UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to
Commission File Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0459536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES : NO 9
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value 25,509,868
----------------------------- ----------------
Title of Class Number of Shares
Outstanding as of
March 31, 2004
Class A Warrant to Purchase
One Share of Common Stock 1,000,000
---------------------------- ------------------
Title of Class Number of Warrants
Outstanding as of
March 31, 2004
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet (unaudited) - March 31, 2004.......................... 3
Statements of Operations (unaudited) for the three months
ended March 31, 2004 and March 31, 2004............................. 4
Statements of Cash Flows (unaudited) for the three months
ended March 31, 2004 and March 31, 2004 ............................ 5
Notes to Financial Statements (unaudited)........................... 6
Item 2. Management's Discussion and Analysis or
Plan of Operation ................................................... 8
Item 3. Controls and Procedures ........................................... 13
PART II - OTHER INFORMATION
Other Information........................................................... 13
Signature Page ............................................................. 21
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 2004
--------------
(Unaudited)
ASSETS
Current Assets
Cash & Cash Equivalents $ 100,000
Receivables, Net 490,000
Inventory 868,000
Prepaid Expenses 243,000
----------------
Total Current Assets 1,701,000
Intangibles, Net 681,000
Property and Equipment, Net 216,000
-----------------
Total Assets $ 2,598,000
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 686,000
Accrued Expenses 1,492,000
Current Portion of Long-term Debt 56,000
----------------
Total Current Liabilities 2,234,000
Long-term Debt 48,000
----------------
Total Liabilities 2,282,000
================
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at March 31, 2004 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at March 31, 2004 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at March 31, 2004 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at March 31, 2004 -
Series E
Authorized: 50,000; issued and
outstanding: 1,000 at March 31, 2004
-
Series F
Authorized: 50,000; issued and
outstanding: 4,598.75 at March 31, 2004 -
Series G
Authorized: 2,000,000; issued and
outstanding: 1,981,560 at March 31, 2004 2,000
Common Stock, Authorized:
80,000,000 Shares, $.001 par value; issued and
outstanding: 25,372,764 at March 31, 2004 25,000
Additional paid-in-capital 57,470,000
Accumulated Deficit (57,181,000)
----------------
Total Stockholders' Equity 316,000
----------------
Total Liabilities and Stockholders' Equity $ 2,598,000
================
3
See accompanying notes to financial statements
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
(Unaudited) (Unaudited)
Sales $ 583,000 $ 727,000
Cost of Sales 227,000 326,000
------------ ------------
Gross Profit 356,000 401,000
------------ ------------
Operating Expenses:
Marketing and Selling 185,000 322,000
General and Administrative 304,000 477,000
Research, development and service 227,000 281,000
------------ ------------
Total Operating Expenses 716,000 1,080,000
------------ ------------
Operating Income (Loss) (360,000) (679,000)
Other Income and (Expense):
Interest Income 2,000 3,000
Interest Expense (6,000) (7,000)
------------ ------------
Total Other Income and (Expense) (4,000) (4,000)
------------ ------------
Net loss before provision
for income taxes (364,000) (683,000)
Income taxes - -
------------ ------------
Net Loss $ (364,000) $ (683,000)
============ ============
Net Loss Per Common Share
- Basic and Diluted $ (.01) $ (.03)
============ ============
Weighted Average Outstanding
Shares - Basic and Diluted 25,373,000 21,976,000
============ ============
4
See accompanying notes to financial statements
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net Loss $ (364,000) $ (683,000)
Adjustments to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 41,000 119,000
Issuance of Common Stock for Services - -
Issuance of Stock Option/Warrant for Services -
Provision for Losses on Receivables - (75,000)
(Increase) Decrease from Changes in:
Trade Accounts Receivable 218,000 129,000
Inventories 135,000 224,000
Prepaid Expenses (102,000) 24,000
Increase (Decrease) from Changes in:
Trade Accounts Payable (20,000) (1,000)
Accrued Expenses and Deposits 73,000 176,000
------------ ------------
Net Cash Used in Operating Activities (19,000) (87,000)
------------ ------------
Cash Flow from Investing Activities:
Purchase of Property and Equipment - -
Increase in Patents and Intangibles - -
Other Assets -
Net Cash Paid in Acquisition - -
------------ -------------
Net Cash Used in Investing Activities - -
------------ ------------
Cash Flows from Financing Activities:
Additions to notes payable - -
Principal Payments on Notes Payable (13,000) (15,000)
Sale of stock and exercise of warrants - -
------------ -------------
Net Cash (Used) Provided by Financing Activities (13,000) (15,000)
------------ ------------
Net Decrease in Cash and Cash Equivalents (32,000) (102,000)
Cash and Cash Equivalents at Beginning of Period 132,000 194,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 100,000 $ 92,000
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 6,000 $ 7,000
============ ============
Cash Paid for Income Taxes $ - $ -
============ ============
5
See accompanying notes to financial statements
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies
-------------------------------
In the opinion of management, the accompanying financial statements contain all
adjustments (consisting only of normal recurring items) necessary to present
fairly the financial position of Paradigm Medical Industries, Inc. (the Company)
as of March 31, 2004 and the results of its operations for the three months
ended March 31, 2004 and 2003, and its cash flows for the three months ended
March 31, 2004 and 2003. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full year
period.
Going Concern
-------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Historically, the Company has not
demonstrated the ability to generate sufficient cash flows from operations to
satisfy its liabilities and sustain operations, and the Company has incurred
significant losses. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
generate sufficient income and cash flow to meet its obligations on a timely
basis and/or obtain additional financing as may be required. The Company is
actively seeking options to obtain additional capital and financing.
In addition, the Company has taken significant steps to reduce costs and
increase operating efficiencies. Specifically, the Company has significantly
reduced the use of consultants, which has resulted in a large decrease in
expenses, and reduced the direct sales force to three representatives, which has
resulted in less payroll, travel and other selling expenses. Although these cost
savings have significantly reduced the Company's losses and ongoing cash flow
needs, if the Company is unable to obtain equity or debt financing, it may be
unable to continue development of its products and may be required to
substantially curtail or cease operations.
