pmed10qa20090331.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C.
FORM
10-Q/A
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF
1934
|
For
Quarter Ended March 31, 2009
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF
1934
|
For
the Transition Period From ___ to ___
Commission
File Number: 0-28498
PARADIGM
MEDICAL INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
87-0459536
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
2355
South 1070 West, Salt Lake City, Utah
|
84119
|
(Address
of principal executive office)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (801) 977-8970
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Sections 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x No o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934). Yes o No x
State the number of shares outstanding
of each of the registrant's classes of common equity, as of the latest
practicable date:
Common
Stock, $.001 par value
|
519,251,922
|
Title
of Class
|
Number
of Shares
|
|
Outstanding
as of
|
|
May
14, 2009
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
(Do not
check if a smaller reporting company).
PARADIGM
MEDICAL INDUSTRIES, INC.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2009
INDEX
PART
I - FINANCIAL INFORMATION
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|
|
|
Item
1. Financial Statements
|
1
|
|
|
Condensed
Balance Sheets (unaudited) – March 31, 2009
|
1
|
|
|
Condensed
Statements of Operations (unaudited) for the three months
ended
|
|
March
31, 2009 and March 31, 2008
|
2
|
|
|
Condensed
Statements of Cash Flows (unaudited) for the three months
ended
|
|
March
31, 2009 and March 31, 2008
|
3
|
|
|
Notes
to Condensed Financial Statements (unaudited)
|
4
|
|
|
Item
2. Management's Discussion and Analysis or Plan of
Operation
|
16
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|
|
Item
3. Controls and Procedures
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22
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|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
23
|
|
|
Item
1A. Rick Factors
|
23
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
25
|
|
|
Item
3. Defaults Upon Senior Securities
|
31
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
31
|
|
|
Item
5. Other Information
|
31
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|
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Item
6. Exhibits and Reports on Form 8-K
|
32
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Signature
Page
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34
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PARADIGM
MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$ |
44,000 |
|
|
$ |
27,000 |
|
Receivables,
net
|
|
|
111,000 |
|
|
|
207,000 |
|
Inventories,
net
|
|
|
632,000 |
|
|
|
659,000 |
|
Prepaid
and other assets
|
|
|
30,000 |
|
|
|
16,000 |
|
Total
current assets
|
|
|
817,000 |
|
|
|
909,000 |
|
Property
and equipment, net
|
|
|
10,000 |
|
|
|
11,000 |
|
Goodwill
|
|
|
339,000 |
|
|
|
339,000 |
|
Total
assets
|
|
$ |
1,166,000 |
|
|
$ |
1,259,000 |
|
Liabilities and Stockholders'
(Deficit)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
441,000 |
|
|
$ |
463,000 |
|
Related
party payable
|
|
|
141,000 |
|
|
|
131,000 |
|
Accrued
liabilities
|
|
|
608,000 |
|
|
|
559,000 |
|
Convertible
notes payable, net of debt discount of
$1,000 and $39,000, respectively
|
|
|
1,632,000 |
|
|
|
2,052,000 |
|
Total
current liabilities
|
|
|
2,822,000 |
|
|
|
3,205,000 |
|
Convertible
notes payable, net of debt discount of
$199,000 and $239,000, respectively
|
|
|
1,942,000 |
|
|
|
1,802,000 |
|
Derivative
liabilities
|
|
|
1,000 |
|
|
|
10,000 |
|
Total
long-term liabilities
|
|
|
1,943,000 |
|
|
|
1,812,000 |
|
Total
liabilities
|
|
|
4,765,000 |
|
|
|
5,017,000 |
|
Commitments
and contingencies
|
|
|
- |
|
|
|
- |
|
Stockholders'
(Deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock, authorized:5,000,000 shares, $00l par value
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
|
|
|
|
|
|
Authorized: 500,000
shares; issued and outstanding:
5,627 shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
B
|
|
|
|
|
|
|
|
|
Authorized: 500,000
shares; issued and outstanding:
8,986 shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
C
|
|
|
|
|
|
|
|
|
Authorized: 30,000
shares; issued and outstanding:
zero shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
D
|
|
|
|
|
|
|
|
|
Authorized: 1,140,000
shares; issued and outstanding:
5,000 shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
E
|
|
|
|
|
|
|
|
|
Authorized: 50,000
shares; issued and outstanding:
250 shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
F
|
|
|
|
|
|
|
|
|
Authorized: 50,000
shares; issued and outstanding:
4,398.75 shares at March 31, 2009
|
|
|
- |
|
|
|
- |
|
Series
G
|
|
|
|
|
|
|
|
|
Authorized: 2,000,000
shares; issued and outstanding:
588,235 shares at March 31, 2009
|
|
|
1,000 |
|
|
|
1,000 |
|
Common
Stock, Authorized:
|
|
|
|
|
|
|
|
|
1,400,000,000 shares, $.001 par
value; issued and outstanding:
517,901,448 and 15,159,807, respectively
|
|
|
518,000 |
|
|
|
15,000 |
|
Additional
paid-in capital
|
|
|
58,299,000 |
|
|
|
58,359,000 |
|
Accumulated
deficit
|
|
|
(62,417,000 |
) |
|
|
(62,133,000 |
) |
Total
stockholders' (Deficit)
|
|
|
(3,599,000 |
) |
|
|
(3,758,000 |
) |
Total
liabilities and stockholders' (Deficit)
|
|
$ |
1,166,000 |
|
|
$ |
1,259,000 |
|
The
accompanying notes are an integral part to these condensed financial
statements
PARADIGM
MEDICAL INDUSTRIES, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
Sales
|
|
$ |
153,000 |
|
|
$ |
229,000 |
|
Cost
of Sales
|
|
|
71,000 |
|
|
|
142,000 |
|
Gross
Profit
|
|
|
82,000 |
|
|
|
87,000 |
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Sales
and Marketing
|
|
|
(46,000 |
) |
|
|
(183,000 |
) |
General
and administrative
|
|
|
(128,000 |
) |
|
|
(222,000 |
) |
Research
and development
|
|
|
(64,000 |
) |
|
|
(88,000 |
) |
Total
Operating Expense
|
|
|
(238,000 |
) |
|
|
(493,000 |
) |
Operating
Income (Loss)
|
|
|
(156,000 |
) |
|
|
(406,000 |
) |
Other
Income and (Expenses):
|
|
|
|
|
|
|
|
|
Interest
expense - accretion of debt discount
|
|
|
(62,000 |
) |
|
|
(185,000 |
) |
Gain/(loss)
on derivative valuation
|
|
|
8,000 |
|
|
|
121,000 |
|
Interest
expense
|
|
|
(72,000 |
) |
|
|
(77,000 |
) |
Interest
income
|
|
|
-- |
|
|
|
1,000 |
|
Total
Other Income (Expenses)
|
|
|
(126,000 |
) |
|
|
(140,000 |
) |
Income
(loss) before provision for income
|
|
|
(282,000 |
) |
|
|
(546,000 |
) |
Provision
for income taxes
|
|
|
-- |
|
|
|
-- |
|
Net
loss
|
|
$ |
(282,000 |
) |
|
$ |
(546,000 |
) |
|
|
|
|
|
|
|
|
|
Earnings
(loss) Per Common Share - Basic
|
|
$ |
(0.00 |
) |
|
$ |
(0.08 |
) |
Earnings
(loss) Per Common Share - Diluted
|
|
$ |
(0.00 |
) |
|
$ |
(0.08 |
) |
Weighted
Average Common Share - Basic
|
|
|
155,854,759 |
|
|
|
7,003,904 |
|
Weighted
Average Common Share - Diluted
|
|
|
155,854,759 |
|
|
|
7,003,904 |
|
The
accompanying notes are an integral part to these condensed financial
statements
PARADIGM
MEDICAL INDUSTRIES, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Cash Flows from Operating
Activities:
|
|
2009
|
|
|
2008
|
|
Net
(loss)
|
|
$ |
(282,000 |
) |
|
$ |
(546,000 |
) |
Adjustment
to Reconcile Net Loss to Net
Cash Used In Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,000 |
|
|
|
2,000 |
|
Stock
Option Valuation
|
|
|
-- |
|
|
|
7,000 |
|
Change
in Fair Value of Derivative Liabilities
|
|
|
(9,000 |
) |
|
|
(121,000 |
) |
Beneficial
Conversion Interest
|
|
|
62,000 |
|
|
|
185,000 |
|
(Increase)
Decrease from Changes in:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
96,000 |
|
|
|
195,000 |
|
Inventories
|
|
|
27,000 |
|
|
|
(77,000 |
) |
Prepaid
and Other Assets
|
|
|
(14,000 |
) |
|
|
(9,000 |
) |
Increase
(Decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
(12,000 |
) |
|
|
(1,000 |
) |
Accrued
Liabilities
|
|
|
48,000 |
|
|
|
74,000 |
|
Net
Cash Used in Operating Activities
|
|
|
(83,000 |
) |
|
|
( 291,000 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flow from Investing Activities:
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Issuance of Convertible Notes
|
|
|
100,000 |
|
|
|
- |
|
Net
Cash Provided by Financing Activities
|
|
|
100,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash
|
|
|
17,000 |
|
|
|
(291,000 |
) |
Cash,
Beginning of Period
|
|
|
27,000 |
|
|
|
321,000 |
|
Cash,
End of Period
|
|
|
44,000 |
|
|
|
30,000 |
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
$ |
- |
|
|
$ |
- |
|
Cash
Paid for Income Taxes
|
|
$ |
- |
|
|
$ |
- |
|
Non-Cash
Transaction:
|
|
|
|
|
|
|
|
|
Notes
Converted into Common Stock
|
|
$ |
458,000 |
|
|
$ |
112,000 |
|
The
accompanying notes are an integral part to these condensed financial
statements
PARADIGM
MEDICAL INDUSTRIES, INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Financial Statement
Presentation
The
accompanying condensed financial statements of the Company have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary to
present fairly the results of operations of the Company for the periods
presented. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-K for the year ended December 31, 2008. The
results of operations for the three months ended March 31, 2009, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2009.
