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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to
Commission File Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0459536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date:
Common Stock, $.001 par value 201,956,394
Title of Class -----------
Number of Shares
Outstanding as of
November 15, 2006
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................. 1
Condensed Balance Sheet (unaudited) - September 30, 2006............. 1
Condensed Statements of Operations (unaudited) for the nine
months ended September 30, 2006 and September 30, 2005.............. 2
Condensed Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2006 and September 30, 2005 ............. 3
Notes to Condensed Financial Statements (unaudited).................. 4
Item 2. Management's Discussion and Analysis or
Plan of Operation ................................................. 10
Item 3. Controls and Procedures ............................................. 17
PART II - OTHER INFORMATION
Item1. Legal Proceedings .................................................... 17
Item2. Unregistered Sales of Equity Securities and Use of Proceeds .......... 20
Item3. Defaults Upon Senior Securities....................................... 22
Item4. Submission of Matters to a Vote of Security Holders................... 22
Item5. Other Information .................................................... 22
Item6. Exhibits and Reports on Form 8-K...................................... 23
Signature Page .............................................................. 26
I
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, 2006
================================================================================
Assets
Current Assets
Cash $ 267,000
Receivables, net 292,000
Inventories, net 873,000
Prepaid and other assets 57,000
------------
Total current assets 1,489,000
Property and equipment, net 24,000
Intangibles, net 339,000
------------
Total assets 1,852,000
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 336,000
Accrued liabilities 793,000
Current portion of capital lease obligations -
------------
Total current liabilities 1,129,000
------------
Long-Term liabilities
Convertible Notes Payable 2,660,000
------------
Total long-term liabilities 2,660,000
------------
Total liabilities 3,789,000
Commitments:
Stockholders' equity:
Preferred Stock, $.001 per value, 5,000,000
shares authorized
Series A: Authorized 500,000 shares; issued and
outstanding 5,627 -
Series B: Authorized 500,000 shares; issued and
outstanding 8,986 -
Series C: Authorized 30,000 shares; issued and
outstanding 0 -
Series D: Authorized 1,140,000 shares; issued
and outstanding 5,000 -
Series E: Authorized 50,000 shares; issued and
outstanding 250 -
Series F: Authorized 50,000 shares; issued and
outstanding: 4,598.75 -
Series G: Authorized 2,000,000 shares; issued and
outstanding: 588,235 1,000
Common stock, $.001 par value, 800,000,000 shares
authorized, 199,956,828 shares issued and outstanding 200,000
Additional paid-in-capital 61,881,000
Accumulated deficit (64,019,000)
------------
Total stockholders' equity (1,937,000)
------------
Total liabilities and stockholders' equity $ 1,852,000
============
The accompanying notes are an integral part to these condensed
consolidated financial statements.
1
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------------------------------------------------
2006 2005 2006 2005
------------- ------------- ------------- --------------
Sales $ 418,000 $ 550,000 $ 1,600,000 $ 1,963,000
Cost of sales 203,000 242,000 841,000 935,000
------------- ------------- ------------- --------------
Gross profit 215,000 308,000 759,000 1,028,000
------------- ------------- ------------- --------------
Operating expenses:
Marketing and selling 123,000 143,000 307,000 509,000
General and administrative 258,000 312,000 772,000 964,000
Research and development 130,000 211,000 388,000 671,000
Gain on settlement of
liabilities
------------- ------------- ------------- --------------
Total operating expenses 511,000 666,000 1,467,000 2,144,000
============= ============= ============= ==============
Operating income (loss) (296,000) (358,000) (708,000) (1,116,000)
------------- ------------- ------------- --------------
Other income (expense):
Interest income 5,000 - 5,000 -
Interest expense (3,000) (4,000) (7,000) (23,000)
Financing Costs (54,000) - (1,152,000) (2,855,000)
Gain on settlements 33,000 - 36,000 -
Other income - - - 28,000
------------- ------------- ------------- --------------
Total other income (expense) (19,000) (4,000) (1,118,000) (2,850,000)
------------- ------------- ------------- --------------
Income (loss) before provision for
income taxes Provision for income taxes (315,000) (362,000) (1,826,000) (3,966,000)
------------- ------------- ------------- --------------
Net income (loss) $ (315,000) (362,000) (1,826,000) $ (3,966,000)
============= ============= ============= ==============
Earnings (loss) per common share - basic $ - (0.01) (0.01) $ (0.13)
------------- ------------- ------------- --------------
Earnings (loss) per common share - diluted $ - (0.01) (0.01) $ (0.13)
============= ============= ============= ==============
Weighted average common shares - basic 198,546,000 38,884,000 166,459,000 31,472,000
------------- ------------- ------------- --------------
Weighted average common shares - diluted 198,546,000 38,884,000 166,459,000 31,472,000
============= ============= ============= ==============
The accompanying notes are an integral part to these condensed consolidated financial statements.
