UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ____
Commission File Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0459536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 South 1070 West, Salt Lake City, Utah 84119
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 977-8970
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES[X] NO [ ]
Indicate by check mark whether the small business issuer is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value 28,530,074
----------------------------- ----------------
Title of Class Number of Shares
Outstanding as of
June 30, 2005
Class A Warrant to Purchase
One Share of Common Stock 1,000,000
--------------------------- ------------------
Title of Class Number of Warrants
Outstanding as of
June 30, 2005
PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2005
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................................. 1
Condensed Balance Sheet (unaudited) - June 30, 2005.............................. 1
Condensed Statements of Operations (unaudited) for the six months ended
June 30, 2005 and June 30, 2004.................................................. 2
Condensed Statements of Cash Flows (unaudited) for the six months ended
June 30, 2005 and June 30, 2004 ............................................ 3
Notes to Condensed Financial Statements (unaudited).............................. 4
Item 2. Management's Discussion and Analysis or
Plan of Operation ........................................................ 9
Item 3. Controls and Procedures ..................................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................................... 21
Item 4. Submission of Matters to a Vote of Security Holders........................... 21
Item 5. Other Information............................................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................................. 21
Signature Page ........................................................................... 23
ii
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 2005
-------------
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,088,000
Receivables, Net 773,000
Inventory 746,000
Prepaid Expenses 99,000
-----------
Total Current Assets 2,706,000
Intangibles, Net 679,000
Property and Equipment, Net 66,000
Total Assets $ 3,451,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable $ 346,000
Accrued Expenses 762,000
Current Portion of Long-term Debt 33,000
-----------
Total Current Liabilities 1,141,000
Long-term Debt 2,500,000
-----------
Total Liabilities (Commitment) 3,641,000
-----------
Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at June 30, 2005 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at June 30, 2005 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at June 30, 2005 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at June 30, 2005 -
Series E
Authorized: 50,000 shares; issued and
outstanding: 1,000 shares at June 30, 2005 -
Series F
Authorized: 50,000 shares; issued and
outstanding: 4,598.75 shares at June 30, 2005 -
Series G
Authorized: 2,000,000 shares; issued and
outstanding: 1,726,560 shares at June 30, 2005 2,000
Common Stock, Authorized:
80,000,000 shares, $.001 par value; issued and
outstanding: 28,530,074 at June 30, 2005 28,000
Additional paid-in-capital 60,187,000
Accumulated Deficit (60,407,000)
-------------
Total Stockholders' Equity (190,000)
-------------
Total Liabilities and Stockholders' Equity $ 3,451,000
=============
See accompanying notes to condensed financial statements
1
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30
2005 2004 2005 2004
-------------------------------------------------------
Sales $ 885,000 $ 806,000 $ 1,413,000 $ 1,389,000
Cost of Sales 478,000 273,000 692,000 501,000
------------- ------------ ------------ ------------
Gross Profit 407,000 533,000 721,000 888,000
Operating Expenses:
Marketing and Selling 187,000 164,000 365,000 349,000
General and Administrative 390,000 139,000 652,000 445,000
Research, development and service 248,000 153,000 459,000 380,000
------------- ------------ ------------ ------------
Total Operating Expenses 825,000 456,000 1,476,000 1,174,000
------------- ------------ ------------ ------------
Operating Income (Loss) (418,000) 77,000 (755,000) (286,000)
Other Income and (Expense):
Interest Expense (16,000) (7,000) (20,000) (12,000)
Financing Costs (2,851,000) - (2,854,000) 5,000
Other Income 9,000 - 28,000 -
------------- ------------ ------------ ------------
Total Other Income and (Expense) (2,858,000) (7,000) (2,846,000) (7,000)
------------- ------------ ------------ ------------
Net Income (Loss) Before Provision
for Income Taxes (3,276,000) 70,000 (3,601,000) (293,000)
Income Taxes - - - -
------------- ------------ ------------ ------------
Net Income (Loss) $ (3,276,000) $ (70,000) $ (3,601,000) $ (293,000)
============= ============ ============ ============
Net Loss Per Common Share
- Basic and Diluted $ (.12) $ (.00) $ (.13) $ (.01)
============= ============ ============ ============
Weighted Average Outstanding
Shares - Basic and Diluted 28,362,000 25,373,000 27,745,000 25,373,000
============= ============ ============ ============
See accompanying notes to condensed financial statements.
2
PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2005 2004
-------------------------------
Cash Flows from Operating Activities:
-------------------------------------
Net Loss $ (3,601,000) $ (293,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 43,000 81,000
Issuance of Common Stock for Satisfaction of Penalty 52,000 -
Issuance of Common Stock for Services 22,000 -
Beneficial Conversion Interest 2,009,000 -
Issuance of Stock Options and Warrants for Services 491,000 -
Increase/decrease in Inventory Reserve (48,000) -
Provision for Losses on Receivables (81,000) -
Loss of Disposal of Assets - 6,000
(Increase) Decrease from Changes in:
Trade Accounts Receivable (36,000) 262,000
Inventories 21,000 202,000
Prepaid Expenses (35,000) 94,000
Increase (Decrease) from Changes in:
Trade Accounts Payable (406,000) 18,000
Accrued Expenses and Deposits (96,000) (379,000)
------------ ------------
Net Cash Used in Operating Activities (1,665,000) (9,000)
------------ ------------
Cash Flow from Investing Activities:
------------------------------------
Proceeds from Sale of Assets - 6,000
------------ ------------
Net Cash Used in Investing Activities - 6,000
------------ ------------
Cash Flows from Financing Activities:
-------------------------------------
Principal Payments on Notes Payable (28,000) (27,000)
Proceeds from Issuance of Common Stock 150,000 -
Proceeds from Issuances of Convertible Notes 2,500,000 -
------------ ------------
Net Cash (Used) Provided by Financing Activities 2,622,000 (27,000)
------------ ------------
Net Increase in Cash and Cash Equivalents 957,000 (30,000)
Cash and Cash Equivalents at Beginning of Period 131,000 132,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,088,000 $ 102,000
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 7,000 $ 12,000
============ ============
Cash Paid for Income Taxes $ - $ -
============ ============
See accompanying notes to financial statements
3
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Significant Accounting Policies
-------------------------------
The accompanying condensed financial statements of the Company have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary to
present fairly the results of operations of the Company for the periods
presented. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 2004. The results of operations for
the six months ended June 30, 2005, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2005.
Going Concern
-------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Historically, the Company has
not demonstrated the ability to generate sufficient cash flows from operations
to satisfy its liabilities and sustain operations, and the Company has incurred
significant losses. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company's continuation as a going concern is dependent on its
ability to generate sufficient income and cash flow to meet its obligations on a
timely basis and/or obtain additional financing as may be required. The Company
is actively seeking options to obtain additional capital and financing.
In addition, the Company has taken significant steps to reduce costs
and increase operating efficiencies. Specifically, the Company has significantly
reduced the use of consultants, which has resulted in a large decrease in
expenses. In addition, the Company has reduced the number of its direct sales
representatives, which has resulted in less payroll, travel and other expenses.
Although these cost savings have significantly reduced the Company's losses and
ongoing cash flow needs, if the Company is unable to obtain equity or debt
financing, it may be unable to continue development of its products and may be
required to substantially curtail or cease operations.
Net Loss Per Share
------------------
Net loss per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents consisting of options
and warrants to purchase 25,295,000 and 5,879,000 shares of common stock and
preferred stock convertible into 2,047,000 and 2,302,000 shares of common stock
at June 30, 2005 and 2004, respectively, have not been included in loss periods
because they are anti-dilutive.
For the six months ended June 30, 2005, the options and warrants to
purchase 25,295,000 shares of common stock were excluded because of the treasury
stock method.