On December 5, 2008, the Company’s
shareholders approved a 1-for-100 reverse stock split, which became effective on
December 5, 2008. All references to share and per-share data for all periods
presented in this report have been adjusted to give effect to this reverse
split.
Going
Concern
The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. Historically, the Company has not demonstrated the ability
to generate sufficient cash flows from operations to satisfy its liabilities and
sustain operations, and the Company has incurred significant
losses. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s continuation as a going
concern is dependent on its ability to generate sufficient income and cash flow
to meet its obligations on a timely basis and/or obtain additional financing as
may be required. The Company is actively seeking options to obtain
additional capital and financing.
In addition, the Company has taken
significant steps to reduce costs and increase operating
efficiencies. Specifically, the Company has significantly reduced the
use of consultants, which has resulted in a large decrease in
expenses. In addition, the Company has reduced the number of its
direct sales representatives, which has resulted in less payroll, travel and
other expenses. Although these cost savings have significantly
reduced the Company’s losses and ongoing cash flow needs, if the Company is
unable to obtain equity or debt financing, it may be unable to continue
development of its products and may be required to substantially curtail or
cease operations.
Net Loss Per
Share
Net loss per common share is computed
on the weighted average number of common and common equivalent shares
outstanding during each period. Common stock equivalents consist of convertible
preferred stock, common stock options and warrants. Common Stock equivalent
shares are excluded from the computation when their effect is anti-dilutive.
Other common stock equivalents consisting of options and warrants to purchase
660,094 and 653,344 shares of common stock and preferred stock convertible into
6,125 and 6,125 shares of common stock, and outstanding commitments to issue
shares underlying the convertible notes into 6,290,328,333 and 95,402,350 shares
of common stock at March 31, 2009 and 2008, respectively, have been considered
but have not been included in loss periods because their inclusion would have
been anti-dilutive.
The following table is a
reconciliation of the basic and fully diluted earnings per share for the nine
month periods ended March 31, 2009 and March 31, 2008:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Basic
weighted average shares outstanding
|
|
|
155,854,759 |
|
|
|
7,003,904 |
|
Diluted
weighted average shares outstanding
|
|
|
155,854,759 |
|
|
|
7,003,094 |
|
Net
loss
|
|
$ |
(282,000 |
) |
|
$ |
(566,000 |
) |
Per
share amount basic
|
|
$ |
(0.00 |
) |
|
$ |
(0.08 |
) |
Per
share amount diluted
|
|
$ |
(0.00 |
) |
|
$ |
(0.08 |
) |
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 165,344 shares of its common
stock. The sale of the convertible notes and warrants is to occur in three
traunches and the investors provided the Company with an aggregate of$2,500,000
as follows:
•
|
$850,000
was disbursed on April 27, 2005;
|
•
|
$800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of warrants;
and
|
•
|
$850,000
was disbursed on June 30, 2005, the effective date of the registration
statement. |
Under the
terms of the securities purchase agreement, the Company agreed it would not,
without the prior written consent of a majority-in-interest of the investors,
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (a) 270 days from
April 27, 2005, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning April 27, 2005
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each
investor must be provided written notice describing any proposed
equity financing at least 20 business days prior to the closing of such proposed
equity financing and the option must be extended to each investor during the
15-day period following delivery of such notice.
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 $9.45, 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) $9.00 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. On June 16, 2008, the Company
agreed to reduce the applicable percentage for calculating the conversion price
from 60% to 45% of the average of the three lowest intraday trading prices of
the Company's common stock. The Company agreed to this change as a
condition to receiving further funding for its ongoing operations on June 16,
2008.
The
$2,500,000 in convertible notes are secured by the Company's assets, including
the Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to prepay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the Company's stock is trading at or below $.09 per share. An event
of default includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration statement as required by
the Company or obtain effectiveness with the Securities and Exchange Commission
of the registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60th
day following the issue date of the notes.
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $20 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
registered pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the callable secured convertible notes
issued pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible
notes.
As of
March 31, 2009, there was an outstanding balance of $1,251,405 in principle
remaining on the convertible notes. During the three months ended
March 31, 2009 and 2008, the Company issued 2,229,100 and 2,538,932 shares of
common stock for the conversion of $6,062 and $112,168 of convertible notes,
respectively.
February 28, 2006 Sale of $1,500,000
in Convertible Notes. To obtain additional funding for the Company's
ongoing operations, the Company entered into a second securities purchase
agreement on February 28, 2006 with the same four accredited investors for the
sale of (i) $1,500,000 in convertible notes and (ii) warrants to purchase
120,000 shares of its common stock. The sale of the convertible notes and
warrants is to occur in three traunches and the investors are obligated to
provide the Company with an aggregate of $1,500,000 as follows:
•
|
$500,000
was disbursed on February 28, 2006; |
•
|
$500,000
was disbursed on June 28, 2006 after the Company filed a registration
statement on June 15, 2006 to register the shares of common stock
underlying the convertible notes. The registration statement was
subsequently withdrawn on July 25, 2006 and a new registration statement
was filed on September 15, 2006 to register 60,000,000 shares of common
stock issuable upon conversion of the
notes.
|
•
|
$500,000
was disbursed on April 30, 2007, the day prior to the effective date of
the registration statement on May
1,2007.
|
Under the
terms of the securities purchase agreement, the Company also agreed it would
not, without the prior written consent of a majority-in-interest of the
investors, negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) that involves (i)
the issuance of common stock at a discount to the market price of the common
stock on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning February 28, 2006 and ending on the later of (a) 270 days from
February 28, 2006, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning February 28,
2006 and ending two years after the end of the above lock-up period unless it
first provided each investor an option to purchase its pro rata share (based on
the ratio of each investor's purchase under the securities purchase agreement)
of the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
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 $2.75, 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) $2.00 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
The
$1,500,000 in convertible notes are secured by the Company's assets, including
the Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to prepay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the Company's stock is trading at or below $2.00 per share. An event
of default includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration statement as required by
the Company or obtain effectiveness with the Securities and Exchange Commission
of the registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60`'day following the issue date of the notes.
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $10 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
registered pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, 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.
The
Company received notice from the accredited investors holding convertible notes
dated June 28, 2006 and convertible notes dated April 30, 2007, that
on January 22, 2009, E-Lionheart, LLC and other third parties purchased $500,000
of the convertible notes dated June 28, 2006 and the $500,000 of convertible
notes dated April 30, 2007. The total purchase price of these
convertible notes was $1,514,444. Between February 18, 2009 and March
27, 2009, the third parties converted a total $452,406 of the June
28, 2006 convertible notes at conversion prices ranging from $.0009 to .00105
per share and received a total of 500,511,410 shares of the Company's common
stock pursuant to said conversions.
As of
March 31, 2009, there was an outstanding balance of $881,869 in principle
remaining on the convertible notes. During the three months ended
March 31, 2009 and 2008, the Company issued 500,511,410 and no shares of common
stock for the conversion of $452,406 and $0.00 of convertible notes,
respectively.
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 100,000 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 $2.75, 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) $2.00 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
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 its stock is
trading at or below $10.00 per share. An event of default includes the failure
by the Company to pay the principal or interest on the convertible notes when
due or to timely file a registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made in
cash equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(b) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and60 days following the issue date of the notes; or (c)
145% of the outstanding principal and accrued interest for prepayments occurring
after the 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 $.50 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on June 11, 2007. The registration statement must be filed
with the Securities and Exchange Commission within 60 days of the June 11, 2007
closing date and the effectiveness of the registration is to be within 135days
of such closing date. Penalties of 2% of the outstanding principal balance of
the convertible notes plus accrued interest are to be applied for each month the
registration is not effective within the required time. The penalty may be paid
in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 19, 2007 Issuance of
$389,010 in Callable Convertible Notes: On December 19, 2007, the Company
was notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was $389,010. To pay this interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31, 2010.
Accordingly, on December 19, 2007, the Company issued $389,010 in convertible
notes to the noteholders as full payment of the past due interest.