Reclassifications
-----------------
Certain amounts in the financial statements for the three months ended March 31,
2003 have been reclassified to conform with the presentation of the current
period financial statements.
Net loss Per Share
------------------
Net loss per common share is computed on the weighted average number of common
and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents consisting of options
and warrants to purchase 5,704,000 and 5,051,000 shares of common stock and
preferred stock convertible into 2,302,000 and 437,000 shares of common stock at
March 31, 2004 and 2003, respectively, have not been included in loss periods
because they are anti-dilutive.
Preferred Stock Conversions
---------------------------
Under the Company's Articles of Incorporation, holders of the Company's Class A
and Class B Preferred Stock have the right to convert such stock into shares of
the Company's common stock at the rate of 1.2 shares of common stock for each
share of preferred stock. During the three months ended March 31, 2004, no
shares of Series A Preferred Stock and no shares of Series B Preferred Stock
were converted to the Company's Common Stock.
Holders of Series D Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 1 share of common stock for each
share of preferred stock. During the three months ended March 31, 2004, no
shares of Series D Preferred Stock were converted to the Company's Common stock.
6
Holders of Series E Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2004, no
shares of Series E Preferred Stock were converted to the Company's Common stock.
Holders of Series F Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2004, no
shares of Series F Preferred Stock were converted to shares of the Company's
Common stock.
Holders of Series G Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 1 share of common stock for each
share of preferred stock. During the three months ended March 31, 2004, no
shares of Series G Preferred Stock were converted to shares of the Company's
Common stock.
Warrants
--------
The fair value of warrants granted as described herein is estimated at the date
of grant using the Black-Scholes option pricing model. The exercise price per
share is reflective of the then current market value of the stock. No grant
exercise price was established at a discount to market. All warrants are fully
vested, exercisable and nonforfeitable as of the grant date. The Company granted
no warrants to purchase the Company's common stock during the period ended March
31, 2004.
Stock - Based Compensation
--------------------------
For stock options and warrants granted to employees, the Company employs the
footnote disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages
entities to adopt a fair-value based method of accounting for stock options or
similar equity instruments. However, it also allows an entity to continue
measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB 25 and provide
pro forma footnote disclosures required by SFAS No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Stock options and warrants granted to non-employees for services are accounted
for in accordance with SFAS 123 which requires expense recognition based on the
fair value of the options/warrants granted. The Company calculates the fair
value of options and warrants granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three Months Ended March 31,
2004 2003
------------ ------------
Net income (loss) - as reported $ (364,000) (683,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects - (274,000)
Net loss - pro forma $ (364,000) (957,000)
------------ ------------
Earnings per share:
Basic and diluted - as reported $ (0.01) (.03)
Basic and diluted - pro forma $ (0.01) (.04)
Related Party Transactions
--------------------------
Payments for legal services to the firm of which the chairman of the board of
directors is a partner were approximately $5,000 and $15,000 for the three
months ended March 31, 2004 and 2003, respectively.
7
Accrued Expenses
----------------
Accrued expenses consist of the following at March 31, 2004:
Accrued consulting and litigation reserve $ 503,000
Warranty and return allowance 422,000
Accrued royalties 67,000
Deferred revenue 82,000
Customer deposits 124,000
Accrued payroll and employee benefits 146,000
Sales taxes payable 32,000
Other accrued expenses 118,000
------------
Total $ 1,492,000
============
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains forward-looking statements and information
relating to the Company that is based on beliefs of management as well as
assumptions made by, and information currently available to management. These
statements reflect its current view respecting future events and are subject to
risks, uncertainties and assumptions, including the risks and uncertainties
noted throughout the document. Although the Company has attempted to identify
important factors that could cause the actual results to differ materially,
there may be other factors that cause the forward-looking statements not to come
true as anticipated, believed, projected, expected or intended. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those
described herein as anticipated, believed, projected, estimated, expected or
intended.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exits. Prior to shipment of
product, the Company requires 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 the
customer upon shipment. This revenue recognition policy does not differ among
the various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when received by the
customer, the Company either makes the necessary repairs on site or has the
product shipped to the Company for the repair work. Once the product has been
repaired and retested for functionality, it is re-shipped to the customer. The
Company provides warranties that generally extend for one year from the date of
sale. Such warranties cover the necessary parts and labor to repair the product
as well as any shipping costs that may be required. The Company maintains a
reserve for estimated warranty costs based on its historical experience and
management's current expectations.
3. The sales price is fixed or determinable. The purchase order
received from the customer includes the agreed-upon sales price. The Company
does not accept customer orders, and therefore do not recognize revenue, until
the sales price is fixed.
4. Collectibility is reasonably assured. With limited exceptions, the
Company requires down payments on product prior to shipment. In some cases the
Company requires payment in full prior to shipment. The Company also performs
credit checks on new customers and ongoing credit checks on existing customers.
The Company maintains an allowance for doubtful accounts receivable based on
historical experience and management's current expectations.
8
Recoverability of Inventory. Since its inception, the Company has
purchased several complete lines of inventory. In some circumstances the Company
has been able to utilize certain items acquired and others remain unused. On a
quarterly basis, the Company attempts to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced.
Recoverability of Goodwill and Other Intangible Assets. The Company's
intangible assets consist of goodwill, product and technology rights,
engineering and design costs, and patent costs. Intangibles with a determined
life are amortized on a straight-line basis over their determined useful life
and are also evaluated for potential impairment if events or circumstances
indicate that the carrying amount may not be recoverable. Intangibles with an
indefinite life, such as goodwill, are not amortized but are tested for
impairment on an annual basis or when events and circumstances indicate that the
asset may be impaired. Impairment tests include comparing the fair value of a
reporting unit with its carrying net book value, including goodwill. To date,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
General
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the three months ended March
31, 2004, diagnostic products have been the major focus and the Photon(TM) and
other extensive research and development projects have been put on hold pending
future evaluation when the Company's financial position improves. The Company
does not focus on a specific diagnostic product or products but, instead, on
this entire diagnostic product group.
