 800,000,000 shares; and
o $500,000 will be disbursed upon the effectiveness of the
registration statement.
Each closing under the securities purchase agreement is subject to the
following conditions:
o The Company delivers to the investors duly executed callable
secured convertible notes and warrants;
o No litigation, statute, regulation or order had been commenced,
enacted or entered by or in any court, governmental authority or
any self-regulatory organization that prohibits consummation of
the transactions contemplated by the securities purchase
agreement; and
o No event occurred that could reasonably be expected to have a
material adverse effect on the Company's business.
Under the terms of the securities purchase agreement dated February 28,
2006, the Company also agreed not, without the prior written consent of a
majority-in-interest of the investors, to negotiate or contract with any party
to obtain additional equity financing (including debt financing with an equity
component) that involves (i) the issuance of common stock at a discount to the
market price of the common stock on the date of issuance (taking into account
the value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants during the lock-up period beginning February 28, 2006 and ending on the
later of (a) 270 days from February 28, 2006, or (b) 180 days from the date the
registration statement is declared effective.
In addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period beginning
February 28, 2006 and ending two years after the end of the above lock-up period
unless it first provided each investor an option to purchase its pro-rata share
6
(based on the ratio of each investor's purchase under the securities purchase
agreement) of the securities being offered in any proposed equity financing.
Each investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The $1,500,000 in callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is computed on the basis of a
365-day year and is payable quarterly in cash, with six months of interest
payable up front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0275, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The callable secured convertible notes mature in three
years from the date of issuance, and are convertible into our common stock at
the selling stockholders' option, at the lower of (i) $.02 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted.
The $1,500,000 in callable secured convertible notes are secured by the
Company's assets, including the Company's inventory, accounts receivable and
intellectual property. Moreover, the Company has a call option under the terms
of the notes. The call option provides the Company with the right to prepay all
of the outstanding callable secured convertible notes at any time, provided
there is no event of default by the Company and the Company's stock is trading
at or below $.02 per share. An event of default includes the failure by the
Company to pay the principal or interest on the callable secured convertible
notes when due or to timely file a registration statement as required by the
Company or obtain effectiveness with the Securities and Exchange Commission of
the registration statement. Prepayment of the callable secured convertible notes
is to be made in cash equal to either (a) 125% of the outstanding principal and
accrued interest for prepayments occurring within 30 days following the issue
date of the notes; (b) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then the Company
will not receive any proceeds therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the callable secured convertible
notes issued pursuant to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes.
The Company is required to register the shares of its common stock
issuable upon conversion of the callable secured convertible notes and exercise
of the warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered into on February 28, 2006. The
registration statement must be filed with the Securities and Exchange Commission
within 60 days of the February 28, 2006 closing date and the effectiveness of
the registration is to be within 135 days of such closing date. Penalties of 2%
of the outstanding principal balance of the callable secured convertible notes
plus accrued interest are to be applied for each month the registration is not
effective within the required time. The penalty may be paid in cash or stock at
our option.
The Company's obligation to issue shares upon conversion of the
callable secured convertible notes is essentially limitless. The following is an
example of the amount of shares of common stock that are issuable upon
conversion of $3,175,170 principal amount of callable secured convertible notes
(excluding accrued interest), based on market prices 25%, 50%, and 75% below the
market price, as of June 26, 2006 of $.007.
7
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------- --------- -------- --------------- -------------
25% $.00525 $.00315 1,002,276,190 516.8%
50% $.0035 $.0021 1,503,414,286 775.1%
75% $.00175 $.00105 3,006,828,571 1,550.3%
*Based on 199,956,828 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of the Company's callable secured convertible notes will increase if
the market price of the Company's common stock declines, which will cause
dilution to existing stockholders.
The callable secured convertible notes are convertible into shares of
the Company's common stock at a 40% discount to the trading price of the common
stock prior to the conversion. The significant downward pressure on the price of
the common stock as the noteholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place further
downward pressure on the price of the common stock. The noteholders could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of notes, warrants and options, but also the mere perception that
these sales could occur, may have a depressive effect on the market price of the
common stock.
The issuance of shares upon conversion of callable secured convertible
notes and exercise of warrants may result in substantial dissolution to the
interests of other stockholders since the holders of the convertible notes may
ultimately convert and sell the full amount issuable upon conversion. Although
the noteholders may not convert their callable secured convertible notes and/or
exercise their warrants if such conversion or exercise price would cause them to
own more than 4.99% of the Company's outstanding common stock, this restriction
does not prevent the noteholders from converting and/or exercising some of their
holdings and then converting the rest of their holdings. In this way, the
noteholders could sell more than this limit while never holding more than this
limit. There is no upper limit on the number of shares that may be issued, which
will have the effect of further diluting the proportionate equity interest and
voting power of holders of the Company's common stock.
The Company anticipates that the full amount of callable secured
convertible notes will be converted into shares of its common stock, in
accordance with the terms of the callable secured convertible notes. If the
Company is required to repay the callable secured convertible notes, it would be
required to use its limited working capital and raise additional funds. If the
Company were unable to repay the notes when required, the noteholders could
commence legal action against the Company and foreclose on all of its assets to
recover the amounts due. Any such action would require the Company to curtail or
cease operations.
Preferred Stock Conversions
---------------------------
Under the Company's Certificate of Incorporation, holders of the
Company's Class A and Class B preferred stock have the right to convert such
stock into shares of the Company's common stock at the rate of 1.2 shares of
common stock for each share of preferred stock. During the three months ended
June 30, 2006, no shares of Series A preferred stock and no shares of Series B
preferred stock were converted to the Company's common stock.
Holders of Series D preferred have the right to convert such stock into
shares of the Company's common stock at the rate of one share of common stock
for each share of preferred stock. During the three months ended June 30, 2006,
no shares of Series D preferred stock were converted to the Company's common
stock.
Holders of Series E preferred have the right to convert such stock into
shares of the Company's common stock at the rate of 53.3 shares of common stock
for each share of preferred stock. During the three months ended June 30, 2006,
no shares of Series E preferred stock were converted to the Company's common
stock.
8
Holders of Series F preferred have the right to convert such stock into
shares of the Company's common stock at the rate of 53.3 shares of common stock
for each share of preferred stock. During the three months ended June 30, 2006,
no shares of Series F preferred stock were converted to shares of the Company's
common stock.
Holders of Series G preferred have the right to convert such stock into
shares of the Company's common stock at the rate of one share of common stock
for each share of preferred stock. During the three months ended June 30, 2006,
no shares of Series G preferred stock were converted to shares of the Company's
common stock.
Warrants
--------
The fair value of warrants granted as described herein is estimated at
the date of grant using the Black-Scholes option pricing model. The exercise
price per share is reflective of the then current market value of the stock. No
grant exercise price was established at a discount to market. All warrants are
fully vested, exercisable and nonforfeitable as of the grant date. As a result
of the financing the Company completed on April 27, 2005 involving the sale of
$2,500,000 in callable secured convertible notes, the Company granted warrants
to the noteholders to purchase 16,534,392 shares of its common stock. The
warrants have an exercise price of $.20 per share and expire on April 27, 2010.
As a result of the financing the Company completed on February 28, 2006
involving the sale of $1,000,000 in callable secured convertible notes, the
Company granted warrants to the noteholders to purchase 8,000,000 shares of its
common stock. The warrants have an exercise price of $.10 per share and expire
on February 27, 2011.
Stock - Based Compensation
--------------------------
The Company has stock option plans that provide for stock-based
employee compensation, including the granting of stock options, to certain key
employees. Prior to January 1, 2006, the Company applied APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for awards made under the Company's stock-based compensation plans.
Under this method, compensation expense was recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise price.
During the periods presented in the accompanying financial statements,
the Company has granted options under its Stock Option Plan. The Company has
adopted the provisions of SFAS No. 123(R) using the modified-prospective
transition method and the disclosures that follow are based on applying SFAS No.
123(R). Under this transition method, compensation expense recognized during the
three months ended June 30, 2005 included: (a) compensation expense for all
share-based awards granted prior to, but not yet vested as of January 1, 2006,
and (b) compensation expense for all share-based awards granted on or after
January 1, 2006. Accordingly, compensation cost of $23,000 has been recognized
for grants of options to employees and directors in the accompanying statements
of operations with an associated recognized tax benefit of $0 of which $0 was
capitalized as an asset for the period ended June 30, 2006. In accordance with
the modified-prospective transition method, the Company's financial statements
for the prior year have not been restated to reflect, and do not include, the
impact of SFAS 123(R). Had compensation cost for the Company's stock option
plans and agreements been determined based on the fair value at the grant date
for awards in 2005 consistent with the provisions of SFAS No. 123(R), the
Company's net loss and basic net loss per common share would have been increased
to the pro forma amounts indicated below:
Three Months Ended June 30 Six Months Ended June 30,
2006 2005 2006 2005
----------- ------------ ------------ ------------
Net income (loss) - as reported $ (718,000) $ (3,276,000) $ (1,182,000) $ (3,601,000)
Plus stock-based employee
compensation expense included
in reported net loss, net related
tax effects
Less stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (78,000) (573,000) (78,000) (657,000)
----------- ------------ ------------ ------------
Pro forma net loss $ (796,000) $ (3,849,000) $ (1,260,000) $ (4,258,000)
=========== ============ ============ ============
Basic and diluted net loss per common
share, as reported $(0.00) $ (0.12) $ (0.01) $ (0.13)
Basic and diluted net loss per share,
pro forma $(0.01) $ (0.14) $ (0.01) $ (0.15)
9
Related Party Transactions
--------------------------
Payments for legal services to the firm of which the Company's Chairman
of the Board of Directors is President, a director and a shareholder were
$83,000 and $180,000 for the three months ended June 30, 2006 and 2005,
respectively. In addition, on April 7, 2005, the Company issued 250,000
registered shares of common stock to such law firm in payment for $22,500 in
legal services
Accrued Expenses
----------------
Accrued expenses consist of the following at June 30, 2006:
Accrued consulting and litigation reserve $ 624,000
Accrued payroll and employee benefits 50,000
Sales taxes payable 10,000
Customer deposits 22,000
Warranty and return allowance 118,000
Other accrued expenses 23,000
------------
Total $ 847,000
============
Stockholders' Equity
--------------------
On January 14, 2005, the Company issued 2,000,000 shares of common
stock to an accredited investor through a private placement at a price of $0.75
per share. The Company received a total of $150,000 in cash from the private
placement transaction and issued as a commission warrants to purchase 200,000
shares of the Company's common stock at $.15 per share.
On February 1, 2005, the Company issued a total of 515,206 shares of
common stock to two accredited investors that had purchased shares of the
Company's Series G convertible preferred stock in a private placement
transaction. Under the terms of the private offering, the Company was required
to file a registration statement with the Securities and Exchange Commission to
register the common shares issuable to the Series G preferred stockholders upon
conversion of their Series G preferred shares and exercise of their warrants.
The 515,206 shares represented a penalty for the Company not having a
registration statement declared effective within 120 days of the initial closing
of the offering. The value of these shares was $52,000.
On April 7, 2005, the Company issued 250,000 registered shares of
common stock to the law firm of Mackey Price Thompson & Ostler in payment of
legal services that the law firm provided to the Company in the amount of
$22,500.
