SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form
10-KSB/A-3
[X] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year
ended December 31, 2007, or
[ ] 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.
(Name of small
business issuer in its charter)
|
DELAWARE
|
87-0459536
|
|
(State or
other jurisdiction
|
(I.R.S.
Employer
|
|
of
incorporation or organization)
|
Identification
Number)
|
|
2355
South 1070 West, Salt Lake City, Utah
|
84119
|
|
(Address of
principal executive offices)
|
(Zip
Code)
|
|
|
Registrant's
telephone number, including area code: (801)
977-8970
|
|
|
Securities
registered pursuant to Section 12(b) of the Act:
None
|
|
|
Securities
registered pursuant to Section 12(g) of the
Act:
|
Common
Stock, par value $.001 per share
(Title of
Class)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
Registrant's
revenues for the fiscal year ended December 31, 2007 were
$1,911,000.
Indicate by check
mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2):Yes [ ] No [X]
Indicate by check
mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2): Yes [ ] No [X]
The aggregate
market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2007 was approximately $1,500,000 based upon the closing sale price of
such stock as reported on the OTC Bulletin Board on that date.
As of March 31,
2008, registrant had outstanding 798,887,500 shares of common stock, 5,627
shares of Series A preferred stock, 8,986 shares of Series B preferred stock, no
shares of Series C preferred stock, 5,000 shares of Series D preferred stock,
250 shares of Series E preferred stock, 4,598.75 shares of Series F preferred
stock, and 588,235 shares of Series G preferred stock.
DOCUMENTS
INCORPORATED BY REFERENCE:
Additional
documents set forth in Part IV hereof are incorporated by
reference.
Transitional Small
Business Disclosure Format (check one): Yes [ ] No [X]
PART
I
Item
1. Description of Business
General
The Company
develops, manufactures, sources, markets and sells ophthalmic surgical and
diagnostic instrumentation and related accessories, including disposable
products. The Company's surgical equipment is designed for minimally invasive
cataract treatment. The Company's cataract removal system, the PhotonTM laser
system, is a laser cataract surgery system designed to be marketed as the next
generation of cataract removal. Because of the "going concern" status of the
Company, management has focused efforts on those products and activities that
will, in its opinion, achieve the most resource efficient short-term cash flow
to the Company. As reflected in the results for the fiscal year ended December
31, 2007, diagnostic products are currently the Company's major focus and the
PhotonTM and
other extensive research and development projects have been put on hold pending
future evaluation when the financial position of the Company improves. Due to
the lack of FDA approval and the lack of current evidence to support
recoverability, the Company has recorded an inventory reserve to offset the
majority of the inventory associated with the PhotonTM. In
addition, most inventory associated with the Precisionist Thirty ThousandTM has
been reserved due to the estimated lack of recoverability. The Company's focus
is not on any specific diagnostic product or products, but rather on its entire
group of diagnostic products. The PhotonTM can be
sold in markets outside of the United States. Both the PhotonTM and the
Precisionist Thirty ThousandTM,
although not currently manufactured, have been manufactured in the past as an
Ocular Surgery WorkstationTM.
The Company's
diagnostic products include a P2000 pachymetric analyzer, a P37 Ultrasonic A/B
Scan, P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37 A/B Scan, two
perimeters, the Blood Flow AnalyzerTM, and
the Glaid. The diagnostic ultrasonic products including the P2000
pachymetric analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound
Biomicroscope were acquired from Humphrey Systems, a division of Carl Zeiss in
1998. The Company developed and offered for sale in the
fall of 2000 the P45, which combines the P37 Ultrasonic A/B Scan and the UBM
biomicroscope in one machine. In addition, the Company developed and offered for
sale in March 2005 the P60, which represents the fourth generation of UBM
devices and has better visual clarity and image flexibility than earlier
versions. The perimeter and the corneal topographer were added when the Company
acquired the outstanding shares of the stock of Vismed, Inc. d/b/a/ DiconTM in June
2000. The Company purchased Ocular Blood Flow, Ltd. in June 2000 whose principal
product is the Blood Flow AnalyzerTM. This
product is designed for the measurement of intraocular pressure and pulsatile
ocular blood flow volume for detection and monitoring of glaucoma. The Company
is currently developing additional applications for all of its diagnostic
products.
In June 1997, the
Company received FDA clearance to market the Blood Flow AnalyzerTM for
measurement of intraocular pressure and pulsatile ocular blood flow for the
detection of glaucoma and other retina related diseases. Ocular blood flow is
critical, the reduction of which may cause nerve fiber bundle death through
oxygen deprivation, thus resulting in visual field loss associated with
glaucoma. The Company's Blood Flow AnalyzerTM is a
portable automated in-office system that presents an affordable method for
ocular blood flow testing for the ophthalmic and optometric practitioner. In
June 2000, the Company purchased Occular Blood Flow, Ltd., the manufacturer of
the Blood Flow AnalyzerTM. The
terms and conditions of the sale were $100,000 in cash and 100,000 shares of
common stock. In April 2001, the Company received authorization to use a common
procedure terminology or CPT code from the American Medical Association for
procedures performed with the Blood Flow AnalyzerTM, for
reimbursement purposes for doctors using the device. However, certain payers
have elected not to reimburse doctors using the Blood Flow AnalyzerTM.
On July 23, 1998,
the Company entered into an Agreement for Purchase and Sale of Assets with the
Humphrey Systems Division of Carl Zeiss, Inc. to acquire the ownership and
manufacturing rights to certain assets of Humphrey Systems that are used in the
manufacturing and marketing of an ultrasonic microprocessor-based line of
ophthalmic diagnostic instruments, including the Ultrasonic Biometer Model 820,
the A/B Scan System Model 837, the Ultrasound Pachymeter Model 855, and the
Ultrasound Biomicroscope Model 840, and all accessories, packaging and end-user
collateral materialsfor each of the product lines for the sum of $500,000,
payable in the form of 78,947 shares of common stock which were issued to
Humphrey Systems and 26,316 shares of common stock which were issued to business
broker Douglas Adams. If the net proceeds received by Humphrey Systems from the
sale of the shares issued pursuant to the Agreement was less than $375,000,
after payment of commissions, transfer taxes and other expenses relating to the
sale of such shares, the Company would be required to issue additional shares of
common stock, or pay additional funds to Humphrey Systems as would be necessary
to increase the net proceeds from the sale of the assets to $375,000. Since
Humphrey Systems realized only $162,818 from the sale of 78,947 shares of its
common stock, the Company issued 80,000 additional shares in January 1999 to
enable Humphrey Systems to receive its guaranteed amount. The amount of $21,431
was paid to the Company as excess proceeds from the sale of this additional
stock.
2
The rights to the ophthalmic diagnostic
instruments, which have been purchased from Humphrey Systems, complement both
the Company's cataract surgical equipment and the Company's ocular Blood Flow
AnalyzerTM. The
Ultrasonic Biometer calculates the prescription for the intraocular lens to be
implanted during cataract surgery. The P55 pachymetric measures corneal
thickness for the new refractive surgical applications that eliminate the need
for eyeglasses and for optometric applications including contact lens fitting.
The P37 Ultrasonic A/B Scan combines the Ultrasonic Biometer and ultrasound
imaging for advanced diagnostic testing throughout the eye and is a viable tool
for retinal specialists. The P40 UBM Ultrasound Biomicroscope utilizes
microscopic digital ultrasound resolution for detection of tumors and improved
glaucoma management. The Company introduced the P45 in the fall of 2000, which
combines the P37 Ultrasonic A/B Scan, and the Ultrasonic Biometer in one
machine.
On October 21, 1999, the Company purchased
Mentor's surgical product line, consisting of the Phaco SlSteniFM, the
OdysseyTM
and the Surg-E-Tro1TM. This
acquisition was an attempt to round out the Company's cataract surgery product
line by adding entry-level, moderately priced cataract surgery products. The
transaction was paid for with $1.5 million worth of the Company's common stock.
Due to the lack of sales volume of these products, they were determined to be
obsolete and a reserve was established to offset all inventory associated with
these products. During the fourth quarter of 2003, the Company sold all
inventory rights associated with the SlStemTM and
OdysseyTM
for $125,000.
On June 5, 2000, the Company purchased Vismed
Inc. d/b/a DiconTM under a
pooling of interest accounting treatment. The purchase included the DiconTM
perimeter product line consisting of the LD 400, the TKS 5000, the
SSTTM,
FieldLinkTM,
FieldViewTM
and Advanced FieldView and the corneal topographer product line, the CT
200TM, the CT
50 and an ongoing service and software business. Perimeters are used to
determine retinal sensitivity testing the visual pathway. Corneal topographers
are used to determine the shape and integrity of the cornea, the anterior
surface of the eye. Corneal topographers are used for the refractive surgical
applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting.
In January 2002, the Company purchased the
InnovatomeTM
microkeratome of Innovative Optics, Inc. by issuing an aggregate of
1,272,825 shares of its common stock, warrants to purchase 250,000 shares of its
common stock at $5.00 per share, exercisable over a period of three years from
the dosing date, and $100,000 in cash. The transaction was accounted for as a
purchase in accordance with Statement of Financial Accounting Standards No. 141.
The Company acquired from Innovative Optics raw materials, work in process and
finished goods inventories. Additionally, the Company acquired the furniture and
equipment used in the manufacturing process of the microkeratome console and the
inspection and packaging of the disposable blades.
The Company was unsuccessful in supplying the
disposable blades. The Company discontinued the marketing and sales efforts of
this product during the third quarter of 2002. On April 1, 2002, the Company
entered into a consulting agreement with John Charles Casebeer, M.D. to develop
and promote the microkeratome. For Dr. Casebeer's services during the period
from April 1, 2002 to September 30, 2002, the Company issued him a total of
43,684 shares of its common stock, representing payment of $100,000 in stock for
his services. All assets acquired from Innovative Optics, including remaining
inventory with a book value of $160,000 and equipment and intangible assets with
a book value of $2,082,000, were written off during 2002.
On September 19, 2002, the Company completed
a transaction with International Bio-Immune Systems, Inc., a Delaware
corporation , in which the Company acquired 2,663,254 shares, or 19.9% of the
outstanding shares of its common stock, and warrants to purchase 1,200,000
shares of its common stock at $2.50 per share for a period of two years, through
the exchange and issuance of 736,945 shares of its common stock, the lending of
300,000 shares of its common stock to the Company and the payment of certain of
its expenses through the issuance of an aggregate of 94,000 shares of its common
stock to the Company and its counsel. During 2004, the Company sold all
2,663,254 shares of International Bio-Immune Systems stock for net proceeds of
$505,000.
3
On December 3, 2003, the Company executed a
purchase agreement with American Optisurgical, Inc. for the sale of the Mentor
surgical products line, consisting of the Phaco SIStemTM and the
OdysseyTM. The
assets sold in the transaction included patents, trademarks, software codes and
programs, supplies, work in process, finished goods, and molds related to the
equipment. The purchase price paid to the Company by American Optisurgical for
the assets was $125,000. The purchase agreement also contained a noncompete
provision in which the Company agreed for a period of three years from the
closing date not to own, manage, operate or control any business that competes
with cataract removal equipment substantially the same as the proprietary
technology of the Phaco SlStemTM and the
OdysseyTM.
On September 28,
2004, the Company entered into an Investment Banking Agreement with Alpha
Advisory Services, Inc. Under the terms of the agreement, Alpha Advisory
Services is to use its best efforts to provide the following services to the
Company: (i) review of and make recommendations regarding the Company's business
plan and promotional materials; (ii) identify and contact potential investors in
the United States and Europe for potential investment in the Company's
securities; (iii) organize meetings with potential investors and participate in
such meetings; and (iv) assist the Company in future financings, mergers,
acquisitions and potential buyouts.
The term of the agreement was for a period of
three months, which was to be automatically renewed for successive one-year
terms. Following the initial three month period, either party could terminate
the agreement upon 15 days written notice to the other party. In consideration
for the services to be performed under the agreement, Alpha Advisory Services
was to receive a fee of $3,000 per month, plus reasonable travel and other
expenses, and warrants to purchase 25,000 shares of the Company's common stock
at $.15 per share. The warrants are exerciseable, on a cashless basis, over a
two year period from the date of issuance. The Company provided notice to Alpha
Advisory Services to terminate the agreement, effective January 28, 2006. During
the four month period the agreement was in effect, the Company paid Alpha
Advisory Services a total of $12,000 pursuant to the terms of the
agreement.
In March 2005, the Company introduced the P60
UBM Ultrasound Biomicroscope. The P60 Biomicroscope represents the fourth
generation of UBM devices and has better visual clarity and image flexibility
than earlier versions. On March 1, 2005, the Company was awarded the CE Mark for
the P60, which enables it to market the device in 19 Western European countries,
most of the Middle East and India, and some parts of Asia and the Pacific Rim.
On May 26, 2005, the Company received FDA 510(k) premarket approval for the P60,
which allows it to be sold in the United States. On February 9, 2006,the Company
received a Canadian device license for the P60, which allows it to be sold in
Canada.
On June 12, 2006,
the Company entered into a Worldwide OEM Agreement with MEDA Co., Ltd., one of
China's leading developers and producers of ultrasound devices. Under the terms
of the agreement, MEDA agrees to jointly engineer, develop and manufacture the
Company's next generation of the Ultrasound BioMicroscope, as well as other
proprietary new products and enhancement of the Company's current products. The
products to be manufactured by MEDA, at agreed upon costs, and supplied to the
Company for resale include the following new products: an ultrasound
biomicroscope, two ultrasound A/B Scans, a biometric A-Scan and a
pachymeter.
The agreement provides that the Company and
MEDA agree to jointly develop and collaborate in the improvement and enhancement
of the Company's products and, in the interest of product development,
enhancement and differentiation, MEDA agrees to give consideration to potential
software development or enhancements made available to the Company for its
products. Moreover, in the interest of product improvement, MEDA agrees to
collaborate with the Company and its designated engineers, employees and
consultants to consider and potentially implement jointly or individually the
development of product enhancements to the Company's products to be manufactured
by MEDA.
The software and hardware modifications
designed jointly by the Company and MEDA will be considered the joint
intellectual property of the Company and MEDA and may be used, without
restriction, unless otherwise previously agreed to, by either party. MEDA also
agrees to provide a twelve month warranty on all products that it manufactures
for the Company. If defects cannot be corrected at the Company's facilities, the
products may be returned to MEDA for the purposes of carrying out such repairs
as required, and MEDA agrees to return the repaired products to the Company or
its designated agent or distributor within ten working days from the date of
receiving such products, at no cost to the Company, and MEDA will pay return
freight costs.
4
MEDA further agrees to endeavor to answer any
technical inquiries concerning the products it has manufactured. MEDA also
agrees to train the Company's technical service engineers and designated
international distributors as soon as possible after the signing of this
agreement, and as future needs arise and as MEDA can reasonably fit such
training into the regular schedules of its employees. MEDA agrees to determine
the need for future training on new products as necessary and will offer such
training in Tiangin, China. For training conducted outside China, the Company or
its designated distributors and/or service centers will be responsible for the
traveling, living and hotel expenses for MEDA's engineers. Training is at no
charge to the Company. The training will also be made available to the Company's
designated repair agencies in order to provide service and repair on a worldwide
basis. Such agencies will be considered authorized repair facilities for the
products manufactured by MEDA.
MEDA provides the
Company with several ultrasound devices. These devices include the P37-legal
issues A/B Scan, the P2000 A-Scan Biometric AnalyzerTM, P2200
Pachymeter and the P2500, which is a combined A-Scan and pachymeter. MEDA also
manufactures the P2700, P3700, and P37-II A/B Scans and the P50 Ultrasound
Biomicroscope. The agreement provides exclusive distribution rights to the
Company throughout most of the world, including the United States and Canada,
once FDA approval is received on these devices.
The agreement shall
be effective for three years from date of execution. At the end of the three
year term, representatives of the Company and MEDA will confer to determine
whether to extend the term of the agreement. This will have a practical effect
of extending the term of the agreement for an additional 120 days. If mutual
agreement for extending the term of the agreement is not reached within 120 days
after the end of the three year term, then the agreement will be deemed
terminated. However, if within the 120 day period, the Company and MEDA mutually
agree to extend the term of the agreement, then thereafter either party may
terminate the agreement by providing at least twelve months' prior written
notice to the other party. All outstanding orders at the time of notification
will be supplied under the terms of the agreement, and MEDA will continue to
fulfill all orders from the Company until the twelve month notice period has
expired.
On January 31 and
February 1, 2007, MEDA received FDA 510(k) premarket approval for a new
generation of ultrasound devices. This approval allows the new devices to be
sold in the United States. The new ultrasound devices, which are to be
manufactured by MEDA and sold by the Company in the United States, include the
P2000 A-Scan (used to measure axial length of the eye), the P2200 Pachymeter
(used for measuring corneal thickness), the P2500 AScan/Pachymeter (a
combination of the two stand alone devices), the P2700 AB/Scan (an ultrasound
imaging device for detecting abnormalities within the eye) and the P37-II (a
more advanced AB/Scan used to provide portability for ophthalmology veterinary
applications) and the P50 Ultrasound Biomicroscope for high frequency imaging of
the anterior chamber of the eye.
On September 25,
2006, the Company entered into a Worldwide OEM Agreement with Tinsley, a
division of Hartest Precision Instruments Limited, and one of Europe's leading
developers and producers of visual fields analysis devices or perimeters. Under
the terms of the agreement, Tinsley agrees to engineer, develop and manufacture
the Company's newest perimeter, the LD700 Visual Fields Analyzer. The product is
to be manufactured by Tinsley at agreed upon costs and supplied to the Company
for resale.
On August 14, 2007,
the Company entered into an agreement with Equity Source Partners, LLC of
Jericho, New York. Under the terms of the agreement, Equity Source Partners will
act as the exclusive financial advisor to the Company and will assist the
Company in raising private capital, creating a strategy for growing its core
business, pursuing a follow on offering, and providing general strategic
corporate advice. Among the strategic advisory services Equity Source Partners
will provide are to assist in identifying and introducing the Company to third
parties in connection with potential strategic relationships, provide advice
concerning issues relating to potential strategic relations, capital raises and
potential investment banking contacts, and establish contact with prospective
providers of capital. Among the financing services Equity Source Partners will
perform is to solicit prospective providers of capital on the Company's
behalf.
The term of the
agreement is for twelve months unless extended by mutual consent. As
compensation for its services, the Company agrees to provide equity Source
Partners with an advisory fee equal to an aggregate of 3% of the outstanding
shares of the Company's common stock. In addition, the Company agrees to pay
Equity Source Partners a cash fee equal to 7.5º%o of the gross proceeds from the
sale of securities to investors that were introduced to the Company by Equity
Source Partners and a cash fee equal to 3% of the gross proceeds received from
the sale of securities to investors that were not introduced by Equity Source
Partners.
5
On January 16, 2008, the Company entered into
a consulting agreement with Corcoran Consulting Group, which specializes in
medical reimbursement issues for optometry and ophthalmology. The Company plans
to work with Corcoran Consulting Group to create a new common procedure
technology, or CPT code number, for reimbursement purposes for physicians and
practitioners using the Blood Flow AnalyzerTM. In
addition, the Company plans to work with Corcoran Consulting Group to offer
educational seminars for physicians and practitioners who purchase the Blood
Flow AnalyzerTM.
On January 28, 2008, the Company entered into
a Distribution Agreement with LACE Elettronica srl to distribute its Glaid
device, a proprietary electrophysiology instrument for the early detection of
glaucoma by means of measuring the physical condition of the retina's ganglion
cells, including retinal ganglion cell loss. The Glaid device was approved by
the FDA in 2005 and has undergone extensive testing and clinical studies in the
United States, Canada and Italy, including at Bascom Palmer Eye Institute,
University of California at San Diego's Hamilton Glaucoma Center, and New York
State College of Optometry.
Under the terms of the agreement, the Company
has the exclusive right to distribute the Glaid device in the United States and
Canada. The Company also has a first right of refusal for distribution of the
product to countries outside the United States and Canada where LACE is not
currently selling or marketing the product. These additional distribution rights
are subject to reasonable new minimum quotas. The Distribution Agreement
requires the Company to purchase the Glaid device from LACE at an agreed upon
price and to then sell the product in compliance with minimum order
requirements. The five year quotas for the Glaid device are 27 units, 60 units,
100 units, 120 units, and 120 units for years one through five of the agreement.
Paradigm sales for quota requirements are to begin as soon as the product is
fully completed, with all accessories and consumables, and ready for
delivery.
The Distribution Agreement is for the term of
five years. At the end of the five year term,
representatives of the Company and LACE will determine whether to extend the
term of the agreement. If mutual agreement for continuation of the agreement is
not reached within 120 days thereafter, the agreement will be deemed terminated.
However, if within the 120 day period, the Company and LACE mutually agree to
continue the agreement, then either party may terminate the agreement at any
time thereafter by providing at least twelve months' prior written notice to the
other party. All outstanding orders at the time of notification will be supplied
under the terms of the agreement, and LACE will continue to fulfill all orders
from the Company until the twelve month notice period has expired.
LACE also agrees to
provide a twelve month warranty from the day of delivery on all Glaid devices
supplied to the Company. If the defects cannot be corrected at the Company's
facilities or at the facilities of trained Company repair centers, the products
must then be returned to LACE for purposes of carrying out such repairs as
required, and LACE agrees to return the repaired products to the Company or its
designated agent or distributor within ten working days from the date of
receiving such products, at no cost to the Company, and LACE will pay return
freight costs. The Company additionally agrees to arrange for installation of
the Glaid device at no cost to LACE. The Company further agrees to provide
Company brand specific labeling to be applied to the LACE devices shipped
directly to the Company's customers and distributors.
Background
Corporate History: The
Company's business originated with Paradigm Medical, Inc., a California
corporation formed in October 1989. Paradigm Medical, Inc. developed its present
ophthalmic business and was operated by its founders Thomas F. Motter and Robert
W. Millar. In May 1993, Paradigm Medical, Inc. merged with Paradigm Medical
Industries, Inc. At the time of the merger, the Company was a dormant public
shell existing under the name French Bar Industries, Inc. French Bar had
operated a mining and tourist business in Montana. Prior to its merger with
Paradigm Medical, Inc. in 1993, French Bar had disposed of its mineral and
mining assets in a settlement of outstanding debt and had returned to the status
of a dormant entity. Pursuant to the merger, the Company caused a 1-for-7.96
reverse stock split of its shares of common stock. The Company then acquired
all of the issued and
outstanding shares of common stock of Paradigm Medical, Inc. using shares of its
own common stock as consideration. As part of the merger, the Company changed
its name from French Bar Industries, Inc. to Paradigm Medical Industries, Inc.
and the management of Paradigm Medical, Inc. assumed control of the Company. In
April 1994, the Company caused a 1-for-5 reverse stock split of its shares of
common stock. In February 1996, the Company re-domesticated to Delaware pursuant
to a reorganization.
6
Overview
Disorders of the Eye: The
human eye is a complex organ which functions much like a camera, with a lens in
front and a light-sensitive screen, the retina, in the rear. The intervening
space contains a transparent jelly-like substance, the vitreous, which together
with the outer layer, the sclera and cornea, helps the eyeball to maintain its
shape. Light enters through the cornea, a transparent domed window at the front
of the eye. The size of the pupil, an aperture in the center of the iris,
controls the amount of light that is then focused by the lens onto the retina as
an upside-down image. The lens is the internal optical component of the eye and
is responsible for adjusting focus. The lens is enclosed in a capsule. The
retina is believed to contain more than 130 million light-receptor cells. These
cells convert light into nerve impulses that are transmitted right-side up by
the optic nerve to the brain, where they are interpreted. Muscles attached to
the eye control its movements.
Birth defects,
trauma from accidents, disease and age related deterioration of the components
of the eye could all contribute to eye disorders. The most common eye disorders
are either pathological or refractive. Many pathological disorders of the eye
can be corrected by surgery. These include cataracts (clouded lenses), glaucoma
(elevated or low pressure in the eye), loss of nerve fibers resulting in loss of
vision, corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.
Ultrasound Technology:
Ultrasound devices have been used in ophthalmology since the late 1960's
for diagnostic and surgical applications when treating or correcting eye
disorders. In diagnostics, ultrasound instruments are used to measure distances
and shapes of various parts of the eye for prescription of eyeglasses and
contact lenses and for calculation of lens implant prescriptions for cataract
surgery treatment. These devices emit sound waves through a hand held probe that
is placed onto or near the eye with the sound waves emitted being reflected by
the targeted tissue. The reflection "echo" is computed into a distance value
that is presented as a visual image, or cross section of the eye, with precise
measurements displayed and printed for diagnostic use by the
surgeon.
Surgical use of
ultrasonics in ophthalmology is limited to treatment of cataract lenses in the
eye through a procedure called phacoemulsification or "phaco." A primary
objective of cataract surgeries is the removal of the opacified (cataract) lens
through an incision that is as small as possible. The opacified lens is then
replaced by a new synthetic lens intraocular implant. Phaco technology involves
a process by which a cataract is broken into small pieces using ultrasonic shock
waves delivered through a hollow, open-ended metal needle attached to a hand
held probe. The fragments of cataracts tissue are then removed through
aspiration. Phaco systems were first designed in the late 1960's after various
attempts by surgeons to use other techniques to remove opacified lenses,
including crushing, cutting, freezing, drilling and applying chemicals to the
cataract. By the mid-1970's, ultrasound had proven to be the most effective
technology to fragment cataracts. Market Scope's (Manchester, Missouri), The 2001 Report on the Worldwide
Cataract Market, January 2001 indicates that phaco cataract treatment was
the technology for cataract removal used in over 80% of surgeries in the United
States and over 20%of all foreign surgeries.
Laser Technology: The term
"laser" is an acronym for Light Amplification by Stimulated Emission of
Radiation. Lasers have been commonly used for a variety of medical and
ophthalmic procedures since the 1960's. Lasers emit photons into a highly
intense beam of energy that typically radiates at a single wavelength or color.
Laser energy is generated and intensified in a laser tube or solid-state cavity
by charging and exciting photons of energy contained within material called the
lazing medium. This stored light energy is then delivered to targeted tissue
through focusing lenses by means of optical mirrors or fiber optics. Most laser
systems use solid state crystals or gases as their lazing medium. Differing
wavelengths of laser light are produced by the selection of the lazing medium.
The medium selected determines the laser wavelength emitted, which in turn is
absorbed by the targeted tissue in the body. Different tissues absorb different
wavelengths or colors of laser light. The degree of absorption by the tissue
also varies with the choice of wavelength and is an important variable in
treating various tissues. In a surgical laser, light is emitted in either a
continuous stream or in a series of short duration "pulses", thus interacting
with the tissue through heat and shock waves, respectively. Several factors,
including the wavelength of the laser and the frequency and duration of the
pulse or exposure, determine the amount of energy that interacts with the
targeted tissue and thus, the amount of surgical effect on the
tissue.
7
Lasers are widely accepted in the ophthalmic
community for treatment of certain eye disorders and are popular for surgical
applications because of their relatively noninvasive nature. In general,
ophthalmic lasers, such as argon, Nd:YAG and excimer (argon-fluoride) are used
to coagulate, cut or ablate targeted tissue. The argon laser is used to treat
leaking blood vessels on the retina (retinopathy) and retinal detachment. The
excimer laser is used in corneal refractive surgery. The Nd:YAG pulsed laser is
used to perforate clouded posterior capsules (posterior capsulotomy) and to
relieve glaucoma-induced elevated pressure in the eye (iridotomy,
trabeulorplasty, transcleral cyclophotocoagulation). Argon, Nd:YAG and excimer
lasers are primarily used for one or two clinical applications each. In contrast
to these conventional laser systems, the Company's PhotonTM laser
cataract system is designed to be used for multiple ophthalmic applications,
including certain new applications that may be made possible with its
proprietary technology. Such new applications, however, must be tested in
clinical trials and be approved by the FDA.
Products
The Company's
principal proprietary surgical products are systems for use by ophthalmologists
to perform surgical treatment procedures to remove cataracts. The Company has
complete ownership of each product with no technological licensing
limitations.
Precisionist Thirty
ThousandTM. The Precisionist
Thirty ThousandTM is the
Company's core phaco surgical technology. The PrecisionistTM was
placed into production and offered for sale in 1997. Although
manufactured in the past, the PrecisionistTM is not
currently being manufactured. As a phaco cataract surgery system, the
Company believes the PrecisionistTM with
its new fluidics panel is equal or superior to the present competitive systems
in the United States. However, due to the lack of recent sales, the majority of
the Company's inventory associated with the Precisionist Thirty ThousandTM has
been estimated to be obsolete and therefore a reserve for such inventory has
been recorded. The system features a graphic color display and unique
proprietary on board computer and graphic user interface linked to a soft key
membrane panel for flexible programmable operation. The system provides
real-time "on-the-fly" adjustment capabilities for each surgical parameter
during the surgical procedure for high volume applications. In addition, the
PrecisionistTM
provides one hundred pre-programmable surgery setups, with a second level of
subprogrammed custom modes within each major surgical screen (i.e., ultrasound
phaco and irrigation/aspiration modes).
The
PrecisionistTM also
features the Company's proprietary fluidics panel which is completely
noninvasive for improved sterility and to provide a surgical environment in the
eye that virtually eliminates fluidic surge and solves chamber maintenance
problems normally associated with phaco cataract surgery. This fluidics system
provides greater control for the surgeon and allows the safe operation at much
higher vacuum settings by sampling changes in aspiration I00 times per second.
Greater vacuum in phaco surgery means less use of ultrasound or laser energy to
fragment the cataract and less chance for surrounding tissue damage. In addition
to the full complement of surgical modalities (e.g., irrigation, aspiration,
bipolar coagulation and anterior vitrectomy), system automation includes
"dimensional" audio feedback of vacuum levels and voice confirmation for major
system functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Sales of the PrecisionistTM and
related accessories were 0% of total revenues in both the fiscal years 2006 and
2005, respectively.
Ocular Surgery
WorkstationTM. The Ocular Surgery
WorkstationTM
comprises the base system of the Precisionist Thirty ThousandTM and is
the first system, to the Company's knowledge, which uses the expansive
capabilities of today's advanced computer technology to offer seamless open
architecture expandability of the system hardware and software modules. The
WorkstationTM
utilizes an embedded open architecture computer developed for the Company and
controlled by a proprietary software system developed by the Company that
interfaces with all components of the system. Ultrasound, fluidics (irrigation),
aspiration, venting, coagulation and anterior vitrectomy (pneumatic) are all
included in the base model. Each component is controlled as a peripheral module
within this fully integrated system. This approach allows for seamless expansion
and refinement of the WorkstationTM with
the ability to add other hardware and software features. Expansion such as the
Company's PhotonTM laser
system and hardware for additional surgical applications are easily implemented
by means of a preexisting expansion rack, which resides in the base of the
WorkstationTM. These
expanded capabilities could include, but would not be limited to laser systems,
video surgical fiber optic imaging, cutting and electrosurgery equipment.
However, there is no guarantee that the WorkstationTM will be
accepted in the marketplace. If the FDA approves the PhotonTM, the
Company will refer to the WorkstationTM as the
PhotonTM Ocular
Surgery WorkstationTM. To
date, the Company has not commercially developed or offered for sale any other
added hardware or software features to its WorkstationTM
8
PhotonTM Laser System: The
PhotonTM laser
cataract system, which is still subject to FDA approval, is designed to be
installed as a seamless plug-in upgrade or add-on to the Company's Precisionist'
Ocular Surgery WorkstationTM. The
plug-in platform concept is unique in the ophthalmic surgical market for systems
of this magnitude and presents a unique market opportunity for the Company. The
main elements of the laser system are the Nd:YAG laser module, PhotonTM laser
software package and interchangeable disposable hand held fiber optic laser
cataract probe. The PhotonTM laser
utilizes the on board microprocessor computer of the WorkstationTM to generate short pulse
laser energy developed through the patented LCPTM to
targeted cataract tissue inside the eye, while simultaneously irrigating the eye
and aspirating the diseased cataract tissue from the eye. The probe is smaller
in diameter than conventional ultrasound phaco needles and presents no damaging
vibration or heat build up in the eye. The Company's Phase I clinical trials
demonstrated that this probe could easily reduce the size of the cataract
incision from 3.0 mm to under 2.0 mm thereby reducing surgical trauma and
complementing current foldable intraocular implant technology.
The laser probe may
also eliminate any possibility for burns around the incision or at the cornea
and may therefore be used with cataract surgery techniques that utilize a more
delicate clear cornea incision which can eliminate sutures and be conducted with
topical anesthesia. However, this system may not effectively remove harder grade
cataracts. Harder grade cataracts can be removed using the already existing
ultrasound capability of the Precisionist'M. Because
of the "going concern" status of the Company, management has focused efforts on
those products and activities that will, in its opinion, achieve the most
resource efficient short-term cash flow to the Company. As reflected in the
results for the fiscal year ended December 31, 2006, diagnostic products are
currently the Company's major focus and the PhotonTM and
other extensive research and development projects have been put on hold pending
future evaluation when the Company's financial position improves. Due to the
uncertainty surrounding the timetable for obtaining FDA approval and the lack of
significant revenue from the other surgical products, the Company has
recorded an inventory reserve against the majority of the inventory associated
with the PhotonTM and
Precisionist Thirty ThousandTM. The
Company's focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products.
At some point in
the future, the Company may intend, subject to economic feasibility and the
availability of adequate funds, to refine the laser delivery system and laser
cataract surgical technique used on soft cataracts through expanded research and
clinical studies. Subject to the aforementioned constraints, the Company intends
to refine the fluidics management system by improving chamber maintenance during
surgical procedures and to develop techniques to optimize time and improve
invasive techniques through expanded research and clinical studies. As far as
the Company can determine, no integrated single laser photofragmenting probe is
presently available on the market that uses laser energy directly, contained in
an enclosed probe, to denature cataract tissue at a precise location inside the
eye while simultaneously irrigating and aspirating the site.
The Company's laser
system is based upon the concept that pulsed laser energy produced with the
microprocessor controlled Nd:YAG laser system provides ophthalmic surgeons with
a more precise and less traumatic alternative in cataract surgery. Although
conventional ultrasonic surgical systems have proven effective and reliable in
clinical use for many years, their use of high frequency shock waves and
vibration to fragment the cataract can make the procedure difficult and can
present risk of complication both during and after surgery. In contrast, the
Company's laser system, which utilizes short centralized energy bursts, should
permit the delivery of the laser beam with less trauma to adjacent tissue.
Therefore, unlike ultrasonic systems, whose vibrations and shock waves affect
(and can damage) non-cataract tissues within the eye, the Company's PhotonTM laser
cataract system should only affect tissues with which it comes into direct
contact.
In October of 2000,
the Company received FDA approval for the PhotonTM
WorkstationTM to be
used with a 532mm green laser which is effective for medical procedures other
than cataract removal, such as photocoagulation of retinal and venous anomalies
within or outside the eye, pigmented lesions around the orbital socket,
posterior or anterior procedures associated with glaucoma or diabetes and
general photocoagulation for various dermatological venous anomalies including
telangiectasia (surface veins), or commonly referred to as "spider veins". The
goal is to be able to integrate multiple laser wavelengths into one system or
workstation that can be used for multiple medical specialties. This approval
represents only one of the potential applications that could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables.