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------------------------------------------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,826,000) $(3,966,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 28,000 61,000
Issuance of common stock for satisfaction of
penalty - 51,000
Issuance of common stock options and warrants
for services - 20,000
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 inventory (24,000) (47,000)
Provision for losses on receivables (5,000) (81,000)
(Increase) decrease in: - -
Accounts Receivables 114,000 (84,000)
Inventories 4,000 (542,000)
Property & Equipment - -
Prepaid and other assets (46,000) (19,000)
Increase (decrease) in:
Accounts payable (123,000) (222,000)
Accrued liabilities and deposits 89,000 (164,000)
----------- -----------
Net cash used in
operating activities (766,000) (2,493,000)
----------- -----------
Cash flows from financing activities:
Acquisition of property and equipment (19,000) -
----------- -----------
Net cash provided by
(used in) investing
activities (19,000) -
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable and
long-term debt (14,000) (39,000)
Proceeds from issuance of common stock - 150,000
Proceeds from issuance of convertible notes 1,000,000 2,500,000
----------- -----------
Net cash (used in)
provided by financing
activities 986,000 2,611,000
----------- -----------
Net change in cash 201,000 118,000
Cash, beginning of year 66,000 131,000
----------- -----------
Cash, end of year $ 267,000 $ 249,000
----------- -----------
Supplemental Disclosure of Cash Flow
Information:
Cash Paid for Interest $ 4,000 $ 9,000
----------- -----------
Cash Paid for Income Taxes $ - $ -
----------- -----------
The accompanying notes are an integral part to these condensed
consolidated financial statements.
3
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS`1
(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 nine months ended September 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 32,131,892 and 25,295,000 shares of common stock and
preferred stock convertible into 869,000 and 2,047,000 shares of common stock at
September 30, 2006 and 2005, respectively, have not been included in loss
periods because they are anti-dilutive.
For the nine months ended September 30, 2006, the options and warrants
to purchase 32,131,892 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 nine month periods
ended September 30, 2006 and September 30, 2005:
4
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
--------------------------------------------------
Basic weighted average
shares outstanding 198,546,000 38,884,000 166,459,000 31,472,000
Common stock equivalents -
convertible preferred stock 869,000 2,047,000 -- --
--------------------------------------------------
Diluted weighted average
shares outstanding 199,415,000 40,931,000 166,459,000 31,472,000
==================================================
Convertible Notes
-----------------
April 27, 2005 Sale of $2,500,000 in Convertible Notes. To obtain
funding for its 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 convertible notes and (ii) warrants to purchase 16,534,392
shares of its common stock. The sale of the convertible notes and warrants
occurred in three traunches and the investors provided the Company with an
aggregate of $2,500,000 as follows:
* $850,000 was disbursed on April 27, 2005;
* $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 convertible notes and exercise of the
warrants; and
* $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 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 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 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 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 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 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
5
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 $.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 convertible notes issued
pursuant to the Securities Purchase Agreement.
The noteholders have agreed to restrict their ability to convert their
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 convertible notes. As
of September 30, 2006, a total of $848,150 in convertible notes have been
converted pursuant to conversion notices from the noteholders.
February 28, 2006 Sale of $1,500,000 in Convertible Notes. To obtain
additional funding for its 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 convertible notes and (ii) warrants
to purchase 12,000,000 shares of its common stock. The sale of the 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:
* $500,000 was disbursed on February 28, 2006;
* $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 underlying of the convertible notes. The registration
statement was subsequently withdrawn on July 26, 2006; and
* $500,000 will be disbursed upon the effectiveness of the registration
statement to register 60,000,000 shares of common stocks issuable upon
conversion of the convertible notes.
Each closing under the securities purchase agreement is subject to the
following conditions:
* The Company delivers to the investors duly executed convertible notes
and warrants;
* 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
* 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
(based on the ratio of each investor's purchase under the securities purchase
6
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 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 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 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 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 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 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
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 convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
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 convertible notes.