The Company's ultrasound diagnostic products include a P55 pachymetric
analyzer, a P37 Ultrasound A/B Scan, a P40 Ultrasound BioMicroscope and a P45
Plus UBM 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. In
addition, the Company markets its Blood Flow Analyzer acquired in the purchase
of Ocular Blood Flow Ltd. in June 2000. Other diagnostic products are the Dicon
LD400 Auto Perimeter and the Dicon(TM) CT200e Corneal Topographer, which were
acquired in the acquisition of Vismed d/b/a Dicon in June 2000. The Company
purchased the inventory, design and production rights of the SIStem(TM) , the
Odyssey and the Surgetrol from Mentor Corporation in October 1999, which was
designed to perform minimally invasive cataract surgery. In November 1999, the
Company entered into a Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist ThirtyThousand(TM), in which the Company
purchased the raw materials and finished goods inventory to bring the
manufacturing of this product in-house. During the fourth quarter of 2003, the
Company sold all inventory and rights associated with the SIStem(TM) and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with $0
cost of sales because a reserve for obsolete inventory had been recorded on all
SIStem(TM) and Odyssey(TM) inventory.
9
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 three months ended March 31, 2003, diagnostic
products are currently its major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. 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 Thousand(TM) and the Photon(TM) 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. The Company does not focus on a specific
diagnostic product or products but, instead, on this entire product group.
Activities for the three months ended March 31, 2004 included sales of
the Company's products and related accessories and disposable products. On March
18, 2004, the Board of Directors appointed John Y. Yoon as President and Chief
Executive Officer of the Company to replace Jeffrey F. Poore, who served in
those positions from March 19, 2003 to March 18, 2004. On March 23, 2004, the
Board of Directors appointed Aziz A. Mohabbat as Vice President of Operations
and Chief Operating Officer, replacing David I. Cullumber who resigned as Chief
Operating Officer and Chief Technical Officer on March 22, 2004. Mr. Mohabbat
previously served as Chief Operating Officer of the Company from August 2002 to
March 2004, and as Vice President of Operations from 2001 to March 2003.
Results of Operations
Three Months Ended March 31, 2004, Compared to Three Months Ended March
31, 2003
Net sales decreased by $152,000, or 21%, to $583,000 for the three
months ended March 31, 2004, from $727,000 from the preceding quarter. Sales of
the Company's diagnostic products and related accessories were $554,000, or 95%
of total revenues, during the first three months of 2004 compared with $558,000,
or 77% of total revenues, for the comparable period of 2003. Sales of surgical
products and related accessories fell to $0 revenues, for the three months of
the current year in comparison with $31,000, or 4%, of total revenues in the
comparable period of 2003. In 2003, sales of the P40 and P45 UBM Ultrasound
Biomicroscope and related accessories increased to $142,000, or 24% of total
revenues, compared to $43,000, or 6% of total revenues, in the same period of
2003. Sales from the Blood Flow Analyzer(TM) and related accessories decreased
slightly by $39,531 to $123,000, or 21% of total revenues, during the year ended
March 31, 2004 compared with $163,000, or 22% of total revenues, in the same
period of last year. During the first three months of 2003, sales from other
ultrasonic products and related accessories totaled $36,000, or 6% of total
revenues, compared with $43,000, or 13% of total revenues, in the same period
last year. Sales of the perimeter and corneal topographer and related
accessories generated $252,000, increasing to 43% of total revenues, in the
first quarter 2004 compared with $258,000, or 36% of total revenues, during the
same period of 2003.
There were a number of material reasons that contributed to the
decrease in sales during the three months ended March 31, 2004, compared to the
same period of 2003. Along with generally weak economic conditions in the United
States, the Company initiated the restructuring of its management structure, its
sales organization and the development of new sales channels during the twelve
months ended December 31, 2003. During the first three months of 2003, the
Company reduced its direct sales force from 10 representatives to five
representatives, and during the remainder of 2003, there were only five direct
sales representatives compared to 10 direct sales representatives during the
comparable period of 2002. In the first quarter of 2004, the company further
reduced the number of direct sales employees to two in the United States.
International sales were impacted by weakness in the economies of the large
industrial countries and by the residual impact of the Afghanistan situation,
which had a negative impact on sales to the Middle East, Pakistan, India and
other countries in that region.
The decrease in sales of the surgical line is the result of the sale of
the SIStem product line and a de-emphasis on the remaining Precisionist line.
The Precisionist is a fairly mature surgical workstation and the Photon has yet
to receive FDA approval. Additional decline in sales is the direct result of the
restructuring of the sales and marketing organization. This restructuring has
significantly reduced the sales expenses and funds dedicated to marketing. In
addition, the sales channels have been altered to include distributor and
independent sale representatives instead of relying more on a direct sales
force. Domestic and international sales have also decreased as a result of the
global financial markets declines beginning in 2000 and the adverse impact of
the events of September 11, 2001.
Other reasons for the decrease in sales were the uncertainties
resulting from its efforts to reduce costs and constraints on availability of
funds that reduced the Company's ability to upgrade and enhance its products and
pursue further regulatory approvals for its products. Additionally, changes in
the exchange rate between these periods have generally made its products more
expensive to some customers outside of the United States. The Company's
objective is to focus its sales efforts on the products with the highest
potential for sales and strong margins.
10
Gross profit for the quarter ended March 31, 2004 was 61% of total
revenues, compared to 52% for the same period in 2003. Cost of goods sold for
the first three months of 2003 was $227,000 as compared to $326,000 for the same
period in 2003, a reduction of $99,000. Since its inception, the Company has
purchased several complete lines of inventory. While its initial intention was
to utilize the substantial majority of inventory acquired in the manufacture of
its products, in some circumstances the Company has been unable to utilize
certain items acquired.