The following table is a reconciliation of the net loss numerator of
basic and diluted net loss per common share for the three and six month periods
ended June 30, 2005 and June 30, 2004:
4
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------------------- ------------------------
Basic weighted average shares outstanding 28,362,000 $25,373,000 27,745,000 $25,373,000
Common stock equivalents - convertible preferred stock 2,047,000 2,302,000 - -
----------- ----------- ---------- -----------
Diluted weighted average shares outstanding 30,409,000 27,675,000 27,745,000 25,373,000
=========== ========== ========== ===========
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 callable secured convertible
notes and (ii) warrants to purchase 16,534,392 shares of its common stock. The
sale of the callable secured convertible notes and warrants is to occur in three
traunches and the investors are obligated to provide the Company with an
aggregate of $2,500,000 as follows:
o $850,000 was disbursed on April 27, 2005;
o $800,000 was disbursed on June 23, 2005 after filing a
registration statement on June 22, 2005, which covered the shares
of common stock underlying the callable secured convertible notes
and the warrants; and
o $850,000 was disbursed on June 30, 2005, upon the effectiveness of
the registration statement on June 29, 2005, which covered the
shares of common stock underlying the callable secured convertible
notes and the warrants.
Each closing under the securities purchase agreement was subject to the
following conditions:
o The Company delivered to the investors duly executed callable
secured convertible notes and warrants;
o No litigation, statute, regulation or order had been commenced,
enacted or entered by or in any court, governmental authority or
any self-regulatory organization that prohibits consummation of
the transactions contemplated by the securities purchase
agreement; and
o No event occurred that could reasonably be expected to have a
material adverse effect on the Company's business.
The Company also agreed not, without the prior written consent of a
majority-in-interest of the investors, to negotiate or contract with any party
to obtain additional equity financing (including debt financing with an equity
component) that involves (i) the issuance of common stock at a discount to the
market price of the common stock on the date of issuance (taking into account
the value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants during the lock-up period beginning April 27, 2005 and ending on the
later of (A) 270 days from April 27, 2005, and (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 callable secured convertible notes bear interest at 8% per annum
from the date of issuance. Interest is computed on the basis of a 365-day year
and is payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock price
is greater than 125% of the initial market price, or $.0945, for each trading
day during that month. Any amount of principal or interest on the 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
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our common stock at the selling stockholders'
option, at the lower of (i) $.09 or (ii) 60% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for the
20 trading days before but not including the conversion date. Accordingly, there
is no limit on the number of shares into which the notes may be converted.
5
The callable secured 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 callable secured 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 callable secured 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 callable secured convertible notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(ii) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and 60 days following the issue date of the notes; and
(iii) 145% of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the notes.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $.20 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then the Company
will not receive any proceeds therefrom. In addition, the exercise price of the
warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the callable secured convertible
notes issued pursuant to the Securities Purchase Agreement.
The selling stockholders have agreed to restrict their ability to
convert their callable secured convertible notes or exercise their warrants and
receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock. However, the selling stockholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and subsequently
convert additional callable secured convertible notes.
The Company is required to register the shares of its common stock
issuable upon the conversion of the callable secured convertible notes and the
exercise of the warrants. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the April 27, 2005 closing
date and the effectiveness of the registration is to be within 135 days of such
closing date. Penalties of 2% of the outstanding principal balance of the
callable secured convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at our option. The Company filed a
registration statement with the Securities and Exchange Commission on June 22,
2005 to register the shares of common stock issuable upon the conversion of the
callable secured convertible notes and the exercise of the warrants. The
registration statement was declared effective on June 29, 2005.
As of June 30, 2005, the average of the three lowest intraday trading
prices of our common stock during the preceding 20 trading days as reported on
the OTC Bulletin Board was $.05 and, therefore, the conversion price for the
callable secured convertible notes was $.03. Based on this conversion price, the
$2,500,000 callable secured convertible notes, excluding interest, were
convertible into 83,333,333 shares of our common stock. As of June 24, 2005,
none of the callable secured convertible notes had been converted.
Since June 30, 2005, a total of $170,610 in callable secured
convertible notes have been converted into 7,160,000 shares of the Company's
common stock pursuant to notices of conversion from The NIR Group. The dates of
these notices of conversion, the amount of the notes converted, the conversion
price of the notes converted, and the shares issued to the noteholders upon
conversion were as follows:
6
Shares Issued to
Date of Notice Amount of Notes Conversion Price Noteholders
of Conversion Converted of Notes Upon Conversion
-------------- --------------- ---------------- ----------------
July 7, 2005 $ 39,900 $.0285 1,400,000
July 14, 2005 40,460 .0289 1,400,000
July 20, 2005 32,110 .0247 1,300,000
July 26, 2005 29,682 .0194 1,530,000
July 29, 2005 28,458 .0186 1,530,000
August 5, 2005 22,032 .0144 1,530,000
---------- ---------
Total $192,642 8,690,000
Preferred Stock Conversions
---------------------------
Under the Company's Articles of Incorporation, holders of the Company's
Class A and Class B preferred stock have the right to convert such stock into
shares of the Company's common stock at the rate of 1.2 shares of common stock
for each share of preferred stock. During the six months ended June 30, 2005, 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 six months ended June 30, 2005, 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 six months ended June 30, 2005, 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 six months ended June 30, 2005, no
shares of Series F preferred stock were converted to shares of the Company's
common stock.
Holders of Series G preferred have the right to convert such stock into
shares of the Company's common stock at the rate of one share of common stock
for each share of preferred stock. During the six months ended June 30, 2005, 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 callable secured convertible notes, the Company granted warrants to
purchase 16,534,392 shares of its common stock. The warrants have an exercise
price of $.20 per share and expire on April 7, 2010.
Stock - Based Compensation
--------------------------
For stock options and warrants granted to employees, the Company
employs the footnote disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
encourages entities to adopt a fair-value based method of accounting for stock
options or similar equity instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based compensation using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The
Company has elected to continue to apply the provisions of APB 25 and provide
pro forma footnote disclosures required by SFAS No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
7
Stock options and warrants granted to non-employees for services are
accounted for in accordance with SFAS 123 which requires expense recognition
based on the fair value of the options/warrants granted. The Company calculates
the fair value of options and warrants granted by use of the Black-Scholes
pricing model. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
--------------------------- ---------------------------
Net income (loss) - as reported $(3,276,000) $ 70,000 $ (3,601,000) $(293,000)
Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (573,000) (109,000) (657,000) (210,000)
Net loss - pro forma $(3,849,000) $ (39,000) $ (4,258,000) $(503,000)
=========== ========== ============ ==========
Earnings per share:
Basic and diluted - as reported $ (0.12) $ (0.00) $ (0.13) $ (0.01)
Basic and diluted - pro forma $ (0.14) $ (0.00) $ (0.15) $ (0.02)
Related Party Transactions
--------------------------
Payments for legal services to the law firm of which the Company's
Chairman of the Board of Directors is President, a director and a shareholder
were approximately $180,000 and $20,000 for the three months ended June 30, 2005
and 2004, respectively. In addition, on April 7, 2005, the Company issued
250,000 registered shares of common stock to such law firm in payment of $22,500
in legal services.
Accrued Expenses
----------------
Accrued expenses consist of the following at June 30, 2005:
Accrued consulting and litigation reserve $ 467,000
Accrued payroll and employee benefits 120,000
Sales taxes payable 10,000
Customer deposits 23,000
Accrued royalties 16,000
Deferred revenue 2,000
Warranty and return allowance 96,000
Other accrued expenses 28,000
----------
Total $ 762,000
==========
Stockholders' Equity
--------------------
On January 14, 2005, the Company issued 2,000,000 shares of common
stock to an accredited investor through a private placement at a price of $0.75
per share. The Company received a total of $150,000 in cash from the private
placement transaction and issued as a commission warrants to purchase 200,000
shares of the Company's common stock at $.15 per share.
On February 1, 2005, the Company issued a total of 515,206 shares of
common stock to two accredited investors that had purchased shares of the
Company's Series G convertible preferred stock in a private placement
transaction. Under the terms of the private offering, the Company was required
to file a registration statement with the Securities and Exchange Commission to
register the common shares issuable to the Series G preferred stockholders upon
conversion of their Series G preferred shares and exercise of their warrants.
The 515,206 shares represented a penalty for the Company not having a
registration statement declared effective within 120 days of the initial closing
of the offering. The value of these shares was $52,000.