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. 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) $2.00 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. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
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 $4.00 per share. An event of
default includes the failure by the Company to pay the principal or interest on
the convertible notes when due. Prepayment of the convertible notes is to be
made in cash equal to either (a) 135% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 24, 2007 Sale of $250,000
in Callable Secured Convertible Notes: To obtain further funding for the
Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with the same four accredited investors
for the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 150,000 shares of its common stock. The investors disbursed
$250,000 to the Company on December 24, 2007.
Under the
terms of the December 24, 2007 securities purchase agreement, the Company agreed
that it would not, without the prior written consent of a majority-in-interest
of the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market price of
the common stock on the date of issuance (taking into account the value of any
warrants or options to acquire common stock in connection therewith), (ii) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock, or (iii) the issuance of warrants during the
lock-up period beginning December 24, 2007 and ending on the later of (a) 270
days from December 24, 2007, or (b) 180 days from the date the registration
statement is declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning December24, 2007
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
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 $2.75, 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) $2.00 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
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 $10.00 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 $.10 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on December 24, 2007. The registration statement must be
filed with the Securities and Exchange Commission within 60 days of the December
24, 2007 closing date and the effectiveness of the registration is to be within
135 days of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
June 16, 2008 Sale of $310,000 in
Callable Secured Convertible Notes: To obtain additional
funding for the Company's ongoing operations, the Company entered into a fifth
securities purchase agreement on June 16, 2008 with three accredited investors
for the sale of (i) $310,000 in convertible notes and (ii) warrants to purchase
100,000 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 $310,000 as follows:
•
|
$110,000
were disbursed on June 16, 2008;
|
•
|
$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and |
•
|
$100,000
will be disbursed on January 20,
2009.
|
Under the
terms of the June 16, 2008 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 16, 2008 and ending on the later of (a) 270
days from June 16, 2008, 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 16, 2008
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
$310,000 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
$2.75, 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) $2.00 or (ii) 45%
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
$310,000 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
$2.00 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 $.10 per share. The investors may exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on a
cashless basis, 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 16, 2008. The registration statement
must be filed with the Securities and Exchange Commission within 60 days of the
June 16, 2008 closing date and the effectiveness of the registration is to be
within 135 days of such closing date. Penalties of 2% of the
outstanding principal balance of the convertible notes plus accrued interest are
to be applied for each month the registration is not effective within the
required time. The penalty may be paid in cash or stock at the
Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
August 29, 2008 Issuance of $191,913
in Callable Convertible Notes: On August 29, 2008, 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 $191,913. To pay this interest, the noteholders were willing
to accept $191,913 in additional convertible notes due on August 29,
2011. Accordingly, on August 29, 2008, the Company issued $191,913 in
convertible notes to the noteholders as full payment of the past due
interest.
The
$191,913 in convertible notes bear interest at 2% per annum from August 29,
2008. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash. 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 August 29, 2011, and are convertible into the
Company's common stock at the noteholders' option, at the lower of (i) $2.00 or
(ii) 45% 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
$191,913 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 $.431 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 90 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 90th day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
The
convertible notes include certain features that are considered embedded
derivative financial instruments. These features are described as
follows:
•
|
The
fixed conversion feature that allows the investor to convert the notes at
a fixed price per share;
|
•
|
The
variable conversion feature that allows the investor to convert the notes
at a specified percentage of the market price at the time of
conversion;
|
•
|
The
variable interest rate provision that calls for no interest to be paid if
the stock price exceeds a predetermined amount for a given number of
months; and
|
•
|
The
contingent put feature, which upon the occurrence of certain events of
default, including (i) the Company's failure to pay the principle and
interest thereon when due on the notes; (ii) bankruptcy, insolvency,
reorganization, liquidation proceedings instituted by or against the
Company; (iii) any money judgment is entered against the Company for more
than $50,000, which remains unvacated, unbonded, or unstayed for more than
twenty days; and (iv) the delisting of the Company's common stock, allows
the investor to require the Company to redeem the convertible notes at
130% of the principal amount. Although the
put feature was determined to be an embedded derivative which
requires bifurcation, the Company believes the likelihood of this feature
being exercised is remote and accordingly no value was ascribed to this
particular put feature. The Company is required to continue to
evaluate our accounting and valuation for this put feature. The
Company will continue to monitor the probability of this particular put
feature being exercised and its impact to the Company's valuation of
embedded derivatives in future
periods.
|
•
|
The
value of the warrants issued in conjunction with each
funding.
|
The
initial fair value assigned to the embedded derivatives and warrants was
$4,169,000, which consisted of the fair value of the embedded derivatives of
$2,588,000 and the fair value of the warrants of $1,582,000. The
Company recorded the first $2,500,000 of fair value of the derivatives and
warrants to debt discount (equal to the total proceeds received as of June 30,
2005), which will be amortized to interest expense over the term of the
notes. The remaining balance of $1,669,000 was recorded as loss of
derivative valuation for the period ended June 30, 2005.
As of
December 31, 2005, the carrying amount on the notes was $340,000, net of the
unamortized debt discount of $1,698,000. Interest expense on the
notes totaled $739,000 for the period ended December 31, 2005, which consisted
of $369,000 of normal accretion of the note discount and $370,000 of accrued
interest on the outstanding note balance for the period. The fair
value of the embedded derivatives and warrants decreased to $195,000 during the
year ended December 31, 2005, which consisted 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
value 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.
As of
December 31, 2006, the carrying amount on the notes was $1,421,000, net of the
unamortized debt discount of $1,235,000. Interest expense on the
notes totaled $935,000 for the period ended December 31, 2006, which consisted
of $721,000 of normal accretion of the note discount and $214,000 of accrued
interest on the outstanding note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of $536,000 during the year ended December 31, 2006, which
consisted of a decrease in the fair value of the embedded derivatives of
$451,000 and the fair value of the warrants of $85,000. Accordingly,
the Company recorded a gain on derivative valuation to the statement of
operations of $536,000 for the year ended December 31, 2006.
During
2007, the Company entered into four securities purchase agreements in the
aggregate amount of $1,639,000. The initial fair value assigned to
the embedded derivatives and warrants was $466,000 for these notes, which
consisted of the fair value of the embedded derivatives of $344,000 and the fair
value of the warrants of $122,000. The Company recorded $466,000 of
fair value of the derivatives and warrants to debt discount, which will be
amortized to interest expense over the term of the notes.
At
December 31, 2007, the carrying amount on the notes was $3,100,000, net of the
unamortized debt discount of $828,000. Interest expense on the notes
totaled $992,000 for the period ended December 31, 2007, which consisted of
$771,000 of normal accretion of the note discount and $221,000 of accrued
interest on the outstanding note balance for the period. The fair
value of the embedded derivatives and warrants decreased by a total of $413,000
during the year ended December 31, 2007, which consisted of a decrease in the
fair value of the embedded derivatives of $391,000 and the fair value of the
warrants of $22,000. Accordingly, the Company recorded a gain on
derivative valuation to the statement of operations of $413,000 for the year
ended December 31, 2007.
At
December 31, 2008, the carrying amount on the notes was $3,854,000, net of the
unamortized debt discount of $278,000. Interest expense on the notes
totaled $827,000 for the period ended December 31, 2008, which consisted of
$515,000 of normal accretion of the note discount and $312,000 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 $207,000
during the twelve months ended December 31, 2008, which consisted of a decrease
in the fair value of the embedded derivatives of $139,000 and the fair value of
the warrants of $68,000. Accordingly, the Company recorded a gain on
derivative valuation to the statement of operations of $207,000 for the twelve
months ended December 31, 2008.
At March
31, 2009, the carrying amount on the notes was $3,574,000, net of the
unamortized debt discount of $200,000. Interest expense on the notes
totaled $134,000 for the period ended March 31, 2009, which consisted of $62,000
of normal accretion of the note discount and $72,000 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 $8,000 during the
quarter ended March 31, 2009, which consisted of a decrease in the fair
value of the embedded derivatives of $4,000 and the fair value of the warrants
of $4,000. Accordingly, the Company recorded a gain on derivative
valuation to the statement of operations of $8,000 for the year ended March 31,
2009.
The
market price of the Company’s common stock significantly impacts the extent to
which the Company may be required or may be permitted to convert the
unrestricted and restricted portion of the notes into shares of the Company's
common stock. The lower the market price of the Company's common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the notes. If the
market price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash. The
Company's operations could be materially impacted, in an adverse way, if the
Company is forced to make repeated cash payments on the notes.
The
Company received notice from the accredited investors holding convertible notes
dated June 28, 2006 and convertible notes dated April 30, 2007, that on January
22, 2009, E-Lionheart, LLC and other third parties purchased $500,000 of the
convertible notes dated June 28, 2006 and the $500,000 of convertible notes
dated April 30, 2007. The total purchase price of these convertible
notes was $1,514,444. Between February 18, 2009 and March 27, 2009, the third
parties converted a total $452,406 of the June 28, 2006 convertible notes at
conversion prices ranging from $.0009 to .00105 per share and received a total
of 500,511,410 shares of the Company's common stock pursuant to said
conversions. As of March 31, 2009, the Company had outstanding
517,901,448 shares of common stock.