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. Such analysis resulted
in material increases in the reserve for obsolete or estimated non-recoverable
inventory in 2003 and 2002. There can be no assurance that the Company will not
identify further obsolete inventory due to significant declines in sales of
certain products or technological advances of products in the future. 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. The Company does
not expect the sales of these items to be significant in the future. During
2003, the Company sold all inventory, rights, and technology related to the
SIStem and Odyssey product lines for $125,000. The entire inventory sold in this
transaction had previously been fully reserved. Therefore, upon the sale, the
Company reduced inventory by $887,000 for the original book value of the
inventory, reduced the reserve for $887,000, and recorded revenue for the cash
received of $125,000.
Marketing and selling expenses decreased by $137,000, or 43%, to
$185,000 in the first quarter 2004, from $322,000 in the first quarter of 2003
due primarily to the lower headcounts of sales persons and travel related and
associated sales expenses.
General and administrative expenses decreased by $173,000, or 36%, to
$304,000 in the first quarter 2004, from $477,000 in the first quarter of 2003,
reflecting the results of the Company's efforts to reduce costs, specifically
costs associated with a reduction of personnel and reduced travel expenses.
Research, development and service expenses decreased by $54,000, or
19%, to $227,000 in 2004 compared to $281,000 for the same period in 2003. This
decrease was mainly due to reduced headcount and the redirection of development
activities.
Other income and (expense) remained flat at $4000 versus for the same
period in 2003. During the first quarter of 2004, interest income was $2,000
compared with $3,000 for the same period in 2003.
Liquidity and Capital Resources
The Company used $19,000 cash in operating activities for the three
months ended March 31, 2004, compared to $87,000 for the three months ended
March 31, 2003. The reduction in cash used by operating activities for the three
months ended March 31, 2004 was primarily attributable to reduced operating
costs, as well as other savings resulting from ongoing efforts to substantially
reduce costs and management of current assets and current liabilities. Net cash
used in financing activities was $13,000 for the three months ended March 31,
2004, versus $15,000 in the same period in 2003. During the three months ended
March 31, 2004, the Company did not sell any shares of common or preferred
stock. In the past, the Company has relied heavily upon sales of its 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.
11
The Company will continue to seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and private placements of its securities, and bank
borrowings. The Company is uncertain whether or not the combination of existing
working capital and benefits from sales of its products will be sufficient to
assure continued operations through December 31, 2004. As of March 31, 2004, the
Company had accounts payable of $686,000, a significant portion of which is 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 it into bankruptcy due to
its inability to pay the liabilities arising out of such judgments at that time.
In addition to the accounts payable noted above, the Company also has
non-cancelable capital lease obligations and operating lease obligations that
require the payment of approximately $187,000 in 2004, $172,000 in 2005, and
$14,000 in 2006.
The Company has taken numerous steps to reduce costs and increase
operating efficiencies. These steps consist of the following:
1. The Company closed its San Diego facility. In so doing, numerous
manufacturing, accounting and management responsibilities were consolidated. In
addition, such closure resulted in significant headcount reductions as well as
savings in rent and other overhead costs.
2. The Company has significantly reduced the use of consultants, which
has resulted in a large decrease to these expenses.
3. The Company has reduced its direct sales force to three
representatives, which has resulted in less payroll, travel and other selling
expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
At March 31, 2004, the Company had net operating loss carry forwards of
approximately $44,000,000 and research and development tax credit carry forwards
of approximately $34,000. These loss carry forwards are available to offset
future taxable income, if any, and have begun to expire in 2001 and extend for
twenty years. The Company's ability to use net operating loss carry forwards to
offset future income is dependant upon certain limitations as a result of the
pooling transaction with Vismed and the tax laws in effect at the time of the
loss carry forwards can be utilized. The Tax Reform Act of 1986 significantly
limits the annual amount that can be utilized for certain of these loss carry
forwards as a result of change of ownership.
The Company will continue to seek funding to meet its working capital
requirements through collaborative arrangements and strategic alliances,
additional public offerings and/or private placements of its securities or bank
borrowings. The Company is uncertain whether or not the combination of existing
working capital and benefits from sales of its products will be sufficient to
assure its operations through December 31, 2004.
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 49% of total outstanding receivables as of
March 31, 2004 and 40% as of December 31, 2003. Much of the increase in the
allowance as a percentage of total accounts receivables relates to outstanding
receivable balances pertaining to international dealers. The downturn in the
economy worldwide has resulted in increased difficulty in collecting certain
accounts. Certain international dealers have some aged unpaid invoices that have
not been resolved. The Company has addressed its credit procedures and
collection efforts and has instituted changes that require more payments at the
time of sale via letters of credit and not on a credit term basis. The Company
intends to continue its efforts to reduce the allowance as a percentage of
accounts receivable. While the allowance as a percentage of accounts receivable
has grown, it is mainly a result of the significant decline in sales. The total
amount of the allowance was $470,000 at March 31, 2004. The majority of the
receivables included in the allowance for doubtful accounts are a result of
sales before the Company implemented the various changes to improve the
collectibility of its receivables. The Company believes that by requiring a
large portion of payment prior to shipment, it has greatly improved the
collectibility of its receivables.
The Company carried an allowance for obsolete or estimated
non-recoverable inventory of $1,642,000 at March 31, 2004, or approximately 65%
of total inventory. This inventory reserve was not increased during the three
months ended March 31, 2004. The Company's means of expansion and development of
product has been largely from acquisition of businesses, product lines, existing
inventory, and the rights to specific products. Through such acquisitions, the
Company has acquired substantial inventory, some of which the eventual use and
recoverability was uncertain. In addition, the Company has a significant amount
of inventory relating to the Photon(TM) laser system, which does not yet have
FDA approval in order to sell the product domestically. Therefore, the allowance
for inventory was established to reserve for these potential eventualities.