8
On April 7, 2005, the Company issued 250,000 registered shares of
common stock to the law firm of Mackey Price Thompson & Ostler in payment of
legal services that the law firm provided to the Company in the amount of
$22,500.
Item 2: Management's Discussion and Analysis or Plan of Operation
This report contains forward-looking statements and information
relating to the Company that is based on beliefs of management as well as
assumptions made by, and information currently available to management. These
statements reflect its current view respecting future events and are subject to
risks, uncertainties and assumptions, including the risks and uncertainties
noted throughout the document. Although the Company has attempted to identify
important factors that could cause the actual results to differ materially,
there may be other factors that cause the forward-looking statements not to come
true as anticipated, believed, projected, expected or intended. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those
described herein as anticipated, believed, projected, estimated, expected or
intended.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue in compliance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB
101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is
recognized:
1. Persuasive evidence of an arrangement exits. Prior to shipment of
product, the Company required a signed purchase order and, depending upon the
customer, a down payment toward the final invoiced price or full payment in
advance with certain international product distributors.
2. Delivery and performance have occurred. Unless the purchase order
requires specific installation or customer acceptance, the Company recognizes
revenue when the product ships. If the purchase order requires specific
installation or customer acceptance, the Company recognizes revenue when such
installation or acceptance has occurred. Title to the product passes to its
customer upon shipment. This revenue recognition policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product. If its product does not function as marketed when received by the
customer, the Company either makes the necessary repairs on site or has the
product shipped to the Company for the repair work. Once the product has been
repaired and retested for functionality, it is re-shipped to the customer. The
Company provides warranties that generally extend for one year from the date of
sale. Such warranties cover the necessary parts and labor to repair the product
as well as any shipping costs that may be required. The Company maintains a
reserve for estimated warranty costs based on its historical experience and
management's current expectations.
3. The sales price is fixed or determinable. The purchase order
received from the customer includes the agreed-upon sales price. The Company
does not accept customer orders, and therefore does not recognize revenue, until
the sales price is fixed.
4. Collectibility is reasonably assured. With limited exceptions, the
Company requires down payments on product prior to shipment. In some cases the
Company requires payment in full prior to shipment. The Company also performs
credit checks on new customers and ongoing credit checks on existing customers.
The Company maintains an allowance for doubtful accounts receivable based on
historical experience and management's current expectations.
Recoverability of Inventory. Since its inception, the Company has
purchased several complete lines of inventory. In some circumstances the Company
has been able to utilize certain items acquired and others remain unused. On a
quarterly basis, the Company attempts to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced.
9
Recoverability of Goodwill and Other Intangible Assets. The Company's
intangible assets consist of goodwill, product and technology rights,
engineering and design costs, and patent costs. Intangibles with a determined
life are amortized on a straight-line basis over their determined useful life
and are also evaluated for potential impairment if events or circumstances
indicate that the carrying amount may not be recoverable. Intangibles with an
indefinite life, such as goodwill, are not amortized but are tested for
impairment on an annual basis or when events and circumstances indicate that the
asset may be impaired. Impairment tests include comparing the fair value of a
reporting unit with its carrying net book value, including goodwill. To date,
the Company's determination of the fair value of the reporting unit has been
based on the estimated future cash flows of that reporting unit.
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts to offset estimated uncollectible accounts receivable. Bad
debt expense associated with the increases in the allowance for doubtful
accounts is recorded as part of general and administrative expense. The
Company's accounting policy generally is to record an allowance for receivables
over 90 days past due unless there is significant evidence to support that the
receivable is collectible.
General
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal year
is from January 1 through December 31.
The Company is engaged in the design, development, manufacture and sale
of high technology diagnostic and surgical eye care products. Given the "going
concern" status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource efficient
short-term cash flow. As seen in the results for the three months ended June 30,
2005, diagnostic products have been the major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the Company's financial position improves. The Company does not
focus on a specific diagnostic product or products but, instead, on the entire
diagnostic product group.
Results of Operations
Three Months Ended June 30, 2005, Compared to Three Months Ended June
30, 2004
Net sales for the three months ended June 30, 2005 increased by
$79,000, or 10%, to $885,000 as compared to $806,000 for the same period of
2004. This increase was primarily due to improved sales of ultrasound
biomicroscopes.
For the three months ended June 30, 2005, sales from the Company's
diagnostic products totaled $789,000, or 89% of total revenues, compared to
$699,000, or 83% of total revenues for the same period of 2004. The remaining
11% of sales, or $97,000, during the three months ended June 30, 2005 was from
parts, disposables, and service revenue.
Sales of the P40 and P45 UBM Ultrasound Biomicroscopes increased to
$535,000 during the second quarter of 2005, or 60% of total quarterly revenues
for the period, compared to $125,000, or 15% of total revenues, for the same
period last year. Sales of the Blood Flow Analyzer(TM) decreased by $139,000 to
$29,000, or 3% of total revenues, for the three months ended June 30, 2005,
compared to net sales of $168,000, or 20% of total revenues, during the same
period in 2004. Sales from the P37 A/B Scan Ocular Ultrasound Diagnostic
decreased to $59,000, or 7% of total revenues, for the three month period ended
June 30, 2005, down slightly compared to $95,000, or 11% of total revenues, for
the same period last year. Combined sales of the LD 400 and TKS 5000
Autoperimeters and the 200 Corneal Topographer were $166,000, or 19% of the
total revenues, for the three months ended June 30, 2005, compared to $311,000,
or 39% of total revenues, for the same period of 2004.
Sales have increased based on the emphasis on the UBM ultrasound
biomicroscope line. Both the strong sales of the existing line comprised of the
P40 and P45 Ultrasound Biomicroscopes and the related P37 Ultrasound
Biomicroscope, as well as the introduction of the new P60 Ultrasound
Biomicroscope contributed to the overall sales figure. This increase was
partially offset by lower sales of the Blood Flow Analyzer(TM), which continue
to lag. Part of this decrease was due to the reorganization of the Company's
sales force. The Company plans to increase its efforts to address this area of
lagging sales of the Blood Flow analyzer(TM) by revisiting the product strategy,
seeking greater support in the medical literature, and revisiting studies
conducted in the past demonstrating the clinical efficacy of the product.
10
For the three months ended June 30, 2005, gross profit decreased by
20%, to 46% of total revenues, compared to the 66% of total revenues for the
comparable period of 2004.
Marketing and selling expenses increased by approximately $23,000, or
14%, to $187,000, for the three months ended June 30,2005, from $164,000 for the
comparable period in 2004. The increase was primarily due to marketing
activities surrounding the introduction of the P60 UBM Ultrasound Biomicroscope,
including recruiting independent sales representatives and marketing expenses.
General and administrative expenses increased by $251,000, or 181%, to
$390,000 for the three months ended June 30, 2005, from $139,000 for the
comparable period in 2004. This increase was primarily due to a reduction in the
warranty reserve for the quarter ended June 30, 2004, which reduced general and
administrative expenses by $308,000 for that period.
Financing costs were $2,851,000 for the three months ended June 30,
2005 compared to no financing costs for the same period of 2004. This expense
was unusually high for the three months ended June 30, 2005 as a result of
accounting for the sale of $2,500,000 in callable secured convertible notes
entirely as a one-time expense plus closing costs related to the sale of the
notes for the second quarter of 2005.
In addition, during the three months ended June 30, 2005, the Company
issued 250,000 registered shares of common stock to a law firm in payment for
legal services that the law firm provided to the Company in the amount of
$22,500. Randall A. Mackey, the Company's Chairman is President, a director and
a shareholder of such law firm.
Research, development and service expenses increased $95,000, or 62%,
for the three months ended June 30, 2005 to $248,000, compared to $153,000 for
the same period of 2004. This increase reflects the addition of staff and
additional engineering expenses related to the introduction of the P60 UBM
Ultrasound Biomicroscope.