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, December 23, 2007, June 16, 2008, and August 29, 2008 is determined by
dividing that portion of the principal of the notes to be converted and interest
by the conversion price. For example, assuming conversion of $3,774,197
principal amount of the convertible notes on March 31, 2009 (consisting of
$5,060,000 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, December 24, 2007, and June 16, 2008, plus $389,010 in
convertible notes issued on December 19, 2007, and $191,913 in convertible notes
issued on August 29, 2008, in payment of past due interest on the notes, less
$1,866,726 in notes converted during the period from June 12, 2005 to March 31,
2009) and a conversion price of $.0012 per share with a 55% discount, the number
of shares issuable upon conversion would be:
$3,774,197/$.0012
x 45% = 6,290,328,333 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,
December 24, 2007, June 16, 2008, and August 29, 2008 is essentially limitless.
The following is an example of the amount of shares of common stock that are
issuable upon conversion of $3,774,197 principal amount of the convertible notes
(including accrued interest), based on market prices 25%, 50%, and 75% below the
market price, as of March 31, 2009 of $.0012 with a 55% discount:
%
Below
Market
|
Price
Per
Share
|
With
55%
Discount
|
Number
of
Shares
Issuable
|
%
of Outstanding
Shares*
|
25%
50%
75%
|
.0009
.0006
.0003
|
.000405
.00027
.000135
|
9,319,004,938
13,978,507,407
27,957,014,815
|
1,799%
2,699%
5,398%
|
*Based on
517,901,448 shares outstanding.
As
illustrated, the number of shares of common stock issuable upon conversion of
the Company's callable secured convertible notes will increase if the market
price of the Company's common stock declines, which will cause dilution to
existing stockholders.
Adjustable Conversion Price
of Convertible Notes
The
convertible notes are convertible into shares of the Company's common stock at a
55% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the
common stock as the noteholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place
further downward pressure on the price of the common stock. The
noteholders could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause further
downward pressure on the stock price. In addition, not only the sale
of shares issued upon conversion or exercise of notes, warrants and options, but
also the mere perception that these sales could occur, may have a depressive
effect on the market price of the common stock.
Possible Dilution to
Stockholders
The
issuance of shares upon conversion of convertible notes and exercise of warrants
may result in substantial dissolution to the interests of other stockholders
since the holders of the convertible notes may ultimately convert and sell the
full amount issuable upon conversion. Although the noteholders may
not convert their convertible notes and/or exercise their warrants if such
conversion or exercise price would cause them to own more than 4.99% of the
Company's outstanding common stock, this restriction does not prevent the
noteholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the noteholders
could sell more than this limit while never holding more than this
limit. There is no upper limit on the number of shares that may be
issued, which will have the effect of further diluting the proportionate equity
interest and voting power of holders of the Company's common stock.
Failure to Repay Convertible
Notes May Require Company Operations to Cease
On April
27, 2005, the Company entered into a securities purchase agreement for the sale
of an aggregate of $2,500,000 principal amount of convertible
notes. On February 28, 2006, the Company entered into another
securities purchase agreement for the sale of an aggregate of $1,500,000
principal amount of convertible notes. On June 11, 2007, 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. On June 16, 2008, the Company
entered into a fifth securities purchase agreement for the sale of an aggregate
of $310,000 principal amount of convertible notes. On August 29,
2008, the Company issued an additional $191,913 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. On March 31, 2009, the
Company had $3,774,197 in convertible notes outstanding. Any event of
default such as the Company's failure to repay the principal or interest when
due on the notes, the Company's failure to issue shares of common stock upon
conversion by the noteholders, the Company's breach of any covenant,
representation or warranty in the securities purchase agreement or related
convertible notes, the assignment or appointment of a receiver to control a
substantial part of the Company's property or business, the filing of a money
judgment, writ or similar process against the Company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against the Company, and the delisting of the Company's common stock
could require the early repayment of the convertible notes, including a default
interest rate of 15% on the outstanding principal balance of the notes if the
default is not cured within the specified grace period.
The
Company anticipates that the full amount of convertible notes will be converted
into shares of its common stock, in accordance with the terms of the convertible
notes. If the Company is required to repay the convertible notes, it
would be required to use its limited working capital and raise additional
funds. If the Company were unable to repay the notes when required,
the noteholders could commence legal action against the Company and foreclose on
all of its assets to recover the amounts due. Any such action would
require the Company to curtail or cease operations.
Preferred Stock
Conversions
Under the
Company's Certificate of Incorporation, holders of the Company's Class A and
Class B preferred stock have the right to convert such stock into shares of the
Company's common stock at the rate of 1.2 shares of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series A preferred stock and no shares of Series B preferred stock were
converted to the Company's common stock.
Holders
of Series D preferred have the right to convert such stock into shares of the
Company's common stock at the rate of one share of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series D preferred stock were converted to the Company's common
stock.
Holders
of Series E preferred have the right to convert such stock into shares of the
Company's common stock at the rate of 53.3 shares of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series E preferred stock were converted to the Company's common
stock.
Holders
of Series F preferred have the right to convert such stock into shares of the
Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2009, no
shares of Series F preferred stock were converted to the Company's common
stock.
Holders
of Series G preferred have the right to convert such stock into shares of the
Company's common stock at the rate of one share of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series G preferred stock were converted to shares of the Company's common
stock.
Warrants
The fair
value of warrants granted as described herein is estimated at the date of grant
using the Black-Scholes option pricing model. The exercise price per share is
reflective of the then current market value of the stock. No grant exercise
price was established at a discount to market. All warrants are fully vested,
exercisable and nonforfeitable as of the grant date. As a result of
the financing the Company completed on April 27, 2005 involving the sale of
$2,500,000 in convertible notes, the Company granted warrants to the noteholders
to purchase 165,344 shares of its common stock. The
warrants have an exercise price of $20.00 per share and expire on April 27,
2010. As a result of the financing the Company completed on
February 28, 2006, involving the sale of $1,500,000 in convertible notes,
the Company granted that warrants to the noteholders to purchase 120,000 shares
of its common stock. The warrants have an exercise price of $10.00
per share and expire on February 27, 2011. As a result of the
financing the Company completed on June 11, 2007, involving the sale of $500,000
in convertible notes, the Company granted warrants to the noteholders to
purchase 100,000 shares of its common stock. The warrants have an
exercise price of $.50 per share and expire on June 11, 2014. As a
result of the financing the Company completed on December 23, 2007, involving
the sale of $250,000 in convertible notes, the Company granted warrants to the
noteholders to purchase 150,000 shares of its common stock. The
warrants have an exercise price of $.10 per share and expire on December 23,
2014. As a result of the financing that the Company completed on June
16, 2008, involving the sale of $110,000 in convertible notes, the Company
granted warrants to the noteholders to purchase 100,000 shares of its common
stock. The warrants have an exercise price of $.10 per share and
expire on June 16, 2015.
Related Party
Transactions
Payments
for legal services to the firm of which the Company's Chairman of the Board is a
partner were $10,000 and $30,000 for the three months ended March 31, 2009 and
2008, respectively.
Accrued
Expenses
Accrued
expenses consist of the following at March 31, 2009:
Litigation
reserve
|
|
$ |
236,000 |
|
Consulting
and service reserve |
|
|
28,000 |
|
Interest
expense on notes payable
|
|
|
188,000 |
|
Payroll
and employee benefits
|
|
|
15,000 |
|
Sales
tax payable
|
|
|
5,000 |
|
Customer
deposits
|
|
|
44,000
|
|
Accrued
royalties
|
|
|
1,000 |
|
Warranty
and return allowance
|
|
|
64,000 |
|
Other
accrued expenses
|
|
|
27,000 |
|
Total
|
|
$ |
608,000 |
|
Subsequent
Events
On April
7, 2009, the Company signed a letter of intent with Fairhills Capital Offshore,
LLC in which Fairhills Capital committed to finance up to $1,800,000 through the
purchase of promissory notes from the Company. The
letter of intent provides that $600,000 in notes will be purchased
every three months over a nine month period, with the first purchase of $300,000
to be made at closing and the remainder to be purchased upon the satisfaction of
financial objectives to be mutually determined between the Company and Fairhills
Capital. The convertible notes will bear interest at 6% per
annum. In addition, Fairhills Capital will have a right of first
refusal on future financing transactions by the Company for as long as the notes
remain outstanding.
On April
15, 2009, the Company entered into a Letter of Understanding with Costrugione
Srumenti Oftalmici srl ("CSO"), an Italian company, to distribute and sell
certain products manufactured by CSO. The products to be distributed
and sold by the Company include the Retimax, the next generation of standard
ocular electrophysiology. The Retimax performs innovative tests for
the early screening and follow up of pathologies such as glaucoma, age related
maculopaty, vascular retinal degeneration, and other optic nerve
diseases. Other CSO products to be sold by the Company include the
Sirius Advanced Topographer and the Endothelium Microscope.