12
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. During the fourth quarter
of 2003, the Company sold all inventory and rights associated with the Phaco
SIStem(TM) and Odyssey(TM) for $125,000. Because the full amount of inventory
related to the SIStem(TM) and Odyssey(TM) had been fully reserved, no cost of
sales were recorded in connection with this sale, thus resulting in gross profit
equal to the sales price of $125,000. The Company does not expect the sales of
these items, if any, to be significant in the future.
At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation
requires additional development and regulatory approvals. Any possible future
efforts to complete development of the Photon(TM) and obtain the necessary
regulatory approvals would depend on the Company obtaining adequate funding. The
Company estimates that the liquidity needed to complete development of the
Photon(TM) and obtain the necessary regulatory approvals to be approximately
$225,000.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of its
products as a result of domestic inflation. Nor has it experienced unfavorable
profit reductions due to currency exchange fluctuations or inflation with its
foreign customers. All sales transactions to date have been denominated in U.S.
Dollars.
Item 3 Controls and Procedures
(a) Evaluation of disclosure controls and procedures
John Yoon who serves as the Company's chief executive officer and Luis
A. Mostacero who serves as the Company's chief financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2004
(the "Evaluation Date") concluded that as of the Evaluation Date, the Company
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company would be made known to them by
others within company, particularly during the period in which this quarterly
report was being prepared.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's disclosure
controls and procedures subsequent to the Evaluation Date, nor were there any
significant deficiencies or material weaknesses in such disclosure controls and
procedures requiring corrective actions. As a result, no corrective actions were
taken.
PART II Other Information
Item 1. Legal Proceedings
An action was brought against the Company in March 2000 by George
Wiseman, a former employee, in the Third District Court of Salt Lake County,
State of Utah. The complaint alleges that the Company owes Mr. Wiseman 6,370
shares of its common stock plus costs, attorney's fees and a wage penalty (equal
to 1,960 additional shares of its common stock) pursuant to Utah law. The action
is based upon an extension of a written employment agreement. The Company
disputes the amount allegedly owed and intends to vigorously defend against the
action.
An action was brought against the Company on March 7, 2000 in the Third
District Court of Salt Lake County, State of Utah, by the Merrill Corporation
that alleges that the Company owes the Merrill Corporation approximately $20,000
together with interest thereon at the rate of 10% per annum from August 30,
1999, plus costs and attorney's fees. The complaint alleges a breach of contract
relative to printing services. The Company filed an answer to the complaint. On
August 12, 2003, the court dismissed the action without prejudice.
An action was brought against the Company on September 11, 2000 by
PhotoMed International, Inc. and Daniel M. Eichenbaum, M.D. in the Third
District Court of Salt Lake County, State of Utah. The action involves an amount
of royalties that are allegedly due and owing to PhotoMed International, Inc.
and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys' fees. Discovery has
taken place and the Company has paid royalties of $14,736 to bring all payments
up to date through June 30, 2001. 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.
13
It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. The issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to its calculations, is $600. The Company intends to
make payment of this amount to PhotoMed and Dr. Eichenbaum and, as a result, 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.
The Company received a demand letter dated December 9, 2002 from
counsel for Dan Blacklock, dba Danlin Corp. The letter demands payment in the
amount of $65,160 for manufacturing and supplying parts for microkeratome
blades. The Company's records show that it received approximately $34,824 in
parts from the Danlin Corp., but that the additional amounts that the Danlin
Corp contends are owed were from parts that were received but rejected by the
Company because they had never been ordered. On August 14, 2003, the Company
agreed to make a $13,650 payment to Danlin Corp. in settlement of the dispute.
The Company has since made the $13,650 payment to Danlin Corp.
The Company received a demand letter dated December 30, 2002 from
counsel for Thomas F. Motter, its former Chairman and Chief Executive Officer.
Mr. Motter claims in the letter that he was entitled to certain stock options
that had not been issued to him in a timely manner. By the time the options were
actually issued to him, however, they had expired. Mr. Motter contends that if
the options had been issued in a timely manner, he would have exercised them in
a manner that would have given him a substantial benefit. Mr. Motter requests
restitution for the loss of the financial opportunity. Mr. Motter also claims
that he was defrauded by the Company not being given an extended employment
agreement when he terminated the change of control agreement that he had entered
into with us.
Mr. Motter is further claiming payment for accrued vacation time during
the 13 years he had been employed by the Company, asserting that he only had a
total of four weeks of vacation during that period. Finally, Mr. Motter is
threatening a shareholder derivative action against the Company because of the
board of directors' alleged failure to conduct an investigation into
conversations that took place in a chat room on Yahoo. Mr. Motter asserts that
certain individuals participating in the conversations were its officers or
directors whose interests were in conflict with the interest of the
shareholders. The Company believes that Mr. Motter's claims and assertions are
without merit. The Company received a letter dated May 18, 2004 from Mr. Motter
stating that he has no intention of pursuing any of the claims against the
Company that were set forth in the demand letter, including filing a lawsuit
against the Company with respect to the claims.
On January 24, 2003, an action was brought by Dr. John Charles Casebeer
against the Company in the Montana Second Judicial District Court, Silver Bow
County, State of Montana (Civil No. DU-0326). The complaint alleges that Dr.
Casebeer entered into a personal services contract with the Company memorialized
by a letter agreement dated April 20, 2002, with it being alleged that Dr.
Casebeer fully performed his obligations. Dr. Casebeer asserts that he is
entitled to $43,750 per quarter for consultant time and as an incentive to be
granted each quarter $5,000 in options issued at the fair market value. An
additional purported incentive was $50,000 in shares of stock being issued at
the time a formalized contract was to be signed by the parties. In the letter it
is provided that at its election, the Company may pay the consideration in the
form of stock or cash and that stock would be issued within 30 days of the close
of the quarter. Prior to the litigation, the Company issued 43,684 shares to Dr.
