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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, 2007
[ ] 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 [ ] No [X]
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 402,655,736
---------------
Title of Class Number of Shares
Outstanding as of
November 13, 2007
i
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 1
Condensed Balance Sheet (unaudited) September 30, 2007....... 1
Condensed Statements of Operations (unaudited) for the
six months ended September 30, 2007 and September 30, 2006.......... 2
Condensed Statements of Cash Flows (unaudited) for the
six months ended September 30, 2007 and September 30, 2006 ......... 3
Notes to Condensed Financial Statements (unaudited).................. 4
Item 2. Management's Discussion and Analysis or
Plan of Operation .......................................... 12
Item 3. Controls and Procedures .......................................... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 20
Item 3. Defaults Upon Senior Securities.................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................ 22
Item 5. Other Information.................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................... 22
Signature Page ............................................................. 25
ii
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
September 30, 2007
ASSETS
Current Assets
Cash and Cash Equivalents $ 129,000
Receivables, Net 515,000
Inventory 1,095,000
Prepaid Expenses 73,000
-------------
Total Current Assets 1,812,000
Property and Equipment, Net 17,000
Intangibles, Net 339,000
-------------
Total Assets $ 2,168,000
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 347,000
Accrued Expenses 1,075,000
-------------
Total Current Liabilities 1,422,000
Convertible Notes Payable 3,455,000
-------------
Total Long-term Liabilities 3,455,000
-------------
Total Liabilities 4,877,000
-------------
Commitements:
-
Stockholders' Deficit:
Preferred Stock, Authorized:
5,000,000 shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at September 30, 2007 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at September 30, 2007 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at September 30, 2007 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at September 30, 2007 -
Series E
Authorized: 50,000 shares; issued and
outstanding: 250 shares at September 30, 2007 -
Series F
Authorized: 50,000 shares; issued and
outstanding: 4,398.75 shares at September 30, 2007 -
Series G
Authorized: 2,000,000 shares; issued and
outstanding: 588,235 shares at September 30, 2007 1,000
Common Stock, Authorized:
800,000,000 shares, $.001 par value; issued and
outstanding: 281,085,819 at September 30, 2007 281,000
Additional Paid-in-capital 63,005,000
Accumulated
Deficit
($65,996,000)
Total Stockholders'
Deficit $ (2,709,000)
-------------
Total Liabilities and Stockholders' Deficit $ 2,168,000
=============
The accompanying notes are an integral part to
these condensed financial statements
1
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Sales $ 534,000 $ 418,000 $ 1,190,000 $ 1,600,000
Cost of Sales 270,000 203,000 645,000 841,000
----------- ----------- ----------- -----------
Gross Profit 264,000 215,000 545,000 759,000
Operating Expenses:
Sales and Marketing 168,000 123,000 442,000 307,000
General and
administrative 191,000 258,000 688,000 772,000
Research, development 71,000 130,000 261,000 388,000
----------- ----------- ----------- -----------
Total Operating
Expenses 430,000 511,000 1,391,000 1,467,000
----------- ----------- ----------- -----------
Operating Income (Loss) (166,000) (296,000) (846,000) (708,000)
Other Income and (Expenses):
Other expense (financing
costs) (70,000) (54,000) (1,185,000) (1,152,000)
Interest expense (1,000) (3,000) (2,000) (7,000)
Interest income 3,000 5,000 8,000 5,000
Settlement of liabilities -- 33,000 41,000 36,000
----------- ----------- ----------- -----------
Total Other Expenses (68,000) (19,000) (1,138,000) (1,118,000)
----------- ----------- ----------- -----------
Income (loss) before
provision for income (234,000) (315,000) (1,984,000) (1,826,000)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (234,000) $ (315,000) $(1,984,000) $(1,826,000)
=========== =========== =========== ===========
Net Loss
Earnings (loss) Per
Common Share - Basic $ (0.00) $ (0.00) $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
Earnings (loss) Per
Common Share - Diluted $ (0.00) $ (0.00) $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
Weighted Average
Common Share - Basic 247,755,000 198,546,000 219,259,000 166,459,000
----------- ----------- ----------- -----------
Weighted Average
Common Share - Diluted 248,614,000 199,415,000 220,118,000 166,459,000
----------- ----------- ----------- -----------
The accompanying notes are an integral part to these
condensed financial statements
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2007 2006
------------- -------------
Cash Flows from Operating Activities:
------------------------------------
Net Income (loss) $ (1,984,000) $ (1,826,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 4,000 28,000