The Company is required to register 60,000,000 shares of its common stock
issuable upon conversion of the convertible notes 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 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 convertible
notes is essentially limitless. The following is an example of the amount of
shares of common stock that are issuable upon conversion of $3,151,850 principal
amount of convertible notes (consisting of $3,500,000 in convertible notes that
were sold to the four noteholders pursuant to the securities purchase agreements
dated April 27, 2005 and February 25, 2006, plus $500,000 in notes to be sold to
the noteholders upon the effectiveness of a registration statement, less
$848,150 in notes that were converted during the period from June 30, 2005 to
September 30, 2006), based on market prices 25%, 50%, and 75% below the market
price, as of November 15, 2006 of $.005.
7
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------ --------- -------- --------------- -----------
25% $ .00375 $ .00225 1,400,822,222 693.6%
50% $ .0025 $ .0015 2,101,233,333 1,040.4%
75% $ .00125 $ .00069 4,567,898,550 2,261.8%
Based on 201,956,394 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of the Company's convertible notes will increase if the market price
of the Company's common stock declines, which will cause dilution to existing
stockholders.
The 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 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 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 convertible notes will be
converted into shares of its common stock, in accordance with the terms of the
convertible notes. If the Company is required to repay the 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 September 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 September 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 September 30,
2006, no shares of Series E preferred stock were converted to the Company's
common stock.
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 September 30,
2006, no shares of Series F preferred stock were converted to shares of the
Company's common stock.
8
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 September 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 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 from April 27, 2010 to June 30, 2010. As a
result of the financing the Company completed on February 28, 2006 involving the
sale of $1,000,000 in 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 from February 28, 2011 to June
23, 2005.
Share-Based Payment
-------------------
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 September 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 September 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 Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------------------------- --------------------------
Net income (loss) -
as reported $ (315,000) $ (362,000) $(1,826,000) $(3,966,000)
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) (675,000)
----------- ----------- ----------- -----------
Pro forma net loss $ (393,000) $ (971,000) $(1,904,000) $(4,641,000)
=========== =========== =========== ===========
9
Basic and diluted net
loss per common share,
as reported $ (0.00) $ (0.01) (0.01) $ (0.13)
Basic and diluted net
loss per share, pro forma $ (0.00) $ (0.03) (0.01) $ (0.16)
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 $30,000
and $10,000 for the three months ended September 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 September 30, 2006:
Accrued consulting and litigation reserve $ 600,000
Accrued payroll and employee benefits 44,000
Sales taxes payable 10,000
Customer deposits 22,000
Warranty and return allowance 116,000
Other accrued expenses 1,000
-----------
Total $ 793,000
===========
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.
Item 2: 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:
10
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.
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.
11
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
September 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
Three Months Ended September 30, 2006, Compared to Three Months Ended
September 30, 2005
Net sales for the three months ended September 30, 2006 decreased by
$132,000, or 24%, to $418,000 as compared to $550,000 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 three months ended September 30, 2006, sales from the Company's
diagnostic products totaled $348,000, or 83% of total revenues, compared to
$600,000 for the same period of 2005. The remaining 17% of sales, or $70,000
during the three months ended September 30, 2006 was from parts, disposables,
and service revenue.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes decreased to
$40,000 during the three months ended September 30, 2006, or 10% of total
quarterly revenues for the period, compared to $419,000, or 76% of total
revenues, for the same period last year. Sales of the Blood Flow Analyzer(TM)
increased by $28,000 to $42,000, or 10% of total revenues, for the nine months
ended September 30, 2006, compared to net sales of $14,000, or 3% of total
revenues, during the same period in 2005. Sales from the P37 A/B Scan Ocular
Ultrasound Diagnostic decreased to $20,000, or 5% of total revenues, for the
three month period ended September 30, 2006, down compared to $48,000, or 9% 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 $175,000, or 42%
of the total revenues, for the three months ended September 30, 2006, compared
to $119,000, or 22% of total revenues, for the same period of 2005.
Sales have been lower during the three months ended September 30, 2006 for
the Company 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 allowed the device to be sold
in the United States. The hardware configuration problems have since been
resolved and the Company continues to work on resolving the software development
problems. The Company anticipates reversing the downward trend in sales through
additional efforts by the Company to gain more widespread support for the P60
through 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 three month period ended September 30, 2006,
the Company 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.
For the three months ended September 30, 2006, gross profit decreased
slightly by 5% to 51% of total revenues, compared to 56% of total revenues for
the same period in 2005.