Under the
terms of the Letter of Understanding, CSO will manufacture and supply products
to be sold by the Company. The products will have the Company's logo
and markings. The Company is granted the exclusive right to sell the
products on an exclusive basis in North America for a period of twelve
months. The twelve month period will begin 60 days after the Retimax
is approved by the FDA. The exclusive right to sell the CSO products
in North America is conditioned upon the Company selling an average of five
Retimax units per month. The exclusive right to sell the CSO products will be
reviewed every six months for the first two years and every year
thereafter. The Company and CSO may end their relationship at any
time upon six months' prior written notice to the other party.
Item 2: Management’s Discussion and Analysis
or Plan of Operation
This
report contains forward-looking statements and information relating to the
Company that is based on beliefs of management as well as assumptions made by,
and information currently available to management. These statements reflect its
current view respecting future events and are subject to risks, uncertainties
and assumptions, including the risks and uncertainties noted throughout the
document. Although the Company has attempted to identify important factors that
could cause the actual results to differ materially, there may be other factors
that cause the forward-looking statements not to come true as anticipated,
believed, projected, expected or intended. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, projected, estimated, expected or intended.
Critical
Accounting Policies
Revenue
Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before
revenue is recognized:
1. Persuasive
evidence of an arrangement exits. Prior to shipment of product, the
Company required a signed purchase order and, depending upon the customer, a
down payment toward the final invoiced price or full payment in advance with
certain international product distributors.
2. Delivery
and performance have occurred. Unless the purchase order requires
specific installation or customer acceptance, the Company recognizes revenue
when the product ships. If the purchase order requires specific installation or
customer acceptance, the Company recognizes revenue when such installation or
acceptance has occurred. Title to the product passes to its customer
upon shipment. This revenue recognition policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when
received by the customer, the Company either makes the necessary repairs on site
or has the product shipped to the Company for the repair work. Once
the product has been repaired and retested for functionality, it is re-shipped
to the customer. The Company provides warranties that generally
extend for one year from the date of sale. Such warranties cover the necessary
parts and labor to repair the product as well as any shipping costs that may be
required. The Company maintains a reserve for estimated warranty costs based on
its historical experience and management’s current expectations.
3. The
sales price is fixed or determinable. The purchase order received from the
customer includes the agreed-upon sales price. The Company does not
accept customer orders, and therefore does not recognize revenue, until the
sales price is fixed.
4. Collectibility
is reasonably assured. With limited exceptions, the Company requires
down payments on product prior to shipment. In some cases the Company requires
payment in full prior to shipment. The Company also performs credit
checks on new customers and ongoing credit checks on existing
customers. The Company maintains an allowance for doubtful accounts
receivable based on historical experience and management’s current
expectations.
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 depositor payment in full from customers are 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.
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. Intangible assets other than goodwill have been fully
amortized.
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.
Derivative
Financial Instruments
The
Company’s derivative financial instruments consist of embedded derivatives
related to the Secured Convertible Term Notes (“the Notes”) entered into
agreements on April 27, 2005; June 23, 2005; June 30, 2005; February 28, 2006;
June 28, 2006; April 30, 2007; June 11, 2007; December 24, 2007; December 31,
2007, June 16, 2008, July 14, 2008, and August 29, 2008. These Notes
contain interrelated embedded derivatives, which include the fixed conversion
feature, the variable conversion feature, the variable interest feature, and the
contingent put feature. Although the put feature was determined to be
an embedded derivative which requires bifurcation, The Company believes the
likelihood of this feature being exercised is remote and accordingly no value
was ascribed to this particular put feature. The Company is required
to continue to evaluate its accounting and valuation for this put
feature. The Company will continue to monitor the probability of this
particular put feature being exercised and its impact to the Company's valuation
of embedded derivatives in future periods. In the event the value of
the put feature becomes material in the future, the Company will use a different
model to value this feature along with the other embedded
derivatives.
Based on
the complex nature of these terms, including the put feature, the Company chose
to employ a binomial lattice model to value these features. The
Company used the lattice model because it allows for the consideration of the
dynamic and interrelated nature of the unique terms of these
securities. It takes into consideration that in each discrete period
of time a stock can either go up or down (described as its “volatility”) and
produces a range of potential future stock prices (and thus multiple values at
those future points in time). A binomial lattice model assumes the price of the
stock underlying the derivative follows one of the two price paths (stock price
can either go up or down). There are three general steps in
constructing a binomial lattice model: (1) calculation of the stock price
lattice, (2) calculation of the potentially applicable option values at each
node based on the terms and conditions of the specific security, and (3)
progressively calculating the security value at each node starting at the
maturity of the security and working back to the present testing for the greater
of the current period value or the probability weighted holding value of the
security. The following key inputs and assumptions were used to
calculate the fair values of the embedded derivatives and the
warrants:
•
|
Stock
Price: This is the stock price as of the respective
valuation date.
|
•
|
Fixed Conversion
Price: The fixed conversion price used in the valuation
analysis was set equal to fixed conversion price (ranging from $20.00 to
$9.00) per share for each of the Notes. This is the fixed price
at which the Investor can convert the Note into common
stock.
|
•
|
Volatility: Volatility
is a measure of the standard deviation of the stocks continuously
compounded return over the life of the security. The ideal
volatility for an accurate calculation of fair value is the future
volatility of the security. This cannot be known with
certainty, so an approximation is derived using historical return
volatility for a period of time equal to the remaining life of the
instrument as a proxy, and professional judgment. As part of
our valuation, we performed extensive analysis of the historical
volatility of returns for the Company’s stock. Based on our
analysis, we chose a standard deviation of 200% as our best estimate of
future volatility.
|
•
|
Risk-Free
Rate: The appropriate risk free rate is the interest
rate of a U.S. treasury note with a maturity equal to the maturity of the
respective security. As of March 31, 2009, the risk free
interest rates ranged from 1.6% to 2.28%. As of December 31,
2008, the risk free interest rates ranged from .11% to .88%. As
of December 31, 2007, the risk free interest rates ranged from 3.06%
to 3.49%.
|
•
|
Time to
Maturity: The time to maturity is measured based on the
remaining term of the security as of the valuation
date.
|
•
|
20-day Minimum Price vs.
Closing Stock Price: The variable conversion feature
allows the Investor to convert the Notes at a price equal to 45% of the
average of the lowest three trading prices during the twenty trading days
preceding a conversion notice. We analyzed the historical
relationship between the common stock closing price and the lowest trading
price. Based on this analysis, we determined that on average
the lowest trading price in any 20-day period during the time period
analyzed was approximately 69.5% of the closing price. We used
this as a conservative proxy for the average of the three lowest closing
prices during the 20-day period. This result was used in the
test of the stock price relative to the fixed conversion
price.
|
•
|
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 $9.45 or $2.75 or $1.20 or $.70 (depending on Note) per
share for every day within a given month. We made a simplifying
assumption that our various node prices were equivalent to this intraday
trading price.
|
•
|
Trading
Liquidity: We assumed that adequate stock trading
liquidity is available for the Investors to sell converted / exercised
shares.
|
•
|
Probability of Contingent Put
Feature: We assumed that the likelihood of this feature
being exercised is remote and accordingly no value was ascribed to this
particular put feature. We will continue to monitor the
probability of this particular put feature being exercised and its impact
to our valuation of embedded derivatives in future
periods.
|
The
warrants were valued using the Black-Scholes Option Pricing Model with the
following assumptions for 2008: dividend yield of 0%; annual volatility of 200%;
and risk free interest rates ranging from .37% to 1.8%. No warrants
were issued during 2008.
In the
event that the Company is required to convert debentures into common stock, the
Company is required to eliminate the pro rata portion of the derivative
liability associated with the conversion, with a corresponding entry recorded to
additional paid in capital.
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.
General
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements, which involve risks
and uncertainty. The Company’s actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
discussed in this section. The Company’s fiscal year is from January 1 through
December 31.
The
Company is engaged in the design, development, manufacture and sale of high
technology diagnostic eye care products. Given the "going concern" status of the
Company, management has focused efforts on those products and activities that
will, in its opinion, achieve the most resource efficient short-term cash
flow. As seen in the results for the three months ended March 31,
2009, diagnostic products have been the major focus and the Photon™ and other
extensive research and development projects have been put on hold
pending future evaluation when the Company's financial position
improves. The Company does not focus on a specific diagnostic product
or products but, instead, on the entire diagnostic group.
Results
of Operations
Three
Months Ended March 31, 2009, Compared to Three Months Ended March 31,
2008
Net sales
for the three months ended March 31, 2009 decreased by $76,000, or 33%, to
$153,000 as compared to $229,000 for the same period of 2008. This
reduction in sales was primarily due to limited working capital not allowing for
the purchase of required raw materials to build existing orders. The
Company was also unable to implement its business plan for first quarter due to
extreme cash flow limitations. Continuing delays in funding had a
negative affect on organizational growth objectives, which resulted in decreased
sales of the P40, P45 and P60 Ultrasound Biomicroscopes, the P37, P37II and
P2700 Ocular Ultrasound Diagnostic A/B Scan, the P2000 A-Scan Biometric
Ultrasound Analyzer, the P2200 and P2500 Pachymetric Analyzers, and the Blood
Flow Analyzer™.