9
The PhotonTM Ocular
Surgery WorkstationTM has not
been commercially developed with any other
added hardware or software features. There is no guarantee that the ophthalmic
surgery market will accept the laser in this capacity or that the FDA will grant
approval. Regulatory approval would require completion of pending PhotonTM
clinical trials and resubmission of a 510(k) predicate device application to the
FDA. Because of the "going concern" status of the Company, management has
focused efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the Company. As
reflected in the results for the fiscal year ended December31, 2007, diagnostic
products consisting mainly of P40, P45 and P60 UBM Ultrasound Biomicroscopes;
P2700, P3700 and P37 A/B Scans; perimeters, CT 50 Corneal Topographer, and Blood
Flow AnalyzerTM are
currently the
Company's major focus and the PhotonTM and
other extensive research and development projects have been put on hold pending
future evaluation when the financial position of the Company improves. The
Company's focus is not on any specific diagnostic product or products, but
rather on the entire group of diagnostic products.
On March 31, 2005,
Joseph W. Spadafora filed a complaint against the Company in the United States
District Court, District of Utah, in which he alleges that he was a clinical
investigator in the study for the FDA involving the Company's PhotonTM laser
system where he performed numerous surgeries using the PhotonTM. Dr.
Spadafora contends that in meetings with the Company's personnel he suggested
ways in which the handpiece on the PhotonTM could
be improved. Dr. Spadafora further contends that on August 5, 1999, when the
Company filed a patent application for an improved handpiece with the United
States Patent and Trademark Office, he was not named as one of the inventors or
a coinventor on the patent application. On September 24, 2004, the Company was
issued a patent entitled, "Laser Surgical Handpiece with Photon Trap." Because
the Company did not list Dr. Spadafora as one of the inventors or a coinventor
on the patent, Dr. Spadafora requests in his complaint that a court order be
entered declaring that he is the inventor or coinventor of the patent and, as a
result, is entitled to all or part of the royalties and profits that the Company
earned or will earn from the sale of any product incorporating or using the
improved handpiece.
On June 2, 2006,
the Company entered into a settlement agreement with Dr. Spadafora for the
dismissal of the lawsuit. Under the terms of the settlement agreement, the
Company agrees to provide Dr. Spadafora with the exclusive right over a
three-year period to market and sell the PhotonTM laser
system and its components, including the inventory and intellectual property
rights. If Dr. Spadafora were successful in finding a prospective purchaser to
acquire the PhotonTM laser
system upon terms acceptable to the Company, it agrees to pay him a commission
equal to 10% of the total purchase price. If the purchase price for the
PhotonTM
laser system includes a royalty or other payments payable to the Company
on later sales of the PhotonTM laser
system other than its handpiece component, the Company agrees to pay Dr.
Spadafora 8% of such royalties or other payments on such later sales through the
full term of the purchase agreement. The Company further agrees that if a
purchase price includes a royalty or other payments payable to the Company on
later sales of the handpiece component of the PhotonTM laser
system, the Company agrees to pay Dr. Spadafora 15% of such royalties or other
payments through the full term of the purchase agreement.
Additionally, the
settlement agreement provides that if the Company is successful through its sole
efforts, without any assistance from Dr. Spadafora, in finding a purchaser to
acquire the PhotonTM laser
system or its components during the second or third year of Dr. Spadafora's
exclusive rights, the Company agrees to pay Dr. Spadafora a commission equal to
1.7% of the total purchase price and of the Company's royalties or other
payments on subsequent sales of the PhotonTM laser
system or its components through the full term of the purchase agreement.
Finally, the settlement agreement provides for mutual releases by Dr. Spadafora
and the Company for the benefit of each other, and that the Company and Dr.
Spadafora each agree to pay their own costs, expenses and attorney's fees
incurred in connection with the lawsuit and the preparation of the settlement
agreement.
Surgical Instruments and
Disposables: In addition to the cataract surgery equipment,
the Company's surgical systems are designed to utilize accessory instruments and
disposables, some of which are proprietary to the Company. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument
drapes and laser cataract probes. The Company intends to expand its disposable
accessories as it penetrates the cataract surgery market and expands the
treatment applications for its WorkstationTM. These
products contributed 0% of total revenues for both 2006 and 2005.
Diagnostic Eye Care
Products: Glaucoma is a second leading cause of adult
blindness in the world. Glaucoma is described as a partial or total loss of
visual field resulting from certain progressive disease or degeneration of the
retina, macula or nerve fiber bundle. The cause and mechanism of the glaucoma
pathology is not completely understood. Present detection methods focus on the
measurement of intraocular pressure in the eye, visual field and observation of
the optic nerve head to determine the possibility of pressure being exerted upon
the retina and optic nerve fiber bundle, which can diminish the visual field.
Recently, retinal blood circulation has been indicated as a key component in the
presence of glaucoma. Some companies produce color Doppler equipment in the
$80,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier
stage.
10
Blood Flow AnalyzerTM: In
June 1997, the Company received FDA clearance to market the Blood Flow
AnalyzerTM for
early detection and treatment management of glaucoma and other retinal related
diseases. The device measures not only intraocular pressure but also pulsatile
ocular blood flow, the reduction of which may cause nerve fiber bundle death
through oxygen deprivation thus resulting in visual field loss associated with
glaucoma. The Company's Blood Flow AnalyzerTM is a
portable automated in-office system that presents an affordable method for
ocular blood flow testing for the ophthalmic and optometric practitioner. This
was the first diagnostic eye care device. The device is a portable desktop
system that utilizes a proprietary and patented pneumatic Air Membrane
Applanation ProbeTM or
AMAPTM, which
can be attached to any model of standard examination slit lamp, which is then
placed on the cornea of the patient's eye to measure the intraocular pressure
within the eye. The device is unique in that it reads a series of intraocular
pressure pulses over a short period of time (approximately five to ten seconds)
and generates a waveform profile, which can be correlated to blood flow volume
within the eye. A proprietary software algorithm developed by David M. Silver,
Ph.D., at Johns Hopkins University, calculates the blood flow volume. The device
presents a numerical intraocular pressure reading and blood flow analysis rating
in a concise printout, which is affixed to the patient history file. In
addition, the data generated by the device can be downloaded to a personal
computer system for advanced database development and management.
The Company markets
the Blood Flow AnalyzerTM as a
stand-alone model packaged with a custom built computer system. The Blood Flow
AnalyzerTM
utilizes a single use disposable cover for the Air Membrane Applanation
Probe''M, a
corneal probe which is shipped in sterile packages. The probe tip cover provides
accurate readings and acts as a prophylactic barrier for the patient. The device
has been issued a patent in the European Economic Community and the United
States and has a patent pending in Japan. The FDA cleared the Blood Flow
AnalyzerTM for
marketing in June 1997 and the Company commenced selling the system in September
1997. In addition to the Humphrey products, this diagnostic product allowed the
Company to expand its market to approximately 35,000 optometry practitioners in
the United States in addition to the approximately 18,000 ophthalmic
practitioners who currently perform eye surgeries and are candidates for the
Company's surgical systems.
In April 2001, the
Company received written authorization from the CPT Editorial Research and
Development Department of the American Medical Association to use common
procedure terminology or CPT code number 92120 for its Blood Flow AnalyzerTM, for
reimbursement purposes for doctors using the device. However, certain payors
have elected not to reimburse doctors using the Blood Flow AnalyzerTM. The
Company is continuing its aggressive campaign to educate the payors about the
Blood Flow AnalyzerTM, its
purposes and the significance of its performance in patient care in order to
achieve reimbursements to the doctors. Currently, there is reimbursement by
insurance payors to doctors using the Blood Flow AnalyzerTM in 22
states and partial reimbursement in four other states. The amount of
reimbursement to doctors using the Blood Flow AnalyzerTM
generally ranges from $56.00 to $76.00 per patient, depending upon the
insurance payor. Insurance payors providing reimbursement for the Blood Flow
AnalyzerTM have
the discretion to increase or reduce the amount of reimbursement. The Company is
endeavoring to obtain reimbursement by insurance payors in other states where
there is currently no reimbursement being made.
The manufacturing
activities for the Blood Flow AnalyzerTM have
been moved to the Salt Lake City facility from the outsourced plant located in
England. On October 21, 2002, the Company received FDA approval on its 510(k)
application for additional indications of use for the Blood Flow AnalyzerTM. The
additional indications include pulsatile ocular blood flow and pulsatile ocular
blood volume. These are diagnostic measurements that assess the hemodynamic and
vascular health of the eye. Also, the Company is continuing its aggressive
campaign to educate the insurance payors about the Blood Flow AnalyzerTM, its
purposes and the significance of its performance in patient care in order to
achieve reimbursements to the doctors using its Blood Flow AnalyzerTM. Sales
of the Blood Flow AnalyzerTM and
related accessories accounted for 13% and 10% of total sales for the fiscal
years ended December 31, 2007 and 2006, respectively.
On January 16,
2008, the Company entered into a consulting agreement with Corcoran Consulting
Group, which specializes in medical reimbursement issues for optometry and
ophthalmology. The Company plans to work with Corcoran Consulting Group to
create a new common procedure technology, or CPT code number, for reimbursement
purposes for physicians and practitioners using the Blood Flow Analyzer ™. In
addition, the Company plans to work with Corcoran Consulting Group to offer
educational seminars for physicians and practitioners who purchase the Blood
Flow Analyzer ™.
11
DiconTM
Perimeters: DiconTM
perimeters consist of the LD 400, the TKS 5000, and software consisting of Field
Link™ FieldViewTM and
Advanced Field View. Perimeters are used to determine retinal sensitivity
testing the visual pathway. Perimeters have become a standard of care in the
detection and monitoring of glaucoma worldwide. Perimetry is reimbursable
worldwide. The DiconTM
perimeters feature patented kinetic fixation and voice synthesis now in
27 different languages. Software programs are sold to assist in the analysis of
the test results. Sales of the perimeters and related accessories generated 19%
and 35% of the total revenues for 2007 and 2006, respectively.
The LD 400FT, or
Fast Threshold Autoperimeter, is the successor to the LD 400. The device is an
autoperimeter used to measure patient visual fields. The LD 400FT is identical
in hardware to the LD 400 but it uses new software to enable a fast threshold
test. This test reduces the time required by ophthalmologists and optometrists
conducting autoperimetry tests by more than 40% by running an abbreviated test
at light levels determined to be sufficient to be seen in normal patients. The
procedure currently takes more than 15 minutes. The fast threshold test by the
LD 400FT is similar to tests by other devices on the market. Healthy patients
will pass the test. Patients with reduced visual fields will be flagged by the
test enabling the device to automatically run a more comprehensive examination
to determine the extent of the visual field loss. All existing LD 400s can be
upgraded to support the new fast threshold test through the purchase of a
software package.
The LD700 Perimeter
is the next generation of perimeters, providing a small footprint and compact
design. The test given with the LD700 tests for visual field loss that is often
an indicator of the presence of glaucoma. The LD700 is designed to identify
glaucoma suspects and also monitor the onset of glaucoma in patients afflicted
with this eye disease. It is also used in the management of medication used to
treat glaucoma to assure the prescribed medication is effective in slowing the
progression of glaucoma and other ailments that result in visual field
loss.
DiconTM Corneal Topographers:
DiconTM corneal
topographers include the CT 200TMand the
CT 50. Corneal topographers are used to determine the shape and integrity of the
cornea, the anterior surface of the eye. Clinical applications for corneal
topographers include refractive surgery that eliminates the need for eyeglasses
and optometric applications including contact lens fitting. Revenues from the
topographer and related accessories were 1% and 3% of the total revenues for
2007 and 2006, respectively. An enhanced version of the CT 200TH was
introduced during the fourth quarter of 2003. The Company has completed the
upgrades to the CT 200THand the
CT 50 Corneal Topographers, which are now operating with Windows XP software
rather than the former Windows 95 operating systems.
P2000 Pachymetric Analyzer:
The ultrasonic pachymeter is used for measurement of corneal thickness.
The Model P2000 is positioned as a standard office pachymeter. This device is
targeted to the refractive surgery market and contributed 1% of the total
revenues for both 2007 and 2006.
P37 A/B Scan Ocular Ultrasound
Diagnostic: The A/B Scan is used by retinal subspecialists to identify
foreign bodies in the posterior chamber of the eye and to evaluate the
structural integrity of the retina. The A/B Scan is attractive to the general
ophthalmic community at large because of its lower price point and its image
resolution qualities. Sales from this product were 10% and 8% of the total
revenues for 2007 and 2006, respectively.
P40, P45 and P60 UBM Ultrasound
Biomicroscopes: Humphrey Systems developed the P40 UBM Ultrasound
Biomicroscope in conjunction with the New York Eye and Ear Infirmary in
Manhattan and the University of Toronto. TheP40 biomicroscope and its
intellectual property were included in the purchase from Humphrey Systems and
gives the Company the proprietary rights to this device. The P40 biomicroscope
creates a high resolution computer image of the unseen parts of the eye that is
a "map" for the glaucoma surgeon. The P40 biomicroscope is an "enabling
technology" for the ophthalmologist, one that the Company has repositioned for
broader market sales penetration. Formerly sold only to glaucoma subspecialty
practitioners, the Company reintroduced the P40 biomicroscope at a price point
targeted for the average practitioners seeking to add glaucoma filtering
surgical procedures and income to their cataract surgical practice.
The P40
biomicroscope related surgical filtering procedures are fully reimbursable by
Medicare and insurance providers. This untapped new market positions the Company
with its proprietary P40 biomicroscope and, to its knowledge, the only
commercially viable product of this type on the market, as a leader in the
rapidly expanding glaucoma imaging and treatment segment. In the fall of 2000,
the Company introduced the P45 UBM Ultrasonic Biomicroscope, which combines the
P40 biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic into one
instrument. The Company believes that by combining functions, the P45 will
appeal to a broader market. The P40 biomicroscope and related accessories sales
were 6% and 4% of the total revenues for 2007 and 2006, respectively. The P45
biomicroscope and related accessories sales contributed 2% and 6% of the total
revenues for 2007 and 2006, respectively.
12
On October 25, 2004, the Company entered into
a Manufacturing and Distribution Agreement with E-Technologies, Inc., a Iowa
based developer of software and related technology for technical applications.
Under the terms of the agreement, E-Technologies granted to the Company the
exclusive right to manufacture, market, sell and distribute an ultrasound
biomicroscope. Upon execution of the agreement, the Company paid $30,000 to
E-Technologies for engineering costs associated with the development of the
biomicroscope. When the biomicroscope received FDA approval on May 26, 2005, the
Company paid E-Technologies an additional fee of $45,000.
In consideration
for the exclusive right to manufacture and distribute the biomicroscope, the
Company agreed to pay E-Technologies a royalty in the amount of $5,000 for each
of the first 25 biomicroscopes sold by the Company. Thereafter, the Company
agreed to pay E-Technologies the sum of $4,000 for each biomicroscope sold. As
an additional condition, the Company agreed to sell 25 biomicroscopes during the
first 12 months after the biomicroscope receives FDA approval. The agreement is
effective for a term of two years. After the expiration of the two year period,
the agreement is to automatically renew for additional one year periods, unless
either party elects to terminate the agreement upon at least 30 days prior
written notice to the other party before the end of any term of the
agreement. The agreement was terminated on July 18,
2006.
In March 2005, the
Company introduced the P60 UBM Ultrasound Biomicroscope. The P60 biomicroscope
represents the fourth generation of UBM devices and has better visual clarity
and image flexibility than earlier versions. On March 1, 2005, the Company was
awarded the CE Mark for the P60, which enables it to market the device in 19
Western European countries, the Middle East and India, and some parts of Asia
and the Pacific Rim. On May 26, 2005, the Company received FDA 510(k) premarket
approval for the P60, which allows it to be sold in the United States. On
February 9, 2006, the Company received a Canadian device license for the P60,
which allows it to be sold in Canada. The P60 biomicroscope and related
accessories sales were 21% and 16% of total revenues for 2007 and 2006,
respectively.
On June 5, 2007,
the Company introduced a new software package for the P60 biomicroscope. This
V2.1 software incorporates greater image resolution, a user-friendly and robust
database management system, and networking capabilities that allow the patient
image data to be transferred within a user's network for efficient patient
record management. The Company developed the new V2.1 software in partnership
with the optic and engineering group at Reliacon Global, Inc.
In July 2000, the
Company received ISO 9001 and EN 46001 certification using TUV Essen as the
notified body. Under ISO 9001 certification, its products are now CE marked. The
CE mark allows the Company to ship product for revenue into the European
Community. The Company successfully retained its certification in 2005 and
retained ISO 13485 in December2005 from TUV Essen.
On June 12, 2006,
the Company entered into a Worldwide OEM Agreement with MEDA Co., Ltd., one of
China's leading developers and producers of ultrasound devices. Under the terms
of the agreement, MEDA agrees to jointly engineer, develop and manufacture the
Company's next generation of the Ultrasound Bio Microscope, as well as other
proprietary new products and enhancement of the Company's current products. The
products to be manufactured by MEDA, at agreed upon costs, and supplied to the
Company for resale include the following new products: an ultrasound
biomicroscope, two ultrasound A/B Scans, a biometric A-Scan and a
pachymeter.
The agreement
provides that the Company and MEDA agree to jointly develop and collaborate in
the improvement and enhancement of the Company's products and, in the interest
of product development, enhancement and differentiation. MEDA agrees to give
consideration to potential software development or enhancements made available
to the Company for its products. Moreover, in the interest of product
improvement, MEDA agrees to collaborate with the Company and its designated
engineers, employees and consultants to consider and potentially implement
jointly or individually the development of product enhancements for the
Company's products to be manufactured by MEDA.
On January 31 and
February 1, 2007, MEDA received FDA 510(k) pre-market approval for a new
generation of ultrasound devices. This approval allows the new devices to be
sold in the United States. The new ultrasound devices, which are to be
manufactured by MEDA and sold by the Company in the United States, include the
P2000 A-Scan (used to measure axial length of the eye), the P2200 Pachymeter
(used for measuring corneal thickness), the P2500 AScan/Pachymeter (a
combination of the two stand-alone devices), the P2700 and P3700 AB/Scans (an
ultrasound imaging device for detecting abnormalities within the eye), the
P37-II (a more advanced AB/Scan used to provide portability for ophthalmology
veterinary applications) and the P50 Ultrasound Biomicroscope for high frequency
imaging of the anterior chamber of the eye.
13
Parts and Services: The parts
and service revenue from the repair and service of equipment sold accounted for
9% and12% of total revenues in 2007 and 2006, respectively.
The following table
identifies each product class, status of commercial development, the percentage
of sales contributed by that class, reimbursement status, and status of
applicable United States and foreign regulatory approvals:
|
Commercial
|
Reimbursement
|
%2006
|
%2007
|
Regulatory
|
||
|
Product
(1)
|
Product
Class
|
Development
|
Status
|
Sales
|
Sales
|
Approvals
|
|
P2200 and
P2500
|
System,
Imaging,
|
Complete
|
Yes
|
3%
|
4%
|
FDA 510(K)
K844299*
|
|
Pachymetric
Analyzer
|
Pulsed Echo
Diagnostic
|
ISO 9001:
1994, EN
|
||||
|
9001**
|
||||||
|
P2000
A-Scan
|
System
Imaging, Pulsed
|
Complete
|
Yes
|
1%
|
3%
|
FDA 510(K)
I844299*
|
|
Biometric
|
Echo
Diagnostic
|
ISO 9001:
1994,
|
||||
|
Ultrasound
Analyzer
|
EN ISO
9001**
|
|||||
|
P37, P37-II,
P2700
|
Transducer,
Ultrasound
|
Complete
|
Yes
|
1.0%
|
22%
|
FDA 510(K)
K844299*
|
|
and P3700 A/B
Scan
|
Diagnostic
|
ISO 9001:
1994,
|
||||
|
Ocular
Ultrasound
Diagnostic
|
EN ISO
9001**
|
|||||
|
P40 UBM
Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
5%
|
6%
|
FDA 510(K)
K844299*
|
|
BioMicroscope
|
Pulsed Echo
Ultrasound
Diagnostic
|
ISO 9001:
1994,
EN ISO
9001**
|
||||
|
P45 UBM
Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
6%
|
2%
|
FDA 510(K)
K844299*
|
|
Biomicroscope,
|
Pulsed Echo
Ultrasound
|
ISO 9001:
1994,
|
||||
|
Workstation
Plus
|
Diagnostic
|
EN ISO
9001**
|
||||
|
P60 UBM
Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
14%
|
21%
|
FDA 510(K)
K844299*
|
|
Biomicroscope,
|
Pulsed Echo
Ultrasound
|
ISO 9001:
1994,
|
||||
|
Workstation
Plus
|
Diagnostic
|
EN ISO
9001.*
|
||||
|
BFA Ocular
Blood
|
Tonometer,
Manual
|
Complete
|
Yes****
|
10%
|
13%
|
FDA 510(K)
K844299*
|
|
Flow Analyzer'TM
and
|
Diagnostic
|
ISO 9001:
1994,
|
||||
|
Disposables
|
EN ISO
9001**
|
|||||
|
CT 200
Corneal
|
Topographer
Corneal
|
Complete
|
Yes
|
3%
|
1%
|
FDA 510(K)
K844299*
|
|
Topography
System
|
AC-Powered
Diagnostic
|
ISO 9001:
1994,
EN ISO
9001**
|
||||
|
LD 400
Autoperimetry
|
Perimeter,
Automatic
|
Complete
|
Yes
|
25%
|
15%
|
FDA 510(K)
K844299*
|
|
System
|
AC-Powered
Diagnostic
|
ISO 9001:
1994,
EN ISO
9001**
|
||||
|
TKS
5000
|
Perimeter,
Automatic
|
Complete
|
Yes
|
11%
|
4%
|
FDA 510(K)
K844299*
|
|
Autoperimetry
System
|
AC-Powered,
Diagnostic
|
ISO 9001:
1994,
EN ISO
9001**
|
||||
|
Precisionist
Thirty
|
Phacofragmentation
|
Complete
|
Yes
|
0%
|
0%
|
FDA 510(K)
K844299*
|
|
ThousandTM,
Ocular
|
ISO 9001:
1994,
|
|||||
|
Surgery
Workstation
with
Surgical
Equipment
and
Disposables(2)
|
EN ISO
9001**
|
|||||
|
PhotonTM Laser,
|
Phacoemulsification
|
In-Process (4)
|
No
|
0%
|
0%
|
IDB
G940151
|
|
Ocular
Surgery
|
ISO 9001:
1994,
|
|||||
|
Workstation
with
Surgical
Equipment
and
Disposables(3)
|
EN ISO
9001**
|
|||||
|
Parts and
Services
|
Perimeter,
BFA,
|
Complete
|
Yes
|
12%
|
9%
|
FDA 510(K)
K844299*
|
|
Tonometer,
Topographer,
Ultrasound
Workstations,
Systems, Imaging
|
ISO 9001:
1994,
EN ISO
9001**
|
14
|
(1)
|
Except for
the PhotonTM
Ocular Surgery Workstation, which can only be sold in countries
outside the United States, these products can be sold in the United States
and in foreign countries including but not limited to Argentina,
Australia, Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia,
Egypt, France, Germany, Greece, Hong Kong, India, Israel, Italy, Japan,
Jordan, Korea, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland,
Puerto Rico, Russia, Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand,
Turkey, United Kingdom, and United Arab
Emirates.
|
|
(2)
|
Due to the
lack of recent sales volume, the inventory associated with the
Precisionist Thirty Thousand TM, the SIStemTM
and the OdysseyTM
has been deemed obsolete and a reserve has been recorded to offset such
inventory.
|
|
(3)
|
Due to the
lack of recent evidence to support the recoverability of inventory
associated with the PhotonTM,
the Company has recorded a reserve to offset the majority of such
inventory on hand.
|
|
(4)
|
The
PhotonTM
is in-process and not complete because the Company has not
completed the clinical trials in order to obtain FDA regulatory
approval.
|
|
*
|
FDA 510(K)
K844299 represents domestic approval by U.S. Food and Drug
Administration.
|
|
**
|
ISO 9001:
1994, EN ISO 9001 represents international
approval.
|
|
***
|
IDE G940151
represents approval for international distribution
only.
|
|
****
|
Represents
full reimbursement in 20 states and partial reimbursement in six other
states.
|
As detailed in the table above, except for
the PhotonTM Laser
Ocular Surgery Workstation, which requires additional development and regulatory
approvals, the Company's current products are developed and available for sale
in footnote (1) of the table. The Company's possible future efforts to finalize
development of the PhotonTM laser
system and obtain the necessary regulatory approvals would depend on adequate
funding. If these efforts were undertaken but proved to be unsuccessful, the
impact would include the costs associated with these efforts and the anticipated
future revenues which the Company would not receive as expected. The Company
estimates that the funds needed to complete the clinical trials on the
PhotonTM in
order to obtain the necessary FDA regulatory approval to be approximately
$1,500,000.
The Company currently purchases components
and parts used in its products from a limited number of key suppliers. The
Company's reliance on its principal suppliers could result in delays associated
with redesigning a product due to an inability to obtain an adequate supply of
required components and parts, and reduced control over pricing, quality and
timely delivery. The loss of any of these principal suppliers or the inability
of a supplier to meet performance and quality specifications, requested
quantities or delivery schedules could cause the Company's revenues to decline.
In addition, any interruption or discontinuance in the supply of components or
parts could have an adverse effect on the Company's business, results of
operation and financial condition. The Company's principal suppliers include
Capistrano Labs, US Ultrasound and Anthrop.
Marketing
and Sales
Ophthalmologists are mainly office based and
perform their surgeries in local hospitals or surgical centers that provide the
necessary surgical equipment and supplies. Ophthalmologists are generally
involved in decisions relating to the purchase of equipment and accessories for
their independent ambulatory surgical centers and for the hospitals with which
they are affiliated. This provides the opportunity for direct, targeted,
personal selling, responsive high quality customer service and short buying
cycles to achieve a product sale in the office or hospital. Hospitals also
comprise a significant market, as recent demand for ultrasonic surgery
technology has put pressure on the ophthalmologist, who in turn persuades the
hospital to install the latest technology system so that he can offer this
procedure to his patients and the community. Ophthalmologist and hospital
administrators are understanding the necessity of Ultrasound diagnostic
equipment such as the UBM and providing the opportunity for increased product
demonstrations. The capability to detect and manage glaucoma is greatly enhanced
with the UBM.
Industry analysts
report that the United States ophthalmic device market has been characterized by
slower growth in recent years. This has apparently been caused by the potential
reforms associated with the health care industry. Further, hospitals have been
inclined to keep their older phaco machines and diagnostic equipment longer than
expected as they have been forced to mind budgets more carefully and have become
less willing to invest in capital equipment until more information on healthcare
reform becomes available. However, analysts predict that the ophthalmic device
market will see renewed growth in the coming years as the health care
environment stabilizes and as the growing elderly population produces an
increased number of cataract surgeries. As a consequence of these factors, the
market should see a greater rate of replacement of older machines that hospitals
and surgeons have been postponing for longer than usual. The acceptance of the
UBM as a necessary diagnostic and disease management tool is enhancing the
opportunities for increased sales of these to hospitals as well as larger
private clinics.
15
Current Market Acceptance and
Potential: The principal purchasers of the Company's products have been
ophthalmologists, optometrists, universities and clinics in many countries
throughout the world. The Company believes that the market for its products is
being driven by: (i) the aging of the population, which is evidenced by the
domestic and international cataract surgery volume growth trend over the past
ten years, (The National Eye Institute reported in March2002 that the number of
blind or visually impaired Americans is likely to double over the next 30
years.) (ii) the entry by emerging countries (including China, Russia, and other
countries in Asia, Eastern Europe and Africa) into advanced technology medical
care for their populations, (iii) increased awareness worldwide of the benefits
of the minimally invasive phaco cataract procedure, (iv) the introduction of
technology improvements such as the Company's laser system, and (v)the growing
awareness of the need for early detection and treatment of
glaucoma.
Marketing Organization: The
Company markets its products internationally through a network of distributors
and domestically through direct sales representatives, independent sales
organizations, and ophthalmic product distributors. As of December 31, 2007, the
Company had five direct domestic sales employees and one independent sales
organization in the United States and 24 ophthalmic and medical product
distributors outside the United States. These sales representatives are assigned
exclusive territories and have entered into contracts with the Company that
contain performance quotas. Domestic sales channels have been expanded to
include independent sales representatives and distributors. The Company also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing
programs.
Product advertising
is intended to be focused in the major industry trade journals. Most of the
ophthalmologists or optometrists in the United States receive one or more of
these magazines through professional subscription programs. The media has shown
strong interest in the Company's technology and products, as evidenced by
several recent articles in these publications.
Manufacturing and Raw Materials:
Currently, the Company maintains a 16,926 square foot facility in Salt
Lake City. The Company transferred the manufacturing activities for the Blood
Flow AnalyzerTM to San
Diego from Ocular Blood Flow, Ltd. in England during 2001. During the second
quarter of 2002, the Company consolidated and closed the San Diego operations
into the Salt Lake City facility. The facility accommodates its manufacturing,
marketing and engineering capabilities. The Company manufactures under systems
of quality control and testing, which complies with the Quality System
Requirements established by the FDA, as well as similar guidelines established
by foreign governments, including the CE Mark and ISO-9001.
The Company
subcontracts the manufacturing of some of its ancillary instruments, accessories
and disposables through specified vendors in the United States. These products
are contracted in quantities and at costs consistent with its financial
purchasing capabilities and pricing needs. The Company manufactures certain
accessories at its facility in Salt Lake City.
Product Service and Support:
Service for the Company's products is overseen from its Salt Lake City
location and is augmented by its international dealer network, which provides
technical service and repair. Installation, on-site training and a limited
product warranty are included as the standard terms of sale. The Company
provides distributors with replacement parts at no charge during the warranty
period. International distributors are responsible for installation, repair and
other customer service to installed systems in their territory. All systems
parts are modular sub-components that are easily removed and replaced. The
Company maintains adequate parts inventory and provides overnight replacement
parts shipments to its dealers.
Research
and Development
The Company
believes its research and development capabilities provide it with the ability
to respond to regulatory developments, including new products, new product
features devised from its users and new applications for its products on a
timely and proprietary basis. The Company intends to continue investing in
research and development and to strengthen its ability to enhance existing
products and develop new products. In addition to its in-house
research and development capabilities, the Company has enlisted several
recognized and respected consultants and other technical personnel to act in
technical and medical advisory capacities.
16
Research,
development and service expenses (which includes production and manufacturing
support and the service department expenses) increased by $94,000, or 38%, to
$344,000 for the twelve months ended December 31, 2007, from $250,000 for the
same period in 2006. None of the costs of research and development activities
during 2007 and 2006 was borne directly by customers.
During the period
in which Thomas F. Motter served as the Company's Chairman and Chief Executive
Officer, he formed a clinical advisory board and met from time to time with the
board. Jeffrey F. Poore, who served as the Company's President and Chief
Executive Officer from March 2003 to March 2004, decided not to utilize the
clinical advisory board. Instead, he consulted with former members of the
advisory board on an informal basis. The Company currently has no agreements
with any former members of the clinical advisory board and none of these former
members hold or own any rights to its products or technologies. The
Company's current management meets regularly with several recognized and
respected ophthalmic experts for advice concerning its diagnostic
devices.
Competition
General. The Company is
subject to competition in the glaucoma diagnostic markets from developers of
technologies for ophthalmic diagnostic instruments used for treatment. A few
large companies that are well established in the marketplace have experienced
management, are well financed and have well recognized trade names and product
lines that dominate the diagnostic equipment industry. The Company believes that
the combined sales of the three largest entities account for over 50% of the
glaucoma diagnostic market. The remaining market is fragmented among emerging
smaller companies, some of which are foreign.
Most major
competitors either entered or expanded into the glaucoma market through the
acquisition of smaller, entrepreneurial high technology manufacturing companies.
Therefore, because existing competitors or other entities desiring to enter the
market could conceivably acquire current entrepreneurial enterprises with small
market activity, any and all competitors must be considered to be
formidable.
Ultrasound Equipment Manufacturers.
The Company currently recognizes Sonomed, Tomey, Nidek, OTI and Quantel
as its primary competitors in the ultrasound equipment market. In respect to
ultrasound diagnostic equipment such as the UBM, A-Scan, Pachymeter and A/B
Scan, the Company is well positioned to compete against companies that currently
hold a significant share of the market.
The Retinal Diagnostic Market.
The Glaucoma Research Foundation suggests that with the aging of the
so-called baby boom generation, there will be an increase of refractive
surgeries, macular degeneration and glaucoma in the United States, the leading
causes of adult blindness worldwide. The National Eye Institute stated in 2002
that the number of visually impaired Americans is likely to double over the next
three decades. Their report estimated that 2.4 million people suffer some visual
impairment in this country. The damage caused by these diseases is irreversible.
The preconditions for the onset of macular degeneration or glaucoma are low
ocular blood flow and/or high intraocular pressure. Diagnostic screening is
important for individuals susceptible to these diseases. People in high risk
categories include: African Americans over 40 years of age, all persons over 60
years of age, persons with a family history of glaucoma or diabetes, and the
very nearsighted. The Glaucoma Research Foundation recommends that these high
risk individuals be tested regularly for glaucoma. According to the U.S. Census
Bureau, in 2004 there were over 36 million adults 65 years of age and older and
over ten million African Americans 45 years of age and older. The Glaucoma
Research Foundation reports that glaucoma currently accounts for more than seven
million visits to physicians annually.
The Company is
subject to intense competition in the ophthalmic diagnostic market from well
financed, established companies with recognizable trade names and product lines
and new and developing technologies. The industry is dominated by several large
entities which the Company believes accounts for the majority of diagnostic
equipment sales. The Company continues to derive revenues from the sale of its
ultrasound diagnostic equipment and Blood Flow AnalyzerTM. The
Blood Flow AnalyzerTM is
designed to detect glaucoma in an earlier stage than is presently possible. In
addition, the device performs tonometry and blood flow analysis. Other
ophthalmic diagnostic devices that do not detect glaucoma in the early stages of
the disease as does the Company's Blood Flow AnalyzerTM retail
at comparable prices. Thus, the Company believes that it can compete in the
diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer. The Company also believes that its ability
to compete successfully will depend on its capability to create and maintain
advanced technology, develop proprietary products, attract and retain scientific
personnel, obtain patent or other proprietary protection for its products and
technologies, obtain required regulatory approvals and manufacture, assemble and
successfully market products either alone or through third parties.
17
Intellectual
Property Protection
The Company's
cataract surgical products are proprietary in design, engineering and
performance. Its surgical ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.