10
PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2005 and 2004
PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and shareholders
Paradigm Medical Industries, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheet of Paradigm Medical Industries,
Inc. (the Company) as of December 31, 2005, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2005 and 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the PCAOB (United
States). Those standards require that we plan and perform the audits 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, audits of its internal control over financial reporting. Our audits
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 purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Paradigm Medical Industries,
Inc. as of December 31, 2005, and the results of their operations and their cash
flows for the years ended December 31, 2005 and 2004, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has a working capital deficit and has suffered recurring
operating losses, which raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Chisholm, Bierwolf & Nilson
Bountiful, Utah
April 20, 2006
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet
December 31, 2005
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash $ 66,000
Receivables, net 401,000
Inventories, net 853,000
Prepaid and other assets 11,000
----------------
Total current assets 1,331,000
Property and equipment, net 32,000
Intangibles, net 339,000
----------------
Total assets $ 1,702,000
----------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 459,000
Accrued liabilities 704,000
Current portion of capital lease obligations 14,000
----------------
Total current liabilities 1,177,000
----------------
Convertible Notes Payable 2,038,000
----------------
Total long-term liabilities 2,038,000
----------------
Total liabilities 3,215,000
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, 613,447 shares issued and
outstanding (aggregate liquidation Preference
of $496,000) 1,000
Common stock, $.001 par value, 250,000,000
shares authorized, 96,389,295 shares issued
and outstanding 96,000
Additional paid-in capital 60,586,000
Accumulated deficit (62,196,000)
----------------
Total stockholders' equity (1,513,000)
----------------
Total liabilities and stockholders' equity $ 1,702,000
----------------
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements F-3
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Operations
Years Ended December 31,
----------------------------------------------------------------------------------------------------------
2005 2004
----------------------------------
Sales $ 2,201,000 $ 3,062,000
Cost of sales 1,599,000 1,217,000
----------------------------------
Gross profit 602,000 1,845,000
----------------------------------
Operating expenses:
General and administrative (1,298,000) (874,000)
Marketing and selling (641,000) (801,000)
Research and development (855,000) (768,000)
Gain on settlement of liabilities 12,000 206,000
----------------------------------
Total operating expenses (2,782,000) (2,237,000)
----------------------------------
Operating loss (2,180,000) (392,000)
----------------------------------
Other income (expense):
Other income 16,000 -
Other expenses (2,870,000) (27,000)
Interest expense (15,000) (22,000)
Gain on sale of investment - 505,000
Impairment of intangible assets (340,000) -
----------------------------------
Total other income (expense) (3,209,000) 456,000
----------------------------------
Income (loss) before provision for income taxes (5,389,000) 64,000
Provision for income taxes - -
----------------------------------
Net income (loss) $ (5,389,000) $ 64,000
----------------------------------
Beneficial conversion feature on Series G preferred stock - -
Series G preferred stock dividend due to registration rights - (54,000)
Deemed dividend from Series G preferred detachable
warrants - -
----------------------------------
Net income (loss) applicable to common shareholders $ (5,389,000) $ 10,000
----------------------------------
Earnings (loss) per common share - basic $ (0.13) $ -
----------------------------------
Earnings (loss) per common share - diluted $ (0.13) $ -
----------------------------------
Weighted average common shares - basic 42,033,000 25,405,000
----------------------------------
Weighted average common shares - diluted 42,942,000 27,669,000
----------------------------------
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements F-4
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Stockholders' Equity
Years Ended December 31, 2005 and 2004
-------------------------------------------------------------------------------------------------------------------------
Preferred Additional Stock
Stock Common Amount Paid-In Subscription Accumulated
(See Note 8) Shares Capital Receivable Deficit
----------------------------------------------------------------------------------------
Balance at January 1, 2004 $ 2,000 25,372,794 $ 25,000 $ 57,470,000 - $ (56,817,000)
Conversion of preferred stock - 255,000 - - - -
Series G preferred stock
dividend due to registration
rights - - - - - (54,000)
registration rights
Net income - - - - - 64,000
----------------------------------------------------------------------------------------
Balance at December 31, 2004 2,000 25,627,764 25,000 57,470,000 - (56,807,000)
Conversion of preferred stock (1000) 1,138,325 1,000 - - -
Issuance of common stock for:
-----------------------------
Cash - 2,000,000 2,000 148,000 - -
Services - 228,000 - 22,000 - -
Conversion of convertible
debentures - 66,880,000 67,000 395,000 - -
Value attribute to discount - - - 2,009,000 - -
on note payable
Value attribute to discount
on warrants - - - 491,000 - -
Penalty provisions of series
G preferred in 2004 - 515,206 1,000 51,000 - -
Net loss - - - - - (5,389,000)
----------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 1,000 96,389,295 $ 96,000 $ 60,586,000 $ - $ (62,196,000)
----------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements F-5
PARADIGM MEDICAL INDUSTRIES, INC.
Statements of Cash Flows
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------
2005 2004
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ (5,389,000) $ 64,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 77,000 137,000
Issuance of common stock for satisfaction of penalty 53,000 -
Issuance of common stock for services 23,000 -
Beneficial conversion interest 2,009,000 -
Issuance of stock options and warrants for services 491,000 -
Provision for losses on receivables (1,000) (369,000)
Provision for losses on inventory (61,000) (224,000)
Gain on sale of investment - (505,000)
Impairment of Intangibles and investments 340,000
(Gain) loss on settlement of liabilities (12,000) (206,000)
(Gain) loss on disposal of assets - 13,000
(Increase) decrease in:
Accounts Receivables 257,000 420,000
Inventories (72,000) 507,000
Prepaid and other assets 56,000 76,000
Increase (decrease) in:
Accounts payable (291,000) 42,000
Accrued liabilities (148,000) (432,000
------------------------------------
Net cash used in
operating activities (2,668,000) (477,000)
------------------------------------
Cash flows from investing activities:
Cash proceeds from sales of investment - 532,000
------------------------------------
Net cash provided by (used in)
investing activities 0.00 532,000
------------------------------------
Cash flows from financing activities:
Principal payments on notes payable and long-term debt (47,000) (56,000)
Proceeds from issuance of common stock 150,000 -
Proceeds from issuance of convertible notes 2,500,000 -
------------------------------------
Net cash (used in) provided by
financing activities 2,603,000 (56,000)
------------------------------------
Net change in cash (65,000) (1,000)
Cash, beginning of year 131,000 132,000
------------------------------------
Cash, end of year $ 66,000 $ 131,000
------------------------------------
-----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements F-6
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2005 and 2004
--------------------------------------------------------------------------------
1. Organization Organization
and Significant Paradigm Medical Industries, Inc. (the Company) is a
Accounting Delaware Corporation incorporated in October 1989. The
Policies Company is engaged in the design, development,
manufacture, and sale of high technology surgical and
diagnostic eye care products. Its surgical equipment is
designed to perform minimally invasive cataract surgery
and is comprised of surgical devices and related
instruments and accessories, including disposable
products. Its diagnostic products include a Blood Flow
Analyzer, a pachymeter, an A/B Scan, ultrasound
biomicroscopes, perimeters, and a corneal topographer.
Cash Equivalents
For purposes of the statement of cash flows, cash
includes all cash and investments with original
maturities to the Company of three months or less.
The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such
account and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
The Company's financial instruments consist of cash,
receivables, payables, and notes payable. The carrying
amount of cash, receivables and payables approximates
fair value because of the short-term nature of these
items. The carrying amount of the notes payable
approximates fair value as the individual borrowings
bear interest at market interest rates.
Accounts Receivable
Accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables
based on a review of all outstanding amounts on a
monthly basis. Specific reserves are estimated by
management based on certain assumptions and variables,
including the customer's financial condition, age of the
customer's receivables, and changes in payment
histories. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
A trade receivable is considered to be past due if any
portion of the receivable balance has not been received
by the contractual pay date. Interest is not charge on
trade receivables that are past due.
--------------------------------------------------------------------------------
F-7
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Inventories
and Significant Inventories are stated at the lower of cost or market,
Accounting cost is determined using the weighted average method.
Policies
Continued Property and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Depreciation on property and
equipment is determined using the straight-line method
over the estimated useful lives of the assets or terms
of the lease. Expenditures for maintenance and repairs
are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and
equipment are reflected in operations. During the years
2005 and 2004 depreciation expense was 77,000 and
132,000 respectively.
Intangible Assets
As of December 31, 2005, intangible assets consisted of
goodwill related to the purchase of Ocular Blood Flow,
Ltd., product rights, capitalized payments to
manufacturers for engineering and design services and
patent costs. In accordance with SFAS 142, "Goodwill and
Other Intangible Assets," the Company performed an
impairment test on all intangible assets at December 31,
2005. As a result an impairment change of $340,000 was
recognized on the Company's statements of operations.
The impairment was based on a significant decrease in
sales of the Blood Flow Analyzer during 2005.
Intangible assets determined to have indefinite useful
lives are not amortized. The Company tests such
intangible assets with indefinite useful lives for
impairment annually or more frequently if events or
circumstances indicate that an asset might be impaired.
Intangible assets determined to have definite lives are
amortized on a straight-line basis over their useful
lives. Product rights, capitalized engineering, and
patents were fully amortized as of December 31, 2005.
The Company reviews such intangible assets with definite
lives for impairment to ensure they are appropriately
valued if conditions exist that may indicate the
carrying value may not be recoverable. Such conditions
may include an economic downturn in a geographic market
or a change in the assessment of future operations.
Goodwill is not amortized. The Company performs tests
for impairment of goodwill annually or more frequently
if events or circumstances indicate it might be
impaired. Such tests include comparing the fair value of
a reporting unit with its carrying value,
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Intangible Assets - Continue
and including goodwill.
Significant
Accounting Impairment assessments are performed using a variety of
Policies methodologies, including cash flow analysis and
Continued estimates of sales proceeds. Where applicable, an
appropriate discount rate is used, based on the
Company's cost of capital rate or location-specific
economic factors.
Evaluation of Other Long-Lived Assets
The Company evaluates the carrying value of the
unamortized balances of other long-lived assets to
determine whether any impairment of these assets has
occurred or whether any revision to the related
amortization periods should be made. This evaluation is
based on management's projections of the undiscounted
future cash flows associated with each asset. If
management's evaluation were to indicate that the
carrying values of these assets were impaired, such
impairment would be recognized by a write down of the
applicable asset.
Income Taxes
Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between
financial and tax reporting, principally related to net
operating loss carryforwards, depreciation, impairment
of intangible assets, stock compensation expense, and
accrued liabilities.
Stock - Based Compensation
For stock options and warrants granted to employees the
Company employs the footnote disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. SFAS No.
123 encourages entities to adopt a fair-value based
method of accounting for stock options or similar equity
instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue
to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123. No
stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had
an exercise price equal to or greater than the market
value of the underlying common stock on the date of
grant.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock - Based Compensation - Continued
and Significant Stock options and warrants granted to non-employees for
Accounting services are accounted for in accordance with SFAS No.
Policies 123, which requires expense recognition based on the
Continued fair value of the options/warrants granted. The Company
calculates the fair value of options and warrants
granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income
and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Years Ended December 31,
--------------------------------
2005 2004
--------------------------------
Net income (loss) applicable to common
shareholders-as reported $ (5,390,000) $ 10,000
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of related
tax effects (355,000) (362,000)
--------------------------------
Net loss applicable to common shareholders -
pro forma $ (5,745,000) $ (352,000)
--------------------------------
Earnings per share:
Basic and diluted - as reported $ (.14) $ -
--------------------------------
Basic and diluted - pro forma $ (.13) $ (.01)
--------------------------------
The fair value of each option grant is estimated at the
date of grant using the Black-Scholes option pricing
model with the following assumptions:
December 31,
----------------------------------------
2005 2004
----------------------------------------
Expected dividend yield $ - $ -
Expected stock price
Volatility 189%-215% 112%-173%
Risk-free interest rate 4% 4%
Expected life of options 2-7 years 2-7 years
The weighted average fair value of options granted
during 2005 and 2004 are $0.07 and $0.09, respectively.
--------------------------------------------------------------------------------
F-10
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Earnings Per Share
and Significant The computation of basic earnings per common share is
Accounting based on the weighted average number of shares
Policies outstanding during each year.