Stock Option Valuation - 23,000
Beneficial Conversion Interest 939,000 964,000
Issuance of Stock Options and Warrants
for Services 61,000 36,000
Provision for Losses on inventory (22,000) (24,000)
Provision for Losses on receivables - (5,000)
(Increase) Decrease from Changes in:
Accounts Receivable (83,000) 114,000
Inventories (150,000) 4,000
Prepaid and Other Expenses (62,000) (46,000)
Increase (Decrease) in:
Accounts Payable (54,000) (123,000)
Accrued Liabilities 274,000 89,000
------------- -------------
Net Cash Used in Operating Activities (1,077,000) (766,000)
------------- -------------
Cash Flow from Investing Activities:
-----------------------------------
Cash proceeds from sales of investment - (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)
Proceeds from Issuance of Convertible Notes 1,000,000 1,000,000
------------- -------------
Net Cash (Used) Provided by Financing
Activities 1,000,000 986,000
------------- -------------
Net Change in Cash (77,000) 201,000
Cash, Beginning of Period 206,000 66,000
------------- -------------
Cash, End of Period $ 129,000 $ 267,000
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 2,000 $ 4,000
------------- -------------
Cash Paid for Income Taxes $ - $ -
------------- -------------
The accompanying notes are an integral part to these
condensed financial statements
3
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Financial Statement Presentation
-----------------------------------------
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, 2006. The results of operations for
the six months ended September 30, 2007, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2007.
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 50,534,392 and 32,131,892 shares of common stock and
preferred stock convertible into 858,688 and 869,000 shares of common stock at
September 30, 2007and 2006, respectively, have not been included in loss periods
because they are anti-dilutive.
For the three months ended September 30, 2007, the options and warrants
to purchase 46,034,392 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 nine month periods ended
September 30, 2007 and September 30, 2006:
4
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Basic weighted
average shares
outstanding 247,755,000 198,546,000 219,259,000 166,459,000
Common stock
equivalents - 859,000 869,000 859,000 --
convertible
preferred stock
Diluted weighted
average shares
outstanding 248,614,000 199,415,000 220,118,000 166,459,000
=========== =========== =========== ===========
Convertible Notes
-----------------
April 27, 2005 Sales of $2,500,000 in Convertible Notes. To obtain
funding for the Company's ongoing operations, the Company entered into a
securities purchase agreement with four accredited investors on April 27, 2005
for the sale of (i) $2,500,000 in convertible notes and (ii) warrants to
purchase 16,534,392 shares of its common stock. The sale of 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 filing a registration
statement on June 22, 2005 to register the shares of common stock
underlying the convertible notes and 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
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 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
5
Commission of the registration statement. Prepayment of the convertible notes is
to be made in cash equal to either (i) 125% of the outstanding principal and
accrued interest for prepayments occurring within 30 days following the issue
date of the notes; (ii) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes; or (iii) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, 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 callable secured
convertible notes. As of November 13, 2007, a total of $947,366 in convertible
notes issued on April 27, 2005 had been converted by the noteholders.
February 28, 2006 Sale of $1,500,000 in Convertible Notes. To obtain
additional funding for the Company's ongoing operations, the Company entered
into a second securities purchase agreement on February 28, 2006 with the same
four accredited investors for the sale of (i) $1,500,000 in 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 the convertible notes. The registration
statement was subsequently withdrawn on July 25, 2006 and a new
registration statement was filed on September 26, 2006 to register
60,000,000 shares of common stock issuable upon conversion of the
convertible notes.
$ $500,000 was disbursed on April 20, 2007, the day prior to the
effective date of the registration statement on May 1, 2007.
Under the terms of the securities purchase agreement, the Company
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 bears 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
6
three years from the date of issuance, and are convertible into our common stock
at the noteholders' 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 (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.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 callable secured
convertible notes. As of November 13, 2007, a total of $164,122 in convertible
notes issued on February 28, 2006 had been converted by the noteholders.
