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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Paradigm Medical Industries Inc (CE) | USOTC:PDMI | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.000001 | 0.00 | 00:00:00 |
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DELAWARE
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87-0459536
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(State
or other jurisdiction
|
(I.R.S.
Employer
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|
of
incorporation or organization)
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Identification
Number)
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2355
South 1070 West, Salt Lake City, Utah
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84119
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|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
(801)
977-8970
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Securities
registered pursuant to Section 12(b) of the Act:
None
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Securities
registered pursuant to Section 12(g) of the
Act:
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [
]
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Registrant's
revenues for the fiscal year ended December 31, 2008 were
$1,259,000.
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,"
"accelerated filer" an "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check
one):
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|
Large
accelerated filer
9
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Accelerated
filers
9
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Non-accelerated
filer
:
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Smaller
reporting company
9
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|
(Do
not check if a smaller reporting company)
|
|||
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Indicate
by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2): Yes [ ] No
[X]
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DOCUMENTS
INCORPORATED BY REFERENCE:
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Additional
documents set forth in Part IV hereof are incorporated by
reference.
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Transitional
Small Business Disclosure Format (check one): Yes [ ] No
[X]
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PART
I
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Item
1. Description of Business
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General
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The
Company develops, manufactures, sources, markets and sells ophthalmic
surgical and diagnostic instrumentation and related accessories, including
disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company's cataract removal
system, the Photon
TM
laser system, is a laser cataract surgery system designed to be
marketed as the next generation of cataract removal. Because of the "going
concern" status of the Company, management has focused efforts
on those products and activities that will, in its opinion, achieve the
most resource efficient short-term cash flow to the Company. As reflected
in the results for the fiscal year ended December 31, 2008, diagnostic
products are currently the Company's major focus and the Photon
TM
and other extensive research and development projects have been put on
hold pending future evaluation when the financial position of the Company
improves. Due to the lack of FDA approval and the lack of current evidence
to support recoverability, the Company has recorded an inventory reserve
to offset the majority of the inventory associated with the Photon
TM
.
In addition, most inventory associated with the Precisionist Thirty
Thousand
TM
has been reserved due to the estimated lack of recoverability. The
Company's focus is not on any specific diagnostic product or products, but
rather on its entire group of diagnostic products. The Photon
TM
can be sold in markets outside of the United States. Both the
Photon
TM
and the Precisionist Thirty Thousand
TM
,
although not currently manufactured, have been manufactured in the past as
an Ocular Surgery Workstation
TM
.
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The
Company's diagnostic products include a P2000 pachymetric analyzer, a P37
Ultrasonic A/B Scan, P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37
A/B Scan, two perimeters, the Blood Flow Analyzer
TM
,
and the Glaid. The diagnostic ultrasonic products including the
P2000 pachymetric analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM
Ultrasound Biomicroscope were acquired from Humphrey Systems, a division
of Carl Zeiss in 1998. The Company developed and
offered for sale in the fall of 2000 the P45, which combines the P37
Ultrasonic A/B Scan and the UBM biomicroscope in one machine. In addition,
the Company developed and offered for sale in March 2005 the P60, which
represents the fourth generation of UBM devices and has better visual
clarity and image flexibility than earlier versions. The perimeter and the
corneal topographer were added when the Company acquired the outstanding
shares of the stock of Vismed, Inc. d/b/a/ Dicon
TM
in June 2000. The Company purchased Ocular Blood Flow, Ltd. in June
2000 whose principal product is the Blood Flow Analyzer
TM
.
This product is designed for the measurement of intraocular pressure and
pulsatile ocular blood flow volume for detection and monitoring of
glaucoma. The Company is currently developing additional applications for
all of its diagnostic products.
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In
June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer
TM
for measurement of intraocular pressure and pulsatile ocular blood flow
for the detection of glaucoma and other retina related diseases. Ocular
blood flow is critical, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation, thus resulting in visual field
loss associated with glaucoma. The Company's Blood Flow Analyzer
TM
is a portable automated in-office system that presents an affordable
method for ocular blood flow testing for the ophthalmic and optometric
practitioner. In June 2000, the Company purchased Occular Blood Flow,
Ltd., the manufacturer of the Blood Flow Analyzer
TM
.
The terms and conditions of the sale were $100,000 in cash and 100,000
shares of common stock. In April 2001, the Company received authorization
to use a common procedure terminology or CPT code from the American
Medical Association for procedures performed with the Blood Flow
Analyzer
TM
,
for reimbursement purposes for doctors using the device. However, certain
payers have elected not to reimburse doctors using the Blood Flow
Analyzer
TM
.
|
|
On
July 23, 1998, the Company entered into an Agreement for Purchase and Sale
of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to
acquire the ownership and manufacturing rights to certain assets of
Humphrey Systems that are used in the manufacturing and marketing of an
ultrasonic microprocessor-based line of ophthalmic diagnostic instruments,
including the Ultrasonic Biometer Model 820, the A/B Scan System Model
837, the Ultrasound Pachymeter Model 855, and the Ultrasound Biomicroscope
Model 840, and all accessories, packaging and end-user collateral
materialsfor each of the product lines for the sum of $500,000, payable in
the form of 78,947 shares of common stock which were issued to Humphrey
Systems and 26,316 shares of common stock which were issued to business
broker Douglas Adams. If the net proceeds received by Humphrey Systems
from the sale of the shares issued pursuant to the Agreement was less than
$375,000, after payment of commissions, transfer taxes and other expenses
relating to the sale of such shares, the Company would be required to
issue additional shares of common stock, or pay additional funds to
Humphrey Systems as would be necessary to increase the net proceeds from
the sale of the assets to $375,000. Since Humphrey Systems realized only
$162,818 from the sale of 78,947 shares of its common stock, the Company
issued 80,000 additional shares in January 1999 to enable Humphrey Systems
to receive its guaranteed amount. The amount of $21,431 was paid to the
Company as excess proceeds from the sale of this additional
stock.
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The
rights to the ophthalmic diagnostic instruments, which have been purchased
from Humphrey Systems, complement both the Company's cataract surgical
equipment and the Company's ocular Blood Flow Analyzer
TM
.
The Ultrasonic Biometer calculates the prescription for the intraocular
lens to be implanted during cataract surgery. The P55 pachymetric measures
corneal thickness for the new refractive surgical applications that
eliminate the need for eyeglasses and for optometric applications
including contact lens fitting. The P37 Ultrasonic A/B Scan combines the
Ultrasonic Biometer and ultrasound imaging for advanced diagnostic testing
throughout the eye and is a viable tool for retinal specialists. The P40
UBM Ultrasound Biomicroscope utilizes microscopic digital ultrasound
resolution for detection of tumors and improved glaucoma management. The
Company introduced the P45 in the fall of 2000, which combines the P37
Ultrasonic A/B Scan, and the Ultrasonic Biometer in one
machine.
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On
October 21, 1999, the Company purchased Mentor's surgical product line,
consisting of the Phaco SlStem
TM
,
the Odyssey
TM
and the Surg-E-Tro1
TM
.
This acquisition was an attempt to round out the Company's cataract
surgery product line by adding entry-level, moderately priced cataract
surgery products. The transaction was paid for with $1.5 million worth of
the Company's common stock. Due to the lack of sales volume of these
products, they were determined to be obsolete and a reserve was
established to offset all inventory associated with these products. During
the fourth quarter of 2003, the Company sold all inventory rights
associated with the SlStem
TM
and Odyssey
TM
for $125,000.
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On
June 5, 2000, the Company purchased Vismed Inc. d/b/a Dicon
TM
under a pooling of interest accounting treatment. The purchase
included the Dicon
TM
perimeter product line consisting of the LD 400, the TKS 5000, the
SST
TM
,
FieldLink
TM
,
FieldView
TM
and Advanced FieldView and the corneal topographer product line,
the CT 200
TM
,
the CT 50 and an ongoing service and software business. Perimeters are
used to determine retinal sensitivity testing the visual pathway. Corneal
topographers are used to determine the shape and integrity of the cornea,
the anterior surface of the eye. Corneal topographers are used for the
refractive surgical applications that eliminate the need for eyeglasses
and for optometric applications including contact lens
fitting.
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In
January 2002, the Company purchased the Innovatome
TM
microkeratome of Innovative Optics, Inc. by issuing an aggregate of
1,272,825 shares of its common stock, warrants to purchase 250,000 shares
of its common stock at $5.00 per share, exercisable over a period of three
years from the dosing date, and $100,000 in cash. The transaction was
accounted for as a purchase in accordance with Statement of Financial
Accounting Standards No. 141. The Company acquired from Innovative Optics
raw materials, work in process and finished goods inventories.
Additionally, the Company acquired the furniture and equipment used in the
manufacturing process of the microkeratome console and the inspection and
packaging of the disposable blades.
|
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The
Company was unsuccessful in supplying the disposable blades. The Company
discontinued the marketing and sales efforts of this product during the
third quarter of 2002. On April 1, 2002, the Company entered into a
consulting agreement with John Charles Casebeer, M.D. to develop and
promote the microkeratome. For Dr. Casebeer's services during the period
from April 1, 2002 to September 30, 2002, the Company issued him a total
of 43,684 shares of its common stock, representing payment of $100,000 in
stock for his services. All assets acquired from Innovative Optics,
including remaining inventory with a book value of $160,000 and equipment
and intangible assets with a book value of $2,082,000, were written off
during 2002.
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On
September 19, 2002, the Company completed a transaction with International
Bio-Immune Systems, Inc., a Delaware corporation , in which the Company
acquired 2,663,254 shares, or 19.9% of the outstanding shares of its
common stock, and warrants to purchase 1,200,000 shares of its common
stock at $2.50 per share for a period of two years, through the exchange
and issuance of 736,945 shares of its common stock, the lending of 300,000
shares of its common stock to the Company and the payment of certain of
its expenses through the issuance of an aggregate of 94,000 shares of its
common stock to the Company and its counsel. During 2004, the Company sold
all 2,663,254 shares of International Bio-Immune Systems stock for net
proceeds of $505,000.
|
|
On
December 3, 2003, the Company executed a purchase agreement with American
Optisurgical, Inc. for the sale of the Mentor surgical products line,
consisting of the Phaco SIStem
TM
and the Odyssey
TM
.
The assets sold in the transaction included patents, trademarks, software
codes and programs, supplies, work in process, finished goods, and molds
related to the equipment. The purchase price paid to the Company by
American Optisurgical for the assets was $125,000. The purchase agreement
also contained a noncompete provision in which the Company agreed for a
period of three years from the closing date not to own, manage, operate or
control any business that competes with cataract removal equipment
substantially the same as the proprietary technology of the Phaco
SlStem
TM
and the Odyssey
TM
.
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In
March 2005, the Company introduced the P60 UBM Ultrasound Biomicroscope.
The P60 Biomicroscope represents the fourth generation of UBM devices and
has better visual clarity and image flexibility than earlier versions. On
March 1, 2005, the Company was awarded the CE Mark for the P60, which
enables it to market the device in 19 Western European countries, most of
the Middle East and India, and some parts of Asia and the Pacific Rim. On
May 26, 2005, the Company received FDA 510(k) premarket approval for the
P60, which allows it to be sold in the United States. On February 9,
2006,the Company received a Canadian device license for the P60, which
allows it to be sold in Canada.
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On
June 12, 2006, the Company entered into a Worldwide OEM Agreement with
MEDA Co., Ltd., one of China's leading developers and producers of
ultrasound devices. Under the terms of the agreement, MEDA agrees to
jointly engineer, develop and manufacture the Company's next generation of
the Ultrasound BioMicroscope, as well as other proprietary new products
and enhancement of the Company's current products. The products to be
manufactured by MEDA, at agreed upon costs, and supplied to the Company
for resale include the following new products: an ultrasound
biomicroscope, two ultrasound A/B Scans, a biometric A-Scan and a
pachymeter.
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The
agreement provides that the Company and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of the Company's products
and, in the interest of product development, enhancement and
differentiation, MEDA agrees to give consideration to potential software
development or enhancements made available to the Company for its
products. Moreover, in the interest of product improvement, MEDA agrees to
collaborate with the Company and its designated engineers, employees and
consultants to consider and potentially implement jointly or individually
the development of product enhancements to the Company's products to be
manufactured by MEDA.
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The
software and hardware modifications designed jointly by the Company and
MEDA will be considered the joint intellectual property of the Company and
MEDA and may be used, without restriction, unless otherwise previously
agreed to, by either party. MEDA also agrees to provide a twelve month
warranty on all products that it manufactures for the Company. If defects
cannot be corrected at the Company's facilities, the products may be
returned to MEDA for the purposes of carrying out such repairs as
required, and MEDA agrees to return the repaired products to the Company
or its designated agent or distributor within ten working days from the
date of receiving such products, at no cost to the Company, and MEDA will
pay return freight costs.
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MEDA
further agrees to endeavor to answer any technical inquiries concerning
the products it has manufactured. MEDA also agrees to train the Company's
technical service engineers and designated international distributors as
soon as possible after the signing of this agreement, and as future needs
arise and as MEDA can reasonably fit such training into the regular
schedules of its employees. MEDA agrees to determine the need for future
training on new products as necessary and will offer such training in
Tiangin, China. For training conducted outside China, the Company or its
designated distributors and/or service centers will be responsible for the
traveling, living and hotel expenses for MEDA's engineers. Training is at
no charge to the Company. The training will also be made available to the
Company's designated repair agencies in order to provide service and
repair on a worldwide basis. Such agencies will be considered authorized
repair facilities for the products manufactured by
MEDA.
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MEDA
provides the Company with several ultrasound devices. These devices
include the P37-legal issues A/B Scan, the P2000 A-Scan Biometric
Analyzer
TM
,
P2200 Pachymeter and the P2500, which is a combined A-Scan and pachymeter.
MEDA also manufactures the P2700, P3700, and P37-II A/B Scans and the P50
Ultrasound Biomicroscope. The agreement provides exclusive distribution
rights to the Company throughout most of the world, including the United
States and Canada, once FDA approval is received on these
devices.
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The
agreement shall be effective for three years from date of execution. At
the end of the three year term, representatives of the Company and MEDA
will confer to determine whether to extend the term of the agreement. This
will have a practical effect of extending the term of the agreement for an
additional 120 days. If mutual agreement for extending the term of the
agreement is not reached within 120 days after the end of the three year
term, then the agreement will be deemed terminated. However, if within the
120 day period, the Company and MEDA mutually agree to extend the term of
the agreement, then thereafter either party may terminate the agreement by
providing at least twelve months' prior written notice to the other party.
All outstanding orders at the time of notification will be supplied under
the terms of the agreement, and MEDA will continue to fulfill all orders
from the Company until the twelve month notice period has
expired.
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On
January 31 and February 1, 2007, MEDA received FDA 510(k) premarket
approval for a new generation of ultrasound devices. This approval allows
the new devices to be sold in the United States. The new ultrasound
devices, which are to be manufactured by MEDA and sold by the Company in
the United States, include the P2000 A-Scan (used to measure axial length
of the eye), the P2200 Pachymeter (used for measuring corneal thickness),
the P2500 AScan/Pachymeter (a combination of the two stand alone
devices), the P2700 AB/Scan (an ultrasound imaging device for detecting
abnormalities within the eye) and the P37-II (a more advanced AB/Scan used
to provide portability for ophthalmology veterinary applications) and the
P50 Ultrasound Biomicroscope for high frequency imaging of the anterior
chamber of the eye.
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On
September 25, 2006, the Company entered into a Worldwide OEM Agreement
with Tinsley, a division of Hartest Precision Instruments Limited, and one
of Europe's leading developers and producers of visual fields analysis
devices or perimeters. Under the terms of the agreement, Tinsley agrees to
engineer, develop and manufacture the Company's newest perimeter, the
LD700 Visual Fields Analyzer. The product is to be manufactured by Tinsley
at agreed upon costs and supplied to the Company for
resale.
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On
August 14, 2007, the Company entered into an agreement with Equity Source
Partners, LLC of Jericho, New York. Under the terms of the agreement,
Equity Source Partners will act as the exclusive financial advisor to the
Company and will assist the Company in raising private capital, creating a
strategy for growing its core business, pursuing a follow on offering, and
providing general strategic corporate advice. Among the strategic advisory
services Equity Source Partners will provide are to assist in identifying
and introducing the Company to third parties in connection with potential
strategic relationships, provide advice concerning issues relating to
potential strategic relations, capital raises and potential investment
banking contacts, and establish contact with prospective providers of
capital. Among the financing services Equity Source Partners will perform
is to solicit prospective providers of capital on the Company's
behalf.
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The
term of the agreement is for twelve months unless extended by mutual
consent. As compensation for its services, the Company agrees to provide
equity Source Partners with an advisory fee equal to an aggregate of 3% of
the outstanding shares of the Company's common stock. In addition, the
Company agrees to pay Equity Source Partners a cash fee equal to 7.5% of
the gross proceeds from the sale of securities to investors that were
introduced to the Company by Equity Source Partners and a cash fee equal
to 3% of the gross proceeds received from the sale of securities to
investors that were not introduced by Equity Source
Partners. The agreement terminated on August 14, 2008, when it
was not extended by mutual consent for an additional time
period.
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On
January 16, 2008, the Company entered into a consulting agreement with
Corcoran Consulting Group, which specializes in medical reimbursement
issues for optometry and ophthalmology. The Company plans to work with
Corcoran Consulting Group to create a new common procedure technology, or
CPT code number, for reimbursement purposes for physicians and
practitioners using the Blood Flow Analyzer
TM
.
In addition, the Company plans to work with Corcoran Consulting Group to
offer educational seminars for physicians and practitioners who purchase
the Blood Flow Analyzer
TM
.
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On
January 28, 2008, the Company entered into a Distribution Agreement with
LACE Elettronica srl to distribute its Glaid device, a proprietary
electrophysiology instrument for the early detection of glaucoma by means
of measuring the physical condition of the retina's ganglion cells,
including retinal ganglion cell loss. The Glaid device was approved by the
FDA in 2005 and has undergone extensive testing and clinical studies in
the United States, Canada and Italy, including at Bascom Palmer Eye
Institute, University of California at San Diego's Hamilton Glaucoma
Center, and New York State College of
Optometry.
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Under
the terms of the agreement, the Company has the exclusive right to
distribute the Glaid device in the United States and Canada. The Company
also has a first right of refusal for distribution of the product to
countries outside the United States and Canada where LACE is not currently
selling or marketing the product. These additional distribution rights are
subject to reasonable new minimum quotas. The Distribution Agreement
requires the Company to purchase the Glaid device from LACE at an agreed
upon price and to then sell the product in compliance with minimum order
requirements. The five year quotas for the Glaid device are 27 units, 60
units, 100 units, 120 units, and 120 units for years one through five of
the agreement. Paradigm sales for quota requirements are to begin as soon
as the product is fully completed, with all accessories and consumables,
and ready for delivery.
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The
Distribution Agreement is for the term of five years. At the
end of the five
year
term,
representatives of the Company and LACE will determine whether to extend
the term of the agreement. If mutual agreement for continuation of the
agreement is not reached within 120 days thereafter, the agreement will be
deemed terminated. However, if within the 120 day period, the Company and
LACE mutually agree to continue the agreement, then either party may
terminate the agreement at any time thereafter by providing at least
twelve months' prior written notice to the other party. All outstanding
orders at the time of notification will be supplied under the terms of the
agreement, and LACE will continue to fulfill all orders from the Company
until the twelve month notice period has
expired.
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LACE
also agrees to provide a twelve month warranty from the day of delivery on
all Glaid devices supplied to the Company. If the defects cannot be
corrected at the Company's facilities or at the facilities of trained
Company repair centers, the products must then be returned to LACE for
purposes of carrying out such repairs as required, and LACE agrees to
return the repaired products to the Company or its designated agent or
distributor within ten working days from the date of receiving such
products, at no cost to the Company, and LACE will pay return freight
costs. The Company additionally agrees to arrange for installation of the
Glaid device at no cost to LACE. The Company further agrees to provide
Company brand specific labeling to be applied to the LACE devices shipped
directly to the Company's customers and distributors. On March
12, 2009, the Distribution Agreement was mutually terminated by the
Company and LACE due to the difficulties that the companies had in working
together.
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On
December 5, 2008, the Company’s shareholders approved a 1-for-100 reverse
stock split, which became effective on December 5, 2008. All references to
share and per-share data for all periods presented in this report have
been adjusted to give effect to this reverse
split.
|
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On
April 7, 2009, the Company signed a letter of intent with Fairhills
Capital Offshore, LLC in which Fairhills Capital committed to finance up
to $1,800,000 through the purchase of promissory notes from the
Company. The letter of intent provides that $600,000 in notes
will be purchased every three months over a nine month period, with the
first purchase of $300,000 to be made at closing and the remainder to be
purchased upon the satisfaction of financial objectives to be mutually
determined between the Company and Fairhills Capital. The
convertible notes will bear interest at 6% per annum. In
addition, Fairhills Capital will have a right of first refusal on future
financing transactions by the Company for as long as the notes remain
outstanding.
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Background
|
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Corporate History:
The
Company's business originated with Paradigm Medical, Inc., a California
corporation formed in October 1989. Paradigm Medical, Inc. developed its
present ophthalmic business and was operated by its founders Thomas F.
Motter and Robert W. Millar. In May 1993, Paradigm Medical, Inc. merged
with Paradigm Medical Industries, Inc. At the time of the merger, the
Company was a dormant public shell existing under the name French Bar
Industries, Inc. French Bar had operated a mining and tourist business in
Montana. Prior to its merger with Paradigm Medical, Inc. in 1993, French
Bar had disposed of its mineral and mining assets in a settlement of
outstanding debt and had returned to the status of a dormant entity.
Pursuant to the merger, the Company caused a 1-for-7.96 reverse stock
split of its shares of common stock. The Company then acquired
all
of the issued and
outstanding shares of common stock of Paradigm Medical, Inc. using shares
of its own common stock as consideration. As part of the merger, the
Company changed its name from French Bar Industries, Inc. to Paradigm
Medical Industries, Inc. and the management of Paradigm Medical, Inc.
assumed control of the Company. In April 1994, the Company caused a
1-for-5 reverse stock split of its shares of common stock. In February
1996, the Company re-domesticated to Delaware pursuant to a
reorganization.
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Overview
|
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Disorders of the Eye:
The human eye is a complex organ which functions much like a
camera, with a lens in front and a light-sensitive screen, the retina, in
the rear. The intervening space contains a transparent jelly-like
substance, the vitreous, which together with the outer layer, the sclera
and cornea, helps the eyeball to maintain its shape. Light enters through
the cornea, a transparent domed window at the front of the eye. The size
of the pupil, an aperture in the center of the iris, controls the amount
of light that is then focused by the lens onto the retina as an
upside-down image. The lens is the internal optical component of the eye
and is responsible for adjusting focus. The lens is enclosed in a capsule.
The retina is believed to contain more than 130 million light-receptor
cells. These cells convert light into nerve impulses that are transmitted
right-side up by the optic nerve to the brain, where they are interpreted.
Muscles attached to the eye control its
movements.
|
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Birth
defects, trauma from accidents, disease and age related deterioration of
the components of the eye could all contribute to eye disorders. The most
common eye disorders are either pathological or refractive. Many
pathological disorders of the eye can be corrected by surgery. These
include cataracts (clouded lenses), glaucoma (elevated or low pressure in
the eye), loss of nerve fibers resulting in loss of vision, corneal
disorders such as scars, defects and irregular surfaces and vitro-retinal
disorders such as the attachment of membrane growths to the retina causing
blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses
and contact lenses. Myopia (nearsightedness), hyperopia (farsightedness)
and presbyopia (inability to focus) are three of the most common
refractive disorders.
|
|
Ultrasound Technology:
Ultrasound devices have been used in ophthalmology since the late
1960's for diagnostic and surgical applications when treating or
correcting eye disorders. In diagnostics, ultrasound instruments are used
to measure distances and shapes of various parts of the eye for
prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit
sound waves through a hand held probe that is placed onto or near the eye
with the sound waves emitted being reflected by the targeted tissue. The
reflection "echo" is computed into a distance value that is presented as a
visual image, or cross section of the eye, with precise measurements
displayed and printed for diagnostic use by the
surgeon.
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Surgical
use of ultrasonics in ophthalmology is limited to treatment of cataract
lenses in the eye through a procedure called phacoemulsification or
"phaco." A primary objective of cataract surgeries is the removal of the
opacified (cataract) lens through an incision that is as small as
possible. The opacified lens is then replaced by a new synthetic lens
intraocular implant. Phaco technology involves a process by which a
cataract is broken into small pieces using ultrasonic shock waves
delivered through a hollow, open-ended metal needle attached to a hand
held probe. The fragments of cataracts tissue are then removed through
aspiration. Phaco systems were first designed in the late 1960's after
various attempts by surgeons to use other techniques to remove opacified
lenses, including crushing, cutting, freezing, drilling and applying
chemicals to the cataract. By the mid-1970's, ultrasound had proven to be
the most effective technology to fragment cataracts. Market Scope's
(Manchester, Missouri),
The 2001 Report on the
Worldwide Cataract Market,
January 2001 indicates that phaco
cataract treatment was the technology for cataract removal used in over
80% of surgeries in the United States and over 20% of all foreign
surgeries.
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Laser Technology:
The
term "laser" is an acronym for Light Amplification by Stimulated Emission
of Radiation. Lasers have been commonly used for a variety of medical and
ophthalmic procedures since the 1960's. Lasers emit photons into a highly
intense beam of energy that typically radiates at a single wavelength or
color. Laser energy is generated and intensified in a laser tube or
solid-state cavity by charging and exciting photons of energy contained
within material called the lazing medium. This stored light energy is then
delivered to targeted tissue through focusing lenses by means of optical
mirrors or fiber optics. Most laser systems use solid state crystals or
gases as their lazing medium. Differing wave lengths of laser light are
produced by the selection of the lazing medium. The medium selected
determines the laser wavelength emitted, which in turn is absorbed by the
targeted tissue in the body. Different tissues absorb different
wavelengths or colors of laser light. The degree of absorption by the
tissue also varies with the choice of wavelength and is an important
variable in treating various tissues. In a surgical laser, light is
emitted in either a continuous stream or in a series of short duration
"pulses", thus interacting with the tissue through heat and shock waves,
respectively. Several factors, including the wavelength of the laser and
the frequency and duration of the pulse or exposure, determine the amount
of energy that interacts with the targeted tissue and thus, the amount of
surgical effect on the tissue.
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Lasers
are widely accepted in the ophthalmic community for treatment of certain
eye disorders and are popular for surgical applications because of their
relatively noninvasive nature. In general, ophthalmic lasers, such as
argon, Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or
ablate targeted tissue. The argon laser is used to treat leaking blood
vessels on the retina (retinopathy) and retinal detachment. The excimer
laser is used in corneal refractive surgery. The Nd:YAG pulsed laser is
used to perforate clouded posterior capsules (posterior capsulotomy) and
to relieve glaucoma-induced elevated pressure in the eye (iridotomy,
trabeulorplasty, transcleral cyclophotocoagulation). Argon, Nd:YAG and
excimer lasers are primarily used for one or two clinical applications
each. In contrast to these conventional laser systems, the Company's
Photon
TM
laser cataract system is designed to be used for multiple ophthalmic
applications, including certain new applications that may be made possible
with its proprietary technology. Such new applications, however, must be
tested in clinical trials and be approved by the
FDA.
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The
Company's principal proprietary surgical products are systems for use by
ophthalmologists to perform surgical treatment procedures to remove
cataracts. The Company has complete ownership of each product with no
technological licensing
limitations.
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Precisionist Thirty
Thousand
TM
.
The
Precisionist Thirty Thousand
TM
is the Company's core phaco surgical technology. The Precisionist
TM
was placed into production and offered for sale in
1997. Although manufactured in the past, the Precisionist
TM
is not currently being manufactured. As a phaco cataract
surgery system, the Company believes the Precisionist
TM
with its new fluidics panel is equal or superior to the present
competitive systems in the United States. However, due to the lack of
recent sales, the majority of the Company's inventory associated with the
Precisionist Thirty Thousand
TM
has been estimated to be obsolete and therefore a reserve for such
inventory has been recorded. The system features a graphic color display
and unique proprietary on board computer and graphic user interface linked
to a soft key membrane panel for flexible programmable operation. The
system provides real-time "on-the-fly" adjustment capabilities for each
surgical parameter during the surgical procedure for high volume
applications. In addition, the Precisionist
TM
provides one hundred pre-programmable surgery setups, with a second level
of subprogrammed custom modes within each major surgical screen (i.e.,
ultrasound phaco and irrigation/aspiration
modes).