Six Months Ended June 30, 2005, Compared to Six Months Ended June 30,
2004
Net sales for the six months ended June 30, 2005 increased by $24,000,
or 2%, to $1,413,000 as compared to $1,389,000 for the same period of 2004. This
increase was primarily due to increased sales of the Company's ultrasound
biomicroscopes offset by a reduction in the sales of the Blood Flow Analyzer(TM)
and the Dicon(TM) perimeters and corneal topographers. Second quarter sales
reflected positive signs of growth, offsetting a slow first quarter.
For the six months ended June 30, 2005, sales from the Company's
diagnostic products totaled $1,172,000, or 83% of total revenues, compared to
$1,253,000, or 90% of total revenues, for the same period of 2004. The remaining
17% of sales, or $242,000, during the six months ended June 30, 2005 was from
parts, disposables, and service revenue.
Sales of the P40 and P45 UBM Ultrasound Biomicroscopes increased to
$677,000 during the six months ended June 30, 2005, or 48% of total quarterly
revenues for the period, compared to $267,000, or 19% of total revenues, for the
same period last year. Sales of the Blood Flow Analyzer(TM) decreased by
$229,000 to $63,000, or 4% of total revenues, for the six months ended June 30,
2005 compared to net sales of $292,000, or 21% of total revenues, during the
same period in 2004. Sales from the P37 A/B Scan Ocular Ultrasound Diagnostic
decreased to $80,000, or 6% of total revenues, for the six month period ended
June 30, 2005, down slightly compared to $131,000, or 9% of total revenues, for
the same period last year. Combined sales of the LD 400 and TKS 5000
Autoperimeters and the 200 Corneal Topographer were $352,000, or 25% of the
total revenues, for the six months ended June 30, 2005, compared to $563,000, or
41% of total revenues, for the same period of 2004.
Sales have been relatively stable for the six months ended June 30,
2005 as the Company's older product lines have faced increased competition. The
existing ultrasound biomicroscopes, the P40 and P45, have realized strong
increases as a result of an increase sales by the Company's international
distributors. Additionally, introduction of the P60 UBM Ultrasound Biomicroscope
continues to reinforce the Company's position as a leader in ultrasound
microscopes, as well as providing the Company with a new, state of the art
product. The Company is addressing the slowdown in the sales of the Blood Flow
Analyzer(TM) and other diagnostic products with product development activities.
In the case of the Blood Flow Analyzer(TM), the Company plans to take a more
assertive position in promoting the therapeutic benefits to the user community
to increase support.
11
For the six months ended June 30, 2005, gross profit decreased by 19%,
to 51% of total revenues, compared to 64% of total revenues for the comparable
period of 2004.
Marketing and selling expenses increased by $16,000, or 5%, to
$365,000, for the six months ended June 30 2005, from $349,000 for the
comparable period in 2004. The increase was due primarily to marketing
activities surrounding the introduction of the P60 UBM Biomicroscope, including
recruiting independent sales representatives and marketing expenses.
General and administrative expenses increased by $207,000, or 47%, to
$652,000 for the six months ended June 30, 2005, from $445,000 for the
comparable period in 2004. This increase was primarily due to a reduction in the
warranty reserve for the six months ended June 30, 2004, which reduced general
and administrative expenses by $308,000 for the six month period.
Financing costs were $2,854,000 for the six months ended June 30, 2005
compared to no financing costs for the same period of 2004. This unusually high
financing cost reflected the one-time expense of $2,500,000 from accounting for
the sale of $2,500,000 in callable secured convertible notes entirely as a
one-time expense plus closing costs related to the sale of the notes for the six
months ended June 30, 2005.
In addition, during the first quarter of 2005, the Company issued
515,206 shares of common stock to two shareholders that had purchased shares of
the Company's Series G convertible preferred stock in a private offering. Under
the terms of the private offering, the Company was required to file a
registration statement with the Securities and Exchange Commission for the
purpose of registering the common shares issuable to the Series G preferred
stockholders upon conversion of their Series G preferred shares and exercise of
their warrants. The shares were issued as a penalty for the Company not having a
registration statement declared effective within 120 days of the initial closing
of the private offering.
Furthermore, during the second quarter of 2005, the Company issued
250,000 registered shares of common stock to a law firm in payment for legal
services that the law firm provided to the Company in the amount of $22,500.
Randall A. Mackey, the Company's Chairman is President, a director and a
shareholder of such law firm.
Research, development and service expenses increased by $79,000, or
21%, for the six months ended June 30, 2005 to $459,000, compared to $380,000
recorded in the same period of 2004. Service and engineering cost reductions
accounted for most of this cost savings. This reduction is also in view of
additional expenditures in developing and introducing the P60 Ultrasound
Microscopes.
Liquidity and Capital Resources
The Company used $1,665,000 in cash in operating activities for the six
months ended June 30, 2005, compared to $9,000 for the six months ended June 30,
2004. The increase in cash used for operating activities for the six months
ended June 30, 2005 was primarily attributable to the Company's sale of
$2,500,000 in callable secured convertible notes to investors. The Company
received no return from investing activities during the six months ended June
30, 2005 compared to the receipt of $6,000 in cash from investing during the
same period of 2004. Net cash provided in financing activities was $2,622,000
for the six months ended June 30, 2005, versus cash used of $27,000 in the same
period in 2004. The Company had working capital of $1,565,000 as of June 30,
2005. In January 2005, the Company sold 2,000,000 shares of its common stock to
an accredited investor for $150,000 in cash. 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 June 30, 2005, the Company had net operating loss carry-forwards
(NOLs) of approximately $51 million. These loss carry-forwards are available to
offset future taxable income, if any, and have begun to expire in 2001 and
extend for twenty years. The Company's ability to use net operating loss
carryforwards (NOLs) to offset future income is dependant upon certain
limitations as a result of the pooling transaction with Vismed and the tax laws
in effect at the time of the NOLs can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of change of ownership.
As of June 30, 2005, the Company had accounts payable of $346,000, a
significant portion of which was over 90 days past due. The Company has
contacted many of the vendors or companies that have significant amounts of
payables past due in an effort to delay payment, renegotiate a reduced
settlement payment, or establish a longer-term payment plan. While some
companies have been willing to renegotiate the outstanding amounts, others have
demanded payment in full. Under certain conditions, including but not limited to
judgments rendered against the Company in a court of law, a group of creditors
could force the Company into bankruptcy due to its inability to pay the
liabilities arising out of such judgments at that time. In addition to the
accounts payable noted above, the Company also has non-cancelable capital lease
obligations and operating lease obligations that require the payment of
approximately $194,000 in 2005, and $14,000 in 2006.
12
The Company has taken numerous steps to reduce costs and increase
operating efficiencies. These steps consist of the following:
1. The Company closed its San Diego facility. In so doing, numerous
manufacturing, accounting and management responsibilities were consolidated. In
addition, such closure resulted in significant headcount reductions as well as
savings in rent and other overhead costs.
2. The Company has significantly reduced the use of consultants, which
has resulted in a large decrease to these expenses.
3. The Company has reduced its direct sales force to five
representatives, which has resulted in less payroll, travel and other selling
expenses.
Because the Company has significantly fewer sales representatives, its
ability to generate sales has been reduced.
The Company has taken measures to reduce the amount of uncollectible
accounts receivable such as more thorough and stringent credit approval,
improved training and instruction by sales personnel, and frequent direct
communication with the customer subsequent to delivery of the system. The
allowance for doubtful accounts was 3% of total outstanding receivables as of
June 30, 2005 and 14% as of December 31, 2004. The allowance for doubtful
accounts has decreased from $101,000 at December 31, 2004 to $20,000 at June 30,
2005. The reduction in the allowance for doubtful accounts was the result of the
collection of no receivables previously allowed as part of the allowance for
doubtful accounts and the write off of $81,000 of receivables against the
allowance. The downturn in the economy worldwide has resulted in increased
difficulty in collecting certain accounts. Certain international dealers have
some aged, unpaid invoices that have not been resolved. The Company has
addressed its credit procedures and collection efforts and has instituted
changes that require more payments at the time of sale through letters of credit
and not on a credit term basis.