June 11, 2007 Sale of $500,000 in Convertible Notes: To obtain further
funding for the Company's ongoing operations, the Company entered into a third
securities purchase agreement on June 11, 2007 with the same four accredited
investors for the sale of (i) $500,000 in callable secured convertible notes and
(ii) warrants to purchase 10,000,000 shares of its common stock. The investors
disbursed $500,000 to the Company on June 11, 2007.
Under the terms of the June 11, 2007 securities purchase agreement, the
Company agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, 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 June 11, 2007 and ending on the
later of (a) 270 days from June 11, 2007, 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
June 11, 2007 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 $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 callable secured
convertible notes that is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such amount is paid. The
7
convertible notes mature in three years from the date of issuance, and are
convertible into the Company's common stock at the noteholders' option, at the
lower of (i) $.02 or (ii) 50% 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 $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 its stock is trading at or below $.10 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 (i) 125% of the outstanding principal and
accrued interest for prepayments occurring within 30 days following the issue
date of the notes; (ii) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes; or (iii) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until seven years from the date of
issuance at a purchase price of $.005 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,
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 the Company's
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,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The Company is required to register the shares of its common stock
issuable upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities purchase
agreement the Company entered in to on June 11, 2007. The registration statement
must be filed with the Securities and Exchange Commission within 60 days of June
11, 2007 closing date and the effectiveness of the registration is to be within
135 days of such closing date. Penalties of 2% of the outstanding principal
balance of the callable secured convertible notes plus accrued interest are to
be applied for each month the registration is not effective within the required
time. The penalty may be paid in cash or stock at the Company's option. As of
November 13, 2007, none of the convertible notes issued on June 11, 2007, had
been converted by the noteholders.
Simple Conversion Calculation
-----------------------------
The number of shares of common stock issuable upon conversion of the
convertible notes issued on April 27, 2005, February 28, 2006 and June 11, 2007
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of the $3,388,496 principal amount of convertible notes on November
13, 2007 (consisting of $4,500,000 in convertible notes that were sold to the
four investors pursuant to the securities purchase agreements dated April 27,
2005, February 25, 2006, and June 11, 2007, less $1,111,504 in notes that were
converted during the period from July 12, 2005 to November 13, 2007) and a
conversion price of $.0024 per share, the number of shares issuable upon
conversion would be:
$3,388,496/$.0024= 1,411,873,000 shares.
The Company's obligation to issue shares upon conversion of the
convertible notes issued on April 27, 2005, February 28, 2006, and June 11, 2007
is essentially limitless. The following is an example of the amount of shares of
common stock that are issuable upon conversion of $3,388,496 principal amount of
convertible notes, based on market prices 25%, 50%, and 75% below the market
price, as of October 26, 2007 of $.0024:
8
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------ ----- -------- --------------- -----------
25% $.0018 $.00108 3,137,496,000 779.2%
50% $.0012 $.00072 4,706,244,000 1,168.8%
75% $.0006 $.000036 94,124,889,000 23,376.0%
*Based on 402,655,736 shares outstanding as of November 13, 2007.
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.
Adjustable Conversion Price of Convertible Notes
------------------------------------------------
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 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.
Possible Dilution to Stockholders
---------------------------------
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.
Failure to Repay Convertible Notes May Require Company Operations to Cease
--------------------------------------------------------------------------
On April 27, 2005, the Company entered into a securities purchase
agreement for the sale of an aggregate of $2,500,000 principal amount of
convertible notes. On February 28, 2006, the Company entered into another
securities purchase agreement for the sale of an aggregate of $1,500,000
principal amount of convertible notes. On June 11, 2007, the Company entered
into a third securities purchase agreement for the sale of an aggregate of
$500,000 principal amount of convertible notes. These convertible notes are all
due and payable, with 8% interest, three years from the date of issuance, unless
sooner converted into shares of the Company's common stock. The Company
currently has $3,388,496 in convertible notes outstanding. Any event of default
such as the Company's failure to repay the principal or interest when due on the
notes, the Company's failure to issue shares of common stock upon conversion by
the noteholders, the Company's breach of any covenant, representation or
warranty in the securities purchase agreement or related convertible notes, the
assignment or appointment of a receiver to control a substantial part of the
Company's property or business, the filing of a money judgment, writ or similar
process against the Company in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against the
Company, and the delisting of the Company's common stock could require the early
repayment of the convertible notes, including a default interest rate of 15% on
the outstanding principal balance of the notes if the default is not cured
within the specified grace period.