Continued
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year plus the common stock
equivalents, which would arise from the conversion of
preferred stock to common stock and from the exercise of
stock options and warrants outstanding using the
treasury stock method and the average market price per
share during the year. Options and warrants to purchase
23,514,690 shares of common stock at prices ranging from
$0.10 to $12.98 per share were outstanding at December
31, 2005.
The following table is a reconciliation of basic and
diluted weighted average shares for the years ended
December 31, 2005 and 2004.
Years Ended December 31,
--------------------------------
2005 2004
Basic weighted average shares outstanding 42,033,000 25,405,000
Common stock equivalent-convertible
preferred stock 909,000 2,047,000
Diluted effect of stock options and warrants - 217,000
--------------------------------
Diluted weighted average shares outstanding 42,942,000 27,669,000
--------------------------------
Revenue Recognition
Revenues for sales of products that require specific
installation and acceptance by the customer are
recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products
are recognized when the product is shipped. A signed
purchase agreement and a deposit or payment in full from
customers is required before a product leaves the
premises. Title passes at time of shipment (F.O.B.
shipping point).
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Research and Development
and Significant Costs incurred in connection with research and
Accounting development activities are expensed as incurred. These
Policies costs consist of direct and indirect costs associated
Continued with specific projects as well as fees paid to various
entities that perform certain research on behalf of the
Company. The total research and development expenses for
the years ended December 2005 and 2004 was $855,000 and
768,000, respectively.
Concentration of Risk
The market for ophthalmic lasers is subject to rapid
technological change, including advances in laser and
other technologies and the potential development of
alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved
products, processes or technologies may make products
developed by the Company obsolete or less competitive.
The Company's high technology product line requires the
Company to deal with suppliers and subcontractors
supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and
performing highly technical calculations and tasks.
Although there are a limited number of suppliers and
manufacturers that meet the standards required of a
regulated medical device, management believes that other
suppliers and manufacturers could provide similar
components and services.
The nature of the Company's business exposes it to risk
from product liability claims. The Company maintains
product liability insurance providing coverage up to $2
million per claim with an aggregate policy limit of $2
million. Any losses that the Company may suffer from any
product liability litigation could have a material
adverse effect on the Company. As of December 31, 2005,
the company maintained the policy in placed.
A significant portion of the Company's product sales is
in foreign countries. The economic and political
instability of some foreign countries may affect the
ability of medical personnel to purchase the Company's
products and the ability of the customers to pay for the
procedures for which the Company's products are used.
Such circumstances could cause a possible loss of sales,
which would affect operating results adversely.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Risk - Continued
and Significant During the years ended December 31, 2005 and 2004, no
Accounting single customer represented more than 10 percent of
Policies total net sales. Accounts receivable are due from
Continued medical distributors, surgery centers, hospitals,
optometrists and ophthalmologists located throughout the
U.S. and a number of foreign countries. The receivables
are generally due within thirty days for domestic
customers with extended terms offered for some
international customers. The Company maintains an
allowance for estimated potentially uncollectible
amounts.
Warranty
The Company provides product warranties on the sale of
certain products that generally extend for one year from
the date of sale. The Company maintains a reserve for
estimated warranty costs based on historical experience
and management's best estimates.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
No amounts in the 2005 financial statements have been
reclassified to conform to the presentation of the
current year financial statements.
Series G Preferred Stock Dividends
Under the terms of the private offering of Series G
preferred shares, the Company is required to file a
registration statement with the Securities and Exchange
Commission to register the common shares issuable to the
Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their
warrants. If the registration statement has not been
declared effective within 120 days of the initial
closing of such offering on August 29, 2003, there is a
penalty of 2% per month payable to the Series G
preferred. Stockholders in common shares (or 39,631
common shares per month) until the registration
statement is declared effective. As of December 31,
2004, the Company had recorded a liability of $54,000
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Series G Preferred Stock Dividends - Continued
and Significant related to the 356,682 common shares to be issued to the
Accounting Series G preferred stockholders because a registration
Policies statement had not been declared effective as of that
Continued date.
In addition, during the first quarter of 2005, the
Company issued 515,206 shares of common stock to two
shareholders that had purchased shares of the Company's
Series G convertible preferred stock in a private
offering. Under the terms of the private offering, the
Company was required to file a registration statement
with the Securities and Exchange Commission for the
purpose of registering the common shares issuable to the
Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their
warrants. The shares were issued as a penalty for the
Company not having a registration statement declared
effective within 120 days of the initial closing of the
private offering. These shares were value at $0.10 per
share.
2. Going The accompanying financial statements have been prepared
Concern on a going concern basis, which contemplates the
realization of assets and the satisfaction of
liabilities in the normal course of business.
Historically, the Company has not demonstrated the
ability to generate sufficient cash flows from
operations to satisfy its liabilities and sustain
operations, and the Company has incurred significant
losses from operations. These factors raise substantial
doubt about the Company's ability to continue as a going
concern.
The Company's continuation as a going concern is
dependent on its ability to generate sufficient income
and cash flow to meet its obligations on a timely basis
and/or obtain additional financing as may be required.
The Company is actively seeking to obtain additional
capital and financing.
In addition, the Company has taken significant steps to
reduce costs and increase operating efficiencies,
including the consolidation of several manufacturing,
accounting and management responsibilities. Such
consolidation resulted in significant headcount
reductions as well as savings in other overhead costs.
The Company has also significantly reduced the use of
consultants, which has resulted in a large decrease in
expenses, and reduced the direct sales force from five
to three representatives, which has resulted in less
payroll, travel and other selling expenses. Although
these cost savings have significantly reduced the
Company's losses and ongoing cash flow needs, if the
--------------------------------------------------------------------------------
F-14
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Going Company is unable to obtain equity or debt financing, it
Concern may be unable to continue development of its products
Continued and may be required to substantially curtail or cease
operations.
3. Detail of Receivables
Certain Trade receivables $ 501,000
Balance Allowance for doubtful accounts (100,000)
Sheet ------------
Accounts
$ 401,000
------------
Inventories:
Raw Materials $ 1,278,000
Finished goods 932,000
Reserve for obsolescence (1,357,000)
------------
$ 853,000
------------
Accrued liabilities:
Consulting and litigation reserve $ 492,000
Payroll and employment benefits 46,000
Sales tax payable 9,000
Customer deposits 29,000
Accrued royalties 1,000
Warranty and return allowance 119,000
Other accrued expenses 8,000
------------
$ 704,000
------------
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Intangible Intangible assets consist of the following at December
Assets 31, 2005:
Goodwill, net of accumulated amortization of $120,000 $ 339,000
----------------
Other intangible assets:
Product and technology rights 769,000
Engineering and design costs 482,000
Patents 92,000
------------------
1,343,000
Accumulated amortization (1,343,000)
------------------
Total other intangible asstes -
------------------
Net intangible assets $ 339,000
------------------
Amortization expense for the years ended December 31,
2005 and 2004 was $0.00 and $3,000, respectively.
During the year ended December 31, 2005, the Company has
no carrying value of its unissued patent costs and
product and technology rights for recoverability. This
analysis, based on the estimated future cash flows
associated with such assets, resulted in an impairment
expense of zero value related to patents and product and
technology rights.
The Company performed an impairment test on all
intangible assets at December 31, 2005. As a result an
impairment change of $340,000 was recognize in the
Company's statements of operations. The impairment was
based on a significant decrease in sales of the Blood
Flow Analyzer during 2005.
5. Property and Property and equipment consists of the following:
Equipment
Machinery and equipment $ 750,000
Computer equipment and software 658,000
Furniture and fixtures 252,000
Leasehold improvements 166,000
-----------------
1,826,000
Accumulated depreciation and amortization (1,794,000)
-----------------
$ 32,000
-----------------
--------------------------------------------------------------------------------
F-16
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Lease During the years ended December 31, 2005 and 2004, the
Obligations Company leased certain equipment under noncancellable
capital leases. These leases provide the Company the
option to purchase the leased assets at the end of the
initial lease term. Assets under capital leases included
in fixed assets and are as follows:
Computer and other equipment $ 291,000
Less accumulated amortization (259,000)
----------------
$ 32,000
----------------
--------------------------------------------------------------------------------
F-17
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Lease Amortization expense on assets under capital leases
Obligations during the years ended December 31, 2005 and 2004 was
Continued $32,000 and $39,000, respectively.
Capital lease obligations have imputed interest rates of
approximately 7% to 22%. The leases are secured by
equipment. Future minimum payments on the capital lease
obligations are as follows:
2006 $ 14,000
----------------
14,000
Less amount representing interest (1,000)
----------------
Present value of future minimum lease payments 13,000
Less current portion (13,000)
----------------
Long-term portion $ -
----------------
The Company leases office and warehouse space under an
operating lease agreement. Future minimum rental
payments under the noncancellable operating lease as of
December 31, 2005 are approximately as follows:
Year Ending December 31, Amount
------------------------ ------------------
2006 $ 105,000
2007 108,000
2008 110,000
----- ------------
Total future minimum rental payments $ 323,000
------------------
Rent expense related to noncancelable operating leases
was approximately $140,000 and $137,000 for the years
ended December 31, 2005 and 2004, respectively.
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income The provision for income taxes is different than amounts
Taxes which would be provided by applying the statutory
federal income tax rate to loss before provision for
income taxes for the following reasons:
Years Ended
December 31,
------------------------------------
2005 2004
------------------------------------
Income tax (provision) benefit at
statutory rate $ 2,101,000 $ (24,000)
NOL adjustment 893,000 -
Taxable temporary differences 57,000
Deductible temporary differences (156,000)
Meals and entertainment - (3,000)
Non-deductible expenses (1,064,000) -
Change in valuation allowance (1,831,000) 27,000
-----------------------------------
$ - $ -
-----------------------------------
Net operating loss carryforward $ 15,127,000
Depreciation, amortization, and impairment 1,009,000
Allowance and reserves 771,000
Research and development tax credit
carryforwards 56,000
-----------------
16,963,000
Valuation allowance (16,963,000)
-----------------
$ -
-----------------
A valuation allowance has been established for the net
deferred tax asset due to the uncertainty of the
Company's ability to realize such asset.
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income At December 31, 2005, the Company had net operating loss
Taxes carryforwards of approximately $38.6 million and
Continued research and development tax credit carryforwards of
approximately $56,000. These carryforwards are available
to offset future taxable income and expire in 2006
through 2021. The utilization of the net operating loss
carryforwards is dependent upon the tax laws in effect
at the time the net operating loss carryforwards can be
utilized. The Tax Reform Act of 1986 significantly
limits the annual amount that can be utilized for
certain of these carryforwards as a result of the change
in ownership.
8. Capital The Company has established a series of preferred stock
Stock with a total of 5,000,000 authorized shares and a par
value of $.001, and one series of common stock with a
par value of $.001 and a total of 250,000,000 authorized
shares.
On April 7, 2005 the Company issued 228,000 shares of
common stock to Mackey Price Thompson & Ostler in
payment of $22,500 in legal services.
Series A Preferred Stock
On September 1, 1993, the Company established a series
of non-voting preferred shares designated as the 6%
Series A Preferred Stock, consisting of 500,000 shares
with $.001 par value. The Series A Preferred Stock has
the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of twenty-four cents ($.24)
per share per annum, payable in cash only from
surplus earnings of the Company or in additional
shares of Series A Preferred Stock. The dividends
are non-cumulative and therefore deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series A Preferred Stock are entitled to
receive, prior to any distribution of any assets
or surplus funds to the holders of shares of
common stock or any other stock, an amount equal
to $1.00 per share, plus any accrued and unpaid
dividends related to the fiscal year in which such
liquidation occurs. Total liquidation preference
at December 31, 2005 was $6,000.
3. The shares are convertible at the option of the
holder at any time into common shares, based on an
initial conversion rate of one share of Series A
Preferred Stock for 1.2 common shares.