The Company intends to continue its efforts to reduce the allowance for
doubtful accounts as a percentage of accounts receivable. The Company has
ongoing efforts to collect a significant portion of the sales price in advance
of the sale or in a timely manner after delivery. During the six months ended
June 30, 2005, the Company had a net recovery of no receivables previously
allowed, and during the six months ended June 30, 2005, the Company did not add
to the allowance for doubtful accounts. The Company believes that by requiring a
large portion of payment prior to shipment, it has greatly improved the
collectibility of its receivables.
The Company carried an allowance for obsolete or estimated
non-recoverable inventory of $1,371,000 at June 30, 2005 and $1,560,000 at June
30, 2004, or approximately 65% and 66% of total inventory, respectively. The
Company's means of expansion and development of product has been largely from
acquisition of businesses, product lines, existing inventory, and the rights to
specific products. Through such acquisitions, the Company has acquired
substantial inventory, some of which the eventual use and recoverability was
uncertain. In addition, the Company has a significant amount of inventory
relating to the Photon(TM) laser system, which does not yet have FDA approval in
order to sell the product domestically. Therefore, the allowance for inventory
was established to reserve for these potential eventualities.
On a quarterly basis, the Company attempts to identify inventory items
that have shown relatively no movement or very slow movement. Generally, if an
item has shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly discounted prices. If items
are sold, the cash received would be recorded as revenue, but there would be no
cost of sales on such items due to the reserve that has been recorded. At the
time of sale, the inventory would be reduced for the item sold and the
corresponding inventory reserve would also be reduced.
13
At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation
requires regulatory FDA approval in order to be sold in the United States. Any
possible future efforts to complete the clinical trials on the Photon(TM) in
order to file for FDA approval would depend on the Company obtaining adequate
funding. The Company estimates that the funds needed to complete the clinical
trials in order to obtain the necessary regulatory approval on the Photon(TM) to
be approximately $225,000.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling price of its
products as a result of domestic inflation. Nor has it experienced unfavorable
profit reductions due to currency exchange fluctuations or inflation with its
foreign customers. All sales transactions to date have been denominated in U.S.
dollars.
Impact of New Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and, accordingly,
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after December
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
In November 2004, the FASB issued SFAS 151 "Inventory Costs--an
amendment of ARB No. 43." This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "[u]nder
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement shall be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not believe adoption of SFAS 151 will have any impact
on the Company's consolidated financial statements.
In December 2004, FASB issued SFAS 153 "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29." The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company does not believe adoption of SFAS 153 will have any
impact on the Company's consolidated financial statements.
In December 2004, the FASB issued FASB Statement No. 123 (revised
2004), "Share-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued. The revised statement requires entities to disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements.
14
Statement 123(R) is effective for public companies that do not file as
small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. For public companies that file
as small business issuers, Statement 123(R) is effective as of the beginning of
the first interim or annual reporting period that begins after December 15, 2005
(i.e., first quarter 2006 for the Company). All public companies must use either
the modified prospective or the modified retrospective transition method. Early
adoption of this statement for interim or annual periods for which financial
statements or interim reports have not been issued is encouraged. The Company
believes that the adoption of this pronouncement may have a material impact on
the Company's financial statements.
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2005. Based
on this evaluation, the Company's principal executive officer and principal
financial officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective and
adequately designed to ensure that the information required to be disclosed by
the Company in the reports it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in applicable rules and forms.
b) Changes in internal controls over financial reporting.
During the three months ended June 30, 2005, there has been no change
in the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II Other Information
Item 1. Legal Proceedings
An action was brought against the Company in March 2000 by George
Wiseman, a former employee, in the Third District Court of Salt Lake County,
State of Utah. The complaint alleges that the Company owes Mr. Wiseman 6,370
shares of its common stock plus costs, attorney's fees and a wage penalty (equal
to 1,960 additional shares of its common stock) pursuant to Utah law. The action
is based upon an extension of a written employment agreement. The Company
disputes the amount allegedly owed and intends to vigorously defend against the
action.
An action was brought against the Company on September 11, 2000 by
PhotoMed International, Inc. and Daniel M. Eichenbaum, M.D. in the Third
District Court of Salt Lake County, State of Utah. The action involves an amount
of royalties that are allegedly due and owing to PhotoMed International, Inc.
and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys' fees. Certain discovery
has taken place and the Company has paid royalties of $15,717, which the Company
believes brings all payments current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure
that the calculations have been correctly made on the royalties paid as well as
the proper method of calculation for the future.
It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. However, if the parties are
unable to agree on a method for calculating royalties, there is a risk that
PhotoMed and Dr. Eichenbaum might amend their complaint to request termination
of the license agreement and, if successful, the Company would lose its right to
manufacture and sell the Photon(TM) laser system.
On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03 CV00448TC. The complaint also
indicated that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." The Company has retained
legal counsel to review the complaint, which appears to be focused on alleged
false and misleading statements pertaining to the Blood Flow Analyzer(TM) and
concerning a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation.
15
More specifically, the complaint alleged that the Company falsely
stated in its Securities and Exchange Commission filings and press releases that
it had received authorization to use an insurance reimbursement CPT code from
the CPT Code Research and Development Division of the American Medical
Association for reimbursement to doctors in connection with the Blood Flow
Analyzer(TM), adding that the CPT code provides for a reimbursement to doctors
of $57.00 per patient for use of the Blood Flow Analyzer(TM). According to the
complaint, the CPT code was critical. Without a reimbursement code, physicians
would not purchase the Blood Flow Analyzer(TM) because they could not receive
compensation for performance of medical procedures using the medical device. The
complaint further contends that the Company never received the CPT code from the
American Medical Association at any time. Nevertheless, it is alleged that the
Company continued to misrepresent in its SEC filings and press releases that it
had received the CPT code. It is also alleged that the Company have never made a
full, corrective disclosure with respect to this alleged misstatement.
The complaint also alleged that on July 11, 2002, the Company issued a
press release falsely announcing that it had received a purchase order from
Valdespino Associates Enterprises and Westland Financial Corporation for 200
sets of its entire portfolio of products, with $70 million in systems to be
delivered over a two-year period, then another $35 million of orders to be
completed in the third year. The complaint further alleged that the Company had
never received a true purchase order for its products. As a result of these
alleged misstatements, the complaint contends that the price of the Company's
shares of common stock was artificially inflated during the period from April
25, 2001 through May 14, 2003, and the persons who purchased or retained the
Company's common shares during that period suffered substantial damages. The
complaint requests judgment for unspecified damages, together with interest and
attorney's fees.
The Company disputes having issued false and misleading statements
concerning the Blood Flow Analyzer(TM) and a purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises. On April 25, 2001,
the Company issued a press release that stated it had received authorization to
use common procedure terminology or CPT code number 92120 for the Blood Flow
Analyzer(TM). This press release was based on a letter the Company received from
the CPT Editorial Research and Development Department of the American Medical
Association stating that CPT code number 92120 was the appropriate common
procedure terminology or CPT code number for doctors to use when reporting
certain procedures performed with the Blood Flow Analyzer(TM).
Currently, there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. The
Company is endeavoring to obtain reimbursement by insurance payors in other
states where there is currently no reimbursement being made. The Company
believes it has continued to correctly represent in its Securities and Exchange
Commission filings that the CPT Editorial Research and Development Department of
the American Medical Association has informed the Company that CPT code number
92120 is the appropriate code for doctors to use when reporting certain
procedures performed with the Blood Flow Analyzer(TM).
On July 11, 2002, the Company issued a press release that stated it
received a purchase order from Valdespino Associates Enterprises and Westland
Financial Corporation for 200 complete sets of the Company's entire product
portfolio of diagnostic and surgical equipment for Mexican ophthalmic
practitioners, to be followed by a second order of 100 sets of equipment. The
press release was based on a purchase order dated July 10, 2002 that the Company
entered into with Westland Financial Corporation for the sale of 200 complete
sets of the Company's surgical and diagnostic equipment to Mexican ophthalmic
practitioners. The press release also stated that the initial order was for $70
million of the Company's equipment to be filled over a two-year period followed
by the second order of $35 million in equipment to be completed in the third
year. The press release further stated that delivery would be made in traunches
of 25 complete sets of the Company's equipment, beginning in 30 days from the
date of the purchase order.