The Company anticipates that the full amount of 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.
9
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 nine months ended
September 30, 2007 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 nine months ended September 30,
2007 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 nine months ended September 30,
2007 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 nine months ended September 30,
2007, no shares of Series F preferred stock were converted to the Company's
common stock.
Holders of Series G preferred have the right to convert such stock into
shares of the Company's common stock at the rate of one share of common stock
for each share of preferred stock. During the nine months ended September 30,
2007, 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 on April 27, 2010. As a result of the
financing the Company completed on February 28, 2006, involving the sale of
$1,500,000 in convertible notes, the Company granted that warrants to the
noteholders to purchase 12,000,000 shares of its common stock. The warrants have
an exercise price of $.10 per share and expire on February 27, 2011. As a result
of the financing the Company completed on June 11, 2007, involving the sale of
$500,000 in convertible notes, the Company granted warrants to the noteholders
to purchase 10,000,000 shares of its common stock. The warrants have an exercise
price of $.005 per share and expire on June 11, 2014.
Related Party Transactions
--------------------------
Payments for legal services to the firm of which the Company's Chairman
of the Board is a partner were $5,000 and $30,000 for the three months ended
September 30, 2007 and 2006 respectively. $150,000 and $113,000 for the nine
months ended September 30, 2007 and 2006, respectively.
Accrued Expenses
----------------
Accrued expenses consist of the following at September 30, 2007:
Accrued consulting and litigation reserve $ 730,000
Accrued payroll and employee benefits 46,000
Sales taxes payable 14,000
Customer deposits 2,000
Accrued Royalties 1,000
Warranty and return allowance 229,000
Other accrued expenses 53,000
-------------
Total $ 1,075,000
=============
10
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:
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
11
indicate that the carrying amount may not be recoverable. Intangibles with an
indefinite life, such as goodwill, are not amortized but are tested for
impairment on an annual basis or when events and circumstances indicate that the
asset may be impaired. Impairment tests include comparing the fair value of a
reporting unit with its carrying net book value, including goodwill. To date,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
General
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the three months ended June 30,
2006, diagnostic products have been the major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the Company's financial position improves. The Company does not
focus on a specific diagnostic product or products but, instead, on the entire
diagnostic group.
Results of Operations
Three Months Ended September 30, 2007, Compared to Three Months Ended
September 30, 2006
Net sales for the three months ended September 30, 2007 increased by
$116,000, or 28%, to $534,000 as compared to $418,000 for the same period of
2006. This increase in sales was primarily due to an increase in sales of the
P37, P2700, and P3700 Ocular Ultrasound A/B Scan Diagnostic, the P2000 A-Scan
Biometric Ultrasound Analyzer, and the P2200 Pachymetric Analyzer.
For the three months ended September 30, 2007, sales from the
Company's diagnostic products totaled $492,000, or 92% of total revenues,
compared to $348,000, or 83% of total revenues for the same period of 2006. The
remaining 8% of sales, or $42,000 during the three months ended September 30,
2007 was from parts, disposables, and service revenue.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes increased
by $37,000 to $77,000, or 14% of total revenues, for the three months ended
September 30, 2007, compared to $40,000, or 10% of total revenues, for the same
period last year. Sales of the Blood Flow Analyzer(TM) increased by $19,000 to
$61,000, or 11% of total revenues, for the three months ended September 30,
2007, compared to net sales of $42,000, or 10% of total revenues, during the
same period in 2006. Sales from the P37, P37-II and P2700 A/B Scan Ocular
Ultrasound Diagnostic devices, the P55, P2200,and P2500 Pachymetric Analyzer,
and the P2000 A-Scan Biometric Ultrasound Analyzer increased to $222,000, or 42%
of total revenues, for the three month period ended September 30, 2007, compared
to $92,000, or 15% of total revenues, for the same period of 2006. Combined
sales of the LD 400 and TKS 5000 Autoperimetry Systems and the CT 200 Corneal
Topography System decreased by $44,000 to $131,000, or 25% of the total
revenues, for the three months ended September 30, 2007, compared to $175,000,
or 42% of total revenues, for the same period of 2006.