The Company
acquired proprietary intellectual property in the transaction with Humphrey
Systems when the Company purchased the diagnostic ultrasonic product line in
1999. This technology uses ultrasound to create a high resolution computer image
of the unseen parts of the eye that is a "map" for the practitioner. The P40 UBM
Ultrasound Biomicroscope, one of the ultrasonic products the Company purchased,
is subject to a license agreement dated September 27, 1990, with Sunnybrook
Health Science Center. Under the terms of the license agreement, the Company has
the exclusive worldwide rights to manufacture and sell the UBM biomicroscope,
for which the Company is required to pay a royalty of $150 for each licensed
product sold. The license agreement was automatically terminated by its terms on
September 27, 2002, at which time the Company had a royalty free worldwide
license to use and sell the P40 UBM Ultrasound Biomicroscope. However, the
Company has a continuing obligation after such termination to continue to use
and sell the biomicroscope only in the field of ophthalmology. As a result of
its agreement with MEDA Co., Ltd., the Company is also able to provide the P50
UBM biomicroscope, which is manufactured by MEDA, to other industry segments
such as the research and the veterinary markets.
The PhotonTM laser
cataract probe is protected under a United States patent issued to
Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to PhotoMed
International, Inc. and a Japanese patent issued to the Company in 1997 for the
utility and methods of laser ablation, aspiration and irrigation of tissue
through a hand held probe of a unique design. The United States patent expired
in September 2004.
The Company secured
the exclusive worldwide rights to this patent shortly after its issue, and to
the international patents pending, from PhotoMed by means of a license agreement
dated July 7, 1993. The license agreement provided the Company with the rights
to manufacture, distribute and sell a laser system using the PhotonTM laser
cataract probe and related components to customers on a worldwide basis, for
which PhotoMed is to receive a 1% royalty on all net sales of such systems and
related components sold worldwide.
Under the license
agreement PhotoMed is entitled to all royalty payments from net sales at the
time of billing to the purchaser or within 30 days of the date of shipment,
whichever occurs first. The Company is required each quarter to prepare a
summary of sales and the royalties to which PhotoMed is entitled to be paid. The
sales summary must list the number of surgical systems and disposable units sold
in each country, the dollar value of gross and net sales, the amount of the
royalty to which PhotoMed is entitled, and any other information requested by
PhotoMed from time to time. Under the terms of the agreement, the Company has
agreed to be actively engaged in either research and development of a salable
product utilizing the patent or in marketing and selling such a
product.
The license
agreement was amended on December 5, 1997 to allow PhotoMed the right to conduct
research, development and marketing utilizing the patent in certain medical
subspecialties other than ophthalmology for which the Company would receive
royalty payments equal to 1% of the proceeds from the net sales of products
utilizing the patent. The license agreement expired when the United States
patent rights expired in September 2004, but the license agreement could be
automatically extended or renewed for any term of extension or renewal awarded
for the patent rights. In addition, the Company has the right to terminate the
license agreement at any time after July 7, 2003 upon 90 days prior written
notice to PhotoMed.
PhotoMed and Dr.
Eichenbaum brought legal action against the Company on September 11, 2000
involving an amount of royalties that were allegedly due and owing to them from
the sale of equipment by the Company. The Company has paid $15,717 to bring all
royalty payments up to date through January 5, 2005. The Company has been
working with PhotoMed and Dr. Eichenbaum to ensure that the royalty calculations
have been correctly made. It is anticipated that once the parties agree on the
correct royalty calculations, the legal action will be dismissed.
An issue in dispute
concerning the method of calculating royalties is whether royalties should be
paid on returned equipment. Since July 1, 2001, only one PhotonTM 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 the complaint to request termination of the license
agreement and, if successful, the Company would lose its rights to manufacture
or sell the PhotonTM laser
system.
18
The PhotonTM laser
cataract probe is also protected under a United States patent issued to the
Company in 2002 for a laser surgical device for the removal of intraocular
tissue including a handpiece and a trap. The patent is due to expire in August
2019. There are also two pending United States patents relating to the
PhotonTM
laser cataract probe.
The Blood Flow
AnalyzerTM was
granted a patent in the United Kingdom in 1998 and in the United States in 1999,
and has a patent pending in Japan. These patents relate to pneumatic pressure
probes for use in measuring change in intraocular pressure and in measuring
pulsatile ocular blood flow. The United States patent rights expire in January
2019 and the United Kingdom patent rights expire in November 2015.
The DiconTM
Perimeters and the DiconTM Corneal
Topographer each have a U.S. patent with a wide scope of claims. The United
States patent for the DiconTM
Perimeter was issued in 1991 and the patent rights expire in March 2010. The
United States patent for the DiconTM Corneal
Topographer was issued in 2002 and the patent rights expire in January
2018.
The Company's
trademarks are important to its business. It is its policy to pursue trademark
registrations for its trademarks associated with its products as appropriate.
Also, the Company relies on common law trademark rights to protect its
unregistered trademarks, although common law trademark rights do not provide the
Company with the same level of protection as would U.S. federal registered
trademarks. Common law trademark rights only extend to the geographical area in
which the trademark is actually used while U.S. federal registration prohibits
the use of the trademark by any party anywhere in the United
States.
The Company also
relies on trade secret law to protect some aspects of its intellectual property.
All of its key employees, consultants and advisors are required to enter into a
confidentiality agreement with the Company. Most of its third-party
manufacturers and formulators are also bound by confidentiality agreements with
the Company.
Regulation
The FDA under the
Food, Drug and Cosmetics Act regulates the Company's surgical and diagnostic
systems as medical devices. As such, these devices require premarket clearance
or approval by the FDA prior to their marketing and sale. Such clearance or
approval is premised on the production of evidence sufficient for the Company to
show reasonable assurance of safety and effectiveness regarding its products.
Pursuant to the Food, Drug and Cosmetics Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States and the
export of medical devices from the United States. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial of
premarket clearance or approval for devices. Recommendations by the FDA that the
Company not be allowed to enter into government contracts in order to avoid
criminal prosecution may also be made.
Following the
enactment of the Medical Device Amendments to the Food, Drug and Cosmetics Act
in May 1976, the FDA began classifying medical devices in commercial
distribution into one of three classes: Class I, II or III. This classification
is based on the controls that are perceived to be necessary to reasonably ensure
the safety and effectiveness of medical devices. Class I devices are those
devices, the safety and effectiveness of which can reasonably be ensured through
general controls, such as adequate labeling, advertising, premarketing
notification and adherence to the FDA's Quality System Requirements regulations.
Some Class I devices are exempt
from some of the general controls. Class II devices are those devices the safety
and effectiveness of which can reasonably be assured through the use of special
controls, such as performance standards, postmarket surveillance, patient
registries and FDA guidelines. Class III devices are devices that must receive
premarketing approval by the FDA to ensure their safety and effectiveness.
Generally, Class III devices are limited to life sustaining, life supporting or
implantable devices, or to new devices that have been found not to be
substantially equivalent to legally marketed devices.
19
There are two principal methods by which FDA
approval may be obtained. One method is to seek FDA approval through a
premarketing notification filing under Section 510(k) of the Food, Drug and
Cosmetics Act. If a manufacturer or distributor of a medical device can
establish that a proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device or to a pre-1976 Class III medical
device for which the FDA has not called for a pre-marketing approval, the
manufacturer or distributor may seek FDA Section 510(k) premarketing clearance
for the device by filing a Section 510(k) premarketing notification. The Section
510(k) notification and the claim of substantial equivalence will likely have to
be supported by various types of data and materials, possibly including clinical
testing results, obtained under an Investigational Device Exemption granted by
the FDA. The manufacturer or distributor may not place the device into
interstate commerce until an order is issued by the FDA granting premarketing
clearance for the device. There can be no assurance that the Company will obtain
Section 510(k) premarketing clearance for any of the future devices for which
the Company seeks such clearance including the PhotonTM laser
system.
The FDA may
determine that the device is "substantially equivalent" to another legally
marketed Class I, Class II or pre-1976 Class III device for which the FDA has
not called for a premarketing approval, and allow the proposed device to be
marketed in the United States. The FDA may determine, however, that the proposed
device is not substantially equivalent, or may require further information, such
as additional test data, before the FDA is able to make a determination
regarding substantial equivalence. A "not substantially equivalent"
determination or a request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
its business, operating results and financial condition.
The alternate
method to seek approval is to obtain premarketing approval from the FDA. If a
manufacturer or distributor of a medical device cannot establish that a proposed
device is substantially equivalent to another legally marketed device, whether
or not the FDA has made a determination in response to a Section 510(k)
notification, the manufacturer or distributor will have to seek premarketing
approval for the proposed device. A premarketing approval application would have
to be submitted and be supported by extensive data, including preclinical and
clinical trial data to prove the safety and efficacy of the device. If human
clinical trials of a proposed device are required and the device presents a
significant risk, the manufacturer or the distributor of the device will have to
file an Investigational Device Exemption application with the FDA prior to
commencing human clinical trials. The Investigational Device Exemption
application must be supported by data, typically including the results of animal
and mechanical testing. If the Investigational Device Exemption application is
approved, human clinical trials may begin at a specific number of
investigational sites, and the approval letter could include the number of
patients approved by the FDA.
An Investigational
Device Exemption clinical trial can be divided into several parts or phases.
Sometimes a company will conduct a feasibility study (Phase I) to confirm that a
device functions according to its design and operating parameters. This is a
usual clinical trial site. If the Phase I results are promising, the applicant
may, with the FDA's permission, expand the number of clinical trial sites and
the number of patients to be treated to assure reasonable stability of clinical
results. Phase II studies are performed to confirm predictability of results and
the absence of adverse reactions. The applicant may, upon receipt of the FDA's
authorization, subsequently expand the study to a third phase with a larger
number of clinical trial sites and a greater number of patients. This involves
longer patient follow-up times and the collection of more patient data. Product
claims, labeling and core data for the premarketing approval are derived
primarily from this portion of the clinical trial. The applicant may also, upon
receipt of the FDA's permission, consolidate one or more of such portions of the
study. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study, provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
Although both approval methods may require clinical testing of the device in
question under an approved Investigational Device Exemption, the premarketing
approval procedure is more complex and time consuming.
Upon receipt of the
premarketing approval application, the FDA makes a threshold determination
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the premarketing approval is sufficiently complete to
permit a substantive review, the FDA will "file" the application. Once the
submission is filed, the FDA has by regulation 90 days to review it; however,
the review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should beapproved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's Quality System Requirements prior to
approval of a premarketing application. While the FDA has responded to
premarketing approval applications within the allotted time period, premarketing
approval reviews generally take approximately 12 to 18 months or more from the
date of filing to approval. The premarketing approval process is lengthy and
expensive, and there can be no assurance that such approval will be obtained for
any of the Company's products determined to be subject to such requirements. A
number of devices for which other companies have sought premarketing approval
have never been approved for marketing.
20
Any products
manufactured or distributed by the Company pursuant to a premarket clearance
notification or premarketing approval are or will be subject to pervasive
and continuing regulation by the FDA. The Food, Drug and Cosmetics Act also
requires that the Company's products be manufactured in registered
establishments and in accordance with Quality System Requirements regulations.
Labeling, advertising and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The export of
medical devices is also subject to regulation in certain instances. In addition,
the use of the Company's products may be regulated by various state agencies.
All lasers manufactured for the Company are subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records, to incorporate certain design and operating features in lasers sold to
end users pursuant to specific performance standards, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product, as established by the
performance standards.
Although the
Company believes that it currently complies and will continue to comply with all
applicable regulations regarding the manufacture and sale of medical devices,
such regulations are always subject to change and depend heavily on
administrative interpretations. There can be no assurance that future changes in
review guidelines, regulations or administrative interpretations by the FDA or
other regulatory bodies, with possible retroactive effect, will not materially
adversely affect the Company. In addition to the foregoing, the Company is
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations and that such compliance will not have a
material adverse effect upon the Company's ability to conduct
business.
The Company and the
manufacturers of its products may be inspected on a routine basis by both the
FDA and individual states for compliance with current Quality System
Requirements regulations and other requirements.
Congress has
considered several comprehensive federal health care programs designed to
broaden coverage and reduce the costs of existing government and private
insurance programs. These programs have been the subject of criticism within
Congress and the health care industry, and many alternative programs and
features of programs have been proposed and discussed. Therefore, the Company
cannot predict the content of any federal health care program, if any is passed
by Congress, or its effect on the Company and its business. Some measures that
have been suggested as possible elements of a new program, such as government
price ceilings on non-reimbursable procedures and spending limitations on
hospitals and other healthcare providers for new equipment, could have an
adverse effect on its business, operating results or financial condition.
Uncertainty concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on the
Company's business could result in volatility of the market price of its common
stock.
Furthermore, the
introduction of the Company's products in foreign countries may require it to
obtain foreign regulatory clearances. The Company believes that only a limited
number of foreign countries have extensive regulatory requirements, including
France, Germany, Korea, China and Japan. The time involved for regulatory
approval in foreign countries varies and can take a number of years. A number of
European and other economically advanced countries, including Italy, Norway,
Spain and Sweden, have not developed regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a premarketing approval, Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine the
nature of devices that they will use in medical procedures. The Company's two
ultrasound surgical and diagnostic systems, the PhotonTM laser
cataract system it is developing and the ocular blood flow analyzer and the UBM
biomicroscope are all devices which require FDA approval. Therefore, a
significant aspect of the acceptance of the devices in the market is the
Company's effectiveness in obtaining the necessary approvals. Having an approved
Investigational Device Exemption allows the Company to export a product to
qualified investigational sites.
21
Regulatory
Status of Products
All of the
Company's products, with the exception of the PhotonTM, are
approved for sale in the U.S. by the FDA under a 510(k). All of the Company's
products have been accepted for import into CE countries and various non-CE
countries.
The Company
acquired permission from the FDA to export the PhotonTM laser
cataract system outside the United States under an open Investigational Device
Exemption granted by the FDA in September 1994. Although the PhotonTM laser
cataract system is uniquely configured in an original and proprietary manner,
the laser system, a Nd:YAG laser, is not proprietary to the device or the
Company and is widely used in the medical industry and other industries as well.
Of particular significance is the fact that this particular component has
received previous market clearance from the FDA for other ophthalmic and medical
applications. Also of significance is the Company's belief that the surgical
treatment method used with the PhotonTM laser
is similar to the current ultrasound cataract treatment employed by
ophthalmologists.
The Company
submitted a Premarket Notification 510(k) application to the FDA for the
PhotonTM laser
cataract system in September 1993. The FDA requested clinical support data for
claims made in the 510(k), and in October 1994 the Company submitted an
Investigational Device Exemption application to provide for a "modest clinical
study" in order to collect the data required by the FDA for clearance of the
PhotonTM
laser cataract system. The FDA granted this Investigational Device
Exemption in May 1995 for a Phase I Feasibility Study. The Company began human
clinical trials in April 1996 and completed the Phase I study in November 1997.
The Company started Phase II trials in September 1998 and completed numerous
cases of treatment group and control group patients, which were included in its
submission to the FDA.
The Company
received a warning letter dated August 30, 2000 from the Office of Compliance,
Center for Devices and Radiological Health of the Food and Drug Administration
relating to certain deficiencies in the human clinical trials for its
PhotonTM Laser
Cataract System. The warning letter concerned the conditions found by the FDA
during several audits at its clinical sites. The FDA's comments were isolated to
the administrative procedures of compiling data from the clinical sites. The
Company responded to the warning letter in a submission dated September 27,
2000. In the submission the Company took corrective action that included
submitting a revised clinical protocol and case report forms and procedures for
the collection and control of data. In a subsequent letter dated November 2,
2000 to the Company, the FDA granted conditional approval provided that the
Company correct certain deficiencies. After providing several additional
submissions to the FDA, the Company received a letter dated February 13, 2001
from the FDA stating that the deficiencies had been corrected and the clinical
trials could continue.
Subsequent to the
warning letter, the Company received approval to continue its clinical trials,
the results of which were included in its supplemental submission to the FDA in
October 2001 for the existing (510)(k) predicate device application for the
PhotonTM
laser system. In December 2001, the Company received a preliminary review
from the FDA regarding the supplemental submission. As a result of that
preliminary review, the Company submitted additional clinical information to the
FDA on February 6, 2002. The application is receiving ongoing review by the FDA.
On May 7, 2002, the Company received a letter from the FDA requesting further
clinical information. The Company has generated additional clinical information
in response to the letter and is uncertain if the Company will make a submission
to the FDA with the additional clinical information. Because of the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the Company. Its diagnostic products are currently its
major focus and the PhotonTM and
other extensive research and development prospects have been put on hold pending
future evaluation until the Company's financial position improves. Its focus is
not on any specific diagnostic product or products, but rather on its entire
group of diagnostic products.
Employees
As of March 31,
2008, the Company had 24 full-time employees. This number does not include its
manufacturer's representatives who are independent contractors rather than its
employees. The Company also utilizes several consultants and advisors. There can
be no assurance that the Company will be successful in recruiting or retaining
key personnel. None of its employees are a member of a labor union and the
Company has never experienced any business interruption as a result of any labor
disputes.
22
In December 2001 the Company initiated the
first phase of a corporate downsizing program to reduce its operating expenses.
The Company implemented the second phase of its downsizing program in the second
quarter of 2002, by closing and transferring its manufacturing from its site in
San Diego, California to Salt Lake City, resulting in further reductions in
operating expenses. As a result of the downsizing program and some resignations,
the number of its employees has been reduced by 72% from 112 to 22 employees.
The estimated cost savings from the downsizing program will be in excess of
$2,000,000 annually. The costs of downsizing have included onetime expenses of
approximately $43,000 for moving and travel. In addition, the Company incurred
additional onetime expenses of approximately $18,000 for housing accommodations
for key employees working in Salt Lake City. The Company realized a net cost
savings from down sizing of approximately $2,394,000 during the twelve months
ended December 31, 2002.
Item 2. Description of
Property
The Company's
corporate offices are currently located at 2355 South 1070 West, Salt Lake City,
Utah. This facility consists of 16,926 square feet of leased office and
warehouse space. These facilities are leased from Eden Roc, a California
partnership, at a base monthly rate of $7,109, plus a $1,690 monthly common area
maintenance fee. In January 2003, the Company renegotiated a three-year lease
with Eden Roc at a monthly rate of $9,295, plus a $1,859 common area maintenance
fee for the year 2003, with the rate increased to $11,433 (including a $1,859
common area maintenance fee) for 2004 and to $11,720 (including a $1,859 common
area maintenance fee) for 2005. Pursuant to the lease, the Company pays all real
estate and personal property taxes and the insurance costs on the premises. The
lease expired on December 31, 2005. Since January 1, 2006, the Company has
leased 16,926 square feet of space in the facility on a month to month basis at
a monthly rate of $7,109 plus a $1,690 common area maintenance fee.
The Company
believes that these facilities are adequate and satisfy its needs for the
foreseeable future.
Item
3. 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 attorney's 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 PhotonTM 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 December 27,
2007, the Company entered into a settlement agreement with Larry Hicks to settle
the lawsuit Mr. Hicks brought against the Company for payments due under a
consulting agreement with the Company in the Third Judicial District Court, Salt
Lake County, State of Utah (Civil No. 030922220). Under the terms of
the settlement agreement, the Company agreed to pay Mr. Hicks a total of
$20,000, of which $10,000 has been paid. The remaining amount owing
of $10,000 is to be paid in quarterly installments of $2,500 each prior to the
end of the next four consecutive quarters, with the next payment due on or
before June 30, 2008.
23
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
4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the
Company's shareholders during the quarter ended December 31, 2006.
PART
II
Item
5. Market for Common Equity and Related Stockholder Matters
The Company's
authorized capital stock consists of 800,000,000 shares of common stock, $.001
par value per share, and 5,000,000 shares of preferred stock, $.001 par value
per share. The Company has created seven classes of preferred stock, designated
as Series A preferred stock, Series B preferred stock, Series C preferred stock
, Series D preferred stock, Series E preferred stock, Series F preferred stock
and Series G preferred stock.
The Company's
common stock trades on the OTC Bulletin Board under the symbol of "PMED.OB."
Prior to July 22, 1996, there was no public market for the common stock. From
July 22, 1996 to June 25, 2003, the Company's common stock was listed on the
Nasdaq SmallCap Market. Since June 25, 2003, the common stock has traded on the
OTC Bulletin Board. As of March 31, 2008, the closing sale prices of the common
stock was $.001 per share. The following are the high and low sale prices for
the common stock by quarter as reported by the OTC Bulletin Board since January
1, 2004.
|
Common
Stock
Price
Range
|
||
|
Period
(Calendar Year)
|
High
|
Low
|
|
2005
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2006
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2007
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2008
First
Quarter
|
.10
.09
.10
.048
.047
.014
.007
.005
.032
.014
.007
.005
.0023
|
.08
.07
.001
.001
.001
.006
.004
.003
.003
.006
.004
.003
.0008
|
The Company's
Series A preferred stock, Series B preferred stock, Series C preferred stock,
Series D preferred stock, Series E preferred stock, Series F preferred stock and
Series G preferred stock are not publicly traded. As of March 31, 2008, there
were 4,781 record holders of common stock, six record holders of Series A
preferred stock, four record holders of Series B preferred stock, no record
holders of Series C preferred stock, one record holder of Series D preferred
stock, one record holder of Series E preferred stock, 18 record holders of
Series F preferred stock, and one record holder of Series G preferred
stock.
24
The Company has
never paid any cash dividends on its common stock and does not anticipate paying
any cash dividends on its common stock in the foreseeable future. The Company
must pay cash dividends to holders of its Series A preferred, Series B
preferred, Series C preferred, Series D preferred stock, Series E preferred,
Series F preferred stock and Series G preferred stock before it can pay any cash
dividend to holders of its common stock. Dividends paid in cash pursuant to
outstanding shares of its Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock are only payable from its surplus
earnings, and are noncumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next.
The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its proposed business and operations. Any payment of cash dividends in
the future on the common stock will be dependent upon its financial condition,
results of operations, current and anticipated cash requirements, plans for
expansion, restrictions, if any, under any debt obligations, as well as other
factors that its board of directors deems relevant. The Company issued 6,764
shares of its Series A preferred and 6,017 shares of its Series B preferred on
January 8, 1996 as a stock dividend to Series A and Series B preferred
shareholders of record as of December 31, 1994.
Item
6. 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 exists. 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 reshipped 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.
25
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.
5. Revenues
for sales of products that require specific installation and acceptance by the
customer are recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems, ultrasound
diagnostic devices, and disposable products are recognized when the product is
shipped. A signed purchase agreement and a deposit or payment in full
from customers is required before a product leaves the
premises. Title passes at time of shipment (F.O.B. shipping
point). The Company's products contain both hardware and software
components. The Company does not recognize revenue for the software
components of the products separate from the product as a whole because the
software is incidental to the product, as defined in paragraph 2of SOP
97-2.
Recoverability of Inventory.
Since its inception, the Company has purchased several complete lines of
inventory. In some circumstances the Company has been able to utilize certain
items acquired and others remain unused. On a quarterly basis, the Company
attempts to identify inventory items that have shown relatively no movement or
very slow movement. Generally, if an item has shown little or no movement for
over a year, it is determined not to be recoverable and a reserve is established
for that item. In addition, if the Company identifies products that have become
obsolete due to product upgrades or enhancements, a reserve is established for
such products. The Company intends to make efforts to sell these items at
significantly discounted prices. If items are sold, the cash received would be
recorded as revenue, but there would be no cost of sales on such items due to
the reserve that has been recorded. At the time of sale, the inventory would be
reduced for the item sold and the corresponding inventory reserve would also be
reduced.
Recoverability of Goodwill and Other
Intangible Assets. The Company's intangible assets consist of goodwill,
product and technology rights, engineering and design costs, and patent costs.
Intangibles with a determined life are amortized on a straight-line basis over
their determined useful life and are also evaluated for potential impairment if
events or circumstances indicate that the carrying amount may not be
recoverable. Intangibles with an indefinite life, such as goodwill, are not
amortized but are tested for impairment on an annual basis or when events and
circumstances indicate that the asset may be impaired. Impairment tests include
comparing the fair value of a reporting unit with its carrying net book value,
including goodwill. To date, the Company's determination of the fair value of
the reporting unit has been based on the estimated future cash flows of that
reporting unit.
Allowance for Doubtful Accounts.
The Company records an allowance for doubtful accounts to offset
estimated uncollectible accounts receivable. Bad debt expense associated with
the increases in the allowance for doubtful accounts is recorded as part of
general and administrative expense. The Company's accounting policy generally is
to record an allowance for receivables over 90 days past due unless there is
significant evidence to support that the receivable is collectible.
General
The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements, which involve risks and
uncertainty. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
discussed in this section. The Company's fiscal year is from January 1 through
December 31.
The Company is
engaged in the design, development, manufacture and sale of high technology
diagnostic 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 twelve months ended December 31, 2007, diagnostic
products have been the major focus and the PhotonTM 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
this entire diagnostic product group.
During the year
ended December 31, 2007, the Company recorded an increase in the warranty
accrual of $72,000. This increase was a result of a comprehensive analysis by
management regarding historic warranty costs. Historically, the Company has
recorded a monthly warranty expense and related increase to the warranty
accrual. However, in recent periods the usage of the warranty accrual has
continued to increase. After reviewing the recent historical data, management
determined that the warranty accrual should be increased by $72,000 to $227,000.
Management will continue to closely monitor the warranty accrual usage to ensure
that the proper amount has been accrued.
26
During the twelve
months ended December 31, 2007, management made certain adjustments to the
financial statements, including a decrease in the reserve for obsolete or
estimated non-recoverable inventory of $1,076,000. The Company also recorded a
net increase in the allowance for doubtful accounts receivable of $37,000,
impairment of intangibles of $-0-, and decreases in accruals to settle
outstanding disputes in the amount of $91,000.
The Company's
ultrasound diagnostic products include a P2200 pachymetric analyzer, a P2000
Ultrasound A-Scan biometric analyzer, a P2500 combination A/Scan and Pachymeter,
a P37 Ultrasound A/B Scan, a P37-II Ultrasound A/B Scan, a P2700 Ultrasound A/B
Scan, a P3700 Ultrasound A/B Scan, a P40 Ultrasound Biomicroscope, a P45 Plus
Ultrasound Biomicroscope, and a P60 Ultrasound Biomicroscope, the technology for
which was acquired from Humphrey Systems in 1998. The Company introduced the P45
Plus in the fall of 2000, which combines the A/B Scan, and the biomicroscope
into one instrument. The Company introduced the P60 in March 2005, which
represents the fourth generation of UBM devices and has better visual clarity
and image flexibility than earlier versions. In addition, the Company markets
its Blood Flow AnalyzerTM
acquired in the purchase of Ocular Blood Flow Ltd. in June 2000. Other
diagnostic products are the DiconTMLD400
Auto Perimeter and the DiconTM CT 200e
Corneal Topographer, which were acquired in the acquisition of Vismed d/b/a
Dicon in June 2000.
Because of the
"going concern" status of the Company, management has focused efforts on those
products and activities that will, in its opinion, achieve the most resource
efficient short-term cash flow to the Company. As reflected in the results for
the fiscal year ended December 31, 2007, diagnostic products are currently the
Company's major focus and the PhotonTM and
other extensive research and development projects have been put on hold pending
future evaluation when the financial position of the Company improves. Due to
the lack of current evidence to support recoverability, the Company has recorded
an inventory reserve to offset the inventory associated with the Precisionist
Thirty ThousandTM and the
PhotonTM as well
as certain other inventory items that are estimated to be non-recoverable due to
the lack of significant turnover of such items in recent periods.
Activities for the
twelve months ended December 31, 2007 and 2006 included sales of the Company's
products and related accessories and disposable products. Raymond P.L. Cannefax
was named President and Chief Executive Officer on January 5, 2006. On March 20,
2006, the Company named Luis A. Mostacero as Vice President of Finance. Mr.
Mostacero previously served as the Company's Controller from June 2000 to August
2005. On January 8, 2008, Mr. Mostacero was also appointed as Chief Financial
Officer. On October 11, 2006, Christina O'Connor was appointed as Vice President
of International Sales and Julio C. Maximo as Vice President of Operations. On
April 10, 2006, the Company named Michael S. Austin as Vice President of Sales
and Marketing. On November 28, 2006, Mr. Austin resigned from the Company. On
January 4, 2007, Alfred B. Franklin was appointed as Vice President of Domestic
Sales. Mr. Franklin resigned on May 10, 2007, to pursue other opportunities. On
May 10, 2007, Stephen L. Davis was appointed as Vice President of Domestic Sales
and Marketing. Mr. Davis resigned on February 14, 2008, to pursue other
opportunities.
On May 7, 2002, the
Company received a letter from the FDA requesting further clinical information
regarding the PhotonTM. The
Company is in the process of generating the additional clinical information in
response to the letter. The Company cannot market or sell the PhotonTM in the
United States until FDA approval is granted. On November 4, 2002, the Company
received FDA approval for expanded indications of use of the Blood Flow
AnalyzerTM for
pulsatile ocular blood flow, volume and pulsatility equivalence index. Also, the
Company is continuing its efforts to educate the payors of Medicare claims
throughout the country about the Blood Flow AnalyzerTM, its
purposes and the significance of its performance in patient care in order to
achieve reimbursements to the providers. These efforts should lead to a more
positive effect on sales.
In April 2001, the
Company received written authorization from the CPT Editorial Research and
Development Department of the American Medical Association to use a common
procedure terminology or CPT code number 92120 for its Blood Flow AnalyzerTM, for
reimbursement purposes for doctors using the device. However, certain
insurance payors have elected not to reimburse doctors using the Blood Flow
AnalyzerTM. The
Company believes the reasons why insurance payors initially elected not to
reimburse doctors using the CPT code were the relatively high volume of claims
that began to be submitted under CPT code number 92120 compared to the limited
volume of claims previously submitted under this code, and the time consumed by
the Blood Flow AnalyzerTM test,
which some payors may have believed was less than what is allowed under CPT code
number 92120. This trend began shortly after insurance payors were presented
with reimbursement requests under this code, and the Company believes these
reasons were the basis for the initiation of nonpayment.
The impact of this
nonpayment by certain payors on the Company's future operations is a lower
volume of sales,
27
particularly in
those states where reimbursement is not yet approved or is delayed. Currently,
there is reimbursement by insurance payors in 20 states and partial
reimbursement in six other states. As insurance payors have the prerogative
whether to provide reimbursement to doctors using the Blood Flow AnalyzerTM, the
Company is continuing to work with insurance payors in states where there is no
reimbursement to doctors using the CPT code to demonstrate the value of the
instrument. However, some insurance payors are currently not providing
reimbursement to doctors where a regional or state administrator of Medicare has
elected not to provide Medicare coverage for the Blood Flow AnalyzerTM. The
Company is continuing to work with the regional and state administrators of
Medicare who have denied Medicare coverage for the Blood Flow AnalyzerTM to
demonstrate the value of the instrument.
There were a number
of factors that contributed to the decrease in sales of the Company's diagnostic
products. The U.S. recessionary economic trend has impacted the Company's
domestic sales. Additionally, the Company restructured its sales organization
and sales channels by decreasing its direct sales force who are full-time
employees to five direct sales employees and one independent sales organization
as of December 31, 2007. The dependent sales force has been reduced because the
Company does not have sufficient revenues to justify a larger direct sales
force. One of the challenges for fiscal 2008 will be the judicious
reestablishment of the sales force in anticipation of increased
sales.
The Company intends
to increase its efforts to sell its diagnostic products through independent
sales representatives and ophthalmic equipment distributors, which are paid
commissions only for their sales. As of December 31, 2007, the Company had 24
ophthalmic and medical product distributors outside the United States. The
Company hopes to benefit from these recently hired sales representatives and
distributors in the United States as they gain familiarity, through training, of
the Company's diagnostic products.
Outstanding
Commitments to Issue Shares
The following table
identifies our outstanding commitments to issue shares, including the shares
underlying the convertible notes and warrants issuable upon conversion of the
notes and exercise of the warrants:
|
Underlying
Shares
|
||
|
Security
|
of
Common Stock
|
|
|
Notes
(1)
|
3,637,280,000
|
|
|
Warrants
(2)
|
54,034,392
|
|
|
Preferred
Stock (3)
|
862,404
|
|
|
Stock Options
(4)
|
11,500,000
|
|
|
Total
|
3,703,676,796
|
|
|
(1)
|
Assumes full
conversion of $3,928,262 of notes issued to AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium Capital
Partners 11, LLC at a conversion price of $.00108 per share (based upon a
market price of $.0018 as of January 14, 2008 with a 40%
discount).
|
|
(2)
|
Consisting of
warrants exercisable at prices ranging from $.001 per share to $6.75 per
share, including warrants issued to AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, and New Millennium Capital Partners II, LLC
to purchase 16,534,392 shares of common stock at an exercise price of $.20
per share, exercisable through the period from April 27, 2010 to June 30,
2010, and warrants to purchase 12,000,000 shares of common stock at an
exercisable price of $.10 per share, exercisable through the period from
February 28, 2011 to April 20, 2012, warrants to purchase 10,000,000
shares of common stock at an exercise price of $.005 per share,
exercisable through June 11, 2012, and warrants to purchase 15,000,000
shares of common stock at an exercise price of $.001 per share,
exerciseable through December 24,
2012.
|
|
(3)
|
Consisting of
6,753 shares of common stock issuable upon conversion of 5,627 shares of
Series A preferred stock, 10,783 shares of common stock issuable upon
conversion of 8,986 shares of Series B preferred stock, 8,750 shares of
common stock issuable upon conversion of 5,000 shares of Series D
preferred stock, 13,333 shares of common stock issuable upon conversion of
250 shares of Series E preferred stock, 234,550 shares of common stock
issuable upon conversion of 4,398.75 shares of Series F preferred stock,
and 588,235 shares of common stock issuable upon conversion of 588,235
shares of Series G preferred
stock.
|
28
|
(4)
|
Consisting of
stock options granted to executive officers and employees to purchase
9,250,000 shares of common stock at exercise prices ranging from $.01 per
share to $2.75 per share, and stock options granted to directors to
purchase 2,250,000 shares of common stock at exercise prices ranging from
$.01rshare to $2.75 per share.
|
There are a total
of 3,703,701,796 shares underlying our convertible notes, warrants, preferred
stock and stock options, assuming full conversion of the outstanding notes and
preferred stock d the exercise of all the outstanding warrants and stock
options. The number of our authorized shares of common stock is 1,400,000,000
shares. The large number of our shares of common stock underlying our notes,
warrants, preferred stock and stock options will require us to increase the
number of authorized shares. Failure to obtain stockholder approval to increase
the number of authorized shares could result in the noteholders commencing legal
action against us and foreclosing on all of our assets to recover damages. Any
such action would require us to curtail or cease our operations.
Convertible
Notes
April 27, 2005 Sale 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 the convertible notes and warrants is to occur in three
traunches and the investors provided the Company with an aggregate of$2,500,000
as follows:
|
•
|
$850,000 was
disbursed on April 27, 2005;
|
|
•
|
$800,000 was
disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of 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 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
April27, 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 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) $.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.