On September 13, 2002, the board of directors issued a press release
updating the status of its product sales to the Mexican ophthalmic
practitioners. In that press release the board stated that the Company had been
in discussions for the prior nine months with Westland Financial Corporation,
aimed at supplying its medical device products to the Mexican market. In the
past, the Company has had a business relationship with Westland Financial. Upon
investigation, the board of directors had determined that the purchase order
referenced in the July 11, 2002 press release was not of such a nature as to be
16
enforceable for the purpose of sales or revenue recognition. In addition, the
Company had not sent any shipment of medical products to Mexican ophthalmic
practitioners nor received payment for those products pursuant to those
discussions. The September 13, 2002 press release also stated that discussions
were continuing with Westland Financial Corporation regarding sales and
marketing activities for the Company's medical device products in Mexico, but
the Company could not, at the time, predict or provide any assurance that any
transactions would result.
On June 2, 2003, a complaint was filed in the United States District
Court, captioned Michael Marrone v. Paradigm Medical Industries, Inc., Thomas
Motter, Mark Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On July 11,
2003, a complaint was filed in the same United States District Court, captioned
Lidia Milian v. Paradigm Medical Industries, Inc., Thomas Motter, Mark Miehle
and John Hemmer, Case No. 2:03 CV00617PGC. Both complaints seek class action
status. These cases are substantially similar in nature to the Meyer case,
including the contention that as a result of allegedly false statements
regarding the Blood Flow Analyzer(TM) and the purchase order from Westland
Financial Corporation and Valdespino Associates Enterprises, the price of the
Company's common stock was artificially inflated and the persons who purchased
the Company's common shares during the class period suffered substantial
damages. In a press release dated July 11, 2003, captioned "Milberg Weiss
announces the filing of a class action suit against Paradigm Medical Industries,
Inc. on behalf of investors," the law firm of Milberg Weiss Bershad Hynen &
Levach LLP, which represents purchasers of the Company's securities in the class
action suit filed on July 11, 2003, stated that the Company alleged
misrepresentations caused the market price of the stock to be artificially
inflated during the class period. As a result, it is alleged that investors
suffered millions of dollars in damages from the Company's alleged
misstatements.
The cases requested judgment for unspecified damages, together with
interest and attorney's fees. These cases have now been consolidated with the
Meyer case into a single action, captioned In re: Paradigm Medical Industries
Securities Litigation, Case No. 03-CV-448TC. The law firm of Milberg Weiss
Bershad & Schulman LLP is representing purchasers of the Company's securities in
the consolidated class action. On June 28, 2004, a consolidated amended class
action complaint was filed on behalf of purchasers of the Company's securities.
The consolidated complaint is similar to the three class action complaints and
alleges that the Company made false representations regarding the CPT code for
the Blood Flow Analyzer(TM), but it includes additional allegations that the
Company failed to disclose in a timely manner that doctors were being denied
reimbursement for procedures performed with the Blood Flow Analyzer(TM). The
consolidated complaint also alleges that the Company made false statements
regarding the purchase order from Westland Financial Corporation and Valdespino
Associates Enterprises. The Company believes the consolidated complaint is
without merit and intends to vigorously defend and protect its interests in the
case.
The Company was issued a Directors and Officers Liability and Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that contains a $5,000,000 limit of liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated cases have requested coverage under the policy. U.S. Fire is
currently investigating whether it may have a right to deny coverage for the
consolidated cases based upon policy terms, conditions and exclusions or to
rescind the policy based upon misrepresentations contained in its application
for insurance.
The Company has paid $50,000 to U.S. Fire toward satisfaction of the
$250,000 retention that is applicable to the consolidated cases. The Company
advised U.S. Fire that it could not pay the $250,000 retention due to its
current financial circumstances. As a consequence, on January 8, 2004, the
Company entered into a non-waiver agreement with U.S. Fire in which U.S. Fire
agreed to fund and advance the Company's retention obligation in consideration
for which the Company agreed to reimburse U.S. Fire the sum of $5,000 a month,
for a period of six months, with the first of such payments due on February 15,
2004. Thereafter, commencing on August 15, 2004, the Company is required to
reimburse U.S. Fire the sum of $10,000 per month until the entire amount of
$250,000 has been reimbursed to U.S. Fire. The Company has made payments to U.S.
Fire in the aggregate amount of $50,000, of which a payment of $20,000 was made
on July 1, 2005, leaving a remaining retention obligation to U.S. Fire of
$200,000.
In the event U.S. Fire determines that the Company or the former
officers and directors named in the consolidated cases are not entitled to
coverage under the policy, or that it is entitled to rescind the policy, or
should the Company be declared in default under the non-waiver agreement on
account of its failure to make the monthly payments owed to U.S. Fire for
funding the Company's retention obligation, then the Company agrees to pay U.S.
Fire, on demand, the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement. Moreover, if U.S. Fire
denies coverage for the consolidated cases under the policy, the Company would
owe its litigation counsel in the class action lawsuits, for any legal fees not
paid by U.S. Fire. However, U.S. Fire has currently agreed to pay the legal fees
relating to the class action lawsuits.
17
The Company will be in default under the non-waiver agreement if it
fails to make any payment due to U.S. Fire thereunder when such payment is due,
or institute proceedings to be adjudicated as bankrupt or insolvent. U.S. Fire's
obligation to advance defense costs under the agreement will terminate in the
event that the $5,000,000 policy limit of liability is exhausted. If U.S. Fire
denies coverage for the consolidated cases under the policy and the Company is
not successful in defending and protecting its interests in the cases, resulting
in a judgment against the Company for substantial damages, the Company would not
be able to pay such liability and, as a result, would be forced to seek
bankruptcy protection.
On July 10, 2003, an action was filed in the United States District
Court, District of Utah, by Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. Defendants include us, Thomas Motter, Mark Miehle and John
Hemmer, former officers of the company. The complaint claims that Innovative and
Barton entered into an asset purchase agreement with the Company on January 31,
2002, in which the Company agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative. The complaint claims the Company breached the asset purchase
agreement. The complaint also claims that the Company allegedly made false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino Associates Enterprises and Westland Financial
Corporation. The purpose of these statements, according to the complaint, was to
induce Innovative to sell its assets and purchase the shares of the Company's
common stock at artificially inflated prices while simultaneously deceiving
Innovative and Barton into believing that the Company's shares were worth more
than they actually were. The complaint contends that had Innovative and Barton
known the truth they would not have sold Innovative to us, would not have
purchased the Company's stock for the assets of Innovative, or would not have
purchased the stock at the inflated prices that were paid. The complaint further
contends that as a result of the allegedly false statements, Innovative and
Barton suffered substantial damages in an amount to be proven at trial.
The complaint also claims that 491,250 of the shares issued to
Innovative in the asset purchase transaction were not issued on a timely basis
and the Company also did not file a registration statement with the Securities
and Exchange Commission within five months of the closing date of the asset
purchase transaction. As a result, the complaint alleged that the value of the
shares of the Company's common stock issued to Innovative in the transaction
declined, and Innovative and Barton suffered damages in an amount to be proven
at trial. The Company filed an answer to the complaint and also filed
counterclaims against Innovative and Barton for breach of contract. The Company
believes the complaint is without merit and intends to vigorously defend and
protect its interests in the action. If the Company is not successful in
defending and protecting its interests in this action, resulting in a judgment
against the Company for substantial damages, and U.S. Fire denies coverage in
the litigation under the Directors and Officers Liability and Company
Reimbursement Policy, the Company would not be able to pay such liability and,
as a result, would be forced to seek bankruptcy protection.
On October 14, 2003, an action was filed in the Third Judicial District
Court, Salt Lake County, State of Utah, captioned Albert Kinzinger, Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries, Inc., Thomas Motter, Mark Miehle, Randall A. Mackey, and John
Hemmer, Case No. 030922608. The complaint also indicated that it was a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs Demand a
Trial by Jury." The Company retained legal counsel to review the complaint,
which appears to be focused on alleged false or misleading statements pertaining
to the Blood Flow Analyzer(TM). More specifically, the complaint alleged that
the Company falsely stated in Securities and Exchange Commission filings and
press releases that it had received authorization to use an insurance
reimbursement CPT code from the CPT Code Research and Development Division of
the American Medical Association in connection with the Blood Flow Analyzer(TM),
adding that the CPT code provides for a reimbursement to doctors of $57.00 per
patient for the Blood Flow Analyzer(TM).