Sales have been higher during the three months ended September 30, 2007
for the Company due to a variety of reasons. Sales increased for the P37, P37-II
and P2900 A/B Scan, the P55, P2200, and P2500 pachymeters, and the 2000 A-Scan.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes were reduced
primarily due to the introduction of new software for the P60, which received
FDA 510(k) premarket approval on May 26, 2005,and to the necessity for hardware
reconfiguration on the P40 and P45. The perimeters experienced a major reduction
12
in sales due to the current redesign and reconfiguration of the LD 400 and the
ongoing software development for the LD700. The Blood Flow Analyzer(TM) sales
were higher during the third quarter by $19,000. The hardware configuration
problems have since been resolved and the Company has recently completed a new
software package for the P60. The Company anticipates reversing the downward
trend in sales through additional efforts by the Company to increase support for
the P60 through increased clinical awareness, increased product development,
improved marketing plans, and ongoing development of the new perimeters.
Gross profit for the three months ended September 30, 2007 decreased by
2% to 49% of total revenues, compared to 51% of total revenues for the same
period in 2006. The reduction in gross profit was mainly due to an increase in
the price of materials, an increase in inventory, and an increase in the cost of
developing a new domestic sales force. There has been no increase to cost of
sales as a result of a charge to the reserve for obsolete inventory in 2007.
Marketing and selling expenses increased by $45,000, or 37%, to
$168,000, for the three months ended September 30, 2007, from $123,000 for the
comparable period in 2006. This increase was due primarily increased salaries
for domestic and international sales representatives, an increased number of
sales representatives, and higher travel related and associated sales expenses.
General and administrative expenses decreased by $67,000, or 26%, to
$191,000 for the three months ended September 30, 2007, from $258,000 for the
comparable period in 2006. This reduction in general and administrative expenses
was primarily due to reduce legal and consulting fees.
Also during 2007, the Company collected $16,000 in receivables that
were previously allowed in the allowance for doubtful accounts. During 2007, the
Company decreased the allowance for doubtful accounts by $22,000.
Research, development and service expenses decreased by $59,000, or
45%, to $71,000 for the three months ended September 30, 2007, compared to
$130,000 in the same period of 2006. Most of the decrease was due to a reduction
in salaries in the engineering department and a reduction in reengineering
costs.
Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2006 and 2005 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable.
Although 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 $34,000 and $12,000
during the years ended December 31, 2006 and 2005 respectively. In 2007 the
Company is continuing its negotiations with certain vendors and suppliers.
Nine Months Ended September 30, 2007, Compared to Nine Months Ended
September 30, 2006
Net sales for the nine months ended September 30, 2007 decreased by
$410,000, or 26%, to $1,190,000 as compared to $1,600,000 for the same period of
2006. This reduction in sales was primarily due to reduced sales of the P40,
P45, P60 UBM Ultrasound Biomicroscopes and the LD 400 and the TKS 5000
Autoperimetry Systems.
For the nine months ended September 30, 2007, sales from the Company's
diagnostic products totaled $1,060,000, or 89% of total revenues, compared to
$1,374,000, or 86% of total revenues for the same period of 2006. The remaining
11% of sales, or $130,000 during the nine months ended September 30, 2007, was
from parts, disposables, and service revenue.
Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes decreased
by $21,000 to $272,000, or 23% of total revenues, for the nine months ended
September 30, 2007, compared to $293,000, or 18% of total revenues, for the same
period ended September 30, 2006. Sales of the Blood Flow Analyzer(TM) decreased
by $1,000 to $127,000, or 11% of total revenues, for the nine months ended
September 30, 2007, compared to net sales of $128,000, or 8% of total revenues,
during the same period in 2006. Sales from the P37, P37-II and P2700 A/B Scan
Ocular Ultrasound Diagnostic devices, the P55, P2200, and P2500 Pachymetric
Analyzers, and the P2000 A-Scan Biometric Ultrasound Analyzer increased by
$162,000 to $401,000, or 34% of total revenues, for the nine month period ended
September 30, 2007, compared to $239,000, or 15% of total revenues, for the same
period of 2006. Combined sales of the LD 400 and TKS 5000 Autoperimetry Systems
and the CT 200 Corneal Topographer decreased by $454,000 to $261,000, or 22% of
the total revenues, for the nine months ended September 30, 2007, compared to
$715,000, or 45% of total revenues, for the same period of 2006.