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Series A Preferred Stock - Continued
Stock
Continued 4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem all of the
then outstanding shares of the Series A Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
Series B Preferred Stock
On May 9, 1994, the Company established a series of
non-voting preferred shares designated as 12% Series B
Preferred Stock, consisting of 500,000 shares with $.001
par value. The Series B Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of forty-eight cents ($.48)
per share per annum, payable in cash only from
surplus earnings of the Company or in additional
shares of Series B Preferred Stock. The dividends
are non-cumulative and therefore deficiencies in
dividend payments from one year are not carried
forward to the next year.
Upon the liquidation of the Company, the holders of the
Series B Preferred Stock are entitled to receive, prior
to any distribution of any assets or surplus funds to
the holders of shares of common stock or any other
stock, an amount equal to $4.00 per share, plus any
accrued and unpaid dividends related to the fiscal year
in which such liquidation occurs. Such right, however,
is subordinate to the rights of the holders of Series A
Preferred Stock to receive a distribution of $1.00 per
share plus accrued and unpaid dividends. Total
liquidation preference at December 31, 2005 was $36,000.
2. The shares are convertible at the option of the
holder at any time into common shares, based on an
initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
3. The holders of the shares have no voting rights.
4. The Company may, at its option, redeem all of the
then outstanding share of the Series B Preferred
Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in
which such redemption occurs.
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock Series C Preferred Stock
Continued In January 1998, the Company authorized the issuance of
a total of 30,000 shares of Series C Preferred Stock,
$.001 par value, $100 stated value. As of December 31,
2005 there were no Series C Preferred Stock issued and
outstanding. The Series C Preferred Stock have the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 12% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series C Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received if they
had converted the shares into shares of Common
Stock immediately prior to such liquidation plus
declared but unpaid dividends; or (b) the stated
value, subject to adjustment.
3. Each share was convertible, at the option of the
holder at any time until January 1, 2002, into
approximately 57.14 shares of common stock at an
initial conversion price, subject to adjustments
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.75 per share of common stock.
4. The holders of the shares have no voting rights.
Series D Preferred Stock
In January 1999, the Company's Board of Directors
authorized the issuance of a total of 1,140,000 shares
of Series D Preferred Stock $.001 par value, $1.75
stated value. The Series D Preferred Stock has the
following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 10% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series D Preferred Stock are entitled to
receive an amount per share equal to the greater
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock of (a) the amount they would have received had
Continued they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2005 was $9,000.
3. Each share was convertible, at the option of the
holder at any time until January 1, 2002, into one
share of Common Stock at an initial conversion
price, subject to adjustment. The Series D
Preferred Stock shall be converted into one share
of the Common Stock subject to adjustment (a) on
January 1, 2002 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series D Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series D Preferred Stock is
at least $3.50 per share. The Company in 1999
recorded $872,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
Series E Preferred Stock
In May 2001, the Company authorized the issuance of a
total of 50,000 shares of Series E Preferred Stock $.001
par value, $100 stated value. The Series E Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series E Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2005 was $53,000.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital 3. Each share is convertible, at the option of the
Stock holder at any time until January 1, 2005, into
Continued approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series E Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series E Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series E Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,482,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
5. The holders of the shares also were issued
warrants to purchase shares of common stock equal
to 1,000 warrants for every 200 shares purchased
at an exercise price of $4.00 per share. Each
warrant is exercisable until May 23, 2006.
Series F Preferred Stock
In August 2001, the Company authorized the issuance of a
total of 50,000 shares of Series F Preferred Stock $.001
par value, $100 stated value. The Series F Preferred
Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 8% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock 2. Upon the liquidation of the Company, the holders
Continued of the Series F Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation
preference at December 31, 2005 was $245,000.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series F Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series F Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series F Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,105,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
4. The holders of the shares have no voting rights.
Series G Preferred Stock
In August 2003, the Company authorized the issuance of a
total of 2,000,000 shares of Series G Preferred Stock
$.001 par value, $1.00 stated value. The Series G
Preferred Stock has the following rights and privileges:
1. The holders of the shares are entitled to
dividends at the rate of 7% per share per annum of
the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
--------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock 2. Upon the liquidation of the Company, the holders
Continued of the Series G Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received had
they converted the shares into Common Stock
immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated
value of $.25 per share plus declared but unpaid
dividends. Total liquidation preference at
December 31, 2005 was $147,000.
3. Each share is convertible, at the option of the
holder at any time until August 1, 2005, into 1
share of common stock at an initial conversion
price, subject to adjustment for dividends, equal
to one share of common stock for each share of
Series G Preferred Stock. The Series G Preferred
Stock shall be converted into common stock subject
to adjustment (a) on August 1, 2005 or (b) upon 30
days written notice by the Company to the holders
of the shares, at any time after (i) the 30-day
anniversary of the registration statement on which
the shares of common stock issuable upon
conversion of the Series G Preferred Stock were
registered and (ii) the average closing price of
the common stock for the 15-day period immediately
prior to the date in which notice of redemption is
given by the Company to the holders of the Series
G Preferred Stock is at least $.50 per share. In
2003, the Company recorded a beneficial conversion
feature of $217,000 related to the differences in
the conversion price of the preferred stock to
common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-26
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Capital Stock The following table summarizes preferred stock activity
Continued during the years ended December 31, 2005 and 2004:
Series A Series B Series C Series D Series E Series F Series G
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
Balance at
January 1,
2004 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,597 $ - 1,981,560 $ -
Issuance of
Series G
preferred stock
for cash - - - - - - - - - - - - - 2,000
Conversion of
preferred stock - - - - - - - - - - - - (255,000) -
-------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2004 5,627 - 8,986 - - - 5,000 - 1,000 - 4,597 - 1,726,560 2,000
Issuance of
Series G
preferred stock
for cash - - - - - - - - - - 2 - - -
Conversion of
preferred stock - - - - - - - - - - - - (1,138,325)(1,000)
-------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2005 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,599 $ - 588,235 1,000
-------------------------------------------------------------------------------------------------------------------
Authorized 500,000 500,000 30,000 1,140,000 50,000 50,000 2,000,000
-------------------------------------------------------------------------------------------------------------------
Liquidation
preference $ 6,000 $ 36,000 $ - $ 9,000 $ 53,000 $245,000 $ 147,000
-------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Convertible Convertible Notes
Notes To obtain funding for the Company's ongoing operations,
the Company entered into a securities purchase agreement
with four accredited investors on April 27, 2005 for the
sale of (i) $2,500,000 in callable secured convertible
notes and (ii) warrants to purchase 16,534,392 shares of
its common stock. The sale of the callable secured
convertible notes and warrants is to occur in three
traunches and the investors are obligated to provide the
Company with an aggregate of $2,500,000 as follows:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after filing a
registration statement on June 22, 2005, which
registered the shares of common stock underlying the
callable secured convertible notes and the warrants; and
o $850,000 was disbursed on June 30, 2005, upon the
effectiveness of the registration statement on June 29,
2005, which registered the shares of common stock
underlying the callable secured convertible notes and
the warrants.
Each closing under the securities purchase agreement was
subject to the following conditions:
o The Company delivered to the investors duly executed
callable secured convertible notes and warrants;
o No litigation, statute, regulation or order had been
commenced, enacted or entered by or in any court,
governmental authority or any self-regulatory
organization that prohibits consummation of the
transactions contemplated by the securities purchase
agreement; and
o No event occurred that could reasonably be expected to
have a material adverse effect on the Company's
business.
The Company also agreed not, without the prior written
consent of a majority-in-interest of the investors, to
negotiate or contract with any party to obtain
additional equity financing (including debt financing
with an equity component) that involves (i) the issuance
of common stock at a discount to the market price of the
common stock on the date of issuance (taking into
account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance
of convertible securities that are convertible into an
indeterminate number of shares of common stock, or (iii)
the issuance of warrants during the lock-up period
beginning April 27, 2005 and ending on the later of (a)
--------------------------------------------------------------------------------
F-28
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Convertible 270 days from April 27, 2005, or (b) 180 days from the
Notes date the registration statement is declared effective.
Continued
In addition, the Company agreed not to conduct any
equity financing (including debt financing with an
equity component) during the period beginning April 27,
2005 and ending two years after the end of the above
lock-up period unless it first provided each investor an
option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the Securities
Purchase Agreement) of the securities being offered in
any proposed equity financing. Each investor must be
provided written notice describing any proposed equity
financing at least 20 business days prior to the closing
of such proposed equity financing and the option must be
extended to each investor during the 15-day period
following delivery of such notice.
The callable secured convertible notes bear interest at
8% per annum from the date of issuance. Interest is
computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for
any month in which the stock price is greater than 125%
of the initial market price, or $.0945, for each trading
day during that month. Any amount of principal or
interest on the callable secured convertible notes that
is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such
amount is paid. The callable secured convertible notes
mature in three years from the date of issuance, and are
convertible into our common stock at the selling
stockholders' option, at the lower of (i) $.09 or (ii)
60% of the average of the three lowest intraday trading
prices for the common stock on the OTC Bulletin Board
for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the
number of shares into which the notes may be converted.
The callable secured convertible notes are secured by
the Company's assets, including the Company's inventory,
accounts receivable and intellectual property. Moreover,
the Company has a call option under the terms of the
notes. The call option provides the Company with the
right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no
event of default by the Company and the Company's stock
is trading at or below $.09 per share. An event of
default includes the failure by the Company to pay the
principal or interest on the callable secured
convertible notes when due or to timely file a
registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of
the callable secured convertible notes is to be made in
cash equal to either (a) 125% of the outstanding
principal and accrued interest for prepayments occurring
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Convertible within 30 days following the issue date of the notes;
Notes (b) 130% of the outstanding principal and accrued
Continued interest for prepayments occurring between 31 and 60
days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for
prepayments occurring after the 60 day of the following
the issue date of the notes.
The warrants are exercisable until five years from the
date of issuance at a purchase price of $.20 per share.
The investors may exercise the warrants on a cashless
basis if the shares of common stock underlying the
warrants are not then registered pursuant to an
effective registration statement. In the event the
investors exercise the warrants on a cashless basis,
then the Company will not receive any proceeds
therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company
issues common stock at a price below market, with the
exception of any securities issued as of the date of the
warrants or issued in connection with the callable
secured convertible notes issued pursuant to the
Securities Purchase Agreement.
The selling stockholders have agreed to restrict their
ability to convert their callable secured convertible
notes or exercise their warrants and receive shares of
our common stock such that the number of shares of
common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares
of common stock. However, the selling stockholders may
repeatedly sell shares of common stock in order to
reduce their ownership percentage, and subsequently
convert additional callable secured convertible notes.
The Company is required to register the shares of its
common stock issuable upon the conversion of the
callable secured convertible notes and the exercise of
the warrants. The registration statement must be filed
with the Securities and Exchange Commission within 60
days of the April 27, 2005 closing date and the
effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the
outstanding principal balance of the callable secured
convertible notes plus accrued interest are to be
applied for each month the registration is not effective
within the required time. The penalty may be paid in
cash or stock at our option. The Company filed a
registration statement with the Securities and Exchange
Commission on June 22, 2005 to register the shares of
common stock issuable upon the conversion of the
callable secured convertible notes and the exercise of
the warrants. The registration statement was declared
effective on June 29, 2005.
--------------------------------------------------------------------------------
F-30
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Convertible As of June 30, 2005, the average of the three lowest
Notes intraday trading prices of the Company's common stock
Continued during the preceding 20 trading days as reported on the
OTC Bulletin Board was $.05 and, therefore, the
conversion price for the callable secured convertible
notes was $.03. Based on this conversion price, the
$2,500,000 callable secured convertible notes, excluding
interest, were convertible into 83,333,333 shares of the
Company's common stock. As of June 30, 2005, none of the
callable secured convertible notes had been converted.