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The
Precisionist
TM
also features the Company's proprietary fluidics panel which is completely
noninvasive for improved sterility and to provide a surgical environment
in the eye that virtually eliminates fluidic surge and solves chamber
maintenance problems normally associated with phaco cataract surgery. This
fluidics system provides greater control for the surgeon and allows the
safe operation at much higher vacuum settings by sampling changes in
aspiration I00 times per second. Greater vacuum in phaco surgery means
less use of ultrasound or laser energy to fragment the cataract and less
chance for surrounding tissue damage. In addition to the full complement
of surgical modalities (e.g., irrigation, aspiration, bipolar coagulation
and anterior vitrectomy), system automation includes "dimensional" audio
feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the
equipment. Sales of the Precisionist
TM
and related accessories were 0% of total revenues in both the
fiscal years 2006 and 2005,
respectively.
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Ocular
Surgery Workstation
TM
.
The Ocular Surgery
Workstation
TM
comprises the base system of the Precisionist Thirty Thousand
TM
and is the first system, to the Company's knowledge, which uses the
expansive capabilities of today's advanced computer technology to offer
seamless open architecture expandability of the system hardware and
software modules. The Workstation
TM
utilizes an embedded open architecture computer developed for the Company
and controlled by a proprietary software system developed by the Company
that interfaces with all components of the system. Ultrasound, fluidics
(irrigation), aspiration, venting, coagulation and anterior vitrectomy
(pneumatic) are all included in the base model. Each component is
controlled as a peripheral module within this fully integrated system.
This approach allows for seamless expansion and refinement of the
Workstation
TM
with the ability to add other hardware and software features. Expansion
such as the Company's Photon
TM
laser system and hardware for additional surgical applications are easily
implemented by means of a preexisting expansion rack, which resides in the
base of the Workstation
TM
.
These expanded capabilities could include, but would not be limited to
laser systems, video surgical fiber optic imaging, cutting and
electrosurgery equipment. However, there is no guarantee that the
Workstation
TM
will be accepted in the marketplace. If the FDA approves the
Photon
TM
,
the Company will refer to the Workstation
TM
as the PhotonT
M
Ocular Surgery Workstation
TM
.
To date, the Company has not commercially developed or offered for sale
any other added hardware or software features to its Workstation
TM
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Photon
TM
Laser System:
The
Photon
TM
laser cataract system, which is still subject to FDA approval, is designed
to be installed as a seamless plug-in upgrade or add-on to the Company's
Precisionist' Ocular Surgery Workstation
TM
.
The plug-in platform concept is unique in the ophthalmic surgical market
for systems of this magnitude and presents a unique market opportunity for
the Company. The main elements of the laser system are the Nd:YAG laser
module, Photon
TM
laser software package and interchangeable disposable hand held fiber
optic laser cataract probe. The Photon
TM
laser utilizes the on board microprocessor computer of the
Workstation
TM
to generate short
pulse laser energy developed through the patented LCP
TM
to targeted cataract tissue inside the eye, while simultaneously
irrigating the eye and aspirating the diseased cataract tissue from the
eye. The probe is smaller in diameter than conventional ultrasound phaco
needles and presents no damaging vibration or heat build up in the eye.
The Company's Phase I clinical trials demonstrated that this probe could
easily reduce the size of the cataract incision from 3.0 mm to under 2.0
mm thereby reducing surgical trauma and complementing current foldable
intraocular implant technology.
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The
laser probe may also eliminate any possibility for burns around the
incision or at the cornea and may therefore be used with cataract surgery
techniques that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this
system may not effectively remove harder grade cataracts. Harder grade
cataracts can be removed using the already existing ultrasound capability
of the Precisionist'
M
.
Because of the "going concern" status of the Company, management has
focused efforts on those products and activities that will, in its
opinion, achieve the most resource efficient short-term cash flow to the
Company. As reflected in the results for the fiscal year ended December
31, 2008, diagnostic products are currently the Company's major focus and
the Photon
TM
and other extensive research and development projects have been put on
hold pending future evaluation when the Company's financial position
improves. Due to the uncertainty surrounding the timetable for obtaining
FDA approval and the lack of significant revenue from the other
surgical products, the Company has recorded an inventory reserve against
the majority of the inventory associated with the Photon
TM
and Precisionist Thirty Thousand
TM
.
The Company's focus is not on any specific diagnostic product or products,
but rather on its entire group of diagnostic
products.
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At
some point in the future, the Company may intend, subject to economic
feasibility and the availability of adequate funds, to refine the laser
delivery system and laser cataract surgical technique used on soft
cataracts through expanded research and clinical studies. Subject to the
aforementioned constraints, the Company intends to refine the fluidics
management system by improving chamber maintenance during surgical
procedures and to develop techniques to optimize time and improve invasive
techniques through expanded research and clinical studies. As far as the
Company can determine, no integrated single laser photofragmenting probe
is presently available on the market that uses laser energy directly,
contained in an enclosed probe, to denature cataract tissue at a precise
location inside the eye while simultaneously irrigating and aspirating the
site.
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The
Company's laser system is based upon the concept that pulsed laser energy
produced with the microprocessor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have
proven effective and reliable in clinical use for many years, their use of
high frequency shock waves and vibration to fragment the cataract can make
the procedure difficult and can present risk of complication both during
and after surgery. In contrast, the Company's laser system, which utilizes
short centralized energy bursts, should permit the delivery of the laser
beam with less trauma to adjacent tissue. Therefore, unlike ultrasonic
systems, whose vibrations and shock waves affect (and can damage)
non-cataract tissues within the eye, the Company's Photon
TM
laser cataract system should only affect tissues with which it comes into
direct contact.
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|
In
October of 2000, the Company received FDA approval for the Photon
TM
Workstation
TM
to be used with a 532mm green laser which is effective for medical
procedures other than cataract removal, such as photocoagulation of
retinal and venous anomalies within or outside the eye, pigmented lesions
around the orbital socket, posterior or anterior procedures associated
with glaucoma or diabetes and general photocoagulation for various
dermatological venous anomalies including telangiectasia (surface veins),
or commonly referred to as "spider veins". The goal is to be able to
integrate multiple laser wavelengths into one system or workstation that
can be used for multiple medical specialties. This approval represents
only one of the potential applications that could represent substantial
growth opportunities including additional sales of equipment, instruments,
accessories and disposables.
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The
Photon
TM
Ocular Surgery Workstation
TM
has not been commercially developed with
any
other
added hardware or software features. There is no guarantee that the
ophthalmic surgery market will accept the laser in this capacity or that
the FDA will grant approval. Regulatory approval would require completion
of pending Photon
TM
clinical trials and resubmission of a 510(k) predicate device application
to the FDA. Because of the "going concern" status of the Company,
management has focused efforts on those products and activities that will,
in its opinion, achieve the most resource efficient short-term cash flow
to the Company. As reflected in the results for the fiscal year ended
December 31, 2008, diagnostic products consisting mainly of P40, P45 and
P60 UBM Ultrasound Biomicroscopes; P2700, P3700 and P37 A/B Scans;
perimeters, CT 50 Corneal Topographer, and Blood Flow Analyzer
TM
are cur
r
ently
the Company's major focus and the Photon
TM
and other extensive research and development projects have been put on
hold pending future evaluation when the financial position of the Company
improves. The Company's focus is not on any specific diagnostic product or
products, but rather on the entire group of diagnostic
products.
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On
March 31, 2005, Joseph W. Spadafora filed a complaint against the Company
in the United States District Court, District of Utah, in which he alleges
that he was a clinical investigator in the study for the FDA involving the
Company's Photon
TM
laser system where he performed numerous surgeries using the Photon
TM
.
Dr. Spadafora contends that in meetings with the Company's personnel he
suggested ways in which the handpiece on the Photon
TM
could be improved. Dr. Spadafora further contends that on August 5, 1999,
when the Company filed a patent application for an improved handpiece with
the United States Patent and Trademark Office, he was not named as one of
the inventors or a coinventor on the patent application. On September 24,
2004, the Company was issued a patent entitled, "Laser Surgical Handpiece
with Photon Trap." Because the Company did not list Dr. Spadafora as one
of the inventors or a coinventor on the patent, Dr. Spadafora requests in
his complaint that a court order be entered declaring that he is the
inventor or coinventor of the patent and, as a result, is entitled to all
or part of the royalties and profits that the Company earned or will earn
from the sale of any product incorporating or using the improved
handpiece.
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On
June 2, 2006, the Company entered into a settlement agreement with Dr.
Spadafora for the dismissal of the lawsuit. Under the terms of the
settlement agreement, the Company agrees to provide Dr. Spadafora with the
exclusive right over a three-year period to market and sell the
Photon
TM
laser system and its components, including the inventory and intellectual
property rights. If Dr. Spadafora were successful in finding a prospective
purchaser to acquire the Photon
TM
laser system upon terms acceptable to the Company, it agrees to pay him a
commission equal to 10% of the total purchase price. If the purchase price
for the Photon
TM
laser system includes a royalty or other payments payable to the
Company on later sales of the Photon
TM
laser system other than its handpiece component, the Company agrees to pay
Dr. Spadafora 8% of such royalties or other payments on such later sales
through the full term of the purchase agreement. The Company further
agrees that if a purchase price includes a royalty or other payments
payable to the Company on later sales of the handpiece component of the
Photon
TM
laser system, the Company agrees to pay Dr. Spadafora 15% of such
royalties or other payments through the full term of the purchase
agreement.
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|
Additionally,
the settlement agreement provides that if the Company is successful
through its sole efforts, without any assistance from Dr. Spadafora, in
finding a purchaser to acquire the Photon
TM
laser system or its components during the second or third year of Dr.
Spadafora's exclusive rights, the Company agrees to pay Dr. Spadafora a
commission equal to 1.7% of the total purchase price and of the Company's
royalties or other payments on subsequent sales of the Photon
TM
laser system or its components through the full term of the
purchase agreement. Finally, the settlement agreement provides for mutual
releases by Dr. Spadafora and the Company for the benefit of each other,
and that the Company and Dr. Spadafora each agree to pay their own costs,
expenses and attorney's fees incurred in connection with the lawsuit and
the preparation of the settlement
agreement.
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Surgical Instruments and
Disposables:
In addition to the cataract surgery
equipment, the Company's surgical systems are designed to utilize
accessory instruments and disposables, some of which are proprietary to
the Company. These include replacement ultrasound tips, sleeves, tubing
sets and fluidics packs, instrument drapes and laser cataract probes. The
Company intends to expand its disposable accessories as it penetrates the
cataract surgery market and expands the treatment applications for its
Workstation
TM
.
These products contributed 0% of total revenues for both 2008 and
2007.
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Diagnostic Eye Care
Products:
Glaucoma is a second leading cause of adult
blindness in the world. Glaucoma is described as a partial or total loss
of visual field resulting from certain progressive disease or degeneration
of the retina, macula or nerve fiber bundle. The cause and mechanism of
the glaucoma pathology is not completely understood. Present detection
methods focus on the measurement of intraocular pressure in the eye,
visual field and observation of the optic nerve head to determine the
possibility of pressure being exerted upon the retina and optic nerve
fiber bundle, which can diminish the visual field. Recently, retinal blood
circulation has been indicated as a key component in the presence of
glaucoma. Some companies produce color Doppler equipment in the $80,000
price range intended to provide measurement of ocular blood flow activity
in order to diagnose and treat glaucoma at an earlier
stage.
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Blood Flow
Analyzer
TM
: In
June 1997, the Company received FDA clearance to market the Blood Flow
Analyzer
TM
for early detection and treatment management of glaucoma and other retinal
related diseases. The device measures not only intraocular pressure but
also pulsatile ocular blood flow, the reduction of which may cause nerve
fiber bundle death through oxygen deprivation thus resulting in visual
field loss associated with glaucoma. The Company's Blood Flow
Analyzer
TM
is a portable automated in-office system that presents an
affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. This was the first diagnostic eye care device.
The device is a portable desktop system that utilizes a proprietary and
patented pneumatic Air Membrane Applanation Probe
TM
or AMAP
TM
,
which can be attached to any model of standard examination slit lamp,
which is then placed on the cornea of the patient's eye to measure the
intraocular pressure within the eye. The device is unique in that it reads
a series of intraocular pressure pulses over a short period of time
(approximately five to ten seconds) and generates a waveform profile,
which can be correlated to blood flow volume within the eye. A proprietary
software algorithm developed by David M. Silver, Ph.D., at Johns Hopkins
University, calculates the blood flow volume. The device presents a
numerical intraocular pressure reading and blood flow analysis rating in a
concise printout, which is affixed to the patient history file. In
addition, the data generated by the device can be downloaded to a personal
computer system for advanced database development and
management.
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The
Company markets the Blood Flow Analyzer
TM
as a stand-alone model packaged with a custom built computer system. The
Blood Flow Analyzer
TM
utilizes a single use disposable cover for the Air Membrane
Applanation Probe
'
'
M
, a
corneal probe which is shipped in sterile packages. The probe tip cover
provides accurate readings and acts as a prophylactic barrier for the
patient. The device has been issued a patent in the European Economic
Community and the United States and has a patent pending in Japan. The FDA
cleared the Blood Flow Analyzer
TM
for marketing in June 1997 and the Company commenced selling the system in
September 1997. In addition to the Humphrey products, this diagnostic
product allowed the Company to expand its market to approximately 35,000
optometry practitioners in the United States in addition to the
approximately 18,000 ophthalmic practitioners who currently perform eye
surgeries and are candidates for the Company's surgical
systems.
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In
April 2001, the Company received written authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use common procedure terminology or CPT code number 92120
for its Blood Flow Analyzer
TM
,
for reimbursement purposes for doctors using the device. However, certain
payors have elected not to reimburse doctors using the Blood Flow
Analyzer
TM
.
The Company is continuing its aggressive campaign to educate the payors
about the Blood Flow Analyzer
TM
,
its purposes and the significance of its performance in patient care in
order to achieve reimbursements to the doctors. Currently, there is
reimbursement by insurance payors to doctors using the Blood Flow
Analyzer
TM
in 22 states and partial reimbursement in four other states. The amount of
reimbursement to doctors using the Blood Flow Analyzer
TM
generally ranges from $56.00 to $76.00 per patient, depending upon
the insurance payor. Insurance payors providing reimbursement for the
Blood Flow Analyzer
TM
have the discretion to increase or reduce the amount of reimbursement. The
Company is endeavoring to obtain reimbursement by insurance payors in
other states where there is currently no reimbursement being
made.
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The
manufacturing activities for the Blood Flow Analyzer
TM
have been moved to the Salt Lake City facility from the outsourced plant
located in England. On October 21, 2002, the Company received FDA approval
on its 510(k) application for additional indications of use for the Blood
Flow Analyzer
TM
.
The additional indications include pulsatile ocular blood flow and
pulsatile ocular blood volume. These are diagnostic measurements that
assess the hemodynamic and vascular health of the eye. Also, the Company
is continuing its aggressive campaign to educate the insurance payors
about the Blood Flow Analyzer
TM
,
its purposes and the significance of its performance in patient care in
order to achieve reimbursements to the doctors using its Blood Flow
Analyzer
TM
.
Sales of the Blood Flow Analyzer
TM
and related accessories accounted for 5% and 13% of total sales for
the fiscal years ended December 31, 2008 and 2007,
respectively.
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On
January 16, 2008, the Company entered into a consulting agreement with
Corcoran Consulting Group, which specializes in medical reimbursement
issues for optometry and ophthalmology. The Company plans to work with
Corcoran Consulting Group to create a new common procedure technology, or
CPT code number, for reimbursement purposes for physicians and
practitioners using the Blood Flow Analyzer ™. In addition, the Company
plans to work with Corcoran Consulting Group to offer educational seminars
for physicians and practitioners who purchase the Blood Flow Analyzer
™.
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Dicon
TM
Perimeters:
Dicon
TM
perimeters consist of the LD 400, the TKS 5000, and software consisting of
Field Link™ FieldView
TM
and Advanced Field View. Perimeters are used to determine retinal
sensitivity testing the visual pathway. Perimeters have become a standard
of care in the detection and monitoring of glaucoma worldwide. Perimetry
is reimbursable worldwide. The Dicon
TM
perimeters feature patented kinetic fixation and voice synthesis
now in 27 different languages. Software programs are sold to assist in the
analysis of the test results. Sales of the perimeters and related
accessories generated 24% and 19% of the total revenues for 2008 and 2007,
respectively.
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The
LD 400FT, or Fast Threshold Autoperimeter, is the successor to the LD 400.
The device is an autoperimeter used to measure patient visual fields. The
LD 400FT is identical in hardware to the LD 400 but it uses new software
to enable a fast threshold test. This test reduces the time required by
ophthalmologists and optometrists conducting autoperimetry tests by more
than 40% by running an abbreviated test at light levels determined to be
sufficient to be seen in normal patients. The procedure currently takes
more than 15 minutes. The fast threshold test by the LD 400FT is similar
to tests by other devices on the market. Healthy patients will pass the
test. Patients with reduced visual fields will be flagged by the test
enabling the device to automatically run a more comprehensive examination
to determine the extent of the visual field loss. All existing LD 400s can
be upgraded to support the new fast threshold test through the purchase of
a software package.
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The
LD700 Perimeter is the next generation of perimeters, providing a small
footprint and compact design. The test given with the LD700 tests for
visual field loss that is often an indicator of the presence of glaucoma.
The LD700 is designed to identify glaucoma suspects and also monitor the
onset of glaucoma in patients afflicted with this eye disease. It is also
used in the management of medication used to treat glaucoma to assure the
prescribed medication is effective in slowing the progression of glaucoma
and other ailments that result in visual field
loss.
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Dicon
TM
Corneal Topographers:
Dicon
TM
corneal topographers include the CT 200
TM
and
the CT 50. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Clinical
applications for corneal topographers include refractive surgery that
eliminates the need for eyeglasses and optometric applications including
contact lens fitting. Revenues from the topographer and related
accessories were 0% and 1% of the total revenues for 2008 and 2007,
respectively. An enhanced version of the CT 200
TH
was introduced during the fourth quarter of 2003. The Company has
completed the upgrades to the CT 200
TH
and
the CT 50 Corneal Topographers, which are now operating with Windows XP
software rather than the former Windows 95 operating
systems.
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P2000 Pachymetric Analyzer:
The ultrasonic pachymeter is used for measurement of corneal
thickness. The Model P2000 is positioned as a standard office pachymeter.
This device is targeted to the refractive surgery market and contributed
2% and 3% of the total revenues for both 2008 and 2007,
respectively.
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P37 A/B Scan Ocular Ultrasound
Diagnostic:
The A/B Scan is used by retinal subspecialists to
identify foreign bodies in the posterior chamber of the eye and to
evaluate the structural integrity of the retina. The A/B Scan is
attractive to the general ophthalmic community at large because of its
lower price point and its image resolution qualities. Sales from this
product were 11% and 10% of the total revenues for 2008 and 2007,
respectively.
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P40, P45 and P60 UBM
Ultrasound Biomicroscopes:
Humphrey Systems developed the P40 UBM
Ultrasound Biomicroscope in conjunction with the New York Eye and Ear
Infirmary in Manhattan and the University of Toronto. The P40
biomicroscope and its intellectual property were included in the purchase
from Humphrey Systems and gives the Company the proprietary rights to this
device. The P40 biomicroscope creates a high resolution computer image of
the unseen parts of the eye that is a "map" for the glaucoma surgeon. The
P40 biomicroscope is an "enabling technology" for the ophthalmologist, one
that the Company has repositioned for broader market sales penetration.
Formerly sold only to glaucoma subspecialty practitioners, the Company
reintroduced the P40 biomicroscope at a price point targeted for the
average practitioners seeking to add glaucoma filtering surgical
procedures and income to their cataract surgical
practice.
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The
P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions the Company with its proprietary P40 biomicroscope and, to its
knowledge, the only commercially viable product of this type on the
market, as a leader in the rapidly expanding glaucoma imaging and
treatment segment. In the fall of 2000, the Company introduced the P45 UBM
Ultrasonic Biomicroscope, which combines the P40 biomicroscope and the P37
A/B Scan Ocular Ultrasound Diagnostic into one instrument. The Company
believes that by combining functions, the P45 will appeal to a broader
market. The P40 biomicroscope and related accessories sales were 1% and 6%
of the total revenues for 2008 and 2007, respectively. The P45
biomicroscope and related accessories sales contributed 0% and 2% of the
total revenues for 2008 and 2007,
respectively.
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|
On
October 25, 2004, the Company entered into a Manufacturing and
Distribution Agreement with E-Technologies, Inc., a Iowa based developer
of software and related technology for technical applications. Under the
terms of the agreement, E-Technologies granted to the Company the
exclusive right to manufacture, market, sell and distribute an ultrasound
biomicroscope. Upon execution of the agreement, the Company paid $30,000
to E-Technologies for engineering costs associated with the development of
the biomicroscope. When the biomicroscope received FDA approval on May 26,
2005, the Company paid E-Technologies an additional fee of
$45,000.
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In
consideration for the exclusive right to manufacture and distribute the
biomicroscope, the Company agreed to pay E-Technologies a royalty in the
amount of $5,000 for each of the first 25 biomicroscopes sold by the
Company. Thereafter, the Company agreed to pay E-Technologies the sum of
$4,000 for each biomicroscope sold. As an additional condition, the
Company agreed to sell 25 biomicroscopes during the first 12 months after
the biomicroscope receives FDA approval. The agreement is effective for a
term of two years. After the expiration of the two year period, the
agreement is to automatically renew for additional one year periods,
unless either party elects to terminate the agreement upon at least 30
days prior written notice to the other party before the end of any term of
the agreement. The agreement was terminated on July 18,
2006.
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In
March 2005, the Company introduced the P60 UBM Ultrasound Biomicroscope.
The P60 biomicroscope represents the fourth generation of UBM devices and
has better visual clarity and image flexibility than earlier versions. On
March 1, 2005, the Company was awarded the CE Mark for the P60, which
enables it to market the device in 19 Western European countries, the
Middle East and India, and some parts of Asia and the Pacific Rim. On May
26, 2005, the Company received FDA 510(k) premarket approval for the P60,
which allows it to be sold in the United States. On February 9, 2006, the
Company received a Canadian device license for the P60, which allows it to
be sold in Canada. The P60 biomicroscope and related accessories sales
were 21% and 16% of total revenues for 2007 and 2006,
respectively.
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On
June 5, 2007, the Company introduced a new software package for the P60
biomicroscope. This V2.1 software incorporates greater image resolution, a
user-friendly and robust database management system, and networking
capabilities that allow the patient image data to be transferred within a
user's network for efficient patient record management. The Company
developed the new V2.1 software in partnership with the optic and
engineering group at Reliacon Global,
Inc.
|
|
In
July 2000, the Company received ISO 9001 and EN 46001 certification using
TUV Essen as the notified body. Under ISO 9001 certification, its products
are now CE marked. The CE mark allows the Company to ship product for
revenue into the European Community. The Company successfully retained its
certification in 2005 and retained ISO 13485 in December2005 from TUV
Essen.
|
|
On
June 12, 2006, the Company entered into a Worldwide OEM Agreement with
MEDA Co., Ltd., one of China's leading developers and producers of
ultrasound devices. Under the terms of the agreement, MEDA agrees to
jointly engineer, develop and manufacture the Company's next generation of
the Ultrasound BioMicroscope, as well as other proprietary new products
and enhancement of the Company's current products. The products to be
manufactured by MEDA, at agreed upon costs, and supplied to the Company
for resale include the following new products: an ultrasound
biomicroscope, two ultrasound A/B Scans, a biometric A-Scan and a
pachymeter.
|
|
The
agreement provides that the Company and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of the Company's products
and, in the interest of product development, enhancement and
differentiation. MEDA agrees to give consideration to potential software
development or enhancements made available to the Company for its
products. Moreover, in the interest of product improvement, MEDA agrees to
collaborate with the Company and its designated engineers, employees and
consultants to consider and potentially implement jointly or individually
the development of product enhancements for the Company's products to be
manufactured by MEDA.
|
|
On
January 31 and February 1, 2007, MEDA received FDA 510(k) pre-market
approval for a new generation of ultrasound devices. This approval allows
the new devices to be sold in the United States. The new ultrasound
devices, which are to be manufactured by MEDA and sold by the Company in
the United States, include the P2000 A-Scan (used to measure axial length
of the eye), the P2200 Pachymeter (used for measuring corneal thickness),
the P2500 AScan/Pachymeter (a combination of the two stand-alone
devices), the P2700 and P3700 AB/Scans (an ultrasound imaging device for
detecting abnormalities within the eye), the P37-II (a more advanced
AB/Scan used to provide portability for ophthalmology veterinary
applications) and the P50 Ultrasound Biomicroscope for high frequency
imaging of the anterior chamber of the
eye.
|
|
Parts and Services:
The
parts and service revenue from the repair and service of equipment sold
accounted for 30% and 9% of total revenues in 2008 and 2007,
respectively.
|
|
The
following table identifies each product class, status of commercial
development, the percentage of sales contributed by that class,
reimbursement status, and status of applicable United States and foreign
regulatory approvals:
|
|
Commercial
|
Reimbursement
|
2007%
|
2008%
|
Regulatory
|
||
|
Product
(1)
|
Product
Class
|
Development
|
Status
|
Approvals
|
||
|
P2200
and P2500
|
System,
Imaging,
|
Complete
|
Yes
|
4%
|
1%
|
FDA
510(K) K844299*
|
|
Pachymetric
Analyzer
|
Pulsed
Echo Diagnostic
|
ISO
9001: 1994, EN
|
||||
|
9001**
|
||||||
|
P2000
A-Scan
|
System
Imaging, Pulsed
|
Complete
|
Yes
|
3%
|
2%
|
FDA
510(K) I844299*
|
|
Biometric
|
Echo
Diagnostic
|
ISO
9001: 1994,
|
||||
|
Ultrasound
Analyzer
|
EN
ISO 9001**
|
|||||
|
P37,
P37-II, P2700
|
Transducer,
Ultrasound
|
Complete
|
Yes
|
22%
|
17%
|
FDA
510(K) K844299*
|
|
and
P3700 A/B Scan
|
Diagnostic
|
ISO
9001: 1994,
|
||||
|
Ocular
Ultrasound
|
EN
ISO 9001**
|
|||||
|
Diagnostic
|
||||||
|
P40
UBM Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
6%
|
1%
|
FDA
510(K) K844299*
|
|
BioMicroscope
|
Pulsed
Echo Ultrasound
|
ISO
9001: 1994,
|
||||
|
Diagnostic
|
EN
ISO 9001**
|
|||||
|
P45
UBM Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
2%
|
0%
|
FDA
510(K) K844299*
|
|
Biomicroscope,
|
Pulsed
Echo Ultrasound
|
ISO
9001: 1994,
|
||||
|
Workstation
Plus
|
Diagnostic
|
EN
ISO 9001**
|
||||
|
P60
UBM Ultrasound
|
System,
Imaging,
|
Complete
|
Yes
|
21%
|
20%
|
FDA
510(K) K844299*
|
|
Biomicroscope,
|
Pulsed
Echo Ultrasound
|
ISO
9001: 1994,
|
||||
|
Workstation
Plus
|
Diagnostic
|
EN
ISO 9001
.