For the
three months ended March 31, 2009, sales from the Company’s diagnostic products
totaled $127,000, or 83% of total revenues, compared to $185,000, or 80% of
total revenues for the same period of 2008. The remaining 17% of sales, or
$26,000 during the three months ended March 31, 2009, was from parts,
disposables, and service revenue.
Sales of
the Glaid device, or Perg, were $0 for the three months ended March 31, 2009
compared to no sales for the same period in 2009. Sales of
the P60 UBM Ultrasound Biomicroscope increased by $68,000 to $73,000, or 44% of
total revenues, for the three months ended March 31, 2009, compared to $5,000,
or 2% of total revenues, for the same period in
2007. Sales of the Blood Flow Analyzer™ increased by $11,000 to
14,000 or 9% for the three months ended March 31, 2009, compared to net
sales of $3,000, or 1% of total revenues, during the same period in
2008. Sales from the P2700, P37, and P37-II A/B Scan Ocular
Ultrasound Diagnostic devices decreased by $34,000 to $7,000, or 5% of total
revenues for the three months ended March 31, 2009, compared to $41,000, or 18%
of total revenues for the same period in 2008. Sales of the P55,
P2200, P2500 Pachymetric Analyzers, and the P2000 A-Scan Biometric Ultrasound
Analyzer decreased by $7,000 to $0 or 0% of total revenues, for the three month
period ended March 31, 2009, compared to $7,000, or 3% of total revenues, for
the same period in 2008. Combined sales of the LD 400, TKS 5000, and
CT200 Autoperimetry Systems decreased by $97,000 to $33,000, or 22% of the total
revenues, for the three months ended March 31, 2009, compared to $130,000,
or 57% of total revenues, for the same period in 2008.
Sales of
the Blood Flow AnalyzerTM
decreased due in part from the reorganization of the Company's sales
force. The Company anticipates continuing the upward trend in Blood Flow
AnalyzerTM sales
through additional efforts by the Company to gain more wide spread support from
the Blood Flow AnalyzerTM through
increased clinical awareness, product development and improved marketing
plans.
Sales of
surgical products are at a standstill pending FDA approval of the PhotonTM laser
system. In the twelve month period ended December 31, 2008, the Company realized
no sales in the surgical line consisting of the PhotonTM laser
system. There were also no sales in the surgical line for the comparable period
of 2007.
The
Company anticipates reversing the downward trend in sales through additional
efforts by the Company to gain more widespread support for the P60 UBM
Ultrasound Biomicroscope, the Blood Flow Analyzer™, the LD400 Antoperimetry
System, the P37-II Ocular Ultrasound Diagnostic A/B Scan, the 2200 and 2500
Pachymetric Analyzers, the P2000 A-Scan Biometric Ultrasound Analyzer, the new
agreement with the Costrugione Srumenti Oftalmici ("CSO") organization and its
ophthalmic products, and through increased clinical awareness, ongoing product
development, improved marketing plans and strategic product replacement, and
ongoing development of the LD400 perimeter. The Blood Flow Analyzer™
is expected to have a new CPT reimbursement code for Medicare insurance
providers issued by the end of 2009, reversing the downward sales trend it has
experienced.
Gross
profit for the three months ended March 31, 2009 increased by 15% to 53% of
total revenues, compared to 38% of total revenues for the same period in
2008. This increase in gross profit was mainly due to reductions in
corporate expenditures as a result of improved operating efficiencies during the
three months ended March 31, 2009. There was no increase to cost of
sales as a result of a charge to the reserve for obsolete inventory in
2008.
Marketing
and selling expenses decreased by $137,000, or 75%, to $46,000, for the three
months ended March 31, 2009, from $183,000 for the comparable period in
2008. This decrease was due primarily to a reduction in overall
marketing expenses, related travel expenses and a general reduction in
staff.
General
and administrative expenses decreased by $94,000, or 42%, to $128,000 for the
three months ended March 31, 2009, from $222,000 for the comparable period in
2008. This decrease was due primarily to a reduction in overall
general and administrative expenses, including a reduction in salaries and hours
worked by employees and travel expenses. The bad debt allowance
remained same from December 31, 2008 to $75,000 for the first three months ended
December 31, 2008.
Also,
during the three months ended March 31, 2009, the Company collected $58,000 in
receivables that were previously allowed in the allowance for doubtful
accounts.
Research,
development and service expenses decreased by $24,000, or 27%, to $64,000 for
the three months ended March 31, 2009, compared to $88,000 in the same period in
2008. This decrease was mainly due to a reduction of funding
available for the marketing of new products and a reduction in
staff.
Gain and
loss of derivative valuation for the three months ended March 31, 2009 decreased
by $113,000, or 93%, to $8,000 as compared to $121,000 for the same period in
2008.
Interest
expense–accretion of debt discount for the three months ended March 31, 2009
decreased by $123,000, or 66%, to $62,000 as compared to $185,000 for the same
period in 2008.
Interest
expense for the three months ended March 31, 2009 decreased by $5,000, or 6%, to
$72,000 as compared to $77,000 for the same period in 2008.
Liquidity
and Capital Resources
The
Company used $83,000 in cash in operating activities for the three months ended
March 31, 2009, compared to $291,000 for the three months ended March 31,
2008. The decrease in cash used for operating activities for the
three months ended March 31, 2009 was primarily attributable to the Company's
net loss and decreases in inventory, and a significant decrease of the change of
the fair value of derivative liabilities. There was no cash used for investment
activities for the three months ended March 31, 2009, compared to no cash used
for investment activities for the same period in 2008. Net cash used in
financing activities was $100,000 for the three months ended March 31, 2009,
compared to $-0- in the same period in 2008. The Company had a working capital
deficit of $2,005,000 as of March 31, 2009. 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
March 31, 2009, 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 2006 and extend
through 2028. 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
March 31, 2009, the Company had accounts payable of $582,000, a significant
portion of which was over 90 days past due, compared to accounts payable of
$416,000 as of March 31, 2008. The Company has contacted many of the
vendors or companies of payables past due in an effort to delay payment,
negotiate 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 operating lease obligations
that require the payment of approximately $110,000 in 2009, and $110,000 in
2008. The Company leases office and warehouse space under a
month-to-month operating lease agreement.
The
Company has taken measures to reduce the amount of uncollectible accounts
receivable such as a more thorough and stringent credit approval, improved
product, 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 40% of total outstanding receivables as of
March 31, 2009, compared to 20% of total outstanding receivables as of March 31,
2008.
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. 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 $231,000 at March 31, 2009 and $244,000 at March 31, 2008, or 27% and 21% 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, 2008,
the Company disposed of $13,000 in obsolete inventory that had been previously
reserved.
On a
quarterly basis, the Company attempts to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an
item has shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition,
if the Company identifies products that have become obsolete due to product
upgrades or enhancements, a reserve is established for such
products. The Company intends to make efforts to sell these items at
significantly discounted prices. If items are sold, the cash received
would be recorded as revenue, but there would be no cost of sales on such items
due to the reserve that has been recorded. At the time of sale, the
inventory would be reduced for the item sold and the corresponding inventory
reserve would also be reduced.
At this
time, the Company’s Photon™ Laser Ocular Surgery Workstation requires regulatory
FDA approval in order to be sold in the United States. Any possible
future efforts to complete the clinical trials on the Photon™ in order to file
for FDA approval would depend on the Company obtaining adequate
funding. The Company estimates that the funds needed to complete the
clinical trials in order to obtain the necessary regulatory approval on the
Photon™ to be approximately $2,500,000. The Company is currently
attempting to find a prospective purchaser to acquire the Photon™ laser system
and its components, including the inventory and intellectual property
rights.
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 exchange rate value of
the pound sterling.
New
Accounting Pronouncements
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions. FSP FAS 140-3
requires an initial transfer of a financial asset and a repurchase financing
that was entered into contemporaneously or in contemplation of the initial
transfer to be evaluated as a linked transaction under SFAS No. 140 unless
certain criteria are met, including that the transferred asset must be readily
obtainable in the marketplace. FSP FAS 140-3 is effective for fiscal years
beginning after November 15, 2008, and will be applied to new transactions
entered into after the date of adoption. Early adoption is prohibited. The
Company does not expect that the adoption of FSP FAS 140-3 will have a material
impact on its consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company does not expect that
the adoption of SFAS No. 161 will have a material impact on its
consolidated financial statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this FSP is to improve the consistency between the
useful life of a recognized intangible asset under FAS FAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R) and other generally accepted accounting principles. FSP FAS 142-3 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008. The Company does not expect that
the adoption of FSP FAS 142-3 will have a material impact in its consolidated
financial statements.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The
Company does not expect that adoption of FASB 162 will have a material impact on
its consolidated financial statements.
In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee
Insurance Contracts. SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement also clarifies how SFAS 60, Accounting and Reporting by
Insurance Enterprises, as amended, applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities. This Statement also requires
expanded disclosures about financial guarantee insurance contracts. SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
some disclosures about the insurance enterprise's risk-management activities.
Early application is not permitted. The Company does not expect that
the adoption of FSP FAS 163 will have a material impact in its consolidated
financial statements.