Marketing and selling expenses decreased by $20,000, or 14%, to $123,000,
for the three months ended September 30, 2006, from $143,000 for the comparable
period in 2005. The reduction was primarily due to a reduced number of sales
representatives and lower travel related and associated sales expenses.
General and administrative expenses decreased by $54,000, or 17%, to
$258,000 for the three months ended September 30, 2006, from $312,000 for the
comparable period in 2005. The decrease in general and administrative expenses
was primarily due to a reduction in management salaries and in the number of
employees, and enhanced operating efficiencies.
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
12
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.
Research, development and service expenses decreased by $81,000, or 38%, to
$130,000 for the three months ended September 30, 2006, compared to $211,000 in
the same period of 2005. Most of the reduction was due to the reduced costs of
product development for the three months ended September 30, 2006, as compared
to the increased costs of development and compliance with regulatory
requirements in releasing the new P60 UBM that were incurred during the same
period in 2005.
Due to our ongoing cash flow difficulties, most of the Company's 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 the Company is continuing its
negotiations with some vendors and suppliers.
Nine Months Ended September 30, 2006, Compared to Nine Months Ended
September 30, 2005
Net sales for the nine months ended September 30, 2006 decreased by
$363,000, or 18%, to $1,600,000 as compared to $1,963,000 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 nine months ended September 30, 2006, sales from the Company's
diagnostic products totaled $1,374,000, or 86% of total revenues, compared to
$1,771,000, or 90% of total revenues for the same period of 2005. The remaining
14% of sales, or $226,000 during the nine months ended September 30, 2006 was
from parts, disposables, and service revenue.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes decreased to
$293,000 during the nine months ended September 30, 2006, or 18% of total
quarterly revenues for the period, compared to $1,096,000 or 56% of total
revenues, for the same period last year. Sales of the Blood Flow Analyzer(TM)
increased by $52,000 to $128,000, or 8% of total revenues, for the nine months
ended September 30, 2006, compared to net sales of $76,000, or 4% of total
revenues, during the same period in 2005. Sales from the P37 A/B Scan Ocular
Ultrasound Diagnostic increased to $140,000, or 9% of total revenues, for the
nine month period ended September 30, 2006, down compared to $128,000, or 7% 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 $715,000, or 45%
of the total revenues, for the nine months ended September 30, 2006, compared to
$471,000, or 24% of total revenues, for the same period of 2005.
Sales have been lower during the nine months ended September 30, 2006 for
the Company 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 allowed the device to be sold
in the United States. The hardware configuration problems have since been
resolved and the Company continues to work on resolving the software development
problems. The Company anticipates reversing the downward trend in sales through
additional efforts by the Company to gain more widespread support for the P60
through 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 nine month period ended September 30, 2006,
the Company 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.
For the nine months ended September 30, 2006, gross profit decreased
slightly by 5% to 47% of total revenues, compared to 52% of total revenues for
the same period in 2005.
Marketing and selling expenses decreased by $202,000, or 40%, to $307,000,
for the nine months ended September 30, 2006, from $509,000 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.
13
General and administrative expenses decreased by $192,000, or 20%, to
$772,000 for the nine months ended September 30, 2006, from $964,000 for the
comparable period in 2005. The decrease in general and administrative expenses
was primarily due to a reduction in management salaries and in the number of
employees, and enhanced operating efficiencies.
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.
Also during 2005, the Company collected $1,000 in receivables that were
previously allowed in the allowance for doubtful accounts. During 2005, the
Company increased allowance for doubtful accounts by $100,000.
Research, development and service expenses decreased by $81,000, or 38%, to
$130,000 for the three months ended September 30, 2006, compared to $211,000 in
the same period of 2005. Most of the reduction was due to the reduced costs of
product development for the nine months ended September 30, 2006, as compared to
the increased costs of development and compliance with regulatory requirements
in releasing the new P60 UBM that were incurred during the same period in 2005.
Due to our ongoing cash flow difficulties, most of the Company's 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 the Company is continuing its
negotiations with some vendors and suppliers.
