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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 2
[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]
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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 Photon(TM) 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 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 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
Photon(TM). In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) 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 Photon(TM) can be sold in
markets outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM). The
Company is considering marketing the Photon(TM) and other lasers for use in eye
care.
The Company's diagnostic products include a pachymeter, a P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, P40, P45 and P60 UBM Ultrasound
Biomicroscopes, a P37 A/B Scan, two perimeters, a corneal topographer and the
Blood Flow Analyzer. The diagnostic ultrasonic products including the P55
pachymetric analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound
Biomicroscope were acquired from Humphrey Systems, a division of Carl Zeiss 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/ Dicon(TM) in June 2000. The Company
purchased Ocular Blood Flow, Ltd. in June 2000 whose principal product is the
Blood Flow Analyzer(TM). This product is designed for the measurement of
intraocular pressure and pulsatile ocular blood flow volume for detection and
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 Analyzer(TM) for measurement of intraocular pressure and pulsatile ocular
blood flow for the detection of glaucoma and other retina related diseases.
Ocular blood flow is critical, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation, thus resulting in visual field loss
associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a portable
automated in-office system that presents an affordable method for ocular blood
flow testing for the ophthalmic and optometric practitioner. In June 2000, the
Company purchased Occular Blood Flow, Ltd., the manufacturer of the Blood Flow
Analyzer(TM). The terms and conditions of the sale were $100,000 in cash and
100,000 shares of common stock. In April 2001, 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
Analyzer(TM) , for reimbursement purposes for doctors using the device. However,
certain payers have elected not to reimburse doctors using the Blood Flow
Analyzer(TM).
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 materials for each of the product
lines for the sum of $500,000, payable in the form of 78,947 shares of common
stock which were issued to Humphrey Systems and 26,316 shares of common stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000, after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares, 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.
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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 Analyzer(TM). The Ultrasonic
Biometer calculates the prescription for the intraocular lens to be implanted
during cataract surgery. The P55 pachymetric measures corneal thickness for the
new refractive surgical applications that eliminate the need for eyeglasses and
for optometric applications including contact lens fitting. The P37 Ultrasonic
A/B Scan combines the Ultrasonic Biometer and ultrasound imaging for advanced
diagnostic testing throughout the eye and is a viable tool for retinal
specialists. The P40 UBM Ultrasound Biomicroscope utilizes microscopic digital
ultrasound resolution for detection of tumors and improved glaucoma management.
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 SIStem(TM), the Odyssey(TM) and the
Surg-E-Trol(TM). 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 SIStem(TM) and Odyssey(TM)
for $125,000.
On June 5, 2000, the Company purchased Vismed Inc. d/b/a Dicon(TM)
under a pooling of interest accounting treatment. The purchase included the
Dicon(TM) perimeter product line consisting of the LD 400, the TKS 5000, the
SST(TM), FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal
topographer product line, the CT 200(TM), the CT 50 and an ongoing service and
software business. Perimeters are used to determine retinal sensitivity testing
the visual pathway. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Corneal topographers
are used for the refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.
In January 2002, the Company purchased the Innovatome(TM) microkeratome
of Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of its common stock at $5.00
per share, exercisable over a period of three years from the closing date, and
$100,000 in cash. The transaction was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards No. 141. 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.
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 SlStem(TM) and the Odyssey(TM). The assets sold in the
transaction included patents, trademarks, software codes and programs, supplies,
work in process, finished goods, and molds related to the equipment. The
purchase price paid to 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
SlStem(TM) and the Odyssey(TM).
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
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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.
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
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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, 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.
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.
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(TM). 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(TM).
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
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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.
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
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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.
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 Photon(TM) 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 ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
the Company's core phaco surgical technology. The Precisionist(TM) was placed
into production and offered for sale in 1997. As a phaco cataract surgery
system, the Company believes the Precisionist(TM) with its new fluidics panel is
equal or superior to the present competitive systems in the United States.
However, due to the lack of recent sales, the majority of the Company's
inventory associated with the Precisionist Thirty Thousand(TM) has been
estimated to be obsolete and therefore a reserve for such inventory has been
recorded. The system features a graphic color display and unique proprietary on
board computer and graphic user interface linked to a soft key membrane panel
for flexible programmable operation. The system provides real-time "on-the-fly"
adjustment capabilities for each surgical parameter during the surgical
procedure for high volume applications. In addition, the Precisionist(TM)
provides one hundred pre-programmable surgery setups, with a second level of
subprogrammed custom modes within each major surgical screen (i.e., ultrasound
phaco and irrigation/aspiration modes).
The Precisionist(TM) also features the Company's newly developed
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 new fluidics system provides
greater control for the surgeon and allows the safe operation at much higher
vacuum settings by sampling changes in aspiration 100 times per second. Greater
vacuum in phaco surgery means less use of ultrasound or laser energy to fragment
the cataract and less chance for surrounding tissue damage. In addition to the
full complement of surgical modalities (e.g., irrigation, aspiration, bipolar
coagulation and anterior vitrectomy), system automation includes "dimensional"
audio feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Sales of the Precisionist(TM) and related accessories were 0% of total revenues
in both the fiscal years 2006 and 2005, respectively.
7
Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist ThirtyThousand(TM) 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 Workstation(TM)
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 Workstation(TM) with the ability to add other hardware and
software features. Expansion such as the Company's Photon(TM) laser system and
hardware for additional surgical applications are easily implemented by means of
a preexisting expansion rack, which resides in the base of the Workstation(TM).
These expanded capabilities could include, but would not be limited to laser
systems, video surgical fiber optic imaging, cutting and electrosurgery
equipment. However, there is no guarantee that the Workstation(TM) will be
accepted in the marketplace. If the FDA approves the Photon(TM), the Company
will refer to the Workstation(TM) as the Photon(TM) Ocular Surgery
Workstation(TM). To date, the Company has not commercially developed or offered
for sale any other added hardware or software features to its Workstation(TM).
Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to the Company's Precisionist(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for the Company. The main elements of the laser system are the
Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand held fiber optic laser cataract probe. The Photon(TM) laser
utilizes the on board microprocessor computer of the Workstation(TM) to generate
short pulse laser energy developed through the patented LCP(TM) to targeted
cataract tissue inside the eye, while simultaneously irrigating the eye and
aspirating the diseased cataract tissue from the eye. The probe is smaller in
diameter than conventional ultrasound phaco needles and presents no damaging
vibration or heat build up in the eye. 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(TM). 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
Photon(TM) 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 Photon(TM) and Precisionist Thirty Thousand (TM).
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 Photon(TM) 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
Photon(TM) Workstation(TM) to be used with a 532mm green laser which is
effective for medical procedures other than cataract removal, such as
photocoagulation of retinal and venous anomalies within or outside the eye,
pigmented lesions around the orbital socket, posterior or anterior procedures
8
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.
The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed with any other added hardware or software features. There is no
guarantee that the ophthalmic surgery market will accept the laser in this
capacity or that the FDA will grant approval. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the FDA. Because of 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 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 Analyzer(TM) are currently the Company's
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. 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 Photon(TM) laser system where he performed numerous surgeries
using the Photon(TM). Dr. Spadafora contends that in meetings with the Company's
personnel he suggested ways in which the handpiece on the Photon(TM) could be
improved. Dr. Spadafora further contends that on August 5, 1999, when 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 Photon(TM) 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 Photon(TM) 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 Photon(TM) laser system includes a royalty or other
payments payable to the Company on later sales of the Photon(TM) 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 Photon(TM) 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 Photon(TM) 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 Photon(TM) laser system or its components through the full term of the
purchase agreement. Finally, the settlement agreement provides for mutual
releases by Dr. Spadafora and 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 utilize or will 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 Workstation(TM). 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
9
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.
Blood Flow Analyzer(TM): In June 1997, the Company received FDA
clearance to market the Blood Flow Analyzer(TM) 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 Analyzer(TM) is a portable automated in-office system that presents
an affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. This was the first diagnostic eye care device. The
device is a portable desktop system that utilizes a proprietary and patented
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM), which can be attached
to any model of standard examination slit lamp, which is then placed on the
cornea of the patient's eye to measure the intraocular pressure within the eye.
The device is unique in that it reads a series of intraocular pressure pulses
over a short period of time (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins University, calculates the blood flow volume. The device presents a
numerical intraocular pressure reading and blood flow analysis rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.
The Company markets the Blood Flow Analyzer(TM) as a stand-alone model
packaged with a custom built computer system. The Blood Flow Analyzer(TM)
utilizes a single use disposable cover for the Air Membrane Applanation
Probe(TM), a corneal probe which is shipped in sterile packages. The probe tip
cover provides accurate readings and acts as a prophylactic barrier for the
patient. The device has been issued a patent in the European Economic Community
and the United States and has a patent pending in Japan. The FDA cleared the
Blood Flow Analyzer(TM) for marketing in June 1997 and 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 Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain payors have elected not to reimburse doctors using the
Blood Flow Analyzer(TM). The Company is continuing its aggressive campaign to
educate the payors about the Blood Flow Analyzer(TM), its purposes and the
significance of its performance in patient care in order to achieve
reimbursements to the doctors. Currently, there is reimbursement by insurance
payors to doctors using the Blood Flow Analyzer(TM) in 22 states and partial
reimbursement in four other states. The amount of reimbursement to doctors using
the Blood Flow Analyzer(TM) generally ranges from $56.00 to $76.00 per patient,
depending upon the insurance payor. Insurance payors providing reimbursement for
the Blood Flow Analyzer(TM) have the discretion to increase or reduce the amount
of reimbursement. 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 Analyzer(TM) 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 Analyzer(TM).