The purpose of these statements, according to the complaint, was to
induce investors to purchase shares of the Company's Series E preferred stock in
a private placement transaction at artificially inflated prices. The complaint
contends that as a result of these statements, the investors that purchased
shares of its Series E preferred stock in the private offering suffered
substantial damages to be proven at trial. The complaint also alleged that the
Company sold Series E preferred shares without registering the sale of such
shares or obtaining an exemption from registration. The complaint requests
rescission, compensatory damages and treble damages, including interest and
attorneys' fees. The Company filed an answer to the complaint. The Company
believes the complaint is without merit and intends to vigorously defend its
interests in the action. If the Company is not successful in defending and
protecting its interests in the action, resulting in a judgment against it for
substantial damages, and U.S. Fire denies coverage in the litigation under the
Directors and Officers Liability and Company Reimbursement Policy, the Company
would not be able to pay such liability and, as a result, would be forced to
seek bankruptcy protection.
18
On January 26, 2005, the Company completed a written settlement
agreement to settle the lawsuit that Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. brought against the Company and its former executive officers.
Under the terms of the settlement, U.S. Fire agreed to pay Innovative Optics,
Inc. and Barton Dietrich Investments, L.P. the sum of $367,500 in cash. Payment
of this amount is contingent, however, upon the courts in the federal and state
class action lawsuits granting final approval of the settlements reached in
those respective actions, and such orders becoming final and not appealable.
On February 23, 2005, the Company executed written settlement
agreements to settle the federal and state court class action lawsuits that were
filed against the Company and its former executive officers. Under the terms of
settlement of the federal court class action lawsuit, U.S. Fire agreed to pay
the sum of $1,507,500 in cash to the class members that purchased the Company's
securities during the period between April 17, 2002 and November 4, 2002. Under
the terms of settlement of the state court class action lawsuit, U.S. Fire
agreed to pay the sum of $625,000 in cash to the class members that purchased
shares of Series E convertible preferred stock on or about July 11, 2001.
As a condition to the settlement agreements to settle the federal and
state court class action lawsuits, the courts in such lawsuits must have entered
orders granting final approval of the settlements reached in those respective
actions, and such orders must have become final and non-appealable. On March 3,
2005, the federal court entered an order granting preliminary approval of the
settlement in the federal court class action lawsuit and providing for notice to
be sent to potential class members. The federal court has set a hearing for
August 25, 2005 to consider granting final approval of the federal court class
action settlement. On April 18, 2005, a hearing was held in the state court and
the court entered a minute entry granting preliminary approval of the settlement
in the state court class action lawsuit. The state court has set a hearing for
August 18, 2005 to consider granting final approval of the state court class
action settlement.
As a further condition to the settlement agreements to settle the
federal and state court class action lawsuits, both settlement agreements
provided that U.S. Fire must not have exercised its option to terminate the
settlement agreements. U.S. Fire has the option to terminate the settlement
agreements if the cumulative dollar value of the claims held by individuals or
entities that "opt out" of the federal and state class action lawsuits exceeds
$250,000. If such "opt outs" exceed $250,000, however, plaintiffs in the federal
and state court class action lawsuits will have five days to cure by reducing
the amount of "opt outs" to less than $250,000.
If U.S. Fire exercises its option to terminate the settlement
agreements, then all parties to the settlement agreements will be restored to
their respective positions in the various actions as of the date of the
settlement agreements. In addition, the terms and provisions of the settlement
agreements will have no further force and effect on the various parties and will
be deemed null and void in their entirety.
Under the terms of the settlement agreements regarding the federal and
state court class action lawsuits and the lawsuit that Innovative Optics, Inc.
and Barton Dietrich Investors, L.P. brought against the Company and its former
executive officers, U.S. Fire has agreed to pay a total of $2,500,000 in cash to
the classes in the class action lawsuits and to Innovative Optics, Inc. and
Barton Dietrich Investments, L.P. in settlement of these lawsuits. Under the
terms of settlement, Paradigm Medical is to pay U.S. Fire the sum of $200,000
representing the remaining amount owing under the $250,000 retention obligation
in the insurance policy, and to execute a policy release in favor of U.S. Fire
as to coverage under the insurance policy.
An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of three copy machines that were
delivered to the Company's Salt Lake City facilities on or about April of 2000.
The action also seeks an award of attorney's fees and costs incurred in the
collection. The Company disputes the amounts allegedly owed, asserting that two
of the machines were returned to the leasing company because they did not work
properly. A responsive pleading has been filed. The Company was engaged in
settlement discussions with CitiCorp until counsel for CitiCorp withdrew from
the case. New counsel for CitiCorp has been appointed and it is anticipated that
settlement discussions will resume.
19
The Company received demand letters dated July 18, 2003, September 26,
2003 and November 10, 2003 from counsel for Douglas A. MacLeod, M.D., a
shareholder of the company. In the July 18, 2003 letter, Dr. MacLeod demands
that he and certain entities with which he is involved or controls, namely the
Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and
Milan Holdings, Ltd., be issued a total of 2,296,667 shares of the Company's
common stock and warrants to purchase 1,192,500 shares of its common stock at an
exercise price of $.25 per share. Dr. MacLeod claims that these common shares
and warrants are owing to him and the related entities under the terms of a
mutual release dated January 16, 2003, which he and the related entities entered
into with us. Dr. MacLeod renewed his request for these additional common shares
and warrants in the September 26, 2003 and November 10, 2003 demand letters. The
Company believes that Dr. MacLeod's claims and assertions are without merit and
that neither he nor the related entities are entitled to any additional shares
of its common stock or any additional warrants under the terms of the mutual
release. The Company intends to vigorously defend against any legal action that
Dr. MacLeod may bring.
On August 3, 2003, a complaint was filed against the Company by Corinne
Powell, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030918364). Defendants consist of the Company
and Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the
Company. The complaint alleges that at the time the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,030 for business expenses, $11,063 for
accrued vacation days, $12,818 for unpaid commissions, the fair market value of
50,000 stock options exercisable at $5.00 per share that she claims she was
prevented from exercising, attorney's fees and a continuing wage penalty under
Utah law. On March 29, 2005, the Company agreed to a settlement with Ms. Powell
of her claims for unpaid business expenses, accrued vacation days, and unpaid
commissions by agreeing to pay her $13,000. The Company made payment to Ms.
Powell for the agreed upon settlement amount.
On September 10, 2003, an action was filed against the Company by Larry
Hicks in the Third Judicial District Court, Salt Lake County, State of Utah,
(Civil No. 030922220), for payments due under a consulting agreement with us.
The complaint claims that monthly payments of $3,083 are due for the months of
October 2002 to October 2003 under a consulting agreement and, if the agreement
is terminated, for the sum of $110,000 minus whatever the Company has paid Mr.
Hicks prior to such termination, plus costs, attorney's fees and a wage penalty
pursuant to Utah law. The Company has filed an answer in which it denies any
liability to Mr. Hicks. Formal discovery in the matter has commenced. The
Company disputes the amount allegedly owed and intends to vigorously defend
against such action.
On November 7, 2003, a complaint was filed against the Company by Todd
Smith, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030924951 CN). Defendants consist of the
Company and Randall Mackey, a director of the Company. The complaint alleges
that while an employee of the Company, Mr. Smith was granted stock options to
purchase 16,800 shares of common stock exercisable at $5.00 per share. Mr. Smith
claims unpaid wages in the amount of the fair market value of the stock options
he claims he was prevented from exercising, attorney's fees, and a continuing
wage penalty under Utah law. The Company believes the claims are without merit
and intends to vigorously defend against such action.
On May 25, 2004, an action was brought against the Company by Jeffrey
F. Poore, former President and Chief Executive Officer of the Company, in the
Third Judicial District Court of Salt Lake County, State of Utah (Civil No.