29
The convertible
notes are secured by the Company's assets, including the Company's inventory,
accounts receivable and intellectual property. Moreover, the Company has a call
option under the terms of the notes. The call option provides the Company with
the right to prepay all of the outstanding convertible notes at any time,
provided there is no event of default by the Company and the Company's stock is
trading at or below $.09 per share. An event of default includes the failure by
the Company to pay the principal or interest on the 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 notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (b) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding principal
and accrued interest for prepayments occurring after the 60th day following the
issue date of the notes.
The warrants are
exercisable until five years from the date of issuance at a purchase price of
$.20 per share. The investors may exercise the warrants on a cashless basis if
the shares of common stock underlying the warrants are not 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 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 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.
As of December 31,
2007, there was an outstanding balance of $1,443,000 in principle and accrued
interest on the convertible notes. During the years ended December
31, 2007 and 2006, the Company issued 283,017,246 and 105,529,700 shares of
common stock for the conversion of $212,000 and $381,000 of the convertible
notes, respectively.
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 15, 2006 to register 60,000,000 shares of common
stock issuable upon conversion of the
notes.
|
|
|
•
|
$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 also agreed 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
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.
30
The $1,500,000 in
convertible notes bear interest at 8% per annum from the date of issuance.
Interest is computed on the basis of a 365-day year and is payable quarterly in
cash, with six months of interest payable up front. The interest rate resets to
zero percent for any month in which the stock price is greater than 125% of the
initial market price, or $.0275, for each trading day during that month. Any
amount of principal or interest on the convertible notes that is not paid when
due will bear interest at the rate of 15% per annum from the date due thereof
until such amount is paid. The 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) 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 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 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 notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (b) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding principal
and accrued interest for prepayments occurring after the 60`'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 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 notes issued pursuant to the securities purchase
agreement.
The noteholders
have agreed to
restrict their ability to convert their callable secured convertible notes or
exercise their warrants and receive shares of 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.
As of December 31,
2007, there was an outstanding balance of $1,334,000 in principle and accrued
interest on the convertible notes. During the year ended December 31,
2007, the Company issued 60,000,000 shares of common stock for the conversion of
$167,000 of the convertible notes.
June 11, 2007 Sale of $500,000 in
Callable Secured 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.
31
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 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 (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
6O' 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 the June 11, 2007
closing date and the effectiveness of the registration is to be within 135days
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 December 31,
2007, there have been no conversions of these convertible notes. Upon
conversion of the convertible notes, the Company extinguishes the convertible
debt and related embedded derivatives and no gain or loss is recorded
on the Company's statements of operations as a result of said
conversion.
December 19, 2007 Issuance of
$389,010 in Callable Convertible Notes: On December 19, 2007, the Company
was notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was.$389,010. To pay this interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31, 2010.
Accordingly, on December 19, 2007, the Company issued $389,010 in convertible
notes to the noteholders as full payment of the past due interest.
32
The $389,010 in
convertible notes bear interest at 2% per annum from December 31, 2007. 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 convertible notes mature on
December 31, 2010, 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 $389,010 in
convertible notes have 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 $.04 per share. An event of default
includes the failure by the Company to pay the principal or interest on the
convertible notes when due. Prepayment of the convertible notes is to be made in
cash equal to either (a) 135% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(b) 145% of the outstanding principal and accrued interest for prepayments
occurring between 31 and 60 days following the issue date of the notes; or (c)
150% of the outstanding principal and accrued interest for prepayments occurring
after the 60th day
following the issue date of the notes.
The noteholders
have agreed to restrict their ability to convert their convertible notes 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 does not exceed 4.9% 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 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.
As of December 31,
2007, there have been no conversions of these convertible notes. Upon
conversion of the convertible notes, the Company extinguishes the convertible
debt and related embedded derivatives and no gain or loss is recorded on the
Company's statements of operations as a result of said conversion.
December 24, 2007 Sale of $250,000
in Callable Secured Convertible Notes: To obtain further funding for the
Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with the same four accredited investors
for the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 15,000,000 shares of its common stock. The investors
disbursed $250,000 to the Company on December 24, 2007.
Under the terms of
the December 24, 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 December 24, 2007 and ending on the later of (a) 270 days from
December 24, 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 December24, 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.
33
The $250,000 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 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 $250,000 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 (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60th
day following the issue date of the notes.
The warrants are
exercisable until seven years from the date of issuance at a purchase price of
$.001 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 December 24, 2007. The registration statement must be filed
with the Securities and Exchange Commission within 60 days of the December 24,
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 December 31,
2007, there have been no conversions of these convertible notes. Upon
conversion of the convertible notes, the Company extinguishes the convertible
debt and related embedded derivatives and no gain or loss is recorded
on the Company's statements of operations as a result of said
conversion.
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, June 11, 2007, December 19, 2007, and
December 24, 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 $3,928,262 principal amount of the convertible
notes on December 31, 2007 (consisting of $5,139,010 in convertible notes that
were sold to the four investors pursuant to securities purchase agreements dated
April27, 2005, February 28, 2006, June 11, 2007, and December 24, 2007, plus
$389,010 in convertible notes issued on December 19, 2007 in payment of past due
interest on the notes, less $1,210,748 in notes converted during the period from
June 12,2005 to December 31, 2007) and a conversion price of $.0018 per share
with a 40% discount, the number of shares issuable upon conversion would
be:
$3,928,262/$.0018 x
60% = 3,637,280,000 shares.
34
The Company's
obligation to issue shares upon conversion of the convertible notes issued on
April 27, 2005, February 28, 2006, June 11, 2007, December 19, 2007, and
December 24, 2007 is essentially limitless. The following is an example of the
amount of shares of common stock that are issuable upon conversion of $3,928,262
principal amount of the convertible notes (including accrued interest), based on
market prices 25%, 50%, and 75% below the market price, as of January 14, 2008
of $.0018 with a 40% discount:
|
%
Below
Market
|
Price
Per
Share
|
With
40%
Discount
|
Number
of
Shares
Issuable
|
% of
Outstanding
Shares*
|
|
25%
50%
75%
|
$.00135
$.0009
$.00045
|
$.00081
$.00054
$.00027
|
4,849,706,000
7,274,559,000
14,594,118,000
|
712%
10,682%
21,365%
|
*Based on
680,984,307 shares outstanding.
As illustrated, the
number of shares of common stock issuable upon conversion of the Company's
callable secured convertible notes will increase if the market price of the
Company's common stock declines, which will cause dilution to existing
stockholders.
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 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.
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 a second securities purchase agreement for the
sale of an aggregate of $1,500,000 principal amount of convertible notes. On
June 11, 2007and December 24, 2007, the Company entered into third and fourth
securities purchase agreements for the sale of an aggregate of $750,000
principal amount of convertible notes. On December 19, 2007, the Company issued
an additional $389,010 in convertible notes as payment of past due interest
owing on the outstanding 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. 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.
35
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.
Results
of Operations
Fiscal
Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31,
2006
Net sales for the
twelve months ended December 31, 2007 decreased by $323,000 to $1,872,000 as
compared to $2,195,000 for the same period of 2006. This reduction in sales was
primarily due to decreased sales of the P40, P45 and P60 Ultrasound
Biomicroscopes, and the P37 A/B Scan Ocular Ultrasound Diagnostic.
For the twelve
months ended December 31, 2007, sales from the Company's diagnostic products
totaled $1,707,000, or 91% of total revenues, compared to $1,928,000, or 88% of
total revenues for the same period of 2006.The remaining 9 % of sales, or
$165,000 during the twelve months ended December 31, 2007 was from parts,
disposables, and service revenue. Sales of the P40, P45 and P60 UBM
Ultrasound Biomicroscopes decreased to $513,000 during the twelve months ended
December 31, 2007, or 27% of total revenues for the period, compared to
$547,000, or 25% of total revenues, for the same period last year. Sales of the
Blood Flow AnalyzerTM
increased by $46,000 to $257,000, or 14% of total revenues, for the
twelve months ended December 31, 2007, compared to net sales of $211,000,
or 10% of total revenues during the same period in 2006. Sales from the P37-II,
P2700 and P3700 A/B Scan Ocular Ultrasound Diagnostic increased to $210,000, or
11% of total revenues, for the twelve month period ended December 31, 2007, up
compared to $221,000 for the same period last year. Combined sales of the LD 400
and TKS 5000 autoperimeters and the CT 200 Corneal Topographer were $388,000, or
20% of the total revenues, for the twelve months ended December 31, 2007,
compared to $856,000, or 39% of total revenues, for the same period of
2006.
Sales of the Blood
Flow AnalyzerTM
increased due in part from the reorganization of the Company's sales
force. The Company anticipates continuing the upward trend in Blood Flow
AnalyzerTM sales
through additional efforts by the Company to gain more wide spread support from
the Blood Flow AnalyzerTM through
increased clinical awareness, product development and improved marketing
plans.
Sales of surgical
products are at a standstill pending FDA approval of the PhotonTM laser
system. In the twelve month period ended December 31, 2007, the Company realized
no sales in the surgical line consisting of the PhotonTM laser
system. There were also no sales in the surgical line for the comparable period
of 2006.
Gross profit for
the twelve months ended December 31, 2007 increased to 46% of total revenues,
compared to 42%of total revenues for the same period in 2006. This increase in
gross profit in 2007 was mainly due to reductions in corporate expenditures due
to improved operating efficiencies during the twelve months ending December 31,
2007. There was no increase to cost of sales as a result of a charge to the
reserve for obsolete inventory in 2006.
Marketing and
selling expenses increased by $228,000, or 53%, to $662,000 for the twelve
months ended December 31, 2007, from $434,000 for the comparable period in 2006.
This increase was due primarily to an increased number of sales representatives
and higher travel related and associated sales expenses.
General and
administrative expenses increased by $206,000, or 26%, to $998,000 for the
twelve months ended December 31, 2007, from $792,000 for the comparable period
in 2006. Contributing to this increase was a $42,000 increase in salaries from
$246,000 in 2006 to $288,000 in 2007, primarily due to merit increases in the
salaries of existing employees. Commission expenses increased by $16,000 from
$72,000 in 2006 to $88,000 in 2007 due to an increased amount of convertible
notes sold in 2007 compared to 2006. Accounting support expenditures increased
by $25,000 in 2007 as a result of the necessary updates and modifications to the
Company's network system services and associated software support. The bad debt
allowance increased by $37,000 from $72,000 in 2006 to $109,000 in 2007due to an
increased amount of the Company's accounts receivable over 90 days during 2007
as compared to 2006.
36
Also during 2007,
the Company collected $22,000 in receivables that were previously allowed in the
allowance for doubtful accounts.
Research,
development and service expenses increased by $94,000, or 38%, to $344,000 for
the twelve months ended December 31, 2007, compared to $250,000 for the same
period of 2006. This increased was mainly due to the increased expenses in 2007
for the development of the new software package for the P60 UBM.
Liquidity
and Capital Resources
The Company used
$1,135,000 in cash in operating activities for the twelve months ended December
31, 2007, compared to $828,000 for the twelve months ended December 31, 2006.
The increase in cash used for operating activities for the twelve months ended
December 31, 2007 was primarily attributable to the Company's net loss,
increases in accounts receivable, and a significant decrease of the change of
the fair value of derivative liabilities. There was no cash used for investment
activities for the twelve months ended December 31, 2007, compared to cash used
for investment activities of $20,000 for the same period in 2006. Net cash used
in financing activities was $1,250,000 for the twelve months ended December 31,
2007, versus net cash used of $988,000 in the same period in 2006. The Company
had working capital of $758,000 as of December 31, 2007. In the past, the
Company has relied heavily upon sales of the Company's common and preferred
stock to fund operations. There can be no assurance that such equity funding
will be available on terms acceptable to the Company in the future.
As of December 31,
2007, the Company had net operating loss carryforwards (NOLs) of approximately
$56 million. These loss carryforwards are available to offset future taxable
income, if any, and have begun to expire in 2001and extend for twenty years. The
Company's ability to use net operating loss carryforwards (NOLs) to offset
future income is dependent upon certain limitations as a result of the pooling
transaction with Vismed and the tax laws in effect at the time of the NOLs being
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 December 31,
2007, the Company had accounts payable of $417,000, a significant portion of
which was over 90 days past due. 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
noncancelable capital lease obligations and operating lease obligations that
require the payment of approximately $110,000 in 2007, and $218,000 in
2006.
The Company has
taken numerous steps to reduce costs and increase operating efficiencies. These
steps consist of the following:
1. The
Company closed its San Diego facility. In so doing, numerous manufacturing,
accounting and management responsibilities were consolidated. In addition, such
closure resulted in significant head count reductions as well as savings in rent
and other overhead costs.
2. The
Company has reduced the size of its manufacturing facility and corporate office
in Salt Lake City. In doing so, management responsibilities were consolidated.
Such reduction in space resulted in a reduction in the number of employees, as
well as savings in rent and other overhead expenses.
3. The
Company has significantly reduced the use of consultants, which has resulted in
a large decrease to these expenses.
4. The
Company has reduced its direct sales force to five representatives, which has
resulted in less payroll, travel and other selling expenses.
37
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
15% of total outstanding receivables as of December 31, 2007 and 15% as of
December 31, 2006. The allowance for doubtful accounts increased from $72,000 at
December 31, 2006 to $109,000 at December 31, 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 twelve months ended December 31, 2007, the
Company added a net recovery of receivables previously allowed of $22,000, and
during the twelve months ended December 31, 2006, the Company had a net zero 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 $244,000 at
December 31, 2007 and $1,320,000 at December 31, 2006, or 22% and 58% 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. On December 31, 2007, the Company disposed of
$1,076,000 in obsolete inventory, which had been previously
reserved.
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™ 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™ in order to file for FDA approval
would depend on the Company obtaining adequate funding. The Company estimates
that the funds needed to complete the clinical trials in order to obtain the
necessary regulatory approval on the Photon™ to be approximately
$1,500,000.
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 a higher cost for equipment manufactured for the Company by
Tinsley in England due to the exchange rate value of the pound
sterling.
Impact
of 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 his
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.
38
In March 2006, the
FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets ("SFAS 156'). SFAS 156 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 SFAS 156 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.
SFAS 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. SFAS 156 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 SFAS 156, 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 more consistently than by reporting
other-than-temporary impairments. The Company believes the adoption of new
standards will not have a material effect on its financial position, results of
operations, cash flows, or previously issued financial reports.
In September 2006,
the FASB issued SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158"). Under SFAS 158, companies
must recognize a net liability or asset to report the funded status of their
defined benefit pension and other postretirement benefit plans on their balance
sheets. The effective date of the recognition and disclosure provisions for
calendar-year public companies is for calendar years ending after December 15,
2006. The Company is currently evaluating the impact of this new standard but it
is not expected to have a significant effect on the Company's consolidated
financial statements.
In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 will be applied prospectively and is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. SFAS 157 is not expected to have a material impact on the Company's
consolidated financial statements.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value, and establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective on January 1, 2008, and is not expected to
have a material effect on the Company's consolidated financial
statements.
In December 2007,
the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141R"). SFAS 141R establishes the principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in
the acquiree, and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective on January 1, 2009,
and is not expected to have a material effect on the Company's consolidated
financial statements.
In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS
160"). SFAS 160 will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. SFAS 160 is
effective on January 1, 2009, and is not expected to have a material effect on
the Company's consolidated financial statements.
39
Item 7. Financial
Statements
PARADIGM
MEDICAL INDUSTRIES, INC.
Financial
Statements
December
31, 2007 and 2006
40
PARADIGM MEDICAL INDUSTRIES,
INC.
Index to Financial Statements
Index to Financial Statements
|
Page
|
|
|
Report of
Independent Registered Public Accounting Firm
|
F-3
|
|
Balance
Sheet
|
F-4
|
|
Statements of
Operations
|
F-5
|
|
Statements of
Stockholders’ Equity
|
F-6
|
|
Statements of
Cash Flows
|
F-7
|
|
Notes to
Financial Statements
|
F-8
|
F-2
PARADIGM
MEDICAL INDUSTRIES, INC.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and shareholders
Paradigm
Medical Industries, Inc.
Salt
Lake City, Utah
We have audited the
accompanying balance sheet of Paradigm Medical Industries,
Inc. (the Company) as of December 31, 2007, and the related statements of
operations, stockholders’ deficit and cash flows for the years ended December
31, 2007 and 2006. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Boards (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, audits of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paradigm Medical Industries, Inc. as of December 31,
2007, and the results of their operations and their cash flows for the years
ended December 31, 2007 and 2006, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. As discussed in Note 2 to the financial statements,
the Company has a working capital deficit and has suffered recurring operating
losses, which raises substantial doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
As discussed in
Note 18 to the financial statements, there were errors in reporting the
Company’s accounting for the embedded derivatives and warrants issued in
connection with the Company’s convertible notes in the balance sheets and the
statements of operations that were discovered by
management. Accordingly, the financial statements have been restated
to correct the errors.
Chisholm, Bierwolf
& Nilson LLC
Bountiful,
Utah
May 15, 2008 except
for Notes 1, 6, 8, 13 and 18 dated September 10, 2008.
F-3
PARADIGM
MEDICAL INDUSTRIES, INC.
Balance
Sheet
December
31, 2007
|
(Restated)
|
||||
|
Assets
|
||||
|
Current
assets:
|
||||
|
Cash
|
$ | 321,000 | ||
|
Receivables,
net
|
624,000 | |||
|
Inventories,
net
|
847,000 | |||
|
Prepaid and
other assets
|
27,000 | |||
|
Total current
assets
|
1,819,000 | |||
|
Property and
equipment, net
|
16,000 | |||
|
Goodwill
|
339,000 | |||
|
Total
assets
|
$ | 2,174,000 | ||
|
Liabilities and
Stockholders’ (Deficit)
|
||||
|
Current
liabilities:
|
||||
|
Accounts
payable
|
$ | 370,000 | ||
|
Related
party payable
|
46,000 | |||
|
Accrued
liabilities
|
644,000 | |||
|
Total current
liabilities
|
1,060,000 | |||
|
Convertible
notes payable, net of debt discount of $828,000
|
3,100,000 | |||
|
Derivative
liabilities
|
210,000 | |||
|
Total
long-term liabilities
|
3,310,000 | |||
|
Total
liabilities
|
4,370,000 | |||
|
Commitments
and contingencies
|
- | |||
|
Stockholders’
(Deficit):
|
||||
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized,
|
||||
|
612,497
shares issued and outstanding (aggregate liquidation
|
||||
|
preference
of $456,000)
|
1,000 | |||
|
Common stock,
$.001 par value, 800,000,000 shares authorized,
|
||||
|
544,986,907
shares issued and outstanding
|
545,000 | |||
|
Additional
paid-in capital
|
57,662,000 | |||
|
Accumulated
deficit
|
(60,404,000 | ) | ||
|
Total
stockholders’ (Deficit)
|
(2,196,000 | ) | ||
|
Total
liabilities and stockholders’ (Deficit)
|
$ | 2,174,000 | ||
The accompanying
notes are an integral part of these financial statements
F-4
PARADIGM
MEDICAL INDUSTRIES, INC.
Statements
of Operations
Years
Ended December 31,
|
2007
|
2006
|
|||||||
|
(Restated)
|
(Restated)
|
|||||||
|
Sales
|
$ | 1,872,000 | $ | 2,195,000 | ||||
|
Cost of
sales
|
1,020,000 | 1,277,000 | ||||||
|
Gross
profit
|
852,000 | 918,000 | ||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(1,012,000 | ) | (792,000 | ) | ||||
|
Professional
fees-related party
|
- | (187,000 | ) | |||||
|
Marketing
and selling
|
(662,000 | ) | (434,000 | ) | ||||
|
Research
and development
|
(344,000 | ) | (250,000 | ) | ||||
|
Gain
on settlement of liabilities
|
91,000 | 34,000 | ||||||
|
Total
operating expenses
|
(1,927,000 | ) | (1,629,000 | ) | ||||
|
Operating
loss
|
(1,075,000 | ) | (711,000 | ) | ||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
- | 109,000 | ||||||
|
Interest
expense - Accretion of debt discount
|
(771,000 | ) | (720,000 | ) | ||||
|
Interest
income
|
11,000 | - | ||||||
|
Interest
expense
|
(221,000 | ) | (214,000 | ) | ||||
|
Gain
on derivative valuation
|
413,000 | 536,000 | ||||||
|
Total other
income (expense)
|
(568,000 | ) | (289,000 | ) | ||||
|
Income (loss)
before provision for income taxes
|
(1,643,000 | ) | (1,000,000 | ) | ||||
|
Provision for
income taxes
|
- | - | ||||||
|
Net
(loss)
|
$ | (1,643,000 | ) | $ | (1,000,000 | ) | ||
|
Earnings
(loss) per common share - basic
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Earnings
(loss) per common share - diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Weighted
average common shares - basic
|
264,736,000 | 175,034,000 | ) | |||||
|
Weighted
average common shares - diluted
|
264,736,000 | 175,034,000 | ) | |||||
The accompanying
notes are an integral part of these financial statements
F-5
PARADIGM
MEDICAL INDUSTRIES, INC.
Statements
of Stockholders’ Equity
For
the Period January 1, 2006 through December 31, 2007
|
Preferred
Stock (See Note 8)
|
Common
Shares
|
Amount
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
||||||||||||||||
|
Balance
at January 1, 2006 (Restated)
|
1,000 | 96,389,295 | 96,000 | 57,654,000 | (57,760,000 | ) | ||||||||||||||
|
Issuance of common
stock for:
|
||||||||||||||||||||
|
Stock option
valuation
|
- | - | - | 23,000 | - | |||||||||||||||
|
Conversion of
convertible debentures
|
- | 105,529,700 | 106,000 | 275,000 | - | |||||||||||||||
|
Unamortized
discount associated to convertible debenture convertions
|
(286,000 | ) | ||||||||||||||||||
|
Pro rata
portion of derivative liability associated with debenture
conversions
|
35,000 | |||||||||||||||||||
|
Conversion of
preferred stock
|
- | 39,999 | - | - | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,001,000 | ) | ||||||||||||||
|
Balance
at December 31, 2006 (Restated)
|
1,000 | 201,958,994 | 202,000 | 57,701,000 | (58,761,000 | ) | ||||||||||||||
|
Issuance of common
stock for:
|
||||||||||||||||||||
|
Stock option
valuation
|
- | - | - | 14,000 | - | |||||||||||||||
|
Conversion of
convertible debentures
|
- | 343,017,246 | 343,000 | 36,000 | - | |||||||||||||||
|
Unamortized
discount associated to convertible debenture convertions
|
(100,000 | ) | ||||||||||||||||||
|
Pro rata
portion of derivative liability associated with debenture
conversions
|
11,000 | |||||||||||||||||||
|
Conversion of
preferred stock
|
- | 10,667 | - | - | - | |||||||||||||||
|
Net
loss
|
- | - | - | - | (1,643,000 | ) | ||||||||||||||
|
Balance
at December 31, 2007 (Restated)
|
1,000 | 544,986,907 | 545,000 | 57,662,000 | (60,404,000 | ) | ||||||||||||||
The accompanying
notes are an integral part of these financial statements
F-6
PARADIGM MEDICAL INDUSTRIES,
INC.
Statements
of Cash Flows
Years
Ended December 31,
|
2007
|
2006
|
|||||||
|
(Restated)
|
(Restated)
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$ | (1,643,000 | ) | $ | (1,000,000 | ) | ||
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
5,000 | 31,000 | ||||||
|
Stock
option valuation
|
14,000 | 23,000 | ||||||
|
Change
in fair value of derivative liabilities
|
(413,000 | ) | (536,000 | ) | ||||
|
Accretion
of debt discount
|
772,000 | 720,000 | ||||||
|
Provision
for losses on receivables
|
56,000 | (28,000 | ) | |||||
|
Provision
for losses on inventory
|
- | (37,000 | ) | |||||
|
(Gain)
loss on settlement of liabilities
|
(91,000 | ) | (34,000 | ) | ||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
(251,000 | ) | 19,000 | |||||
|
Inventories
|
98,000 | (55,000 | ) | |||||
|
Prepaid
and other assets
|
(16,000 | ) | - | |||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
17,000 | (30,000 | ) | |||||
|
Accrued
liabilities
|
317,000 | 99,000 | ||||||
|
Net
cash used in operating activities
|
(1,135,000 | ) | (828,000 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
- | (20,000 | ) | |||||
|
Net
cash provided by (used in) investing activities
|
- | (20,000 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
- | (12,000 | ) | |||||
|
Proceeds
from issuance of convertible notes
|
1,250,000 | 1,000,000 | ||||||
|
Net
cash (used in) provided by financing activities
|
1,250,000 | 988,000 | ||||||
|
Net change in
cash
|
115,000 | 140,000 | ||||||
|
Cash,
beginning of year
|
206,000 | 66,000 | ||||||
|
Cash,
end of year
|
$ | 321,000 | $ | 206,000 | ||||
The accompanying
notes are an integral part of these financial statements
F-7
PARADIGM
MEDICAL INDUSTRIES, INC.
| 1. |
Organization
and
Significant
Accounting
Policies |
Organization
Paradigm
Medical Industries, Inc. (the Company) is a Delaware Corporation
incorporated in October 1989. The Company is engaged in the
design, development, manufacture, and sale of high technology surgical and
diagnostic eye care products. Its surgical equipment is
designed to perform minimally invasive cataract surgery and is comprised
of surgical devices and related instruments and accessories, including
disposable products. Its diagnostic products include a Blood
Flow Analyzer, a pachymeter, an A/B Scan, ultrasound biomicroscopes,
perimeters, and a corneal topographer.
Fair
Value of Financial Instruments
The
fair value of the Company's cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate carrying
value based on their effective interest rates compared to current market
prices.
Cash
Equivalents
For
purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or
less.
The
Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
The
Company’s financial instruments consist of cash, receivables, payables,
and notes payable. The carrying amount of cash, receivables and
payables approximates fair value because of the short-term nature of these
items. The carrying amount of the notes payable approximates
fair value as the individual borrowings bear interest at market interest
rates.
Accounts Receivable
Accounts
receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Specific reserves are estimated by management
based on certain assumptions and variables, including the customer’s
financial condition, age of the customer’s receivables, and changes in
payment histories. Trade receivables are written off when
deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
A
trade receivable is considered to
be past due if any portion of the receivable balance has not been received
by the contractual pay date. Interest is not charge on trade
receivables that are past
due.
|
F-8
PARADIGM
MEDICAL INDUSTRIES, INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
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.
Also during
2007, the Company collected $22,000 in receivables that were previously
allowed in the allowance for doubtful accounts. During 2007,
the Company increased net allowance for doubtful accounts by
$56,000.
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 was15% of total outstanding receivables as
of December 31, 2007 and 15% as of December 31, 2006. The allowance for
doubtful accounts increased from $72,000 at December 31, 2006 to $109,000
at December 31, 2007.
Inventories
Inventories
are stated at the lower of cost or market, cost is determined using the
weighted average method.
Property
and Equipment
Property and
equipment are recorded at cost, less accumulated
depreciation. Depreciation on property and equipment is
determined using the straight-line method over the estimated useful lives
of the assets or terms of the lease, usually between 3-7
years. Expenditures for maintenance and repairs are expensed
when incurred and betterments are capitalized.
Gains and
losses on sale of property and equipment are reflected in operations.
Leasehold improvements are depreciated over the lesser of the term of the
lease or the useful life of the related asset. During
the years
2007 and 2006 depreciation expense was $5,000 and $30,000 respectively.
Newly acquired assets that have a value of $3,000 or more are capitalized
and included on the depreciation
schedule.
|
F-9
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and Significant
Accounting
Policies
Continued
|
Goodwill
As of
December 31, 2007, the Company had recorded on their books goodwill
related to the purchase of Ocular Blood Flow, Ltd., during
2001. In accordance with SFAS 142, “Goodwill and Other
Intangible Assets, goodwill is not amortized.”
The Company
performs tests for impairment of goodwill annually or more frequently if
events or circumstances indicate it might be impaired. Such
tests include comparing the fair value of a reporting unit with its
carrying value, including goodwill. The analysis of the
impairment test of goodwill did not result in a charge to the statements
of operations for impairment for the years ended December 31, 2007 and
2006, respectively.
Impairment
assessments are performed using a variety of methodologies, including cash
flow analysis and estimates of sales proceeds. Where
applicable, an appropriate discount rate is used,
based on the
Company’s cost of capital rate or location-specific economic
factors.
Evaluation
of Other Long-Lived Assets
The Company
evaluates the carrying value of the unamortized balances of other
long-lived assets to determine whether any impairment of these assets has
occurred or whether any revision to the related amortization periods
should be made. This evaluation is based on management’s
projections of the undiscounted future cash flows associated with each
asset. If management’s evaluation were to indicate that the
carrying values of these assets were impaired, such impairment would be
recognized by a write down of the applicable asset.
Income
Taxes
Deferred
income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally
related to net operating loss carryforwards, depreciation, impairment of
intangible assets, stock compensation expense, and accrued
liabilities.
|
F-10
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
Stock
– Based Compensation
On January 1,
2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment, ("SFAS 123(R)") which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods
or services, primarily focusing on accounting for transactions where an
entity obtains
employee services in share-based payment transactions. SFAS 123(R)
requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments, including stock options,
based on the grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to provide
service in exchange for the award, usually the vesting period. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123(R). The Company has applied the provisions of SAB 107
in its adoption of SFAS 123(R).
Stock-based
compensation expense recognized during the period is based on the value of
the portion of share-based payment awards that is ultimately expected to
vest during the period. Stock-based compensation expense recognized in the
Company's consolidated statement of operations for the year ended December
31, 2007 included compensation expense for the share-based payment awards
granted based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). Stock based compensation expense for the
years ended December 31, 2007 and 2006 was $14,000 and $23,000,
respectively.
Earnings
Per Share (restated)
The
computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents, which would arise from the conversion of preferred stock to
common stock, the conversion of the Company’s convertible debentures, and
from the exercise of stock options and warrants outstanding using the
treasury stock method and the average market price per share during the
year. Shares potentially issuable from the conversion of
convertible debentures and preferred stock conversion of 3,637,280,000 and
862,438 shares of common stock, respectively, as well as, options and
warrants to purchase 65,534,392 shares of common of common stock were
considered in the computation of earnings per share but were not included
because their inclusion would have been
anti-dilutive.
|
F-11
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
The following
table is a reconciliation of basic earnings per share for the years ended
December 31, 2007 and 2006. |
|
Years
Ended December 31,
|
||||
|
2007
|
2006
|
|||
|
Basic
weighted average shares outstanding
|
264,736,000
|
175,034,000
|
||
|
Net
loss
|
(1,643,000)
|
(1,000,000)
|
||
|
Per share
amount
|
(0.01)
|
(0.01)
|
||
|
Revenue
Recognition
Revenues for
sales of products that require specific installation and acceptance by the
customer are recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products are recognized when
the product is shipped. A signed purchase agreement and a
deposit or payment in full from customers is required before a product
leaves the premises. Title passes at time of shipment (F.O.B.
shipping point). The products of the Company contain both
hardware and software components. The Company does not
recognize revenue for the software components of the products separate
from the product as a whole because the software is incidental to the
product, as defined in paragraph 2 of SOP 97-2.
Research
and Development
Costs
incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and
indirect costs associated with specific projects as well as fees paid to
various entities that perform certain research on behalf of the
Company. The total research and development expenses for the
years ended December 2007 and 2006 was $344,000 and $250,000,
respectively.
Concentration
of Risk
The market
for ophthalmic lasers is subject to rapid technological change, including
advances in laser and other technologies and the potential development of
alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved products,
processes or technologies may make products developed by the Company
obsolete or less
competitive.
|
F-12
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
The Company’s
high technology product line requires the Company to deal with suppliers
and subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly
technical calculations and tasks. Although there are a limited
number of suppliers and manufacturers that meet the standards required of
a regulated medical device, management believes that
other suppliers and manufacturers could provide similar components and
services.
A significant
portion of the Company’s product sales is in foreign
countries. The economic and political instability of some
foreign countries may
affect the ability of medical personnel to purchase the Company’s products
and the ability of the customers to pay for the procedures for which the
Company’s products are used. Such circumstances could cause a
possible loss of sales, which would affect operating results
adversely.
During the
year ended December 31, 2007 and 2006 one single customer, Grafton Optical
Company Ltd. in the United Kingdom, represented more than 10% of total net
sales for the years ended. Accounts receivable are due from
medical distributors, surgery centers, hospitals, optometrists and
ophthalmologists located throughout the U.S. and a number of foreign
countries. The receivables are generally due within thirty days
for domestic customers with extended terms offered for some international
customers. The Company maintains an allowance for estimated
potentially uncollectible amounts.
Warranty
The Company
provides product warranties on the sale of certain products that generally
extend for one year from the date of sale. The Company
maintains a reserve for estimated warranty costs based on historical
experience and management’s best
estimates. |
|
Warranty
Accruals
|
Years
Ended December 31,
|
|||
|
2007
|
2006
|
|||
|
Beginning
warranty liability balance
|
155,000
|
125,000
|
||
|
Less:
Reductions for payments
|
(20,000)
|
(10,000)
|
||
|
Plus:
Increase for accrual
|
92,000
|
40,000
|
||
|
Ending
warranty liability balance
|
227,000
|
155,000
|
||
F-13
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Reclassifications
No amounts in
the 2007 financial statements have been reclassified to conform to the
presentation of the current year financial statements.
Contingencies
The Company
has adopted the guidance in Statement of Financial Accounting Standards
No. 5, “Accounting for Contingencies,” when booking for loss
contingencies. The Company accrues a charge to income when (1)
information available prior to issuance of the financial statements
indicates that it is probable that an asset has been impaired or a
liability has been incurred at the date of the financial statements, and
(2) the amount of loss can be reasonably estimated. Loss
contingencies related to litigation for the year ended December 31, 2007
were $255,000.
Derivative
Financial Instruments (restated)
The
Company’s derivative financial instruments consist of embedded derivatives
related to the Secured Convertible Term Notes (“the Notes”) entered into
agreements on April 27, 2005; June 23, 2005; June 30, 2005; February 28,
2006; June 28, 2006; April 30, 2007; June 11, 2007; December 24, 2007; and
December 31, 2007. These Notes contain interrelated embedded
derivatives, which include the fixed conversion feature, the variable
conversion feature, the variable interest feature, and the contingent put
feature. Although the put feature was determined to be an
embedded derivative which requires bifurcation, we believe the likelihood
of this feature being exercised is remote and accordingly no value was
ascribed to this particular put feature. We are required to
continue to evaluate our accounting and valuation for this put
feature. We will continue to monitor the probability of this
particular put feature being exercised and its impact to our valuation of
embedded derivatives in future
periods.
|
F-14
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
In the event the value
of the put feature becomes material in the future, we will use a different
model to value this feature along with the other embedded
derivatives.