The additional indications include pulsatile ocular blood flow and pulsatile
ocular blood volume. These are diagnostic measurements that assess the
hemodynamic and vascular health of the eye. Also, the Company is continuing its
aggressive campaign to educate the insurance payors about the Blood Flow
Analyzer(TM), its purposes and the significance of its performance in patient
care in order to achieve reimbursements to the doctors using its Blood Flow
Analyzer(TM). Sales of the Blood Flow Analyzer(TM) 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(TM). 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(TM).
Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, and software consisting of FieldLink(TM), FieldView(TM) and Advanced
FieldView. Perimeters are used to determine retinal sensitivity testing the
visual pathway. Perimeters have become a standard of care in the detection and
monitoring of glaucoma worldwide. Perimetry is reimbursable worldwide. The
10
Dicon(TM) perimeters feature patented kinetic fixation and voice synthesis now
in 27 different languages. Software programs are sold to assist in the analysis
of the test results. Sales of the perimeters and related accessories generated
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.
Dicon(TM) Corneal Topographers: Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50. Corneal topographers are used to determine the
shape and integrity of the cornea, the anterior surface of the eye. Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for eyeglasses and optometric applications including contact lens
fitting. Revenues from the topographer and related accessories were 1% and 3% of
the total revenues for 2007 and 2006, respectively. An enhanced version of the
CT 200(TM) was introduced during the fourth quarter of 2003. The Company has
completed the upgrades to the CT 200(TM) and the CT 50 Corneal Topographers,
which are now operating with Windows XP software rather than the former Windows
95 operating systems.
P55 Pachymetric Analyzer: The ultrasonic pachymeter is used for
measurement of corneal thickness. The Model P55 is positioned as a standard
office pachymeter. This device is targeted to the refractive surgery market and
contributed 1% of the total revenues for both 2007 and 2006.
P20 A-Scan Biometric Ultrasound Analyzer: The A-Scan was removed from
the Company's line of diagnostic products in 2002 but added back as a result of
its Worldwide OEM Agreement with MEDA Co., Ltd. in which MEDA has agreed to
jointly develop and collaborate in the improvement and enhancement of the
Company's products. The A-Scan is a prerequisite procedure reimbursed by
Medicare and is performed before every cataract surgery. Over 5,000 A-Scan
systems have been installed in the worldwide market, representing a substantial
market opportunity for software upgrades and extended warranty contract sales.
A-Scan sales were 0% 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. The P40
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.
11
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
bioimicroscope 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.
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 9001certification, 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 December 2005 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 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 for the Company's products to be manufactured by MEDA.
On January 31 and February 1, 2007, the Company 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 A-
Scan/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.
Parts and Services: The parts and service revenue from the repair and
service of equipment sold accounted for 9% and 12% 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:
12
Commercial Reimbursement % 2006 %2007 Regulatory
Product (1) Product Class Development Status Sales Sales Approvals
P55, P2200 and P2500 System, Imaging, Complete Yes 3% 4% FDA 510(K) K844299*
Pachymetric Analyzer Pulsed Echo Diagnostic ISO 9001: 1994, EN ISO
9001**
P20 and P2000 System Imaging, Pulsed Complete Yes 1% 3% FDA 510(K) I844299*
A-Scan Biometric Echo Diagnostic ISO 9001: 1994,
Ultrasound Analyzer EN ISO 9001**
P37, P37-II, P2700 Transducer, Ultrasound Complete Yes 10% 22% FDA 510(K) K844299*
and P3700 A/B Scan Diagnostic ISO 9001: 1994,
Ocular Ultrasound EN ISO 9001**
Diagnostic
P40 UBM Ultrasound System, Imaging, Complete Yes 5% 6% FDA 510(K) K844299*
BioMicroscope Pulsed Echo Ultrasound ISO 9001: 1994,
Diagnostic 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 ISO 9001: 1994,
Diagnostic EN ISO 9001**
LD 400 Autoperimetry Perimeter, Automatic Complete Yes 25% 15% FDA 510(K) K844299*
System AC-Powered ISO 9001: 1994,
Diagnostic EN ISO 9001**
TKS 5000 Perimeter, Automatic Complete Yes 11% 4% FDA 510(K) K844299*
Autoperimetry System AC-Powered, ISO 9001: 1994,
Diagnostic EN ISO 9001**
Precisionist Thirty Phacofragmentation Complete Yes 0% 0% FDA 510(K) K844299*
Thousand(TM), Ocular ISO 9001: 1994,
Surgery Workstation EN ISO 9001**
with Surgical
Equipment and
Disposables(2)
Photon(TM) Laser, Phacoemulsification In-Process (4) No 0% 0% IDE G940151
Ocular Surgery ISO 9001: 1994,
Workstation with EN ISO 9001**
Surgical Equipment
and Disposables(3)
Parts and Services Perimeter, BFA, Complete Yes 12% 9% FDA 510(K) K844299*
Tonometer, ISO 9001: 1994,
Topographer, EN ISO 9001**
Ultrasound
Workstations, Systems,
Imaging
-----------------------------
13
(1) Except for the Photon(TM) Ocular Surgery Workstation, which can only be
sold in countries outside the United States, these products can be sold
in the United States and in foreign countries including but not limited
to Argentina, Australia, Bangladesh, Borneo, Brazil, Canada, China,
Czechoslovakia, Egypt, France, Germany, Greece, Hong Kong, India,
Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand,
Pakistan, Peru, Poland, Puerto Rico, Russia, Saudi Arabia, Spain, Sri
Lanka, Taiwan, Thailand, Turkey, United Kingdom, and United Arab
Emirates.
(2) Due to the lack of recent sales volume, the inventory associated with
the Precisionist Thirty Thousand (TM), the SIStem(TM) and the
Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
offset such inventory.
(3) Due to the lack of recent evidence to support the recoverability of
inventory associated with the Photon(TM), the Company has recorded a
reserve to offset the majority of such inventory on hand.
(4) The Photon(TM) is in-process and not complete because the Company has
not completed the clinical trials in order to obtain FDA regulatory
approval.
* FDA 510(K) K844299 represents domestic approval by U.S. Food and Drug
Administration
** ISO 9001: 1994, EN ISO 9001 represents international approval
*** IDE G940151 represents approval for international distribution only
**** Represents full reimbursement in 20 states and partial reimbursement in
six other states.
As detailed in the table above, except for the Photon(TM) 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 Photon(TM) laser system and obtain the necessary regulatory
approvals would depend on adequate funding. If these efforts were undertaken but
proved to be unsuccessful, the impact would include the costs associated with
these efforts and the anticipated future revenues which the Company would not
receive as expected. The Company estimates that the funds needed to complete the
clinical trials on the Photon(TM) in order to obtain the necessary FDA
regulatory approval to be approximately $225,000.
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 Anthro.
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 surgical
device market has been characterized by slower growth in recent years. This has
apparently been caused by the potential reforms associated with the health care
industry. Further, hospitals have been inclined to keep their older phaco
machines longer than expected as they have been forced to mind budgets more
carefully and have become less willing to invest in capital equipment until more
information on health care reform becomes available. However, analysts predict
that the ophthalmic surgical device market will see renewed growth in the coming
years as the health care environment stabilizes and as the growing elderly
population produces an increased number of cataract surgeries. As a consequence
of these factors, the market should see a greater rate of replacement of older
machines that hospitals and surgeons have been postponing for longer than usual.
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.
14
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
March 2002 that the number of blind or visually impaired Americans is likely to
double over the next 30 years.) (ii) the entry by emerging countries (including
China, Russia, and other countries in Asia, Eastern Europe and Africa) into
advanced technology medical care for their populations, (iii) increased
awareness worldwide of the benefits of the minimally invasive phaco cataract
procedure, (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 Analyzer(TM) 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 IS0-9001.
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's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for its
future. In addition to its expanded 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.
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.
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.
15
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.
Competition
General. The Company is subject to competition in the cataract surgery
and the glaucoma diagnostic markets from two principal sources: (i)
manufacturers of competing ultrasound systems used when performing cataract
treatments and (ii) developers of technologies for ophthalmic diagnostic and
surgical instruments used for treatment. A few large companies that are well
established in the marketplace have experienced management, are well financed
and have well recognized trade names and product lines that dominate the
surgical equipment industry. The Company believes that the combined sales of
five entities account for over 90% of the cataract surgery market. The remaining
market is fragmented among emerging smaller companies, some of which are
foreign. The ophthalmic diagnostic market has a similar composition.
Most major competitors either entered or expanded into the cataract or
glaucoma markets through the acquisition of smaller, entrepreneurial high
technology manufacturing companies. Therefore, because existing competitors or
other entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all competitors
must be considered to be formidable.