Sales have been lower during the nine months ended September 30, 2007
for the Company due to a variety of reasons. Sales of the P40, P45 and P60 UBM
Ultrasound Biomicroscopes were reduced primarily due to the introduction of new
software for the P60, which received FDA 510(k) premarket approval on May 26,
2005,and to the necessity for hardware reconfiguration on the P40 and P45. The
perimeters experienced a major reduction in sales due to the current redesign
13
and reconfiguration of the LD 400 and the ongoing software development for the
LD700. The hardware configuration problems have since been resolved and the
Company has recently completed a new software package for the P60. The Company
anticipates reversing the downward trend in sales through additional efforts by
the Company to increase support for the P60 through increased clinical
awareness, increased product development, improved marketing plans, and ongoing
development of the new perimeters.
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, 2007,
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 2006.
Gross profit for the nine months ended September 30, 2006 decreased by
1% to 46% of total revenues, compared to 47% of total revenues for the same
period in 2006. The decrease in gross profit was mainly due to an increase in
the price of materials, an increase in inventory and an increase in the cost of
developing a new domestic sales force. There was no increase to cost of sales as
a result of a charge to the reserve for obsolete inventory in 2007.
Marketing and selling expenses increased by $135,000, or 44%, to
$442,000, for the nine months ended September 30, 2007, from $307,000 for the
comparable period in 2006. The increase was due primarily to increased salaries
for domestic and international sales representatives, an increased number of
sales representatives, and higher travel related and associated sales expenses.
General and administrative expenses decreased by $84,000, or 11%, to
$688,000 for the nine months ended September 30, 2007, from $772,000 for the
same period in 2006. This reduction in general and administrative expenses was
primarily due to reduced depreciation expenses, reduced travel expenses, and
reduced legal and consulting fees.
Also during 2007, the Company collected $19,000 in receivables that
were previously allowed in the allowance for doubtful accounts. During 2007, the
Company reduced the allowance for doubtful accounts by $22,000.
Research, development and service expenses decreased by $127,000, or
33%, to $261,000 for the nine months ended September 30, 2007, compared to
$388,000 in the same period of 2006. This reduction was mainly due to lower
costs of development and compliance with regulatory requirements compared to the
higher costs associated with development of the new P60 UBM, including the cost
of compliance with regulatory requirements, for the comparable period in 2006.
Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2006 and 2005 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable.
Although 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 $34,000 and $12,000
during the years ended December 31, 2006 and 2005 respectively. In 2007 the
Company is continuing its negotiations with certain vendors and suppliers.
Liquidity and Capital Resources
The Company used $1,077,000 in cash in operating activities for the
nine months ended September 30, 2007, compared to $766,000 for the nine months
ended September 30, 2006. The increase 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, accounts receivable, and
accrued liabilities and a decrease in inventory, specifically for the P60 UBM.
The Company used zero in investing activities for the nine months ended
September 30, 2007, compared to $19,000 used for the nine months ended September
30, 2006. Net cash received in financing activities was $1,000,000 for the nine
months ended September 30, 2007, versus cash received from financing activities
of $986,000 in the same period in 2006. The Company had working capital of
$389,000 as of September 30, 2006, compared to working capital of $360,000 as of
September 30, 2006.
As of September 30, 2007, the Company had net operating loss
carry-forwards (NOLs) of approximately $55 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
14
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, 2007, the Company had accounts payable of $347,000,
a significant portion of which was over 90 days past due, compared to accounts
payable of $336,000 as of September 30, 2006. 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
Company also has non-cancelable capital lease obligations and operating lease
obligations that required the payment of approximately $105,000 in 2006 and
$107,000 in 2007.
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 increased its direct sales force to seven
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 11% of total outstanding
receivables as of September 30, 2007 and 15% as of December 31, 2006 compared to
25% of total outstanding receivables as of September 30, 2006. The allowance for
doubtful accounts decreased from $72,000 at December 31, 2006 to $50,000 at
September 30, 2007.
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 six months ended
June 30, 2007, the Company decreased a net of $22,000 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 $1,320,000 at September 30, 2007 and $1,333,000 at
September 30, 2006, or 55% and 60% 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
15
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.
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. The Company has experienced an increase in product being manufactured
in England and in parts being acquired from the European Community due to the
fluctuations of the dollar compared to the Euro and the Pound Sterling. This has
increased the cost of several products. There may be an impact on profits as a
result of this decrease in the value of the dollar because the profit margins
will decrease if higher product pricing has a negative impact on sales.