Based on the complex nature of
these terms (including the put
feature), the Company chose to employ a binomial lattice model to
value these features. The Company used the lattice model
because it allows for the consideration of the dynamic and interrelated
nature of the unique terms of these securities. It takes into
consideration that in each discrete period of time a stock can either go
up or down (described as its “volatility”) and produces a range of
potential future stock prices (and thus multiple values at those future
points in time). A binomial lattice model assumes the price of the stock
underlying the derivative follows one of the two price paths (stock price
can either go up or down). There are three general steps in
constructing a binomial lattice model: (1) calculation of the stock price
lattice, (2) calculation of the potentially applicable option values at
each node based on the terms and conditions of the specific security, and
(3) progressively calculating the security value at each node starting at
the maturity of the security and working back to the present testing for
the greater of the current period value or the probability weighted
holding value of the security. The following key inputs and
assumptions were used to calculate the fair values of the embedded
derivatives and the warrants:
|
| ● |
Stock
Price: This is the stock price as of the
respective valuation date.
|
| ● |
Fixed
Conversion Price: The fixed conversion price used
in the valuation analysis was set equal to fixed conversion price (ranging
from $0.2 to $0.09) per share for each of the Notes. This is
the fixed price at which the Investor can convert the Note into common
stock.
|
F-15
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
● |
Volatility: Volatility
is a measure of the standard deviation of the stocks continuously
compounded return over the life of the security. The ideal
volatility for an accurate calculation of fair value is the future
volatility of the security. This cannot be known with
certainty, so an approximation is derived using historical return
volatility for a period of time equal to the remaining life of the
instrument as a proxy, and professional judgment. As part of
our valuation, we performed extensive analysis of the historical
volatility of returns for the Company’s stock. Based on our
analysis, we chose a standard deviation of 200% as our best estimate of
future volatility.
|
|
| ● |
Risk-Free
Rate: The appropriate risk free rate is the
interest rate of a U.S. treasury note with a maturity equal to the
maturity of the respective security. As of December 31, 2007,
the risk free interest rates ranged from 3.06% to 3.49%. As of
December 31, 2006, the risk free interest rates ranged from 4.78% to
4.91%.
|
|||
| ● |
Time to
Maturity: The time to maturity is measured based
on the remaining term of the security as of the valuation
date.
|
|||
| ● |
20-day Minimum Price vs.
Closing Stock Price: The variable conversion
feature allows the Investor to convert the Notes at a price equal to 60% -
50% (ranges per note) of the average of the lowest three trading prices
during the twenty trading days preceding a conversion
notice. We analyzed the historical relationship between the
common stock closing price and the lowest trading price. Based
on this analysis, we determined that on average the lowest trading price
in any 20-day period during the time period analyzed was approximately 70%
of the closing price. We used this as a conservative proxy for
the average of the three lowest closing prices during the 20-day
period. This result was used in the test of the stock price
relative to the fixed conversion
price.
|
F-16
PARADIGM MEDICAL INDUSTRIES,
INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
● |
Monthly
Intraday Trading Price: The variable interest
rate provision waives interest for a given month if the intraday trading
price of the common stock exceeds $0.0945 or $0.0275 (depending on Note)
per share for every day within a given month. We assumed that
our various node prices were equivalent to this intraday trading
price.
|
|
| ● |
Trading
Liquidity: We assumed that adequate stock trading
liquidity is available for the Investors to sell converted / exercised
shares.
|
|||
| ● |
Probability
of Contingent Put Feature: We
assumed that the likelihood of this feature being exercised is remote and
accordingly no value was ascribed to this particular put
feature. We will continue to monitor the probability of this
particular put feature being exercised and its impact to our valuation of
embedded derivatives in future
periods.
|
|
The warrants were
valued using the Black-Scholes Option Pricing Model with the following
assumptions for 2007 and 2006, respectively: dividend yield of 0% and 0%;
annual volatility of 200% and 200%; and risk free interest rates ranging
from of 3.06% to 3.7% and 4.72% to 4.74%.
The accounting
treatment of derivative instruments requires that the Company record the
derivatives and related warrants at their fair values as of the inception
date of the agreement and at a fair value of each subsequent balance sheet
date. In addition, under the provisions of SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities”, as a result of
entering into the Notes, the Company is required to classify all other
non-employee stock options and warrants as derivative liabilities and mark
them to market at each reporting date. Any change in the fair value will
be recorded as non-operating, non-cash income or expense at each reporting
date. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record a non-operating, non-cash
income.
|
F-17
PARADIGM MEDICAL
INDUSTRIES, INC.
| 1. |
Organization
and
Significant
Accounting
Policies
Continued
|
In the event that the
Company is required to convert the debentures into common stock, the
Company is required to eliminate the pro rata portion of the derivative
liability associated with the conversion, with a corresponding entry
recorded to additional
paid-in-capital.
|
| 2. |
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 from
operations. These factors raise substantial doubt about the
Company’s ability to continue as a going
concern.
|
| 3. |
Detail
of
|
Receivables:
|
|||||
| Certain | Trade receivables | $ |
733,000
|
||||
| Balance | Allowance for doubtful accounts | (109,000 | ) | ||||
| Sheet | |||||||
|
Accounts
|
$ |
624,000
|
|||||
| Inventories: | |||||||
| Raw Materials | $ | 558,000 | |||||
| Finished goods |
533,000
|
||||||
| Reserve for obsolescence |
(244,000
|
) | |||||
| $ |
847,000
|
||||||
| Accrued liabilities: | |||||||
| Consulting and litigation reserve |
283,000
|
||||||
| Payroll and employment benefits |
64,000
|
||||||
| Sales tax payable |
20,000
|
||||||
| Customer deposits |
20,000
|
||||||
| Accrued royalties |
3,000
|
||||||
| Warranty and return allowance |
227,000
|
||||||
| Other accrued expenses |
27,000
|
||||||
| $ |
644,000
|
||||||
F-18
PARADIGM MEDICAL
INDUSTRIES, INC.
|
|
||||||||
| 4. |
Property
and
|
Property and equipment consists of the following: | ||||||
| Equipment |
|
|||||||
| Machinery and equipment | $ |
765,000
|
||||||
| Computer equipment and software |
663,000
|
|||||||
|
|
Furniture and fixtures |
252,000
|
||||||
| Leasehold improvements |
166,000
|
|||||||
| 1,846,000 | ||||||||
| Accumulated depreciation and amortization |
(1,830,000
|
) | ||||||
| $ |
16,000
|
|||||||
| 5. |
Lease
Obligations
|
During the years ended
December 31, 2007 and 2006, the Company did not lease equipment under
noncancellable capital leases. Any leases previously issued
provided the Company the option to purchase the leased assets at the end
of the initial lease term. Assets under capital leases included
in fixed assets and are as follows:
|
||||||
|
|
||||||||
|
Computer and
other equipment
|
$
|
291,000
|
||||||
|
|
||||||||
|
Less
accumulated amortization
|
(291,000
|
)
|
||||||
| $ |
-
|
|||||||
| 5. |
Lease
Obligations
Continued
|
Amortization expense on
assets under capital leases during the years ended December 31, 2007
and 2006 was $5,000 and $31,000, respectively.
|
||||||
|
|
||||||||
|
The Company leases
office and warehouse space under an operating lease
agreement. Future minimum rental payments under the
noncancellable operating lease as of December 31, 2007 are approximately
as follows:
|
||||||||
| Year Ending December 31, |
Amount
|
|||||||
| 2007 | $ |
108,000
|
||||||
| 2008 |
110,000
|
|||||||
| Total future minimum rental payments | $ |
218,000
|
||||||
|
Rent expense related to
noncancelable operating leases was approximately $108,000 and $108,000 for
the years ended December 31, 2007 and 2006,
respectively.
|
||||||||
F-19
PARADIGM MEDICAL
INDUSTRIES, INC.
| 6. |
Income
Taxes
(restated)
|
The provision for
income taxes is different than amounts which would be provided by applying
the statutory federal income tax rate to loss before provision for income
taxes for the following
reasons:
|
|
Years
Ended
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Income tax
(provision) benefit at statutory
rate
|
$ | 559,000 | $ | 340,000 | ||||
|
NOL
adjustment
|
- | |||||||
|
Taxable
temporary differences
|
(17,000 | ) | (22,000 | ) | ||||
|
Deductible
temporary differences
|
374,000 | 38,000 | ||||||
|
Non-deductible
expenses
|
(122,000 | ) | (104,000 | ) | ||||
|
Change in
valuation allowance
|
(794,000 | ) | (252,000 | ) | ||||
| $ | - | $ | - | |||||
| 6. |
Income
Taxes
Continued
|
Deferred tax
assets (liabilities) are comprised of the
following: |
|
2007
|
2006
|
|||||||
|
Net operating
loss carryforward
|
$ | 15,888,000 | $ | 14,720,000 | ||||
|
Depreciation,
amortization, and impairment
|
- | - | ||||||
|
Allowance and
reserves
|
2,065,000 | 2,439,000 | ||||||
|
Research and
development tax Credit
|
56,000 | 56,000 | ||||||
| 18,009,000 | 17,215,000 | |||||||
|
Valuation
allowance
|
(18,009,000 | ) | (17,215,000 | ) | ||||
| $ | - | $ | - | |||||
| A valuation allowance has been established for the net deferred tax asset due to the uncertainty of the Company’s ability to realize such asset. | ||||||||
|
At December
31, 2007, the Company had net operating loss carryforwards of
approximately $55.8 million and research and development tax credit
carryforwards of approximately $56,000. These carryforwards are
available to offset future taxable income and expire in 2006 through
2021. The utilization of the net operating loss carryforwards
is dependent upon the tax laws in effect at the time the net operating
loss carryforwards can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of
these carryforwards as a result of the change in
ownership.
|
||||||||
F-20
PARADIGM MEDICAL
INDUSTRIES, INC.
| 7. |
Capital
Stock
|
Capital
Stock
The Company
has established a series of preferred stock with a total of 5,000,000
authorized shares and a par value of $.001, and one series of common stock
with a par value of $.001 and a total of 800,000,000 authorized
shares.
Series
A Preferred Stock
On September
1, 1993, the Company established a series of non-voting preferred shares
designated as the 6% Series A Preferred Stock, consisting of 500,000
shares with $.001 par value. The Series A Preferred Stock has
the following rights and
privileges:
|
| 1. |
The holders
of the shares are entitled to dividends at the rate of twenty-four cents
($.24) per share per annum, payable in cash only from surplus earnings of
the Company or in additional shares of Series A Preferred
Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
|
|||
| 2. |
Upon the liquidation of
the Company, the holders of the Series A Preferred Stock are entitled to
receive, prior to any distribution of any assets or surplus funds to the
holders of shares of common stock or any other stock, an amount equal
to $1.00 per share, plus any accrued and unpaid dividends related to the
fiscal year in which such liquidation occurs. Total liquidation preference
at December 31, 2007 was $6,000.
|
|||
| 3. | The shares are convertible at the option of the holder at any time into common shares, based on an initial conversion rate of one share of Series A Preferred Stock for 1.2 common shares. | |||
| 4. | The holders of the shares have no voting rights. | |||
| 5. |
The Company may, at its
option, redeem all of the then outstanding shares of the Series A
Preferred Stock at a price of $4.50 per share, plus accrued and unpaid
dividends related to the fiscal year in which such redemption
occurs.
|
F-21
PARADIGM MEDICAL INDUSTRIES,
INC.
| 7. |
Capital
Stock
Continued
|
Series
B Preferred Stock
On May 9, 1994, the
Company established a series of non-voting preferred shares designated as
12% Series B Preferred Stock, consisting of 500,000 shares with $.001 par
value. The Series B Preferred Stock has the following rights
and privileges:
|
||
| 1. |
The holders of the
shares are entitled to dividends at the rate of forty-eight cents ($.48)
per share per annum, payable in cash only from surplus earnings of the
Company or in additional shares of Series B Preferred
Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
|
|||
|
Upon the liquidation of
the Company, the holders of the Series B Preferred Stock are entitled to
receive, prior to any distribution of any assets or surplus funds to the
holders of shares of common stock or any other stock, an amount equal to
$4.00 per share, plus any accrued and unpaid dividends related to the
fiscal year in which such liquidation occurs. Such right,
however, is subordinate to the rights of the holders of Series A Preferred
Stock to receive a distribution of $1.00 per share plus accrued and unpaid
dividends. Total liquidation preference at December 31,
2007 was $36,000.
|
||||
| 2. |
The shares are
convertible at the option of the holder at any time into common shares,
based on an initial conversion rate of one share of Series B Preferred
Stock for 1.2 common shares.
|
|||
| 3. | The holders of the shares have no voting rights. | |||
| 4. |
The Company may, at its
option, redeem all of the then outstanding share of the Series B Preferred
Stock at a price of $4.50 per share, plus accrued and unpaid
dividends related to the fiscal year in which such redemption
occurs.
|
|||
| Series C Preferred Stock | ||||
|
In January 1998,
the Company authorized the issuance of a total of 30,000 shares of Series
C Preferred Stock, $.001 par value, $100 stated value. As of
December 31, 2007 there were no Series C Preferred Stock
issued and outstanding. The Series C Preferred Stock have the
following rights and
privileges:
|
||||
| The holders of the shares are entitled to dividends at the rate of 12% per share per annum of the aggregate stated value. The dividends are non-cumulative and, therefore, deficiencies in dividend payments from one year are not carried forward to the next year. | ||||
F-22
PARADIGM MEDICAL INDUSTRIES,
INC.
| 7. |
Capital
Stock
Continued
|
1.
|
Upon the liquidation of
the Company, the holders of the Series C Preferred Stock are entitled to
receive an amount per share equal to the greater of (a) the amount they
would have received if they had converted the shares into shares of Common
Stock immediately prior to such liquidation plus declared but unpaid
dividends; or (b) the stated value, subject to adjustment.
|
|
| 2. |
Each share was convertible, at
the option of the holder at any time until January 1, 2002, into
approximately 57.14 shares of common stock at an initial conversion price,
subject to adjustments for stock splits, stock dividends and certain
combination or recapitalization of the common stock, equal to $1.75 per
share of common stock.
|
|||
| 3. | The holders of the shares have no voting rights. | |||
|
Series
D Preferred Stock
In January
1999, the Company’s Board of Directors authorized the issuance of a total
of 1,140,000 shares of Series D Preferred Stock $.001 par value, $1.75
stated value. The Series D Preferred Stock has the following
rights and privileges:
|
||||
| 1. |
The holders of the shares are
entitled to dividends at the rate of 10% per share per annum of the
aggregate stated value. The dividends are non-cumulative and,
therefore, deficiencies in dividend payments from one year are not carried
forward to the next year.
|
|||
| 2. |
Upon the
liquidation of the Company, the holders of the Series D Preferred Stock
are entitled to receive an amount per share equal to the
greater of (a) the amount they would have received had they converted the
shares into Common Stock immediately prior to such liquidation plus all
declared but unpaid dividends; or (b) the stated value, subject to
adjustment. Total liquidation preference at December 31,
2007 was $9,000.
|
|||
| 3. |
Each share was convertible, at
the option of the holder at any time until January 1, 2002, into one share
of Common Stock at an initial conversion price, subject to
adjustment. The Series D Preferred Stock shall be converted
into one share of the Common Stock subject to adjustment (a) on January 1,
2002 or (b) upon 30 days written notice by the Company to the holders of
the Shares, at any time after (i) the 30-day anniversary of the
registration statement on which the shares of Common Stock issuable upon
conversion of the Series D Preferred Stock were registered and (ii) the
average closing price of the Common Stock for the 20-day period
immediately prior to the date on which notice of redemption is given by
the Company to the holders of the Series D Preferred Stock is at least
$3.50 per share. The Company in 1999 recorded $872,000 as a
beneficial conversion feature related to the differences in the conversion
price of the preferred stock to common
stock.
|
|||
F-23
PARADIGM MEDICAL INDUSTRIES,
INC.
| 7. |
Capital
|
4. | The holders of the shares have no voting rights. | |
| Stock | ||||
| Continued | Series E Preferred Stock | |||
|
In May 2001,
the Company authorized the issuance of a total of 50,000 shares of Series
E Preferred Stock $.001 par value, $100 stated value. The
Series E Preferred Stock has the following rights and
privileges:
|
||||
| 1. |
The holders of the shares are
entitled to dividends at the rate of 8% per share per annum of the
aggregate stated value. The dividends are non-cumulative and,
therefore, deficiencies in dividend payments from one year are not carried
forward to the next year.
|
|||
| 2. |
Upon the liquidation of the
Company, the holders of the Series E Preferred Stock are entitled to
receive an amount per share equal to the greater of (a) the amount they
would have received had they converted the shares into Common Stock
immediately prior to such liquidation plus all declared but unpaid
dividends; or (b) the
stated value, subject to adjustment. Total liquidation
preference at December 31, 2007 was
$13,000.
|
|||
| 3. |
Each share is convertible, at
the option of the holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an initial conversion price,
subject to adjustment for stock splits, stock dividends and certain
combination or recapitalization of the common stock, equal to $1.875 per
share of common stock. The Series E Preferred Stock shall be
converted into Common Stock subject to adjustment (a) on January 1, 2005
or (b) upon 30 days written notice by the Company to the holders of the
Shares, at any time after (i) the 30-day anniversary of the registration
statement on which the shares of Common Stock issuable upon conversion of
the Series E Preferred Stock were registered and (ii) the average closing
price of the Common Stock for the 20-day period immediately prior to the
date on which notice of redemption is given by the Company to the holders
of the Series E Preferred Stock is at least $3.50 per
share. The Company in 2001 recorded $1,482,000 as a beneficial
conversion feature related to the differences in the conversion price of
the preferred stock to common
stock.
|
|||
F-24
PARADIGM MEDICAL INDUSTRIES,
INC.
| 7. |
Capital
|
4. | The holders of the shares have no voting rights. | |
| Stock | ||||
| Continued | 5. |
The holders of the shares also
were issued warrants to purchase shares of common stock equal to 1,000
warrants for every 200 shares purchased at an exercise price of $4.00 per
share. Each warrant is exercisable until May 23,
2006.
|
||
| Series F Preferred Stock | ||||
|
In August 2001, the
Company authorized the issuance of a total of 50,000 shares of Series F
Preferred Stock $.001 par value, $100 stated value. The Series
F Preferred Stock has the following rights and
privileges:
|
||||
| 1. |
The holders of the shares are
entitled to dividends at the rate of 8% per share per annum of the
aggregate stated value. The dividends are non-cumulative and, therefore,
deficiencies in dividend
payments from one year are not carried forward to the next
year.
|
|||
| 2. |
Upon the liquidation of the
Company, the holders of the Series F Preferred Stock are entitled to
receive an amount per share equal to the greater of (a) the amount they
would have received had they converted the shares into Common Stock
immediately prior to such liquidation plus all declared but unpaid
dividends; or (b) the
stated value, subject to adjustment. Total liquidation
preference at December 31, 2007 was
$235,000.
|
|||
|
Each share is convertible, at
the option of the holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an initial conversion price,
subject to adjustment for stock splits, stock dividends and certain
combination or recapitalization of the common stock, equal to $1.875 per
share of common stock. The Series F Preferred Stock shall be
converted into Common Stock subject to adjustment (a) on January 1, 2005
or (b) upon 30 days written notice by the Company to the holders of the
Shares, at any time after (i) the 30-day anniversary of the registration
statement on which the shares of Common Stock issuable upon conversion of
the Series F Preferred Stock were registered and (ii) the average closing
price of the Common Stock for the 20-day period immediately prior to the
date on which notice of redemption is given by the Company to the holders
of the Series F Preferred Stock is at least $3.50 per
share. The Company in 2001 recorded $1,105,000 as a beneficial
conversion feature related to the differences in the conversion price of
the preferred stock to common
stock.
|
||||
F-25
PARADIGM MEDICAL INDUSTRIES,
INC.
| 7. |
Capital
|
3.
|
The holders of the shares have no voting rights. | |
| Stock | ||||
| Continued | Series G Preferred Stock | |||
|
In August 2003, the
Company authorized the issuance of a total of 2,000,000 shares of Series G
Preferred Stock $.001 par value, $1.00 stated value. The Series
G Preferred Stock has the following rights and
privileges:
|
||||
| 1. |
The holders of the shares are
entitled to dividends at the rate of 7% per share
per annum of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in dividend
payments from one year are not carried forward to the next
year.
|
|||
| 2. |
Upon the liquidation of the
Company, the holders of the Series G Preferred Stock are entitled to
receive an amount per share equal to the greater of (a) the amount they
would have received had they converted the shares into Common Stock
immediately prior to such liquidation plus all declared but unpaid
dividends; or (b) the stated value of $.25 per share plus declared but
unpaid dividends. Total liquidation preference at December 31,
2007 was
$147,000.
|
|||
| Each share is convertible, at the option of the holder at any time until August 1, 2005, into 1 share of common stock at an initial conversion price, subject to adjustment for dividends, equal to one share of common stock for each share of Series G Preferred Stock. The Series G Preferred Stock shall be converted into common stock subject to adjustment (a) on August 1, 2005 or (b) upon 30 days written notice by the Company to the holders of the shares, at any time after (i) the 30-day anniversary of the registration statement on which the shares of common stock issuable upon conversion of the Series G Preferred Stock were registered and (ii) the average closing price of the common stock for the 15-day period immediately prior to the date in which notice of redemption is given by the Company to the holders of the Series G Preferred Stock is at least $.50 per share. In 2003, the Company recorded a beneficial conversion feature of $217,000 related to the differences in the conversion price of the preferred stock to common stock. | ||||
| 3. | The holders of the shares have no voting rights. | |||
F-26
PARADIGM MEDICAL
INDUSTRIES, INC.
| 7. |
Capital
Stock
Continued
|
The following
table summarizes preferred stock activity during the years ended December
31, 2007 and 2006:
|
|
Series
A
|
Series
B
|
Series
C
|
Series
D
|
Series
E
|
Series
F
|
Series
G
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|
|
Balance at
January 1, 2006
|
5,627
|
$
-
|
8,986
|
$
-
|
-
|
$
-
|
5,000
|
$
-
|
1,000
|
$
-
|
4,598.75
|
$
-
|
588,235
|
$
1,000
|
|
Issuance of
Series G preferred stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Conversion of
preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(750.00)
|
-
|
-
|
-
|
-
|
-
|
|
Balance at
December 31, 2006
|
5,627
|
-
|
8,986
|
-
|
-
|
-
|
5,000
|
-
|
250
|
-
|
4,598.75
|
-
|
588,235
|
1,000
|
|
Issuance of
Series G preferred stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Conversion of
preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(200)
|
-
|
-
|
-
|
|
Balance at
December 31, 2007
|
5,627
|
$
-
|
8,986
|
$
-
|
-
|
$
-
|
5,000
|
$
-
|
250
|
$
-
|
4,398.75
|
$
-
|
588,235
|
$
1,000
|
|
Authorized
|
500,000
|
500,000
|
30,000
|
1,140,000
|
50,000
|
50,000
|
2,000,000
|
|||||||
|
Liquidation
preference
|
$
6,000
|
$36,000
|
$
-
|
$
9,000
|
$13,000
|
$235,000
|
$147,000
|
|||||||
F-27
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
(restated)
|
Convertible
Notes
April
27, 2005 Sale of $2,500,000 in Callable Secured Convertible
Notes: To obtain funding for the Company's ongoing
operations, the Company entered into a securities purchase agreement with
four accredited investors on April 27, 2005 for the sale of (i) $2,500,000
in convertible notes and (ii) warrants to purchase 16,534,392 shares of
its common stock. The sale of the convertible notes and
warrants is to occur in three traunches and the investors provided the
Company with an aggregate of $2,500,000 as follows:
• $850,000
was disbursed on April 27, 2005;
• $800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of 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 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 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.
|
F-28
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
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 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) $.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
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the
notes. The call option provides the Company with the right to
prepay all of the outstanding convertible notes at any time, provided
there is no event of default by the Company and the Company's stock is
trading at or below $.09 per share. An event of default includes the
failure by the Company to pay the principal or interest on the 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 notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the
notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of
the notes; or (c) 145% of the outstanding principal and accrued interest
for prepayments occurring after the 60th day following the issue date of
the notes.
|
F-29
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
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 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 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 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.
As of
December 31, 2007, there was an outstanding balance
of $1,443,000 in principle and accrued interest remaining
on the convertible notes. During the years ended December 31,
2007 and 2006, the Company issued 283,017,246 and 105,529,700 shares of
common stock for the conversion of $212,000 and $381,000 of the
convertible notes, respectively.
February
28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes: To obtain additional funding for the Company's
ongoing operations, the Company entered into a second securities purchase
agreement on February 28, 2006 with the same four accredited investors for
the sale of (i) $1,500,000 in 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 15, 2006 to register 60,000,000 shares of
common stock issuable upon conversion of the notes.
• $500,000
was disbursed on April 30, 2007, the day prior to the effective date of
the registration statement on May 1,
2007.
|
F-30
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
Under the terms of the
securities purchase agreement, the Company also agreed 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
February 28, 2006 and ending on the later of (a) 270 days from February
28, 2006, or (b) 180 days from the date the registration statement is
declared effective.
In addition,
the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning February
28, 2006 and ending two years after the end of the above lock-up period
unless it first provided each investor an option to purchase its pro rata
share (based on the ratio of each investor's purchase under the securities
purchase agreement) of the securities being offered in any proposed equity
financing. Each investor must be provided written notice
describing any proposed equity financing at least 20 business days prior
to the closing of such proposed equity financing and the option must be
extended to each investor during the 15-day period following delivery of
such notice.
The
$1,500,000 in convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and
is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month
in which the stock price is greater than 125% of the initial market price,
or $.0275, for each trading day during that month. Any amount of principal
or interest on the convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The 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) 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.
|
F-31
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The
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 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 notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 130% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the
notes.
The warrants
are exercisable until five years from the date of issuance at a purchase
price of $.10 per share. The investors may exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not 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 notes issued pursuant to the
securities purchase
agreement.
|
F-32
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The
noteholders have agreed to restrict their ability to convert their
callable secured 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.
As of
December 31, 2007, there was an outstanding balance of $1,334,000 in
principle and accrued interest on the convertible notes. During
the year ended December 31, 2007, the Company issued 60,000,000 shares of
common stock for the conversion of $167,000 of the convertible
notes.
June
11, 2007 Sale of $500,000 in Callable Secured 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.
|
F-33
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
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 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 (a) 125% of the outstanding principal
and accrued interest for prepayments occurring within 30 days following
the issue date of the notes; (b) 130% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding
principal and accrued interest for prepayments occurring after the
60th day following the issue date of the
notes.
|
F-34
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
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 the 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.
|
F-35
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
As of
December 31, 2007, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company extinguishes
the convertible debt and related embedded derivatives and no gain or loss
is recorded on the Company’s statements of operations as a result of said
conversion.
December
24, 2007 Sale of $250,000 in Callable Secured Convertible
Notes: To obtain further funding for the Company's
ongoing operations, the Company entered into a fourth securities purchase
agreement on December 24, 2007 with the same four accredited investors for
the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 15,000,000 shares of its common stock. The investors
disbursed $250,000 to the Company on December 24,
2007.
Under the
terms of the December 24, 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 December 24, 2007 and ending on the later of (a) 270 days from
December 24, 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 December
24, 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.
|
F-36
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The $250,000
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 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 $250,000
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 (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date
of the notes; (b) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date
of the notes; or (c) 145% of the outstanding principal and accrued
interest for prepayments occurring after the 60th day following the issue
date of the notes.
The warrants
are exercisable until seven years from the date of issuance at a purchase
price of $.001 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.
|
F-37
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
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 December 24, 2007. The
registration statement must be filed with the Securities and Exchange
Commission within 60 days of the December 24, 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
December 31, 2007, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company extinguishes
the convertible debt and related embedded derivatives and no gain or loss
is recorded on the Company’s statements of operations as a result of said
conversion.
|
F-38
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
December
19, 2007 issuance of $389,010 in Callable Secured Convertible
Notes: On December 19, 2007 the Company was notified by
the holders of the convertible notes that there was a past due interest
owing on the outstanding convertible notes. The total amount of interest
was $389,010. To pay the interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31,
2010. Accordingly, on December 19, 2007, the Company issued $389,010 in
convertible notes to the noteholders as full payment of the past due
interest.
The $389,000
in convertible notes bear interest at 2% 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 convertible notes mature
on December 31, 2007, 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 $389,000
in convertible notes 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 $.04 per
share. An event of default includes the failure by the Company
to pay the principal or interest on the convertible notes when
due. Prepayment of the convertible notes is to be made in cash
equal to either (a) 135% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the
notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of
the notes; or (c) 150% of the outstanding principal and accrued interest
for prepayments occurring after the 60th day following the issue date of
the notes.
|
F-39
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes 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
4.9% 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
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.
As of
December 31, 2007, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company extinguishes
the convertible debt and related embedded derivatives and no gain or loss
is recorded on the Company’s statements of operations as a result of said
conversion.
The Notes
include certain features that are considered embedded derivative financial
instruments. These features are described below, as
follows:
|
| ● | The fixed conversion feature which allows the investor to convert the Notes at a fixed price per share; | ||||
| ● | The variable conversion feature, which allows the investor to convert the Notes at a specified percentage of the market price at the time of conversion; | ||||
| ● | The variable interest rate provision that calls for no interest to be paid if the stock price exceeds a predetermined amount for a given months; | ||||
| ● | The contingent put feature, which upon the occurrence of certain events of default, including (i) the Company’s failure to pay the principle and interest thereon when due on the Notes; (ii) bankruptcy, insolvency, reorganization, liquidation proceedings instituted by or against the Company; (iii) any money judgment is entered against the Company for more than $50,000, which remains unvacated, unbonded, or unstayed for more than twenty days; and (iv) the delisting of the Company’s common stock, allows the investor to require the Company to redeem the convertible notes at 130% of the principal amount. Although the put feature was determined to be an embedded derivative which requires bifurcation, we believe the likelihood of this feature being exercised is remote and accordingly no value was ascribed to this particular put feature. We are required to continue to evaluate our accounting and valuation for this put feature. We will continue to monitor the probability of this particular put feature being exercised and its impact to our valuation of embedded derivatives in future periods. | ||||
| ● | The value of the warrants issued in conjunction with each funding. |
F-40
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The initial
fair value assigned to the embedded derivatives and
warrants was $4,169,000, which consisted of the fair
values of the embedded derivatives of $2,588,000 and the fair
value of the warrants of $1,582,000. The Company recorded the
first $2,500,000 of fair value of the derivatives and warrants to debt
discount (equal to the total proceeds received as of June 30, 2005), which
will be amortized to interest expense over the term of the
Notes. The remaining balance of $1,669,000
was recorded as loss of derivative valuation for the period ended
June 30, 2005.
As of
December 31, 2005, the carrying amount on the Notes was
$340,000, net of the unamortized debt discount of
$1,698,000. Interest expense on the Notes totaled $739,000
for the period ended December 31, 2005, which consisted of $369,000
of normal accretion of the Note discount, and $370,000 of accrued
interest on the outstanding Note balance for the period. The
fair value of the embedded derivatives and warrants decreased to $195,000
during the year ended December 31, 2005, which consists of a fair value of
the embedded derivatives of $137,000 and the fair value of the warrants of
$58,000. The corresponding decrease in derivative value was
reflected as a gain on derivative valuation on the statements of
operations in the amount of $3,975,000.
During 2006,
the Company entered into another securities purchase agreement in the
amount $1,000,000. The initial fair value assigned to the
embedded derivatives and warrants was $541,000, for this Note, which
consisted of the fair values of the embedded derivatives of $464,000 and
the fair value of the warrants of $77,000. The Company recorded
the $541,000 of fair value of the derivatives and warrants to debt
discount, which will be amortized to interest expense over the term of the
Notes.
|
F-41
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
As of
December 31, 2006, the carrying amount on the Notes was $1,421,000, net of
the unamortized debt discount of $1,235,000. Interest expense
on the Notes totaled $935,000 for the period ended December 31, 2006,
which consisted of $721,000 of normal accretion of the Note discount, and
$214,000 of accrued interest on the outstanding Note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of $536,000 during the year ended December 31, 2006,
which consists of a decrease in the fair value of the embedded derivatives
of $451,000 and the fair value of the warrants of
$85,000. Accordingly, the Company recorded a gain on derivative
valuation to the statement of operations of $536,000 for the year ended
December 31, 2006.
During 2007,
the Company entered into four securities purchase agreements in the
aggregate amount of $1,639,000. The initial fair value assigned
to the embedded derivatives and warrants was $466,000, for these Notes,
which consisted of the fair values of the embedded derivatives
of $344,000 and the fair value of the warrants of $122,000. The
Company recorded $466,000 of fair value of the derivatives and warrants to
debt discount, which will be amortized to interest expense over the term
of the Notes.
At December
31, 2007, the carrying amount on the Notes was
$3,100,000, net of the unamortized debt discount of
$828,000. Interest expense on the Notes totaled $992,000
for the period ended December 31, 2007, which consisted of
$771,000 normal accretion of the Note discount, and $221,000
of accrued interest on the outstanding Note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of $413,000
during the year ended December 31, 2007, which consists of a
decrease in the fair value of the embedded derivatives of $391,000
and the fair value of the warrants of
$22,000. Accordingly, the Company recorded a gain on derivative
valuation to the statement of operations of $413,000
for the year ended December 31,
2007.
|
F-42
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 8. |
Convertible
Notes
Continued
|
The market
price of the Company’s common stock significantly impacts the extent to
which the Company may be required or may be permitted to convert the
unrestricted and restricted portion of the Notes into shares of the
Company’s common stock. The lower the market price of the Company’s common
stock at the respective times of conversion, the more shares the Company
will need to issue to convert the principal and interest
payments then due on the Notes. If the market price of the company’s
common stock falls below certain thresholds, the Company will be unable to
convert any such repayments of principal and interest into equity, and the
Company will be forced to make such repayments in cash. The Company’s
operations could be materially impacted, in an adverse way, if the Company
is forced to make repeated cash payments on the
Notes.
|
| 9. |
Stock
Option
Plan
and
Warrants
|
The Option
Plan provides for the grant of incentive stock options and non-qualified
stock options to employees and directors of the Company. Incentive stock
options may be granted only to employees. The Option Plan is administered
by the Board of Directors or a Compensation Committee, which determines
the terms of options granted including the exercise price, the number of
shares subject to the option, and the exercisability of the
option.