The Cataract Surgical System Industry. The major manufacturers
utilizing ultrasonic technology offer products currently in use. Those systems
rely on accessories including single use cassette packs and other ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits. The cassette packs are required for fluid and tissue collection
during the surgical procedure. The cassette packs are generally unique and
proprietary to their respective systems and represent a barrier to entry for
third party, lower cost aftermarket suppliers. While there is growing market
resistance in the United States and internationally to single use cassettes, it
is anticipated that manufacturers of ultrasound equipment will continue to
develop and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. The Company's Precisionist Thirty
Thousand(TM) ultrasonic phaco system has the ability to use either reusable or
single use disposable components. The Photon(TM) laser cataract system will
utilize probes and cassette packs designed for single use and semi-disposable
instruments priced at a level consistent with the demands of health care cost
containment. This will allow the health care providers a substantial measure of
cost containment, while providing the Company with the quality control and
income capability of cassette sales.
The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.
Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lomb, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract 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 Company recognizes Sonomed, Tomey, Nidek, OTI and Quantel.
Laser Equipment Manufacturers. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:YAG
wavelength used by the Photon(TM). One competitor uses a Nd:YAG wavelength,
however the laser is used only to vibrate an ultrasonic needle. Thus the device
remains an ultrasonic system subject to the same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. The Company
also believes that its product is sufficiently distinctive and, if properly
marketed, can capture a significant share of the cataract surgical device
market. However, there are substantial risks in undertaking a new venture in an
established and already highly competitive industry. In the short-term, the
Company is seeking to exploit these opportunities. Depending upon further
developments, the Company may ultimately exploit those opportunities through a
merger with a stronger entity already established or one that desires to enter
the medical industry.
The Company 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.
16
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 1995 there were over 30 million adults
65 years of age and older and eight 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
analyzer. The blood flow analyzer is designed to detect glaucoma in an earlier
stage than is presently possible. In addition, the device performs tonometry and
blood flow analysis. Other ophthalmic diagnostic devices that do not detect
glaucoma in the early stages of the disease as does the Company's blood flow
analyzer 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.
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 Photon(TM) laser cataract probe is protected under a United States
patent issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to 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 Photon(TM) laser cataract probe and related components to
customers on a worldwide basis, for which PhotoMed is to receive a 1% royalty on
all net sales of such systems and related components sold worldwide.
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.
17
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 Photon(TM) laser system has been sold and no systems returned. Thus, the
amount of royalties due, according to the Company's calculations, is $981. The
Company made payment of this amount to Photomed and Dr. Eichenbaum on January 5,
2005 and, as a result, seeks to have the legal action dismissed. However, if the
parties are unable to agree on a method for calculating royalties, there is a
risk that PhotoMed and Dr. Eichenbaum might amend the complaint to request
termination of the license agreement and, if successful, the Company would lose
its rights to manufacture or sell the Photon(TM) laser system.
The Photon(TM) laser cataract probe is also protected under a United
States patent issued to 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 Photon(TM) laser cataract probe.
The Blood Flow Analyzer(TM) was granted a patent in the United Kingdom
in 1998 and in the United States in 1999, and has a patent pending in Japan.
These patents relate to pneumatic pressure probes for use in measuring change in
intraocular pressure and in measuring pulsatile ocular blood flow. The United
States patent rights expire in January 2019 and the United Kingdom patent rights
expire in November 2015.
The Dicon(TM) Perimeters and the Dicon(TM) Corneal Topographer each
have a U.S. patent with a wide scope of claims. The United States patent for the
Dicon(TM) Perimeter was issued in 1991 and the patent rights expire in March
2010. The United States patent for the Dicon(TM) Corneal 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.
18
Following the enactment of the Medical Device Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III. This
classification is based on the controls that are perceived to be necessary to
reasonably ensure the safety and effectiveness of medical devices. Class I
devices are those devices, the safety and effectiveness of which can reasonably
be ensured through general controls, such as adequate labeling, advertising,
premarketing notification and adherence to the FDA's Quality System Requirements
regulations. Some Class I devices are exempt from some of the general controls.
Class II devices are those devices the safety and effectiveness of which can
reasonably be assured through the use of special controls, such as performance
standards, postmarket surveillance, patient registries and FDA guidelines. Class
III devices are devices that must receive premarketing approval by the FDA to
ensure their safety and effectiveness. Generally, Class III devices are limited
to life sustaining, life supporting or implantable devices, or to new devices
that have been found not to be substantially equivalent to legally marketed
devices.
There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a premarketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics Act. If a manufacturer or
distributor of a medical device can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a pre-1976 Class III medical device for which the FDA has not
called for a 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 Photon(TM) laser system.
The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a premarketing approval, and allow the proposed
device to be marketed in the United States. The FDA may determine, however, that
the proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. A "not substantially
equivalent" determination or a request for additional information could delay
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
19
also evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Quality System
Requirements prior to approval of a premarketing application. While the FDA has
responded to premarketing approval applications within the allotted time period,
premarketing approval reviews generally take approximately 12 to 18 months or
more from the date of filing to approval. The premarketing approval process is
lengthy and expensive, and there can be no assurance that such approval will be
obtained for any of 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.
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or pre- marketing 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 Photon(TM) 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.
20
Regulatory Status of Products
All of the Company's products, with the exception of the Photon(TM),
are approved for sale in the U.S. by the FDA under a 510(k). All of 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 Photon(TM)
laser cataract system outside the United States under an open Investigational
Device Exemption granted by the FDA in September 1994. Although the Photon(TM)
laser cataract system is uniquely configured in an original and proprietary
manner, the laser system, a Nd:YAG laser, is not proprietary to the device or
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 Photon(TM) 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 Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the 510(k), and in October
1994 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 Photon(TM) 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 Photon(TM) 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 Photon(TM) 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
Photon(TM) 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.
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
downsizing of approximately $2,394,000 during the twelve months ended December
31, 2002.
21
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 Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to the Company's calculations, is $981. The Company
made payment of this amount to Photomed and Dr. Eichenbaum on January 5, 2005
and, as a result, seeks to have the legal action dismissed. However, if the
parties are unable to agree on a method for calculating royalties, there is a
risk that PhotoMed and Dr. Eichenbaum might amend their complaint to request
termination of the license agreement and, if successful, the Company would lose
its right to manufacture and sell the Photon(TM) laser system.
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of three copy machines that were
delivered to the Company's Salt Lake City facilities on or about April of 2000.
The action also seeks an award of attorney's fees and costs incurred in the
collection. The Company filed an answer to the complaint disputing the amounts
allegedly owed due to machine problems and a claimed understanding with the
vendor. The Company returned two of the machines. The Company was engaged in
settlement discussions with CitiCorp until counsel for CitiCorp withdrew from
the case. New counsel for CitiCorp was appointed. After an initial meeting with
new counsel, the Company provided initial disclosures to the new counsel.
On 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 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.
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
22
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 ................................. .10 .08
Second Quarter ................................ .09 .07
Third Quarter.................................. .10 .001
Fourth Quarter................................. .048 .001
2006
First Quarter ................................. .047 .001
Second Quarter ................................ .014 .006
Third Quarter.................................. .007 .004
Fourth Quarter................................. .005 .003
2007
First Quarter ................................. .032 .003
Second Quarter ................................ .014 .006
Third Quarter.................................. .007 .004
Fourth Quarter................................. .005 .003
2008
First Quarter ................................. .0023 .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.
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.
23
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.
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 2 of 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.
24
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 twelve months ended
December 31, 2007, 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.
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 historical 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.
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 P55 pachymetric
analyzer, 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
Analyzer(TM) acquired in the purchase of Ocular Blood Flow Ltd. in June 2000.
Other diagnostic products are the Dicon(TM) LD400 Auto Perimeter and the Dicon
(TM) 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 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.
25
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 Photon(TM). The Company is in the
process of generating the additional clinical information in response to the
letter. The Company cannot market or sell the Photon(TM) 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 Analyzer(TM) 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 Analyzer(TM), 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 Analyzer(TM), for reimbursement purposes for doctors using the
device. However, certain insurance payors have elected not to reimburse doctors
using the Blood Flow Analyzer(TM). 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 Analyzer(TM) 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, 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 Analyzer(TM), 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 Analyzer(TM). The
Company is continuing to work with the regional and state administrators of
Medicare who have denied Medicare coverage for the Blood Flow Analyzer(TM) 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.
26
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 II, 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 exerciseable 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, exerciseable
through the period from April 27, 2010 to June 30, 2010, and warrants
to purchase 12,000,000 shares of common stock at an exerciseable price
of $.10 per share, exerciseable 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, exerciseable
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.
(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 $.01 per share 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 and 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:
27
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after the Company filed a
registration statement on June 22, 2005 to register the shares of
common stock issuable upon conversion of the convertible notes and
exercise of warrants; and
o $850,000 was disbursed on June 30, 2005, the effective date of the
registration statement.
Under the terms of the securities purchase agreement, 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.
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.
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.
28
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:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after the Company filed a
registration statement on June 15, 2006 to register the shares of
common stock 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.
o $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.
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
60th day following the issue date of the notes.
29
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.
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.
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.
30
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.
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.
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.