**
|
||||
|
BFA
Ocular Blood
|
Tonometer,
Manual
|
Complete
|
Yes****
|
13%
|
5%
|
FDA
510(K) K844299*
|
|
Flow
Analyzer'
TM
and
|
Diagnostic
|
ISO
9001: 1994,
|
||||
|
Disposables
|
EN
ISO 9001**
|
|||||
|
CT
200 Corneal
|
Topographer
Corneal
|
Complete
|
Yes
|
1%
|
0%
|
FDA
510(K) K844299*
|
|
Topography
System
|
AC-Powered
|
ISO
9001: 1994,
|
||||
|
Diagnostic
|
EN
ISO 9001**
|
|||||
|
LD
400 Autoperimetry
|
Perimeter,
Automatic
|
Complete
|
Yes
|
15%
|
17%
|
FDA
510(K) K844299*
|
|
System
|
AC-Powered
|
ISO
9001: 1994,
|
||||
|
Diagnostic
|
EN
ISO 9001**
|
|||||
|
TKS
5000
|
Perimeter,
Automatic
|
Complete
|
Yes
|
4%
|
7%
|
FDA
510(K) K844299*
|
|
Autoperimetry
System
|
AC-Powered,
|
ISO
9001: 1994,
|
||||
|
Diagnostic
|
EN
ISO 9001**
|
|||||
| Glaid Ocular | System, Imagine |
Complete
|
Yes
|
0%
|
16%
|
FDA 510(K) K043367* |
| Electrophysiology | Electrophysiologic | ISO 9001: 1994, | ||||
| Device | Diagnostic | EN ISO 9001** | ||||
|
Precisionist
Thirty
|
Phacofragmentation
|
Complete
|
Yes
|
0%
|
0%
|
FDA
510(K) K844299*
|
|
Thousand
TM
,
Ocular
|
ISO
9001: 1994,
|
|||||
|
Surgery
Workstation
|
EN
ISO 9001**
|
|||||
|
with
Surgical
|
||||||
|
Equipment
and
|
||||||
|
Disposables(2)
|
||||||
|
Photon
TM
Laser,
|
Phacoemulsification
|
In-Process
(4)
|
No
|
0%
|
0%
|
IDB
G940151
|
|
Ocular
Surgery
|
ISO
9001: 1994,
|
|||||
|
Workstation
with
|
EN
ISO 9001**
|
|||||
|
Surgical
Equipment
|
||||||
|
and
Disposables(3)
|
||||||
|
Parts
and Services
|
Perimeter,
BFA,
|
Complete
|
Yes
|
9%
|
14%
|
FDA
510(K) K844299*
|
|
Tonometer,
|
ISO
9001: 1994,
|
|||||
|
Topographer,
|
EN
ISO 9001**
|
|||||
|
Ultrasound
|
||||||
|
Workstations,
Systems, Imaging
|
|
(1)
|
Except
for the Photon
TM
Ocular Surgery Workstation, which can only be sold in countries
outside the United States, these products can be sold in the United States
and in foreign countries including but not limited to Argentina,
Australia, Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia,
Egypt, France, Germany, Greece, Hong Kong, India, Israel, Italy, Japan,
Jordan, Korea, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland,
Puerto Rico, Russia, Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand,
Turkey, United Kingdom, and United Arab
Emirates.
|
|
(2)
|
Due
to the lack of recent sales volume, the inventory associated with the
Precisionist Thirty Thousand
TM
,
the SIStem
TM
and the Odyssey
TM
has been deemed obsolete and a reserve has been recorded to offset such
inventory.
|
|
(3)
|
Due
to the lack of recent evidence to support the recoverability of inventory
associated with the Photon
TM
,
the Company has recorded a reserve to offset the majority of such
inventory on hand.
|
|
(4)
|
The
Photon
TM
is in-process and not complete because the Company has not
completed the clinical trials in order to obtain FDA regulatory
approval.
|
|
*
|
FDA
510(K) K844299 and FDA 510(K) K043367 represent domestic
approval by U.S. Food and Drug
Administration.
|
|
**
|
ISO
9001: 1994, EN ISO 9001 represents international
approval.
|
|
***
|
IDE
G940151 represents approval for international distribution
only.
|
|
****
|
Represents
full reimbursement in 20 states and partial reimbursement in six other
states.
|
|
As
detailed in the table above, except for the Photon
TM
Laser Ocular Surgery Workstation, which requires additional
development and regulatory approvals, the Company's current products are
developed and available for sale in footnote (1) of the table. The
Company's possible future efforts to finalize development of the
Photon
TM
laser system and obtain the necessary regulatory approvals would depend on
adequate funding. If these efforts were undertaken but proved to be
unsuccessful, the impact would include the costs associated with these
efforts and the anticipated future revenues which the Company would not
receive as expected. The Company estimates that the funds needed to
complete the clinical trials on the Photon
TM
in order to obtain the necessary FDA regulatory approval to be
approximately $2,500,000. This does not include the
necessary funds for product development and to bring the Photon
TM
to market.
|
|
The
Company currently purchases components and parts used in its products from
a limited number of key suppliers. The Company's reliance on its principal
suppliers could result in delays associated with redesigning a product due
to an inability to obtain an adequate supply of required components and
parts, and reduced control over pricing, quality and timely delivery. The
loss of any of these principal suppliers or the inability of a supplier to
meet performance and quality specifications, requested quantities or
delivery schedules could cause the Company's revenues to decline. In
addition, any interruption or discontinuance in the supply of components
or parts could have an adverse effect on the Company's business, results
of operation and financial condition. The Company's principal suppliers
include Capistrano Labs, US Ultrasound and
Anthrop.
|
|
Marketing
and Sales
|
|
Ophthalmologists
are mainly office based and perform their surgeries in local hospitals or
surgical centers that provide the necessary surgical equipment and
supplies. Ophthalmologists are generally involved in decisions relating to
the purchase of equipment and accessories for their independent ambulatory
surgical centers and for the hospitals with which they are affiliated.
This provides the opportunity for direct, targeted, personal selling,
responsive high quality customer service and short buying cycles to
achieve a product sale in the office or hospital. Hospitals also comprise
a significant market, as recent demand for ultrasonic surgery technology
has put pressure on the ophthalmologist, who in turn persuades the
hospital to install the latest technology system so that he can offer this
procedure to his patients and the community. Ophthalmologist and hospital
administrators are understanding the necessity of Ultrasound diagnostic
equipment such as the UBM and providing the opportunity for increased
product demonstrations. The capability to detect and manage glaucoma is
greatly enhanced with the UBM.
|
|
Industry
analysts report that the United States ophthalmic device market has been
characterized by slower growth in recent years. This has apparently been
caused by the potential reforms associated with the health care industry.
Further, hospitals have been inclined to keep their older phaco machines
longer than expected as they have been forced to mind budgets more
carefully and have become less willing to invest in capital equipment
until more information on healthcare reform becomes available. However,
analysts predict that the ophthalmic and diagnostic equipment device
market will see renewed growth in the coming years as the health care
environment stabilizes and as the growing elderly population produces an
increased number of cataract surgeries. As a consequence of these factors,
the market should see a greater rate of replacement of older machines that
hospitals and surgeons have been postponing for longer than usual. The
acceptance of the UBM as a necessary diagnostic and disease management
tool is enhancing the opportunities for increased sales of these to
hospitals as well as larger private
clinics.
|
|
Current Market Acceptance and
Potential:
The principal purchasers of the Company's products have
been ophthalmologists, optometrists, universities and clinics in many
countries throughout the world. The Company believes that the market for
its products is being driven by: (i) the aging of the population, which is
evidenced by the domestic and international cataract surgery volume growth
trend over the past ten years, (The National Eye Institute reported in
March 2002 that the number of blind or visually impaired Americans is
likely to double over the next 30 years.) (ii) the entry by emerging
countries (including China, Russia, and other countries in Asia, Eastern
Europe and Africa) into advanced technology medical care for their
populations, (iii) increased awareness worldwide of the benefits of the
minimally invasive phaco cataract procedure, (iv) the introduction of
technology improvements such as the Company's laser system, and (v)the
growing awareness of the need for early detection and treatment of
glaucoma.
|
|
Marketing Organization
:
The Company markets its products internationally through a network of
distributors and domestically through direct sales representatives,
independent sales organizations, and ophthalmic product distributors. As
of December 31, 2008, the Company had two direct domestic sales employees
and five independent sales representatives in the United States and 30
ophthalmic and medical product distributors outside the United States.
These sales representatives are assigned exclusive territories and have
entered into contracts with the Company that contain performance quotas.
Domestic sales channels have been expanded to include independent sales
representatives and distributors. The Company also plans to continue to
market its products by identifying customers through internal market
research, trade shows and direct marketing
programs.
|
|
Product
advertising is intended to be focused in the major industry trade
journals. Most of the ophthalmologists or optometrists in the United
States receive one or more of these magazines through professional
subscription programs. The media has shown strong interest in the
Company's technology and products, as evidenced by several recent articles
in these publications.
|
|
Manufacturing and Raw
Materials:
Currently, the Company maintains a 16,926 square foot
facility in Salt Lake City. The Company transferred the manufacturing
activities for the Blood Flow Analyzer
TM
to San Diego from Ocular Blood Flow, Ltd. in England during 2001. During
the second quarter of 2002, the Company consolidated and closed the San
Diego operations into the Salt Lake City facility. The facility
accommodates its manufacturing, marketing and engineering capabilities.
The Company manufactures under systems of quality control and testing,
which complies with the Quality System Requirements established by the
FDA, as well as similar guidelines established by foreign governments,
including the CE Mark and ISO-9001.
|
|
The
Company subcontracts the manufacturing of some of its ancillary
instruments, accessories and disposables through specified vendors in the
United States. These products are contracted in quantities and at costs
consistent with its financial purchasing capabilities and pricing needs.
The Company manufactures certain accessories at its facility in Salt Lake
City.
|
|
Product Service and Support:
Service for the Company's products is overseen from its Salt Lake
City location and is augmented by its international dealer network, which
provides technical service and repair. Installation, on-site training and
a limited product warranty are included as the standard terms of sale. The
Company provides distributors with replacement parts at no charge during
the warranty period. International distributors are responsible for
installation, repair and other customer service to installed systems in
their territory. All systems parts are modular sub-components that are
easily removed and replaced. The Company maintains adequate parts
inventory and provides overnight replacement parts shipments to its
dealers.
|
|
Research
and Development
|
|
The
Company believes its research and development capabilities provide it with
the ability to respond to regulatory developments, including new products,
new product features devised from its users and new applications for its
products on a timely and proprietary basis. The Company intends to
continue investing in research and development and to strengthen its
ability to enhance existing products and develop new
products. In addition to its in-house research and development
capabilities, the Company has enlisted several recognized and respected
consultants and other technical personnel to act in technical and medical
advisory capacities.
|
|
Research,
development and service expenses (which includes production and
manufacturing support and the service department expenses) decreased by
$89,000, or 26%, to $255,000 for the twelve months ended December 31,
2008, from $355,000 for the same period in 2007. None of the costs of
research and development activities during 2008 and 2007 was borne
directly by customers.
|
|
During
the period in which Thomas F. Motter served as the Company's Chairman and
Chief Executive Officer, he formed a clinical advisory board and met from
time to time with the board. Jeffrey F. Poore, who served as the Company's
President and Chief Executive Officer from March 2003 to March 2004,
decided not to utilize the clinical advisory board. Instead, he consulted
with former members of the advisory board on an informal basis. The
Company currently has no agreements with any former members of the
clinical advisory board and none of these former members hold or own any
rights to its products or technologies. The Company's current
management meets regularly with recognized and respected
ophthalmic experts for advice concerning the Company's diagnostic
devices.
|
|
Competition
|
|
General.
The Company is
subject to competition in the glaucoma diagnostic markets from developers
of technologies for ophthalmic diagnostic instruments used for treatment.
A few large companies that are well established in the marketplace have
experienced management, are well financed and have well recognized trade
names and product lines that dominate the diagnostic equipment industry.
The Company believes that the combined sales of the three largest entities
account for over 50% of the glaucoma diagnostic market. The remaining
market is fragmented among emerging smaller companies, some of which are
foreign.
|
|
Most
major competitors either entered or expanded into the glaucoma market
through the acquisition of smaller, entrepreneurial high technology
manufacturing companies. Therefore, because existing competitors or other
entities desiring to enter the market could conceivably acquire current
entrepreneurial enterprises with small market activity, any and all
competitors must be considered to be
formidable.
|
|
Ultrasound Equipment
Manufacturers.
The Company currently recognizes Sonomed, Tomey,
Nidek, OTI and Quantel as its primary competitors in the ultrasound
equipment market. In respect to ultrasound diagnostic equipment such as
the UBM, A-Scan, Pachymeter and A/B Scan, the Company is well positioned
to compete against companies that currently hold a significant share of
the market.
|
|
The Retinal Diagnostic Market.
The Glaucoma Research Foundation suggests that with the aging of
the so-called baby boom generation, there will be an increase of
refractive surgeries, macular degeneration and glaucoma in the United
States, the leading causes of adult blindness worldwide. The National Eye
Institute stated in 2002 that the number of visually impaired Americans is
likely to double over the next three decades. Their report estimated that
2.4 million people suffer some visual impairment in this country. The
damage caused by these diseases is irreversible. The preconditions for the
onset of macular degeneration or glaucoma are low ocular blood flow and/or
high intraocular pressure. Diagnostic screening is important for
individuals susceptible to these diseases. People in high risk categories
include: African Americans over 40 years of age, all persons over 60 years
of age, persons with a family history of glaucoma or diabetes, and the
very nearsighted. The Glaucoma Research Foundation recommends that these
high risk individuals be tested regularly for glaucoma. According to the
U.S. Census Bureau, in 2004 there were over 36 million adults 65 years of
age and older and over ten million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently
accounts for more than seven million visits to physicians
annually.
|
|
The
Company is subject to intense competition in the ophthalmic diagnostic
market from well financed, established companies with recognizable trade
names and product lines and new and developing technologies. The industry
is dominated by several large entities which the Company believes accounts
for the majority of diagnostic equipment sales. The Company continues to
derive revenues from the sale of its ultrasound diagnostic equipment and
Blood Flow Analyzer
TM
.
The Blood Flow Analyzer
TM
is designed to detect glaucoma in an earlier stage than is presently
possible. In addition, the device performs tonometry and blood flow
analysis. Other ophthalmic diagnostic devices that do not detect glaucoma
in the early stages of the disease as does the Company's Blood Flow
Analyzer
TM
retail at comparable prices. Thus, the Company believes that it can
compete in the diagnostic market place based upon the lower price and
improved diagnostic functions of the analyzer. The Company also
believes that its ability to compete successfully will depend on its
capability to create and maintain advanced technology, develop proprietary
products, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals and manufacture, assemble and successfully market
products either alone or through third
parties.
|
|
Intellectual
Property Protection
|
|
The
Company's cataract surgical products are proprietary in design,
engineering and performance. Its surgical ultrasonic products have not
been patented to date because the primary technology for ultrasonic tissue
fragmentation, as available to all competitors in the market, is mainly in
the public domain.
|
|
The
Company acquired proprietary intellectual property in the transaction with
Humphrey Systems when the Company purchased the diagnostic ultrasonic
product line in 1999. This technology uses ultrasound to create a high
resolution computer image of the unseen parts of the eye that is a "map"
for the practitioner. The P40 UBM Ultrasound Biomicroscope, one of the
ultrasonic products the Company purchased, is subject to a license
agreement dated September 27, 1990, with Sunnybrook Health Science Center.
Under the terms of the license agreement, the Company has the exclusive
worldwide rights to manufacture and sell the UBM biomicroscope, for which
the Company is required to pay a royalty of $150 for each licensed product
sold. The license agreement was automatically terminated by its terms on
September 27, 2002, at which time the Company had a royalty free worldwide
license to use and sell the P40 UBM Ultrasound Biomicroscope. However, the
Company has a continuing obligation after such termination to continue to
use and sell the biomicroscope only in the field of ophthalmology. As a
result of its agreement with MEDA Co., Ltd., the Company is also able to
provide the P50 UBM biomicroscope, which is manufactured by MEDA, to other
industry segments such as the research and the veterinary
markets.
|
|
The
Photon
TM
laser cataract probe is protected under a United States patent
issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to the Company
in 1997 for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand held probe of a unique design. The
United States patent expired in September
2004.
|
|
The
Company secured the exclusive worldwide rights to this patent shortly
after its issue, and to the international patents pending, from PhotoMed
by means of a license agreement dated July 7, 1993. The license agreement
provided the Company with the rights to manufacture, distribute and sell a
laser system using the Photon
TM
laser cataract probe and related components to customers on a worldwide
basis, for which PhotoMed is to receive a 1% royalty on all net sales of
such systems and related components sold
worldwide.
|
|
Under
the license agreement PhotoMed is entitled to all royalty payments from
net sales at the time of billing to the purchaser or within 30 days of the
date of shipment, whichever occurs first. The Company is required each
quarter to prepare a summary of sales and the royalties to which PhotoMed
is entitled to be paid. The sales summary must list the number of surgical
systems and disposable units sold in each country, the dollar value of
gross and net sales, the amount of the royalty to which PhotoMed is
entitled, and any other information requested by PhotoMed from time to
time. Under the terms of the agreement, the Company has agreed to be
actively engaged in either research and development of a salable product
utilizing the patent or in marketing and selling such a
product.
|
|
The
license agreement was amended on December 5, 1997 to allow PhotoMed the
right to conduct research, development and marketing utilizing the patent
in certain medical subspecialties other than ophthalmology for which the
Company would receive royalty payments equal to 1% of the proceeds from
the net sales of products utilizing the patent. The license agreement
expired when the United States patent rights expired in September 2004,
but the license agreement could be automatically extended or renewed for
any term of extension or renewal awarded for the patent rights. In
addition, the Company has the right to terminate the license agreement at
any time after July 7, 2003 upon 90 days prior written notice to
PhotoMed.
|
|
The
Photon
TM
laser cataract probe is also protected under a United States patent
issued to the Company in 2002 for a laser surgical device for the removal
of intraocular tissue including a handpiece and a trap. The patent is due
to expire in August 2019. There are also two pending United States patents
relating to the Photon
TM
laser cataract probe.
|
|
The
Blood Flow Analyzer
TM
was granted a patent in the United Kingdom in 1998 and in the United
States in 1999, and has a patent pending in Japan. These patents relate to
pneumatic pressure probes for use in measuring change in intraocular
pressure and in measuring pulsatile ocular blood flow. The United States
patent rights expire in January 2019 and the United Kingdom patent rights
expire in November 2015.
|
|
The
Dicon
TM
Perimeters and the Dicon
TM
Corneal Topographer each have a U.S. patent with a wide scope of claims.
The United States patent for the Dicon
TM
Perimeter was issued in 1991 and the patent rights expire in March 2010.
The United States patent for the Dicon
TM
Corneal Topographer was issued in 2002 and the patent rights expire in
January 2018.
|
|
The
Company's trademarks are important to its business. It is its policy to
pursue trademark registrations for its trademarks associated with its
products as appropriate. Also, the Company relies on common law trademark
rights to protect its unregistered trademarks, although common law
trademark rights do not provide the Company with the same level of
protection as would U.S. federal registered trademarks. Common law
trademark rights only extend to the geographical area in which the
trademark is actually used while U.S. federal registration prohibits the
use of the trademark by any party anywhere in the United
States.
|
|
The
Company also relies on trade secret law to protect some aspects of its
intellectual property. All of its key employees, consultants and advisors
are required to enter into a confidentiality agreement with the Company.
Most of its third-party manufacturers and formulators are also bound by
confidentiality agreements with the
Company.
|
|
Regulation
|
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The
FDA under the Food, Drug and Cosmetics Act regulates the Company's
surgical and diagnostic systems as medical devices. As such, these devices
require premarket clearance or approval by the FDA prior to their
marketing and sale. Such clearance or approval is premised on the
production of evidence sufficient for the Company to show reasonable
assurance of safety and effectiveness regarding its products. Pursuant to
the Food, Drug and Cosmetics Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States and
the export of medical devices from the United States. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
denial of premarket clearance or approval for devices. Recommendations by
the FDA that the Company not be allowed to enter into government contracts
in order to avoid criminal prosecution may also be
made.
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Following
the enactment of the Medical Device Amendments to the Food, Drug and
Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III.
This classification is based on the controls that are perceived to be
necessary to reasonably ensure the safety and effectiveness of medical
devices. Class I devices are those devices, the safety and effectiveness
of which can reasonably be ensured through general controls, such as
adequate labeling, advertising, premarketing notification and adherence to
the FDA's Quality System Requirements regulations. Some Class I devices
are
exempt from some of the general controls. Class II devices are
those devices the safety and effectiveness of which can reasonably be
assured through the use of special controls, such as performance
standards, postmarket surveillance, patient registries and FDA guidelines.
Class III devices are devices that must receive premarketing approval by
the FDA to ensure their safety and effectiveness. Generally, Class III
devices are limited to life sustaining, life supporting or implantable
devices, or to new devices that have been found not to be substantially
equivalent to legally marketed
devices.
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There
are two principal methods by which FDA approval may be obtained. One
method is to seek FDA approval through a premarketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics Act. If a
manufacturer or distributor of a medical device can establish that a
proposed device is "substantially equivalent" to a legally marketed Class
I or Class II medical device or to a pre-1976 Class III medical device for
which the FDA has not called for a pre-marketing approval, the
manufacturer or distributor may seek FDA Section 510(k) premarketing
clearance for the device by filing a Section 510(k) premarketing
notification. The Section 510(k) notification and the claim of substantial
equivalence will likely have to be supported by various types of data and
materials, possibly including clinical testing results, obtained under an
Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an
order is issued by the FDA granting premarketing clearance for the device.
There can be no assurance that the Company will obtain Section 510(k)
premarketing clearance for any of the future devices for which the Company
seeks such clearance including the Photon
TM
laser system.
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The
FDA may determine that the device is "substantially equivalent" to another
legally marketed Class I, Class II or pre-1976 Class III device for which
the FDA has not called for a premarketing approval, and allow the proposed
device to be marketed in the United States. The FDA may determine,
however, that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA
is able to make a determination regarding substantial equivalence. A "not
substantially equivalent" determination or a request for additional
information could delay the Company's market introduction of its products
and could have a material adverse effect on its business, operating
results and financial condition.
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The
alternate method to seek approval is to obtain premarketing approval from
the FDA. If a manufacturer or distributor of a medical device cannot
establish that a proposed device is substantially equivalent to another
legally marketed device, whether or not the FDA has made a determination
in response to a Section 510(k) notification, the manufacturer or
distributor will have to seek premarketing approval for the proposed
device. A premarketing approval application would have to be submitted and
be supported by extensive data, including preclinical and clinical trial
data to prove the safety and efficacy of the device. If human clinical
trials of a proposed device are required and the device presents a
significant risk, the manufacturer or the distributor of the device will
have to file an Investigational Device Exemption application with the FDA
prior to commencing human clinical trials. The Investigational Device
Exemption application must be supported by data, typically including the
results of animal and mechanical testing. If the Investigational Device
Exemption application is approved, human clinical trials may begin at a
specific number of investigational sites, and the approval letter could
include the number of patients approved by the
FDA.
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An
Investigational Device Exemption clinical trial can be divided into
several parts or phases. Sometimes a company will conduct a feasibility
study (Phase I) to confirm that a device functions according to its design
and operating parameters. This is a usual clinical trial site. If the
Phase I results are promising, the applicant may, with the FDA's
permission, expand the number of clinical trial sites and the number of
patients to be treated to assure reasonable stability of clinical results.
Phase II studies are performed to confirm predictability of results and
the absence of adverse reactions. The applicant may, upon receipt of the
FDA's authorization, subsequently expand the study to a third phase with a
larger number of clinical trial sites and a greater number of patients.
This involves longer patient follow-up times and the collection of more
patient data. Product claims, labeling and core data for the premarketing
approval are derived primarily from this portion of the clinical trial.
The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such portions of the study. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study,
provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. Although both approval
methods may require clinical testing of the device in question under an
approved Investigational Device Exemption, the premarketing approval
procedure is more complex and time
consuming.
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Upon
receipt of the premarketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete
to permit a substantive review. If the FDA determines that the
premarketing approval is sufficiently complete to permit a substantive
review, the FDA will "file" the application. Once the submission is filed,
the FDA has by regulation 90 days to review it; however, the review time
is often extended significantly by the FDA asking for more information or
clarification of information already provided in the submission. During
the review period, an advisory committee may also evaluate the application
and provide recommendations to the FDA as to whether the device should
beapproved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's Quality System Requirements prior to
approval of a premarketing application. While the FDA has responded to
premarketing approval applications within the allotted time period,
premarketing approval reviews generally take approximately 12 to 18 months
or more from the date of filing to approval. The premarketing approval
process is lengthy and expensive, and there can be no assurance that such
approval will be obtained for any of the Company's products determined to
be subject to such requirements. A number of devices for which other
companies have sought premarketing approval have never been approved for
marketing.
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Any
products manufactured or distributed by the Company pursuant to a
premarket clearance notification or premarketing approval are or will
be subject to pervasive and continuing regulation by the FDA. The Food,
Drug and Cosmetics Act also requires that the Company's products be
manufactured in registered establishments and in accordance with Quality
System Requirements regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The export of medical devices is also
subject to regulation in certain instances. In addition, the use of the
Company's products may be regulated by various state agencies. All lasers
manufactured for the Company are subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to
file new product and annual reports and to maintain quality control,
product testing and sales records, to incorporate certain design and
operating features in lasers sold to end users pursuant to specific
performance standards, and to comply with labeling and certification
requirements. Various warning labels must be affixed to the laser,
depending on the class of the product, as established by the performance
standards.
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Although
the Company believes that it currently complies and will continue to
comply with all applicable regulations regarding the manufacture and sale
of medical devices, such regulations are always subject to change and
depend heavily on administrative interpretations. There can be no
assurance that future changes in review guidelines, regulations or
administrative interpretations by the FDA or other regulatory bodies, with
possible retroactive effect, will not materially adversely affect the
Company. In addition to the foregoing, the Company is subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs
to comply with such laws and regulations and that such compliance will not
have a material adverse effect upon the Company's ability to conduct
business.
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The
Company and the manufacturers of its products may be inspected on a
routine basis by both the FDA and individual states for compliance with
current Quality System Requirements regulations and other
requirements.
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Congress
has considered several comprehensive federal health care programs designed
to broaden coverage and reduce the costs of existing government and
private insurance programs. These programs have been the subject of
criticism within Congress and the health care industry, and many
alternative programs and features of programs have been proposed and
discussed. Therefore, the Company cannot predict the content of any
federal health care program, if any is passed by Congress, or its effect
on the Company and its business. Some measures that have been suggested as
possible elements of a new program, such as government price ceilings on
non-reimbursable procedures and spending limitations on hospitals and
other healthcare providers for new equipment, could have an adverse effect
on its business, operating results or financial condition. Uncertainty
concerning the features of any health care program considered by the
Congress, its adoption by the Congress and the effect of the program on
the Company's business could result in volatility of the market price of
its common stock.
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Furthermore,
the introduction of the Company's products in foreign countries may
require it to obtain foreign regulatory clearances. The Company believes
that only a limited number of foreign countries have extensive regulatory
requirements, including France, Germany, Korea, China and Japan. The time
involved for regulatory approval in foreign countries varies and can take
a number of years. A number of European and other economically advanced
countries, including Italy, Norway, Spain and Sweden, have not developed
regulatory agencies for intensive supervision of such devices. Instead,
they generally have been willing to accept the approval of the FDA.
Therefore, a premarketing approval, Section 510(k) or approved
Investigational Device Exemption from the FDA is tantamount to approval in
those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine
the nature of devices that they will use in medical procedures. The
Company's two ultrasound surgical and diagnostic systems, the Photon
TM
laser cataract system it is developing and the ocular blood flow analyzer
and the UBM biomicroscope are all devices which require FDA approval.
Therefore, a significant aspect of the acceptance of the devices in the
market is the Company's effectiveness in obtaining the necessary
approvals. Having an approved Investigational Device Exemption allows the
Company to export a product to qualified investigational
sites.
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Regulatory
Status of Products
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All
of the Company's products, with the exception of the Photon
TM
,
are approved for sale in the U.S. by the FDA under a 510(k). All of the
Company's products have been accepted for import into CE countries and
various non-CE countries.
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The
Company acquired permission from the FDA to export the Photon
TM
laser cataract system outside the United States under an open
Investigational Device Exemption granted by the FDA in September 1994.
Although the Photon
TM
laser cataract system is uniquely configured in an original and
proprietary manner, the laser system, a Nd:YAG laser, is not proprietary
to the device or the Company and is widely used in the medical industry
and other industries as well. Of particular significance is the fact that
this particular component has received previous market clearance from the
FDA for other ophthalmic and medical applications. Also of significance is
the Company's belief that the surgical treatment method used with the
Photon
TM
laser is similar to the current ultrasound cataract treatment employed by
ophthalmologists.
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The
Company submitted a Premarket Notification 510(k) application to the FDA
for the Photon
TM
laser cataract system in September 1993. The FDA requested clinical
support data for claims made in the 510(k), and in October 1994 the
Company submitted an Investigational Device Exemption application to
provide for a "modest clinical study" in order to collect the data
required by the FDA for clearance of the Photon
TM
laser cataract system. The FDA granted this Investigational Device
Exemption in May 1995 for a Phase I Feasibility Study. The Company began
human clinical trials in April 1996 and completed the Phase I study in
November 1997. The Company started Phase II trials in September 1998 and
completed numerous cases of treatment group and control group patients,
which were included in its submission to the
FDA.