The Company
granted the following options and warrants to non-employees during the
year ended December 31,
2006:
|
| ● | Options to employees, officers and the board of directors to purchase 4,700,000 shares of common stock at an exercise price ranging from $0.01 to $0.02. | ||||
| ● | Warrants to purchase 8,000,000 shares of common stock at an exercise price of $0.10 per share in return for the sale of callable secure convertible notes. | ||||
|
The Company granted the
following options and warrants to non-employees during the year ended
December 31, 2007:
|
|||||
| ● | Warrants to purchase 4,000,000 shares of common stock at an exercise price of $0.10 per share in return for the sale of callable secure convertible notes, exercisable through April 26, 2012. | ||||
| ● | Warrants to purchase 10,000,000 shares of common stock at an exercise price of $0.005 per share in return for the sale of callable secure convertible notes, exercisable through June 11, 2012. | ||||
| ● | Warrants to purchase 15,000,000 shares of common stock at an exercise price of $0.001 per share in return for the sale of callable secure convertible notes, exercisable through December 24, 2014. | ||||
| ● | Options to the Company’s President and Chief Executive Officer to purchase 4,500,000 share of common stock at an exercise price of $0.01, exercisable through July 1, 2010. | ||||
F-43
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 9. |
Stock
Option
Plan
and
Warrants
Continued
|
A Schedule of the options and warrants if as follows: |
|
Number
of
|
Exercise
Price
Per
|
|||||
|
Options
|
Warrants
|
Share
|
||||
|
Outstanding
at January 1,
2006
|
3,932,500
|
19,582,190
|
$
0.10 – 12.98
|
|||
|
Granted
|
4,700,000
|
8,000,000
|
0.01 –
0.10
|
|||
|
Exercised
|
-
|
-
|
-
|
|||
|
Expired
|
(225,000)
|
(2,522,798)
|
0.50 –
7.50
|
|||
| Forfeited |
(1,402,500)
|
-
|
0.10 –
2.75
|
|||
|
Outstanding
at December 31,
2006
|
7,005,000
|
25,059,392
|
0.01 –
6.75
|
|||
|
Granted
|
4,500,000
|
29,000,000
|
0.001 –
0.10
|
|||
|
Exercised
|
-
|
-
|
-
|
|||
|
Expired
|
-
|
(25,000)
|
0.15 –
0.15
|
|||
|
Forfeited
|
(5,000)
|
-
|
0.10 –
0.10
|
|||
|
Outstanding
at December 31,
2007
|
11,500,000
|
54,034,392
|
$
0.001 – 6.75
|
|||
| The following table summarizes information about stock options and warrants outstanding at December 31, 2007: | |||||||||
|
Outstanding
|
Exercisable
|
||||||||
|
Weighted
|
|||||||||
|
Average
|
|||||||||
|
Remaining
|
Weighted
|
Weighted
|
|||||||
|
Range
of
|
Contractual
|
Average
|
Average
|
||||||
|
Exercise
|
Number
|
Life
|
Exercise
|
Number
|
Exercise
|
||||
|
Prices
|
Outstanding
|
(Years)
|
Price
|
Exercisable
|
Price
|
||||
|
$0.001 –
0.75
|
64,459,392
|
0.31
|
$0.0036
|
2,759,339
|
$0.17
|
||||
|
2.00 –
5.00
|
1,025,000
|
2.30
|
3.11
|
1,027,500
|
3.14
|
||||
|
6.00 –
8.13
|
50,000
|
2.92
|
6.75
|
50,000
|
6.75
|
||||
|
12.98
|
-
|
-
|
12.98
|
-
|
12.98
|
||||
|
$0.001 –
12.98
|
65,534,392
|
0.34
|
$0.06
|
3,836,839
|
$1.14
|
||||
F-44
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 9. |
Stock Option
Plan
and
Warrants
Continued
|
The fair value of each
option and warrant grant, outside of those granted in conjunction with the
Notes are estimated at the date of grant using the Black-Scholes option
pricing model with the following
assumptions:
|
|
December
31,
|
|||||
|
2007
|
2006
|
||||
|
Expected
dividend yield
|
$
|
-
|
$
|
-
|
|
|
Expected
stock price volatility
|
210%-210%
|
216%-210%
|
|||
|
Risk-free
interest rate
|
4.14%-5.37%
|
4.30%-5.18%
|
|||
|
Expected life
of options
|
3-5
years
|
3-5
years
|
|||
|
The weighted average
fair value of options granted during 2007 and 2006 are $0.01 and $0.01,
respectively.
|
|||
| 10. |
Gain
on
Settlement
of
Liabilities
|
Due to the Company’s
ongoing cash flow difficulties, during 2007 and 2006 most vendors and
suppliers were contacted with attempts to negotiate reduced payments and
settlements of outstanding accounts payable and accrued
expenses. While some vendors refused to negotiate and demanded
payment in full, some vendors were willing to settle for a reduced
amount. The accounts payable forgiven by vendors and suppliers
and accrued expenses settled resulted in a gain of $91,000 and $34,000 in
2007 and 2006, respectively.
|
|
| 11. |
Related
Party
Transactions
|
A law firm, of which
the chairman of the board of directors of the Company is a shareholder,
has rendered legal services to the Company. The Company paid
this firm $156,000 and $148,000, for the years ended December 31, 2007 and
2006, respectively. As of December 31, 2007, the Company owed
this firm $46,000, which is included in accounts
payable.
|
F-45
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 12. |
Supplemental
Cash
Flow
|
During the year ended December 31, 2007,
the Company:
|
|||
|
Information
|
● | Incurred paid
obligation of approximately $20,000 for the settlement of accrued
liabilities of approximately $111,000 and recorded a corresponding gain of
$91,000.
|
|||
|
Actual
amounts paid for interest and income taxes are as
follows:
|
|||||
|
Years
Ended
December
31,
|
||||
|
2007
|
2006
|
|||
|
Interest
|
$
|
11,000
|
$
|
7,000
|
|
Income
taxes
|
$
|
-
|
$
|
-
|
| 13. |
Export
Sales
(restated)
|
In accordance with
Paragraph 38(a) of SFAS 131 “Disclosures about Segments of an Enterprise
and Related Information,” The company has the following information
regarding revenues to external customers. Revenues are attributed to
countries based on location of
customer.
|
F-46
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 13. |
Export
Sales
Continued
|
Total sales include
export sales by major geographic area as
follows:
|
|
Years
Ended December 31,
|
||||||||
|
Geographic
Area
|
2007
|
2006
|
||||||
|
Europe:
|
||||||||
|
Belgium
|
$ | - | $ | 325 | ||||
|
Bulgaria
|
28,400 | 4,900 | ||||||
|
France
|
34,224 | 6,250 | ||||||
|
Germany
|
- | 7,200 | ||||||
|
Greece
|
11,750 | 75,455 | ||||||
|
Italy
|
38,040 | 17,725 | ||||||
|
Poland
|
37,000 | 12,650 | ||||||
|
Russia
|
204,540 | 158,620 | ||||||
|
Spain
|
7,200 | 32,550 | ||||||
|
Turkey
|
102,940 | 57,750 | ||||||
|
United
Kingdom
|
255,717 | 293,240 | ||||||
|
Sub
total
|
719,811 | 666,665 | ||||||
|
Far
East:
|
||||||||
|
Bangladesh
|
$ | 560 | $ | 29,850 | ||||
|
China
|
91,600 | 74,544 | ||||||
|
India
|
16,800 | 63300 | ||||||
|
Pakistan
|
8,200 | - | ||||||
|
South
Korea
|
42,500 | 175,656 | ||||||
|
Taiwan
|
32,650 | 31,050 | ||||||
|
Thailand
|
- | 32,250 | ||||||
|
Vietnam
|
80,600 | - | ||||||
|
Sub
total
|
272,910 | 406,650 | ||||||
F-47
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 13. |
Export
Sales
Continued
|
|
|
Middle
East:
|
||||||||
|
Egypt
|
$ | 9,540 | $ | 27,200 | ||||
|
Israel
|
2,800 | 2,150 | ||||||
|
Jordan
|
- | 5,100 | ||||||
|
Saudi
Arabia
|
65,700 | 33,950 | ||||||
|
UAE
|
10,600 | - | ||||||
|
Sub
total
|
88,640 | 68,400 | ||||||
|
North
America:
|
||||||||
|
Canada
|
$ | 44,750 | $ | 99,402 | ||||
|
Mexico
|
- | 6,800 | ||||||
|
USA
|
636,879 | 894,758 | ||||||
|
Sub
total
|
681,629 | 1,000,960 |
|
Central,
South America, and Caribbean:
|
||||||||
|
Argentina
|
$ | 21,915 | $ | - | ||||
|
Brazil
|
36,698 | 9,500 | ||||||
|
El
Salvador
|
8,749 | 12,650 | ||||||
|
Guatemala
|
- | 8,300 | ||||||
|
Honduras
|
- | 5,150 | ||||||
|
Puerto
Rico
|
26,798 | 10,825 | ||||||
|
Venezuela
|
14,850 | - | ||||||
|
Colombia
|
- | 5,900 | ||||||
|
Sub
total
|
109,010 | 52,325 | ||||||
|
Total
|
$ | 1,872,000 | $ | 2,195,000 |
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 13. |
Export
Sales
Continued
|
Percentage and amount
of revenues to external customers by product, as required by SFAS 131,
paragraph 37, are as
follows:
|
|
PRODUCT
|
MODEL
|
2007
|
2006
|
|
|
Humphrey
Systems: P55 & A/B Scan
|
Pachymeter
(P55), A/B Scan (P37)
|
(548,902)
|
(314,227)
|
|
|
MEDA
Systems
|
P2000, P2200,
P2500, P2700, P3700
|
29%
|
14%
|
|
|
Dicon
diagnostic: Perimeter and corneal topographer
|
LD, TKS,
CT
|
(388,179)
|
(855,800)
|
|
|
21%
|
39%
|
|||
|
UBM
biomicroscope:
|
P40, P45,
P60
|
(512,644)
|
(546,793)
|
|
|
27%
|
25%
|
|||
|
Blood Flow
Analyzer:
|
BFA
|
(256,511)
|
(210,929)
|
|
|
14%
|
10%
|
|||
|
Sub-Total
|
(1,706,236)
|
(1,927,748)
|
||
|
91%
|
88%
|
|||
|
Cataract
removal sales (Precisionist and SIStem)
|
PHO, SIS
(Surgical)
|
-
|
5,856
|
|
|
0%
|
0%
|
|||
|
Service,
parts, disposables, and other
|
(165,318)
|
(273,577)
|
||
|
9%
|
12%
|
|||
|
Total
YTD Sales
|
(1,871,554)
|
(2,195,469)
|
||
|
100%
|
100%
|
|||
F-49
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 14. | Savings Plan |
In November
1996, the Company established a 401(k) Retirement Savings Plan for the
Company’s officers and employees. The Plan provisions include
eligibility after six months of service, a three year vesting provision
and nondiscriminatory no matching contributions at this
time. During the years ended December 31, 2007 and 2006,
the Company made no contributions to the Plan.
|
|
| 15. |
Commitments
and
Contingencies
|
Agreements
On June 12,
2006, the Company entered into a Worldwide OEM Agreement with MEDA Co.,
Ltd., one of China's leading developers and producers of ultrasound
devices. Under the terms of the agreement, MEDA agrees to
jointly engineer, develop and manufacture the Company's next generation of
the Ultrasound BioMicroscope, as well as other proprietary new products
and enhancement of the Company's current products. The products
to be manufactured by MEDA, at agreed upon costs, and supplied to the
Company for resale include the following new products: an ultrasound
biomicroscope, two ultrasound A/B Scans, a biometric A-Scan and a
pachymeter.
The agreement
provides that the Company and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of the Company's products
and, in the interest of product development, enhancement and
differentiation, MEDA agrees to give consideration to potential software
development or enhancements made available to the Company for its
products. Moreover, in the interest of product improvement,
MEDA agrees to collaborate with the Company and its designated engineers,
employees and consultants to consider and potentially implement jointly or
individually the development of product enhancements to the Company's
products to be manufactured by MEDA.
The software
and hardware modifications designed jointly by the Company and MEDA will
be considered the joint intellectual property of the Company and MEDA and
may be used, without restriction, unless otherwise previously agreed to,
by either party. MEDA also agrees to provide a twelve month
warranty on all products that it manufactures for the
Company. If defects cannot be corrected at the Company's
facilities, the products may be returned to MEDA for the purposes of
carrying out such repairs as required, and MEDA agrees to return the
repaired products to the Company or its designated agent or distributor
within ten working days from the date of receiving such products, at no
cost to the Company, and MEDA will pay return freight
costs.
|
F-50
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
MEDA further
agrees to endeavor to answer any technical inquiries concerning the
products it has manufactured. MEDA also agrees to train the
Company's technical service engineers and designated international
distributors as soon as possible after the signing of this agreement, and
as future needs arise and as MEDA can reasonably fit such training into
the regular schedules of its employees. MEDA agrees to
determine the need for future training on new products as necessary and
will offer such training in Tiangin, China. For training
conducted outside China, the Company or its designated distributors and/or
service centers will be responsible for the traveling, living and hotel
expenses for MEDA's engineers. Training is at no charge to the
Company. The training will also be made available to the
Company's designated repair agencies in order to provide service and
repair on a worldwide basis. Such agencies will be considered
authorized repair facilities for the products manufactured by
MEDA.
MEDA provides
the Company with several ultrasound devices. These devices
include the P37-II A/B Scan, the P2000 A-Scan Biometric Analyzer, P2200
Pachymeter and the P2500, which is a combined A-Scan and
pachymeter. MEDA also manufactures the P2700, P3700, and P37-II
A/B Scans and the P50 Ultrasound Biomicroscope. The agreement
provides exclusive distribution rights to the Company throughout most of
the world, including the United States and Canada, once FDA approval is
received on these devices.
The agreement
shall be effective for three years from date of execution. At
the end of the three year term, representatives of the Company and MEDA
will confer to determine whether to extend the term of the
agreement. This will have a practical effect of extending the
term of the agreement for an additional 120 days. If mutual
agreement for extending the term of the agreement is not reached within
120 days after the end of the three year term, then the agreement will be
deemed terminated. However, if within the 120 day period, the
Company and MEDA mutually agree to extend the term of the agreement, then
thereafter either party may terminate the agreement by providing at least
twelve months' prior written notice to the other party. All
outstanding orders at the time of notification will be supplied under the
terms of the agreement, and MEDA will continue to fulfill all orders from
the Company until the twelve month notice period has
expired.
|
F-51
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
On January 31
and February 1, 2007, the Company received FDA 510(k) premarket approval
for a new generation of ultrasound devices. This approval
allows the new devices to be sold in the United States. The new
ultrasound devices, which are to be manufactured by MEDA and sold by the
Company in the United States, include the P2000 A-Scan (used to measure
axial length of the eye), the P2200 Pachymeter (used for measuring corneal
thickness), the P2500 A-Scan/Pachymeter (a combination of the two stand
alone devices), the P2700 AB/Scan (an ultrasound imaging device for
detecting abnormalities within the eye) and the P37-II (a more advanced
AB/Scan used to provide portability for ophthalmology veterinary
applications) and the P50 Ultrasound Biomicroscope for high frequency
imaging of the anterior chamber of the eye.
On September
25, 2006, the Company entered into a Worldwide OEM Agreement with Tinsley,
a division of Hartest Precision Instruments Limited, and one of Europe's
leading developers and producers of visual fields analysis devices or
perimeters. Under the terms of the agreement, Tinsley agrees to
engineer, develop and manufacture the Company's newest perimeter, the
LD700 Visual Fields Analyzer. The product is to be manufactured
by Tinsley at agreed upon costs and supplied to the Company for
resale.
On August 14,
2007, the Company entered into an agreement with Equity Source Partners,
LLC of Jericho, New York. Under the terms of the agreement,
Equity Source Partners will act as the exclusive financial advisor to the
Company and will assist the Company in raising private capital, creating a
strategy for growing its core business, pursuing a follow on offering, and
providing general strategic corporate advice. Among the
strategic advisory services Equity Source Partners will provide are to
assist in identifying and introducing the Company to third parties in
connection with potential strategic relationships, provide advice
concerning issues relating to potential strategic relations, capital
raises and potential investment banking contacts, and establish contact
with prospective providers of capital. Among the financing
services Equity Source Partners will perform is to solicit prospective
providers of capital on the Company's
behalf.
|
F-52
PARADIGM MEDICAL INDUSTRIES,
INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
The term of
the agreement is for twelve months unless extended by mutual
consent. As compensation for its services, the Company agrees
to provide equity Source Partners with an advisory fee equal to an
aggregate of 3% of the outstanding shares of the Company's common
stock. In addition, the Company agrees to pay Equity Source
Partners a cash fee equal to 7.5% of the gross proceeds from the sale of
securities to investors that were introduced to the Company by Equity
Source Partners and a cash fee equal to 3% of the gross proceeds received
from the sale of securities to investors that were not introduced by
Equity Source Partners.
Legal
Proceedings
On December
27, 2007, the Company entered into a settlement agreement with Larry Hicks
to settle the lawsuit Mr. Hicks brought against the Company for payments
due under a consulting agreement with the Company (Third Judicial District
Court, Salt Lake County, State of Utah, Civil No.
030922220). Under the terms of the agreement, the Company
agrees to pay Mr. Hicks a total of $20,000, of which $10,000 has been
paid. The remaining amount owing of $10,000 is to be paid in
quarterly installments of $2,500 each prior to the end of the next four
consecutive quarters, with the next payment due on or before June 30,
2008.
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 attorney's 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™ 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™ laser
system.
|
F-53
PARADIGM MEDICAL INDUSTRIES,
INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
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.
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.
Employment
Agreements
The Company
entered into an employment agreement with Raymond P.L. Cannefax, which
commenced on January 5, 2006 and expired on January 5, 2007. The
employment agreement requires Mr. Cannefax to devote substantially all of
his working time as the Company’s President and Chief Executive Officer,
providing that he may be terminated for “cause” (as provided in the
agreement) and prohibits him from competing with the Company for two years
following the termination of his employment agreement. The
employment agreement provides for the payment of an initial base salary of
$125,000. The employment agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the
Board of Directors, with the first review of the annual salary to be made
as of June 30, 2006. The employment agreement further provides for the
issuance of stock options to purchase 4,500,000 shares of the Company’s
common stock at $.01 per share. The options vest in twelve equal monthly
installments of 375,000 shares, beginning on February 5, 2006 until such
shares are vested.
|
F-54
PARADIGM MEDICAL INDUSTRIES,
INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
In the event
of a change of control of the Company, then all outstanding stock options
granted to Mr. Cannefax shall be immediately vested. A change
of control shall be deemed to have occurred if (i) a tender offer shall be
made and consummated for the ownership of more than 25% of the Company’s
outstanding shares; (ii) the Company shall be merged or consolidated with
another corporation and, as a result, less than 25% of the outstanding
common shares of the surviving corporation shall be owned in the aggregate
by the Company’s former shareholders, as the same shall have listed prior
to such merger or consolidation; (iii) the Company shall sell all or
substantially all of its assets to another corporation that is not a
wholly owned subsidiary or affiliate; (iv) as a result of any contested
election for the Board of Directors, or any tender or exchange offer,
merger of business combination or sale of assets, the persons who were
directors of the Company before such a transaction shall cease to
constitute a majority of the Board of Directors; or (v) a person other
than an officer or director of the Company shall acquire more than 20% of
the outstanding shares of common stock of the Company.
Effective
July 1, 2007, the Company entered into an amendment of the employment
agreement with Mr. Cannefax, which extends the term of the employment
agreement until January 5, 2009. Under the terms of the
amendment, Mr. Cannefax's annual base salary increased to $150,000. The
initial base salary in the employment agreement dated January 5, 2006 was
$125,000, which the Board of Directors increased to $140,000 as of July 1,
2006. The amendment also provides for the granting of
additional stock options to Mr. Cannefax to purchase an additional
4,500,000 shares of the Company's common stock at $.01 per share. These
options vest in twelve equal monthly installments of 375,000 shares
beginning on June 1, 2007 until such shares are
vested.
|
F-55
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 15. |
Commitments
and
Contingencies
Continued
|
Retirement
Agreement
On May 6,
1999, the Company's Board of Directors approved resolutions relating to
the retirement of John M. Hemmer, then Vice President of Finance and Chief
Financial Officer of the Company. The board resolutions provided that Mr.
Hemmer's annual salary of $120,000 per annum was to continue until June 1,
1999, at which time his employment contract and change of control
agreement with the Company would terminate and he would become an
independent consultant to the Company. As a consultant, Mr.
Hemmer was to receive an initial payment of $12,500 with annual payments
thereafter of $25,000 payable on January 1, 2000, 2001 and 2002, and a
final payment of $12,500 payable on January 1, 2003, for a total
consulting contract of $100,000.
In addition,
the board resolutions provided that the Company was to issue to Mr. Hemmer
warrants to purchase 125,000 shares of common stock at $2.63 per share,
exercisable for a period of five years, and warrants to purchase 75,000
shares of common stock at $7.50 per share, exercisable for a period of
five years, but such warrants were not to be issued until Mr. Hemmer
exercised all of the warrants to purchase 125,000 common shares at $2.63
per share. The Company has paid a total of $87,500 to Mr. Hemmer under the
consulting agreement.
On May 30,
2006, the Company entered into an agreement with Mr. Hemmer in which he
acknowledged that the Company owed him a total of $12,500 for past
services he rendered to the Company, including as a consultant, and the
Company agreed to pay him the sum of $12,500 in twelve monthly
installments of $1,000 each and a final monthly payment of
$500. The Company has paid $7,000 to Mr. Hemmer under this
agreement, as of December 31,
2007.
|
F-56
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 16. |
Recent
Accounting
Pronouncements
|
Recent
accounting pronouncements
In September
2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132R" ("SFAS 158"). SFAS 158 requires
employers that sponsor defined benefit pension and postretirement plans to
recognize previously unrecognized actuarial losses and prior service costs
in the statement of financial position and to recognize future changes in
these amounts in the year in which changes occur through comprehensive
income. As a result, the statement of financial position will reflect
funded status of those plans as an asset or liability. Additionally,
employers are required to measure the funded status of a plan as of the
date of their year-end statements of financial position and provide
additional disclosures. SFAS 158 is effective for financial statements
issued for fiscal years ending after December 15, 2006 for companies whose
securities are publicly traded. The Company does not expect the adoption
of SFAS 158 to have a
significant effect on its financial position or results of
operation.
In September
2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS
157"), which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), and
expands disclosures about fair value measurements. Where applicable, SFAS
157 simplifies and codifies related guidance within GAAP and does not
require any new fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Earlier adoption is
encouraged. The Company does not expect the adoption of SFAS 157 to have a
significant effect on its financial position or results of
operation.
|
F-57
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 16. |
Recent
Accounting
Pronouncements
Continued
|
In June 2006,
the Financial Accounting Standards Board issued FASB Interpretation No.
48, "Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109" ("FIN 48"), which prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company does not expect the
adoption of FIN 48 to have a material impact on its financial reporting,
and the Company is currently evaluating the impact, if any, the adoption
of FIN 48 will have on its disclosure requirements.
In March
2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of
Financial Assets -- an Amendment of FASB Statement No. 140 ("SFAS 156")."
This statement requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in any of the
following situations: a transfer of the servicer's financial assets that
meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying
special-purpose entity in a guaranteed mortgage securitization in which
the transferor retains all of the resulting securities and classifies them
as either available-for-sale securities or trading securities; or an
acquisition or assumption of an obligation to service a financial asset
that does not relate to financial assets of the service or its
consolidated affiliates. The statement also requires all separately
recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable, and permits an entity to choose
either the amortization or fair value method for subsequent measurement of
each class of servicing assets and liabilities. The statement further
permits, at its initial adoption, a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Financial Accounting
Standards Board Statement No. 115, provided that the available-for-sale
securities are identified in some manner as offsetting the entity's
exposure to changes in fair value of servicing assets or servicing
liabilities that a services elects to subsequently measure at fair value
and requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS 156 is
effective for fiscal years beginning after September 15, 2006, with early
adoption permitted as of the beginning of an entity's fiscal year.
Management believes the adoption of SFAS 156 will have no immediate impact
on the Company's financial condition or results of
operations.
|
F-58
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 16. |
Recent
Accounting
Pronouncements
Continued
|
In February
2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140"
("SFAS 155"), to (a) permit fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would require bifurcation, (b) clarify which interest-only strip and
principal-only strip are not subject to the requirements of Statement 133,
(c) establish a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation,
(d) clarify that concentrations of credit risk in the form of
subordination are not embedded derivatives, and (e) amend Statement 140 to
eliminate the prohibition on a qualifying special purpose entity from
holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. This
statement is effective for financial statements for fiscal years beginning
after September 15, 2006. Earlier adoption of SFAS 155 is permitted as of
the beginning of an entity's fiscal year, provided the entity has not yet
issued any financial statements for that fiscal year. Management believes
SFAS 155 will have no impact on the financial statements of the Company
once adopted.
In December
2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141(R), “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes the principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, any noncontrolling interest in the acquiree, and
the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects
of the business combination. SFAS 141R is effective for us on
January 1, 2009, and is not expected to have a material effect on our
consolidated financial statements.
In December
2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions with
minority interest holders. SFAS 160 is effective for us on
January 1, 2009, and is not expected to have a material effect on our
consolidated financial
statements.
|
F-59
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 16. |
Recent
Accounting
Pronouncements
Continued
|
In February
2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value, and
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS
159 is effective for us on January 1, 2008, and is not expected to have a
material effect on our consolidated financial statements.
The
implementation of the provisions of these pronouncements is not expected
to have a significant effect on the Company's consolidated financial
statement
presentation.
|
| 17. |
Subsequent
Events
|
Subsequent
Events
On January
16, 2008, the Company entered into a consulting agreement with Corcoran
Consulting Group, which specializes in medical reimbursement issues for
optometry and ophthalmology. The Company plans to work with
Corcoran Consulting Group to create a new common procedure technology, or
CPT code number, for reimbursement purposes for physicians and
practitioners using the Blood Flow AnalyzerÔ. In
addition, the Company plans to work with Corcoran Consulting Group to
offer educational seminars for physicians and practitioners who purchase
the Blood Flow AnalyzerÔ.
On January
28, 2008, the Company entered into a Distribution Agreement with LACE
Elettronica srl to distribute its Glaid device, a proprietary
electrophysiology instrument for the early detection of glaucoma by means
of measuring the physical condition of the retina's ganglion cells,
including retinal ganglion cell loss. The Glaid device was
approved by the FDA in 2005 and has undergone extensive testing and
clinical studies in the United States, Canada and Italy, including at
Bascom Palmer Eye Institute, University of California at San Diego's
Hamilton Glaucoma Center, and New York State College of
Optometry
|
F-60
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 17. |
Subsequent
Events
Continued
|
Under the
terms of the agreement, the Company has the exclusive right to distribute
the Glaid device in the United States and Canada. The Company
also has a first right of refusal for distribution of the
product to countries outside the United States and Canada where LACE is
not currently selling or marketing the product. These
additional distribution rights are subject to reasonable new minimum
quotas. The Distribution Agreement requires the Company to
purchase the Glaid device from LACE at an agreed upon price and to then
sell the product in compliance with minimum order
requirements. The five year quotas for the Glaid device are 27
units, 60 units, 100 units, 120 units, and 120 units for years one through
five of the agreement. Paradigm sales for quota requirements
are to begin as soon as the product is fully completed, with all
accessories and consumables, and ready for delivery.
The
Distribution Agreement is for the term of five years. At the
end of the five year term, representatives of the Company and LACE will
determine whether to extend the term of the agreement. If
mutual agreement for continuation of the agreement is not reached within
120 days thereafter, the agreement will be deemed
terminated. However, if within the 120 day period, the Company
and LACE mutually agree to continue the agreement, then either party may
terminate the agreement at any time thereafter by providing at least
twelve months' prior written notice to the other party. All
outstanding orders at the time of notification will be supplied under the
terms of the agreement, and LACE will continue to fulfill all orders from
the Company until the twelve month notice period has expired.
LACE also
agrees to provide a twelve month warranty from the day of delivery on all
Glaid devices supplied to the Company. If the
defects cannot be corrected at the Company's facilities or at the
facilities of trained Company repair centers, the products must then be
returned to LACE for purposes of carrying out such repairs as required,
and LACE agrees to return the repaired products to the Company or its
designated agent or distributor within ten working days from the date of
receiving such products, at no cost to the Company, and LACE will pay
return freight costs. The Company additionally agrees to
arrange for installation of the Glaid device at no cost to
LACE. The Company further agrees to provide Company brand
specific labeling to be applied to the LACE devices shipped directly to
the Company's
customers.
|
F-61
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
| 18. |
Restatement
and
Reclassification
(restated)
|
We have
restated our annual financial statements for the years ended December 31,
2007,
2006 and 2005, and our quarterly financial statements for the quarter
ended March 31, June 30, and September 30, 2007 and 2006,
respectively. These restatements have been performed to reflect
issues identified during a review of our financial
statements. Management and the board of directors concluded
these restatements were necessary to reflect the changes described
below.
|
| ● |
We erroneously
treated the conversion-related derivatives and warrants associated with
the Company’s Callable Secured Convertible Notes for the years ended
December 31, 2005, 2006 and 2007. The correct presentation is
as a liability adjusted for changes in fair value, at each balance sheet
date, through the statements of operations, as provided by SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities.”
|
| ● | We have also expanded footnote disclosures and added disclosures to help clarify the amounts recorded in the financial statements of the Company. |
|
|
A summary of the effects of
these changes is as follows:
|
F-62
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
December
31, 2005
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
66,000
|
$
|
66,000
|
$
|
-
|
||
|
Receivables,
net
|
401,000
|
401,000
|
-
|
|||||
|
Inventories,
net
|
853,000
|
853,000
|
-
|
|||||
|
Prepaid and
other assets
|
11,000
|
11,000
|
-
|
|||||
|
Total current
assets
|
1,331,000
|
1,331,000
|
-
|
|||||
|
Property and
equipment, net
|
32,000
|
32,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
1,702,000
|
$
|
1,702,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
459,000
|
$
|
459,000
|
$
|
-
|
||
|
Accrued
liabilities
|
704,000
|
704,000
|
-
|
|||||
|
Current
portion of capital lease obligations
|
14,000
|
14,000
|
-
|
|||||
|
Total current
liabilities
|
1,177,000
|
1,177,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,698,000
|
2,038,000
|
340,000
|
(1,698,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
195,000
|
195,000
|
b
|
||||
|
Total
long-term liabilities
|
2,038,000
|
535,000
|
(1,503,000)
|
|||||
|
Total
liabilities
|
3,215,000
|
1,712,000
|
(1,503,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized,
|
||||||||
|
613,447
shares issued and outstanding (aggregate liquidation
|
||||||||
|
preference
of $496,000)
|
1,000
|
1,000
|
-
|
|||||
|
Common stock,
$.001 par value, 250,000,000 shares authorized,
|
||||||||
|
96,389,295
shares issued and outstanding
|
96,000
|
96,000
|
-
|
|||||
|
Additional
paid-in capital
|
60,586,000
|
57,653,000
|
(2,933,000)
|
c
|
||||
|
Accumulated
deficit
|
(62,196,000)
|
(57,760,000)
|
4,436,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(1,513,000)
|
(10,000)
|
1,503,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
1,702,000
|
$
|
1,702,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-63
PARADIGM
MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Twelve
months ended December 31, 2005
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Sales
|
$
|
2,201,000
|
$
|
2,201,000
|
$
|
-
|
||
|
Cost of
sales
|
1,599,000
|
1,599,000
|
-
|
|||||
|
Gross
profit
|
602,000
|
602,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(1,298,000)
|
(1,298,000)
|
-
|
|||||
|
Marketing
and selling
|
(641,000)
|
(641,000)
|
-
|
|||||
|
Research
and development
|
(855,000)
|
(855,000)
|
-
|
|||||
|
Gain
on settlement of liabilities
|
12,000
|
12,000
|
-
|
|||||
|
Total
operating expenses
|
(2,782,000)
|
(2,782,000)
|
-
|
|||||
|
Operating
loss
|
(2,180,000)
|
(2,180,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
16,000
|
16,000
|
-
|
|||||
|
Other
expenses
|
(2,870,000)
|
-
|
2,870,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(369,000)
|
(369,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
3,974,000
|
3,974,000
|
c
|
||||
|
Initial
fair value of derivative and warrant
|
-
|
(1,669,000)
|
(1,669,000)
|
a
|
||||
|
Interest
expense
|
(15,000)
|
(385,000)
|
(370,000)
|
d
|
||||
|
Impairment
of intangible assets
|
(340,000)
|
(340,000)
|
-
|
|||||
|
Total other
income (expense)
|
(3,209,000)
|
1,227,000
|
4,436,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(5,389,000)
|
(953,000)
|
4,436,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(5,389,000)
|
$
|
(953,000)
|
$
|
4,436,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.13)
|
$
|
(0.02)
|
$
|
0.12
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.13)
|
$
|
(0.02)
|
$
|
0.11
|
||
|
Weighted
average common shares - basic
|
42,033,000
|
42,033,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
42,942,000
|
42,033,000
|
(909,000)
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-64
PARADIGM MEDICAL
INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
December
31, 2005
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(5,389,000)
|
$
|
(953,000)
|
$
|
4,436,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
77,000
|
77,000
|
-
|
|||||
|
Issuance
of common stock for satisfaction of penalty
|
53,000
|
53,000
|
-
|
|||||
|
Issuance
of common stock for services
|
23,000
|
23,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
(2,305,000)
|
(2,305,000)
|
b
|
||||
|
Beneficial
conversion interest
|
2,009,000
|
369,000
|
(1,640,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
491,000
|
-
|
(491,000)
|
d
|
||||
|
Provision
for losses on receivables
|
(1,000)
|
(1,000)
|
-
|
|||||
|
Provision
for losses on inventory
|
(61,000)
|
(61,000)
|
-
|
|||||
|
Impairment
of Intangibles and investments
|
340,000
|
340,000
|
-
|
|||||
|
(Gain)
loss on settlement of liabilities
|
(12,000)
|
(12,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
257,000
|
257,000
|
-
|
|||||
|
Inventories
|
(72,000)
|
(72,000)
|
-
|
|||||
|
Prepaid
and other assets
|
56,000
|
56,000
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(291,000)
|
(291,000)
|
-
|
|||||
|
Accrued
liabilities
|
(148,000)
|
(148,000)
|
-
|
|||||
|
Net
cash used in operating activities
|
(2,668,000)
|
(2,668,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
(47,000)
|
(47,000)
|
-
|
|||||
|
Proceeds
from issuance of common stock
|
150,000
|
150,000
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
2,500,000
|
2,500,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
2,603,000
|
2,603,000
|
-
|
|||||
|
Net change in
cash
|
(65,000)
|
(65,000)
|
-
|
|||||
|
Cash,
beginning of year
|
131,000
|
131,000
|
-
|
|||||
|
Cash,
end of year
|
$
|
66,000
|
$
|
66,000
|
$
|
-
|
||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
F-65
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
March
31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
400,000
|
$
|
400,000
|
$
|
-
|
||
|
Receivables,
net
|
319,000
|
319,000
|
-
|
|||||
|
Inventories,
net
|
820,000
|
820,000
|
-
|
|||||
|
Prepaid and
other assets
|
61,000
|
61,000
|
-
|
|||||
|
Total current
assets
|
1,600,000
|
1,600,000
|
-
|
|||||
|
Property and
equipment, net
|
21,000
|
21,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
1,960,000
|
$
|
1,960,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
432,000
|
$
|
432,000
|
$
|
-
|
||
|
Accrued
liabilities
|
732,000
|
732,000
|
-
|
|||||
|
Current
portion of capital lease obligations
|
5,000
|
5,000
|
-
|
|||||
|
Total current
liabilities
|
1,169,000
|
1,169,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,764,000
|
2,343,000
|
579,000
|
(1,764,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
816,000
|
816,000
|
b
|
||||
|
Total
long-term liabilities
|
2,343,000
|
1,395,000
|
(948,000)
|
|||||
|
Total
liabilities
|
3,512,000
|
2,564,000
|
(948,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
250,000,000
shares, $.001 par value, 160,800,324 shares
|
||||||||
|
issued
and outstanding at March 31, 2006
|
161,000
|
161,000
|
-
|
|||||
|
Additional
paid-in capital
|
61,238,000
|
57,667,000
|
(3,571,000)
|
c
|
||||
|
Accumulated
deficit
|
(62,952,000)
|
(58,433,000)
|
4,519,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(1,552,000)
|
(604,000)
|
948,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
1,960,000
|
$
|
1,960,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-66
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Three
months ended March 31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
463,000
|
$
|
463,000
|
$
|
-
|
||
|
Cost of
sales
|
222,000
|
222,000
|
-
|
|||||
|
Gross
profit
|
241,000
|
241,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(250,000)
|
(250,000)
|
-
|
|||||
|
Marketing
and selling
|
(78,000)
|
(78,000)
|
-
|
|||||
|
Research
and development
|
(124,000)
|
(124,000)
|
-
|
|||||
|
Total
operating expenses
|
(452,000)
|
(452,000)
|
-
|
|||||
|
Operating
loss
|
(211,000)
|
(211,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
2,000
|
2,000
|
-
|
|||||
|
Other
expenses
|
(544,000)
|
-
|
544,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(173,000)
|
(173,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
(244,000)
|
(244,000)
|
c
|
||||
|
Interest
expense
|
(3,000)
|
(47,000)
|
(44,000)
|
d
|
||||
|
Total other
income (expense)
|
(545,000)
|
(462,000)
|
83,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(756,000)
|
(673,000)
|
83,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(756,000)
|
$
|
(673,000)
|
$
|
83,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
124,647,000
|
124,647,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
124,647,000
|
124,647,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
|||||||
F-67
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
March
31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(756,000)
|
$
|
(673,000)
|
$
|
83,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
16,000
|
16,000
|
-
|
|||||
|
Stock
option valuation
|
23,000
|
23,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
244,000
|
244,000
|
b
|
||||
|
Beneficial
conversion interest
|
482,000
|
173,000
|
(309,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
18,000
|
-
|
(18,000)
|
d
|
||||
|
Provision
for losses on receivables
|
1,000
|
1,000
|
-
|
|||||
|
Provision
for losses on inventory
|
25,000
|
25,000
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
80,000
|
80,000
|
-
|
|||||
|
Inventories
|
8,000
|
8,000
|
-
|
|||||
|
Prepaid
and other assets
|
(50,000)
|
(50,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(27,000)
|
(27,000)
|
-
|
|||||
|
Accrued
liabilities
|
28,000
|
28,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(152,000)
|
(152,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
(5,000)
|
(5,000)
|
-
|
|||||
|
Net
cash provided by (used in) investing activities
|
(5,000)
|
(5,000)
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
(9,000)
|
(9,000)
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
500,000
|
500,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
491,000
|
491,000
|
-
|
|||||
|
Net change in
cash
|
334,000
|
334,000
|
-
|
|||||
|
Cash,
beginning of period
|
66,000
|
66,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
400,000
|
$
|
400,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
1,000
|
$
|
1,000
|
||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
F-68
PARADIGM MEDICAL INDUSTRIES,
INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
June
30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
591,000
|
$
|
591,000
|
$
|
-
|
||
|
Receivables,
net
|
486,000
|
486,000
|
-
|
|||||
|
Inventories,
net
|
786,000
|
786,000
|
-
|
|||||
|
Prepaid and
other assets
|
49,000
|
49,000
|
-
|
|||||
|
Total current
assets
|
1,912,000
|
1,912,000
|
-
|
|||||
|
Property and
equipment, net
|
24,000
|
24,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
2,275,000
|
$
|
2,275,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
390,000
|
$
|
390,000
|
$
|
-
|
||
|
Accrued
liabilities
|
848,000
|
848,000
|
-
|
|||||
|
Current
portion of capital lease obligations
|
1,000
|
1,000
|
-
|
|||||
|
Total current
liabilities
|
1,239,000
|
1,239,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,613,000
|
2,670,000
|
1,057,000
|
(1,613,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
440,000
|
440,000
|
b
|
||||
|
Total
long-term liabilities
|
2,670,000
|
1,497,000
|
(1,173,000)
|
|||||
|
Total
liabilities
|
3,909,000
|
2,736,000
|
(1,173,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
250,000,000
shares, $.001 par value, 196,956,828 shares
|
||||||||
|
issued
and outstanding at June 30, 2006
|
197,000
|
197,000
|
-
|
|||||
|
Additional
paid-in capital
|
61,873,000
|
57,700,000
|
(4,173,000)
|
c
|
||||
|
Accumulated
deficit
|
(63,705,000)
|
(58,359,000)
|
5,346,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(1,634,000)
|
(461,000)
|
1,173,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
2,275,000
|
$
|
2,275,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005 and
2006
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-69
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries,Inc.