Casebeer. The referenced letter provides that termination may be made by either
party upon giving 90 days written notice. Notice was given by the Company in
early November 2002. The Company recently filed its answer in defense of the
action. Issues included whether or not Dr. Casebeer fully performed as asserted.
The case has been settled through the issuance of 300,000 additional shares of
its common stock to Dr. Casebeer.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has retained
legal counsel to review the complaint, which appears to be focused on alleged
false and misleading statements pertaining to the Blood Flow Analyzer(TM) and
concerning a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation.
14
More specifically, the complaint alleges that the Company falsely
stated in its Securities and Exchange Commission filings and press releases that
the Company had received authorization to use an insurance reimbursement CPT
code from the CPT Code Research and Development Division of the American Medical
Association in connection with the Blood Flow Analyzer(TM), adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for use of
the Blood Flow Analyzer(TM). The complaint also alleges that on July 11, 2002,
the Company issued a press release falsely announcing that the Company had
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 sets of its entire portfolio of products, with $70
million in systems to be delivered over a two-year period, then another $35
million of orders to be completed in the third year. As a result of these
statements, the complaint contends that the price of the Company's shares of
common stock was artificially inflated during the period from April 25, 2001
through May 14, 2003, and the persons who purchased its common shares during
that period suffered substantial damages. The complaint requests judgment for
unspecified damages, together with interest and attorney's fees.
The Company disputes having issued false and misleading statements
concerning the Blood Flow Analyzer(TM) and a purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation. On April 25, 2001,
the Company issued a press release that stated the Company had received
authorization to use common procedure terminology or CPT code number 92120 for
its Blood Flow Analyzer(TM). This press release was based on a letter the
Company received from the CPT Editorial Research and Development Department of
the American Medical Association authorizing use of common procedure terminology
or CPT code number 92120 for its Blood Flow Analyzer(TM), for reimbursement
purposes for doctors using the device.
Currently, there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. The
Company is endeavoring to obtain reimbursement by insurance payors in other
states where there is currently no reimbursement being made. The Company
believes it has continued to correctly represent in its Securities and Exchange
Commission filings that the Company has received authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use CPT code number 92120 for its Blood Flow Analyzer(TM), for
reimbursement purposes for doctors using the device.
On July 11, 2002, the Company issued a press release that stated it
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 complete sets of the Company's entire product
portfolio of diagnostic and surgical equipment for Mexican ophthalmic
practitioners, to be followed by a second order of 100 sets of equipment. The
press release was based on a purchase order dated July 10, 2002 that the Company
entered into with Westland Financial Corporation for the sale of 200 complete
sets of the Company's surgical and diagnostic equipment to Mexican ophthalmic
practitioners. The press release also stated that the initial order was for $70
million of the Company's equipment to be filled over a two-year period followed
by the second order of $35 million in equipment to be completed in the third
year. The press release further stated that delivery would be made in traunches
of 25 complete sets of the Company's equipment, beginning in 30 days from the
date of the purchase order.
On September 13, 2002, the board of directors issued a press release
updating the status of its product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that the Company had been
in discussions for the prior nine months with Westland Financial Corporation,
aimed at supplying its medical device products to the Mexican market. In the
past, the Company has had a business relationship with Westland Financial. Upon
investigation, the board of directors had determined that the purchase order
referenced in the July 11, 2002 press release was not of such a nature as to be
enforceable for the purpose of sales or revenue recognition. In addition, the
Company had not sent any shipment of medical products to Mexican ophthalmic
practitioners nor received payment for those products pursuant to those
discussions. The September 13, 2002 press release also stated that discussions
were continuing with Westland Financial Corporation regarding sales and
marketing activities for the Company's medical device products in Mexico, but
the Company could not, at the time, predict or provide any assurance that any
transactions would result.
On June 2, 2003, a complaint was filed in the United States District
Court captioned Michael Marrone v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or about June
11, 2003, a complaint was filed in the same United States District Court
captioned Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark
Miehle and John Hemmer, Case No. 2:03 CV00617PGC. Both complaints seek class
action status. These cases are substantially similar in nature to the Meyer
case, including the contention that as a result of allegedly false statements
regarding the Blood Flow Analyzer(TM) and the purchase order from Valdespino
Associates Enterprises and Westland Financial Corporation, the price of the
Company's common stock was artificially inflated and the persons who purchased
its common shares during the class period suffered substantial damages. The
cases request judgment for unspecified damages, together with interest and
attorneys' fees. These cases have now been consolidated with the Meyer case into
a single action. The Company believes the consolidated cases are without merit
and intends to vigorously defend and protect its interests in the said cases.
The Company was issued a Directors and Officers Liability and Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that contains a $5,000,000 limit of liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated cases have requested coverage under the policy. U.S. Fire is
currently investigating whether it may have a right to deny coverage for the
consolidated cases based upon policy terms, conditions and exclusions or to
rescind the policy based upon misrepresentations contained in its application
for insurance.
15
The Company has not paid any amounts toward satisfaction of any part of
the $250,000 retention that is applicable to the consolidated cases. The Company
has advised U.S. Fire that it cannot pay the $250,000 retention due to its
current financial circumstances. As a consequence, on January 8, 2004, the
Company entered into a non-waiver agreement with U.S. Fire in which U.S. Fire
agreed to fund and advance the Company's retention obligation in consideration
for which the Company has agreed to reimburse U.S. Fire the sum of $5,000 a
month, for a period of six months, with the first of such payments due on
February 15, 2004. Thereafter, commencing on August 15, 2004, the Company is
currently required to reimburse U.S. Fire the sum of $10,000 per month until the
entire amount of $250,000 has been reimbursed to U.S. Fire.
In the event U.S. Fire determines that the Company or the former
officers and directors named in the consolidated cases are not entitled to
coverage under the policy, or that it is entitled to rescind the policy, or
should the Company be declared in default under the non-waiver agreement on
account of its failure to make the monthly payments owed to U.S. Fire for
funding the Company's retention obligation, then the Company agrees to pay U.S.