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The
Company received a warning letter dated August 30, 2000 from the Office of
Compliance, Center for Devices and Radiological Health of the Food and
Drug Administration relating to certain deficiencies in the human clinical
trials for its Photon
TM
Laser Cataract System. The warning letter concerned the conditions found
by the FDA during several audits at its clinical sites. The FDA's comments
were isolated to the administrative procedures of compiling data from the
clinical sites. The Company responded to the warning letter in a
submission dated September 27, 2000. In the submission the Company took
corrective action that included submitting a revised clinical protocol and
case report forms and procedures for the collection and control of data.
In a subsequent letter dated November 2, 2000 to the Company, the FDA
granted conditional approval provided that the Company correct certain
deficiencies. After providing several additional submissions to the FDA,
the Company received a letter dated February 13, 2001 from the FDA stating
that the deficiencies had been corrected and the clinical trials could
continue.
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Subsequent
to the warning letter, the Company received approval to continue its
clinical trials, the results of which were included in its supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate
device application for the Photon
TM
laser system. In December 2001, the Company received a preliminary
review from the FDA regarding the supplemental submission. As a result of
that preliminary review, the Company submitted additional clinical
information to the FDA on February 6, 2002. The application is receiving
ongoing review by the FDA. On May 7, 2002, the Company received a letter
from the FDA requesting further clinical information. The Company has
generated additional clinical information in response to the letter and is
uncertain if the Company will make a submission to the FDA with the
additional clinical information. Because of the "going concern" status of
the Company, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the Company. Its diagnostic products are currently
its major focus and the Photon
TM
and other extensive research and development prospects have been put on
hold pending future evaluation until the Company's financial position
improves. Its focus is not on any specific diagnostic product or products,
but rather on its entire group of diagnostic
products.
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Employees
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As
of March 31, 2009, the Company had 16 full-time employees and one
part-time employee. This number does not include its manufacturer's
representatives who are independent contractors rather than its employees.
The Company also utilizes several consultants and advisors. There can be
no assurance that the Company will be successful in recruiting or
retaining key personnel. None of its employees are a member of a labor
union and the Company has never experienced any business interruption as a
result of any labor disputes.
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In
December 2001 the Company initiated the first phase of a corporate
downsizing program to reduce its operating expenses. The Company
implemented the second phase of its downsizing program in the second
quarter of 2002, by closing and transferring its manufacturing from its
site in San Diego, California to Salt Lake City, resulting in further
reductions in operating expenses. As a result of the downsizing program
and some resignations, the number of its employees has been reduced by 72%
from 112 to 22 employees. The estimated cost savings from the downsizing
program will be in excess of $2,000,000 annually. The costs of downsizing
have included onetime expenses of approximately $43,000 for moving and
travel. In addition, the Company incurred additional onetime expenses of
approximately $18,000 for housing accommodations for key employees working
in Salt Lake City. The Company realized a net cost savings from down
sizing of approximately $2,394,000 during the twelve months ended December
31, 2002.
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Item 2.
Description of
Property
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The
Company's corporate offices are currently located at 2355 South 1070 West,
Salt Lake City, Utah. This facility consists of 16,926 square feet of
leased office and warehouse space. These facilities were leased from Eden
Roc, a California partnership, at a base monthly rate of $7,109, plus a
$1,690 monthly common area maintenance fee. In January 2003, the Company
renegotiated a three-year lease with Eden Roc at a monthly rate of $9,295,
plus a $1,859 common area maintenance fee for the year 2003, with the rate
increased to $11,433 (including a $1,859 common area maintenance fee) for
2004 and to $11,720 (including a $1,859 common area maintenance fee) for
2005. Pursuant to the lease, the Company pays all real estate and personal
property taxes and the insurance costs on the premises. The lease expired
on December 31, 2005. Since January 1, 2006, the Company has leased 16,926
square feet of space in the facility on a month to month basis at a
monthly rate of $7,109 plus a $1,690 common area maintenance
fee.
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The
Company believes that these facilities are adequate and satisfy its needs
for the foreseeable future.
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Item
3. Legal Proceedings
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On
June 20, 2003, an action was brought against the Company by CitiCorp
Vendor Finance, Inc., formerly known as Copelco Capital, Inc. in the Third
Judicial District Court, Salt Lake County, State of Utah (Civil No.
030914195). 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 in or about April of
2000. The action also seeks an award of attorney’s fees and
costs incurred in the collection. The Company filed an answer
to the complaint disputing the amounts allegedly owed due to machine
problems and a claimed understanding with the vendor. The
Company returned two of the machines. The Company was engaged
in settlement discussions with CitiCorp until counsel for CitiCorp
withdrew from the case. New counsel for CitiCorp was
appointed. Thereafter, there was a substitution of plaintiff,
with CIT Technology Financing Services I, LLC as the new
plaintiff. In June 2008, the Company filed an amended answer
and a third party complaint. Pursuant to a notice from the
court dated January 13, 2009 to show cause why the case should not be
dismissed for failure to prosecute and a hearing held on March 3, 2009,
the Company and CIT Technology Financing Services agreed to dismiss the
case without prejudice. Settlement discussion may
continue.
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On
December 27, 2007, the Company entered into a settlement agreement with
Larry Hicks to settle the lawsuit that he brought against the Company for
payments due under a consulting agreement with the Company in the Third
Judicial District Court, Salt Lake County, State of Utah (Civil No.
030922220). Under the terms of the settlement agreement, the
Company agreed to pay Mr. Hicks a total of $20,000, of which $7,500 was
paid within seven days of the date of execution of the settlement
agreement. The remaining amount owing of $12,500 was to be paid
in five consecutive quarterly installments of $2,500 each, beginning in
the first quarter of 2008 and ending in the first quarter of
2009. Payments of $2,500 each were made for the quarters ended
March 31, 2008, June 30, 2008, September 30, 2008, and December 31,
2008.
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On
March 19, 2009, an action was brought against the Company by Pilot Freight
Services in the Third Judicial District Court, Salt Lake County, State of
Utah (Civil No. 090405609), for payments due for shipping
charges. The complaint claims the sum of $11,336 is due for
unpaid shipping charges, together with accrued interest from the date the
shipping charges became due, with the last shipping charge becoming due on
October 22, 2008. The Company is in the process of
investigating the claims made in the complaint and intends to file an
answer in defense of the action.
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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.
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Item
4. Submission of Matters to a Vote of Security
Holders
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On
December 5, 2008, the shareholders approved a 1-for-100 reverse stock
split of the Company's common stock at a Special Meeting of the
Shareholders. There were 736,703,232 votes cast in favor of the
reverse split, 242,024,479 votes against the reverse split, and 3,281,414
abstentions. The reverse stock split became effective upon
shareholder approval at the Special Meeting of
Shareholders.
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PART
II
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Item
5. Market for Common Equity and Related Stockholder
Matters
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The
Company's authorized capital stock consists of 1,400,000,000 shares of
common stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.001 par value per share. The Company has created seven classes of
preferred stock, designated as Series A preferred stock, Series B
preferred stock, Series C preferred stock , Series D preferred stock,
Series E preferred stock, Series F preferred stock and Series G preferred
stock.
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On
December 5, 2008, the Company’s shareholders approved a 1-for-100 reverse
stock split, which became effective on December 5, 2008. All references to
share and per-share data for all periods presented in this report have
been adjusted to give effect to this reverse
split.
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The
Company's common stock trades on the OTC Bulletin Board under the symbol
of "PDMI.OB." Prior to July 22, 1996, there was no public market for the
common stock. From July 22, 1996 to June 25, 2003, the Company's common
stock was listed on the Nasdaq SmallCap Market. Since June 25, 2003, the
common stock has traded on the OTC Bulletin Board. As of March 30, 2008,
the closing sale prices of the common stock was $.002 per share. The
following are the high and low sale prices for the common stock by quarter
as reported by the OTC Bulletin Board since January 1,
2007.
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Common
Stock
Price Range
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|
Period
(Calendar Year)
|
High
|
Low
|
|
2007
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2008
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2009
First
Quarter
|
$ 3.20
1.40
.70
.50
$
.01
.01
.02
.05
$
.0027
|
$ .30
.60
.40
.30
$
.06
.02
.01
.012
$
.0015
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The
Company's Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock,
Series F preferred stock and Series G preferred stock are not publicly
traded. As of March 31, 2009, there were 4,489 record holders of common
stock, six record holders of Series A preferred stock, four record holders
of Series B preferred stock, no record holders of Series C preferred
stock, one record holder of Series D preferred stock, one record holder of
Series E preferred stock, 18 record holders of Series F preferred stock,
and one record holder of Series G preferred
stock.
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The
Company has never paid any cash dividends on its common stock and does not
anticipate paying any cash dividends on its common stock in the
foreseeable future. The Company must pay cash dividends to holders of its
Series A preferred, Series B preferred, Series C preferred, Series D
preferred stock, Series E preferred, Series F preferred stock and Series G
preferred stock before it can pay any cash dividend to holders of its
common stock. Dividends paid in cash pursuant to outstanding shares of its
Series A, Series B, Series C, Series D, Series E, Series F and Series G
preferred stock are only payable from its surplus earnings, and are
noncumulative and therefore, no deficiencies in dividend payments from one
year will be carried forward to the
next.
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The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its proposed business and operations. Any
payment of cash dividends in the future on the common stock will be
dependent upon its financial condition, results of operations, current and
anticipated cash requirements, plans for expansion, restrictions, if any,
under any debt obligations, as well as other factors that its board of
directors deems relevant. The Company issued 6,764 shares of its Series A
preferred and 6,017 shares of its Series B preferred on January 8, 1996 as
a stock dividend to Series A and Series B preferred shareholders of record
as of December 31, 1994.
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Item
6. Management's Discussion and Analysis or Plan of
Operation
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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.
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Critical
Accounting Policies
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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:
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1. Persuasive
evidence of an arrangement exists. Prior to shipment of product, the
Company required a signed purchase order and, depending upon the customer,
a down payment toward the final invoiced price or full payment in advance
with certain international product
distributors.
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2. Delivery
and performance have occurred. Unless the purchase order requires specific
installation or customer acceptance, the Company recognizes revenue when
the product ships. If the purchase order requires specific installation or
customer acceptance, the Company recognizes revenue when such installation
or acceptance has occurred. Title to the product passes to its customer
upon shipment. This revenue recognition policy does not differ among its
various different product lines. The Company guarantees the functionality
of its product. If its product does not function as marketed when received
by the customer, the Company either makes the necessary repairs on site or
has the product shipped to the Company for the repair work. Once the
product has been repaired and retested for functionality, it is reshipped
to the customer. The Company provides warranties that generally extend for
one year from the date of sale. Such warranties cover the necessary parts
and labor to repair the product as well as any shipping costs that may be
required. The Company maintains a reserve for estimated warranty costs
based on its historical experience and management's current
expectations.
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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.
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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.
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5. Revenues
for sales of products that require specific installation and acceptance by
the customer are recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products are recognized when
the product is shipped. A signed purchase agreement and a
deposit or payment in full from customers is required before a product
leaves the premises. Title passes at time of shipment (F.O.B.
shipping point). The Company's products contain both hardware
and software components. The Company does not recognize revenue
for the software components of the products separate from the product as a
whole because the software is incidental to the product, as defined in
paragraph 2 of SOP 97-2.
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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.
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|
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.
|
|
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements, which involve
risks and uncertainty. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The Company's fiscal
year is from January 1 through December
31.
|
|
The
Company is engaged in the design, development, manufacture and sale of
high technology diagnostic eye care products. Given the "going concern"
status of the Company, management has focused efforts on those products
and activities that will, in its opinion, achieve the most resource
efficient short-term cash flow. As seen in the results for the twelve
months ended December 31, 2008, diagnostic products have been the major
focus and the Photon
TM
and other extensive research and development projects have been put on
hold pending future evaluation when the Company's financial position
improves. The Company does not focus on a specific diagnostic product or
products but, instead, on this entire diagnostic product
group.
|
|
During
the year ended December 31, 2008, the Company recorded a decrease in the
warranty accrual of $163,000. This decrease was a result of a
comprehensive analysis by management regarding historic warranty costs.
Historically, the Company has recorded a monthly warranty expense and
related increase to the warranty accrual. However, in recent periods the
usage of the warranty accrual has continued to increase. After reviewing
the recent historical data, management determined that the warranty
accrual should be decreased by $163,000 to $64,000. Management
will continue to closely monitor the warranty accrual usage to ensure that
the proper amount has been accrued.
|
|
During
the twelve months ended December 31, 2008, management made certain
adjustments to the financial statements, including a decrease in the
reserve for obsolete or estimated non-recoverable inventory of $13,000.
The Company also recorded a net increase in the allowance for doubtful
accounts receivable of $34,000 and no change in accruals to settle
outstanding disputes.
|
|
The
Company's ultrasound diagnostic products include a P2200 pachymetric
analyzer, a P2000 Ultrasound A-Scan biometric analyzer, a P2500
combination A/Scan and Pachymeter, a P37 Ultrasound A/B Scan, a P37-II
Ultrasound A/B Scan, a P2700 Ultrasound A/B Scan, a P3700 Ultrasound A/B
Scan, a P40 Ultrasound Biomicroscope, a P45 Plus Ultrasound Biomicroscope,
and a P60 Ultrasound Biomicroscope, the technology for which was acquired
from Humphrey Systems in 1998. The Company introduced the P45 Plus in the
fall of 2000, which combines the A/B Scan, and the biomicroscope into one
instrument. The Company introduced the P60 in March 2005, which represents
the fourth generation of UBM devices and has better visual clarity and
image flexibility than earlier versions. In addition, the Company markets
its Blood Flow Analyzer
TM
acquired in the purchase of Ocular Blood Flow Ltd. in June 2000. Other
diagnostic products are the Dicon
TM
LD400
Auto Perimeter and the Dicon
TM
CT 200e Corneal Topographer, which were acquired in the acquisition of
Vismed d/b/a Dicon in June 2000.
|
|
Because
of the "going concern" status of the Company, management has focused
efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the Company.
As reflected in the results for the fiscal year ended December 31, 2008,
diagnostic products are currently the Company's major focus and the
Photon
TM
and other extensive research and development projects have been put on
hold pending future evaluation when the financial position of the Company
improves. Due to the lack of current evidence to support recoverability,
the Company has recorded an inventory reserve to offset the inventory
associated with the Precisionist Thirty Thousand
TM
and the Photon
TM
as well as certain other inventory items that are estimated to be
non-recoverable due to the lack of significant turnover of such items in
recent periods.
|
|
Activities
for the twelve months ended December 31, 2008 and 2007 included sales of
the Company's products and related accessories and disposable
products. Stephen L. Davis was named President on November 18,
2008. Mr. Davis replaced Raymond L. Cannefax who was terminated
by the Board of Directors. Mr. Davis previously served as the
Company's Vice President of Sales and Marketing from May 2007 to February
2008. On March 20, 2006, the Company named Luis A. Mostacero as
Vice President of Finance. Mr. Mostacero previously served as the
Company's Controller from April 2004 to September 2005. On January 8,
2008, Mr. Mostacero was also appointed as Chief Financial
Officer. Mr. Mostacero resigned on January 16, 2009, to
pursue other opportunities. Mr. Davis has been appointed the
Company's Treasurer until a new Treasurer is appointed. On
October 11, 2006, Christina O'Connor was appointed as Vice President of
International Sales and Julio C. Maximo as Vice President of
Operations. Ms. O'Connor resigned on July 7, 2008, to pursue
other opportunities. On January 4, 2007, Alfred B. Franklin was
appointed as Vice President of Domestic Sales. Mr. Franklin resigned on
May 10, 2007, to pursue other
opportunities.
|
|
On
May 7, 2002, the Company received a letter from the FDA requesting further
clinical information regarding the Photon
TM
.
The Company is in the process of generating the additional clinical
information in response to the letter. The Company cannot market or sell
the Photon
TM
in the United States until FDA approval is granted. On November 4,
2002, the Company received FDA approval for expanded indications of use of
the Blood Flow Analyzer
TM
for pulsatile ocular blood flow, volume and pulsatility equivalence index.
Also, the Company is continuing its efforts to educate the payors of
Medicare claims throughout the country about the Blood Flow Analyzer
TM
,
its purposes and the significance of its performance in patient care in
order to achieve reimbursements to the providers. These efforts should
lead to a more positive effect on
sales.
|
|
In
April 2001, the Company received written authorization from the CPT
Editorial Research and Development Department of the American Medical
Association to use a common procedure terminology or CPT code number 92120
for its Blood Flow Analyzer
TM
,
for reimbursement purposes for doctors using the
device. However, certain insurance payors have elected not to
reimburse doctors using the Blood Flow Analyzer
TM
.
The Company believes the reasons why insurance payors initially elected
not to reimburse doctors using the CPT code were the relatively high
volume of claims that began to be submitted under CPT code number 92120
compared to the limited volume of claims previously submitted under this
code, and the time consumed by the Blood Flow Analyzer
TM
test, which some payors may have believed was less than what is allowed
under CPT code number 92120. This trend began shortly after insurance
payors were presented with reimbursement requests under this code, and the
Company believes these reasons were the basis for the initiation of
nonpayment.
|
|
The
impact of this nonpayment by certain payors on the Company's future
operations is a lower volume of sales, particularly in those states where
reimbursement is not yet approved or is delayed. Currently, there is
reimbursement by insurance payors in 20 states and partial reimbursement
in six other states. As insurance payors have the prerogative whether to
provide reimbursement to doctors using the Blood Flow Analyzer
TM
,
the Company is continuing to work with insurance payors in states where
there is no reimbursement to doctors using the CPT code to demonstrate the
value of the instrument. However, some insurance payors are currently not
providing reimbursement to doctors where a regional or state administrator
of Medicare has elected not to provide Medicare coverage for the Blood
Flow Analyzer
TM
.
The Company is continuing to work with the regional and state
administrators of Medicare who have denied Medicare coverage for the Blood
Flow Analyzer
TM
to demonstrate the value of the
instrument.
|
|
There
were a number of factors that contributed to the decrease in sales of the
Company's diagnostic products. The U.S. recessionary economic trend has
impacted the Company's domestic sales. Additionally, the Company
restructured its sales organization and sales channels by decreasing its
direct sales force who are full-time employees to two direct sales
employees and five independent sales representatives as of December 31,
2008. The dependent sales force has been reduced because the Company does
not have sufficient revenues to justify a larger direct sales force. One
of the challenges for fiscal 2009 will be the judicious reestablishment of
the sales force in anticipation of increased
sales.
|
|
The
Company intends to increase its efforts to sell its diagnostic products
through independent sales representatives and ophthalmic equipment
distributors, which are paid commissions only for their sales. As of
December 31, 2008, the Company had 30 ophthalmic and medical product
distributors outside the United States. The Company hopes to benefit from
these recently hired sales representatives and distributors in the United
States as they gain familiarity, through training, of the Company's
diagnostic products.
|
|
Outstanding
Commitments to Issue Shares
|
|
The
following table identifies the Company's outstanding commitments to issue
shares, including the shares underlying the convertible notes
and warrants issuable upon conversion of the notes and exercise of
the warrants. All references to share and pre-share
data for all periods presented in this report have been adjusted to give
effect to the 1-for-100 reverse stock split, effective December 5,
2008.
|
|
Underlying
Shares
|
|
|
Security
|
of
Common Stock
|
|
Notes
(1)
|
966,705,263
|
|
Warrants
(2)
|
637,594
|
|
Preferred
Stock (3)
|
8,624
|
|
Stock
Options (4)
|
114,550
|
|
Total
|
967,466,031
|
|
(1)
|
Assumes
full conversion of $4,132,665 of notes issued to AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium Capital
Partners 11, LLC at a conversion price of $.0009 per share (based upon a
market price of $.0095 as of December 31, 2008 with a 55%
discount).
|
|
(2)
|
Consisting
of warrants exercisable at prices ranging from $.10 per share to $675.00
per share, including warrants issued to AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II,
LLC to purchase 165,344 shares of common stock at an exercise price of
$20.00 per share, exercisable through the period from April 27, 2010 to
June 30, 2010, and warrants to purchase 120,000 shares of common stock at
an exercisable price of $10.00 per share, exercisable through the period
from February 28, 2011 to April 20, 2012, warrants to purchase 100,000
shares of common stock at an exercise price of $.50 per share, exercisable
through June 11, 2012, warrants to purchase 150,000 shares of common stock
at an exercise price of $.10 per share, exerciseable through December 24,
2012, and warrants to purchase 150,000 shares of common stock at an
exercise price of $.10 per share, exercisable through June 16,
2015.
|
|
(3)
|
Consisting
of 68 shares of common stock issuable upon conversion of 5,627 shares of
Series A preferred stock, 108 shares of common stock issuable upon
conversion of 8,986 shares of Series B preferred stock, 88 shares of
common stock issuable upon conversion of 5,000 shares of Series D
preferred stock, 133 shares of common stock issuable upon conversion of
250 shares of Series E preferred stock, 2,346 shares of common stock
issuable upon conversion of 4,398.75 shares of Series F preferred stock,
and 5,882 shares of common stock issuable upon conversion of 588,235
shares of Series G preferred stock.
|
|
(4)
|
Consisting
of stock options granted to executive officers and employees to purchase
92,050 shares of common stock at exercise prices ranging from $1.00 per
share to $10.00 per share, and stock options granted to directors to
purchase 22,500 shares of common stock at exercise prices ranging from
$9.00 per share to $275.00 per
share.
|
|
There
are a total of 967,466,031 shares underlying our convertible notes,
warrants, preferred stock and stock options, assuming full conversion of
the outstanding notes and preferred stock and the exercise of all the
outstanding warrants and stock options. The number of the Company's
authorized shares of common stock is 1,400,000,000 shares. The large
number of the Company's shares of common stock underlying its notes,
warrants, preferred stock and stock options will require the Company to
increase the number of authorized shares. Failure to obtain stockholder
approval to increase the number of authorized shares could result in the
noteholders commencing legal action against the Company and foreclosing on
all of its assets to recover damages. Any such action would require the
Company to curtail or cease its
operations.
|
|
Convertible
Notes
|
|
April 27, 2005 Sale of
$2,500,000 in Convertible Notes.
To obtain funding for the
Company's ongoing operations, the Company entered into a securities
purchase agreement with four accredited investors on April 27, 2005 for
the sale of (i) $2,500,000 in convertible notes and (ii) warrants to
purchase 165,344 shares of its common stock. The sale of the convertible
notes and warrants is to occur in three traunches and the investors
provided the Company with an aggregate of $2,500,000 as
follows:
|
|
•
|
$850,000
was disbursed on April 27, 2005;
|
|
•
|
$800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of warrants;
and
|
| • |
$850,000
was disbursed on June 30, 2005, the effective date of the registration
statement.
|
|
Under
the terms of the securities purchase agreement, the Company agreed it
would not, without the prior written consent of a majority-in-interest of
the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market
price of the common stock on the date of issuance (taking into account the
value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are
convertible into an indeterminate number of shares of common stock, or
(iii) the issuance of warrants during the lock-up period beginning April
27, 2005 and ending on the later of (a) 270 days from April 27, 2005, or
(b) 180 days from the date the registration statement is declared
effective.
|
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning April 27, 2005 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least
20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
|
|
The
$2,500,000 in convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and
is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in which the
stock price is greater than 125% of the initial market price, or $9.45,
for each trading day during that month. Any amount of principal or
interest on the convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The notes mature in three
years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $9.00 or (ii)
60% of the average of the three lowest intraday trading prices for the
common stock on the OTC Bulletin Board for the 20 trading days before but
not including the conversion date. Accordingly, there is no limit on the
number of shares into which the notes may be
converted.
|
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no
event of default by the Company and the Company's stock is trading at or
below $9.00 per share. An event of default includes the failure by the
Company to pay the principal or interest on the notes when due or to
timely file a registration statement as required by the Company or obtain
effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the
notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of
the notes; or (c) 145% of the outstanding principal and accrued interest
for prepayments occurring after the 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 $2.00 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants
are not registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, the Company
will not receive any proceeds therefrom. In addition, the exercise price
of the warrants will be adjusted in the event the Company issues common
stock at a price below market, with the exception of any securities issued
as of the date of the warrants or issued in connection with the callable
secured convertible notes issued pursuant to the securities purchase
agreement.
|
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible
notes.
|
|
The
due date of the convertible note is June 30, 2008, and the note is
currently in default. The amount of the note is classified as a
current liability on the balance sheet in the Company's financial
statements.
|
|
As
of December 31, 2008, there was an outstanding balance of $1,258,000 in
principle and accrued interest on the convertible notes. During
the years ended December 31, 2008 and 2007, the Company issued 9,709,938
and 2,830,172 shares of common stock for the conversion of $200,910 and
$212,346 of the convertible notes,
respectively.
|
|
February 28, 2006 Sale of
$1,500,000 in Convertible Notes.
To obtain additional funding for
the Company's ongoing operations, the Company entered into a second
securities purchase agreement on February 28, 2006 with the same four
accredited investors for the sale of (i) $1,500,000 in convertible notes
and (ii) warrants to purchase 120,000 shares of its common stock. The sale
of the convertible notes and warrants is to occur in three traunches and
the investors are obligated to provide the Company with an aggregate of
$1,500,000 as follows:
|
|
|
•
|
$500,000
was disbursed on February 28, 2006;
|
|
|
•
|
$500,000
was disbursed on June 28, 2006 after the Company filed a registration
statement on June 15, 2006 to register the shares of common stock
underlying the convertible notes. The registration statement was
subsequently withdrawn on July 25, 2006 and a new registration statement
was filed on September 15, 2006 to register 600,000 shares of common stock
issuable upon conversion of the
notes.
|
|
|
•
|
$500,000
was disbursed on April 30, 2007, the day prior to the effective date of
the registration statement on May
1,2007.
|
|
Under
the terms of the securities purchase agreement, the Company also agreed it
would not, without the prior written consent of a majority-in-interest of
the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market
price of the common stock on the date of issuance (taking into account the
value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are
convertible into an indeterminate number of shares of common stock, or
(iii) the issuance of warrants during the lock-up period beginning
February 28, 2006 and ending on the later of (a) 270 days from February
28, 2006, or (b) 180 days from the date the registration statement is
declared effective.
|
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning February 28, 2006 and ending two years after the end of the
above lock-up period unless it first provided each investor an option to
purchase its pro rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be provided
written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and
the option must be extended to each investor during the 15-day period
following delivery of such notice.
|
|
The
$1,500,000 in convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and
is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in which the
stock price is greater than 125% of the initial market price, or $2.75,
for each trading day during that month. Any amount of principal or
interest on the convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The notes mature in three years from the date of issuance,
and are convertible into the Company's common stock at the noteholders'
option, at the lower of (i) $2.00 or (ii) 60% of the average of the three
lowest intraday trading prices for the common stock on the OTC Bulletin
Board for the 20 trading days before but not including the conversion
date. Accordingly, there is no limit on the number of shares into which
the notes may be converted.
|
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of
default by the Company and the Company's stock is trading at or below
$2.00 per share. An event of default includes the failure by the Company
to pay the principal or interest on the notes when due or to timely file a
registration statement as required by the Company or obtain effectiveness
with the Securities and Exchange Commission of the registration statement.
Prepayment of the notes is to be made in cash equal to either (a) 125% of
the outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 130% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for prepayments
occurring after the 60
th
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 $1.00 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants
are not registered pursuant to an effective registration statement. In the
event the investors exercise the warrants on a cashless basis, then the
Company will not receive any proceeds therefrom. In addition, the exercise
price of the warrants will be adjusted in the event the Company issues
common stock at a price below market, with the exception of any securities
issued as of the date of the warrants or issued in connection with the
notes issued pursuant to the securities purchase
agreement.
|
|
The
noteholders have
agreed to
restrict their ability to convert their callable secured convertible notes
or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock.