As of December 31, 2005, a total of $461,558 in callable
secured convertible notes have been converted into
66,880,000 shares of the Company's common stock pursuant
to notices of conversion from The NIR Group. The dates
of these notices of conversion, the amount of the notes
converted, the conversion price of the notes converted,
and the shares issued to the noteholders upon conversion
were as follows: (See 10-K page 27).
10. Stock Option The Option Plan provides for the grant of incentive
Plan and stock options and non-qualified stock options to
Warrants employees and directors of the Company. Incentive stock
options may be granted only to employees. The Option
Plan is administered by the Board of Directors or a
Compensation Committee, which determines the terms of
options granted including the exercise price, the number
of shares subject to the option, and the exercisability
of the option.
The Company granted the following options and warrants
during the year ended December 31, 2004:
o Options to officers and the board of directors to
purchase 1,775,000 shares of common stock at an
exercise price ranging from $0.10 to $0.14.
--------------------------------------------------------------------------------
F-31
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option The Company granted the following options and warrants
Plan and to non-employees during the year ended December 31,
Warrants 2005:
Continued
o Options to employees, officers and the board of
directors to purchase 1,250,000 shares of common
stock at an exercise price ranging from $0.09 to
$0.10.
o Warrants to purchase 16,534,392 shares of common
stock at an exercise price of $0.20 per share in
return for the sale of callable secure convertible
notes.
o Warrants to investors to purchase 200,000 shares
of common stock at an exercise price of $0.15.
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Stock Option A schedule of the options and warrants is as follows:
Plan and
Warrants
Continued Exercise
Number of Price Per
--------------------------------
Options Warrants Share
------------------------------------------------
Outstanding at
January 1, 2004 3,628,456 2,807,983 $ 2.00 - 12.98
Granted 1,775,000 - 0.10 - 0.14
Exercised - - -
Expired (187,500) (161,019) 2.38 - 4.00
Forfeited (1,369,750) (200,000) 0.16 - 5.00
--------------------------------------------------
Outstanding at
December 31, 2004 3,846,206 2,446,964 0.10 - 12.98
Granted 1,250,000 16,734,392 0.09 - 0.20
Exercised - - -
Expired (274,603) (10,048) 0.50 - 7.50
Forfeited (889,103) 410,882 0.22 - 12.98
--------------------------------------------------
Outstanding at
December 31, 2005 3,932,500 19,582,190 $ 0.10 - 12.98
--------------------------------------------------
The following table summarizes information about stock
options and warrants outstanding at December 31, 2005:
Outstanding Exercisable
------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
----------------------------------------------------- -----------------------
$ 0.16 - 0.75 20,209,981 0.64 $ 0.03 2,668,922 $ 0.20
2.00 - 5.00 2,254,709 1.84 3.56 2,253,459 3.67
6.00 - 8.13 1,050,000 0.21 7.46 1,050,000 7.46
12.98 - N/A 12.98 - 12.98
----------------------------------------------------- -----------------------
$ 0.16 - 12.98 23,514,690 0.74 $ 0.71 5,972,381 $ 2.84
----------------------------------------------------- -----------------------
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Sale of In July 2004, the Company sold its investment in
Investment International Bioimmune Systems, Inc. (IBS) for $532,000
cash. Because, for book purposes, the Company's
investment in IBS had previously been reduced to $0, the
net sales price was recorded as a gain as follows.
Sale of IBS stock $ 532,000
Less commissions 27,000
-----------
Net gain $ 505,000
12. Gain on Due to the Company's ongoing cash flow difficulties,
Settlement of during 2005 and 2004 most vendors and suppliers were
Liabilities contacted with attempts to negotiate reduced payments
and settlements of outstanding accounts payable and
accrued expenses. While some vendors refused to
negotiate and demanded payment in full, some vendors
were willing to settle for a reduced amount. The
accounts payable forgiven by vendors and suppliers and
accrued expenses settled resulted in a gain of $12,000
and $206,000 in 2005 and 2004, respectively.
13. Related Party A law firm, of which the chairman of the board of
Transactions directors of the Company is a shareholder, has rendered
legal services to the Company. The Company paid this
firm $220,000 and $100,000, for the years ended December
31, 2005 and 2004, respectively. As of December 31,
2005, the Company owed this firm $93,000, which is
included in accounts payable.
During the year ended December 31, 2004, the Company
increased accrued liabilities and increased accumulated
deficit for $54,000 for accrued preferred stock
dividends related to registration rights on the Series G
preferred stock.
14. Supplemental During the year ended December 31, 2005, the Company:
Cash Flow
Information o Incurred paid obligation of approximately $13,000
for the settlement of accrued liabilities of
approximately $25,000 and recorded a corresponding
gain of $12,000.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information
Continued Years Ended
December 31,
-------------------------
2005 2004
Interest $ 15,000 $ 22,000
-------------------------
Income taxes $ - $ -
-------------------------
15. Export Sales Total sales include export sales by major geographic
area as follows:
Years Ended
December 31,
-----------------------------------
Geographic Area 2005 2004
-----------------------------------
Far East $ 500,000 $ 529,000
South America 27,000 50,000
Middle East 162,000 233,000
Europe 817,000 684,000
Canada 62,000 68,000
Mexico 1,000 -
Africa 1,000 9,000
-----------------------------------
$ 1,570,000 $ 1,573,000
-----------------------------------
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
16. Savings Plan In November 1996, the Company established a 401(k)
Retirement Savings Plan for the Company's officers and
employees. The Plan provisions include eligibility after
six months of service, a three year vesting provision
and nondiscriminatory no matching contributions at this
time. During the years ended December 31, 2005 and 2004,
the Company made no contributions to the Plan.
17. Commitments and Consulting Agreements
Contingencies On April 3, 2003, the Company entered into a consulting
agreement with Kinexsys Corporation ("Kinexsys"). Under
the terms of the agreement, Kinexsys through its Senior
Partner, Timothy R. Forstrom, was to prepare a capital
markets plan and a corporate positioning and
communications plan for the Company, for which Kinexsys
was to receive warrants to purchase up to 200,000 shares
of the Company's common stock at an exercise price of
$.16 per share. The capital markets plan is to include a
detailed analysis of the Company's capital market
structure in relation to current investors, market
trends and projected equity movements, and
recommendations on capital management strategies. The
corporate positioning and communications plan was to
include a corporate positioning matrix for markets,
analysts, customers and partners, and a communications
plan. The agreement was for a one-year term but may be
renewed at the option of both parties. The Agreement
expired on April 3, 2004, as the Company elected no to
exercise its renewal option
During the year ended December 31, 1999 the Company
entered a consulting agreement with a former officer of
the Company, which expired in 2004. Total payments made
on the consulting agreement were $12,500 and $25,000 in
2004 and 2003, respectively
Litigation
An action was brought against the Company in March 2000
by George Wiseman, a former employee, in the Third
District Court of Salt Lake County, State of Utah. The
complaint alleges that the Company owes Mr. Wiseman
6,370 shares of its common stock plus costs, attorney's
fees and a wage penalty (equal to 1,960 additional
shares of its common stock) pursuant to Utah law. The
action is based upon an extension of a written
employment agreement. The Company disputes the amount
allegedly owed and intends to vigorously defend against
the action.
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and An action was brought against the Company on September
Contingencies 11, 2000 by PhotoMed International, Inc. and Daniel M.
Continued Eichenbaum, M.D. in the Third District Court of Salt
Lake County, State of Utah. The action involves an
amount of royalties that are allegedly due and owing to
PhotoMed International, Inc. and Dr. Eichenbaum under a
license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys'
fees. Certain discovery has taken place and the Company
has paid royalties of $15,717, which the Company
believes brings all payments current as of the date of
last payment on January 7, 2005. The Company has been
working with PhotoMed and Dr. Eichenbaum to ensure that
the calculations have been correctly made on the
royalties paid as well as the proper method of
calculation for the future.
It is anticipated that once the parties can agree on the
correct calculations on the royalties, the legal action
will be dismissed. An issue in dispute concerning the
method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1,
2001, only one Photon(TM) laser system has been sold and
no systems returned. Thus, the amount of royalties due,
according to the Company's calculations, is $981. The
Company made payment of this amount to Photomed and Dr.
Eichenbaum on January 5, 2005 and, as a result, seeks to
have the legal action dismissed. However, if the parties
are unable to agree on a method for calculating
royalties, there is a risk that PhotoMed and Dr.
Eichenbaum might amend their complaint to request
termination of the license agreement and, if successful,
the Company would lose its right to manufacture and sell
the Photon(TM) laser system.
An action was filed on June 20, 2003, in the Third
Judicial District Court, Salt Lake County, State of Utah
(Civil No. 030914195) by CitiCorp Vendor Finance, Inc.,
formerly known as Copelco Capital, Inc. The complaint
claims that $49,626 plus interest is due for the leasing
of three copy machines that were delivered to the
Company's Salt Lake City facilities on or about April of
2000. The action also seeks an award of attorney's fees
and costs incurred in the collection. The Company filed
an answer to the complaint disputing the amounts
allegedly owed due to machine problems and a claimed
understanding with the vendor. The Company returned two
of the machines. The Company was engaged in settlement
discussions with CitiCorp until counsel for CitiCorp
withdrew from the case. New counsel for CitiCorp has
been appointed. After the initial meeting with new
counsel the Company provided initial disclosures to the
new counsel.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and On August 3, 2003, a complaint was filed against the
Contingencies Company by Corinne Powell, a former employee, in the
Continued Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030918364). Defendants consist of the
Company and Randall A. Mackey, Dr. David M. Silver and
Keith D. Ignotz, directors of the Company. The complaint
alleges that at the time the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,030 for business
expenses, $11,063 for accrued vacation days, $12,818 for
unpaid commissions, the fair market value of 50,000
stock options exercisable at $5.00 per share that she
claims she was prevented from exercising, attorney's
fees and a continuing wage penalty under Utah law. On
March 29, 2005, the Company agreed to a settlement with
Ms. Powell of her claims for unpaid business expenses,
accrued vacation days, and unpaid commissions by
agreeing to pay her the sum of $13,000. The Company made
payment to Ms. Powell for the agreed upon settlement
amount. The Company believes the remaining claims are
without merit and intends to vigorously defend against
such claims.
On September 10, 2003, an action was filed against the
Company by Larry Hicks in the Third Judicial District
Court, Salt Lake County, State of Utah, (Civil No.
030922220), for payments due under a consulting
agreement with us. The complaint claims that monthly
payments of $3,083 are due for the months of October
2002 to October 2003 under a 20 consulting agreement
and, if the agreement is terminated, for the sum of
$110,000 minus whatever the Company has paid Mr. Hicks
prior to such termination, plus costs, attorney's fees
and a wage penalty pursuant to Utah law. The Company has
filed an answer in which it denies any liability to Mr.
Hicks. Formal discovery in the matter has commenced. The
Company disputes the amount allegedly owed and intends
to vigorously defend against such action.
On November 7, 2003, a complaint was filed against the
Company by Todd Smith, a former employee, in the Third
Judicial District Court, Salt Lake County, State of Utah
(Civil No. 030924951 CN). Defendants consist of the
Company and Randall Mackey, a director of the Company.
The complaint alleges that while an employee of the
Company, Mr. Smith was granted stock options to purchase
16,800 shares of common stock exercisable at $5.00 per
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and share. Mr. Smith claims unpaid wages in the amount of
Contingencies the fair market value of the stock options he claims he
Continued was prevented from exercising, attorney's fees, and a
continuing wage penalty under Utah law. The Company
believes the claims are without merit and intends to
vigorously defend against such action.
On March 31, 2005, an action was filed against the
Company by Joseph W. Spadafora in the United States
District Court, District of Utah (Civil No. 2:05CV00278
TS). The complaint alleges that Dr. Spadafora was a
clinical investigator in the study for the FDA involving
the Company's Photon(TM) laser system where he performed
numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he
suggested ways in which the handpiece on the Photon(TM)
could be improved. Dr. Spadafora further contends that
on August 5, 1999, the Company filed a patent
application for an improved handpiece with the United
States Patent and Trademark Office but he was not named
as one of the inventors or a co-inventor on the patent
application.