Fire, on demand, the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement.
The Company will be in default under the non-waiver agreement if it
fails to make any payment due to U.S. Fire thereunder when such payment is due,
or institute proceedings to be adjudicated as bankrupt or insolvent. U.S. Fire's
obligation to advance defense costs under the agreement will terminate in the
event that the $5,000,000 policy limit of liability is exhausted. If U.S. Fire
denies coverage for the consolidated cases under the policy and the Company is
not successful in defending and protecting its interests in the cases, resulting
in a judgment against the Company for substantial damages, the Company would not
be able to pay such liability and, as a result, would be forced to seek
bankruptcy protection.
On July 10, 2003, an action was filed in the United States District
Court, District of Utah, by Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. Defendants include us, Thomas Motter, Mark Miehle and John
Hemmer, former officers of the company. The complaint claims that Innovative and
Barton entered into an asset purchase agreement with the Company on January 31,
2002, in which the Company agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative. The complaint claims the Company breached the asset purchase
agreement. The complaint also claims that the Company allegedly made false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino Associates Enterprises and Westland Financial
Corporation. The purpose of these statements, according to the complaint, was to
induce Innovative to sell its assets and purchase the shares of the Company's
common stock at artificially inflated prices while simultaneously deceiving
Innovative and Barton into believing that the Company's shares were worth more
than they actually were. The complaint contends that had Innovative and Barton
known the truth they would not have sold Innovative to us, would not have
purchased the Company's stock for the assets of Innovative, or would not have
purchased the stock at the inflated prices that were paid. The complaint further
contends that as a result of the allegedly false statements, Innovative and
Barton suffered substantial damages in an amount to be proven at trial.
The complaint also claims that 491,250 of the shares to be issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and the Company also did not file a registration statement with the Securities
and Exchange Commission within five months of the closing date of the asset
purchase transaction. As a result, the complaint alleges that the value of the
shares of the Company's common stock issued to Innovative in the transaction
declined, and Innovative and Barton suffered damages in an amount to be proven
at trial. The Company filed an answer to the complaint and also filed
counterclaims against Innovative and Barton for breach of contract. The Company
believes the complaint is without merit and intends to vigorously defend and
protect its interests in the action. If the Company is not successful in
defending and protecting its interests in this action, resulting in a judgment
against the Company for substantial damages, and U.S. Fire denies coverage in
the litigation under the Directors and Officers Liability and Company
Reimbursement Policy, the Company would not be able to pay such liability and,
as a result, would be forced to seek bankruptcy protection.
On October 14, 2003, an action was filed in the Third Judicial District
Court, Salt Lake County, State of Utah, captioned Albert Kinzinger, Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries, Inc., Thomas Motter, Mark Miehle, Randall A. Mackey, and John
Hemmer, Case No. 030922608. The complaint also indicates that it is a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs Demand a
Trial by Jury." The Company has retained legal counsel to review the complaint,
which appears to be focused on alleged false or misleading statements pertaining
to the Blood Flow Analyzer(TM). More specifically, the complaint alleges that
the Company falsely stated in Securities and Exchange Commission filings and
press releases that it had received authorization to use an insurance
reimbursement CPT code from the CPT Code Research and Development Division of
the American Medical Association in connection with the Blood Flow Analyzer(TM),
adding that the CPT code provides for a reimbursement to doctors of $57.00 per
patient for the Blood Flow Analyzer(TM).
16
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of the Company's Series E preferred stock in
a private placement transaction at artificially inflated prices. The complaint
contends that as a result of these statements, the investors that purchased
shares of its Series E preferred stock in the private offering suffered
substantial damages to be proven at trial. The complaint also alleges that the
Company sold Series E preferred shares without registering the sale of such
shares or obtaining an exemption from registration. The complaint requests
rescission, compensatory damages and treble damages, including interest and
attorneys' fees. The Company filed an answer to the complaint. The Company
believes the complaint is without merit and intends to vigorously defend its
interests in the action. If the Company is not successful in defending and
protecting its interests in the action, resulting in a judgment against it for
substantial damages, and U.S. Fire denies coverage in the litigation under the
Directors and Officers Liability and Company Reimbursement Policy, the Company
would not be able to pay such liability and, as a result, would be forced to
seek bankruptcy protection.
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 two copy machines that were
delivered to its 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 disputes the amounts allegedly owed, asserting that the equipment it
returned to the leasing company did not work properly. A responsive pleading has
not yet been filed. The Company is currently engaged in settlement discussions
with CitiCorp.
An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding, Inc.
in which it alleges that the Company had entered into a lease agreement for the
lease of certain equipment for which payment is due. It is claimed that there is
due and owing approximately $89,988 after accruing late fees, interest,
repossession costs, collection costs and attorneys' fees. On August 28, 2003,
the Company agreed to a settlement of the case with Franklin Funding by agreeing
to make 24 monthly payments of $2,300 to Franklin Funding, with the first
monthly payment due on August 29, 2003.
The Company received demand letters dated July 18, 2003, September 26,
2003 and November 10, 2003 from counsel for Douglas A. MacLeod, M.D., a
shareholder of the company. In the July 18, 2003 letter, Dr. MacLeod demands
that he and certain entities with which he is involved or controls, namely the
Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and
Milan Holdings, Ltd., be issued a total of 2,296,667 shares of the Company's
common stock and warrants to purchase 1,192,500 shares of its common stock at an
exercise price of $.25 per share. Dr. MacLeod claims that these common shares
and warrants are owing to him and the related entities under the terms of a
mutual release dated January 16, 2003, which he and the related entities entered
into with us. Dr. MacLeod renewed his request for these additional common shares
and warrants in the September 26, 2003 and November 10, 2003 demand letters. The
Company believes that Dr. MacLeod's claims and assertions are without merit and
that neither he nor the related entities are entitled to any additional shares
of its common stock or any additional warrants under the terms of the mutual
release. The Company intends to vigorously defend against any legal action that
Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against the Company by Corinne
Powell, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030918364). Defendants consist of the Company
and Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the
company. The complaint alleges that at the time the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,030 for business expenses, $11,063 for
accrued vacation days, $12,818 for unpaid commissions, the fair market value of
50,000 stock options exercisable at $5.00 per share that she claims she was
prevented from exercising, attorney's fees and a continuing wage penalty under
Utah law. The Company disputes the amounts allegedly owed and intends to
vigorously defend and protect its interests in the action.