Liquidity and Capital Resources
The Company used $766,000 in cash in operating activities for the nine
months ended September 30, 2006, compared to $2,493,000 for the nine months
ended September 30, 2005. The decrease in cash used for operating activities for
the nine months ended September 30, 2006 was primarily attributable to the
Company's net loss and decreases in accounts payable and accrued liabilities and
an increase in inventory, specifically for the P60 UBM. The Company used $19,000
in investing activities for the nine months ended September 30, 2006, compared
to $-0- for the nine months ended September 30, 2005. Net cash received in
financing activities was $986,000 for the nine months ended September 30, 2006,
versus cash provided from financing activities of $2,611,000 in the same period
in 2005. The Company had working capital of $360,000 as of September 30, 2006,
compared to working capital of $1,221,000 as of September 30, 2005. In January
2005, the Company sold 2,000,000 shares of its common stock to an accredited
investor for $150,000 in cash. In the past, the Company has relied heavily upon
sales of the Company's common and preferred stock to fund operations. There can
be no assurance that such equity funding will be available on terms acceptable
to the Company in the future.
As of September 30, 2006, the Company 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. The Company's 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 September 30, 2006, the Company had accounts payable of $336,000, a
significant portion of which was over 90 days past due, compared to accounts
payable of $530,000 as of September 30, 2005. The Company has 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 the
Company in a court of law, a group of creditors could force the Company into
bankruptcy due to its inability to pay the liabilities arising out of such
judgments at that time. In addition to the accounts payable noted above, the
14
Company also has non-cancelable capital lease obligations and operating lease
obligations that required the payment of approximately $194,000 in 2005, and
$14,000 in 2006.
The Company has taken numerous steps to reduce costs and increase operating
efficiencies. These steps consist of the following:
1. The Company closed its 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. The Company has significantly reduced the use of consultants, which has
resulted in a large decrease to these expenses.
3. The Company has reduced its direct sales force to three representatives,
which has resulted in less payroll, travel and other selling expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
The Company has 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 25% of total outstanding receivables as of
September 30, 2006 and 20% as of December 31, 2005 compared to 2% of total
outstanding receivables as of September 30, 2005. The allowance for doubtful
accounts decreased from $100,000 at December 31, 2005 to $95,000 at September
30, 2006.
The Company intends to continue its efforts to reduce the allowance for
doubtful accounts as a percentage of accounts receivable. The Company has
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 nine months ended
September 30, 2006, the Company added a net of $-0- to the allowance for
doubtful accounts. The Company believes that by requiring a large portion of
payment prior to shipment, it has greatly improved the collectibility of its
receivables.
The Company carried an allowance for obsolete or estimated non-recoverable
inventory of $1,333,000 at September 30, 2006 and $1,371,000 at September 30,
2005, or 60% and 51% of total inventory, respectively. The Company's 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, the Company has acquired substantial
inventory, some of which the eventual use and recoverability was uncertain. In
addition, the Company has 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, 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.
At this time, the Company's 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 the Company obtaining adequate
funding. The Company estimates 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.
15
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of its
products as a result of domestic inflation. Nor has it experienced unfavorable
profit reductions due to currency exchange fluctuations or inflation with its
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.
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.
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. The Company believes the adoption of new standards will not
have a material effect on its 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
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
16
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. The Company believes the adoption
of new standards will not have a material effect on its financial position,
results of operations, cash flows, or previously issued financial reports.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158"). Under SFAS 158, companies
must recognize a net liability or asset to report the funded status of their
defined benefit pension and other postretirement benefit plans on their balance
sheets. The effective date of the recognition and disclosure provisions for
calendar-year public companies is for calendar years ending after December 15,
2006. The Company is currently evaluating the impact of this new standard but it
is not expected to have a significant effect on the consolidated financial
statements for the year ended December 31, 2006.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 will
be applied prospectively and is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS 157 is
not expected to have a material impact on the Company's consolidated financial
statements.
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2006.
Based on this evaluation, the Company's principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
and adequately designed to ensure that the information required to be disclosed
by the Company in the reports it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in applicable rules and forms.
b) Changes in internal controls over financial reporting.
During the three months ended September 30, 2006, there has been no change
in the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II Other Information
Item 1. Legal Proceedings
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 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.
An action was brought against the Company 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 the Company has paid royalties of $15,717, which it believes
brings all payments current as of the date of last payment on January 7, 2005.
17
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 7, 2005
and, as a result, have sought to have the legal action dismissed by agreement.
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 in 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 and another machine was available for return but
has not been picked up. The Company was 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, the Company
provided initial disclosures to the new counsel and initial disclosures were
thereafter provided to the Company. A case schedule was agreed upon and
submitted to the court.