However, the noteholders may repeatedly sell shares of common stock in
order to reduce their ownership percentage, and subsequently convert
additional convertible notes.
|
|
Two
of the three traunches relative to the note totaling $834,275 are due in
2009 and have been classified as a current liability on the balance sheet
in the Company's financial
statements.
|
|
As
of December 31, 2008, there was an outstanding balance of $1,334,275 in
principle and accrued interest on the convertible notes. During
the year ended December 31, 2008 and 2007, the Company issued zero and
600,000 shares of common stock for the conversion of $0.00 and $167,000 of
the convertible notes,
respectively.
|
|
The
Company received notice from the accredited investors holding the
convertible notes dated February 28, 2006 and the convertible notes dated
June 11, 2007, that on January 22, 2009, E-Lionheart, LLC and other third
parties purchased $500,000 of the convertible notes dated February 28,
2006 and the $500,000 of convertible notes dated June 11,
2007. The total purchase price of these convertible notes was
$1,514,444. Between February 18, 2009 and March 27, 2009, the
third parties converted a total $454,147 of the February 28,
2006 convertible notes at conversion prices ranging from $.0009 to .00105
per share and received a total of 502,169,656 shares of the Company's
common stock pursuant to said conversions. As of March 31,
2009, the Company had outstanding 517,901,422 shares of common
stock.
|
|
June 11, 2007 Sale of $500,000
in Convertible Notes:
To obtain further funding for the Company's
ongoing operations, the Company entered into a third securities purchase
agreement on June 11, 2007 with the same four accredited investors for the
sale of (i) $500,000 in convertible notes and (ii) warrants to purchase
100,000 shares of its common stock. The investors disbursed $500,000 to
the Company on June 11, 2007.
|
|
Under
the terms of the June 11, 2007 securities purchase agreement, the Company
agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning June 11, 2007 and ending on the later of (a) 270 days from June
11, 2007, or (b) 180 days from the date the registration statement is
declared effective.
|
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning June 11, 2007 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be provided
written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and
the option must be extended to each investor during the 15-day period
following delivery of such notice.
|
|
The
$500,000 in convertible notes bear interest at 8% per annum from the date
of issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock
price is greater than 125% of the initial market price, or $2.75, for each
trading day during that month. Any amount of principal or interest on the
callable secured convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The convertible notes mature in three years from the date
of issuance, and are convertible into the Company's common stock at the
noteholders' option, at the lower of (i) $.02 or (ii) 50% of the average
of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares
into which the notes may be
converted.
|
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of
default by the Company and its stock is trading at or below $.10 per
share. An event of default includes the failure by the Company to pay the
principal or interest on the convertible notes when due or to timely file
a registration statement as required by the Company or obtain
effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made
in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date
of the notes; (b) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and60 days following the issue date
of the notes; or (c) 145% of the outstanding principal and accrued
interest for prepayments occurring after the 60th day following the issue
date of the notes.
|
|
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.50 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants
are not then registered pursuant to an effective registration statement.
In the event the investors exercise the warrants on a cashless basis, the
Company will not receive any proceeds therefrom. In addition, the exercise
price of the warrants will be adjusted in the event the Company issues
common stock at a price below market, with the exception of any securities
issued as of the date of the warrants or issued in connection with the
convertible notes issued pursuant to the securities purchase
agreement.
|
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar month.
|
|
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on June 11, 2007. The
registration statement must be filed with the Securities and Exchange
Commission within 60 days of the June 11, 2007 closing date and the
effectiveness of the registration is to be within 135days of such closing
date. Penalties of 2% of the outstanding principal balance of the
convertible notes plus accrued interest are to be applied for each month
the registration is not effective within the required time. The penalty
may be paid in cash or stock at the Company's
option.
|
|
As
of December 31, 2008, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded
derivatives and no gain or loss is recorded on the Company's
statements of operations as a result of said
conversion.
|
|
The
Company received notice from the accredited investors holding the
convertible notes dated February 28, 2006 and the convertible notes dated
June 11, 2007, that on January 22, 2009, E-Lionheart, LLC and other third
parties purchased $500,000 of the convertible notes dated February 28,
2006 and the $500,000 of convertible notes dated June 11, 2007. The total
purchase price of these convertible notes was
$1,514,444.
|
|
December 19, 2007 Issuance of
$389,010 in Convertible Notes:
On December 19, 2007, the Company
was notified by the holders of the convertible notes that there was a past
due interest owing on the outstanding convertible notes. The total amount
of interest owed was.$389,010. To pay this interest, the noteholders were
willing to accept $389,010 in additional convertible notes due on December
31, 2010. Accordingly, on December 19, 2007, the Company issued $389,010
in convertible notes to the noteholders as full payment of the past due
interest.
|
|
The
$389,010 in convertible notes bear interest at 2% per annum from December
31, 2007. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock
price is greater than 125% of the initial market price, or $2.75, for each
trading day during that month. Any amount of principal or interest on the
callable secured convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The convertible notes mature on December 31, 2010, and are
convertible into the Company's common stock at the noteholders' option, at
the lower of (i) $2.00 or (ii) 50% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for
the 20 trading days before but not including the conversion date.
Accordingly, there is no limit on the number of shares into which the
notes may be converted.
|
|
The
convertible notes have a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of
default by the Company and its stock is trading at or below $4.00 per
share. An event of default includes the failure by the Company to pay the
principal or interest on the convertible notes when due. Prepayment of the
convertible notes is to be made in cash equal to either (a) 135% of the
outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 145% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 150%
of the outstanding principal and accrued interest for prepayments
occurring after the 60
th
day following the issue date of the
notes.
|
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes and receive shares of the Company's common stock such
that the number of shares of common stock held by them in the aggregate
and their affiliates after such conversion does not exceed 4.9% of the
then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional
convertible notes, provided, however, that such conversions do not exceed
the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that
calendar month, per calendar
month.
|
|
As
of December 31, 2008, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no
gain or loss is recorded on the Company's statements of operations as a
result of said conversion.
|
|
December 24, 2007 Sale of
$250,000 in Convertible Notes:
To obtain further funding for the
Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with the same four accredited
investors for the sale of (i) $250,000 in callable secured convertible
notes and (ii) warrants to purchase 150,000 shares of its common stock.
The investors disbursed $250,000 to the Company on December 24,
2007.
|
|
Under
the terms of the December 24, 2007 securities purchase agreement, the
Company agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning December 24, 2007 and ending on the later of (a) 270 days from
December 24, 2007, or (b) 180 days from the date the registration
statement is declared effective.
|
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning December24, 2007 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be provided
written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and
the option must be extended to each investor during the 15-day period
following delivery of such notice.
|
|
The
$250,000 in convertible notes bear interest at 8% per annum from the date
of issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up front.
The interest rate resets to zero percent for any month in which the stock
price is greater than 125% of the initial market price, or $2.75, for each
trading day during that month. Any amount of principal or interest on the
callable secured convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The convertible notes mature in three years from the date
of issuance, and are convertible into the Company's common stock at the
noteholders' option, at the lower of (i) $2.00 or (ii) 50% of the average
of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares
into which the notes may be
converted.
|
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of
default by the Company and its stock is trading at or below $10.00 per
share. An event of default includes the failure by the Company to pay the
principal or interest on the convertible notes when due or to timely file
a registration statement as required by the Company or obtain
effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made
in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date
of the notes; (b) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date
of the notes; or (c) 145% of the outstanding principal and accrued
interest for prepayments occurring after the 60
th
day following the issue date of the
notes.
|
|
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.10 per share. The investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants
are not then registered pursuant to an effective registration statement.
In the event the investors exercise the warrants on a cashless basis, the
Company will not receive any proceeds therefrom. In addition, the exercise
price of the warrants will be adjusted in the event the Company issues
common stock at a price below market, with the exception of any securities
issued as of the date of the warrants or issued in connection with the
convertible notes issued pursuant to the securities purchase
agreement.
|
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar month.
|
|
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on December 24, 2007. The
registration statement must be filed with the Securities and Exchange
Commission within 60 days of the December 24, 2007 closing date and the
effectiveness of the registration is to be within 135 days of such closing
date. Penalties of 2% of the outstanding principal balance of the
convertible notes plus accrued interest are to be applied for each month
the registration is not effective within the required time. The penalty
may be paid in cash or stock at the Company's
option.
|
|
As
of December 31, 2008, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded
derivatives and no gain or loss is recorded on the Company's statements of
operations as a result of said
conversion.
|
|
June 16, 2008 Sale of $310,000
in Convertible Notes:
To obtain additional funding for
the Company's ongoing operations, the Company entered into a fifth
securities purchase agreement on June 16, 2008 with three accredited
investors for the sale of (i) $310,000 in convertible notes and (ii)
warrants to purchase 100,000 shares of its common stock. The
sale of the convertible notes and warrants is to occur in three traunches
and the investors are obligated to provide the Company with an aggregate
of $310,000 as follows:
|
|
|
•
|
$110,000
were disbursed on June 16, 2008;
|
|
|
•
|
$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and
|
|
|
•
|
$100,000
was disbursed on January 20, 2009.
|
|
Under
the terms of the June 16, 2008 securities purchase agreement, the Company
agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning June 16, 2008 and ending on the later of (a) 270 days from
June 16, 2008, or (b) 180 days from the date the registration statement is
declared effective.
|
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning June 16, 2008 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least
20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
|
|
The
$310,000 in convertible notes bear interest at 8% per annum from the date
of issuance. Interest is computed on the basis of a 365-day
year and is payable quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for any
month in which the stock price is greater than 125% of the initial market
price, or $2.75, for each trading day during that month. Any
amount of principal or interest on the callable secured convertible notes
that is not paid when due will bear interest at the rate of 15% per annum
from the date due thereof until such amount is paid. The
convertible notes mature in three years from the date of issuance, and are
convertible into the Company's common stock at the noteholders' option, at
the lower of (i) $2.00 or (ii) 45% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for
the 20 trading days before but not including the conversion
date. Accordingly, there is no limit on the number of shares
into which the notes may be
converted.
|
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under
the terms of the notes. The call option provides the Company
with the right to prepay all of the outstanding convertible notes at any
time, provided there is no event of default by the Company and its stock
is trading at or below $2.00 per share. An event of default
includes the failure by the Company to pay the principal or interest on
the convertible notes when due or to timely file a registration statement
as required by the Company or obtain effectiveness with the Securities and
Exchange Commission of the registration statement. Prepayment
of the convertible notes is to be made in cash equal to either (a) 125% of
the outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 130% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for prepayments
occurring after the 60
th
day following the issue date of the
notes.
|
|
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.10 per share. The investors may exercise
the warrants on a cashless basis if the shares of common stock underlying
the warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase
agreement.
|
|
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell
shares of common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar month.
|
|
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on June 16,
2008. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the June 16, 2008
closing date and the effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the outstanding
principal balance of the convertible notes plus accrued interest are to be
applied for each month the registration is not effective within the
required time. The penalty may be paid in cash or stock at the
Company's option.
|
|
As
of December 31, 2008, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no
gain or loss is recorded on the Company's statements of operations as a
result of said conversion.
|
|
August 29, 2008 Issuance of
$191,913 in Convertible Notes:
On August 29, 2008, the Company was
notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was $191,913. To pay this interest, the noteholders were
willing to accept $191,913 in additional convertible notes due on August
29, 2011. Accordingly, on August 29, 2008, the Company issued
$191,913 in convertible notes to the noteholders as full payment of the
past due interest.
|
|
•
|
The
fixed conversion feature that allows the investor to convert the notes at
a fixed price per share;
|
|
•
|
The
variable conversion feature that allows the investor to convert the notes
at a specified percentage of the market price at the time of
conversion;
|
|
•
|
The
variable interest rate provision that calls for no interest to be paid if
the stock price exceeds a predetermined amount for a given number of
months; and
|
|
•
|
The
value of the warrants issued in conjunction with each
funding.
|
|
%
Below
Market
|
Price
Per
Share
|
With
55%
Discount
|
Number
of
Shares Issuable
|
%
of Outstanding
Shares
*
|
|
25%
50%
75%
|
.007125
.00475
.002375
|
.003206
.002138
.001069
|
1,289,040,800
1,932,958,300
3,865,916,700
|
8,503%
12,750%
25,501%
|
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets
|
F-3
|
|
Statements
of Operations
|
F-4
|
|
Statements
of Stockholders’ Equity
|
F-5
|
|
Statements
of Cash Flows
|
F-6
|
|
Notes
to Financial Statements
|
F-7
|
|
December
31,2008
|
December
31,2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 27,000 | $ | 321,000 | ||||
|
Receivables,
net
|
207,000 | 624,000 | ||||||
|
Inventories,
net
|
659,000 | 847,000 | ||||||
|
Prepaid
and other assets
|
16,000 | 27,000 | ||||||
|
Total
current assets
|
909,000 | 1,819,000 | ||||||
|
Property
and equipment, net
|
11,000 | 16,000 | ||||||
|
Goodwill
|
339,000 | 339,000 | ||||||
|
Total
assets
|
$ | 1,259,000 | $ | 2,174,000 | ||||
|
Liabilities and Stockholders’
(Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 463,000 | $ | 370,000 | ||||
|
Related
party payable
|
131,000 | 46,000 | ||||||
|
Accrued
liabilities
|
559,000 | 644,000 | ||||||
|
Convertible
note payble, net of debt discount of $39,000 and $240,000
|
2,052,000 | 1,203,000 | ||||||
|
Total
current liabilities
|
3,205,000 | 2,263,000 | ||||||
|
Convertible
notes payable, net of debt discount of $239,000 and
$588,000
|
1,802,000 | 1,897,000 | ||||||
|
Derivative
liabilities
|
10,000 | 210,000 | ||||||
|
Total
long-term liabilities
|
1,812,000 | 2,107,000 | ||||||
|
Total
liabilities
|
5,017,000 | 4,370,000 | ||||||
|
Commitments
and contingencies
|
- | |||||||
|
Stockholders’
(Deficit):
|
||||||||
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized,
|
||||||||
|
612,497
shares issued and outstanding (aggregate liquidation
|
||||||||
|
preference
of $456,000)
|
1,000 | 1,000 | ||||||
|
Common
stock, $.001 par value, 1,400,000,000 shares authorized,
|
||||||||
|
15,159,807
and 5,449,869 respectively
|
15,000 | 5,000 | ||||||
|
Additional
paid-in capital
|
58,359,000 | 58,202,000 | ||||||
|
Accumulated
deficit
|
(62,133,000 | ) | (60,404,000 | ) | ||||
|
Total
stockholders’ (Deficit)
|
(3,758,000 | ) | (2,196,000 | ) | ||||
|
Total
liabilities and stockholders’ (Deficit)
|
$ | 1,259,000 | $ | 2,174,000 | ||||
|
2008
|
2007
|
|||||||
|
Sales
|
$ | 1,259,000 | $ | 1,872,000 | ||||
|
Cost
of sales
|
704,000 | 1,020,000 | ||||||
|
Gross
profit
|
555,000 | 852,000 | ||||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
(922,000 | ) | (1,012,000 | ) | ||||
|
Marketing
and selling
|
(500,000 | ) | (662,000 | ) | ||||
|
Research
and development
|
(255,000 | ) | (344,000 | ) | ||||
|
Total
operating expenses
|
(1,677,000 | ) | (2,018,000 | ) | ||||
|
Operating
loss
|
(1,122,000 | ) | (1,166,000 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Other
income
|
10,000 | - | ||||||
|
Interest
expense - Accretion of debt discount
|
(515,000 | ) | (771,000 | ) | ||||
|
Interest
income
|
3,000 | 11,000 | ||||||
|
Interest
expense
|
(312,000 | ) | (221,000 | ) | ||||
|
Gain
on derivative valuation
|
207,000 | 413,000 | ||||||
|
Gain
on settlement of liabilities
|
- | 91,000 | ||||||
|
Total
other income (expense)
|
(607,000 | ) | (477,000 | ) | ||||
|
Income
(loss) before provision for income taxes
|
(1,729,000 | ) | (1,643,000 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
Net
(loss)
|
$ | (1,729,000 | ) | $ | (1,643,000 | ) | ||
|
Basic
and fully diluted loss per share:
|
||||||||
|
Earnings
(loss) per common share - basic
|
$ | (0.15 | ) | $ | (0.62 | ) | ||
|
Earnings
(loss) per common share - diluted
|
$ | (0.15 | ) | $ | (0.62 | ) | ||
|
Weighted
average common shares - basic
|
11,394,793 | 2,647,360 | ||||||
|
Weighted
average common shares - diluted
|
11,394,793 | 2,647,360 | ||||||
|
Preferred
Stock
(See
Note 8)
|
Common
Shares
|
Amount
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
||||||||||||||||
|
Balance
at January 1, 2007
|
1,000 | 2,019,590 | 2,000 | 57,901,000 | (58,761,000 | ) | ||||||||||||||
|
Issuance of common
stock for
:
|
||||||||||||||||||||
|
Stock
option valuation
|
- | - | - | 14,000 | - | |||||||||||||||
|
Conversion
of convertible debentures
|
- | 3,430,172 | 3,000 | 376,000 | - | |||||||||||||||
|
Unamortized
discount associated to convertible debenture conversions
|
(100,000 | ) | ||||||||||||||||||
|
Pro
rata portion of derivative liability associated with debenture
conversions
|
11,000 | |||||||||||||||||||
|
Conversion
of preferred stock
|
- | 107 | - | - | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,643,000 | ) | ||||||||||||||
|
Balance
at December 31, 2007
|
1,000 | 5,449,869 | 5,000 | 58,202,000 | (60,404,000 | ) | ||||||||||||||
|
Issuance of common
stock for
:
|
||||||||||||||||||||
|
Stock
option valuation
|
- | - | - | 14,000 | - | |||||||||||||||
|
Conversion
of convertible debentures
|
- | 9,709,938 | 10,000 | 185,000 | - | |||||||||||||||
|
Unamortized
discount associated to convertible debenture conversions
|
- | - | (42,000 | ) | ||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,729,000 | ) | ||||||||||||||
|
Balance
at December 31, 2008
|
1,000 | 15,159,807 | 15,000 | 58,359,000 | (62,133,000 | ) | ||||||||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | (1,729,000 | ) | $ | (1,643,000 | ) | ||
|
Adjustments
to reconcile net income (loss) to net
|
||||||||
|
cash
used in operating activities:
|
||||||||
|
Depreciation
and amortization
|
5,000 | 5,000 | ||||||
|
Stock
option valuation
|
14,000 | 14,000 | ||||||
|
Change
in fair value of derivative liabilities
|
(207,000 | ) | (413,000 | ) | ||||
|
Accretion
of debt discount
|
515,000 | 772,000 | ||||||
|
Provision
for losses on receivables
|
45,000 | 56,000 | ||||||
|
(Gain)
loss on settlement of liabilities
|
- | (91,000 | ) | |||||
|
(Increase)
decrease in:
|
||||||||
|
Accounts
Receivables
|
372,000 | (251,000 | ) | |||||
|
Inventories
|
188,000 | 98,000 | ||||||
|
Prepaid
and other assets
|
11,000 | (16,000 | ) | |||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
178,000 | 17,000 | ||||||
|
Accrued
liabilities
|
104,000 | 317,000 | ||||||
|
Net
cash used in operating activities
|
(504,000 | ) | (1,135,000 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
| - | - | |||||||
|
Net
cash used in investing activities
|
- | - | ||||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of convertible notes
|
210,000 | 1,250,000 | ||||||
|
Net
cash provided by financing activities
|
210,000 | 1,250,000 | ||||||
|
Net
change in cash
|
(294,000 | ) | 115,000 | |||||
|
Cash,
beginning of year
|
321,000 | 206,000 | ||||||
|
Cash,
end of year
|
$ | 27,000 | $ | 321,000 | ||||
|
1. Organization
and
Significant
Accounting Policies
|
Organization
Paradigm
Medical Industries, Inc. (the Company) is a Delaware Corporation
incorporated in October 1989. The Company is engaged in the
design, development, manufacture, and sale of high technology surgical and
diagnostic eye care products. Its surgical equipment is
designed to perform minimally invasive cataract surgery and is comprised
of surgical devices and related instruments and accessories, including
disposable products. Its diagnostic products include a Blood
Flow Analyzer, a pachymeter, an A/B Scan, ultrasound biomicroscopes,
perimeters, and a corneal topographer.
Fair
Value of Financial Instruments
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are
defined as follows:
·
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
·
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
·
Level
3 inputs to valuation methodology are unobservable and significant to the
fair measurement.
The
fair value of the Company's cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate carrying value based
on their effective interest rates compared to current market
prices.
The
Company’s financial instruments consist of cash, receivables, payables,
and notes payable. The carrying amount of cash, receivables and
payables approximates fair value because of the short-term nature of these
items. The carrying amount of the notes payable approximates
fair value as the individual borrowings bear interest at market interest
rates.
|
|
|
Cash
Equivalents
For
purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or
less.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
The
Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash
equivalents.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Specific reserves are estimated by management
based on certain assumptions and variables, including the customer’s
financial condition, age of the customer’s receivables, and changes in
payment histories. Trade receivables are written off when
deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when received.
A
trade receivable is considered to be past due if any portion of the
receivable balance has not been received by the contractual pay
date. Interest is not charge on trade receivables that are past
due.
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.
During
2008, the Company collected $36,000 in receivables that were previously
allowed in the allowance for doubtful accounts. During 2008,
the Company decreased net allowance for doubtful accounts by
$34,000.
The
Company has taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct
communication with the customer subsequent to delivery of the system. The
allowance for doubtful accounts was27% of total
outstanding receivables as of December 31, 2008 and 15% as of December 31,
2007. The allowance for doubtful accounts decreased from $109,000 at
December 31, 2007 to $75,000 at December 31, 2008.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Inventories
Inventories
are stated at the lower of cost or market, cost is determined using the
weighted average method.
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated
depreciation. Depreciation on property and equipment is
determined using the straight-line method over the estimated useful lives
of the assets or terms of the lease, usually between 3-7
years. Expenditures for maintenance and repairs are expensed
when incurred and betterments are capitalized.
Gains
and losses on sale of property and equipment are reflected in operations.
Leasehold improvements are depreciated over the lesser of the term of the
lease or the useful life of the related asset. During
the
years ended 2008 and 2007 depreciation expense was $5,000 and $5,000
respectively. Newly acquired assets that have a value of $3,000 or more
are capitalized and included on the depreciation
schedule.
|
|
Goodwill
As
of December 31, 2008, the Company had recorded on their books
goodwill related to the purchase of Ocular Blood Flow, Ltd., during
2001. In accordance with SFAS 142, “Goodwill and Other
Intangible Assets,” goodwill is not amortized.
The Company performs tests for
impairment of goodwill annually or more frequently if events or
circumstances indicate it might be impaired. Such tests include
comparing the fair value of a reporting unit with its carrying value,
including goodwill. The analysis of the impairment test of
goodwill did not result in a charge to the statements of operations for
impairment for the years ended December 31, 2008 and 2007,
respectively
.
Impairment
assessments are performed using a variety of methodologies, including cash
flow analysis and estimates of sales proceeds. Where
applicable, an appropriate discount rate is used,
based
on the Company’s cost of capital rate or location-specific economic
factors.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Evaluation
of Other Long-Lived Assets
The
Company evaluates the carrying value of the unamortized balances of other
long-lived assets to determine whether any impairment of these assets has
occurred or whether any revision to the related amortization periods
should be made, in accordance with Statement of Financial Accounting
Standards No. 144,” Accounting for the Impairment or Disposal of
Long-Lived Assets” (‘SFAS 144”), which addresses financial accounting and
reporting for the impairment or disposal of long-lived
assets. This evaluation is based on management’s projections of
the undiscounted future cash flows associated with each
asset. If management’s evaluation were to indicate that the
carrying values of these assets were impaired, such impairment would be
recognized by a write down of the applicable asset.
Income
Taxes
Deferred
income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally
related to net operating loss carry forwards, depreciation, impairment of
intangible assets, stock compensation expense, and accrued
liabilities.
|
|
Stock
– Based Compensation
On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment, ("SFAS 123(R)") which establishes standards for the
accounting of transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on accounting for
transactions where an entity obtai
ns
employee services in
share-based payment transactions. SFAS 123(R) requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments, including stock options, based on the grant-date fair
value of the award and to recognize it as compensation expense over the
period the employee is required to provide service in exchange for the
award, usually the vesting period. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
Stock-based
compensation expense recognized during the period is based on the value of
the portion of share-based payment awards that is ultimately expected to
vest during the period. Stock-based compensation expense recognized in the
Company's consolidated statement of operations for the year ended December
31, 2008 included compensation expense for the share-based payment awards
granted based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). Stock based compensation expense for the
years ended December 31, 2008 and 2007 was $14,000 and $14,000,
respectively.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Basic
and Fully Diluted Loss Per Share
Net
loss per common share is computed on the weighted average number of common
stock and common stock equivalent shares outstanding during each year.
Common stock equivalents consist of convertible preferred stock, and
common stock options and warrants. Common stock equivalent shares are
excluded from the computation when their effect is
anti-dilutive.
Common
stock equivalents consisting of options and warrants to purchase the
Company’s common stock were 66,214,392 and 65,534,392; shares of common
stock and preferred stock convertible into 862,438 and 862,438 shares of
common stock, and outstanding commitments to issue shares underlying the
convertible notes into 966,705,263 and 36,372,800 shares of common stock
at December 31, 2008 and 2007, respectively, have not been included in the
fully diluted loss per share because their inclusion would have
been anti-dilutive.
The
following table is a reconciliation of basic earnings per share for the
years ended December 31, 2008 and
2007.
|
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
loss
|
$ | (1,729,000 | ) | $ | (1,643,000 | ) | ||
|
Basic
and fully diluted weighted average shares outstanding
|
11,394,793 | 2,647,360 | ||||||
|
Basic
and fully diluted loss per share
|
$ | (0.15 | ) | $ | (0.62 | ) | ||
|
Revenue
Recognition
Revenues
for sales of products that require specific installation and acceptance by
the customer are recognized upon such installation and acceptance by the
customer. Revenues for sales of other surgical systems,
ultrasound diagnostic devices, and disposable products are recognized when
the product is shipped. A signed purchase agreement and a
deposit or payment in full from customers is required before a product
leaves the premises. Title passes at time of shipment (F.O.B.
shipping point). The products of the Company contain both
hardware and software components. The Company does not
recognize revenue for the software components of the products separate
from the product as a whole because the software is incidental to the
product, as defined in paragraph 2 of SOP
97-2.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Research
and Development
Costs
incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and
indirect costs associated with specific projects as well as fees paid to
various entities that perform certain research on behalf of the
Company. The total research and development expenses for the
years ended December 2008 and 2007 was $255,000 and $344,000,
respectively.
|
|
Concentration
of Risk
The
market for ophthalmic lasers is subject to rapid technological change,
including advances in laser and other technologies and the potential
development of alternative surgical techniques or new pharmaceutical
products. Development by others of new or improved products,
processes or technologies may make products developed by the Company
obsolete or less competitive. The Company’s high technology product line
requires the Company to deal with suppliers and subcontractors supplying
highly specialized parts, operating highly sophisticated and narrow
tolerance equipment and performing highly technical calculations and
tasks. Although there are a limited number of suppliers and
manufacturers that meet the standards required of a regulated medical
device, management believes that other suppliers and manufacturers could
provide similar components and services.
|
|
|
A
significant portion of the Company’s product sales is in foreign
countries. The economic and political instability of some
foreign
countries
may affect the ability of medical personnel to purchase the Company’s
products and the ability of the customers to pay for the procedures for
which the Company’s products are used. Such circumstances could
cause a possible loss of sales, which would affect operating results
adversely.
|
|
|
During
the years ended December 31, 2008 and 2007 no single customer
represented more than 10% of total net sales for the respective years
. Accounts receivable are due from medical distributors,
surgery centers, hospitals, optometrists and ophthalmologists located
throughout the U.S. and a number of foreign countries. The
receivables are generally due within thirty days for domestic customers
with extended terms offered for some international
customers. The Company maintains an allowance for estimated
potentially uncollectible
amounts.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Warranty
The
Company provides product warranties on the sale of certain products that
generally extend for one year from the date of sale. The
Company maintains a reserve for estimated warranty costs based on
historical experience and management’s best
estimates
|
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Beginning
warranty liability balance
|
$ | 227,000 | $ | 155,000 | ||||
|
Less: Reductions
for payments
|
(163,000 | ) | (20,000 | ) | ||||
|
Plus: Increase
for accrual
|
- | 92,000 | ||||||
|
Ending
warranty liability balance
|
$ | 64,000 | $ | 227,000 | ||||
|
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
|
|
|
Contingencies
The
Company has adopted the guidance in Statement of Financial Accounting
Standards No. 5, “Accounting for Contingencies,” when booking for loss
contingencies. The Company accrues a charge to income when (1)
information available prior to issuance of the financial statements
indicates that it is probable that an asset has been impaired or a
liability has been incurred at the date of the financial statements, and
(2) the amount of loss can be reasonably estimated. Loss
contingencies related to litigation for the year ended December 31, 2008
and 2007 were $236,000 and 255,000.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
Derivative
Financial Instruments
The
Company’s derivative financial instruments consist of embedded derivatives
related to the Secured Convertible Term Notes (“the Notes”) entered into
agreements on April 27, 2005; June 23, 2005; June 30, 2005; February 28,
2006; June 28, 2006; April 30, 2007; June 11, 2007; December 19, 2007;
December 24, 2007, June 16, 2008, July 14, 2008, and August 29,
2008. These Notes contain interrelated embedded derivatives,
which include the fixed conversion feature, the variable conversion
feature, the variable interest feature
,
and the contingent put
feature. Although the put feature was determined to be an
embedded derivative which requires bifurcation, we believe the likelihood
of this feature being exercised is remote and accordingly no value was
ascribed to this particular put feature. We are required to
continue to evaluate our accounting and valuation for this put
feature. We will continue to monitor the probability of this
particular put feature
being exercised and
its impact to our valuation of embedded derivatives in future
periods.