On September 24, 2004, the Company was issued a patent
entitled, "Laser Surgical Handpiece with Photon Trap."
Because the Company did not list Dr. Spadafora as one of
the inventors or a co-inventor on the patent, Dr.
Spadafora is requesting in his complaint that a court
order be entered declaring that he is the inventor or
co-inventor of the patent and, as a result, is entitled
to all or part of the royalties and profits that the
Company earned or will earn from the sale of any product
incorporating or using the improved handpiece, plus
interest and attorney's fees. Formal discovery has
commenced. The Company disputes the claims made by Dr.
Spadafora and intends to vigorously defend against such
action.
The Company is not a party to any other material legal
proceedings outside the ordinary course of its business
or to any other legal proceedings, which, if adversely
determined, would have a material adverse effect on its
financial condition or results of operations.
Completion of Settlement of Federal and State Class
Action Lawsuits
On August 26, 2005, the federal court entered an order
and final judgment granting final approval of the
settlement agreement reached on February 22, 2005 in the
federal court class action lawsuit and dismissing the
complaint filed in the lawsuit with prejudice as against
the Company and its former executive officers, Thomas F.
Motter, Mark R. Miehle and John W. Hemmer. In addition,
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and the court permanently enjoined class members in the
Contingencies lawsuit and their successors and assigns from
Continued instituting any other actions against the Company and
its former executive officers that had been or could
have been asserted by the class members against the
Company and its former executive officers in the federal
court class action lawsuit.
Following the entry of the order and final judgment in
the federal court class action lawsuit, there was a 30
days period to appeal the order and final judgment. The
30 day period lapsed and no appeal was made of the order
and final judgment. Consequently, the order and final
judgment entered by the federal court is non-appealable.
Under the terms of settlement of the federal court class
action lawsuit, U.S. Fire Insurance Company, which
issued a Directors and Officers Liability and Company
Reimbursement Policy to the Company for the period from
July 10, 2002 to July 10, 2003, agreed to pay the sum of
$1,507,500 in cash to the class members that purchased
securities of the Company during the period between
April 17, 2002 and November 4, 2002.
On August 23, 2005, the state court entered a final
judgment and order of dismissal with prejudice, granting
final approval of the terms of settlement reached on
February 23, 2005 in the state court class action
lawsuit, dismissing the state class action lawsuit and
all claims contained therein against the Company and its
former executive officers, and enjoining the class
members in the lawsuit from prosecuting the settled
claims against the Company and its former executive
officers. Following the entry of the final judgment and
order of dismissal with prejudice in the state court
class action lawsuit, there was a 30 day period to
appeal the final judgment and order. The 30 day period
has now lapsed and no appeal was made of the final
judgment and order. Consequently, the final judgment and
order entered by the state court is nonappealable. Under
the terms of settlement of the state court class action
lawsuit, U.S. Fire agreed to pay the sum of $625,000 in
cash to the class members that purchased shares of
Series E Convertible preferred stock on or about July
11, 2001.
--------------------------------------------------------------------------------
F-40
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and The federal court class action lawsuit was initially
Contingencies filed on May 14, 2003 by Richard Meyer, individually and
Continued on behalf of all others similarly situated, in the
United States District Court for the District of Utah.
The lawsuit was consolidated into a single action on
June 28, 2004 with two other class action lawsuits --
the class action lawsuit filed by Michael Marone on June
2, 2003 and the class action lawsuit filed by Lidia
Milian on July 11, 2003 against Paradigm Medical and its
former executive officers in the same court. The
consolidated action was captioned: In re: Paradigm
Medical Industries Securities Litigation, with lead
plaintiffs Rock Solid Investments of Miami, Inc., Brito
& Brito Accounting, Inc. and Joseph Savanjo.
The state court class action lawsuit was initially filed
on October 14, 2003 by Albert Kinzinger, Jr.,
individually and on behalf of all others similarly
situated, against Paradigm Medical and its former
executive officers in the Third District Court for Salt
Lake County, State of Utah.
On February 22, 2005, the Company executed written
settlement agreements to settle the federal and state
court class action lawsuits. As a condition to the
settlement agreements, the courts in such lawsuits must
have entered orders granting final approval of the
settlements reached in those respective actions, and
such orders must have become final and nonappealable.
Royalty Agreements
The Company has an amended exclusive patent license
agreement with a company which owns the patent for the
laser-probe used on the Photon machine. The agreement
provides for the payment of a 1% royalty on all sales
proceeds related directly or indirectly, to the Photon
machine. The agreement expires when the United States
patent rights expire in September 2004. Through December
31, 2003, no significant royalties have been paid under
this agreement.
The Company has cancelled a royalty agreement with
another company that developed a promotional CD for the
Company. Through the promotion of the CD, the Company
hopes to increase sales in the Autoperimiter and assist
doctors currently using the unit with the interpretation
of visual fields. The royalty base is 50% each until the
Company's share equals the production costs related to
development of the disk. Thereafter, the developer will
receive 70% and the Company will receive 30% of the
royalty base. No royalties were accrued nor paid during
the year relating to this agreement.
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Commitments and Royalty Agreements - Continued
Contingencies The Company entered into a Manufacturing and
Continued Distribution agreement on October 25, 2004 with
E-Technologies, Inc., a Iowa based developer of software
and related technology for technical applications. Under
the terms of the agreement, E-Technologies granted to
the Company the exclusive right to manufacture, market,
sell and distribute an ultrasound biomicroscope. Upon
execution of the agreement, the Company paid $30,000 to
E-Technologies for engineering costs associated with the
development of the biomicroscope. Once the
bioimicroscope receives FDA approval, the Company agrees
to pay E-Technologies an additional fee of $45,000.
The Company's financial instruments consist of cash,
receivables, payables, and notes payable. The carrying
amount of cash, receivables and payables approximates
fair value because of the short-term nature of these
items. The carrying amount of the notes payable
approximates fair value as the individual borrowings
bear interest at market interest rates.
18. Recent In December 2004, FASB issued SFAS 153 "Exchanges of
Accounting Nonmonetary Assets--an amendment of APB Opinion No. 29".
Pronounce- The guidance in APB Opinion No. 29, Accounting for
ments Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based
on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to
that principle. This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the
entity are expected to change significantly as a result
of the exchange. The Company does not believe adoption
of SFAS 153 will have any impact on the Company's
consolidated financial statements.
In November 2004, the FASB issued SFAS 151 "Inventory
Costs--an amendment of ARB No. 43". This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense,
excessive spoilage, double freight, and re-handling
costs may be so abnormal as to require treatment as
current period charges. . . ." This Statement requires
that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the
production facilities. The provisions of this Statement
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent shall be effective for inventory costs incurred during
Accounting fiscal years beginning after June 15, 2005. The Company
Pronounce- does not believe adoption of SFAS 151 will have any
ments impact on the Company's consolidated financial
Continued statements.
In December 2004, the FASB issued FASB Statement No. 123
(revised 2004), "Shared-Based Payment." Statement 123(R)
addresses the accounting for share-based payment
transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other
equity-based compensation issued to employees in the
income statement. The revised Statement generally
requires that an entity account for those transactions
using the fair-value-based method, and eliminates the
intrinsic value method of accounting in APB Opinion No.
25, "Accounting for Stock Issued to Employees", which
was permitted under Statement 123, as originally issued.
The revised Statement requires entities to disclose
information about the nature of the share-based payment
transactions and the effects of those transactions on
the financial statements. Statement 123(R) is effective
for public companies that do not file as small business
issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005.
For public companies that file as small business
issuers, Statement 123(R) is effective as of the
beginning of the first interim or annual reporting
period that begins after December 15, 2005 (i.e., first
quarter 2006 for the Company). All public companies must
--------------------------------------------------------------------------------
F-43
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
18. Recent use either the modified prospective or the modified
Accounting retrospective transition method. Early adoption of this
Pronounce- Statement for interim or annual periods for which
ments financial statements or interim reports have not been
Continued issued is encouraged. The Company believes that the
adoption of this pronouncement may have a material
impact on the Company's financial statements.
In May 2005, the FASB issued SFAS no. 154, "Accounting
Changes and Error Corrections." This statement replaces
APB Opinion No. 20 and SFAS No 3. APB Opinion No 20
previously required that most voluntary changes in
accounting principle be recognize by including the
cumulative effect of changing to the new accounting
principle in the net income of the period of the change.
SFAS No 154 requires retrospective application to prior
periods' financial statements of changes in accounting
principle, unless it is impracticable to determine
either the period-specific effects or the cumulative
effect of the change. When it is impracticable to
determine the period-specific effects of an accounting
change on one or more individual prior periods
presented, this Statement requires that the accounting
principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period
for which retrospective application is practicable and
that a corresponding adjustment be made to the opening
balance of retained earnings for that period, rather
than being reported in an income statement. The new
standard will be effective for accounting changes and
corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes the
adoption of new standard will not have a material effect
on its financial position, results of operations, cash
flows, or previously issued financial reports.
19. Subsequent Subsequent Events
Events To obtain additional funding for the Company's ongoing
operations, the Company entered into a second securities
purchase agreement on February 28, 2006 with the same
four accredited investors for the sale of (i) $1,500,000
in callable secured convertible notes and (ii)warrants
to purchase 12,000,000 shares of its common stock. The
sale of the callable secured convertible notes and
warrants is to occur in three traunches and the
investors are obligated to provide the Company with an
aggregate of $1,500,000 as follows:
o $500,000 was disbursed on February 28, 2006;
o $500,000 will be disbursed after filing a
registration statement that registers the shares
of common stock underlying the callable secured
convertible notes and the warrants; and
--------------------------------------------------------------------------------
F-44
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent o $500,000 will be disbursed upon the effectiveness
Events of the registration statement that registers the
Continued shares of common stock underlying the callable
secured convertible notes and the warrants.
Each closing under the securities purchase agreement was
subject to the following conditions:
o The Company delivered to the investors duly
executed callable secured convertible notes and
warrants;
o No litigation, statute, regulation or order had
been commenced, enacted or entered by or in any
court, governmental authority or any
self-regulatory organization that prohibits
consummation of the transactions contemplated by
the securities purchase agreement; and
o No event occurred that could reasonably be
expected to have a material adverse effect on the
Company's business.
The Company also agreed not, without the prior written
consent of a majority-in-interest of the investors, to
negotiate or contract with any party to obtain
additional equity financing (including debt financing
with an equity component) that involves (i) the issuance
of common stock at a discount to the market price of the
common stock on the date of issuance (taking into
account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance
of convertible securities that are convertible into an
indeterminate number of shares of common stock, or (iii)
the issuance of warrants during the lock-up period
beginning February 28, 2006 and ending on the later of
(a) 270 days from February 28, 2006, or (b) 180 days
from the date the registration statement is declared
effective.
In addition, the Company agreed not to conduct any
equity financing (including debt financing with an
equity component) during the period beginning February
28, 2006 and ending two years after the end of the above
lock-up period unless it first provided each investor an
option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the Securities
Purchase Agreement) of the securities being offered in
any proposed equity financing. Each investor must be
provided written notice describing any proposed equity
financing at least 20 business days prior to the closing
of such proposed equity financing and the option must be
extended to each investor during the 15-day period
following delivery of such notice.