In June
2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for
Maintenance Deposits Under Lease Arrangements. EITF 08-3 provides
guidance for accounting for nonrefundable maintenance deposits. It also provides
revenue recognition accounting guidance for the lessor. EITF 08-3 is effective
for fiscal years beginning after December 15, 2008. The Company does
not expect that the adoption of EITF 08-3 will have a material impact in its
consolidated financial statements.
In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.
FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic
and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for
fiscal years beginning after December 15, 2008. The Company does not expect that
the adoption of FSP EITF 03-6-1 will have a material impact on its consolidated
financial statements.
In
October 2008, the FASB issued FSP FAS 157-3 Determining Fair Value of a
Financial Asset in a Market That Is Not Active. FSP FAS 157-3 clarified
the application of SFAS No. 157 in an inactive market. It demonstrated how the
fair value of a financial asset is determined when the market for that financial
asset is inactive. FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued. The Company does not
expect that the adoption of FSP FAS 157-3 will have a material impact on its
consolidated financial statements.
In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment Accounting
Considerations. EITF 08-6 clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with
early adoption prohibited. The Company does not expect that the
adoption of EITF 08-6 will have a material impact on its consolidated financial
statements.
In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. FSP FAS 140-4 and FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for the first interim or annual reporting period ending after December
15, 2008. The Company does not expect that the adoption of FSP FAS 140 and FIN
46(R)-8 will have a material impact in its consolidated financial
statements.
Item
3. Controls and Procedures
Disclosures
Controls and Procedures
As of the
end of the period covered by the quarterly report for the period ended March 31,
2009, the Company's management, with the participation of the President and
Treasurer, evaluated the effectiveness of the Company's disclosure controls and
procedures, as defined in Rules 13a-15(b) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Company's President and Treasurer concluded that, as of the
end of the period covered by such report, the Company's disclosure controls and
procedures were not effective and adequate. The Company's independent
registered public accounting firm advised the Company's Board of Directors of
the following material weakness in its financial reporting: lack of sufficient
resources to identify and properly address technical SEC and reporting
issues. Disclosure controls are controls and procedures designed to
reasonably ensure that information required to be disclosed in the Company's
reports filed under the Exchange Act, such as this report, are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to management, including the
President and Treasurer, as appropriate to allow timely decisions
regarding required disclosure as of March 31, 2009.
Management's
Annual Report on Internal Control over Financial Reporting
The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f), to provide reasonable assurance of the proper authorization
of transactions, the safeguarding of assets and the reliability of financial
records. The internal control system was designed to provide
reasonable assurance to management and the Company's Board of Directors
regarding the preparation and fair presentation of published financial
statements. Under the supervision and with the participation of the
Company's management, including the Company's President and Treasurer, the
Company conducted an evaluation of the effectiveness of its internal control
over financial reporting. Management assessed the effectiveness of
the Company's internal control over financial reporting as of March 31,
2009. In making this assessment, management used the criteria or
framework set forth in Internal Control - Integrated
Framework issued by the Committed of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the Company's evaluation, the
Company's management concluded that the Company's internal control over
financial reporting was not effective. The Company's independent
registered public accounting firm advised the Company's Board of Directors of
the following material weakness in its financial reporting: lack of sufficient
resources to identify and properly address technical SEC and reporting
issues. In particular, the Company's management was not effective in
identifying and following new accounting rules and new rules promulgated by the
SEC. The remedial plan to correct his material weakness includes
management training and the engagement of outside counsel to assist
the Company's management in identifying and following such new accounting and
SEC rules.
Inherent
Limitations on Effectiveness of Controls
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PART
II Other Information
Item
1. Legal Proceedings
An action
was filed on March 19, 2009 in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 090405609) by Pilot Freight
Services. The complaint claims that $11,336 plus interest is due for
shipping charges the Company incurred between April 2, 2008 and September 26,
2008. The Company has until May 21, 2009 to file a response to the
complaint.
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
1A. Risk Factors
The
continuously adjustable conversion price feature of the convertible notes could
require the Company to issue a substantially greater number of shares, which
will cause dilution to the existing shareholders.
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, December 24, 2007, June 16, 2008, and August 29, 2008 is essentially
limitless. The following is an example of the amount of shares of common stock
that are issuable upon conversion of $3,774,197 principal amount of the
convertible notes (including accrued interest), based on market prices 25%, 50%,
and 75% below the market price, as of March 31, 2009 of $.0012 with a 55%
discount:
%
Below
Market
|
Price
Per
Share
|
With
55%
Discount
|
Number
of
Shares
Issuable
|
%
of Outstanding
Shares*
|
25%
50%
75%
|
.0009
.0006
.0003
|
.000405
.00027
.000135
|
9,319,004,938
13,978,507,407
27,957,014,815
|
1,799%
2,699%
5,398%
|
*Based on
517,901,448 shares outstanding.
As
illustrated, the number of shares of common stock issuable upon conversion of
the Company's convertible notes will increase if the market price of the
Company's stock declines, which will cause dilution to the Company's existing
shareholders.
The
continuously adjustable conversion price feature of the convertible notes may
encourage investors to make short sales in the Company's common stock, which
could have a depressive effect on the price of the Company's common
stock.
The
convertible notes are convertible into shares of the Company's common stock at a
55% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the
common stock as the noteholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place
further downward pressure on the price of the common stock. The
noteholders could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further
downward pressure on the stock price. In addition, not only could the
sales of shares issuable upon conversion or exercise of notes, warrants and
options, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
The
issuance of shares upon conversion of the convertible notes may cause immediate
and substantial dilution to existing shareholders.
The
issuance of shares upon conversion of convertible notes may result in
substantial dilution to the interests of other shareholders since the
noteholders may ultimately convert and sell the full amount issuable on
conversion. Although the noteholders may not convert their
convertible notes if such conversion 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 some of their holdings and then converting the rest
of their holdings. In this way, the noteholders could sell more than
this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued, which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of the Company's common stock.
Failure
to Repay Convertible Notes May Require Company Operations to Cease
On April
27, 2005, the Company entered into a securities purchase agreement for the sale
of an aggregate of $2,500,000 principal amount of convertible
notes. On February 28, 2006, the Company entered into another
securities purchase agreement for the sale of an aggregate of $1,500,000
principal amount of convertible notes. On June 11, 2007, 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. On June 16, 2008, the Company
entered into a fifth securities purchase agreement for the sale of an aggregate
of $310,000 principal amount of convertible notes. On August 29,
2008, the Company issued an additional $191,913 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. The Company currently has
$3,774,197 in convertible notes outstanding. Any event of default
such as the Company's failure to repay the principal or interest when due on the
notes, the Company's failure to issue shares of common stock upon conversion by
the noteholders, the Company's breach of any covenant, representation or
warranty in the securities purchase agreement or related convertible notes, the
assignment or appointment of a receiver to control a substantial part of the
Company's property or business, the filing of a money judgment, writ or similar
process against the Company in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against the
Company, and the delisting of the Company's common stock could require the early
repayment of the convertible notes, including a default interest rate of 15% on
the outstanding principal balance of the notes if the default is not cured
within the specified grace period.
The
Company anticipates that the full amount of convertible notes will be converted
into shares of its common stock, in accordance with the terms of the convertible
notes. If the Company is required to repay the convertible notes, it
would be required to use its limited working capital and raise additional
funds. If the Company were unable to repay the notes when required,
the noteholders could commence legal action against the Company and foreclose on
all of its assets to recover the amounts due. Any such action would
require the Company to curtail or cease operations.
Because
the Company failed to hold an Annual Shareholders Meeting in fiscal 2007 and
fiscal 2008, the Delaware Court of Chancery may order an Annual Meeting to be
held upon request by a shareholder.
The
Company did not hold an Annual Meeting of the Shareholders (the "Annual
Meeting") for fiscal 2007 or for fiscal 2008 in order to avoid the costs of such
a meeting, including the cost of preparing and mailing a Proxy Statement and
Annual Report to each of its shareholders. Under Delaware law, the
Company is required to hold an Annual Meeting each year. A failure to
hold an Annual Meeting does not affect otherwise valid corporate acts or work a
forfeiture or dissolution of the Company. Moreover, under Delaware
law, directors continue to serve as directors despite lack of an Annual Meeting
until the next Annual Meeting and until their successors have been elected and
qualified. However, if the Company fails to hold an Annual Meeting
for a period of 30 days after the date designated in its bylaws for the Annual
Meeting, the Delaware Court of Chancery may order an Annual Meeting to be held
upon the application of any of the Company's shareholders, if an Annual Meeting
is ordered to be held by the court, the Company would have to incur the costs of
holding the meeting, including the cost of preparing and mailing the Proxy
Statement and Annual Report to each of its shareholders. The Company
anticipates holding an Annual Meeting in 2009.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Callable
Secured Convertible Notes and Warrants
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 100,000 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 $2.75, 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) $2.00 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
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 its stock is
trading at or below $10.00 per share. An event of default includes the failure
by the Company to pay the principal or interest on the convertible notes when
due or to timely file a registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made in
cash equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(b) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and60 days following the issue date of the notes; or (c)
145% of the outstanding principal and accrued interest for prepayments occurring
after the 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 $.50 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on June 11, 2007. The registration statement must be filed
with the Securities and Exchange Commission within 60 days of the June 11, 2007
closing date and the effectiveness of the registration is to be within 135days
of such closing date. Penalties of 2% of the outstanding principal balance of
the convertible notes plus accrued interest are to be applied for each month the
registration is not effective within the required time. The penalty may be paid
in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 19, 2007 Issuance of
$389,010 in Callable Convertible Notes: On December 19, 2007, the Company
was notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was $389,010. To pay this interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31, 2010.