Statements
of Operations
Three
months ended June 30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
718,000
|
$
|
718,000
|
$
|
-
|
||
|
Cost of
sales
|
416,000
|
416,000
|
-
|
|||||
|
Gross
profit
|
302,000
|
302,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(263,000)
|
(263,000)
|
-
|
|||||
|
Marketing
and selling
|
(108,000)
|
(108,000)
|
-
|
|||||
|
Research
and development
|
(132,000)
|
(132,000)
|
-
|
|||||
|
Total
operating expenses
|
(503,000)
|
(503,000)
|
-
|
|||||
|
Operating
loss
|
(201,000)
|
(201,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
expenses (Financing cost)
|
(553,000)
|
-
|
553,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(179,000)
|
(179,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
506,000
|
506,000
|
c
|
||||
|
Interest
expense
|
(1,000)
|
(54,000)
|
(53,000)
|
d
|
||||
|
Total other
income (expense)
|
(554,000)
|
273,000
|
827,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(755,000)
|
72,000
|
827,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(755,000)
|
$
|
72,000
|
$
|
827,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.00)
|
$
|
0.00
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.00)
|
$
|
0.00
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
175,402,000
|
175,402,242
|
242
|
|||||
|
Weighted
average common shares - diluted
|
175,402,000
|
209,150,191
|
33,748,191
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-70
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Six
months ended June 30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
1,182,000
|
$
|
1,182,000
|
$
|
-
|
||
|
Cost of
sales
|
638,000
|
638,000
|
-
|
|||||
|
Gross
profit
|
544,000
|
544,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(514,000)
|
(514,000)
|
-
|
|||||
|
Marketing
and selling
|
(185,000)
|
(185,000)
|
-
|
|||||
|
Research
and development
|
(257,000)
|
(257,000)
|
-
|
|||||
|
Total
operating expenses
|
(956,000)
|
(956,000)
|
-
|
|||||
|
Operating
loss
|
(412,000)
|
(412,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
2,000
|
2,000
|
-
|
|||||
|
Other
expenses (Financing cost)
|
(1,097,000)
|
-
|
1,097,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(352,000)
|
(352,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
262,000
|
262,000
|
c
|
||||
|
Interest
expense
|
(4,000)
|
(101,000)
|
(97,000)
|
d
|
||||
|
Total other
income (expense)
|
(1,099,000)
|
(189,000)
|
910,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,511,000)
|
(601,000)
|
910,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,511,000)
|
$
|
(601,000)
|
$
|
910,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.00)
|
$
|
0.01
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.00)
|
$
|
0.01
|
||
|
Weighted
average common shares - basic
|
150,164,000
|
150,164,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
150,164,000
|
150,164,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-71
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
June
30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,511,000)
|
$
|
(601,000)
|
$
|
910,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
24,000
|
24,000
|
-
|
|||||
|
Stock
option valuation
|
23,000
|
23,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
(262,000)
|
(262,000)
|
b
|
||||
|
Beneficial
conversion interest
|
964,000
|
352,000
|
(612,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
36,000
|
-
|
(36,000)
|
d
|
||||
|
Provision
for losses on receivables
|
1,000
|
1,000
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
(86,000)
|
(86,000)
|
-
|
|||||
|
Inventories
|
67,000
|
67,000
|
-
|
|||||
|
Prepaid
and other assets
|
(38,000)
|
(38,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(69,000)
|
(69,000)
|
-
|
|||||
|
Accrued
liabilities
|
144,000
|
144,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(445,000)
|
(445,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
(16,000)
|
(16,000)
|
-
|
|||||
|
Net
cash provided by (used in) investing activities
|
(16,000)
|
(16,000)
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
(14,000)
|
(14,000)
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
986,000
|
986,000
|
-
|
|||||
|
Net change in
cash
|
525,000
|
525,000
|
-
|
|||||
|
Cash,
beginning of period
|
66,000
|
66,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
591,000
|
$
|
591,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
2,000
|
$
|
2,000
|
||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
|||||||
F-72
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
September
30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
267,000
|
$
|
267,000
|
$
|
-
|
||
|
Receivables,
net
|
292,000
|
292,000
|
-
|
|||||
|
Inventories,
net
|
873,000
|
873,000
|
-
|
|||||
|
Prepaid and
other assets
|
57,000
|
57,000
|
-
|
|||||
|
Total current
assets
|
1,489,000
|
1,489,000
|
-
|
|||||
|
Property and
equipment, net
|
24,000
|
24,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
1,852,000
|
$
|
1,852,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
336,000
|
$
|
336,000
|
$
|
-
|
||
|
Accrued
liabilities
|
793,000
|
793,000
|
-
|
|||||
|
Total current
liabilities
|
1,129,000
|
1,129,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,422,000
|
2,660,000
|
1,238,000
|
(1,422,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
383,000
|
383,000
|
b
|
||||
|
Total
long-term liabilities
|
2,660,000
|
1,621,000
|
(1,039,000)
|
|||||
|
Total
liabilities
|
3,789,000
|
2,750,000
|
(1,039,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
800,000,000
shares, $.001 par value, 199,956,828 shares
|
||||||||
|
issued
and outstanding at September 30, 2006
|
200,000
|
200,000
|
-
|
|||||
|
Additional
paid-in capital
|
61,881,000
|
57,701,000
|
(4,180,000)
|
c
|
||||
|
Accumulated
deficit
|
(64,019,000)
|
(58,800,000)
|
5,219,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(1,937,000)
|
(898,000)
|
1,039,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
1,852,000
|
$
|
1,852,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005 and
2006
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-73
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Three
months ended September 30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
418,000
|
$
|
418,000
|
$
|
-
|
||
|
Cost of
sales
|
203,000
|
203,000
|
-
|
|||||
|
Gross
profit
|
215,000
|
215,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(258,000)
|
(258,000)
|
-
|
|||||
|
Marketing
and selling
|
(123,000)
|
(123,000)
|
-
|
|||||
|
Research
and development
|
(130,000)
|
(130,000)
|
-
|
|||||
|
Total
operating expenses
|
(511,000)
|
(511,000)
|
-
|
|||||
|
Operating
loss
|
(296,000)
|
(296,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
5,000
|
5,000
|
-
|
|||||
|
Other
expenses (Financing cost)
|
(54,000)
|
-
|
54,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(184,000)
|
(184,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
58,000
|
58,000
|
c
|
||||
|
Interest
expense
|
(3,000)
|
(57,000)
|
(54,000)
|
d
|
||||
|
Gain
on sale of investment
|
33,000
|
33,000
|
-
|
|||||
|
Total other
income (expense)
|
(19,000)
|
(145,000)
|
(126,000)
|
|||||
|
Income (loss)
before provision for income taxes
|
(315,000)
|
(441,000)
|
(126,000)
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(315,000)
|
$
|
(441,000)
|
$
|
(126,000)
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.00)
|
$
|
(0.00)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.00)
|
$
|
(0.00)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
198,546,000
|
198,546,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
198,546,000
|
198,546,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-74
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Nine
months ended September 30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
1,600,000
|
$
|
1,600,000
|
$
|
-
|
||
|
Cost of
sales
|
841,000
|
841,000
|
-
|
|||||
|
Gross
profit
|
759,000
|
759,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(772,000)
|
(772,000)
|
-
|
|||||
|
Marketing
and selling
|
(307,000)
|
(307,000)
|
-
|
|||||
|
Research
and development
|
(388,000)
|
(388,000)
|
-
|
|||||
|
Total
operating expenses
|
(1,467,000)
|
(1,467,000)
|
-
|
|||||
|
Operating
loss
|
(708,000)
|
(708,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
5,000
|
5,000
|
-
|
|||||
|
Other
expenses (Financing cost)
|
(1,152,000)
|
-
|
1,152,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(536,000)
|
(536,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
319,000
|
319,000
|
c
|
||||
|
Interest
expense
|
(7,000)
|
(159,000)
|
(152,000)
|
d
|
||||
|
Gain
on sale of investment
|
36,000
|
36,000
|
-
|
|||||
|
Total other
income (expense)
|
(1,118,000)
|
(335,000)
|
783,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,826,000)
|
(1,043,000)
|
783,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,826,000)
|
$
|
(1,043,000)
|
$
|
783,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
166,459,000
|
166,459,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
166,459,000
|
166,459,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-75
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
September
30, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,826,000)
|
$
|
(1,043,000)
|
$
|
783,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
28,000
|
28,000
|
-
|
|||||
|
Stock
option valuation
|
23,000
|
23,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
(319,000)
|
(319,000)
|
b
|
||||
|
Beneficial
conversion interest
|
964,000
|
536,000
|
(428,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
36,000
|
-
|
(36,000)
|
d
|
||||
|
Provision
for losses on receivables
|
(5,000)
|
(5,000)
|
-
|
|||||
|
Provision
for losses on inventory
|
(24,000)
|
(24,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
114,000
|
114,000
|
-
|
|||||
|
Inventories
|
4,000
|
4,000
|
-
|
|||||
|
Prepaid
and other assets
|
(46,000)
|
(46,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(123,000)
|
(123,000)
|
-
|
|||||
|
Accrued
liabilities
|
89,000
|
89,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(766,000)
|
(766,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
(19,000)
|
(19,000)
|
-
|
|||||
|
Net
cash provided by (used in) investing activities
|
(19,000)
|
(19,000)
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
(14,000)
|
(14,000)
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
986,000
|
986,000
|
-
|
|||||
|
Net change in
cash
|
201,000
|
201,000
|
-
|
|||||
|
Cash,
beginning of period
|
66,000
|
66,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
267,000
|
$
|
267,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
4,000
|
$
|
4,000
|
||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
F-76
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
December
31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
206,000
|
$
|
206,000
|
$
|
-
|
||
|
Receivables,
net
|
410,000
|
410,000
|
-
|
|||||
|
Inventories,
net
|
945,000
|
945,000
|
-
|
|||||
|
Prepaid and
other assets
|
11,000
|
11,000
|
-
|
|||||
|
Total current
assets
|
1,572,000
|
1,572,000
|
-
|
|||||
|
Property and
equipment, net
|
21,000
|
21,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
1,932,000
|
$
|
1,932,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
400,000
|
$
|
400,000
|
$
|
-
|
||
|
Accrued
liabilities
|
802,000
|
802,000
|
-
|
|||||
|
Total current
liabilities
|
1,202,000
|
1,202,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,235,000
|
2,655,000
|
1,420,000
|
(1,235,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
166,000
|
166,000
|
b
|
||||
|
Total
long-term liabilities
|
2,655,000
|
1,586,000
|
(1,069,000)
|
|||||
|
Total
liabilities
|
3,857,000
|
2,788,000
|
(1,069,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized,
|
||||||||
|
612,697
shares issued and outstanding (aggregate liquidation
|
||||||||
|
preference
of $456,000)
|
1,000
|
1,000
|
-
|
|||||
|
Common stock,
$.001 par value, 250,000,000 shares authorized,
|
||||||||
|
201,956,394
shares issued and outstanding
|
202,000
|
202,000
|
-
|
|||||
|
Additional
paid-in capital
|
61,884,000
|
57,701,000
|
(4,183,000)
|
c
|
||||
|
Accumulated
deficit
|
(64,012,000)
|
(58,761,000)
|
5,251,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(1,925,000)
|
(857,000)
|
1,068,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
1,932,000
|
$
|
1,931,000
|
$
|
(1,000)
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005 and
2006
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-77
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Twelve
months ended December 31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Sales
|
$
|
2,195,000
|
$
|
2,195,000
|
$
|
-
|
||
|
Cost of
sales
|
1,277,000
|
1,277,000
|
-
|
|||||
|
Gross
profit
|
918,000
|
918,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(792,000)
|
(792,000)
|
-
|
|||||
|
Professional
fees-related party
|
(187,000)
|
(187,000)
|
||||||
|
Marketing
and selling
|
(434,000)
|
(434,000)
|
-
|
|||||
|
Research
and development
|
(250,000)
|
(250,000)
|
-
|
|||||
|
Gain
on settlement of liabilities
|
34,000
|
34,000
|
-
|
|||||
|
Total
operating expenses
|
(1,629,000)
|
(1,629,000)
|
-
|
|||||
|
Operating
loss
|
(711,000)
|
(711,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
109,000
|
109,000
|
-
|
|||||
|
Other
expenses
|
(1,207,000)
|
-
|
1,207,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(720,000)
|
(720,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
536,000
|
536,000
|
c
|
||||
|
Interest
expense
|
(7,000)
|
(214,000)
|
(207,000)
|
d
|
||||
|
Total other
income (expense)
|
(1,105,000)
|
(289,000)
|
816,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,816,000)
|
(1,000,000)
|
816,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,816,000)
|
$
|
(1,000,000)
|
$
|
816,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
175,034,000
|
175,034,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
175,034,000
|
175,034,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
|||||||
F-78
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
December
31, 2006
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,816,000)
|
$
|
(1,000,000)
|
$
|
816,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
31,000
|
31,000
|
-
|
|||||
|
Stock
option valuation
|
23,000
|
23,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
(536,000)
|
(536,000)
|
b
|
||||
|
Beneficial
conversion interest
|
964,000
|
720,000
|
(244,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
36,000
|
-
|
(36,000)
|
d
|
||||
|
Provision
for losses on receivables
|
(28,000)
|
(28,000)
|
-
|
|||||
|
Provision
for losses on inventory
|
(37,000)
|
(37,000)
|
-
|
|||||
|
(Gain)
loss on settlement of liabilities
|
(34,000)
|
(34,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
19,000
|
19,000
|
-
|
|||||
|
Inventories
|
(55,000)
|
(55,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(30,000)
|
(30,000)
|
-
|
|||||
|
Accrued
liabilities
|
99,000
|
99,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(828,000)
|
(828,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
(20,000)
|
(20,000)
|
-
|
|||||
|
Net
cash provided by (used in) investing activities
|
(20,000)
|
(20,000)
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
(12,000)
|
(12,000)
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
988,000
|
988,000
|
-
|
|||||
|
Net change in
cash
|
140,000
|
140,000
|
-
|
|||||
|
Cash,
beginning of year
|
66,000
|
66,000
|
-
|
|||||
|
Cash,
end of year
|
$
|
206,000
|
$
|
206,000
|
$
|
-
|
||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
F-79
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
March
31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
66,000
|
$
|
66,000
|
$
|
-
|
||
|
Receivables,
net
|
471,000
|
471,000
|
-
|
|||||
|
Inventories,
net
|
841,000
|
841,000
|
-
|
|||||
|
Prepaid and
other assets
|
38,000
|
38,000
|
-
|
|||||
|
Total current
assets
|
1,416,000
|
1,416,000
|
-
|
|||||
|
Property and
equipment, net
|
19,000
|
19,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
1,774,000
|
$
|
1,774,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
411,000
|
$
|
411,000
|
$
|
-
|
||
|
Accrued
liabilities
|
882,000
|
882,000
|
-
|
|||||
|
Total current
liabilities
|
1,293,000
|
1,293,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,053,000
|
2,653,000
|
1,601,000
|
(1,052,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
1,181,000
|
1,181,000
|
b
|
||||
|
Total
long-term liabilities
|
2,653,000
|
2,782,000
|
129,000
|
|||||
|
Total
liabilities
|
3,946,000
|
4,075,000
|
129,000
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
800,000,000
shares, $.001 par value, 203,986,625 shares
|
||||||||
|
issued
and outstanding at March 31, 2007
|
204,000
|
204,000
|
-
|
|||||
|
Additional
paid-in capital
|
61,883,000
|
57,699,000
|
(4,184,000)
|
c
|
||||
|
Accumulated
deficit
|
(64,260,000)
|
(60,205,000)
|
4,055,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(2,172,000)
|
(2,301,000)
|
(129,000)
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
1,774,000
|
$
|
1,774,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005 and
2006
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-80
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Three
months ended March 31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
397,000
|
$
|
397,000
|
$
|
-
|
||
|
Cost of
sales
|
225,000
|
225,000
|
-
|
|||||
|
Gross
profit
|
172,000
|
172,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(189,000)
|
(189,000)
|
-
|
|||||
|
Marketing
and selling
|
(115,000)
|
(115,000)
|
-
|
|||||
|
Research
and development
|
(64,000)
|
(64,000)
|
-
|
|||||
|
Total
operating expenses
|
(368,000)
|
(368,000)
|
-
|
|||||
|
Operating
loss
|
(196,000)
|
(196,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
1,000
|
1,000
|
-
|
|||||
|
Other
expenses
|
(52,000)
|
-
|
52,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(181,000)
|
(181,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
(1,014,000)
|
(1,014,000)
|
c
|
||||
|
Interest
expense
|
(1,000)
|
(53,000)
|
(52,000)
|
d
|
||||
|
Total other
income (expense)
|
(52,000)
|
(1,247,000)
|
(1,195,000)
|
|||||
|
Income (loss)
before provision for income taxes
|
(248,000)
|
(1,443,000)
|
(1,195,000)
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(248,000)
|
$
|
(1,443,000)
|
$
|
(1,195,000)
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.00)
|
$
|
(0.01)
|
$
|
(0.01)
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.00)
|
$
|
(0.01)
|
$
|
(0.01)
|
||
|
Weighted
average common shares - basic
|
203,306,000
|
203,306,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
203,306,000
|
203,306,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-81
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
March
31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(248,000)
|
$
|
(1,443,000)
|
$
|
(1,195,000)
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
2,000
|
2,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
1,014,000
|
1,014,000
|
b
|
||||
|
Beneficial
conversion interest
|
-
|
181,000
|
181,000
|
c
|
||||
|
Provision
for losses on receivables
|
(10,000)
|
(10,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
(51,000)
|
(51,000)
|
-
|
|||||
|
Inventories
|
104,000
|
104,000
|
-
|
|||||
|
Prepaid
and other assets
|
(27,000)
|
(27,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
11,000
|
11,000
|
-
|
|||||
|
Accrued
liabilities
|
79,000
|
79,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(140,000)
|
(140,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
cash (used in) provided by financing activities
|
-
|
-
|
-
|
|||||
|
Net change in
cash
|
(140,000)
|
(140,000)
|
-
|
|||||
|
Cash,
beginning of period
|
206,000
|
206,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
66,000
|
$
|
66,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
1,000
|
$
|
1,000
|
||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
F-82
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
June
30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
486,000
|
$
|
486,000
|
$
|
-
|
||
|
Receivables,
net
|
388,000
|
388,000
|
-
|
|||||
|
Inventories,
net
|
1,002,000
|
1,002,000
|
-
|
|||||
|
Prepaid and
other assets
|
90,000
|
90,000
|
-
|
|||||
|
Total current
assets
|
1,966,000
|
1,966,000
|
-
|
|||||
|
Property and
equipment, net
|
18,000
|
18,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
2,323,000
|
$
|
2,323,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
332,000
|
$
|
332,000
|
$
|
-
|
||
|
Accrued
liabilities
|
1,011,000
|
1,011,000
|
-
|
|||||
|
Total current
liabilities
|
1,343,000
|
1,343,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $1,242,000
|
3,589,000
|
2,347,000
|
(1,242,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
832,000
|
832,000
|
b
|
||||
|
Total
long-term liabilities
|
3,589,000
|
3,179,000
|
(410,000)
|
|||||
|
Total
liabilities
|
4,932,000
|
4,522,000
|
(410,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
800,000,000
shares, $.001 par value, 216,989,225 shares
|
||||||||
|
issued
and outstanding at June 30, 2007
|
217,000
|
217,000
|
-
|
|||||
|
Additional
paid-in capital
|
62,935,000
|
57,736,000
|
(5,199,000)
|
c
|
||||
|
Accumulated
deficit
|
(65,762,000)
|
(60,153,000)
|
5,609,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(2,609,000)
|
(2,199,000)
|
410,000
|
|||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
2,323,000
|
$
|
2,323,000
|
$
|
-
|
||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005, 2006 and
2007
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-83
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Three
months ended June 30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
260,000
|
$
|
260,000
|
$
|
-
|
||
|
Cost of
sales
|
149,000
|
149,000
|
-
|
|||||
|
Gross
profit
|
111,000
|
111,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(309,000)
|
(309,000)
|
-
|
|||||
|
Marketing
and selling
|
(159,000)
|
(159,000)
|
-
|
|||||
|
Research
and development
|
(126,000)
|
(126,000)
|
-
|
|||||
|
Total
operating expenses
|
(594,000)
|
(594,000)
|
-
|
|||||
|
Operating
loss
|
(483,000)
|
(483,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
3,000
|
3,000
|
-
|
|||||
|
Other
expenses
|
(1,062,000)
|
-
|
1,062,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(191,000)
|
(191,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
745,000
|
745,000
|
c
|
||||
|
Interest
expense
|
(1,000)
|
(63,000)
|
(62,000)
|
d
|
||||
|
Gain
on sale of investment
|
41,000
|
41,000
|
-
|
|||||
|
Total other
income (expense)
|
(1,019,000)
|
535,000
|
1,554,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,502,000)
|
52,000
|
1,554,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,502,000)
|
$
|
52,000
|
$
|
1,554,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
0.00
|
$
|
0.01
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
0.00
|
$
|
0.01
|
||
|
Weighted
average common shares - basic
|
206,228,000
|
206,228,383
|
383
|
|||||
|
Weighted
average common shares - diluted
|
206,228,000
|
239,965,666
|
33,737,666
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-84
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Six
months ended June 30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
656,000
|
$
|
656,000
|
$
|
-
|
||
|
Cost of
sales
|
375,000
|
375,000
|
-
|
|||||
|
Gross
profit
|
281,000
|
281,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(496,000)
|
(496,000)
|
-
|
|||||
|
Marketing
and selling
|
(273,000)
|
(273,000)
|
-
|
|||||
|
Research
and development
|
(190,000)
|
(190,000)
|
-
|
|||||
|
Total
operating expenses
|
(959,000)
|
(959,000)
|
-
|
|||||
|
Operating
loss
|
(678,000)
|
(678,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
5,000
|
5,000
|
-
|
|||||
|
Other
expenses
|
(1,115,000)
|
-
|
1,115,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(373,000)
|
(373,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
(269,000)
|
(269,000)
|
c
|
||||
|
Interest
expense
|
(1,000)
|
(116,000)
|
(115,000)
|
d
|
||||
|
Gain
on sale of investment
|
41,000
|
41,000
|
-
|
|||||
|
Total other
income (expense)
|
(1,070,000)
|
(712,000)
|
358,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,748,000)
|
(1,390,000)
|
358,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,748,000)
|
$
|
(1,390,000)
|
$
|
358,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
204,775,000
|
204,775,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
204,775,000
|
204,775,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-85
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
June
30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,748,000)
|
$
|
(1,390,000)
|
$
|
358,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
3,000
|
3,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
269,000
|
269,000
|
b
|
||||
|
Beneficial
conversion interest
|
939,000
|
373,000
|
(566,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
61,000
|
-
|
(61,000)
|
d
|
||||
|
Provision
for losses on inventory
|
(22,000)
|
(22,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
44,000
|
44,000
|
-
|
|||||
|
Inventories
|
(57,000)
|
(57,000)
|
-
|
|||||
|
Prepaid
and other assets
|
(79,000)
|
(79,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(69,000)
|
(69,000)
|
-
|
|||||
|
Accrued
liabilities
|
208,000
|
208,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(720,000)
|
(720,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of convertible notes
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net change in
cash
|
280,000
|
280,000
|
-
|
|||||
|
Cash,
beginning of period
|
206,000
|
206,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
486,000
|
$
|
486,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
1,000
|
$
|
1,000
|
||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
|||||||
F-86
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
September
30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
129,000
|
$
|
129,000
|
$
|
-
|
||
|
Receivables,
net
|
515,000
|
515,000
|
-
|
|||||
|
Inventories,
net
|
1,095,000
|
1,095,000
|
-
|
|||||
|
Prepaid and
other assets
|
73,000
|
73,000
|
-
|
|||||
|
Total current
assets
|
1,812,000
|
1,812,000
|
-
|
|||||
|
Property and
equipment, net
|
17,000
|
17,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
2,168,000
|
$
|
2,168,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
347,000
|
$
|
347,000
|
$
|
-
|
||
|
Accrued
liabilities
|
1,075,000
|
1,075,000
|
-
|
|||||
|
Total current
liabilities
|
1,422,000
|
1,422,000
|
-
|
|||||
|
Convertible
notes payable, net of discount $996,000
|
3,455,000
|
2,458,000
|
(997,000)
|
a
|
||||
|
Derivative
liabilities
|
-
|
228,000
|
228,000
|
b
|
||||
|
Total
long-term liabilities
|
3,455,000
|
2,686,000
|
(769,000)
|
|||||
|
Total
liabilities
|
4,877,000
|
4,108,000
|
(769,000)
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
-
|
|||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock authorized:
|
||||||||
|
5,000,000
shares, $0.001 par value
|
1,000
|
1,000
|
-
|
|||||
|
Common stock
authorized:
|
||||||||
|
800,000,000
shares, $.001 par value, 281,085,819 shares
|
||||||||
|
issued
and outstanding at September 30, 2007
|
281,000
|
281,000
|
-
|
|||||
|
Additional
paid-in capital
|
63,005,000
|
57,769,000
|
(5,236,000)
|
c
|
||||
|
Accumulated
deficit
|
(65,996,000)
|
(59,991,000)
|
6,005,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(2,709,000)
|
(1,940,000)
|
769,000
|
|||||
| Total liabilities and stockholders' (Deficit) |
$
|
2,168,000 |
$
|
2,168,000 | - | |||
| a | To properly record debt discount in accordance with SFAS 133 | |||||||
| b | Fair valuation of embedded derivatives associated with Notes | |||||||
| c | Reclassification of fully expensed beneficial conversion feature in 2005, 2006 and 2007 | |||||||
| d | Effect of propertly accounting for embedded derivatives |
F-87
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Three
months ended September 30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
534,000
|
$
|
534,000
|
$
|
-
|
||
|
Cost of
sales
|
270,000
|
270,000
|
-
|
|||||
|
Gross
profit
|
264,000
|
264,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(191,000)
|
(191,000)
|
-
|
|||||
|
Marketing
and selling
|
(168,000)
|
(168,000)
|
-
|
|||||
|
Research
and development
|
(71,000)
|
(71,000)
|
-
|
|||||
|
Total
operating expenses
|
(430,000)
|
(430,000)
|
-
|
|||||
|
Operating
loss
|
(166,000)
|
(166,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
3,000
|
3,000
|
-
|
|||||
|
Other
expenses (financing cost)
|
(70,000)
|
-
|
70,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(206,000)
|
(206,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
602,000
|
602,000
|
c
|
||||
|
Interest
expense
|
(1,000)
|
(71,000)
|
(70,000)
|
d
|
||||
|
Total other
income (expense)
|
(68,000)
|
328,000
|
396,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(234,000)
|
162,000
|
396,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(234,000)
|
$
|
162,000
|
$
|
396,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.00)
|
$
|
0.00
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.00)
|
$
|
0.00
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
247,755,000
|
247,755,137
|
137
|
|||||
|
Weighted
average common shares - diluted
|
247,755,000
|
299,148,217
|
51,393,217
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
F-88
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Nine
months ended September 30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Sales
|
$
|
1,190,000
|
$
|
1,190,000
|
$
|
-
|
||
|
Cost of
sales
|
645,000
|
645,000
|
-
|
|||||
|
Gross
profit
|
545,000
|
545,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(688,000)
|
(688,000)
|
-
|
|||||
|
Marketing
and selling
|
(442,000)
|
(442,000)
|
-
|
|||||
|
Research
and development
|
(261,000)
|
(261,000)
|
-
|
|||||
|
Total
operating expenses
|
(1,391,000)
|
(1,391,000)
|
-
|
|||||
|
Operating
loss
|
(846,000)
|
(846,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income (interest)
|
8,000
|
8,000
|
-
|
|||||
|
Other
expenses (financing cost)
|
(1,185,000)
|
-
|
1,185,000
|
a
|
||||
|
Interest
expense-Accetion of debt discount
|
-
|
(579,000)
|
(579,000)
|
b
|
||||
|
Gain
and loss on derivative valuation
|
-
|
332,000
|
332,000
|
c
|
||||
|
Interest
expense
|
(2,000)
|
(187,000)
|
(185,000)
|
d
|
||||
|
Gain
on sale of investment
|
41,000
|
41,000
|
-
|
|||||
|
Total other
income (expense)
|
(1,138,000)
|
(385,000)
|
753,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,984,000)
|
(1,231,000)
|
753,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,984,000)
|
$
|
(1,231,000)
|
$
|
753,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
219,259,000
|
219,259,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
219,259,000
|
219,259,000
|
-
|
|||||
|
a
|
Reclassification
and effect of properly accounting for embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
|||||||
|
c
|
Effect of
valuation of embedded derivatives
|
|||||||
|
d
|
Reclassification
of interest
|
|||||||
F-89
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
September
30, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
(Unaudited)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,984,000)
|
$
|
(1,231,000)
|
$
|
753,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
4,000
|
4,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
-
|
(333,000)
|
(333,000)
|
b
|
||||
|
Beneficial
conversion interest
|
939,000
|
580,000
|
(359,000)
|
c
|
||||
|
Issuance
of stock options and warrants for services
|
61,000
|
-
|
(61,000)
|
d
|
||||
|
Provision
for losses on inventory
|
(22,000)
|
(22,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
(83,000)
|
(83,000)
|
-
|
|||||
|
Inventories
|
(150,000)
|
(150,000)
|
-
|
|||||
|
Prepaid
and other assets
|
(62,000)
|
(62,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
(54,000)
|
(54,000)
|
-
|
|||||
|
Accrued
liabilities
|
274,000
|
274,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(1,077,000)
|
(1,077,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of convertible notes
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
1,000,000
|
1,000,000
|
-
|
|||||
|
Net change in
cash
|
(77,000)
|
(77,000)
|
-
|
|||||
|
Cash,
beginning of period
|
206,000
|
206,000
|
-
|
|||||
|
Cash,
end of period
|
$
|
129,000
|
$
|
129,000
|
$
|
-
|
||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
2,000
|
$
|
2,000
|
|
|||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
|
|||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
F-90
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Balance
Sheet
December
31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$
|
321,000
|
$
|
321,000
|
$
|
-
|
||
|
Receivables,
net
|
624,000
|
624,000
|
-
|
|||||
|
Inventories,
net
|
847,000
|
847,000
|
-
|
|||||
|
Prepaid and
other assets
|
27,000
|
27,000
|
-
|
|||||
|
Total current
assets
|
1,819,000
|
1,819,000
|
-
|
|||||
|
Property and
equipment, net
|
16,000
|
16,000
|
-
|
|||||
|
Goodwill
|
339,000
|
339,000
|
-
|
|||||
|
Total
assets
|
$
|
2,174,000
|
$
|
2,174,000
|
$
|
-
|
||
|
Liabilities and
Stockholders’ (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
370,000
|
$
|
370,000
|
$
|
-
|
||
|
Related
party payable
|
46,000
|
46,000
|
-
|
|||||
|
Accrued
liabilities
|
644,000
|
644,000
|
-
|
|||||
|
Total current
liabilities
|
1,060,000
|
1,060,000
|
-
|
|||||
|
Convertible
notes payable, net of debt discount of $889,000
|
3,039,000
|
3,100,000
|
61,000
|
a
|
||||
|
Derivative
liabilities
|
215,000
|
210,000
|
(5,000)
|
b
|
||||
|
Total
long-term liabilities
|
3,254,000
|
3,310,000
|
56,000
|
|||||
|
Total
liabilities
|
4,314,000
|
4,370,000
|
56,000
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
||||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized,
|
||||||||
|
612,497
shares issued and outstanding (aggregate liquidation
|
||||||||
|
preference
of $456,000)
|
1,000
|
1,000
|
-
|
|||||
|
Common stock,
$.001 par value, 800,000,000 shares authorized,
|
||||||||
|
544,986,907
shares issued and outstanding
|
545,000
|
545,000
|
-
|
|||||
|
Additional
paid-in capital
|
58,435,000
|
57,662,000
|
(773,000)
|
c
|
||||
|
Accumulated
deficit
|
(61,121,000)
|
(60,404,000)
|
717,000
|
d
|
||||
|
Total
stockholders’ (Deficit)
|
(2,140,000)
|
(2,196,000)
|
(56,000)
|
|||||
|
|
||||||||
|
Total
liabilities and stockholders’ (Deficit)
|
$
|
2,174,000
|
$
|
2,174,000
|
$
|
-
|
||
|
|
|
|||||||
|
a
|
To properly
record debt discount in accordance with SFAS 133
|
|||||||
|
b
|
Fair
valuation of embedded derivatives associated with Notes
|
|||||||
|
c
|
Reclassification
of fully expensed beneficial conversion feature in 2005, 2006 and
2007
|
|||||||
|
d
|
Effect of
properly accounting for embedded derivatives
|
F-91
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Operations
Twelve
months ended December 31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Sales
|
$
|
1,872,000
|
$
|
1,872,000
|
$
|
-
|
||
|
Cost of
sales
|
1,020,000
|
1,020,000
|
-
|
|||||
|
Gross
profit
|
852,000
|
852,000
|
-
|
|||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(1,012,000)
|
(1,012,000)
|
-
|
|||||
|
Professional
fees-related party
|
-
|
-
|
-
|
|||||
|
Marketing
and selling
|
(662,000)
|
(662,000)
|
-
|
|||||
|
Research
and development
|
(344,000)
|
(344,000)
|
-
|
|||||
|
Gain
on settlement of liabilities
|
91,000
|
91,000
|
-
|
|||||
|
Total
operating expenses
|
(1,927,000)
|
(1,927,000)
|
-
|
|||||
|
Operating
loss
|
(1,075,000)
|
(1,075,000)
|
-
|
|||||
|
Other income
(expense):
|
||||||||
|
Other
income
|
-
|
-
|
-
|
|||||
|
Interest
expense - Accretion of debt discount
|
(864,000)
|
(771,000)
|
93,000
|
b
|
||||
|
Interest
income
|
11,000
|
11,000
|
-
|
|||||
|
Interest
expense
|
(221,000)
|
(221,000)
|
-
|
|||||
|
Gain
on derivative valuation
|
418,000
|
413,000
|
(5,000)
|
a
|
||||
|
-
|
-
|
-
|
||||||
|
Total other
income (expense)
|
(656,000)
|
(568,000)
|
88,000
|
|||||
|
Income (loss)
before provision for income taxes
|
(1,731,000)
|
(1,643,000)
|
88,000
|
|||||
|
Provision for
income taxes
|
-
|
-
|
-
|
|||||
|
Net
(loss)
|
$
|
(1,731,000)
|
$
|
(1,643,000)
|
$
|
88,000
|
||
|
Earnings
(loss) per common share - basic
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Earnings
(loss) per common share - diluted
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.00
|
||
|
Weighted
average common shares - basic
|
264,736,000
|
264,736,000
|
-
|
|||||
|
Weighted
average common shares - diluted
|
264,736,000
|
264,736,000
|
-
|
|||||
|
a
|
Effect of
valuation of embedded derivatives
|
|||||||
|
b
|
Properly
record accretion on Notes
|
F-92
PARADIGM MEDICAL INDUSTRIES, INC.