New Accounting Pronouncements
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
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.
16
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 June 30, 2007. 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 nine months ended September 30, 2007, 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 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 the Company
believes brings all payments current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure
that the calculations have been correctly made on the royalties paid as well as
the proper method of calculation for the future.
It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to the Company's calculations, is $981. The Company
made payment of this amount to Photomed and Dr. Eichenbaum on January 5, 2005
and, as a result, seeks to have the legal action dismissed. However, if the
parties are unable to agree on a method for calculating royalties, there is a
risk that PhotoMed and Dr. Eichenbaum might amend their complaint to request
termination of the license agreement and, if successful, the Company would lose
its right to manufacture and sell the Photon(TM)laser system.
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of three copy machines that were
delivered to the Company's Salt Lake City facilities on or about April of 2000.
The action also seeks an award of attorney's fees and costs incurred in the
collection. The Company filed an answer to the complaint disputing the amounts
allegedly owed due to machine problems and a claimed understanding with the
vendor. The Company returned two of the machines. The Company was engaged in
settlement discussions with CitiCorp until counsel for CitiCorp withdrew from
the case. New counsel for CitiCorp was appointed. After an initial meeting with
new counsel, the Company provided initial disclosures to the new counsel.
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 that monthly payments of $3,083 are due for the
months of October 2002 to October 2003 under the consulting agreement and, if
17
the agreement is terminated, for the sum of $110,000 minus whatever the Company
has paid Mr. Hicks prior to such termination, plus costs, attorney's fees and a
wage penalty pursuant to Utah law. The Company has filed an answer in which it
denies any liability to Mr. Hicks. Formal discovery in the matter has commenced.
A trial is scheduled to begin on December 6, 2007. The Company disputes the
amount allegedly owed and intends to vigorously defend against such action.
The Company is not a party to any other material legal proceedings
outside the ordinary course of its business or to any other legal proceedings,
which, if adversely determined, would have a material adverse effect on its
financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Callable Secured Convertible Notes and Warrants
February 28, 2006 Sale of $1,500,000 in Convertible Notes. To obtain
funding for the Company's ongoing operations, the Company entered into a
securities purchase agreement on February 28, 2006 with 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 the convertible notes. The registration
statement was subsequently withdrawn on July 25, 2006 and a new
registration statement was filed on September 26, 2006 to register
60,000,000 shares of common stock issuable upon conversion of the
convertible notes; and
$ $500,000 was disbursed on April 30, 2007, the day prior to the
effective date of the registration statement on May 1, 2007.
Under the terms of the securities purchase agreement, the Company
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 bears 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 noteholders' 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
18
and Exchange Commission of the registration statement. Prepayment of the
convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then the Company
will not receive any proceeds therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the callable secured convertible
notes issued pursuant to the securities purchase agreement.
The noteholders have agreed to restrict their ability to convert their
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 November 13, 2007, a total of $164,122 in convertible notes issued on
February 28, 2006 had been converted by the noteholders.
June 11, 2007 Sale of $500,000 in Convertible Notes: To obtain further
funding for the Company's ongoing operations, the Company entered into a third
securities purchase agreement on June 11, 2007 with the same four accredited
investors for the sale of (i) $500,000 in convertible notes and (ii) warrants to
purchase 10,000,000 shares of its common stock. The investors disbursed $500,000
to the Company on June 11, 2007.
Under the terms of the June 11, 2007 securities purchase agreement, the
Company agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, 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 June 11, 2007 and ending on the
later of (a) 270 days from June 11, 2007, 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
June 11, 2007 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 $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 the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii) 50% 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 $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 its stock is trading at or below $.10 per share. An event of
default includes the failure by the Company to pay the principal or interest on
19
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 (i) 125% of the outstanding principal and
accrued interest for prepayments occurring within 30 days following the issue
date of the notes; (ii) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes; or (iii) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until seven years from the date of
issuance at a purchase price of $.005 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,
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 the Company's
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,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The Company is required to register the shares of its common stock
issuable upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities purchase
agreement the Company entered in to on June 11, 2007. The registration statement
must be filed with the Securities and Exchange Commission within 60 days of June
11, 2007 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 the Company's option. As of November 13,
2007, none of the convertible notes issued on June 11, 2007 had been converted
by the noteholders.