040910875). The complaint alleges that the Company unlawfully terminated the
written employment agreement between Mr. Poore and the Company. As a result, Mr.
Poore demanded judgment against the Company for $350,000, representing his
annual salary for the two remaining years under the employment agreement, for
money judgment based on the value of his benefits for the two remaining years
under the employment agreement, including profit sharing plans, 401(k) and
cafeteria plans, health, hospitalization, dental, disability and other insurance
plans canceled by the Company, and for money judgment equal to the value of the
stock options granted to him under the employment agreement. The Company
disputes the amounts allegedly owed in the complaint and believes that there was
a sufficient basis to terminate Mr. Poore's employment for cause under the terms
of the employment agreement. Accordingly, the Company intends to vigorously
defend against the action.
On August 9, 2004, a third party complaint was brought against the
Company by Wakefield Eye Center and Dr. Kenneth C. Westfield (collectively
"Westfield"). The original action was brought by American Express Business
Finance Corporation against Westfield on May 27, 2004 in the District Court,
Clark County, State of Nevada (Civil No. A486307, Dept. No. XXI) concerning the
financing of the purchase of a Blood Flow Analyzer(TM) involving Westfield Eye
Center. The transaction took place during the latter half of 2001. Westfield
takes the position that if there is liability of Westfield to American Express
this liability is ultimately the Company's and the other third-party defendants.
The amount being sought against Westfield by American Express in the original
action includes the sum of $29,765.83, together with interest and attorney's
fees. Westfield's alleged claims against the Company include fraud, breach of
20
contract, promissory estoppel, declaratory relief, negligence, negligent
supervision, damages for injuries resulting from actions of employee/contractor,
wilful and wanton misconduct, conspiracy, and breach of fiduciary duty as well
as costs and attorney's fees. Westfield also seeks punitive damages. The Company
has filed an answer to the third party complaint in which the Company denies
liability. Formal discovery in the matter involving us has commenced. The case
has been referred to arbitration. The Company intends to vigorously defend the
action.
On March 31, 2005, an action was filed against the Company by Joseph W.
Spadafora in the United States District Court, District of Utah (Civil No.
2:05CV00278 TS). The complaint alleges that Dr. Spadafora was a clinical
investigator in the study for the FDA involving the Company's Photon(TM) laser
system where he performed numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he suggested ways in which the
handpiece on the Photon(TM) could be improved. Dr. Spadafora further contends
that on August 5, 1999, the Company filed a patent application for an improved
handpiece with the United States Patent and Trademark Office but he was not
named as one of the inventors or a co-inventor on the patent application.
On September 24, 2004, the Company was issued a patent entitled, "Laser
Surgival Handpiece with Photon Trap." Because the Company did not list Dr.
Spadafora as one of the inventors or a co-inventor on the patent, Dr. Spadafora
is requesting in his complaint that a court order be entered declaring that he
is the inventor or co-inventor of the patent and, as a result, is entitled to
all or part of the royalties and profits that the Company earned or will earn
from the sale of any product incorporating or using the improved handpiece, plus
interest and attorney's fees. The Company disputes the claims made by Dr.
Spadafora and intends to vigorously defend against such action.
The Company is not a party to any other material legal proceedings
outside the ordinary course of its business or to any other legal proceedings,
which, if adversely determined, would have a material adverse effect on its
financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit
No. Document Description
------- --------------------
2.1 Amended Agreement and Plan of Merger between Paradigm Medical
Industries, Inc., a California corporation and Paradigm Medical
Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Amended Certificate of Incorporation(9)
3.3 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Class A Warrant Certificate(2)
4.3 Form of Class A Warrant Agreement(2)
21
4.4 Specimen Series C Convertible Preferred Stock Certificate(3)
4.5 Certificate of the Designations, Powers, Preferences and Rights of
the Series C Convertible Preferred Stock(3)
4.6 Specimen Series D Convertible Preferred Stock Certificate (4)
4.7 Certificate of the Designations, Powers, Preferences and Rights of
the Series D Convertible Preferred Stock (5)
4.8 Warrant to Purchase Common Stock with Cyndel & Co. (4)
4.9 Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)
4.10 Warrant to Purchase Common Stock with KSH Investment Group,
Inc.(8)
4.11 Certificate of Designations, Powers, Preferences and Rights of the
Series G Convertible Preferred Stock (12)
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 Stock Purchase Agreement with Ocular Blood Flow, Ltd. and Malcolm
Redman (5)
10.5 Consulting Agreement with Malcolm Redman (5)
10.6 Royalty Agreement with Malcolm Redman (5)
10.7 Registration Rights with Malcolm Redman (5)
10.8 Termination of Employment Agreement with Mark R. Miehle(10)
10.9 Consulting Agreement with Mark R. Miehle(10)
10.10 Employment Agreement with Jeffrey F. Poore (11)
10.11 License Agreement with Sunnybrook Health Science Center(13)
10.12 Major Account Facilitator Contract(13)
10.13 Mutual Release with Douglas A. MacLeod, M.D. and Others(13)
10.14 Purchase Agreement with American Optisurgical, Inc.(13)
10.15 Purchase Order with Westland Financial Corporation(14)
10.16 Non-Waiver Agreement with United States Fire Insurance Company(14)
10.17 Employment Agreement with John Y. Yoon(15)
10.18 Consulting Agreement with Dr. John Charles Casebeer(16)
10.19 Stock Purchase and Sale Agreement with William Ungar (17)
10.20 Employment Agreement with Aziz A. Mohabbat (18)
10.21 Investment Banking Agreement with Alpha Advisory Services, Inc.
(19)
10.22 Manufacturing and Distribution Agreement with E-Technologies, Inc.
(19)
10.23 Settlement Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. and United States Fire Insurance Company (20)
10.24 Securities Purchase Agreement with AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC and New Millennium
Capital Partners II, LLP (the "Purchasers")(21)
10.25 Form of Callable Secured Convertible Note with each purchaser(21)
10.26 Form of Stock Purchase Warrant with each purchaser(21)
10.27 Security Agreement with Purchasers(21)
10.28 Intellectual Property Security Agreement with Purchasers(21)
10.29 Registration Statement with the Purchasers(21)
10.30 Stock Purchase Agreement with Mackey Price Thompson & Ostler (22)
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998.
(4) Incorporated by reference from Registration Statement on Form
SB-2, as filed on April 29, 1999.
(5) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(8) Incorporated by reference from Report on Form 10-KSB, as filed on
April 16, 2001.
(9) Incorporated by reference from Current Report on Form 8-K, as
filed on March 5, 2002.
(10) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.
(11) Incorporated by reference from Registration Statement on Form
SB-2, as filed on July 7, 2003.
(12) Incorporated by reference from Report on Form 10-QSB, as filed on
November 14, 2003.
22
(13) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on December 15, 2003.
(14) Incorporated by reference from Amendment No. 3 to Registration
Statement on Form SB-2, as filed on February 27, 2004.
(15) Incorporated by reference from Current Report on Form 8-K, as
filed on March 23, 2004.
(16) Incorporated by reference from Report in Form 10-KSB, as filed on
April 14, 2004.
(17) Incorporated by reference from Quarterly Report on Form 10-QSB, as
filed on August 16, 2004.
(18) Incorporated by reference from Amendment No. 6 to Registration
Statement on Form SB-2, as filed on October 20, 2004.
(19) Incorporated by reference from Report on Form 10-QSB, as filed on
November 15, 2004.
(20) Incorporated by reference from Current Report on Form 8-K, as
filed on January 26, 2005.
(21) Incorporated by reference from Current Report on Form 8-K, as
filed on May 18, 2005.
(22) Incorporated by reference from Registration Statement on Form
SB-2, as filed on June 22, 2005.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K, as filed on May 18, 2005.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PARADIGM MEDICAL INDUSTRIES, INC.
August 15, 2005 /s/ John Y. Yoon
----------------------------------------
John Y. Yoon
President and Chief Executive Officer
August 15, 2005 /s/ Luis A. Mostacero
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Luis A. Mostacero, Controller, Treasurer
and Secretary
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