Notes
to Financial Statements
Continued
|
Paradigm
Medical Industries, Inc.
Statements
of Cash Flows
December
31, 2007
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,731,000)
|
$
|
(1,643,000)
|
$
|
88,000
|
a
|
|
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash used in
operating activities:
|
||||||||
|
Depreciation
and amortization
|
5,000
|
5,000
|
-
|
|||||
|
Stock
option valuation
|
14,000
|
14,000
|
-
|
|||||
|
Change
in fair value of derivative liabilities
|
(418,000)
|
(413,000)
|
5,000
|
b
|
||||
|
Accretion
of debt discount
|
865,000
|
772,000
|
(93,000)
|
c
|
||||
|
Provision
for losses on receivables
|
56,000
|
56,000
|
-
|
|||||
|
Provision
for losses on inventory
|
-
|
-
|
-
|
|||||
|
(Gain)
loss on settlement of liabilities
|
(91,000)
|
(91,000)
|
-
|
|||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
(251,000)
|
(251,000)
|
-
|
|||||
|
Inventories
|
98,000
|
98,000
|
-
|
|||||
|
Prepaid
and other assets
|
(16,000)
|
(16,000)
|
-
|
|||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
17,000
|
17,000
|
-
|
|||||
|
Accrued
liabilities
|
317,000
|
317,000
|
-
|
|||||
|
Net
cash used in operating activities
|
(1,135,000)
|
(1,135,000)
|
-
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisition
of property and equipment
|
-
|
-
|
-
|
|||||
|
Net
cash provided by (used in) investing activities
|
-
|
-
|
-
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on notes payable and long-term debt
|
-
|
-
|
-
|
|||||
|
Proceeds
from issuance of convertible notes
|
1,250,000
|
1,250,000
|
-
|
|||||
|
Net
cash (used in) provided by financing activities
|
1,250,000
|
1,250,000
|
-
|
|||||
|
Net change in
cash
|
115,000
|
115,000
|
-
|
|||||
|
Cash,
beginning of year
|
206,000
|
206,000
|
-
|
|||||
|
Cash,
end of year
|
$
|
321,000
|
$
|
321,000
|
$
|
-
|
||
|
a
|
Effect of
properly accounting for embedded derivatives
|
|||||||
|
b
|
Effect of
valuation of embedded derivatives
|
|||||||
|
c
|
To properly
record accretion on Notes
|
|||||||
|
d
|
Reclassification
of improperly recorded warrant expense
|
|||||||
F-93
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
None.
Item
8A. Controls and Procedures
Disclosure Controls
and Procedures
As of the end of
the period covered by the annual reports for the fiscal years ended December 31,
2007, 2006 and 2005, the Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures pursuant to
Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Based upon that evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that, as
of the end of the periods covered by such reports, the Company’s disclosure
controls and procedures were not effective and adequate because off errors
related to the Company not correctly following the requirements of SFAS No. 133
when accounting for the convertible notes and related embedded derivatives in
the financial statements and related disclosures of its Form 10-KSB reports for
the fiscal years ended December 31, 2007, 2006 and 2005.
Management’s Annual
Report on Internal Control over Financial Reporting
The Company’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, the Company conducted an evaluation of the effectiveness of
its internal control over financial reporting. Based on the Company’s
evaluation, the Company’s management concluded that the Company’s internal
control over financial reporting was not effective as of December 31,
2007. In particular, the Company's management was not effective in
identifying and following new accounting rules and new rules promulgated by the
SEC. The remedial plan to correct this material weakness includes
management training and the engagement of outside counsel to assist the
Company's management in identifying and following such new accounting and SEC
rules.
Another material
weakness in the Company's internal control over financial reporting was that the
Company did not account for the convertible notes and related embedded
derivatives in the financial statements and related disclosures in accordance
with SFAS No. 133. To correct this material weakness the Company has
developed procedures to value these convertible notes and related embedded
derivatives in the financial statements and related disclosures and will
continue to apply these valuation principles in the future.
The annual report
for the year ended December 31, 2007 does not include an attestation of our
registered public accounting firm regarding internal control over financial
reporting, pursuant to temporary rules of the Securities and Exchange Commission
that permit us to provide only management’s report in this annual
report.
Inherent
Limitations on Effectiveness of Controls
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PART
III
Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.
As of March 31, 2007, the Company's executive
officers and directors, their ages and their positions are set forth
below:
|
Name
|
Age
|
Position
|
|
Raymond P.L.
Cannefax
|
59
|
President and
Chief Executive Officer
|
|
Randall A.
Mackey, Esq.
|
62
|
Chairman of
the Board and Director
|
|
David M.
Silver, PhD.
|
66
|
Director
|
|
Keith D.
Ignotz
|
61
|
Director
|
|
John C.
Pingree
|
67
|
Director
|
41
The directors are
elected for one year terms that expire at the next annual meeting of
shareholders. Executive officers are elected annually by the Board of Directors
to hold office until the first meeting of the Board following the next annual
meeting of shareholders and until their successors have been elected and
qualified.
Raymond P.L. Cannefax has
served as the Company's President and Chief Executive Officer since January 5,
2006.Mr. Cannefax previously served as the Company's Vice President of Sales and
Marketing from January 2003 to May 2005. From May 2005 to January 2006, Mr.
Cannefax served as Vice President of the Asia/Pacific Region for Sonomed,Inc., a
manufacturer of ophthalmic products and a wholly owned subsidiary of Escalon
Medical Corp. From 2002 to 2003, Mr. Cannefax was Vice President of Business
Development and Sales for Vermax, Inc., a manufacturer of products for hotel
properties. From 1996 to 2002, he was President, Chief Operating Officer and
founder of Aspen Network, Inc., a software development and ecommerce company.
From 1992 to 1996, Mr. Cannefax was President and Chief Executive Officer of
Apollo Telecom, Inc., a telecommunications company. From 1986 to
1992, he was a Regional Sales Director and a Senior District Manager of Sprint
Communications Corporation. Mr. Cannefax received a B.S. degree in Psychology
and Zoology from the University of Utah in 1976.
Randall A. Mackey, Esq. has
been the Company's Chairman of the Board since August 20, 2002, and a director
since January 2000. He had served as a director of the Company from 1995 to
1998. Mr. Mackey has been President of the Salt Lake City law firm of Mackey
Price Thompson & Ostler since 1992, and a shareholder and director of the
firm and its predecessor firms since 1989. Mr. Mackey received a B.S. degree in
Economics from the University of Utah in 1968, an M.B.A. degree from the Harvard
Business School in 1970, a J.D. degree from Columbia Law School in 1975 and a
B.C.L. degree from Oxford University in 1977. Mr. Mackey has also served as
Chairman of the Board from 2001 to 2003, and as a director from 1998 to 2003 of
Cimetrix, Incorporated, a software development company. Mr. Mackey has
additionally served as Chairman of the Board from2000 to 2003 and as a trustee
from 1993 to 2003 of Salt Lake Community College and as a member of the Utah
State Board of Education since 2005.
David M. Silver, Ph.D. has
been a director since January 2000. He had served as a director of the Company
from 1995 to 1998. Dr. Silver is a Principal Senior Scientist in the Milton S.
Eisenhower Research and Technology Development Center at the Johns Hopkins
University Applied Physics Laboratory, where he has been employed since 1970. He
served as the J. H. Fitzgerald Dunning Professor of Ophthalmology in the Johns
Hopkins Wilmer Eye Institute in Baltimore during 1998-99. He received a B.S.
degree from Illinois Institute of Technology, an M.A. degree from Johns Hopkins
University and a Ph.D. degree from Iowa State University before holding a
postdoctoral fellowship at Harvard University and a visiting scientist position
at the University of Paris.
Keith D. Ignotz has been a
director since November 2000. Since March 2005, Mr. Ignotz has been President
and Chief Executive Officer of Diakine Therapeutics, Inc., a pharmaceutical
therapeutics company. From 1992 to 2004, Mr. Ignotz was with SpectRx, Inc., a
medical technology company that he founded, which develops, manufactures and
markets alternatives to traditional blood based medical tests, serving from 2002
to 2004 as the Chief Executive Officer of Guided Therapeutics, Inc., a
wholly-owned subsidiary of SpectRx, Inc., and from 1992 to 2002 as President and
Chief Operating Officer of SpectRx, Inc. From 1986 to 1992, Mr. Ignotz was
Senior Vice President of Allergan Humphrey, Inc., a medical electronics company.
From 1985 to 1986, he was President of Humphrey Instruments Limited-SKB, a
medical electronics company, and from 1980 to 1985, Mr. Ignotz was President of
Humphrey Instruments GmbH, also a medical electronics company. Mr. Ignotz also
served on the Board of Directors of Vismed, Inc., d/b/a Dicon from 1992 to 2000.
Mr. Ignotz received a B.A. degree in Sociology and Political Science from San
Jose University and an M.B.A. degree from Pepperdine University. Mr. Ignotz has
served as a trustee of Pennsylvania College of Optometry and Audiology since
1990, a director of AeroVectrix, Inc., a drug delivery company, since August
2005, and as a member of the American Diabetes Association and the American
Marketing Association of the American Association of Diabetes
Education.
John C. Pingree has been a
director since April 2004. From 2001 to 2004, Mr. Pingree was the Executive
Director of the Semnani Foundation, which funds projects to assist women and
children in developing countries. From 1998 to 2001, Mr. Pingree was a Mission
President for the Church of Jesus Christ of Latter-day Saints, serving in Mexico
City, Mexico. From 1977 to 1997, Mr. Pingree was General Manager and Chief
Executive Officer of Utah Transit Authority. From 1970 to 1975, he was Director
of Marketing for Memorex Corporation. From 1967 to 1970, Mr. Pingree was
Regional Manager, Sales Planning at Xerox Corporation. He also currently serves
as a member of the Utah State Board of Education. Mr. Pingree received a B.A.
degree in Economics from the University of Utah and an M.B.A. degree from the
Harvard Business School.
42
Appointment
of New President and Chief Executive Officer
On January 5, 2006,
Raymond P.L. Cannefax was appointed as the Company's President and Chief
Executive Officer, replacing John Y. Yoon who had served in those positions from
March 18, 2004 to December 31, 2005. Mr. Yoon resigned as the Company's
President and Chief Executive Officer, effective December 31, 2005, to pursue
other opportunities.
Appointment
of New Vice President of Finance, New Vice President of International Sales, New
Vice President of Operations, and New Vice President of Domestic
Sales
On March 20, 2006,
Luis A. Mostacero was appointed as the Vice President of Finance. Mr. Mostacero
previously served as the Controller from June 2000 to August 2005. On January 8,
2008, Mr. Mostacero was also appointed as Chief Financial Officer. On October
11, 2006, Christina M. O'Connor was appointed as Vice President of International
Sales and Julio C. Maximo was appointed as Vice President of Operations. On
January 4, 2007, Alfred B. Franklin was appointed as Vice President of Domestic
Sales, replacing Michael S. Austin who resigned on November 28, 2006, to pursue
other opportunities. Mr. Franklin resigned on May 10, 2007, to pursue other
opportunities. On May 10, 2007, Stephen L. Davis was appointed as Vice President
of Domestic Sales and Marketing. Mr. Davis resigned on February 14, 2008, to
pursue other opportunities.
Board
Meetings and Committees
The Board of
Directors held a total of four meetings during the fiscal year ended December
31, 2007. No director attended fewer than 75% of all meetings of the Board of
Directors during the 2006 fiscal year. The Audit Committee of the Board of
Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith D.
Ignotz and John C. Pingree. The Audit Committee met one time during the fiscal
year. The Audit
Committee is primarily responsible for reviewing the services performed by its
independent public accountants and internal audit department and evaluating its
accounting principles and its system of internal accounting controls. The
Compensation Committee of the Board of Directors consists of directors Dr. David
M. Silver, Randall A. Mackey, Keith D. Ignotz and John C. Pingree. The
Compensation Committee met two times during the fiscal year. The
Compensation Committee is primarily responsible for reviewing compensation of
executive officers and overseeing the granting of stock options.
Pursuant to Item
406 of Regulation S-K under the Securities Exchange Act of 1934, the Company has
not yet adopted a code of ethics that applies to its principle executive
officer, principal financial officer, controller or persons performing similar
functions. The Company is still in the process of studying this issue and
intends to adopt a code of ethics in the near future.
The Company's Board
of Directors has determined that Keith D. Ignotz and John C. Pingree, who
currently serve as directors of the Company as well as a member of the Company's
audit committee, are independent audit committee financial experts.
Item
10. Executive Compensation
The following table
sets forth, for each of the last three fiscal years, the compensation received
by Raymond P.L. Cannefax, President and Chief Executive Officer, and other
executive officers whose salary and bonus for all services in all capacities
exceed $100,000 for the fiscal years ended December 31, 2006, 2005 and
2004.
43
Summary
Compensation Table
|
Name
and
Principal
Position
|
Year
|
Salary$
|
Bonus($)
|
Stock
Awards
|
Option
Awards($)
|
Non-Equity
Incentive
Plan
Compen-sation
|
Change in
Pension
Value and
Non-qualified Deferred Compen-sation Earnings
|
All Other
Compen-
sation
|
Total
|
|
Raymond P.L.
Cannefax President and Chief Executive
Officer(1)
|
2007
2006
2005
|
$143,330
127,940
64,285
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
$ 143,330
127,940
64,285
|
______________________
(1) Mr.
Cannefax has served as President and Chief Executive Officer since January 5,
2006.
Supplemental
All Other Compensation Table
|
Name
|
Year
|
Perks
and
Other
Personal
Benefits
|
Tax
Reimburse-
ments
|
Discounted
Securities
Purchases
|
Payments/
Accruals
on
Termin-
ation
Plans
|
Registrant
Contribu-
tions
to
Defined
Contribu-
tion
Plans
|
Insurance
Premiums
|
Dividends
or
Earnings
on
Stock
or
Option
Awards
|
Other
|
|
Raymond
P.L.
Cannefax
|
2007
2006
2005
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
Grants
of Plan-Based Awards
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards
|
Estimated
Future Payouts
Under Equity
Incentive Plan
Awards
|
|||||||||
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
($)
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options
(#)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
|
|
Raymond P.L.
Cannefax
|
5/1/07
1/5/06
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
-
-
|
4,500,000
|
$.01
$.01
|
44
Outstanding
Equity Awards At Fiscal Year End
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options:
(#)
Unexer-
cisable
|
Equity
Incentive
Plan
Awards
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
Held
That
Have
Not
Vested(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
Raymond P.L.
Cannefax
|
0
|
0
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Option
Exercises and Stock Vested for Fiscal 2006
|
Option
Awards
|
Stock
Awards
|
|||
|
Name
|
Number
of
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)
|
|
Raymond P.L.
Cannefax
|
0
|
-
|
0
|
-
|
Pension
Benefits for Fiscal 2006
|
Name
|
Plan
Name
|
Number
of
Years
Credited
Service
(#)
|
Present Value
of
Accumulated
Benefit
($)
|
Payments
During
Last Fiscal
Year
($)
|
|
Raymond P.L.
Cannefax
|
None
|
-
|
-
|
-
|
45
Director
Compensation
Outside directors
are currently not paid a director's fee for their services but are reimbursed
for their expenses in attending board and committee meetings. Directors are not
precluded from serving the Company in any other capacity and receiving
compensation therefore. The directors were not granted any options to purchase
shares of the Company's common stock during 2006 or 2007.
Director
Compensation for Fiscal 2007
|
Name
|
Fees
Earned
or
Paid
In
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
($)
|
Total
($)
|
| Keith D. Ignotz | 0 |
-
|
-
|
-
|
-
|
-
|
0 |
| Randall A. Mackey |
-
|
-
|
-
|
-
|
-
|
||
| John C. Pingree |
-
|
-
|
-
|
-
|
-
|
||
| David M. Silver, PhD. |
-
|
-
|
-
|
-
|
-
|
Employee
401(k) Plan
In
October 1996, the Company's Board of Directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of November 1,
1996, the Company may make discretionary employer matching contributions to its
employees who choose to participate in the plan. The plan allows the board to
determine the amount of the contribution at the beginning of each year. The
board adopted a contribution formula specifying that such discretionary employer
matching contributions would equal 100% of the participating employee's
contribution to the plan up to a maximum discretionary employee contribution of
3% of a participating employee's compensation, as defined by the plan. All
persons who have completed at least six months' service with the Company and
satisfy other plan requirements are eligible to participate in the plan. The
plan is currently available to the Company's employees at the employees' expense
with no matching contribution from the Company.
1995
Stock Option Plan
The Company adopted
a 1995 Stock Option Plan, for the officers, employees, directors and consultants
of its Company on November 7, 1995. The plan authorized the granting of stock
options to purchase an aggregate of not more than 300,000 shares of its common
stock. On February 16, 1996, options for substantially all 300,000 shares were
granted. On June 9, 1997, its shareholders approved an amendment to the plan to
increase the number of shares of common stock reserved for issuance thereunder
from 300,000 shares to 600,000 shares. On September 3, 1998, its shareholders
approved an amendment to the plan to increase the number of shares of common
stock reserved for issuance thereunder from 600,000 shares to 1,200,000 shares.
On November 29, 2000, its shareholders approved an amendment to the plan to
increase the number of shares of common stock reserved for issuance thereunder
from 1,200,000 shares to 1,700,000 shares. On September 11, 2001, its
shareholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 1,700,000 shares to
2,700,000 shares. On June 13, 2003, its shareholders approved an amendment to
the plan to increase the number of shares of common stock reserved for issuance
thereunder from 2,700,000 shares to 3,700,000 shares. On July 11, 2005, its
shareholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 3,700,000 shares to
5,000,000 shares.
The compensation
committee administers the 1995 Stock Option Plan. In general, the compensation
committee will select the person to whom options will be granted and will
determine, subject to the terms of the plan, the number, exercise, and other
provisions of such options. Options granted under the plan will become
exercisable at such times as may be determined by the compensation committee.
Options granted under the plan may be either incentive stock options, as such
term is defined in the Internal Revenue Code, or non-incentive stock options.
Incentive stock options may only be granted to persons who are employees.
Non-incentive stock options may be granted to any person, including, but not
limited to, its employees, independent agents, consultants as the compensation
committee believes has contributed, or will contribute, to its success as the
compensation committee believes has contributed, or will contribute, to its
success. The compensation committee determines the exercise price of options
granted under the 1995 Stock Option Plan, provided that, in the case of
incentive stock options, such price is not less than 100% (110% in the case of
incentive stock options granted to holders of 10% of voting power of its stock)
of the fair market value (as defined in the plan) of the common stock on the
date of grant. The aggregate fair market value (determined at the time of option
grant) of stock with respect to which incentive stock options become exercisable
for the first time in any year cannot exceed $100,000.
46
The term of each
option shall not be more than ten years (five years in the case of incentive
stock options granted to holders of 10% of the voting power of its stock) from
the date of grant. The Board of Directors has a right to amend, suspend or
terminate the 1995 Stock Option Plan at any time; provided, however, that unless
ratified by its shareholders, no amendment or change in the plan will be
effective that would increase the total number of shares that may be issued
under the plan, materially increase the benefits accruing to persons granted
under the plan or materially modify the requirements as to eligibility and
participation in the plan. No amendment, supervision or termination of the plan
shall, without the consent of an employee to whom an option shall heretofore
have been granted, affect the rights of such employee under such
option.
Employment
Agreement
The Company entered
into an employment agreement with Raymond P.L. Cannefax, which commenced on
January 5,2006 and expired on January 5, 2007. The employment agreement requires
Mr. Cannefax to devote substantially all of his working time as the Company's
President and Chief Executive Officer, providing that he may be terminated for
"cause" (as provided in the agreement) and prohibits him from competing with the
Company for two years following the termination of his employment agreement. The
employment agreement provides for the payment of an initial base salary of
$125,000. The employment agreement also provides for salary increases and
bonuses as shall be determined at the discretion of the Board of Directors, with
the first review of the annual salary to be made as of June 30, 2006. The
employment agreement further provides for the issuance of stock options to
purchase 4,500,000 shares of the Company's common stock at $.01 per share. The
options vest in twelve equal monthly installments of 375,000 shares, beginning
on February 5, 2006 until such shares are vested.
In
the event of a change of control of the Company, then all outstanding stock
options granted to Mr. Cannefax shall be immediately vested. A change of control
shall be deemed to have occurred if (i) a tender offer shall be made and
consummated for the ownership of more than 25% of the Company's outstanding
shares; (ii) the Company shall be merged or consolidated with another
corporation and, as a result, less than 25% of the outstanding common shares of
the surviving corporation shall be owned in the aggregate by the Company's
former shareholders, as the same shall have listed prior to such merger or
consolidation; (iii) the Company shall sell all or substantially all of its
assets to another corporation that is not a wholly owned subsidiary or
affiliate; (iv) as a result of any contested election for the Board of
Directors, or any tender or exchange offer, merger of business combination or
sale of assets, the persons who were directors of the Company before such a
transaction shall cease to constitute a majority of the Board of Directors; or
(v) a person other than an officer or director of the Company shall acquire more
than 20% of the outstanding shares of common stock of the Company.
Effective July 1,
2007, the Company entered into an amendment of the employment agreement with Mr.
Cannefax, which extends the term of the employment agreement until January 5,
2009. Under the terms of the amendment, Mr. Cannefax's annual base salary
increased to $150,000. The initial base salary in the employment agreement dated
January 5, 2006 was $125,000, which the Board of Directors increased to $140,000
as of July 1, 2006. The amendment also provides for the granting of additional
stock options to Mr. Cannefax to purchase an additional 4,500,000 shares of the
Company's common stock at $.01 per share. These options vest in twelve equal
monthly installments of 375,000 shares beginning on June 1, 2007 until such
shares are vested.
Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The following table
sets forth certain information with respect to beneficial ownership of the
Company's common stock as of March 31, 2008 for (i) each executive officer (ii)
each director, (iii) each person known to the Company to be the beneficial owner
of more than 5% of the outstanding shares, and (iv) all directors and officers
as a group.
|
Percentage
of
|
||
|
Name and Address
(1)
|
Number of
Shares
|
Ownership
|
|
Raymond P.L.
Cannefax
|
10,000,000
|
1.3%
|
|
Dr. David M.
Silver
|
761,166
|
*
|
|
Randall A.
Mackey (2)
|
725,000
|
*
|
|
Keith D.
Ignotz (2)
|
525,709
|
*
|
|
John C.
Pingree (2)
|
431,500
|
*
|
|
Executive
officers and directors
|
||
|
as
a group (five persons)
|
12,443,375
|
1.6%
|
|
______________________
|
||
|
*Less than
1%.
|
47
Unless otherwise
indicated, the address of each listed stockholder is c/o Paradigm Medical
Industries, Inc., 2355 South 1070 West, Salt Lake City, Utah,
84119.
The amounts shown
include shares that may be acquired currently, or within 60 days after March 31,
2007 through the exercise of stock options are follows: Mr. Cannefax, 9,000,000
shares; Dr. Silver, 725,000 shares; Mr. Mackey, 725,000 shares; Mr. Ignotz,
525,851 shares; and Mr. Pingree, 275,000 shares.
Compliance
with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of
the Securities Exchange Act of 1934, as amended, requires the Company's
executive officers, directors and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
periodic changes in ownership of the Company's common stock with the Securities
and Exchange Commission. Such persons are also required to furnish
the Company with copies of all Section 16(a) reports they file. Based
solely on its review of the copies of stock reports received by it with respect
to fiscal 2007, or written representations from certain reporting persons, the
Company believes that its directors, officers and greater than 10% beneficial
owners complied with all Section 16(a) filing requirements applicable to
them.
Item
12. Certain Relationships and Related Transactions
The information set
forth herein describes certain transactions between the Company and certain
affiliated parties. Future transactions, if any, will be approved by a majority
of the disinterested members and will be on terms no less favorable to the
Company than those that could be obtained from unaffiliated
parties.
Randall A. Mackey,
a director since January 21, 2000, and from 1995 to 1998 and Chairman of the
Board since August 30, 2002, is president and a shareholder of the law firm of
Mackey Price Thompson & Ostler, which rendered legal services in connection
with various corporate matters. Legal fees and expenses paid to Mackey Price
Thompson & Ostler for the fiscal years ended December 31, 2007 and 2006,
totaled $156,000 and $148,000, respectively. As of December 31, 2007, the
Company owed this firm $46,400, which is included in accounts
payable.
PART IV
Item
13. 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(l)
|
|
3.2
|
Amended
Certificate of Incorporation
|
|
3.3
|
Bylaws(1)
|
|
4.1
|
Specimen
Common Stock Certificate (2)
|
48
|
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
|
1995 Stock
Option Plan (1)
|
|
10.3
|
April 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)
|
|
10.4
|
Form of
Convertible Note with each Purchaser(7)
|
|
10.5
|
Form of Stock
Purchase Warrant with each Purchaser(7)
|
|
10.6
|
Security
Agreement with Purchasers(7)
|
|
10.7
|
Intellectual
Property Security Agreement with Purchasers(7)
|
|
10.8
|
Registration
Rights Agreement with Purchasers(7)
|
|
10.9
|
Employment
Agreement with Raymond P.L. Cannefax(8)
|
|
10.10
|
February 2006
Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, and New Millennium Capital Partners II,
LLP(9)
|
|
10.11
|
Form of
Callable Secured Convertible Note with each
Purchaser(9)
|
|
10.12
|
Form of Stock
Purchase Warrant with each Purchaser(9)
|
|
10.13
|
Security
Agreement with Purchasers(9)
|
|
10.14
|
Intellectual
Property Security Agreement with Purchasers(9)
|
|
10.15
|
Registration
Rights Agreement with Purchasers(9)
|
|
10.16
|
Settlement
Agreement with Dr. Joseph W. Spadafora (10)
|
|
10.17
|
Worldwide OEM
Agreement with MEDA Co., Ltd. (11)
|
|
10.18
|
Second
Amendment to the Registration Rights Agreement dated April 27, 2005
(12)
|
|
10.19
|
Second
Amendment to the Registration Rights Agreement dated February 28, 2006
(12)
|
|
10.20
|
June 2007
Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, and New Millennium Capital Partners L1, LLP
(13)
|
|
10.21
|
Form of
Convertible Note with each Purchaser (13)
|
|
10.22
|
Form of Stock
Purchase Warrant with each Purchaser (13)
|
|
10.23
|
Security
Agreement with Purchasers (13)
|
|
10.24
|
Intellectual
Property Agreement with Purchasers (13)
|
|
10.25
|
Registration
Rights Agreement with Purchasers (13)
|
|
10.26
|
December 2007
Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, and New Millennium Capital Partners II, LLP
(14)
|
|
10.27
|
Form of
Convertible Note with each Purchaser (14)
|
|
10.28
|
Form of Stock
Purchase Warrant with each Purchaser (14)
|
|
10.29
|
Security
Agreement with Purchasers (14)
|
|
10.30
|
Intellectual
Property Agreement with Purchasers (14)
|
|
10.31
|
Registration
Rights Agreement with Purchasers (14)
|
|
10.32
|
Agreement
with Equity Source Partners, LLC
|
|
10.33
|
Distribution
Agreement with LACE Elettronica srl
|
|
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 Sarbane's-Oxley Act of2002
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
49
|
(1)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on March
19, 1996.
|
|
(2)
|
Incorporated
by reference from Amendment No. 1 to Registration Statement on Form SB-2,
as filed on May 14, 1996.
|
|
(3)
|
Incorporated
by reference from Annual Report on Form 10-KSB, as filed on April 16,
1998.
|
|
(4)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on April
29, 1999.
|
|
(5)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on August 16,
2000.
|
|
(6)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on November 14,
2003.
|
|
(7)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on May 18,
2005.
|
|
(8)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on January 18,
2006.
|
|
(9)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on March 1,
2006.
|
|
(10)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on June
15, 2006.
|
|
(11)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on June 19,
2006.
|
|
(12)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on April
16, 2007.
|
|
(13)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on August 17,
2007.
|
|
(14)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on January 7,
2008.
|
(b) Reports on Form
8-K
Current
report on Form 8-K, as filed on January 7, 2008.
Item
14. Principal Accountant Fees and Services
Fees for the 2007
annual audit of the financial statements and related quarterly review services
were $31,893. Fees in 2007 related to the review of registration statements and
assistance in responding to SEC comments were $675. Fees in 2007 for
edgarization of filings were $4,565. Fees in 2007 for tax return preparation
were $2,350. There were no other fees in 2007for meetings and other
consultation.
Fees for the 2006
annual audit of the financial statements and related quarterly review services
were $28,600. Fees in 2006 related to the review of registration statements and
assistance in responding to SEC comments were $1,300. Fees in 2006 for
edgarization of filings were $2,600. Fees in 2006 for tax return preparation
were $3,500. There were no fees in 2006 for meetings and other
consultation.
50
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
| PARADIGM MEDICAL INDUSTRIES, INC. | |
|
Dated:
September 26, 2008
|
By: /s/ Raymond P.L.
Cannefax
|
|
Raymond
P.L. Cannefax
|
|
|
President
and Chief Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
by the following persons in counterpart on behalf of the Company on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Raymond P.L.
Cannefax
|
President and
Chief Executive Officer
|
September 26,
2008
|
|
Raymond P.L.
Cannefax
|
(Principal
Executive Officer)
|
|
|
/s/
Randall A. Mackey
|
Chairman of
the Board and Director
|
September 26,
2008
|
|
Randall A.
Mackey
|
||
|
/s/ David
M. Silver
|
Director
|
September 26,
2008
|
|
David M.
Silver, Ph.D.
|
||
|
/s/ Keith D.
Ignotz
|
Director
|
September 26,
2008
|
|
Keith D.
Ignotz
|
||
|
/s/ John
C. Pingree
|
Director
|
September 26,
2008
|
|
John C.
Pingree
|
||
|
/s/ Luis
A. Mostacero
|
Vice
President of Finance, Treasurer and
|
September 26,
2008
|
|
Luis A.
Mostacero
|
Chief
Financial Officer, (Principal
|
|
|
Financial
and Accounting Officer)
|
51