The Company's obligation to issue shares upon conversion of the
convertible notes issued on April 27, 2005, February 28, 2006, and June 11, 2007
is essentially limitless. The following is an example of the amount of shares of
common stock that are issuable upon conversion of $3,388,496 principal amount of
convertible notes (excluding accrued interest), based on market prices 25%, 50%,
and 75% below the market price, as of October 26, 2007 of $.0024:
% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------ ----- -------- --------------- -----------
25% $.0018 $.00108 3,137,496,000 779.2%
50% $.0012 $.00072 4,706,244,000 1,168.8%
75% $.0006 $.000036 94,124,889,000 23,376.0%
*Based on 402,655,736 shares outstanding as of November 13, 2007.
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.
Adjustable Conversion Price of Convertible Notes
------------------------------------------------
The callable secured convertible notes are convertible into shares of
the Company's common stock at a 40% discount to the trading price of the common
stock prior to the conversion. The significant downward pressure on the price of
the common stock as the noteholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place further
downward pressure on the price of the common stock. The noteholders could sell
common stock into the market in anticipation of covering the short sale by
20
converting their securities, which could cause 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.
Possible Dilution to Stockholders
---------------------------------
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 callable secured convertible notes and/or
exercise their warrants if such conversion or exercise price would cause them to
own more than 4.99% of the Company's outstanding common stock, this restriction
does not prevent the noteholders from converting and/or exercising some of their
holdings and then converting the rest of their holdings. In this way, the
noteholders could sell more than this limit while never holding more than this
limit. There is no upper limit on the number of shares that may be issued, which
will have the effect of further diluting the proportionate equity interest and
voting power of holders of the Company's common stock.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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(13)
3.3 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Series C Convertible Preferred Stock Certificate(3)
4.3 Certificate of the Designations, Powers, Preferences and Rights
of the Series C Convertible Preferred Stock(3)
4.4 Specimen Series D Convertible Preferred Stock Certificate (4)
4.5 Certificate of the Designations, Powers, Preferences and Rights
of the Series D Convertible Preferred Stock (5)
4.6 Certificate of Designations, Powers, Preferences and Rights of
the Series G Convertible Preferred Stock (6)
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 2005 Securities Purchase Agreement with AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium
Capital Partners II, LLP (the "Purchasers")(7)
10.5 Form of Convertible Note with each Purchaser(7)
10.6 Form of Stock Purchase Warrant with each Purchaser(7)
10.7 Security Agreement with Purchasers(7)
10.8 Intellectual Property Security Agreement with Purchasers(7)
10.9 Registration Rights Agreement with Purchasers(7)
21
10.10 Stock Purchase Agreement with Mackey Price Thompson & Ostler(8)
10.11 Employment Agreement with Raymond P.L. Cannefax(9)
10.12 2006 Securities Purchase Agreement with AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium
Capital Partners II, LLP(10)
10.13 Form of Callable Secured Convertible Note with each
Purchaser(10)
10.14 Form of Stock Purchase Warrant with each Purchaser(10)
10.15 Security Agreement with Purchasers(10)
10.16 Intellectual Property Security Agreement with Purchasers(10)
10.17 Registration Rights Agreement with Purchasers(10)
10.18 Settlement Agreement with Dr. Joseph W. Spadafora (11)
10.19 Worldwide OEM Agreement with MEDA Co., Ltd. (12)
10.20 Second Amendment to the Registration Rights Agreement dated
April 27, 2005 (14)
10.21 Second Amendment to the Registration Rights Agreement dated
February 28, 2006 (14)
10.22 2007 Securities Purchase Agreement with AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium
Capital Partners II, LLP
10.23 Form of Convertible Note with each Purchaser
10.24 Form of Stock Purchase Warrant with each Purchaser
10.25 Security Agreement with Purchasers
10.26 Intellectual Property Agreement with Purchasers
10.27 Registration Rights Agreement with Purchasers
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
-----------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 2007.
22
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 14, 2007 /s/ Raymond P.L. Cannefax
-------------------------------------------------
Raymond P.L. Cannefax
President and Chief Executive Officer
November 14, 2007 /s/ Luis A. Mostacero
------------ ------------------------------------
Luis A. Mostacero, Vice President of Finance,
Treasurer and Secretary
23
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