Accordingly, on December 19, 2007, the Company issued $389,010 in convertible
notes to the noteholders as full payment of the past due interest.
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. 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) $2.00 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. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
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 $4.00 per share. An event of
default includes the failure by the Company to pay the principal or interest on
the convertible notes when due. Prepayment of the convertible notes is to be
made in cash equal to either (a) 135% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
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. 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) $2.00 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. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
The
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 $4.00 per share. An event of
default includes the failure by the Company to pay the principal or interest on
the convertible notes when due. Prepayment of the convertible notes is to be
made in cash equal to either (a) 135% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 24, 2007 Sale of $250,000
in Callable Secured Convertible Notes: To obtain further funding for the
Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with the same four accredited investors
for the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 150,000 shares of its common stock. The investors disbursed
$250,000 to the Company on December 24, 2007.
Under the
terms of the December 24, 2007 securities purchase agreement, the Company agreed
that it would not, without the prior written consent of a majority-in-interest
of the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market price of
the common stock on the date of issuance (taking into account the value of any
warrants or options to acquire common stock in connection therewith), (ii) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock, or (iii) the issuance of warrants during the
lock-up period beginning December 24, 2007 and ending on the later of (a) 270
days from December 24, 2007, or (b) 180 days from the date the registration
statement is declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning December24, 2007
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
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 $2.75, 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) $2.00 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
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 $10.00 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 $.10 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on December 24, 2007. The registration statement must be
filed with the Securities and Exchange Commission within 60 days of the December
24, 2007 closing date and the effectiveness of the registration is to be within
135 days of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
June 16, 2008 Sale of $310,000 in
Callable Secured Convertible Notes: To obtain additional
funding for the Company's ongoing operations, the Company entered into a fifth
securities purchase agreement on June 16, 2008 with three accredited investors
for the sale of (i) $310,000 in convertible notes and (ii) warrants to purchase
100,000 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 $310,000 as follows:
•
|
$110,000
were disbursed on June 16, 2008;
|
•
|
$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and
|
•
|
$100,000
will be disbursed on January 20,
2009.
|
Under the
terms of the June 16, 2008 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 16, 2008 and ending on the later of (a) 270
days from June 16, 2008, 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 16, 2008
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
$310,000 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
$2.75, 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) $2.00 or (ii) 45%
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
$310,000 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
$2.00 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 $.10 per share. The investors may exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on a
cashless basis, 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 16, 2008. The registration statement
must be filed with the Securities and Exchange Commission within 60 days of the
June 16, 2008 closing date and the effectiveness of the registration is to be
within 135 days of such closing date. Penalties of 2% of the
outstanding principal balance of the convertible notes plus accrued interest are
to be applied for each month the registration is not effective within the
required time. The penalty may be paid in cash or stock at the
Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
August 29, 2008 Issuance of $191,913
in Callable Convertible Notes: On August 29, 2008, 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 $191,913. To pay this interest, the noteholders were willing
to accept $191,913 in additional convertible notes due on August 29,
2011. Accordingly, on August 29, 2008, the Company issued $191,913 in
convertible notes to the noteholders as full payment of the past due
interest.
The
$191,913 in convertible notes bear interest at 2% per annum from August 29,
2008. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash. 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 August 29, 2011, and are convertible into the
Company's common stock at the noteholders' option, at the lower of (i) $2.00 or
(ii) 45% 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 i s no limit on the number of
shares into which the notes may be converted.
The
$191,913 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 $.431 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 90 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 90th day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
On
December 5, 2008, the Company’s shareholders approved a 1-for-100 reverse stock
split, which became effective on December 5, 2008. All references to share and
per-share data for all periods presented in this report have been adjusted to
give effect to this reverse split.
The
Company received notice from the accredited investors holding convertible notes
dated June 28, 2006 and convertible notes dated April 30, 2007, that
on January 22, 2009, E-Lionheart, LLC and other third parties purchased $500,000
of the convertible notes dated June 28, 2006 and the $500,000 of convertible
notes dated April 30, 2007. The total purchase price of these
convertible notes was $1,514,444. Between February 18, 2009 and March
27, 2009, the third parties converted a total $452,406 of the June
28, 2006 convertible notes at conversion prices ranging from $.0009 to .00105
per share and received a total of 500,511,410 shares of the Company's common
stock pursuant to said conversions. As of March 31, 2009, the Company
had outstanding 517,901,448 shares of common stock.
On April
7, 2009, the Company signed a letter of intent with Fairhills Capital Offshore,
LLC in which Fairhills Capital committed to finance up to $1,800,000 through the
purchase of promissory notes from the Company. The
letter of intent provides that $600,000 in notes will be purchased
every three months over a nine month period, with the first purchase of $300,000
to be made at closing and the remainder to be purchased upon the satisfaction of
financial objectives to be mutually determined between the Company and Fairhills
Capital. The convertible notes will bear interest at 6% per
annum. In addition, Fairhills Capital will have a right of first
refusal on future financing transactions by the Company for as long as the notes
remain outstanding.
On April
15, 2009, the Company entered into a Letter of Understanding with Costrugione
Srumenti Oftalmici srl ("CSO"), an Italian company, to distribute and sell
certain products manufactured by CSO. The products to be distributed
and sold by the Company include the Retimax, the next generation of standard
ocular electrophysiology. The Retimax performs innovative tests for
the early screening and follow up of pathologies such as glaucoma, age related
maculopaty, vascular retinal degeneration, and other optic nerve
diseases. Other CSO products to be sold by the Company include the
Sirius Advanced Topographer and the Endothelium Microscope.
Under the
terms of the Letter of Understanding, CSO will manufacture and supply products
to be sold by the Company. The products will have the Company's logo
and markings. The Company is granted the exclusive right to sell the
products on an exclusive basis in North America for a period of twelve
months. The twelve month period will begin 60 days after the Retimax
is approved by the FDA. The exclusive right to sell the CSO products
in North America is conditioned upon the Company selling an average of five
Retimax units per month. The exclusive right to sell the CSO products will be
reviewed every six months for the first two years and every year
thereafter. The Company and CSO may end their relationship at any
time upon six months' prior written notice to the other party.
Item
6. Exhibits and Reports on Form 8-K
(a) Exhibits
The
following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-B or
are incorporated by reference to previous filings.
Exhibit
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No.
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Document
Description
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2.1
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Amended
Agreement and Plan of Merger between Paradigm Medical Industries, Inc., a
California corporation and Paradigm Medical Industries, Inc., a Delaware
corporation(1)
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3.1
|
Certificate
of Incorporation(l)
|
3.2
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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)
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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
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1995
Stock Option Plan (1)
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10.3
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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)
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10.4
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Form
of Convertible Note with each Purchaser(7)
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10.5
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Form
of Stock Purchase Warrant with each Purchaser(7)
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10.6
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Security
Agreement with Purchasers(7)
|
10.7
|
Intellectual
Property Security Agreement with Purchasers(7)
|
10.8
|
Registration
Rights Agreement with Purchasers(7)
|
10.9
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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
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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
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Settlement
Agreement with Dr. Joseph W. Spadafora (10)
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10.17
|
Worldwide
OEM Agreement with MEDA Co., Ltd. (11)
|
10.18
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Second
Amendment to the Registration Rights Agreement dated April 27, 2005
(12)
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10.19
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Second
Amendment to the Registration Rights Agreement dated February 28, 2006
(12)
|
10.20
|
June
2007 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners L1,
LLP (13)
|
10.21
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Form
of Convertible Note with each Purchaser (13)
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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 (15)
|
10.33
|
Distribution
Agreement with LACE Elettronica srl (15)
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10.34
|
Letter
of Intent with Fairhills Capital Offshore, LLC (16)
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10.35
|
Letter
of Understanding with Costrugione Srumenti Oftalmici
|
31.1
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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.
|
(14)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on January 7,
2008.
|
(15)
|
Incorporated
by reference from Annual Report on Form 10-KSB, as filed on May 16,
2008.
|
(16)
|
Incorporated
by reference from Annual Report on Form 10-K, as filed on April 15,
2009.
|
(b) Reports on Form
8-K
|
No
reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2009.
|
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
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PARADIGM
MEDICAL INDUSTRIES, INC.
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August
5, 2009
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/s/
Stephen L. Davis
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Stephen
L. Davis
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President
and Treasurer
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(Principal
Executive Officer, Principal Financial
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Officer,
and Principal Accounting Officer)
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