--------------------------------------------------------------------------------
F-45
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent The callable secured convertible notes bear interest at
Events 8% per annum from the date of issuance. Interest is
Continued computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for
any month in which the stock price is greater than 125%
of the initial market price, or $.0275, for each trading
day during that month. Any amount of principal or
interest on the callable secured convertible notes that
is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such
amount is paid. The callable secured convertible notes
mature in three years from the date of issuance, and are
convertible into our common stock at the selling
stockholders' option, at the lower of (i) $.02 or (ii)
60% of the average of the three lowest intraday trading
prices for the common stock on the OTC Bulletin Board
for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the
number of shares into which the notes may be converted.
The callable secured convertible notes are secured by
the Company's assets, including the Company's inventory,
accounts receivable and intellectual property. Moreover,
the Company has a call option under the terms of the
notes. The call option provides the Company with the
right to prepay all of the outstanding callable secured
convertible notes at any time, provided there is no
event of default by the Company and the Company's stock
is trading at or below $.02 per share. An event of
default includes the failure by the Company to pay the
principal or interest on the callable secured
convertible notes when due or to timely file a
registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of
the callable secured convertible notes is to be made in
cash equal to either (a) 125% of the outstanding
principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes;
(b) 130% of the outstanding principal and accrued
interest for prepayments occurring between 31 and 60
days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for
--------------------------------------------------------------------------------
F-46
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent prepayments occurring after the 60th day following the
Events issue date of the notes. The warrants are exercisable
Continued until five years from the date of issuance at a purchase
price of $.10 per share. The investors may exercise the
warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered
pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless
basis, then the Company will not receive any proceeds
therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company
issues common stock at a price below market, with the
exception of any securities issued as of the date of the
warrants or issued in connection with the callable
secured convertible notes issued pursuant to the
Securities Purchase Agreement.
The selling stockholders have agreed to restrict their
ability to convert their callable secured convertible
notes or exercise their warrants and receive shares of
our common stock such that the number of shares of
common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares
of common stock. However, the selling stockholders may
repeatedly sell shares of common stock in order to
reduce their ownership percentage, and subsequently
convert additional callable secured convertible notes.
The Company is required to register the shares of its
common stock issuable upon the conversion of the
callable secured convertible notes and the exercise of
the warrants. The registration statement must be filed
with the Securities and Exchange Commission within 60
days of the February 28, 2006 closing date and the
effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the
outstanding principal balance of the callable secured
convertible notes plus accrued interest are to be
applied for each month the registration is not effective
within the required time. The penalty may be paid in
cash or stock at our option.
As of April 14, 2006, the Company had 160,959,428 shares
of its common stock issued and outstanding and
$2,411,439 callable secured convertible notes
outstanding that may be converted into an estimated
335,000,000 shares of common stock at current market
prices, and outstanding warrants to purchase 20,534,392
shares of its common stock. Additionally, the Company
has an obligation to sell $1,000,000 callable secured
convertible notes that may be converted into an
estimated 139,000,000 shares of common stock at current
market prices and issue warrants to purchase 8,000,000
--------------------------------------------------------------------------------
F-47
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent shares of common stock in the near future. In addition,
Events the number of shares of common stock issuable upon
Continued conversion of the outstanding callable secured
convertible notes may increase if the market price of
our stock declines. All the shares, including all of the
shares issuable upon conversion of the notes and upon
exercise of our warrants, may be sold without
restriction. The sale of these shares may depress the
market price of the Company's common stock.
The Company's obligation to issue shares upon conversion
of the callable secured convertible notes is essentially
limitless. The following is an example of the amount of
shares of common stock that are issuable upon conversion
of $3,411,439 principal amount of callable secured
convertible notes (excluding accrued interest), based on
market prices 25%, 50%, and 75% below the market price,
as of April 13, 2006 of $.012.
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
25% $.009 $.0054 631,747,963 392.5%
50% $.006 $.0036 947,621,944 588.7%
75% $.003 $.0018 1,895,243,889 1,177.5%
*Based on 160,959,428 shares outstanding.
As illustrated, the number of shares of common stock
issuable upon conversion of the Company's callable
secured convertible notes will increase if the market
price of the Company's common stock declines, which will
cause dilution to existing stockholders.
The callable secured convertible notes are convertible
into shares of the Company's common stock at a 40%
discount to the trading price of the common stock prior
to the conversion. The significant downward pressure on
the price of the common stock as the noteholders convert
and sell material amounts of common stock could
encourage short sales by investors. This could place
further downward pressure on the price of the common
stock. The noteholders could sell common stock into the
--------------------------------------------------------------------------------
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent market in anticipation of covering the short sale by
Events converting their securities, which could cause the
Continued further downward pressure on the stock price. In
addition, not only the sale of shares issued upon
conversion or exercise of notes, warrants and options,
but also the mere perception that these sales could
occur, may have a depressive effect on the market price
of the common stock.
The issuance of shares upon conversion of callable
secured convertible notes and exercise of warrants may
result in substantial dissolution to the interests of
other stockholders since the holders of the convertible
notes may ultimately convert and sell the full amount
issuable upon conversion. Although the noteholders may
not convert their callable secured convertible notes
and/or exercise their warrants if such conversion or
exercise price would cause them to own more than 4.99%
of the Company's outstanding common stock, this
restriction does not prevent the noteholders from
converting and/or exercising some of their holdings and
then converting the rest of their holdings. In this way,
the noteholders could sell more than this limit while
never holding more than this limit. There is no upper
limit on the number of shares that may be issued, which
will have the effect of further diluting the
proportionate equity interest and voting power of
holders of the Company's common stock.
On April 27, 2005, the Company entered into a securities
purchase agreement for the sale of an aggregate of
$2,500,000 principal amount of callable secured
convertible notes. On February 28, 2006, the Company
entered into another securities purchase agreement for
the sale of an aggregate of $1,500,000 principal amount
of callable secured convertible notes. These callable
secured convertible notes are all due and payable, with
8% interest, three years from the date of issuance,
unless sooner converted into shares of our common stock.
Although the Company currently has $2,411,439 in
callable secured convertible notes outstanding, the
noteholders are obligated to purchase additional
callable secured convertible notes in the aggregate
amount of $1,000,000. Any event of default such as the
Company's failure to repay the principal or interest
when due on the notes, the Company's failure to issue
shares of common stock upon conversion by the
noteholders, the Company's breach of any covenant,
representation or warranty in the securities purchase
--------------------------------------------------------------------------------
F-49
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent agreement or related convertible notes, the assignment
Events or appointment of a receiver to control a substantial
Continued part of our property or business, the filing of a money
judgment, writ or similar process against the Company in
excess of $50,000, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding
against the Company, and the delisting of the Company's
common stock could require the early repayment of the
callable secured convertible notes, including a default
interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured within
the specified grace period.
The Company anticipates that the full amount of callable
secured convertible notes will be converted into shares
of its common stock, in accordance with the terms of the
callable secured convertible notes. If the Company is
required to repay the callable secured convertible
notes, it would be required to use its limited working
capital and raise additional funds. If the Company were
unable to repay the notes when required, the noteholders
could commence legal action against the Company and
foreclose on all of its assets to recover the amounts
due. Any such action would require the Company to
curtail or cease operations.
Employment Agreement
The Company entered into an employment agreement with
Raymond P.L. Cannefax, which commenced on January 5,
2006 and expires on January 5, 2007. The employment
agreement requires Mr. Cannefax to devote substantially
all of his working time as the Company's President and
Chief Executive Officer, providing that he may be
terminated for "cause" (as provided in the agreement)
and prohibits him from competing with the Company for
two years following the termination of his employment
agreement. The employment agreement provides for the
payment of an initial base salary of $125,000. The
employment agreement also provides for salary increases
and bonuses as shall be determined at the discretion of
the Board of Directors, with the first review of the
annual salary to be made as of June 30, 2006. The
employment agreement further provides for the issuance
of stock options to purchase 4,500,000 shares of the
Company's common stock at $.01 per share. The options
vest in twelve equal monthly installments of 375,000
shares, beginning on February 5, 2006 until such shares
are vested.
In the event of a change of control of the Company, then
all outstanding stock options granted to Mr. Yoon shall
be immediately vested. A change of control shall be
deemed to have occurred if (i) a tender offer shall be
made and consummated for the ownership of more than 25%
of the Company's outstanding shares; (ii) the Company
shall be merged or consolidated with another corporation
and, as a result, less than 25% of the outstanding
--------------------------------------------------------------------------------
F-50
PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
19. Subsequent common shares of the surviving corporation shall be
Events owned in the aggregate by the Company's former
Continued shareholders, as the same shall have listed prior to
such merger or consolidation; (iii) the Company shall
sell all or substantially all of its assets to another
corporation that is not a wholly owned subsidiary or
affiliate; (iv) as a result of any contested election
for the Board of Directors, or any tender or exchange
offer, merger of business combination or sale of assets,
the persons who were directors of the Company before
such a transaction shall cease to constitute a majority
of the Board of Directors; or (v) a person other than an
officer or director of the Company shall acquire more
than 20% of the outstanding shares of common stock of
the Company.
During the first quarter of 2006, a total of $127,000 in
callable secured convertible notes have been converted
into 64,371,200 shares of the Company's common stock
pursuant to notices of conversion from The NIR Group.
The dates of these notices of conversion, the amount of
the notes converted, the conversion price of the notes
converted, and the shares issued to the noteholders upon
conversion were as follows: (See 10-K page 28).
--------------------------------------------------------------------------------
F-51
No dealer, salesperson or other
person is authorized to give any
information or to represent anything
not contained in this prospectus. 60,000,000 Shares of Common Stock
This prospectus is an offer to sell
only the shares offered hereby, but
only under circumstances and in
jurisdictions where it is lawful to
do so. The information contained in
this prospectus is current only as of
its date. PARADIGM MEDICAL INDUSTRIES, INC.
_________________
TABLE OF CONTENTS PROSPECTUS
Page _________________
Prospectus Summary...................
Risk Factors .......................
Use of Proceeds......................
Dividend Policy......................
Capitalization.......................
Market for Common Equity and
Related Shareholder Matters.......
Selected Financial Data..............
Management's Discussion and Analysis September __, 2006
or Plan of Operation..............
Business ............................
Management ..........................
Security Ownership of Certain
Beneficial Owners and Management .
Certain Transactions.................
Selling Stockholders.................
Description of Securities............
Plan of Distribution.................
Experts..............................
Legal Matters........................
Where You Can Find More Information..
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware Law") empowers a Delaware corporation to indemnify any person who
is, or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.
In accordance with the Delaware Law, the Certificate of Incorporation
of the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.
All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.
II-1
The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of our
Certificate of Incorporation relative to providing indemnification to the
maximum extent and in the manner permitted by the Delaware General Corporation
Law. Additionally, such Indemnification Agreements contractually bind the
Company with respect to indemnification and contain certain exceptions to
indemnification, but do not limit the indemnification available pursuant to our
Bylaws, our Certificate of Incorporation or the Delaware General Corporation
Law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being registered
(all amounts except the Securities and Exchange Commission filing fee are
estimated):
Filing fee -- Securities and Exchange Commission............ $ 39
Legal fees and expenses..................................... 5,000
Accounting fees and expenses................................ 1,000
--------
Total expenses.............................................. $ 6,039
Item 26. Recent Sales of Unregistered Securities
The following information is furnished with regard to all issuances of
unregistered shares of our common stock during the past three years. These
shares were issued, unless otherwise indicated, without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended or, in the case of the exercise of warrants, the shares were registered
pursuant to a registration statement in effect at the time of the warrant
exercise.
I. Common Stock
On October 9, 2003, the Company issued 300,000 shares of common stock
to John Charles Casebeer, M.D. in settlement of a lawsuit that Dr. Casebeer
brought against the Company for services performed under a personal services
contract.
On January 14, 2005, the Company issued 2,000,000 shares of common
stock to Dr. Endre Bodnar, an accredited investor, as defined in Section 2(15)
of the Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.075 per share. The Company received a
total of $150,000 in cash from the private placement transaction and issued as a
commission warrants to purchase 200,000 shares of the Company's common stock at
$.15 per share.