31
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.
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.
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.
32
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.
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 April 27, 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.
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 Price Per With 40% Number of % of Outstanding
Market Share Discount Shares Issuable Shares*
------ ----- -------- ---------------- ------
25% $.00135 $.00081 4,849,706,000 712%
50% $.0009 $.00054 7,274,559,000 10,682%
75% $.00045 $.00027 14,594,118,000 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.
33
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, 2007 and 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.
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, the P37 A/B Scan Ocular Ultrasound Diagnostic and
the P55 Pachymeter.
34
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 Analyzer(TM) 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, 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 Analyzer(TM) increased due in part from the
reorganization of the Company's sales force. The Company anticipates continuing
the upward trend in Blood Flow Analyzer(TM) sales through additional efforts by
the Company to gain more wide spread support from the Blood Flow Analyzer(TM)
through increased clinical awareness, product development and improved marketing
plans.
Sales of surgical products are at a standstill pending FDA approval of
the Photon(TM) laser system. In the twelve month period ended December 31, 2007,
the Company realized no sales in the surgical line consisting of the Photon(TM)
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 2007 due to an increased amount of the Company's accounts receivable
over 90 days during 2007 as compared to 2006.
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.
Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2006 and 2007 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable.
Although some vendors refused to negotiate and demanded payment in full, some
vendors were willing to settle for a reduced amount. The accounts payable
forgiven by vendors and suppliers resulted in a gain of $91,000 and $34,000
during the years ended December 31, 2007 and 2006, respectively.
35
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 and increase in accounts payable,
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 2001 and 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 three
representatives, which has resulted in less payroll, travel and other selling
expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
The Company has taken measures to reduce the amount of uncollectible
accounts receivable such as more thorough and stringent credit approval,
improved training and instruction by sales personnel, and frequent direct
communication with the customer subsequent to delivery of the system. The
allowance for doubtful accounts was 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.
36
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(TM) Laser Ocular Surgery Workstation
requires regulatory FDA approval in order to be sold in the United States. Any
possible future efforts to complete the clinical trials on the Photon(TM) in
order to file for FDA approval would depend on the Company obtaining adequate
funding. The Company estimates that the funds needed to complete the clinical
trials in order to obtain the necessary regulatory approval on the Photon(TM) to
be approximately $225,000.
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.
37
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.
38
Item 7. Financial Statements
PARADIGM MEDICAL INDUSTRIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
PARADIGM MEDICAL INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
PAGE
----
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
--------------------------------------------------------------------------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and shareholders
Paradigm Medical Industries, Inc.
Salt Lake City, Utah
We have audited the accompanying balance sheet of Paradigm Medical
Industries, Inc. (the Company) as of December 31, 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 PCAOB
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, audits of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Paradigm Medical
Industries, Inc. as of December 31, 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 Compan'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 May 18, 2008.
--------------------------------------------------------------------------------
F-2
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31, 2007
--------------------------------------------------------------------------------
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 $889,000 3,039,000
Derivative liabilities 215,000
---------------
Total long-term liabilities 3,254,000
===============
Total liabilities 4,314,000
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 58,435,000
Accumulated deficit (61,121,000)
---------------
Total stockholders' (Deficit) (2,140,000)
---------------
Total liabilities and stockholders' (Deficit) $ 2,174,000
===============
The accompanying notes are an integral part of these financial statements
--------------------------------------------------------------------------------
F-3
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
2007 2006
(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) (712,000)
----------------- -----------------
Other income (expense):
Other income - 109,000
Interest expense - Accretion of debt discount (864,000) (952,000)
Interest income 11,000 -
Interest expense (221,000) (214,000)
Gain on derivative valuation 418,000 570,000
- -
----------------- -----------------
Total other income (expense) (656,000) (487,000)
----------------- -----------------
Income (loss) before provision for income taxes (1,731,000) (1,198,000)
Provision for income taxes - -
----------------- -----------------
Net (loss) $ (1,731,000) $ (1,198,000)
================= =================
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-4
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 2006 THROUGH DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------
PREFERRED ADDITIONAL
STOCK COMMONS PAID-IN ACCUMULATED
(SEE NOTE 8) SHARES AMOUNT CAPITAL DEFICIT
---------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2006 (RESTATED) 1,000 96,389,295 96,000 58,086,000 (58,191,000)
Issuance of common stock for:
Stock option valuation - - - 23,000 -
Conversion of convertible debentures - 105,529,700 106,000 275,000 -
Conversion of preferred stock - 39,999 - - -
Net loss - - - - (1,199,000)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2006 (RESTATED) 1,000 201,958,994 202,000 58,384,000 (59,390,000)
Issuance of common stock for:
Stock option valuation - - - 14,000 -
Conversion of convertible debentures - 343,017,246 343,000 37,000 -
Conversion of preferred stock - 10,667 - - -
Net loss - - - - (1,731,000)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2007 1,000 544,986,907 545,000 58,435,000 (61,121,000)
===========================================================================
The accompanying notes are an integral part of these financial statements
------------------------------------------------------------------------------------------------------------------------
F-5
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2007 2006
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,731,000) $ (1,198,000)
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 (418,000) (570,000)
Accretion of debt discount 865,000 952,000
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-6
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
1. ORGANIZATION ORGANIZATION
AND SIGNIFICANT
ACCOUNTING POLICIES 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.
--------------------------------------------------------------------------------
F-7
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION Recoveries of trade receivables previously written off
AND SIGNIFICANT are recorded when received. A trade receivable is
ACCOUNTING POLICIES considered to be past due if any portion of the
CONTINUED receivable balance has not been received by the
contractual pay date. Interest is not charge on trade
receivables that are past due.
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.
--------------------------------------------------------------------------------
F-8
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION PROPERTY AND EQUIPMENT
AND SIGNIFICANT Gains and losses on sale of property and equipment are
ACCOUNTING POLICIES reflected in operations. Leasehold improvements are
CONTINUED 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.
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.
--------------------------------------------------------------------------------
F-9
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION INCOME TAXES
AND SIGNIFICANT Deferred income taxes are provided in amounts
ACCOUNTING POLICIES sufficient to give effect to temporary differences
CONTINUED between financial and tax reporting, principally
related to net operating loss carryforwards,
depreciation, impairment of intangible assets, stock
compensation expense, and accrued liabilities.
STOCK - BASED COMPENSATION
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-10
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION The following table is a reconciliation of basic
AND SIGNIFICANT earnings per share for the years ended December 31,
ACCOUNTING POLICIES 2007 and 2006.
CONTINUED
YEARS ENDED DECEMBER 31,
--------------------------
2007 2006
--------------------------
Basic weighted average
shares outstanding 264,736,000 175,034,000
Net loss (1,731,000) (1,199,000)
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.
--------------------------------------------------------------------------------
F-11
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION CONCENTRATION OF RISK
AND SIGNIFICANT The market for ophthalmic lasers is subject to rapid
ACCOUNTING POLICIES technological change, including advances in laser and
CONTINUED other technologies and the potential development of
alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved
products, processes or technologies may make products
developed by the Company obsolete or less competitive.
The Company's high technology product line requires
the Company to deal with suppliers and subcontractors
supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and
performing highly technical calculations and tasks.
Although there are a limited number of suppliers and
manufacturers that meet the standards required of a
regulated medical device, management believes that
other suppliers and manufacturers could provide
similar components and services.
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.
--------------------------------------------------------------------------------
F-12
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION
AND SIGNIFICANT WARRANTY ACCRUALS
ACCOUNTING POLICIES YEARS ENDED DECEMBER 31,
CONTINUED --------------------------
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
==========================
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.
--------------------------------------------------------------------------------
F-13
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION DERIVATIVE FINANCIAL INSTRUMENTS (RESTATED)
AND SIGNIFICANT The Company's derivative financial instruments consist
ACCOUNTING POLICIES of embedded derivatives related to the Secured
CONTINUED 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, and the
variable interest feature. Based on the complex nature
of these terms 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:
o Stock Price: This is the stock price as of the
respective valuation date.
o 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-14
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION o Volatility: Volatility is a measure of the
AND SIGNIFICANT standard deviation of the stocks continuously
ACCOUNTING POLICIES compounded return over the life of the security.
CONTINUED 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.
o 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%.
o Time to Maturity: The time to maturity is
measured based on the remaining term of the
security as of the valuation date.
o 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
--------------------------------------------------------------------------------
F-15
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
1. ORGANIZATION on average the lowest trading price in any 20-day
AND SIGNIFICANT period during the time period analyzed was
ACCOUNTING POLICIES approximately 70% of the closing price. We used
CONTINUED 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.
o 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.
o Trading Liquidity: We assumed that adequate stock
trading liquidity is available for the Investors
to sell converted / exercised shares.
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-16
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
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 CERTAIN Receivables
BALANCE SHEET Trade Receivables $ 733,000
ACCOUNTS Allowance for doubtful accounts (109,000)
-------------
$ 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-17
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
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)
-------------
$ -
=============
--------------------------------------------------------------------------------
F-18
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
5. LEASE OBLIGATIONS Amortization expense on assets under capital leases
CONTINUED 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.