In the event the value
of the put feature becomes material in the future, we will use a different
model to value this feature along with the other embedded
derivatives.
Based
on the complex nature of these
terms
(including the
put
feature
)
,
the Company chose to employ a binomial lattice model to value these
features. The Company used the lattice model because it allows
for the consideration of the dynamic and interrelated nature of the unique
terms of these securities. It takes into consideration that in
each discrete period of time a stock can either go up or down (described
as its “volatility”) and produces a range of potential future stock prices
(and thus multiple values at those future points in time). A binomial
lattice model assumes the price of the stock underlying the derivative
follows one of the two price paths (stock price can either go up or
down). There are three general steps in constructing a binomial
lattice model: (1) calculation of the stock price lattice, (2) calculation
of the potentially applicable option values at each node based on the
terms and conditions of the specific security, and (3) progressively
calculating the security value at each node starting at the maturity of
the security and working back to the present testing for the greater of
the current period value or the probability weighted holding value of the
security. The following key inputs and assumptions were used to
calculate the fair values of the embedded derivatives and the
warrants:
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
|
|
§
|
Stock
Price
: This is the stock price as of the respective
valuation
date.
|
|
§
|
Fixed
Conversion Price
: The fixed conversion price used in the
valuation analysis was set equal to fixed conversion price (ranging from
$0.2 to $0.09) per share for each of the Notes. This is the
fixed price at which the Investor can convert the Note into common
stock.
|
|
§
|
Volatility
: Volatility
is a measure of the standard deviation of the stocks continuously
compounded return over the life of the security. The ideal
volatility for an accurate calculation of fair value is the future
volatility of the security. This cannot be known with
certainty, so an approximation is derived using historical return
volatility for a period of time equal to the remaining life of the
instrument as a proxy, and professional judgment. As part of
our valuation, we performed extensive analysis of the historical
volatility of returns for the Company’s stock. Based on our
analysis, we chose a standard deviation of 200% as our best estimate of
future volatility.
|
|
§
|
Risk-Free
Rate
: The appropriate risk free rate is the interest
rate of a U.S. treasury note with a maturity equal to the maturity of the
respective security. As of December 31, 2008, the risk free
interest rates ranged from 0.11% to 0.88%. As of December 31,
2007, the risk free interest rates ranged from 3.06%
to3.49%.
|
|
§
|
Time to
Maturity
: The time to maturity is measured based on the
remaining term of the security as of the valuation
date.
|
|
§
|
20-day
Minimum Price vs. Closing Stock Price:
The variable
conversion feature allows the Investor to convert the Notes at a price
equal to 60% - 50% (ranges per note) of the average of the lowest three
trading prices during the twenty trading days preceding a conversion
notice. We analyzed the historical relationship between the
common stock closing price and the lowest trading price. Based
on this analysis, we determined that on average the lowest trading price
in any 20-day period during the time period analyzed was approximately 70%
of the closing price. We used this as a conservative proxy for
the average of the three lowest closing prices during the 20-day
period. This result was used in the test of the stock price
relative to the fixed conversion
price.
|
|
§
|
Monthly
Intraday Trading Price:
The variable interest rate
provision waives interest for a given month if the intraday trading price
of the common stock exceeds $0.0945 or $0.0275 (depending on Note) per
share for every day within a given month. We assumed that our
various node prices were equivalent to this intraday trading
price.
|
|
§
|
Trading
Liquidity:
We assumed that adequate stock trading
liquidity is available for the Investors to sell converted / exercised
shares.
|
|
§
|
Probability
of Contingent Put Feature:
We assumed that the
likelihood of this feature being exercised is remote and accordingly no
value was ascribed to this particular put feature. We will
continue to monitor the probability of this particular put feature being
exercised and its impact to our valuation of embedded derivatives in
future periods.
|
|
The
warrants were valued using the Black-Scholes Option Pricing Model with the
following assumptions for 2008 and 2007, respectively: dividend yield of
0% and 0%; annual volatility of 200% and 200%; and risk free interest
rates ranging from of 0.37% to 1.8% and 3.06% to
3.7%.
|
|
1.
Organization
and
Significant
Accounting
Policies
Continued
|
The
accounting treatment of derivative instruments requires that the Company
record the derivatives and related warrants at their fair values as of the
inception date of the agreement and at a fair value of each subsequent
balance sheet date. In addition, under the provisions of SFAS No. 133,
“Accounting for
Derivative Instruments and Hedging Activities”
, as a result of
entering into the Notes, the Company is required to classify all other
non-employee stock options and warrants as derivative liabilities and mark
them to market at each reporting date. Any change in the fair value will
be recorded as non-operating, non-cash income or expense at each reporting
date. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record a non-operating, non-cash
income.
In the event that the Company is required to
convert the debentures into common stock, the Company is required to
eliminate the pro rata portion of the derivative liability associated with
the conversion, with a corresponding entry recorded to additional
paid-in-capital.
|
|
2.
Going Concern
|
Going
Concern
The
accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
Historically,
the Company has not demonstrated the ability to generate sufficient cash
flows from operations to satisfy its liabilities and sustain operations,
and the Company has incurred significant losses from
operations. The company had a working capital deficit of
$2,296,000 and has used $504,000 in cash in operating activities as of
December 31, 2008. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
|
|
2.
Going Concern
Continued
|
Management’s
focus on the going concern that has plagued the organization for recent
years concerning the inability of the company to generate sufficient cash
flow from operations is a primary one. In the past three years, little has
been done to create and maintain a domestic sales force within the US. In
the international market, sales have diminished due to the company’s
inability or unwillingness to update or find replacements for its current
product offerings. Management’s plan is two-fold; complete a full product
review of current products and take steps to re-engineer those products
selected within a rapid time frame and re-introduce them to the world
markets. If products are found to be incapable of being re-engineered,
management will take steps to remove them from product listings.
Management will take the necessary steps to locate new products
manufactured by another organization to sell in the markets through its
sales organizations. This important step will provide Paradigm the
opportunity to generate sales, revenues and time to complete the final
step, that of beginning to develop its own additional devices for sale in
the market. This “partnering” benefit will help with sales and revenue but
will not be enough to make up for prior years omissions of product
development and essential partnering efforts. Therefore, the organization
will require additional funding to support these efforts and that funding
has been arranged and completed in April of 2009. It will be management’s
primary responsibility to carefully manage these capital infusions to
assure that they begin to serve as a safety net rather than the only
source of cash for growth. It is the goal of management to closely manage
its capital resources during the remainder of 2009 and to begin to
generate the sales and continuing revenue to move into 2010 more
self-sufficient and move closer to profitability. As mentioned earlier,
the addition of 20 new independent sales representatives in the US market
and the addition of 15 new international distributors in the international
market will provide the proper platform to introduce both re-engineered
and “partnered” products to the respective
markets.
|
|
3.
Detail of Certain
Balance Sheet Accounts
|
|
Receivables
|
2008
|
2007
|
||||||
|
Trade
receivables
|
$ | 282,000 | $ | 733,000 | ||||
|
Allowance
for doubtful accounts
|
(75,000 | ) | (109,000 | ) | ||||
| $ | 207,000 | $ | 624,000 | |||||
|
Inventories
|
2008
|
2007
|
||||||
|
Raw
materials
|
$ | 514,000 | $ | 558,000 | ||||
|
Finished
goods
|
376,000 | 533,000 | ||||||
|
Reserve
for obsolence
|
(231,000 | ) | (244,000 | ) | ||||
| $ | 659,000 | $ | 847,000 | |||||
|
Accrued
liabilities:
|
2008
|
2007
|
||||||
|
Litigation
reserve
|
$ | 236,000 | $ | 256,000 | ||||
|
Interest
expense on notes payable
|
116,000 | - | ||||||
|
Payroll
and employment benefits
|
24,000 | 64,000 | ||||||
|
Sales
tax payable
|
4,000 | 20,000 | ||||||
|
Customer
deposits
|
57,000 | 20,000 | ||||||
|
Accrued
royalties
|
1,000 | 3,000 | ||||||
|
Warranty
and return allowance
|
64,000 | 227,000 | ||||||
|
Consulting
and other accrued liabilities
|
57,000 | 54,000 | ||||||
|
Total
accrued liabilities
|
$ | 559,000 | $ | 644,000 | ||||
|
2008
|
2007
|
|||||||
|
Machinery
and equipment
|
$ | 765,000 | $ | 765,000 | ||||
|
Computer
equipment and software
|
663,000 | 663,000 | ||||||
|
Furniture
and fixtures
|
252,000 | 252,000 | ||||||
|
Leasehold
improvements
|
166,000 | 166,000 | ||||||
| 1,846,000 | 1,846,000 | |||||||
|
Accumulated
depreciation and amortization
|
(1,835,000 | ) | (1,830,000 | ) | ||||
| $ | 11,000 | $ | 16,000 | |||||
|
5.
Lease
Obligations
|
During
the years ended December 31, 2008 and 2007, the Company did not lease
equipment under noncancellable capital leases. Any leases
previously issued provided the Company the option to purchase the leased
assets at the end of the initial lease term. Assets under
capital leases included in fixed assets are as
follows:
|
|
2008
|
2007
|
|||||||
|
Computer
and other equipment
|
$ | 765,000 | $ | 765,000 | ||||
|
Less
accumulated amortization
|
166,000 | 166,000 | ||||||
| $ | 931,000 | $ | 931,000 | |||||
|
Amortization
expense on assets under capital leases during the years ended
December 31, 2008 and 2007 was $5,000 and $0
respectively.
|
|
|
The
Company leases office and warehouse space under a month-to-month operating
lease agreement.
|
|
|
Rent
expense related to noncancelable operating leases was approximately
$110,000 and $108,000 for the years ended December 31, 2008 and 2007,
respectively.
|
|
|
6. Income
Taxes
|
Income
Taxes
The
Financial Accounting Standards Board (FASB) has issued Financial
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 requires a company to determine whether it is
more likely than not that a tax position will be sustained upon
examination based upon the technical merits of the position. If the
more-likely-than-not threshold is met, a company must measure the tax
position to determine the amount to recognize in the financial statements.
As a result of the implementation of FIN 48, the Company performed a
review of its material tax positions. At the adoption date of January 1,
2007, the Company had no unrecognized tax benefit which would affect the
effective tax rate. As of December 31, 2008, the Company had no
accrued interest and penalties related to uncertain tax
positions.
Deferred
tax assets and the valuation allowance as of December 31, 2008 and 2007
are as follows:
|
|
2008
|
2007
|
|||||||
|
Deferred
tax asset:
|
||||||||
|
Net
operating loss carryforward
|
16,176,000 | 15,888,000 | ||||||
|
Valuation
allowance
|
(16,176,000 | ) | (15,888,000 | ) | ||||
| - | - | |||||||
|
2008
|
2007
|
|||||||
|
The
components of income tax expense are as follows:
|
||||||||
|
Current
federal tax
|
- | - | ||||||
|
Current
state tax
|
- | - | ||||||
|
Change
in NOL benefit
|
(288,000 | ) | (855,000 | ) | ||||
|
Change
in allowance
|
288,000 | 855,000 | ||||||
| - | - | |||||||
|
A
valuation allowance has been established for the net deferred tax asset
due to the uncertainty of the Company's ability to realize such
assets. At December 31, 2008, the Company has available net
operating loss carryforwards of approximately $56 million for federal
income tax purposes the begin to expire in 2015. The
utilization of the net operating loss carryforward is dependent upon the
tax laws in effect at the time of the operating loss carryforwrds 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 a change in ownership.
|
|
|
7.
Capital
Stock
|
Capital
Stock
The
Company has established a series of preferred stock with a total of
5,000,000 authorized shares and a par value of $.001, and one series of
common stock with a par value of $.001 and a total of 1,400,000,000
authorized shares.
On
December 5, 2008, the Company’s board of directors approved a 1-for-100
reverse stock split, which became effective on December 5, 2008. All
references to share and per-share data for all periods presented in this
report have been adjusted to give effect to this reverse
split.
|
|
7.
Capital
Stock
Continued
|
Series
A Preferred Stock
On
September 1, 1993, the Company established a series of non-voting
preferred shares designated as the 6% Series A Preferred Stock, consisting
of 500,000 shares with $.001 par value. The Series A Preferred
Stock has the following rights and privileges:
|
|
1.
The
holders of the shares are entitled to dividends at the rate of twenty-four
cents ($.24) per share per annum, payable in cash only from surplus
earnings of the Company or in additional shares of Series A Preferred
Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
|
|
|
2.
Upon
the liquidation of the Company, the holders of the Series A Preferred
Stock are entitled to receive, prior to any distribution of any assets or
surplus funds to the holders of shares of
common stock
or any other stock, an amount equal to $1.00 per share, plus any accrued
and unpaid dividends related to the fiscal year in which such liquidation
occurs. Total liquidation preference at December 31, 2008 was
$6,000.
3.
The
shares are convertible at the option of the holder at any
time into common shares, based on an initial conversion rate of
one
share
of Series A Preferred Stock for 1.2 common shares.
4. The holders of the shares have no voting
rights.
|
|
|
5.
The
Company may, at its option, redeem all of the then outstanding shares of
the Series A Preferred Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in which such redemption
occurs.
|
|
|
Series B
Preferred Stock
On
May 9, 1994, the Company established a series of non-voting preferred
shares designated as 12% Series B Preferred Stock, consisting of 500,000
shares with $.001 par value. The Series B Preferred Stock has
the following rights and privileges:
|
|
|
1.
The
holders of the shares are entitled to dividends at the rate of forty-eight
cents ($.48) per share per annum, payable in cash only from surplus
earnings of the Company or in additional shares of Series B Preferred
Stock. The dividends are non-cumulative and therefore
deficiencies in dividend payments from one year are not carried forward to
the next year.
|
|
7.
Capital
Stock
Continued
|
Upon
the liquidation of the Company, the holders of the Series B Preferred
Stock are entitled to receive, prior to any distribution of any assets or
surplus funds to the holders of shares of common stock or any other stock,
an amount equal to $4.00 per share, plus any accrued and unpaid dividends
related to the fiscal year in which such liquidation
occurs. Such right, however, is subordinate to the rights of
the holders of Series A Preferred Stock to receive a distribution of $1.00
per share plus accrued and unpaid dividends. Total liquidation
preference at December 31, 2008 was $36,000.
|
|
1.
The
shares are convertible at the option of the holder at any time into common
shares, based on an initial conversion rate of one share of Series B
Preferred Stock for 1.2 common shares.
|
|
|
2.
The
holders of the shares have no voting rights.
|
|
|
3.
The
Company may, at its option, redeem all of the then outstanding share of
the Series B Preferred Stock at a price of $4.50 per share, plus accrued
and unpaid dividends related to the fiscal year in which such redemption
occurs.
|
|
|
Series
C Preferred Stock
In
January 1998, the Company authorized the issuance of a total of 30,000
shares of Series C Preferred Stock, $.001 par value, $100 stated
value. As of December 31, 2007 there were no
Series C
Preferred
Stock issued and outstanding. The Series C Preferred Stock have
the following rights and privileges:
|
|
|
The
holders of the shares are entitled to dividends at the rate of 12% per
share per annum of the aggregate stated value. The dividends
are non-cumulative and, therefore, deficiencies in dividend payments from
one year are not carried forward to the next year.
|
|
|
1.
Upon
the liquidation of the Company, the holders of the Series C Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received if they had converted the shares
into shares of Common Stock immediately prior to such liquidation plus
declared but unpaid dividends; or (b) the stated value, subject to
adjustment.
|
|
|
2.
Each
share was convertible, at the option of the holder at any time until
January 1, 2002, into approximately 57.14 shares of common stock at an
initial conversion price, subject to adjustments for stock splits, stock
dividends and certain combination or recapitalization of the common stock,
equal to $1.75 per share of common stock.
3.
The
holders of the shares have no voting
rights.
|
|
7.
Capital
Stock
Continued
|
Series
D Preferred Stock
In
January 1999, the Company’s Board of Directors authorized the issuance of
a total of 1,140,000 shares of Series D Preferred Stock $.001 par value,
$1.75 stated value. The Series D Preferred Stock has the
following rights and privileges:
|
|
1.
The
holders of the shares are entitled to dividends at the rate of 10% per
share per annum of the aggregate stated value. The dividends
are non-cumulative and, therefore, deficiencies in dividend payments from
one year are not carried forward to the next year.
|
|
|
2.
Upon
the liquidation of the Company, the holders of the Series D Preferred
Stock are entitled to receive an amount per share equal
to
the greater of (a) the amount they would have received had they converted
the shares into Common Stock immediately prior to such liquidation plus
all declared but unpaid dividends; or (b) the stated value, subject to
adjustment. Total liquidation preference at December 31,
2008 was $9,000.
|
|
|
3.
Each
share was convertible, at the option of the holder at any time until
January 1, 2002, into one share of Common Stock at an initial conversion
price, subject to adjustment. The Series D Preferred Stock
shall be converted into one share of the Common Stock subject to
adjustment (a) on January 1, 2002 or (b) upon 30 days written notice by
the Company to the holders of the Shares, at any time after (i) the 30-day
anniversary of the registration statement on which the shares of Common
Stock issuable upon conversion of the Series D Preferred Stock were
registered and (ii) the average closing price of the Common Stock for the
20-day period immediately prior to the date on which notice of redemption
is given by the Company to the holders of the Series D Preferred Stock is
at least $3.50 per share. The Company in 1999 recorded $872,000
as a beneficial conversion feature related to the differences in the
conversion price of the preferred stock to common stock.
4.
The
holders of the shares have no voting rights.
|
|
|
Series
E Preferred Stock
In
May 2001, the Company authorized the issuance of a total of 50,000 shares
of Series E Preferred Stock $.001 par value, $100 stated
value. The Series E Preferred Stock has the following
rights
And
privileges:
|
|
7.
Capital
Stock
Continued
|
1.
The
holders of the shares are entitled to dividends at the rate of 8% per
share per annum of the aggregate stated value. The dividends
are non-cumulative and, therefore, deficiencies in dividend payments from
one year are not carried forward to the next year.
|
|
2.
Upon
the liquidation of the Company, the holders of the Series E Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received had they converted the shares into
Common Stock immediately prior to such liquidation plus all declared but
unpaid dividends;
or
(b) the stated value, subject to adjustment. Total liquidation
preference at December 31, 2008 was $13,000.
|
|
|
3.
Each
share is convertible, at the option of the holder at any time until
January 1, 2005, into approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment for stock splits, stock
dividends and certain combination or recapitalization of the common stock,
equal to $1.875 per share of common stock. The Series E
Preferred Stock shall be converted into Common Stock subject to adjustment
(a) on January 1, 2005 or (b) upon 30 days written notice by the Company
to the holders of the Shares, at any time after (i) the 30-day anniversary
of the registration statement on which the shares of Common Stock issuable
upon conversion of the Series E Preferred Stock were registered and (ii)
the average closing price of the Common Stock for the 20-day period
immediately prior to the date on which notice of redemption is given by
the Company to the holders of the Series E Preferred Stock is at least
$3.50 per share. The Company in 2001 recorded $1,482,000 as a
beneficial conversion feature related to the differences in the conversion
price of the preferred stock to common stock.
4.
The
holders of the shares have no voting rights.
5.
The
holders of the shares also were issued warrants to purchase shares of
common stock equal to 1,000 warrants for every 200 shares purchased at an
exercise price of $4.00 per share. Each warrant is exercisable
until May 23, 2006.
|
|
|
Series
F Preferred Stock
In
August 2001, the Company authorized the issuance of a total of 50,000
shares of Series F Preferred Stock $.001 par value, $100 stated
value. The Series F Preferred Stock has the following rights
and privileges:
|
|
7.
Capital
Stock
Continued
|
1
.
The
holders of the shares are entitled to dividends at the rate of 8% per
share per annum of the aggregate stated value. The dividends are
non-cumulative and, therefore, deficiencies in
dividend
payments from one year are not carried forward to the next
year.
|
|
2.
Upon
the liquidation of the Company, the holders of the Series F Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received had they converted the shares into
Common Stock immediately prior to such liquidation plus all declared but
unpaid dividends; or
(b)
the stated value, subject to adjustment. Total liquidation
preference at December 31, 2008 was $235,000.
|
|
|
Each share is convertible, at the option of the holder at any time until
January 1, 2005, into approximately 53.33 shares of Common Stock at an
initial conversion price, subject to adjustment for stock splits, stock
dividends and certain combination or recapitalization of the common stock,
equal to $1.875 per share of common stock. The Series F
Preferred Stock shall be converted into Common Stock subject to adjustment
(a) on January 1, 2005 or (b) upon 30 days written notice by the Company
to the holders of the Shares, at any time after (i) the 30-day anniversary
of the registration statement on which the shares of Common Stock issuable
upon conversion of the Series F Preferred Stock were registered and (ii)
the average closing price of the Common Stock for the 20-day period
immediately prior to the date on which notice of redemption is given by
the Company to the holders of the Series F Preferred Stock is at least
$3.50 per share. The Company in 2001 recorded $1,105,000 as a
beneficial conversion feature related to the differences in the conversion
price of the preferred stock to common stock.
|
|
|
3.
The
holders of the shares have no voting rights.
|
|
|
Series
G Preferred Stock
In
August 2003, the Company authorized the issuance of a total of 2,000,000
shares of Series G Preferred Stock $.001 par value, $1.00 stated
value. The Series G Preferred Stock has the following rights
and privileges:
1.
The
holders of the shares are entitled to dividends at the rate
of
7%
per share per annum of the aggregate stated
value. The
dividends
are non-cumulative and, therefore, deficiencies in
dividend
payments from one year are not carried forward to the next
year.
|
|
7.
Capital
Stock
Continued
|
2.
Upon
the liquidation of the Company, the holders of the Series G Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received had they converted the shares into
Common Stock immediately prior to such liquidation plus all declared but
unpaid dividends; or (b) the stated value of $.25 per share plus declared
but unpaid dividends. Total liquidation preference at December
31, 2008
was $147,000.
Each
share is convertible, at the option of the holder at any time until August
1, 2005, into 1 share of common stock at an initial conversion price,
subject to adjustment for dividends, equal to one share of common stock
for each share of Series G Preferred Stock. The Series G
Preferred Stock shall be converted into common stock subject to adjustment
(a) on August 1, 2005 or (b) upon 30 days written notice by the Company to
the holders of the shares, at any time after (i) the 30-day anniversary of
the registration statement on which the shares of common stock issuable
upon conversion of the Series G Preferred Stock were registered and (ii)
the average closing price of the common stock for the 15-day period
immediately prior to the date in which notice of redemption is given by
the Company to the holders of the Series G Preferred Stock is at least
$.50 per share. In 2003, the Company recorded a beneficial
conversion feature of $217,000 related to the differences in the
conversion price of the preferred stock to common
stock.
|
|
3.
The
holders of the shares have no voting
rights.
|
|
7.
Capital
Stock
Continued
|
The
following table summarizes preferred stock activity during the years ended
December 31, 2008 and
2007:
|
|
Series
A
|
Series
B
|
Series
C
|
Series
D
|
Series
E
|
Series
F
|
Series
G
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|
|
Balance
at January 1, 2007
|
5,627
|
$6.00
|
8,986
|
$9.00
|
-
|
$-
|
5,000
|
$5.00
|
250
|
$1.00
|
4,598.75
|
$5.00
|
588,235
|
$1,000
|
|
Conversion
of preferred stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(200.00)
|
-
|
-
|
-
|
|
Balance
at December 31, 2007
|
5,627
|
6.00
|
8,986
|
9
|
-
|
-
|
5,000
|
5
|
250
|
1
|
4,398.75
|
5
|
588,235
|
1,000
|
|
Balance
at December 31, 2008
|
5,627
|
$6
|
8,986
|
$9
|
-
|
$-
|
5,000
|
$5
|
250
|
$1
|
4,398.75
|
$5
|
588,235
|
$1,000
|
|
Authorized
|
500,000
|
500,000
|
30,000
|
1,140,000
|
50,000
|
50,000
|
2,000,000
|
|||||||
|
Liquidation
preference
|
1
|
$6,000
|
4
|
$36,000
|
100
|
$-
|
1.75
|
$9,000
|
53.33
|
$13,000
|
53.33
|
$235,000
|
0.25
|
$147,000
|
|
8.
Convertible
Notes
|
Convertible
Notes
April 27,
2005 Sale of $2,500,000 in Callable Secured Convertible
Notes:
To obtain funding for the Company's ongoing
operations, the Company entered into a securities purchase agreement with
four accredited investors on April 27, 2005 for the sale of (i) $2,500,000
in convertible notes and (ii) warrants to purchase 16,534,392 shares of
its common stock. The sale of the convertible notes and
warrants is to occur in three traunches and the investors provided the
Company with an aggregate of $2,500,000 as follows:
• $850,000
was disbursed on April 27, 2005;
• $800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of warrants;
and
• $850,000
was disbursed on June 30, 2005, the effective date of the registration
statement.
Under
the terms of the securities purchase agreement, the Company agreed it
would not, without the prior written consent of a majority-in-interest of
the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market
price of the common stock on the date of issuance (taking into account the
value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are
convertible into an indeterminate number of shares of common stock, or
(iii) the issuance of warrants during the lock-up period beginning April
27, 2005 and ending on the later of (a) 270 days from April 27, 2005, or
(b) 180 days from the date the registration statement is declared
effective.
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning April 27, 2005 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least
20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such
notice.
|
|
8.
Convertible
Notes
Continued
|
The
$2,500,000 in convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and
is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month
in which the stock price is greater than 125% of the initial market price,
or $.0945, for each trading day during that month. Any amount
of principal or interest on the convertible notes that is not paid when
due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The notes mature in three
years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.09 or (ii)
60% of the average of the three lowest intraday trading prices for the
common stock on the OTC Bulletin Board for the 20 trading days before but
not including the conversion date. Accordingly, there is no
limit on the number of shares into which the notes may be
converted.
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the
notes. The call option provides the Company with the right to
prepay all of the outstanding convertible notes at any time, provided
there is no event of default by the Company and the Company's stock is
trading at or below $.09 per share. An event of default includes the
failure by the Company to pay the principal or interest on the notes when
due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the
notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of
the notes; or (c) 145% of the outstanding principal and accrued interest
for prepayments occurring after the 60th day following the issue date of
the notes.
|
|
8.
Convertible
Notes
Continued
|
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $.20 per share. The investors may exercise
the warrants on a cashless basis if the shares of common stock underlying
the warrants are not registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the callable secured convertible
notes issued pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell
shares of common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes.
The
note due date was June 30, 2008, therefore, the Company
is in default. Since this Note is in default the amount
of $1,256,248 has been classified as a current liability in the balance
sheet.
As of December 31,
2008, there was an outstanding balance of $1,256,248 in
principal and accrued interest remaining on the convertible
notes. During the years ended December 31, 2008 and 2007, the
Company issued 9,709,938 and 2,830,172 shares of common stock for the
conversion of $200,910 and $212,346 of the convertible notes,
respectively.
February
28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes:
To obtain additional funding for the Company's
ongoing operations, the Company entered into a second securities purchase
agreement on February 28, 2006 with the same four accredited investors for
the sale of (i) $1,500,000 in convertible notes and (ii) warrants to
purchase 12,000,000 shares of its common stock. The sale of the
convertible notes and warrants is to occur in three traunches and the
investors are obligated to provide the Company with an aggregate of
$1,500,000 as follows:
• $500,000
was disbursed on February 28,
2006;
|
|
8.
Convertible
Notes
Continued
|
•
$500,000
was disbursed on June 28, 2006 after the Company filed a registration
statement on June 15, 2006 to register the shares of common stock
underlying the convertible notes. The registration statement
was subsequently withdrawn on July 25, 2006 and a new registration
statement was filed on September 15, 2006 to register 60,000,000 shares of
common stock issuable upon conversion of the notes.
• $500,000
was disbursed on April 30, 2007, the day prior to the effective date of
the registration statement on May 1, 2007.