On August 20, 2003, a complaint was filed against the Company by Corinne
Powell, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030918364). Defendants consist of the Company
and directors Randall A. Mackey, Dr. David M. Silver, Keith D. Ignotz and John
Does I through V. 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, and $12,818 for unpaid commissions. She also seeks
damages for being allegedly prevented from exercising 50,000 stock options in
early 2000 (stock ranging from a low of $7.00 per share to $13.21 per share)
exercisable at $5.00 per share and attorney's fees. 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. As to the remaining claims, a trial is scheduled for March
12, 2007. After certain discovery took place, the Company filed a motion for
summary judgment on August 21, 2006. If the motion is denied, the Company still
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 the
Company. The complaint claims payment is due for a three year period of
$111,000, minus $15,942 paid prior to termination of the contract, plus costs,
attorney's fees. The foregoing is included as a wage claim. The Company has
filed an answer denying liability to Mr. Hicks as claimed. Formal discovery in
the matter has commenced. A case schedule is to be set. Settlement negotiations
are in progress. Because the Company disputes the amount allegedly owned, if a
settlement is not reached, the Company 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 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 wages in the amount of the fair market value of
the stock options that he claims he was prevented from exercising, which in the
first amended complaint is alleged to be $86,250 plus attorney's fees. In later
discovery he asserts he is entitled to an amount based on options to purchase
20,150 shares rather than options to purchase 16,800 shares. A motion for
summary judgment has been filed, which is set for hearing on December 14, 2006.
If the motion is not granted, a trial is scheduled for February 20, 2007. The
Company denies the claims and intends to vigorously defend against the 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.
18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Convertible Notes and Warrants
To obtain additional funding for its 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 convertible
notes and (ii) warrants to purchase 12,000,000 shares of its common stock. The
sale of the 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:
* $500,000 was disbursed on February 28, 2006;
* $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 underlying of the convertible notes. The registration
statement was subsequently withdrawn on July 26, 2006; and
* $500,000 will be disbursed upon the effectiveness of the registration
statement to register 60,000,000 shares of common stocks issuable upon
conversion of the convertible notes.
Each closing under the securities purchase agreement is subject to the
following conditions:
* The Company delivers to the investors duly executed convertible notes
and warrants;
* 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
* 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
(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 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 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 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 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 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 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
19
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 convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
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 convertible notes.
The Company is required to register 60,000,000 shares of its common stock
issuable upon conversion of the convertible notes 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 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 convertible
notes is essentially limitless. The following is an example of the amount of
shares of common stock that are issuable upon conversion of $3,151,850 principal
amount of convertible notes (consisting of $3,500,000 in convertible notes that
were sold to the four noteholders pursuant to the securities purchase agreements
dated April 27, 2005 and February 25, 2006, plus $500,000 in notes to be sold to
the noteholders upon the effectiveness of a registration statement, less
$848,150 in notes that were converted during the period from June 30, 2005 to
September 30, 2006), based on market prices 25%, 50%, and 75% below the market
price, as of November 15, 2006 of $.005.
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------ --------- -------- --------------- -----------
25% $ .00375 $ .00225 1,400,822,222 693.6%
50% $ .0025 $ .0015 2,101,233,333 1,040.4%
75% $ .00125 $ .00069 4,567,898,550 2,261.8%
Based on 201,956,394 shares outstanding.
As illustrated, the number of shares of common stock issuable upon
conversion of the Company's convertible notes will increase if the market price
of the Company's common stock declines, which will cause dilution to existing
stockholders.
The 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.
20
The issuance of shares upon conversion of 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 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 convertible notes will be
converted into shares of its common stock, in accordance with the terms of the
convertible notes. If the Company is required to repay the 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.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
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.
Item 6. Exhibits and Reports on Form 8-K
(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(21)
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)
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)
21
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 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)
10.24 Form of 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)
10.31 Amendment to the Registration Rights Agreement dated April 27, 2005
(22)
10.32 Amendment to the Registration Rights Agreement dated February 28, 2006
(22)
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.
22
(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.
(21) Incorporated by reference from Registration Statement on Form SB-2, as
filed on September 15, 2006.
(22) Incorporated by reference from Registration Statement on Form SB-2, as
filed on October 24, 2006.
(b) Reports on Form 8-K
-------------------
No reports were filed by the Company during the quarter ended September 30,
2006.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
November 17, 2006 /s/ Raymond P.L. Cannefax
----------------------------------------
Raymond P.L. Cannefax
President and Chief Executive Officer
November 17, 2006 /s/ Luis A. Mostacero
----------------------------------------
Luis A. Mostacero, Vice President of
Finance, Treasurer and Secretary
24
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