6. INCOME TAXES 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 $ 588,000 $ 408,000
NOL adjustment -
Taxable temporary
differences (16,700) (22,000)
Deductible temporary
differences 374,000 38,000
Non-deductible expenses (151,600) (172,000)
Change in valuation
allowance (793,700) (252,000)
--------------------------
$ - $ -
==========================
--------------------------------------------------------------------------------
F-19
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
6. INCOME TAXES Deferred tax assets (liabilities) are comprised of the
CONTINUED following:
--------------------------
2007 2006
--------------------------
Net operating loss
carryforward $15,887,700 $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
--------------------------
18,008,700 17,215,000
Valuation allowance (18,008,700) (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 $55.8 million. 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.
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 $.001 par value. The Series A Preferred Stock has
the following rights and privileges:
--------------------------------------------------------------------------------
F-20
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK 1. The holders of the shares are entitled to
CONTINUED dividends at the rate of twenty-four cents ($.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.
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
--------------------------------------------------------------------------------
F-21
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK any accrued and unpaid dividends related to the fiscal
CONTINUED 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:
1. The holders of the shares are entitled to
dividends at the rate of 12% per share per annum
of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend payments from one year are not carried
forward to the next year.
2. Upon the liquidation of the Company, the holders
of the Series C Preferred Stock are entitled to
receive an amount per share equal to the greater
of (a) the amount they would have received if they
had converted the shares into shares of Common
Stock immediately prior to such liquidation plus
declared but unpaid dividends; or (b) the stated
value, subject to adjustment.
3. Each share was convertible, at the option of the
holder at any time until January 1, 2002, into
approximately 57.14 shares of common stock at an
initial conversion price, subject to adjustments
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.75 per share of common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-22
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK SERIES D PREFERRED STOCK
CONTINUED 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.
4. The holders of the shares have no voting
rights.
--------------------------------------------------------------------------------
F-23
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK SERIES E PREFERRED STOCK
CONTINUED 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.
4. The holders of the shares have no voting rights.
5. The holders of the shares also were issued
warrants to purchase shares of common stock equal
to 1,000 warrants for every 200 shares purchased
at an exercise price of $4.00 per share. Each
warrant is exercisable until May 23, 2006.
--------------------------------------------------------------------------------
F-24
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK SERIES F PREFERRED STOCK
CONTINUED 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.
3. Each share is convertible, at the option of the
holder at any time until January 1, 2005, into
approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment
for stock splits, stock dividends and certain
combination or recapitalization of the common
stock, equal to $1.875 per share of common stock.
The Series F Preferred Stock shall be converted
into Common Stock subject to adjustment (a) on
January 1, 2005 or (b) upon 30 days written notice
by the Company to the holders of the Shares, at
any time after (i) the 30-day anniversary of the
registration statement on which the shares of
Common Stock issuable upon conversion of the
Series F Preferred Stock were registered and (ii)
the average closing price of the Common Stock for
the 20-day period immediately prior to the date on
which notice of redemption is given by the Company
to the holders of the Series F Preferred Stock is
at least $3.50 per share. The Company in 2001
recorded $1,105,000 as a beneficial conversion
feature related to the differences in the
conversion price of the preferred stock to common
stock.
--------------------------------------------------------------------------------
F-25
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
4. The holders of the shares have no voting rights.
7. CAPITAL STOCK SERIES G PREFERRED STOCK
CONTINUED 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.
3. Each share is convertible, at the option of the
holder at any time until August 1, 2005, into 1
share of common stock at an initial conversion
price, subject to adjustment for dividends, equal
to one share of common stock for each share of
Series G Preferred Stock. The Series G Preferred
Stock shall be converted into common stock subject
to adjustment (a) on August 1, 2005 or (b) upon 30
days written notice by the Company to the holders
of the shares, at any time after (i) the 30-day
anniversary of the registration statement on which
the shares of common stock issuable upon
conversion of the Series G Preferred Stock were
registered and (ii) the average closing price of
the common stock for the 15-day period immediately
prior to the date in which notice of redemption is
given by the Company to the holders of the Series
G Preferred Stock is at least $.50 per share. In
2003, the Company recorded a beneficial conversion
feature of $217,000 related to the differences in
the conversion price of the preferred stock to
common stock.
4. The holders of the shares have no voting rights.
--------------------------------------------------------------------------------
F-26
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
7. CAPITAL STOCK The following table summarizes preferred stock
CONTINUED activity during the years ended December 31, 2007 and
2006:
SERIES A SERIES B SERIES C SERIES D
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Balance at January 1, 2006 5,627 $ - 8,986 $ - - $ - 5,000 $ -
Issuance of Series G
preferred stock for cash - - - - - - - -
Conversion of preferred stock - - - - - - - -
--------------------------------------------------------------------------------------
Balance at December 31, 2006 5,627 - 8,986 - - - 5,000 -
Issuance of Series G
preferred stock for cash - - - - - - - -
Conversion of preferred stock - - - - - - - -
--------------------------------------------------------------------------------------
Balance at December 31, 2007 5,627 $ - 8,986 $ - - $ - 5,000 $ -
--------------------------------------------------------------------------------------
Authorized 500,000 500,000 30,000 1,140,000
--------------------------------------------------------------------------------------
Liquidation preference $6,000 $36,000 $ - $9,000
--------------------------------------------------------------------------------------
SERIES E SERIES F SERIES G
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Balance at January 1, 2006 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 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 250 $ - 4,398.75 $ - 588,235 $ 1,000
-------------------------------------------------------------
Authorized 50,000 50,000 2,000,000
-------------------------------------------------------------
Liquidation preference $13,000 $235,000 $147,000
-------------------------------------------------------------
--------------------------------------------------------------------------------
F-27
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES CONVERTIBLE NOTES (RESTATED)
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:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after the
Company filed a registration statement on June 22,
2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise
of warrants; and
o $850,000 was disbursed on June 30, 2005, the
effective date of the registration statement.
Under the terms of the securities purchase agreement,
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 The $2,500,000 in convertible notes bear interest at
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-29
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES underlying the warrants are not registered pursuant to
CONTINUED 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.
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:
o $500,000 was disbursed on February 28, 2006;
o $500,000 was disbursed on June 28, 2006 after the
Company filed a registration statement on June 15,
2006 to register the shares of common stock 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.
o $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 Under the terms of the securities purchase agreement,
CONTINUED 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 The convertible notes are secured by the Company's
CONTINUED 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.
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.
--------------------------------------------------------------------------------
F-32
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES JUNE 11, 2007 SALE OF $500,000 IN CALLABLE SECURED
CONTINUED CONVERTIBLE NOTES: To obtain further funding for the
Company's ongoing operations, the Company entered into
a third securities purchase agreement on June 11, 2007
with the same four accredited investors for the sale
of (i) $500,000 in callable secured convertible notes
and (ii) warrants to purchase 10,000,000 shares of its
common stock. The investors disbursed $500,000 to the
Company on June 11, 2007.
Under the terms of the June 11, 2007 securities
purchase agreement, the Company agreed that it would
not, without the prior written consent of a
majority-in-interest of the investors, negotiate or
contract with any party to obtain additional equity
financing (including debt financing with an equity
component) that involves (i) the issuance of common
stock at a discount to the market price of the common
stock on the date of issuance (taking into account the
value of any warrants or options to acquire common
stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an
indeterminate number of shares of common stock, or
(iii) the issuance of warrants during the lock-up
period beginning June 11, 2007 and ending on the later
of (a) 270 days from June 11, 2007, or (b) 180 days
from the date the registration statement is declared
effective.
In addition, the Company agreed not to conduct any
equity financing (including debt financing with an
equity component) during the period beginning June 11,
2007 and ending two years after the end of the above
lock-up period unless it first provided each investor
an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities
purchase agreement) of the securities being offered in
any proposed equity financing. Each investor must be
provided written notice describing any proposed equity
financing at least 20 business days prior to the
closing of such proposed equity financing and the
option must be extended to each investor during the
15-day period following delivery of such notice.
The $500,000 in convertible notes bear interest at 8%
per annum from the date of issuance. Interest is
computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for
any month in which the stock price is greater than
125% of the initial market price, or $.0275, for each
trading day during that month. Any amount of principal
or interest on the callable secured convertible notes
--------------------------------------------------------------------------------
F-33
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES that is not paid when due will bear interest at the
CONTINUED 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.
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.
--------------------------------------------------------------------------------
F-34
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES The noteholders have agreed to restrict their ability
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-35
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES stock on the date of issuance (taking into account the
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-36
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES outstanding convertible notes at any time, provided
CONTINUED 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.
--------------------------------------------------------------------------------
F-37
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES The Company is required to register the shares of its
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-38
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES outstanding convertible notes at any time, provided
CONTINUED 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 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 treading days of that calendar month,
per calendar month.
The Notes include certain features that are considered
embedded derivative financial instruments. These
features are described below, as follows:
o The fixed conversion feature which allows the
investor to convert the Notes at a fixed price
per share;
o 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;
o 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;
o The value of the warrants issued in conjunction
with each funding.