On February 1, 2005, the Company issued a total of 515,206 shares of
common stock to Crescent International, Ltd. and Otape Investments, Ltd. that
had purchased a total of 1,981,560 shares of the Company's Series G convertible
preferred stock in a private placement transaction, which was initially closed
on September 29, 2003. Under the terms of the private offering, the Company was
required to file a registration statement with the Securities and Exchange
Commission to register the common shares issuable to the Series G preferred
stockholders upon conversion of their Series G preferred shares and exercise of
their warrants. The 515,206 shares represented a penalty for the Company not
having a registration statement declared effective within 120 days of the
initial closing of the offering.
On April 7, 2005, the Company issued 250,000 shares of common stock to
the law firm of Mackey Price Thompson & Ostler for legal services rendered in
the amount of $22,500 pursuant to the terms of a stock purchase agreement dated
April 7, 2005, between Mackey Price Thompson & Ostler and the Company. Randall
A. Mackey, Chairman of the Company, is President and a shareholder of Mackey
Price Thompson & Ostler.
II. Series G Preferred Stock
During the period from August 24, 2003 to September 15, 2003, the
Company sold a total of 1,981,560 shares of Series G convertible preferred stock
to two accredited investors, as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Regulation D promulgated under the Securities Act of 1933 at a price of
$.17 per share. The Company received $300,000 in cash as a result of the private
placement transaction and paid $30,000 in commissions and expenses. In addition,
the Company issued warrants to purchase 88,236 shares of its common stock at an
exercise price of $.50 per share for commissions and expenses. The Series G
convertible preferred stock is convertible into shares of common stock at a
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conversion price equal to one share of common stock for each share of Series G
preferred stock. The accredited investors also received warrants to purchase a
total of 382,353 shares of common stock at an exercise price of $.50 per share.
These shares of Series G convertible preferred stock were issued
without registration in reliance upon Section 4(2) of the Securities Act of 1933
and Rule 506 of Regulation D promulgated thereunder. Moreover, the Company
issued an additional 515,206 shares of common stock to the investors. Under the
terms of the private offering, the Company was required to file a registration
statement with the Securities and Exchange Commission to register the common
shares issuable to the Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their warrants. If the registration
statement was not declared effective within 120 days of the initial closing of
the offering on August 29, 2003, there was a penalty of 2% per month payable to
the investors in common shares (or 39,631 common shares per month) until the
registration statement was declared effective. The registration Statement was
declared effective on February 10, 2005.
III. Callable Secured Convertible Notes
During the period from April 27, 2005 to June 30, 2005, the Company
sold a total of $2,500,000 in callable secured convertible notes to four
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933. In addition, the
Company issued warrants to purchase 16,534,392 shares of its common stock at an
exercise price of $.20 per share, exercisable through the period from April 27,
2010 to June 23, 2010.
The $2,500,000 in callable secured convertible notes bear interest at
8% per annum, payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in which the stock
price is greater than 125% of the initial market price, or $.0945, for each
trading date during that month. The callable secured convertible notes mature in
three years from the date of issuance, and are convertible into common stock, at
the noteholder's option, at the lower of (i) $.09 or (ii) 60% of the average of
the three lowest intraday trading prices for the common stock on the OTC
Bulletin Board for the 20 days before but not including the conversion date.
The $2,500,000 in callable secured convertible notes are secured by the
Company's assets, including its inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the terms of the notes.
The call option provides the Company with the right to repay all of the
outstanding callable secured convertible notes at any time, provided there is no
event of default by the Company and the common stock is trading at or below $.09
per share. Prepayment of the callable secured convertible notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(ii) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and 60 days following the issue date of the notes; and
(iii) 145% of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the notes.
During the period from February 28, 2006 to June 28, 2006, the Company
sold a total of $1,000,000 in callable secured convertible notes to four
accredited investors, as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of Regulation D thereunder, through a private placement under
Regulation D promulgated under the Securities Act of 1933. In addition, the
Company issued warrants to purchase 8,000,000 shares of its common stock at an
exercise price of $.10 per share, exercisable through the period from February
28, 2011 to June 28, 2011.
The $1,000,000 in callable secured convertible notes bear interest at
8% per annum, payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in which the stock
price is greater than 125% of the initial market price, or $.0275, for each
trading date during that month. The callable secured convertible notes mature in
three years from the date of issuance, and are convertible into common stock, at
the noteholder's option, at the lower of (i) $.02 or (ii) 60% of the average of
the three lowest intraday trading prices for the common stock on the OTC
Bulletin Board for the 20 days before but not including the conversion date.
The $1,000,000 in callable secured convertible notes are secured by the
Company's assets, including its inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the terms of the notes.
The call option provides the Company with the right to repay all of the
outstanding callable secured convertible notes at any time, provided there is no
event of default by the Company and the common stock is trading at or below $.02
per share. Prepayment of the callable secured convertible notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
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for prepayments occurring within 30 days following the issue date of the notes;
(ii) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and 60 days following the issue date of the notes; and
(iii) 145% of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the notes.
Item 27. Exhibits
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit
No. Document Description
------- --------------------
2.1 Amended Agreement and Plan of Merger between Paradigm
Medical Industries, Inc., a California corporation and
Paradigm Medical Industries, Inc., a Delaware
corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Amended Certificate of Incorporation
3.3 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Class A Warrant Certificate(2)
4.3 Form of Class A Warrant Agreement(2)
4.4 Underwriter's Warrant with Kenneth Jerome & Co.,
Inc.(3)
4.5 Specimen Series C Convertible Preferred Stock
Certificate(4)
4.6 Certificate of the Designations, Powers, Preferences
and Rights of the Series C Convertible Preferred
Stock(4)
4.7 Specimen Series D Convertible Preferred Stock
Certificate (5)
4.8 Certificate of the Designations, Powers, Preferences
and Rights of the Series D Convertible Preferred Stock
(6)
4.9 Warrant to Purchase Common Stock with Dr. Michael B.
Limberg (6)
4.10 Certificate of Designations, Powers, Preferences and
Rights of the Series G Convertible Preferred Stock (7)
5.1 Opinion of Mackey Price Thompson & Ostler
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 License Agreement with Sunnybrook Health Science
Center(8)
10.5 Employment Agreement with John Y. Yoon(9)
10.6 Stock Purchase and Sale Agreement with William Ungar
(10)
10.7 Employment Agreement with Aziz A. Mohabbat (11)
10.8 Investment Banking Agreement with Alpha Advisory
Services, Inc. (12)
10.9 Manufacturing and Distribution Agreement with
E-Technologies, Inc. (12)
10.10 Settlement Agreement with Innovative Optics, Inc.,
Barton Dietrich Investments, L.P. and United States
Fire Insurance Company (13)
10.11 Stipulation and Agreement of Settlement (14)
10.12 Supplemental Agreement (14)
10.13 Stipulation of Settlement (14)
10.14 Supplemental Agreement (14)
10.15 Securities Purchase Agreement with AJW Partners, LLC,
AJW Offshore, Ltd., AJW Qualified Partners, LLC and
New Millennium Capital Partners II, LLP (the
"Purchasers")(15)
10.16 Form of Callable Secured Convertible Note with each
purchaser(15)
10.17 Form of Stock Purchase Warrant with each purchaser(15)
10.18 Security Agreement with Purchasers(15)
10.19 Intellectual Property Security Agreement with
Purchasers(15)
10.20 Registration Rights Agreement with Purchasers(15)
10.21 Stock Purchase Agreement with Mackey Price Thompson &
Ostler(16)
10.22 Employment Agreement with Raymond P.L. Cannefax(17)
10.23 Securities Purchase Agreement with AJW Partners, LLC,
AJW Offshore, Ltd., AJW Qualified Partners, LLC and
New Millennium Capital Partners II, LLP(18)
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10.24 Form of Callable Secured Convertible Note with each
purchaser(18)
10.25 Form of Stock Purchase Warrant with each purchaser(18)
10.26 Security Agreement with Purchasers(18)
10.27 Intellectual Property Security Agreement with
Purchasers(18)
10.28 Registration Rights Agreement with Purchasers(18)
10.29 Settlement Agreement with Dr. Joseph W. Spadafora(19)
10.30 Worldwide OEM Agreement with MEDA Co., Ltd.(20)
23.1 Consent of Mackey Price Thompson & Ostler
23.2 Consent of Chisholm, Bierwolf & Nilson, LLC
31.1 Certification pursuant to 18 U.S.C. Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
-----------------
(1) Incorporated by reference from Registration Statement
on Form SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to
Registration Statement on Form SB-2, as filed on May
14, 1996.
(3) Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on June
3, 1996.
(4) Incorporated by reference from Annual Report on Form
10-KSB, as filed on April 16, 1998.
(5) Incorporated by reference from Registration Statement
on Form SB-2, as filed on April 29, 1999.
(6) Incorporated by reference from Report on Form 10-QSB,
as filed on August 16, 2000.
(7) Incorporated by reference from Report on Form 10-QSB,
as filed on November 14, 2003.
(8) Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on
December 15, 2003.
(9) Incorporated by reference from Current Report on Form
8-K, as filed on March 23, 2004.
(10) Incorporated by reference from Quarterly Report on
Form 10-QSB, as filed on August 16, 2004.
(11) Incorporated by reference from Amendment No. 6 to
Registration Statement on Form SB-2, as filed on
October 20, 2004.
(12) Incorporated by reference from Report on Form 10-QSB,
as filed on November 15, 2004.
(13) Incorporated by reference from Current Report on Form
8-K, as filed on January 27, 2005.
(14) Incorporated by reference from Current Report on Form
8-K, as filed on February 23, 2005.
(15) Incorporated by reference from Current Report on Form
8-K, as filed on May 18, 2005.
(16) Incorporated by reference from Registration Statement
on Form SB-2, as filed on June 22, 2005.
(17) Incorporated by reference from Current Report on Form
8-K, as filed on January 18, 2006.
(18) Incorporated by reference from Current Report on Form
8-K, as filed on March 1, 2006.
(19) Incorporated by reference from Registration Statement
on Form SB-2, as filed on June 15, 2006.
(20) Incorporated by reference from Current Report on Form
8-K, as filed on June 19, 2006.
(b) Reports on Form 8-K
Current Report on Form 8-K, as filed on January 18, 2006.
Current Report on Form 8-K, as filed on March 1, 2006.
Current Report on Form 8-K, as filed on June 19, 2006.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post -effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");
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(ii) To 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 Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant 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 policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant also undertakes that:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial bona
fide offering of those securities.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, this 14th day of September, 2006.
PARADIGM MEDICAL INDUSTRIES, INC.
By:/s/ Raymond P.L. Cannefax
-------------------------
Raymond P.L. Cannefax
Its: President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers or
directors of the Registrant, by virtue of their signatures to this Registration
Statement appearing below, hereby constitute and appoint Raymond P.L. Cannefax
as attorney-in-fact in their names, place and stead to execute any and all
amendments to this Registration Statement in the capacities set forth opposite
their names and hereby ratify all that said attorney-in-fact may do by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement 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
/s/ Raymond P.L. Cannefax President and Chief September 14, 20066
------------------------- Executive Officer
Raymond P.L. Cannefax (Principal Executive
Officer)
/s/ Randall A. Mackey Chairman of the Board September 14, 2006
----------------------
Randall A. Mackey
/s/ David M. Silver Director September 14, 2006
-------------------
David M. Silver
/s/ Keith D. Ignotz Director September 14, 2006
-------------------
Keith D. Ignotz
/s/ John C. Pingree Director September 14, 2006
-------------------
John C. Pingree
/s/ Luis A. Mostacero Vice President of Finance, September 14, 2006
--------------------- Treasurer and Secretary
Luis A. Mostacero (Principal Financial and
Accounting Officer)
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