On September 10, 2003, an action was filed against the Company by Larry
Hicks in the Third Judicial District Court, Salt Lake County, State of Utah,
(Civil No. 030922220), for payments due under a consulting agreement with us.
The complaint claims that monthly payments of $3,083 are due for the months of
October 2002 to October 2003 under a consulting agreement and, if the agreement
is terminated, for the sum of $110,000 minus whatever the Company has paid Mr.
Hicks prior to such termination, plus costs, attorney's fees and a wage penalty
pursuant to Utah law. The Company disputes the amount allegedly owed and intends
to vigorously defend against such action.
The Company is not a party to any other material legal proceedings
outside the ordinary course of its business or to any other legal proceedings,
which, if adversely determined, would have a material adverse effect on its
financial condition or results of operations.
17
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
-----------
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit
No. Document Description
------- --------------------
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm
Medical Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Amended Certificate of Incorporation(10)
3.3 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer &
Trust Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing (1)
4.7 Specimen Series C Convertible Preferred Stock Certificate(4)
4.8 Certificate of the Designations, Powers, Preferences and
Rights of the Series C Convertible Preferred Stock(4)
4.9 Specimen Series D Convertible Preferred Stock Certificate (6)
4.1 Certificate of the Designations, Powers, Preferences and
Rights of the Series D Convertible Preferred Stock (7)
4.11 Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.12 Warrant to Purchase Common Stock with R.F. Lafferty & Co.,
Inc. (6)
4.13 Warrant to Purchase Common Stock with Dr. Michael B. Limberg
(7)
4.14 Warrant to Purchase Common Stock with John W. Hemmer (7)
4.15 Stock Purchase Warrant with Triton West Group, Inc.(9)
4.16 Warrant to Purchase Common Stock with KSH Investment Group,
Inc.(9)
4.17 Warrant to Purchase Common Stock with Consulting for Strategic
Growth, Ltd.(9)
4.18 Certificate of Designations, Powers, Preferences and Rights of
the Series G Convertible Preferred Stock (14)
5.1 Opinion of Mackey Price & Thompson
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 Employment Agreement with Thomas F. Motter (5)
10.5 Stock Purchase Agreement with Ocular Blood Flow, Ltd. and
Malcolm Redman (7)
10.6 Consulting Agreement with Malcolm Redman (7)
18
10.7 Royalty Agreement with Malcolm Redman (7)
10.8 Registration Rights with Malcolm Redman (7)
10.9 Employment Agreement with Mark R. Miehle (8)
10.10 Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11 Private Equity Line of Credit Agreement with Triton West
Group, Inc. (9)
10.12 Asset Purchase Agreement with Innovative Optics, Inc. and
Barton Dietrich Investments, L.P.(10)
10.13 Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. (10)
10.14 Assignment and Assumption Agreement with Innovative Optics,
Inc.(10)
10.15 General Assignment and Bill of Sale with Innovative Optics,
Inc.(10)
10.16 Non-Competition and Confidentiality Agreement with Mario F.
Barton(10)
10.17 Termination of Employment Agreement with Mark R. Miehle(12)
10.18 Consulting Agreement with Mark R. Miehle(12)
10.19 Employment Agreement with Jeffrey F. Poore (13)
10.20 License Agreement with Sunnybrook Health Science Center(15)
10.21 Major Account Facilitator Contract(15)
10.22 Mutual Release with Douglas A. MacLeod, M.D. and Others(15)
10.23 Purchase Agreement with American Optisurgical, Inc.(15)
10.24 Purchase Order with Westland Financial Corporation(16)
10.25 Non-Waiver Agreement with United States Fire Insurance
Company(16)
10.26 Employment Agreement with John Y. Yoon(17)
10.27 Consulting Agreement with Dr. John Charles Casebeer(18)
10.28 Consulting Agreement with Kinexsys Corporation(18)
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 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------
(1) Incorporated by reference from Registration Statement on Form SB-2, as
filed on March 19, 1996.
(2) incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Annual Report on Form 10-KSB, as filed
on April 16, 1998.
(5) Incorporated by reference from Report on Form 10-QSB, as filed on
November 12, 1998.
(6) Incorporated by reference from Registration Statement on Form SB-2, as
filed on April 29, 1999.
(7) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(8) Incorporated by reference from Report on Form 10-QSB, as filed on
November 1, 2000.
(9) Incorporated by reference from Report on Form 10-KSB, as filed on April
16, 2001.
(10) Incorporated by reference from Current Report on Form 8-K, as filed on
March 5, 2002.
(11) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-3, as filed on March 20, 2002.
(12) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.
(13) Incorporated by reference from Registration Statement on Form SB-2, as
filed on July 7, 2003.
(14) Incorporated by reference from Report on Form 10-QSB, as filed on
November 14, 2003.
19
(15) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on December 15, 2003.
(16) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on February 27, 2004.
(17) Incorporated by reference from Current Report on Form 8-K, as filed on
March 23, 2004.
(18) Incorporated by reference from Annual Report on Form 10-KSB, as filed
on April 14, 2004.
(b) Reports on Form 8-K
-----------------------
No reports were filed by the Company during the quarter ended March 31,
2004.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
May 24, 2004 /s/ John Y. Yoon
-------------------------------------
John Y. Yoon
President and Chief Executive Officer
May 24, 2004 /s/ Luis A. Mostacero
-------------------------------------
Luis A. Mostacero, Controller
21