--------------------------------------------------------------------------------
F-39
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES The initial fair value assigned to the embedded
CONTINUED 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 $339,000, net of the unamortized debt
discount of $1,699,000. Interest expense on the Notes
totaled $1,171,000 for the period ended December 31,
2005, which consisted of $462,000 related to the
conversion of a portion of the Notes into 66,880,000
shares of the Company's common stock. The remaining
$709,000 recorded as interest expense, consisted of
$339,000 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-40
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES As of December 31, 2006, the carrying amount on the
CONTINUED Notes was $1,367,000, net of the unamortized debt
discount of $1,288,000. Interest expense on the Notes
totaled $1,159,000 for the period ended December 31,
2006, which consisted of $383,000 related to the
conversion of a portion of the Notes into 105,570,000
shares of the Company's common stock. The remaining
$776,000 recorded as interest expense, consisted of
$569,000 of normal accretion of the Note discount, and
$207,000 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
$570,000 during the year ended December 31, 2006,
which consists of a decrease in the fair value of the
embedded derivatives of $485,000 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 $570,000 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 $3,039,000, net of the unamortized debt discount
of $889,000. Interest expense on the Notes totaled
$1,084,000 for the period ended December 31, 2007,
which consisted of $366,000 related to the conversion
of a portion of the Notes into 343,017,000 shares of
the Company's common stock. The remaining $718,000
recorded as interest expense, consisted of $499,000 on
normal accretion of the Note discount, and $219,000 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 $418,000 during
the year ended December Accordingly, the Company
recorded a 31, 2007, which consists of a decrease in
the fair value of the embedded derivatives of $444,000
and the fair value of the warrants of $22,000.gain on
derivative valuation to the statement of operations of
$418,000 for the year ended December 31, 2007.
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
--------------------------------------------------------------------------------
F-41
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
8. CONVERTIBLE NOTES shares of the Company's common stock. The lower the
CONTINUED 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 The Option Plan provides for the grant of incentive
AND WARRANTS 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:
o 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.
o 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:
o 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.
o 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.
--------------------------------------------------------------------------------
F-42
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
9. STOCK OPTION PLAN o Warrants to purchase 15,000,000 shares of
AND WARRANTS common stock at an exercise price of
CONTINUED $0.001 per share in return for the sale
of callable secure convertible notes,
exercisable through December 24, 2014.
o 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.
A schedule of the options and warrants is 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-43
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
9. STOCK OPTION The fair value of each option and warrant grant,
PLAN AND outside of those granted in conjunction with the Notes
WARRANTS are estimated at the date of grant using the
CONTINUED 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 Due to the Company's ongoing cash flow difficulties,
OF LIABILITIES 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 A law firm, of which the chairman of the board of
TRANSACTIONS directors of the Company is a shareholder, has
rendered legal services to the Company. The Company
paid this firm $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-44
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
12. SUPPLEMENTAL During the year ended December 31, 2007, the Company:
FLOW CASH
INFORMATION o 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 In accordance with Paragraph 38(a) of SFAS 131
(RESTATED) "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.
Total sales include export sales by major geographic
area as follows:
--------------------------------------------------------------------------------
F-45
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
-------------------------------------------------------------------------------------------------
13. EXPORT SALES Years Ended December 31,
CONTINUED ----------------------------------
GEOGRAPHIC AREA 2007 2006
----------------------------------
EUROPE:
Belgium $ - $ 650
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 719,811 666,340
-------------- --------------
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
-------------- --------------
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 894758
-------------- --------------
SUB TOTAL 681,629 1,000,960
-------------- --------------
-------------------------------------------------------------------------------------------------
F-46
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
-------------------------------------------------------------------------------------------------
13. EXPORT SALES
CONTINUED 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-47
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
13. EXPORT SALES
CONTINUED --------------------- ------------------------------------------- -------------- --------------
PRODUCT MODEL 2,006 2,007
--------------------- ------------------------------------------- -------------- --------------
Humphrey Systems: P55 & A/Pachymeter (P55), A/B Scan (P37) (314,227) (548,902)
MEDA Systems P2000, P2200, P2500, P2700, P3700 14% 29%
Dicon diagnostic: Perimeter and corneal topographer (855,800) (388,179)
LD, TKS, CT 39% 21%
UBM biomicroscope: (546,793) (512,644)
P40, P45, P60 25% 27%
Blood Flow Analyzer: (210,929) (256,511)
BFA 10% 14%
-----------------------------
SUB-TOTAL (1,927,748) (1,706,236)
-----------------------------
1 1
Cataract removal sales (Precisionist and SIStem) 5,856 -
PHO, SIS (Surgical) 0% 0%
Service, parts, disposables, and other (273,577) (165,318)
12% 9%
-----------------------------
TOTAL YTD SALES (2,195,469) (1,871,554)
=============================
100% 100%
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 AGREEMENTS
AND On June 12, 2006, the Company entered into a Worldwide
CONTINGENCIES 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
--------------------------------------------------------------------------------
F-48
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
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 Contingencies 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.
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
--------------------------------------------------------------------------------
F-49
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
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
Contingencies agreement is not reached within 120 days
after the end of the three year Continued 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, 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
--------------------------------------------------------------------------------
F-50
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
15. COMMITMENTS abnormalities within the eye) and the P37-II (a more
AND advanced AB/Scan used to provide portability for
CONTINGENCIES ophthalmology veterinary applications) and the P50
CONTINUED 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 7.5% 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.
--------------------------------------------------------------------------------
F-51
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
15. COMMITMENTS LEGAL PROCEEDINGS
AND On December 27, 2007, the Company entered into a
CONTINGENCIES settlement agreement with Larry Hicks to settle the
CONTINUED 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(TM)
laser system has been sold and no systems returned.
Thus, the amount of royalties due, according to the
Company's calculations, is $981. The Company made
payment of this amount to Photomed and Dr. Eichenbaum
on January 5, 2005 and, as a result, seeks to have the
legal action dismissed. However, if the parties are
unable to agree on a method for calculating royalties,
there is a risk that PhotoMed and Dr. Eichenbaum might
amend their complaint to request termination of the
license agreement and, if successful, the Company
would lose its right to manufacture and sell the
Photon(TM) laser system.
An action was filed on June 20, 2003, in the Third
--------------------------------------------------------------------------------
F-52
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
15. COMMITMENTS Judicial District Court, Salt Lake County, State of
AND Utah (Civil No. 030914195) by CitiCorp Vendor Finance,
CONTINGENCIES Inc., formerly known as Copelco Capital, Inc. The
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-53
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
15. COMMITMENTS tender offer shall be made and consummated for the
AND ownership of more than 25% of the Company's
CONTINGENCIES outstanding shares; (ii) the Company shall be merged
CONTINUED 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.
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.
--------------------------------------------------------------------------------
F-54
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
15. COMMITMENTS In addition, the board resolutions provided that the
AND Company was to issue to Mr. Hemmer warrants to
CONTINGENCIES purchase 125,000 shares of common stock at $2.63 per
CONTINUED 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.
16. RECENT RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING In September 2006, the Financial Accounting Standards
PRONOUNCE- Board issued Statement of Financial Accounting
MENTS 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
--------------------------------------------------------------------------------
F-55
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
16. RECENT Board issued Statement of Financial Accounting
ACCOUNTING Standards No. 157, "Fair Value Measurements" ("SFAS
PRONOUNCE- 157"), which defines fair value, establishes a
MENTS framework for measuring fair value in generally
CONTINUED 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.
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
--------------------------------------------------------------------------------
F-56
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
16. RECENT recognized servicing assets and servicing liabilities
ACCOUNTING to be initially measured at fair value, if
PRONOUNCE- practicable, and permits an entity to choose either
MENTS the amortization or fair value method for subsequent
CONTINUED 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 Continued 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.
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
--------------------------------------------------------------------------------
F-57
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
16. RECENT entity has not yet issued any financial statements for
ACCOUNTING that fiscal year. Management believes SFAS 155 will
PRONOUNCE- have no impact on the financial statements of the
MENTS Company once adopted.
CONTINUED
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 16.
Recent interests, which will be recharacterized as
noncontrolling interests and Accounting classified as
a component of equity. This new consolidation method
will Pronounce- significantly change the accounting
for transactions with minority interest ments holders.
SFAS 160 is effective for us on January 1, 2009, and
is not Continued expected to have a material effect on
our 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 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.
--------------------------------------------------------------------------------
F-58
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
17. SUBSEQUENT SUBSEQUENT EVENTS
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 Analyzer(TM). 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(TM).