Under
the terms of the securities purchase agreement, the Company also agreed it
would not, without the prior written consent of a majority-in-interest of
the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market
price of the common stock on the date of issuance (taking into account the
value of any warrants or options to acquire common stock in connection
therewith), (ii) the issuance of convertible securities that are
convertible into an indeterminate number of shares of common stock, or
(iii) the issuance of warrants during the lock-up period beginning
February 28, 2006 and ending on the later of (a) 270 days from February
28, 2006, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning February 28, 2006 and ending two years after the end of the
above lock-up period unless it first provided each investor an option to
purchase its pro rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least
20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$1,500,000 in convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and
is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month
in which the stock price is greater than 125% of the initial market price,
or $.0275, for each trading day during that month. Any amount of principal
or interest on the convertible notes that is not paid when due will bear
interest at the rate of 15% per annum from the date due thereof until such
amount is paid. The notes mature in three years from the date
of issuance, and are convertible into the Company's common stock at the
noteholders' option, at the lower of (i) $.02 or (ii) 60% of the average
of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares
into which the notes may be
converted.
|
|
8.
Convertible
Notes
Continued
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the
terms of the notes. The call option provides the Company with
the right to prepay all of the outstanding convertible notes at any time,
provided there is no event of default by the Company and the Company's
stock is trading at or below $.02 per share. An event of
default includes the failure by the Company to pay the principal or
interest on the notes when due or to timely file a registration statement
as required by the Company or obtain effectiveness with the Securities and
Exchange Commission of the registration statement. Prepayment
of the notes is to be made in cash equal to either (a) 125% of the
outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 130% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the
notes.
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $.10 per share. The investors may exercise
the warrants on a cashless basis if the shares of common stock underlying
the warrants are not registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, then the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the notes issued pursuant to the
securities purchase
agreement.
|
|
8.
Convertible
Notes
Continued
|
The
noteholders have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive
shares of the Company's common stock such that the number of shares of
common stock held by them in the aggregate and their affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. However, the noteholders
may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible
notes.
Two
of the tree traunches of the Note of $334,275 and $500,000 will be due on
February 28, 2009 and June 28, 2009, respectively; therefore, the amounts
have been classified as a current liability in the balance
sheet.
As of December 31,
2008, there was an outstanding balance of $1,334,275 in principal and
accrued interest on the convertible notes. During the year
ended December 31, 2008 and 2007, the Company issued
zero
and 600,000 shares of
common stock for the conversion of
zero
and $167,000 of the
convertible notes, respectively.
June 11,
2007 Sale of $500,000 in Callable Secured Convertible Notes:
To
obtain further funding for the Company's ongoing operations, the Company
entered into a third securities purchase agreement on June 11, 2007 with
the same four accredited investors for the sale of (i) $500,000 in
callable secured convertible notes and (ii) warrants to purchase
10,000,000 shares of its common stock. The investors disbursed $500,000 to
the Company on June 11, 2007.
Under
the terms of the June 11, 2007 securities purchase agreement, the Company
agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning June 11, 2007 and ending on the later of (a) 270 days from June
11, 2007, or (b) 180 days from the date the registration statement is
declared effective.
|
|
8.
Convertible
Notes
Continued
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning June 11, 2007 and ending two years after the end of the above
lock-up period unless it first provided each investor an option to
purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be provided
written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and
the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$500,000 in convertible notes bear interest at 8% per annum from the date
of issuance. Interest is computed on the basis of a 365-day
year and is payable quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for any
month in which the stock price is greater than 125% of the initial market
price, or $.0275, for each trading day during that month. Any
amount of principal or interest on the callable secured convertible notes
that is not paid when due will bear interest at the rate of 15% per annum
from the date due thereof until such amount is paid. The
convertible notes mature in three years from the date of issuance, and are
convertible into the Company's common stock at the noteholders' option, at
the lower of (i) $.02 or (ii) 50% of the average of the three lowest
intraday trading prices for the common stock on the OTC Bulletin Board for
the 20 trading days before but not including the conversion
date. Accordingly, there is no limit on the number of shares
into which the notes may be converted.
The
$500,000 in convertible notes are secured by the Company's assets,
including the Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the terms of the
notes. The call option provides the Company with the right to prepay all
of the outstanding convertible notes at any time, provided there is no
event of default by the Company and its stock is trading at or below $.10
per share. An event of default includes the failure by the
Company to pay the principal or interest on the convertible notes when due
or to timely file a registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is
to be made in cash equal to either (a) 125% of the outstanding principal
and accrued interest for prepayments occurring within 30 days following
the issue date of the notes; (b) 130% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 145% of the outstanding
principal and accrued interest for prepayments occurring after the
60th day following the issue date of the
notes.
|
|
8.
Convertible
Notes
Continued
|
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.005 per share. The investors may exercise
the warrants on a cashless basis if the shares of common stock underlying
the warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell
shares of common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar month.
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on June 11, 2007. The
registration statement must be filed with the Securities and Exchange
Commission within 60 days of the June 11, 2007 closing date and the
effectiveness of the registration is to be within 135 days of such closing
date. Penalties of 2% of the outstanding principal balance of the
convertible notes plus accrued interest are to be applied for each month
the registration is not effective within the required time. The
penalty may be paid in cash or stock at the Company's option.
As of December 31,
2008 and 2007, there have been no conversions of these convertible notes.
Upon conversion of the convertible notes, the Company extinguishes the
convertible debt and related embedded derivatives and no gain or loss is
recorded on the Company’s statements of operations as a result of said
conversion.
|
|
8.
Convertible
Notes
Continued
|
December
19, 2007 issuance of $389,010 in Callable Secured Convertible
Notes
: On December 19, 2007 the Company was notified by
the holders of the convertible notes that there was a past due interest
owing on the outstanding convertible notes. The total amount of interest
was $389,010. To pay the interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31,
2010. Accordingly, on December 19, 2007, the Company issued $389,010 in
convertible notes to the noteholders as full payment of the past due
interest.
The
$389,000 in convertible notes bear interest at 2% per annum from the date
of issuance. Interest is computed on the basis of a 365-day
year and is payable quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for any
month in which the stock price is greater than 125% of the initial market
price, or $.0275, for each trading day during that month. Any
amount of principal or interest on the callable secured convertible notes
that is not paid when due will bear interest at the rate of 15% per annum
from the date due thereof until such amount is paid. The convertible notes
mature on December 31, 2007, and are convertible into the Company's common
stock at the noteholders' option, at the lower of (i) $.02 or (ii) 50% of
the average of the three lowest intraday trading prices for the common
stock on the OTC Bulletin Board for the 20 trading days before but not
including the conversion date. Accordingly, there is no limit
on the number of shares into which the notes may be
converted.
The
$389,000 in convertible notes has a call option under the terms of the
notes. The call option provides the Company with the right to prepay all
of the outstanding convertible notes at any time, provided there is no
event of default by the Company and its stock is trading at or below $.04
per share. An event of default includes the failure by the
Company to pay the principal or interest on the convertible notes when
due. Prepayment of the convertible notes is to be made in cash
equal to either (a) 135% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the
notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of
the notes; or (c) 150% of the outstanding principal and accrued interest
for prepayments occurring after the 60th day following the issue date of
the notes.
The
noteholders have agreed to restrict their ability to convert their
convertible notes and receive shares of the Company's common stock such
that the number of shares of common stock held by them in the aggregate
and their affiliates after such conversion or exercise does not exceed
4.9% of the then issued and outstanding shares of common stock. However,
the noteholders may repeatedly sell shares of common stock in order to
reduce their ownership percentage, and subsequently convert additional
convertible notes, provided, however, that such conversions do not exceed
the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of
trading
days of
that calendar month, per calendar
month.
|
|
8.
Convertible
Notes
Continued
|
As of December 31,
2008 and 2007, there have been no conversions of these convertible notes.
Upon conversion of the convertible notes, the Company extinguishes the
convertible debt and related embedded derivatives and no gain or loss is
recorded on the Company’s statements of operations as a result of said
conversion.
December
24, 2007 Sale of $250,000 in Callable Secured Convertible
Notes:
To obtain further funding for the Company's
ongoing operations, the Company entered into a fourth securities purchase
agreement on December 24, 2007 with the same four accredited investors for
the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 15,000,000 shares of its common stock. The investors
disbursed $250,000 to the Company on December 24, 2007.
Under
the terms of the December 24, 2007 securities purchase agreement, the
Company agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning December 24, 2007 and ending on the later of (a) 270 days from
December 24, 2007, or (b) 180 days from the date the registration
statement is declared
effective
|
|
8.
Convertible
Notes
Continued
|
In
addition, the Company agreed not to conduct any equity financing
(including debt financing with an equity component) during the period
beginning December 24, 2007 and ending two years after the end of the
above lock-up period unless it first provided each investor an option to
purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least
20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$250,000 in convertible notes bear interest at 8% per annum from the date
of issuance. Interest is computed on the basis of a 365-day
year and is payable quarterly in cash, with six months of interest payable
up front. The interest rate resets to zero percent for any
month in which the stock price is greater than 125% of the initial market
price, or $.0275, for each trading day during that month. Any
amount of principal or interest on the callable secured convertible notes
that is not paid when due will bear interest at the rate of 15% per annum
from the date due thereof until such amount is paid. The convertible notes
mature in three years from the date of issuance, and are convertible into
the Company's common stock at the noteholders' option, at the lower of (i)
$.02 or (ii) 50% of the average of the three lowest intraday trading
prices for the common stock on the OTC Bulletin Board for the 20 trading
days before but not including the conversion date. Accordingly,
there is no limit on the number of shares into which the notes may be
converted.
|
|
8.
Convertible
Notes
Continued
|
The
$250,000 in convertible notes are secured by the Company's assets,
including the Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the terms of the
notes. The call option provides the Company with the right to prepay all
of the outstanding convertible notes at any time, provided there is no
event of default by the Company and its stock is trading at or below $.10
per share. An event of default includes the failure by the
Company to pay the principal or interest on the convertible notes when due
or to timely file a registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made
in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date
of the notes; (b) 130% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date
of the notes; or (c) 145% of the outstanding principal and accrued
interest for prepayments occurring after the 60th day following the issue
date of the notes.
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.001 per share. The investors may exercise
the warrants on a cashless basis if the shares of common stock underlying
the warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the
Company's common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar
month.
|
|
8.
Convertible
Notes
Continued
|
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on December 24,
2007. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the December 24, 2007
closing date and the effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied
for each month the registration is not effective within the required time.
The penalty may be paid in cash or stock at the Company’s
option.
As of December 31,
2008 and 2007, there have been no conversions of these convertible notes.
Upon conversion of the convertible notes, the Company extinguishes the
convertible debt and related embedded derivatives and no gain or loss is
recorded on the Company’s statements of operations as a result of said
conversion.
June 16,
2008 Sale of $310,000 in Callable Secured Convertible Notes:
To
obtain additional funding for the Company's ongoing operations, the
Company entered into a fifth securities purchase agreement on June 16,
2008 with three accredited investors for the sale of (i) $310,000 in
convertible notes and (ii) warrants to purchase 10,000,000 shares of its
common stock. The sale of the convertible notes and warrants is
to occur in three traunches and the investors are obligated to provide the
Company with an aggregate of $310,000 as
follows:
|
|
·
|
$110,000
were disbursed on June 16,
2008;
|
|
·
|
$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and
|
|
·
|
$100,000
was disbursed on January 20,
2009.
|
|
Under
the terms of the June 16, 2008 securities purchase agreement, the Company
agreed that it would not, without the prior written consent of a
majority-in-interest of the investors, negotiate or contract with any
party to obtain additional equity financing (including debt financing with
an equity component) that involves (i) the issuance of common stock at a
discount to the market price of the common stock on the date of issuance
(taking into account the value of any warrants or options to acquire
common stock in connection therewith), (ii) the issuance of convertible
securities that are convertible into an indeterminate number of shares of
common stock, or (iii) the issuance of warrants during the lock-up period
beginning June 16, 2008 and ending on the later of (a) 270 days from
June 16, 2008, or (b) 180 days from the date the registration statement is
declared effective.
|
|
8.
Convertible
Notes
Continued
|
In addition, the Company agreed
not to conduct any equity financing (including debt financing with an
equity component) during the period beginning June 16, 2008 and ending two
years after the end of the above lock-up period unless it first provided
each investor an option to purchase its pro-rata share (based on the ratio
of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity
financing. Each investor must be provided written notice
describing any proposed equity financing at least 20 business days prior
to the closing of such proposed equity financing and the option must be
extended to each investor during the 15-day period following delivery of
such notice.
The $310,000 in convertible notes
bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year
and is payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month
in which the stock price is greater than 125% of the initial market price,
or $.0275, for each trading day during that month. Any amount
of principal or interest on the callable secured convertible notes that is
not paid when due will bear interest at the rate of 15% per annum from the
date due thereof until such amount is paid. The convertible
notes mature in three years from the date of issuance, and are convertible
into the Company's common stock at the noteholders' option, at the lower
of (i) $.02 or (ii) 45% of the average of the three lowest intraday
trading prices for the common stock on the OTC Bulletin Board for the 20
trading days before but not including the conversion
date. Accordingly, there is no limit on the number of shares
into which the notes may be
converted.
|
|
8.
Convertible
Notes
Continued
|
The
convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under
the terms of the notes. The call option provides the Company
with the right to prepay all of the outstanding convertible notes at any
time, provided there is no event of default by the Company and its stock
is trading at or below $.02 per share. An event of default
includes the failure by the Company to pay the principal or interest on
the convertible notes when due or to timely file a registration statement
as required by the Company or obtain effectiveness with the Securities and
Exchange Commission of the registration statement. Prepayment
of the convertible notes is to be made in cash equal to either (a) 125% of
the outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 130% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145%
of the outstanding principal and accrued interest for prepayments
occurring after the 60th day following the issue date of the
notes.
The warrants are exercisable
until seven years from the date of issuance at a purchase price of $.001
per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on
a cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed to
restrict their ability to convert their convertible notes or exercise
their warrants and receive shares of the Company's common stock such that
the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.99%
of the then issued and outstanding shares of common
stock. However, the noteholders may repeatedly sell shares of
common stock in order to reduce their ownership percentage, and
subsequently convert additional convertible notes, provided, however, that
such conversions do not exceed $75,000 per calendar month, or the average
daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar
month, per calendar month.
|
|
8.
Convertible
Notes
Continued
|
The
Company is required to register the shares of its common stock issuable
upon the conversion of the convertible notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities
purchase agreement the Company entered in to on June 16,
2008. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the June 16, 2008
closing date and the effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the outstanding
principal balance of the convertible notes plus accrued interest are to be
applied for each month the registration is not effective within the
required time. The penalty may be paid in cash or stock at the
Company's option.
As of December 31, 2008, there
have been no conversions of these convertible notes. Upon
conversion of the convertible notes, the Company extinguishes the
convertible debt and related embedded derivatives and no gain or loss is
recorded on the Company's statements of operations as a result of said
conversion.
August 29,
2008 Issuance of $191,913 in Callable Convertible Notes:
On
August 29, 2008, the Company was notified by the holders of the
convertible notes that there was a past due interest owing on the
outstanding convertible notes. The total amount of interest owed was
$191,913. To pay this interest, the noteholders were willing to accept
$191,913 in additional convertible notes due on August 29,
2011. Accordingly, on August 29, 2008, the Company issued
$191,913 in convertible notes to the noteholders as full payment of the
past due interest.
The $191,913 in convertible
notes bear interest at 2% per annum from August 29, 2008. Interest is
computed on the basis of a 365-day year and is payable quarterly in cash.
Any amount of principal or interest on the callable secured convertible
notes that is not paid when due will bear interest at the rate of 15% per
annum from the date due thereof until such amount is paid. The convertible
notes mature on August 29, 2011, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii)
45% of the average of the three lowest intraday trading prices for the
common stock on the OTC Bulletin Board for the 20 trading days before but
not including the conversion date. Accordingly, there is no limit on the
number of shares into which the notes may be
converted.
|
|
8.
Convertible
Notes
Continued
|
The
convertible notes have a call option under the terms of the notes. The
call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of
default by the Company and its stock is trading at or below $.00431 per
share. An event of default includes the failure by the Company to pay the
principal or interest on the convertible notes when due. Prepayment of the
convertible notes is to be made in cash equal to either (a) 135% of the
outstanding principal and accrued interest for prepayments occurring
within 30 days following the issue date of the notes; (b) 145% of the
outstanding principal and accrued interest for prepayments occurring
between 31 and 90 days following the issue date of the notes; or (c) 150%
of the outstanding principal and accrued interest for prepayments
occurring after the 90th day following the issue date of the
notes.
The
noteholders have agreed to restrict their ability to convert their
convertible notes and receive shares of the Company's common stock such
that the number of shares of common stock held by them in the aggregate
and their affiliates after such conversion does not exceed 4.9% of the
then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional
convertible notes, provided, however, that such conversions do not exceed
the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Notes include certain features that are considered embedded derivative
financial instruments. These features are described below, as
follows:
|
|
·
|
The
fixed conversion feature which allows the investor to convert the Notes at
a fixed price per share;
|
|
·
|
The
variable conversion feature, which allows the investor to convert the
Notes at a specified percentage of the market price at the time of
conversion;
|
|
·
|
The
variable interest rate provision that calls for no interest to be paid if
the stock price exceeds a predetermined amount for a given
months;
|
|
·
|
The contingent put
feature, which upon the occurrence of certain events of default, including
(i) the Company’s failure to pay the principle and interest thereon when
due on the Notes; (ii) bankruptcy, insolvency, reorganization, liquidation
proceedings instituted by or against the Company; (iii) any money judgment
is entered against the Company for more than $50,000, which remains
unvacated, unbonded, or unstayed for more than twenty days; and (iv) the
delisting of the Company’s common stock, allows the investor to require
the Company to redeem the convertible notes at 130% of the principal
amount. Although the put feature was determined to be an
embedded derivative which requires bifurcation, we believe the likelihood
of this feature being exercised is remote and accordingly no value was
ascribed to this particular put feature. We are required to
continue to evaluate our accounting and valuation for this put
feature. We will continue to monitor the probability of this
particular put feature being exercised and its impact to our valuation of
embedded derivatives in future
periods.
|
|
·
|
The
value of the warrants issued in conjunction with each
funding.
|
|
The
initial fair value assigned to the embedded derivatives and
warrants was $4,169,000, which consisted of the fair
values of the embedded derivatives of $2,588,000 and the fair
value of the warrants of $1,582,000. The Company recorded the
first $2,500,000 of fair value of the derivatives and warrants to debt
discount (equal to the total proceeds received as of June 30, 2005), which
will be amortized to interest expense over the term of the
Notes. The remaining balance o
f
$1,669,000
was recorded as loss
of derivative valuation for the period ended June 30, 2005.
As
of December 31, 2005, the carrying amount on the Notes was
$340,000
,
net of the unamortized debt discount of
$1,698,000
.
Interest expense on
the Notes totaled
$739,000
for the period ended
December 31, 2005, which consisted of
$369,000
of normal accretion
of the Note discount, and $370,000 of accrued interest on the outstanding
Note balance for the period. The fair value of the embedded
derivatives and warrants decreased to $195,000 during the year ended
December 31, 2005, which consists of a fair value of the embedded
derivatives of $137,000 and the fair value of the warrants of
$58,000. The corresponding decrease in derivative value was
reflected as a gain on derivative valuation on the statements of
operations in the amount of
$3,975,000.
|
|
8.
Convertible
Notes
Continued
|
During
2006, the Company entered into another securities purchase agreement in
the amount $1,000,000. The initial fair value assigned to the
embedded derivatives and warrants was $541,000, for this Note, which
consisted of the fair values of the embedded derivatives of $464,000 and
the fair value of the warrants of $77,000. The Company recorded
the $541,000 of fair value of the derivatives and warrants to debt
discount, which will be amortized to interest expense over the term of the
Notes.
As
of December 31, 2006, the carrying amount on the Notes was
$1,421,000
, net
of the unamortized debt discount of
$1,235,000
. Interest
expense on the Notes totaled
$935,000
for
the period ended December 31, 2006, which consisted of
$721,
000
of normal
accretion of the Note discount, and
$214,000
of
accrued interest on the outstanding Note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of
$536,000
during
the year ended December 31, 2006, which consists of a decrease in the fair
value of the embedded derivatives of
$451,000
and
the fair value of the warrants of $85,000. Accordingly, the
Company recorded a gain on derivative valuation to the statement of
operations of
$536,000
for
the year ended December 31, 2006.
During
2007, the Company entered into four securities purchase agreements in the
aggregate amount of $1,639,000. The initial fair value assigned
to the embedded derivatives and warrants was $466,000, for these Notes,
which consisted of the fair values of the embedded derivatives
of $344,000 and the fair value of the warrants of $122,000. The
Company recorded $466,000 of fair value of the derivatives and warrants to
debt discount, which will be amortized to interest expense over the term
of the Notes.
At
December 31, 2007, the carrying amount on the Notes was
$3,100,000
,
net of the unamortized debt discount of
$828,000
.
Interest
expense on the Notes totaled
$99
2,000
for the period ended
December 31, 2007, which consisted o
f
$7
71,000
normal accretion of the Note discount, and
$221,000
of accrued interest
on the outstanding Note balance for the period. The fair value
of the embedded derivatives and warrants decreased by a total of
$413,000
during the year
ended December 31, 2007, which consists of a decrease in the fair value of
the embedded derivatives of
$391,000
and the fair value
of the warrants of $22,000. Accordingly, the Company recorded a
gain on derivative valuation to the statement of operations o
f
$413,000
for the year ended
December 31, 2007.
|
|
8.
Convertible
Notes
Continued
|
At
December 31, 2008, the carrying amount on the Notes was
$
3,854
,000
, net of
the unamortized debt discount of
$
278
,000
. Interest
expense on the Notes totaled
$
827
,000
for the
period ended December 31, 2008, which consisted of
$
515
,000
normal
accretion of the Note discount, and
$312,000
of
accrued interest on the outstanding Note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of
$
207
,000
during the
year ended December 31, 2008, which consists of a decrease in the fair
value of the embedded derivatives of
$
139
,000
and the
fair value of the warrants of $68,000. Accordingly, the Company
recorded a gain on derivative valuation to the statement of operations of
$
207
,000
for the
year ended December 31, 2008.
The
market price of the Company’s common stock significantly impacts the
extent to which the Company may be required or may be permitted to convert
the unrestricted and restricted portion of the Notes into shares of the
Company’s common stock. The lower the market price of the Company’s common
stock at the respective times of conversion, the more shares the Company
will need to issue to convert the principal and interest payments then due
on the Notes. If the market price of the company’s common stock falls
below certain thresholds, the Company will be unable to convert any such
repayments of principal and interest into equity, and the Company will be
forced to make such repayments in cash. The Company’s operations could be
materially impacted, in an adverse way, if the Company is forced to make
repeated cash payments on the
Notes.
|
|
9.
Stock Option Plan
and Warrants
|
Stock
Option Plan and Warrants
The
Option Plan provides for the grant of incentive stock options and
non-qualified stock options to employees and directors of the Company.
Incentive stock options may be granted only to employees. The Option Plan
is administered by the Board of Directors or a Compensation Committee,
which determines the terms of options granted including the exercise
price, the number of shares subject to the option, and the exercisability
of the option.
The
Company granted the following options and warrants during the year ended
December 31, 2008:
|
|
·
|
Warrants
to purchase 100,000 shares of common stock at an exercise price of $0.10
per share in return for the sale of callable secured convertible
notes.
|
|
The
Company granted the following options and warrants during the year ended
December 31, 2007:
|
|
·
|
Warrants
to purchase 40,000 shares of common stock at an exercise price of $10.00
per share in return for the sale of callable secure convertible notes,
exercisable through April 26,
2012.
|
|
·
|
Warrants
to purchase 100,000 shares of common stock at an exercise price of $0.50
per share in return for the sale of callable secure convertible notes,
exercisable through June 11,
2012.
|
|
·
|
Warrants
to purchase 150,000 shares of common stock at an exercise price of $0.10
per share in return for the sale of callable secure convertible notes,
exercisable through December 24,
2014.
|
|
Options
to the Company’s President and Chief Executive Officer to purchase 90,000
share of common stock at an exercise price of $1.00, exercisable through
July 1, 2010.
|
|
9.
Stock Option Plan
and Warrants
Continued
|
A
schedule of the options and warrants is as
follows:
|
|
Number
of Options
|
Number
of Warrants
|
Exercise
price per share
|
||||||||||
|
Outstanding
at January 1, 2007
|
70,050 | 250,594 | 1.00-675.00 | |||||||||
|
Granted
|
45,000 | 290,000 | 0.10-10.00 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Expired
|
- | (250 | ) | 15.00-15.00 | ||||||||
|
Forfeited
|
(50 | ) | - | 10.00-10.00 | ||||||||
|
Outstanding
at December 31, 2007
|
115,000 | 540,344 | 0.10-675.00 | |||||||||
|
Granted
|
- | 100,000 | 0.10-0.10 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Expired
|
(50 | ) | (2,750 | ) | 15.00-400.00 | |||||||
|
Forfeited
|
(400 | ) | - | 1.00-21.00 | ||||||||
|
Outstanding
at December 31, 2008
|
114,550 | 637,594 | 0.10-675.00 | |||||||||
|
9.
Stock Option Plan
and Warrants
Continued
|
The
following table summarizes information about stock options and warrants
outstanding at December 31,
2008:
|
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||
|
Range
of
exercise
price
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
(years)
|
Weighted
average
exercise
price
|
Number
exercisable
|
Weighted
average
exercise
price
|
|||||||||||||||||
|
$
0.10-75.00
|
742,144 | 3.61 | $ | 7.00 | 741,644 | $ | 7.00 | |||||||||||||||
|
$
200.00-500.00
|
9,500 | 0.87 | $ | 304.00 | 9,500 | $ | 304.00 | |||||||||||||||
|
$
600.00-675.00
|
500 | 1.42 | $ | 675.00 | 500 | $ | 675.00 | |||||||||||||||
|
$
0.10-675.00
|
752,144 | 3.57 | $ | 11.00 | 751,644 | $ | 11.00 | |||||||||||||||
|
The
fair value of each option and warrant grant, outside of those granted in
conjunction with the Notes are estimated at the date of grant using the
Black-Scholes option pricing model with the following
assumptions:
|
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Expected
dividend yield
|
$ | - | $ | - | ||||
|
Expected
stock price volatility
|
208%-266 | % | 210%-214 | % | ||||
|
Risk-free
interest rate
|
4.32%-4.32 | % | 4.14%-5.37 | % | ||||
|
Expected
life of options
|
3-7
years
|
3-7
years
|
||||||
|
The
aggregate intrinsic value of stock warrants and options outstanding and
exercisable at December 31, 2008 and 2007 totaled $0 and $0; and $0 and
$0, respectively. The weighted average grant date fair value of warrants
and options granted during the periods ended December 31, 2008 and 2007 is
$0.00 and $0.01, respectively. The fair value of warrants
vested during the periods ended December 31, 2008 and 2007 totaled
$189,150 and $60,390,
respectively.
|
|
10.
Gain on Settlement
of Liabilities
|
Due
to the Company’s ongoing cash flow difficulties, during 2008 and 2007 most
vendors and suppliers were contacted with attempts to negotiate reduced
payments and settlements of outstanding accounts payable and accrued
expenses. While some vendors refused to negotiate and demanded
payment in full, some vendors were willing to settle for a reduced
amount. The accounts payable forgiven by vendors and suppliers
and accrued expenses settled resulted in a gain of $0 and $91,000 in 2008
and 2007, respectively.
|
|
11.
Related Party
Transactions
|
A
law firm, of which the chairman of the board of directors of the Company
is a shareholder, has rendered legal services to the
Company. The Company paid this firm $60,000 and $156,000, for
the years ended December 31, 2008 and 2007, respectively. As of
December 31, 2008, the Company owed this firm $131,000, which is included
in accounts
payable.
|
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for interest
|
||||||||
|
Interest
|
$ | 3,000 | $ | 11,000 | ||||
|
Income
taxes
|
$ | - | $ | - | ||||
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES:
|
||||||||
|
Settlement
of liabilities
|
$ | - | $ | 91,000 | ||||
|
Convertible
notes issued in satisfaction of accrued interest
|
$ | 191,913 | $ | 389,010 | ||||
| 13. Export Sales |
In
accordance with Paragraph 38(a) of SFAS 131 “Disclosures about Segments of
an Enterprise and Related Information,” The company has the following
information regarding revenues to external customers. Revenues are
attributed to countries based on location of customer.