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
--------------------------------------------------------------------------------
F-59
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
17. SUBSEQUENT agreement for continuation of the agreement is not
EVENTS reached within 120 days thereafter, the agreement will
CONTINUED 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-60
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------
18. RESTATEMENT We have restated our annual financial statements for
AND the years ended December 31, 2006 and 2005, and our
RECLASSIFICA- quarterly financial statements for the quarter ended
TION March 31, June 30, and September 30, 2007 and 2006,
respectively. These restatements have been performed
to reflect issues identified during a regulatory
review of our financial statements associated with a
filing with the SEC. Management and the board of
directors concluded these restatements were necessary
to reflect the changes described below.
o 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."
o 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-61
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
----------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
DECEMBER 31, 2005 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 $1,699,000 2,038,000 339,000 (1,699,000) a
Derivative liabilities - 195,000 195,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,038,000 534,000 (1,504,000)
--------------- --------------- ---------------
Total liabilities 3,215,000 1,711,000 (1,504,000)
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 58,086,000 (2,500,000) c
Accumulated deficit (62,196,000) (58,192,000) 4,004,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (1,513,000) (9,000) 1,504,000
--------------- --------------- ---------------
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-62
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
TWELVE MONTHS ENDED DECEMBER 31, 2005 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 - (801,000) (801,000) 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) 795,000 4,004,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (5,389,000) (1,385,000) 4,004,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (5,389,000) $ (1,385,000) $ 4,004,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.13) $ (0.03) $ 0.11
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.13) $ (0.03) $ 0.10
=============== =============== ===============
Weighted average common shares - basic 42,033,000 42,033,000 -
--------------- --------------- ---------------
Weighted average common shares - diluted 42,942,000 42,033,000 -
=============== =============== ===============
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-63
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
DECEMBER 31, 2005 REPORTED AS RESTATED CHANGE
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,389,000) $ (1,385,000) $ 4,004,000 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 2,009,000 801,000 (1,208,000) 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-64
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
MARCH 31, 2006 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 $1,741,000 2,343,000 602,000 (1,741,000) a
Derivative liabilities - 816,000 816,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,343,000 1,418,000 (925,000)
=============== =============== ===============
Total liabilities 3,512,000 2,587,000 (925,000)
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 58,238,000 (3,000,000) c
Accumulated deficit (62,952,000) (59,027,000) 3,925,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (1,552,000) (627,000) 925,000
--------------- --------------- ---------------
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-65
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED MARCH 31, 2006 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 - (349,000) (349,000) b
Gain and loss on derivative valuation - (230,000) (230,000) c
Interest expense (3,000) (47,000) (44,000) d
--------------- --------------- ---------------
Total other income (expense) (545,000) (624,000) (79,000)
--------------- --------------- ---------------
Income (loss) before provision for income taxes (756,000) (835,000) (79,000)
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (756,000) $ (835,000) $ (79,000)
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ (0)
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ (0)
=============== =============== ===============
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-66
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
MARCH 31, 2006 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (756,000) $ (835,000) $ (79,000) 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 - 230,000 230,000 b
Beneficial conversion interest 482,000 349,000 (133,000) 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-67
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
JUNE 30, 2006 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 $1,579,000 2,670,000 1,091,000 (1,579,000) a
Derivative liabilities - 440,000 440,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,670,000 1,531,000 (1,139,000)
--------------- --------------- ---------------
Total liabilities 3,909,000 2,770,000 (1,139,000)
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 58,373,000 (3,500,000) c
Accumulated deficit (63,705,000) (59,066,000) 4,639,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (1,634,000) (495,000) 1,139,000
--------------- --------------- ---------------
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-68
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED JUNE 30, 2006 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 - (312,000) (312,000)b
Gain and loss on derivative valuation - 526,000 526,000 c
Interest expense (1,000) (54,000) (53,000)d
--------------- --------------- ---------------
Total other income (expense) (554,000) 160,000 714,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (755,000) (41,000) 714,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (755,000) $ (41,000) $ 714,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.00) $ (0.00) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.00) $ (0.00) $ 0
=============== =============== ===============
Weighted average common shares - basic 175,402,000 175,402,000 -
--------------- --------------- ---------------
Weighted average common shares - diluted 175,402,000 175,402,000 -
=============== =============== ===============
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-69
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
SIX MONTHS ENDED JUNE 30, 2006 REPORTED AS RESTATED CHANGE
--------------- --------------- ---------------
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 - (661,000) (661,000) b
Gain and loss on derivative valuation - 296,000 296,000 c
Interest expense (4,000) (101,000) (97,000) d
--------------- --------------- ---------------
Total other income (expense) (1,099,000) (464,000) 635,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,511,000) (876,000) 635,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,511,000) $ (876,000) $ 635,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ 0
=============== =============== ===============
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-70
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
JUNE 30, 2006 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,511,000) $ (876,000) $ 635,000 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 - (296,000) (296,000) b
Beneficial conversion interest 964,000 661,000 (303,000) 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-71
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
SEPTEMBER 30, 2006 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 $1,431,000 2,660,000 1,229,000 (1,431,000) a
Derivative liabilities - 383,000 383,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,660,000 1,612,000 (1,048,000)
=============== =============== ===============
Total liabilities 3,789,000 2,741,000 (1,048,000)
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 58,381,000 (3,500,000) c
Accumulated deficit (64,019,000) (59,471,000) 4,548,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (1,937,000) (889,000) 1,048,000
--------------- --------------- ---------------
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-72
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED SEPTEMBER 30, 2006 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 - (148,000) (148,000) 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) (109,000) (90,000)
--------------- --------------- ---------------
Income (loss) before provision for income taxes (315,000) (405,000) (90,000)
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (315,000) $ (405,000) $ (90,000)
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.00) $ (0.00) $ (0)
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.00) $ (0.00) $ (0)
=============== =============== ===============
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-73
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
NINE MONTHS ENDED SEPTEMBER 30, 2006 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 - (809,000) (809,000) b
Gain and loss on derivative valuation - 353,000 353,000 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) (574,000) 544,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,826,000) (1,282,000) 544,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,826,000) $ (1,282,000) $ 544,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ 0
=============== =============== ===============
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-74
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
SEPTEMBER 30, 2006 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,826,000) $ (1,282,000) $ 544,000 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 - (353,000) (353,000) b
Beneficial conversion interest 964,000 809,000 (155,000) 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-75
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
DECEMBER 31, 2006 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 $1,288,000 2,655,000 1,367,000 (1,288,000) a
Derivative liabilities - 166,000 166,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,655,000 1,533,000 (1,122,000)
=============== =============== ===============
Total liabilities 3,857,000 2,735,000 (1,122,000)
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 58,384,000 (3,500,000) c
Accumulated deficit (64,012,000) (59,390,000) 4,622,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (1,925,000) (803,000) 1,122,000
--------------- --------------- ---------------
Total liabilities and stockholders' (Deficit) $ 1,932,000 $ 1,932,000 $ -
=============== =============== ===============
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-76
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
TWELVE MONTHS ENDED DECEMBER 31, 2006 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 - (952,000) (952,000) b
Gain and loss on derivative valuation - 570,000 570,000 c
Interest expense (7,000) (214,000) (207,000) d
--------------- --------------- ---------------
Total other income (expense) (1,105,000) (487,000) 618,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,816,000) (1,198,000) 618,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,816,000) $ (1,198,000) $ 618,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ 0
=============== =============== ===============
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-77
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
DECEMBER 31, 2006 REPORTED AS RESTATED CHANGE
--------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (1,816,000) $ (1,198,000) $ 618,000 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 - (570,000) (570,000) b
Beneficial conversion interest 964,000 952,000 (12,000) 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-78
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
MARCH 31, 2007 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 $1,148,000 2,653,000 1,505,000 (1,148,000) a
Derivative liabilities - 1,181,000 1,181,000 b
--------------- --------------- ---------------
Total long-term liabilities 2,653,000 2,686,000 33,000
=============== =============== ===============
Total liabilities 3,946,000 3,979,000 33,000
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 58,383,000 (3,500,000) c
Accumulated deficit (64,260,000) (60,793,000) 3,467,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (2,172,000) (2,205,000) (33,000)
--------------- --------------- ---------------
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-79
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED MARCH 31, 2007 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 - (139,000) (139,000) 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) (1,205,000) (1,153,000)
--------------- --------------- ---------------
Income (loss) before provision for income taxes (248,000) (1,401,000) (1,153,000)
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (248,000) $ (1,401,000) $ (1,153,000)
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.00) $ 0.00 $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.00) $ 0.00 $ 0
=============== =============== ===============
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-80
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
MARCH 31, 2007 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (248,000) $ (1,401,000) $ (1,153,000) 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 - 139,000 139,000 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-81
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
JUNE 30, 2007 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 $1,355,000 3,589,000 2,234,000 (1,355,000) a
Derivative liabilities - 832,000 832,000 b
--------------- --------------- ---------------
Total long-term liabilities 3,589,000 3,066,000 (523,000)
=============== =============== ===============
Total liabilities 4,932,000 4,409,000 (523,000)
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 58,435,000 (4,500,000) c
Accumulated deficit (65,762,000) (60,739,000) 5,023,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (2,609,000) (2,086,000) 523,000
--------------- --------------- ---------------
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-82
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED JUNE 30, 2007 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 - (197,000) (197,000) b
Gain and loss on derivative valuation - 752,000 752,000 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) 536,000 1,555,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,502,000) 53,000 1,555,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,502,000) $ 53,000 $ 1,555,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ 0.00 $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ 0.00 $ 0
=============== =============== ===============
Weighted average common shares - basic 206,228,000 206,228,000 -
--------------- --------------- ---------------
Weighted average common shares - diluted 206,228,000 206,228,000 -
=============== =============== ===============
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-83
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
SIX MONTHS ENDED JUNE 30, 2007 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 - (337,000) (337,000) b
Gain and loss on derivative valuation - (262,000) (262,000) 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) (669,000) 401,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,748,000) (1,347,000) 401,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,748,000) $ (1,347,000) $ 401,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ 0
=============== =============== ===============
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-84
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
JUNE 30, 2007 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,748,000) $ (1,346,000) $ 402,000 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 - 262,000 262,000 b
Beneficial conversion interest 939,000 336,000 (603,000) 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-85
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET AS PREVIOUSLY
SEPTEMBER 30, 2007 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 $1,099,000 3,455,000 2,355,000 (1,100,000) a
Derivative liabilities - 228,000 228,000 b
--------------- --------------- ---------------
Total long-term liabilities 3,455,000 2,583,000 (872,000)
=============== =============== ===============
Total liabilities 4,877,000 4,005,000 (872,000)
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 58,505,000 (4,500,000) c
Accumulated deficit (65,996,000) (60,624,000) 5,372,000 d
--------------- --------------- ---------------
Total stockholders' (Deficit) (2,709,000) (1,837,000) 872,000
--------------- --------------- ---------------
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 properly accounting for embedded derivatives
------------------------------------------------------------------------------------------------------------------------
F-86
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
THREE MONTHS ENDED SEPTEMBER 30, 2007 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 - (255,000) (255,000) b
Gain and loss on derivative valuation - 605,000 605,000 c
Interest expense (1,000) (71,000) (70,000) d
--------------- --------------- ---------------
Total other income (expense) (68,000) 282,000 350,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (234,000) 116,000 350,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (234,000) $ 116,000 $ 350,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.00) $ 0.00 $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.00) $ 0.00 $ 0
=============== =============== ===============
Weighted average common shares - basic 247,755,000 247,755,000 -
--------------- --------------- ---------------
Weighted average common shares - diluted 247,755,000 247,755,000 -
=============== =============== ===============
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-87
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS AS PREVIOUSLY
NINE MONTHS ENDED SEPTEMBER 30, 2007 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 - (592,000) (592,000) b
Gain and loss on derivative valuation - 342,000 342,000 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) (388,000) 750,000
--------------- --------------- ---------------
Income (loss) before provision for income taxes (1,984,000) (1,234,000) 750,000
Provision for income taxes - - -
--------------- --------------- ---------------
Net (loss) $ (1,984,000) $ (1,234,000) $ 750,000
=============== =============== ===============
Earnings (loss) per common share - basic $ (0.01) $ (0.01) $ 0
--------------- --------------- ---------------
Earnings (loss) per common share - diluted $ (0.01) $ (0.01) $ 0
=============== =============== ===============
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-88
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
------------------------------------------------------------------------------------------------------------------------
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS AS PREVIOUSLY
SEPTEMBER 30, 2007 REPORTED AS RESTATED CHANGE
(Unaudited) --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,984,000) $ (1,233,000) $ 751,000 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 - (343,000) (343,000) b
Beneficial conversion interest 939,000 592,000 (347,000) 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-89
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 8A. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based
upon that evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective and adequately
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms.
During the fourth fiscal quarter, there has been no change in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
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
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
39
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 from 2000
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.
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
40
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, 20076. 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 $100,000 for the fiscal years ended December
31, 2007, 2006 and 2005.
Summary Compensation Table
Change in
Pension
Value and
Non-Equity Non-qualified
Incentive Deferred
Plan Compen- All Other
Name and Stock Option Compen- sation Compen-
Principal Position Year Salary$ Bonus($) Awards Awards($) sation Earnings sation Total
------------------ ---- ------- -------- ------ --------- ------ -------- ------ -----
Raymond P.L. 2007 $143,330 - - - - - - $143,330
Cannefax President 2006 127,940 - - - - - - 127,940
and Chief Executive 2005 64,285 - - - - - - 64,285
Officer(1)
----------------------
(1) Mr. Cannefax has served as President and Chief Executive Officer
since January 5, 2006.
41
Supplemental All Other Compensation Table
Registrant
Contribu- Dividends
Perks tions to or
and Payments/ Defined Earnings
Other Tax Discounted Accruals Contribu- on Stock
Personal Reimburse- Securities on Termin- tion Insurance or Option
Name Year Benefits ments Purchases ation Plans Plans Premiums Awards Other
---- ---- -------- ----- --------- ----------- ----- -------- ------ -----
Raymond P.L. 2007 - - - - - - - -
Cannefax 2006 - - - - - - - -
2005 - - - - - - - -
Grants of Plan-Based Awards
Estimated Future Payouts Under Estimated Future Payouts
Non-Equity Incentive Plan Under Equity Incentive Plan
Awards Awards
All Other
All Other Option
Stock Awards:
Awards: Number of Exercise
Number of Securities or Base
Shares of Under- Price of
Stock or lying Option
Grant Threshold Target Maximum Threshold Target Maximum Units Options Awards
Name Date ($) ($) ($) (#) (#) ($) (#) (#) ($/Sh)
---- ---- --- ---- --- --- --- --- --- --- ------
Raymond P.L. 5/1/07 - - - - - - - 4,500,000 $.01
Cannefax 1/5/06 - - - - - - - 4,500,000 $.01
42
Outstanding Equity Awards At Fiscal Year End
Equity
Equity Incentive
Incentive Plan
Plan Awards:
Awards Market or
Equity Number of Payout
Incentive Market Unearned Value of
Number of Pan Awards Number Value of Shares, Unearned
Number of Securities Number of of Shares or Units or Shares,
Securities Underlying Securities Shares or Units of Other Units or
Underlying Unexercised Underlying Units of Stock Rights Other
Unexercised Options: Unexercised Option Stock That Have That Have Rights That
Options (#) Unearned Exercise Option Held That Not Not Have Not
(#) Unexer- Options Price Expiration Have Not Vested Vested Vested
Name Exercisable cisable (#) ($) Date Vested(#) ($) (#) ($)
---- ----------- ------- --- --- ---- --------- --- --- ---
Raymond P.L. 0 0 - - - - - - -
Cannefax
Option Exercises and Stock Vested for Fiscal 2007
Option Awards Stock Awards
Number of Value Number of Value
Shares Acquired Realized Shares Acquired Realized
on Exercise on Exercise on Vesting on Vesting
Name (#) ($) (#) ($)
----- ----- ----- ----
Raymond P.L. 0 - 0 -
Cannefax
Pension Benefits for Fiscal 2007
Number of
Years Present Value of
Credited Accumulated Payments During
Service Benefit Last Fiscal Year
Name Plan Name (#) ($) ($)
---- --------- ----- ----- ----
Raymond P.L. None - - -
Cannefax
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.
43
Director Compensation for Fiscal 2007
Change in
Pension Value
Fees and
Earned or Non-Equity Nonqualified
Paid In Stock Option Incentive Plan Deferred All Other
Cash Awards Awards Compensation Compensation Compensation Total
Name ($) ($) ($) ($) Earnings ($) ($)
---- --- --- --- --- -------- --- ---
Keith D. Ignotz 0 - - - - - 0
Randall A. Mackey 0 - - - - - 0
John C. Pingree 0 - - - - - 0
David M. Silver, PhD. 0 - - - - - 0
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.
44
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 (2) 10,000,000 1.3%
Dr. David M. Silver (2) 761,166 *
Randall A. Mackey (2) 725,000 *
Keith D. Ignotz (2) 525,709 *
John C. Pingree (2) 431,500 *
----------
Executive officers and directors
as a group (five persons) 12,443,375 1.6%
-----------------
*Less than 1%.
(1) Unless otherwise indicated, the address of each listed stockholder is
c/o Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake
City, Utah, 84119.
(2) The amounts shown include shares that may be acquired currently, or
within 60 days after 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.
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(1)
3.2 Amended Certificate of Incorporation
3.3 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Series C Convertible Preferred Stock Certificate(3)
4.3 Certificate of the Designations, Powers, Preferences and
Rights of the Series C Convertible Preferred Stock(3)
4.4 Specimen Series D Convertible Preferred Stock Certificate (4)
4.5 Certificate of the Designations, Powers, Preferences and
Rights of the Series D Convertible Preferred Stock (5)
4.6 Certificate of Designations, Powers, Preferences and Rights
of the Series G Convertible Preferred Stock (6)
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 1995 Stock Option Plan (1)
45
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 II, 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 Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to
Registration Statement on Form SB-2, as filed on May 14,
1996.
(3) Incorporated by reference from 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.
46
(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 2007 for 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.
47
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: July 8, 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 July 8, 2008
--------------------------- Officer(Principal Executive
Raymond P.L. Cannefax Officer)
/s/ Randall A. Mackey Chairman of the Board and July 8, 2008
--------------------------- Director
Randall A. Mackey
/s/ David M. Silver Director July 8, 2008
---------------------------
David M. Silver, Ph.D.
/s/ Keith D. Ignotz Director July 8, 2008
---------------------------
Keith D. Ignotz
/s/ John C. Pingree Director July 8, 2008
---------------------------
John C. Pingree
/s/ Luis A. Mostacero Vice President of Finance, July 8, 2008
--------------------------- Treasurer and Chief Financial
Luis A. Mostacero Officer, (Principal Financial
and Accounting Officer)
48
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