Total
sales include export sales by major geographic area as
follows:
|
|
Years
Ended December 31,
|
||||||||
|
Geographic
Area
|
2008
|
2007
|
||||||
|
Europe:
|
||||||||
|
Belgium
|
$ | - | $ | - | ||||
|
Bulgaria
|
19,600.00 | 28,400 | ||||||
|
France
|
- | 34,224 | ||||||
|
Germany
|
1,650.00 | - | ||||||
|
Greece
|
25,155.00 | 11,750 | ||||||
|
Italy
|
870.00 | 38,040 | ||||||
|
Poland
|
13,850.00 | 37,000 | ||||||
|
Russia
|
18,400.00 | 204,540 | ||||||
|
Spain
|
- | 7,200 | ||||||
|
Turkey
|
43,215.00 | 102,940 | ||||||
|
United
Kingdom
|
207,615.00 | 255,717 | ||||||
|
Sub
total
|
330,355.00 | 719,811 | ||||||
|
Far
East:
|
||||||||
|
Bangladesh
|
$ | - | $ | 560 | ||||
|
China
|
- | 91,600 | ||||||
|
India
|
110,400.00 | 16,800 | ||||||
|
Pakistan
|
- | 8,200 | ||||||
|
South
Korea
|
25,749.00 | 42,500 | ||||||
|
Taiwan
|
(25,250.00 | ) | 32,650 | |||||
|
Austria
|
180.00 | - | ||||||
|
Vietnam
|
10,600.00 | 80,600 | ||||||
|
Sub
total
|
121,679.00 | 272,910 | ||||||
|
Middle
East:
|
||||||||
|
Egypt
|
$ | - | $ | 9,540 | ||||
|
Israel
|
- | 2,800 | ||||||
|
Jordan
|
- | - | ||||||
|
Saudi
Arabia
|
34,089.00 | 65,700 | ||||||
|
UAE
|
- | 10,600 | ||||||
|
Sub
total
|
34,089.00 | 88,640 | ||||||
|
North
America:
|
||||||||
|
Canada
|
$ | 60,535.00 | $ | 44,750 | ||||
|
Mexico
|
31,250.00 | - | ||||||
|
USA
|
640,184.00 | 636,879 | ||||||
|
Sub
total
|
731,969.00 | 681,629 | ||||||
|
Central, South
America, and Caribbean:
|
||||||||
|
Argentina
|
$ | 6,000.00 | $ | 21,915 | ||||
|
Brazil
|
- | 36,698 | ||||||
|
El
Salvador
|
4,600.00 | 8,749 | ||||||
|
Ecuador
|
12,750.00 | - | ||||||
|
Honduras
|
- | - | ||||||
|
Puerto
Rico
|
5,400.00 | 26,798 | ||||||
|
Venezuela
|
12,400.00 | 14,850 | ||||||
|
Colombia
|
- | - | ||||||
|
Sub
total
|
41,150.00 | 109,010 | ||||||
|
Total
|
$ | 1,259,242.00 | $ | 1,872,000 | ||||
|
13.
Export Sales
Continued
|
Percentage
and amount of revenues to external customers by product, as required by
SFAS 131, paragraph 37, are as
follows:
|
|
PRODUCT
|
MODEL
|
2008
|
2007
|
|||||||||
|
Humphrey
Systems: P55 & A/B Scan
|
Pachymeter
(P55), A/B Scan (P37)
|
270,640 | 548,902 | |||||||||
|
MEDA
Systems
|
P2000,
P2200, P2500, P2700, P3700
|
21 | % | 29 | % | |||||||
|
Dicon
diagnostic: Perimeter and corneal topographer
|
LD,
TKS, CT
|
295,527 | 388,179 | |||||||||
| 23 | % | 21 | % | |||||||||
|
UBM
biomicroscope:
|
P40,
P45, P60
|
257,951 | 512,644 | |||||||||
| 20 | % | 27 | % | |||||||||
|
Blood
Flow Analyzer:
|
BFA
|
58,330 | 256,511 | |||||||||
| 5 | % | 14 | % | |||||||||
| Glaid | 197,477 | - | ||||||||||
| 16 | % | 0 | % | |||||||||
|
Sub-Total
|
1,079,925 | 1,706,236 | ||||||||||
| 86 | % | 91 | % | |||||||||
|
Cataract
removal sales (Precisionist and SIStem)
|
PHO,
SIS (Surgical)
|
- | - | |||||||||
| 0 | % | 0 | % | |||||||||
|
Service,
parts, disposables, and other
|
179,318 | 165,318 | ||||||||||
| 14 | % | 9 | % | |||||||||
|
Total
YTD Sales
|
1,259,243 | 1,871,554 | ||||||||||
| 100 | % | 100 | % | |||||||||
| 14. Savings Plan |
In
November 1996, the Company established a 401(k) Retirement Savings Plan
for the Company’s officers and employees. The Plan provisions
include eligibility after six months of service, a three year vesting
provision and nondiscriminatory no matching contributions at this
time. During the years ended December 31, 2008 and 2007,
the Company made no contributions to the Plan.
Agreements
On
June 12, 2006, the Company entered into a Worldwide OEM Agreement with
MEDA Co., Ltd., one of China's leading developers and producers of
ultrasound devices. Under the terms of the agreement, MEDA
agrees to jointly engineer, develop and manufacture the Company's next
generation of the Ultrasound BioMicroscope, as well as other proprietary
new products and enhancement of the Company's current
products. The products to be manufactured by MEDA, at agreed
upon costs, and supplied to the Company for resale include the following
new products: an ultrasound biomicroscope, two ultrasound A/B Scans, a
biometric A-Scan and a pachymeter.
The
agreement provides that the Company and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of the Company's products
and, in the interest of product development, enhancement and
differentiation, MEDA agrees to give consideration to potential software
development or enhancements made available to the Company for its
products. Moreover, in the interest of product improvement,
MEDA agrees to collaborate with the Company and its designated engineers,
employees and consultants to consider and potentially implement jointly or
individually the development of product enhancements to the Company's
products to be manufactured by MEDA.
The
software and hardware modifications designed jointly by the Company and
MEDA will be considered the joint intellectual property of the Company and
MEDA and may be used, without restriction, unless otherwise previously
agreed to, by either party. MEDA also agrees to provide a
twelve month warranty on all products that it manufactures for the
Company. If defects cannot be corrected at the Company's
facilities, the products may be returned to MEDA for the purposes of
carrying out such repairs as required, and MEDA agrees to return the
repaired products to the Company or its designated agent or distributor
within ten working days from the date of receiving such products, at no
cost to the Company, and MEDA will pay return freight
costs.
|
|
15.
Commitments
and
Contengencies
|
MEDA
further agrees to endeavor to answer any technical inquiries concerning
the products it has manufactured. MEDA also agrees to train the
Company's technical service engineers and designated international
distributors as soon as possible after the signing of this agreement, and
as future needs arise and as MEDA can reasonably fit such training into
the regular schedules of its employees. MEDA agrees to
determine the need for future training on new products as necessary and
will offer such training in Tiangin, China. For training
conducted outside China, the Company or its designated distributors and/or
service centers will be responsible for the traveling, living and hotel
expenses for MEDA's engineers. Training is at no charge to the
Company. The training will also be made available to the
Company's designated repair agencies in order to provide service and
repair on a worldwide basis. Such agencies will be considered
authorized repair facilities for the products manufactured by
MEDA.
MEDA
provides the Company with several ultrasound devices. These
devices include the P37-II A/B Scan, the P2000 A-Scan Biometric Analyzer,
P2200 Pachymeter and the P2500, which is a combined A-Scan and
pachymeter. MEDA also manufactures the P2700, P3700, and P37-II
A/B Scans and the P50 Ultrasound Biomicroscope. The agreement
provides exclusive distribution rights to the Company throughout most of
the world, including the United States and Canada, once FDA approval is
received on these devices.
The
agreement shall be effective for three years from date of
execution. At the end of the three year term, representatives
of the Company and MEDA will confer to determine whether to extend the
term of the agreement. This will have a practical effect of
extending the term of the agreement for an additional 120
days. If mutual agreement for extending the term of the
agreement is not reached within 120 days after the end of the three year
term, then the agreement will be deemed terminated. However, if
within the 120 day period, the Company and MEDA mutually agree to extend
the term of the agreement, then thereafter either party may terminate the
agreement by providing at least twelve months' prior written notice to the
other party. All outstanding orders at the time of notification
will be supplied under the terms of the agreement, and MEDA will continue
to fulfill all orders from the Company until the twelve month notice
period has
expired.
|
|
15.
Commitments and
Contengies
Continued
|
On
January 31 and February 1, 2007, the Company received FDA 510(k) premarket
approval for a new generation of ultrasound devices. This
approval allows the new devices to be sold in the United
States. The new ultrasound devices, which are to be
manufactured by MEDA and sold by the Company in the United States, include
the P2000 A-Scan (used to measure axial length of the eye), the P2200
Pachymeter (used for measuring corneal thickness), the P2500
A-Scan/Pachymeter (a combination of the two stand alone devices), the
P2700 AB/Scan (an ultrasound imaging device for detecting abnormalities
within the eye) and the P37-II (a more advanced AB/Scan used to provide
portability for ophthalmology veterinary applications) and the P50
Ultrasound Biomicroscope for high frequency imaging of the anterior
chamber of the eye.
On
September 25, 2006, the Company entered into a Worldwide OEM Agreement
with Tinsley, a division of Hartest Precision Instruments Limited, and one
of Europe's leading developers and producers of visual fields analysis
devices or perimeters. Under the terms of the agreement,
Tinsley agrees to engineer, develop and manufacture the Company's newest
perimeter, the LD700 Visual Fields Analyzer. The product is to
be manufactured by Tinsley at agreed upon costs and supplied to the
Company for resale.
On
August 14, 2007, the Company entered into an agreement with Equity Source
Partners, LLC of Jericho, New York. Under the terms of the
agreement, Equity Source Partners will act as the exclusive financial
advisor to the Company and will assist the Company in raising private
capital, creating a strategy for growing its core business, pursuing a
follow on offering, and providing general strategic corporate
advice. Among the strategic advisory services Equity Source
Partners will provide are to assist in identifying and introducing the
Company to third parties in connection with potential strategic
relationships, provide advice concerning issues relating to potential
strategic relations, capital raises and potential investment banking
contacts, and establish contact with prospective providers of
capital. Among the financing services Equity Source Partners
will perform is to solicit prospective providers of capital on the
Company's behalf.
The
term of the agreement is for twelve months unless extended by mutual
consent. As compensation for its services, the Company agrees
to provide equity Source Partners with an advisory fee equal to an
aggregate of 3% of the outstanding shares of the Company's common
stock. In addition, the Company agrees to pay Equity Source
Partners a cash fee equal to 7.5% of the gross proceeds from the sale of
securities to investors that were introduced to the Company by Equity
Source Partners and a cash fee equal to 3% of the gross proceeds received
from the sale of securities to investors that were not introduced by
Equity Source Partners. The agreement terminated on August 14,
2008 when it was not extended by mutual consent for an additional time
period.
|
|
15.
Commitments and
Contengies
Continued
|
On
January 16, 2008, the Company entered into a consulting agreement with
Corcoran Consulting Group, which specializes in medical reimbursement
issues for optometry and ophthalmology. The Company plans to work with
Corcoran Consulting Group to create a new common procedure technology, or
CPT code number, for reimbursement purposes for physicians and
practitioners using the Blood Flow AnalyzerTM. In addition, the Company
plans to work with Corcoran Consulting Group to offer educational seminars
for physicians and practitioners who purchase the Blood Flow
AnalyzerTM.
On
January 28, 2008, the Company entered into a Distribution Agreement with
LACE Elettronica srl to distribute its Glaid device, a proprietary
electrophysiology instrument for the early detection of glaucoma by means
of measuring the physical condition of the retina's ganglion cells,
including retinal ganglion cell loss. The Glaid device was approved by the
FDA in 2005 and has undergone extensive testing and clinical studies in
the United States, Canada and Italy, including at Bascom Palmer Eye
Institute, University of California at San Diego's
Hamilton Glaucoma Center, and New York State College of
Optometry.
Under
the terms of the agreement, the Company has the exclusive right to
distribute the Glaid device in the United States and Canada. The Company
also has a first right of refusal for distribution of the product to
countries outside the United States and Canada where LACE is not currently
selling or marketing the product. These additional distribution
rights are subject to reasonable new minimum quotas. The Distribution
Agreement requires the Company to purchase the Glaid device from LACE at
an agreed upon price and to then sell the product in compliance with
minimum order requirements. The five year quotas for the Glaid device are
27 units, 60 units, 100 units, 120 units, and 120 units for years one
through five of the agreement. Paradigm sales for quota requirements are
to begin as soon as the product is fully completed, with all accessories
and consumables, and ready for
delivery.
|
|
15.
Commitments and
Contengies
Continued
|
The
Distribution Agreement is for the term of five years. At the
end of the five year term, representatives of the Company and LACE will
determine whether to extend the term of the agreement. If mutual agreement
for continuation of the agreement is not reached within 120 days
thereafter, the agreement will be deemed terminated. However, if within
the 120 day period, the Company and LACE mutually agree to continue the
agreement, then either party may terminate the agreement at any time
thereafter by providing at least twelve months' prior written notice to
the other party. All outstanding orders at the time of notification will
be supplied under the terms of the agreement, and LACE will continue to
fulfill all orders from the Company until the twelve month notice period
has expired.
LACE
also agrees to provide a twelve month warranty from the day of delivery on
all Glaid devices supplied to the Company. If the defects cannot be
corrected at the Company's facilities or at the facilities of trained
Company repair centers, the products must then be returned to LACE for
purposes of carrying out such repairs as required, and LACE agrees to
return the repaired products to the Company or its designated agent or
distributor within ten working days from the date of receiving such
products, at no cost to the Company, and LACE will pay return freight
costs. The Company additionally agrees to arrange for installation of the
Glaid device at no cost to LACE. The Company further agrees to provide
Company brand specific labeling to be applied to the LACE devices shipped
directly to the Company's customers and distributors. On March
12, 2009, the Distribution Agreement was mutually terminated by the
Company and LACE due to the difficulties that the companies had in working
together.
|
|
15.
Commitments and
Contengies
Continued
|
Legal
Proceedings
In
2005, the Company settled a class action law suit of approximately $3.5
million. The Company’s insurance deductible related to the
class action law suit was $250,000. Since the settlement was in
2005, the Company has made payments totaling $50,000. The
$200,000 represents the remaining accrual balance of the
deductible.
On
June 20, 2003, an action was brought against the Company by CitiCorp
Vendor Finance, Inc., formerly known a Copelco Capital, Inc. in the Third
Judicial District Court, Salt Lake County, State of Utah (Civil No.
030914195). 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 in or about April of 2000. The action also seeks an
award of attorney’s fees and costs incurred in the collection. The Company
filed an answer to the complaint disputing the amounts allegedly owed due
to machine problems and a claimed understanding with the vendor. The
Company returned two of the machines. The Company was engaged in
settlement discussions with CitiCorp until counsel for CitiCorp withdrew
from the case. New counsel for CitiCorp was appointed. Thereafter, there
was a substitution of plaintiff, with CIT Technology Financing Services I,
LLC as the new plaintiff. In June 2008, the Company filed an amended
answer and a third party complaint. Pursuant to a notice from the court
dated January 13, 2009 to show cause why the case should not be dismissed
for failure to prosecute and a hearing held on March 3, 2009, the Company
and CIT Technology Financing Services agreed to dismiss the case without
prejudice. Settlement discussion may continue. The company has accrued
$36,000 for this case until it has been settled.
On
December 27, 2007, the Company entered into a settlement agreement with
Larry Hicks to settle the lawsuit that he brought against the Company for
payments due under a consulting agreement with the Company in the Third
Judicial District Court, Salt Lake County, State of Utah (Civil No.
030922220). Under the terms of the settlement agreement, the Company
agreed to pay Mr. Hicks a total of $20,000, of which $7,500 was paid
within seven days of the date of execution of the settlement agreement.
The remaining amount owing of $12,500 was to be paid in five consecutive
quarterly installments of $2,500 each, beginning in the first quarter of
2008 and ending in the first quarter of 2009. Payments of $2,500 each were
made for the quarters ended March 31, 2008, June 30, 2008, September 30,
2008, and December 31, 2008. The remaining balance of $2,500
due on March 31, 2009 is still outstanding and had not been paid as of the
date of these financial
statements.
|
|
15.
Commitments and
Contengies
Continued
|
On
March 19, 2009, an action was brought against the Company by Pilot Freight
Services in the Third Judicial District Court, Salt Lake County, State of
Utah (Civil No. 90405609), for payments due for shipping charges. The
complaint claims the sum of $11,336 is due for unpaid shipping charges,
together with accrued interest from the date the shipping charges became
due, with the last shipping charge becoming due on October 22, 2008. The
Company is in the process of investigating the claims made in the
complaint and intends to file an answer in defense of the
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.
Employment
Agreements
Effective
July 1, 2007, the Company entered into an amendment of the employment
agreement with Mr. Cannefax, which extended the term of the employment
agreement until January 5, 2009. Under the terms of the
amendment, Mr. Cannefax's annual base salary increased to $150,000. The
initial base salary in the employment agreement dated January 5, 2006 was
$125,000, which the Board of Directors increased to $140,000 as of July 1,
2006. The amendment also provided for the granting of additional
stock options to Mr. Cannefax to purchase an additional 4,500,000 shares
of the Company's common stock at $.01 per share. These options vest in
twelve equal monthly installments of 375,000 shares beginning on June 1,
2007 until such shares are vested.
On
November 18, 2008, Mr. Raymond P.L. Cannefax was terminated as the
Company’s Chief Executive Officer, therefore his options and warrants were
not forfeited until 90 days after termination, therefore, options and
warrants were outstanding at the end of December 31, 2008. Mr.
Cannefax had served as the Company's President and Chief Executive Officer
from January 5, 2006 to November 18,
2008.
|
|
15.
Commitments and
Contengies
Continued
|
Appointment
of New President
On
November 18, 2008, Stephen L. Davis was appointed as the Company's
President, replacing Raymond P.L. Cannefax who was terminated by the Board
of Directors.
Retirement
Agreement
On
May 6, 1999, the Company's Board of Directors approved resolutions
relating to the retirement of John M. Hemmer, then Vice President of
Finance and Chief Financial Officer of the Company. The board resolutions
provided that Mr. Hemmer's annual salary of $120,000 per annum was to
continue until June 1, 1999, at which time his employment contract and
change of control agreement with the Company would terminate and he would
become an independent consultant to the Company. As a
consultant, Mr. Hemmer was to receive an initial payment of $12,500 with
annual payments thereafter of $25,000 payable on January 1, 2000, 2001 and
2002, and a final payment of $12,500 payable on January 1, 2003, for a
total consulting contract of $100,000.
In
addition, the board resolutions provided that the Company was to issue to
Mr. Hemmer warrants to purchase 125,000 shares of common stock at $2.63
per share, exercisable for a period of five years, and warrants to
purchase 75,000 shares of common stock at $7.50 per share, exercisable for
a period of five years, but such warrants were not to be issued until Mr.
Hemmer exercised all of the warrants to purchase 125,000 common shares at
$2.63 per share. The Company has paid a total of $87,500 to Mr. Hemmer
under the consulting agreement.
On
May 30, 2006, the Company entered into an agreement with Mr. Hemmer in
which he acknowledged that the Company owed him a total of $12,500 for
past services he rendered to the Company, including as a consultant, and
the Company agreed to pay him the sum of $12,500 in twelve monthly
installments of $1,000 each and a final monthly payment of
$500. The Company had paid $7,000 as of December 31, 2006 and
the remaining balance of $5,500 during the year ended December 31,
2007.
|
|
16.
Recent Accounting
Pronouncements
|
Recent
accounting pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141(R), “Business Combinations” (“SFAS 141R”). SFAS
141R establishes the principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in
the acquiree, and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is
effective for us on January 1, 2009, and is not expected to have a
material effect on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to
choose to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value,
and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS
159 is effective for us on January 1, 2008, and is not expected to have a
material effect on our consolidated financial statements.
The
implementation of the provisions of these pronouncements is not expected
to have a significant effect on the Company's consolidated financial
statement presentation.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling interest in
consolidated financial statements
, an amendment of ARB No.
51. SFAS 160 will change ther accounting and reporting for
minority interests, which will be recharacterized as noncontrolling
interestand classified as a component of equity. This new
consolidation method will significantly change the accounting for
transactions with minority interest holders. SFAS 160 is
effective on January 1, 2009, and is not expected to have a material
effect on the Company’s consolidated financial
statements.
|
|
16.
Recent Accounting
Pronouncements
Continued
|
In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities
. SFAS No. 161 is
intende to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors
to better understand thier effects on an equity’s financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, whichearly application
encourage. The Company does not expect that the adoption of
SFAS No. 161 will have a material impact on its consolidated financial
statements.
In
May 2008, the FASBissued SFAS 162,
The Hierarchy of General
Accepted Accounting Principles
. SFAS No. 162 identifies
the sources of accounting principles and provides entities with a
framework for selecting for selecting the principles used in preparation
of finanancial statements that are presented in conformity with
GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it
ranks FASB Statements of Financial Accounting Concepts, which are subject
to the same level of due process as FASB Statements of Financial
Accounting Standards, below industry practices that are widely recognized
as general accepted but that are not subject to due
process. The board believes that GAAP hierarchy should be
directed to entities because it is the entity (noits auditors0 that is
responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. The Company does
not expect that adoption of FASB 162 will have a material impact on its
consolidated financial statements.
In May 2008, the FASB issued
SFAS No. 163,
Accounting
for Financial Guarantee Insurance Contracts
. SFAS 163
requires that an insurance enterprise recognize a claim liability prior to
an event of default (insured event) when there is an evidence that credit
deterioration has occurred in an insured financial
obligation. This Statement also clarifies how SFAS 60,
Accounting and Reporting by
Insurance Enterprises
, as amended, applies to financial guarantee
insurance contracts, including the recognition and measurement to be used
to account for premium revenue and claim liabilities. This
Statement also requires expanded disclosures about financial guarantee
insurance contracts. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
all interim periods within those fiscal years, except for some disclosures
about the insurance enterprise’s risk-management
activities. Early application is not permitted. The
Company does not expect that the adoption of FSP FAS 163 will have a
material impact in its consolidated financial
statements.
|
| 17. Subsequent Events |
The
Company received notice from the accredited investors holding the
convertible notes dated February 28, 2006 and the convertible notes dated
June 11, 2007 that on January 22, 2009, E-Lionheart, LLC and other
third parties purchased $500,000 of the convertible notes dated February
28, 2006 and the $500,000 of the convertible notes date June 11,
2007. The total purchase price of these convertible notes was
$1,514,444. Between February 18, 2009 and March 27, 2009, the
third parties converted a total of $454,147 of the February 28, 2006
convertible notes at conversion prices ranging from $0.0009 to $0.00105
per share and received a total of 502,169,656 shares of the Company’s
common stock pursuant to said conversions. As of March 31,
2009, the Company had outstanding 517,901,422 shares of common
stock.
On
April 7, 2009, The Company signed a letter of intent with Fairhills
Capital Offshort in which Fairhills Capital Committed to finance up to
$1,800,000 through the purchase of promissory notes from the
Company. The letter of intent provides that $600,000 in notes
will be purchased every three months over a nine month period, which the
first purchase of $300,000 to be made at closing and the remainder to be
purchased upon the satisfaction of financial objectives to be mutually
determined between the Company and Fairhills Capital. The
convertible notes will bear interest at 6% per annum. In
addition, Fairhills Capital will have a right of first refusal on future
financing transactions by the Company for as long as the notes remain
outstanding.
|
|
Name
|
Age
|
Position
|
|
Stephen
L. Davis
|
61
|
President
and Treasurer
|
|
Randall
A. Mackey, Esq.
|
62
|
Chairman
of the Board and Director
|
|
David
M. Silver, PhD.
|
67
|
Director
|
|
Keith
D. Ignotz
|
62
|
Director
|
|
John
C. Pingree
|
68
|
Director
|
|
Name
and
Principal Position
|
Year
|
Salary$
|
Bonus($)
|
Stock
Awards
|
Option
Awards($)
|
Non-Equity
Incentive
Plan
Compen
sation
|
Change
in Pension
Value
and Non-qualified Deferred Compensation
Earnings
|
All
Other
Compen
sation
|
Total
|
|
Stephen
L. Davis,
President
and
Treasurer
Raymond
P.L.
Cannefax,
former
President
and
Chief Executive Officer
Luis
A. Mostecero,
former
Vice President
of Finance,
Treasurer,
and
Chief
Financial
Officer
|
2008
2008
2007
2006
2008
|
$ 20,402
$
132,955
143,330
127,940
$
101,512
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
$ 20,402
$ 132,955
143,330
127,940
$ 101,512
|
|
Name
|
Year
|
Perks
and
Other
Personal
Benefits
|
Tax
Reimburse-
ments
|
Discounted
Securities
Purchases
|
Payments/
Accruals
on
Termin-
ation Plans
|
Registrant
Contribu-
tions
to
Defined
Contribu-
tion
Plans
|
Insurance
Premiums
|
Dividends
or
Earnings
on
Stock
or
Option
Awards
|
Other
|
|
Stephen
L. Davis
Raymond
P.L.
Cannefax
Luis
A. Mostecero
|
2008
2008
2007
2006
2008
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
-
-
-
-
-
|
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan
Awards
|
Estimated
Future Payouts
Under
Equity Incentive Plan
Awards
|
|||||||||
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
($)
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards:
Number
of
Securities
Under-
lying
Options
(#)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
|
|
Stephen
L.
Davis
Raymond
P.L.
Cannefax
LuisA.
Mostecero
|
-
5/1/07
1/5/06
3/16/09
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
4,500,000
4,500,000
200,000
|
-
$.01
$.01
$.02
|
|
Name
|
Number
of Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options:
(#)
Unexer-
cisable
|
Equity
Incentive
Plan
Awards
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
Held
That
Have
Not
Vested(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
Stephen
L.
Davis
Raymond
P.L.
Cannefax
Luis
A.
Mostecero
|
0
0
0
|
0
0
0
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
|
Option
Awards
|
Stock
Awards
|
|||
|
Name
|
Number
of
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)
|
|
Stephen
L. Davis
Raymond
P.L. Cannefax
Luis
A. Mostecero
|
0
0
0
|
-
-
-
|
0
0
0
|
-
-
-
|
|
Name
|
Plan Name
|
Number
of
Years
Credited
Service
(#)
|
Present
Value of
Accumulated
Benefit
($)
|
Payments
During
Last
Fiscal Year
($)
|
|
Stephen
L. Davis
Raymond
P.L. Cannefax
Luis
A. Mostecero
|
None
None
None
|
-
-
-
|
-
-
-
|
-
-
-
|
|
Name
|
Fees
Earned
or
Paid
In
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
($)
|
Total
($)
|
|
Keith
D. Ignotz
Randall
A. Mackey
John
C. Pingree
David
M. Silver, PhD.
|
0
0
0
0
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
-
|
0
0
0
0
|
|
Percentage
of
|
||
|
Name and Address (1)
|
Number of Shares
|
Ownership
|
|
Stephen
L. Davis
|
0
|
*
|
|
Dr.
David M. Silver(2)
|
7,612
|
*
|
|
Randall
A. Mackey (2)
|
7,250
|
*
|
|
Keith
D. Ignotz (2)
|
5,257
|
*
|
|
John
C. Pingree (2)
|
4,315
|
*
|
|
Executive
officers and directors
|
||
|
as
a group (five persons)
|
24,434
|
*
|
|
(1)
|
Unless
otherwise indicated, the address of each listed stockholder is c/o
Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake City,
Utah, 84119.
|
|
(2)
|
The
amounts shown include shares that may be acquired currently, or within 60
days after March 31, 2009 through the exercise of stock options are
follows: Dr. Silver, 7,250 shares; Mr. Mackey, 7,250 shares; Mr. Ignotz,
5,259 shares; and Mr. Pingree, 2,750
shares.
|
|
Exhibit
|
|
|
No.
|
Document Description
|
|
2.1
|
Amended
Agreement and Plan of Merger between Paradigm Medical Industries, Inc., a
California corporation and Paradigm Medical Industries, Inc., a Delaware
corporation(1)
|
|
3.1
|
Certificate
of Incorporation(l)
|
|
3.2
|
Amended
Certificate of Incorporation
|
|
3.3
|
Bylaws(1)
|
|
4.1
|
Specimen
Common Stock Certificate (2)
|
|
4.2
|
Specimen
Series C Convertible Preferred Stock Certificate(3)
|
|
4.3
|
Certificate
of the Designations, Powers, Preferences and Rights of the Series C
Convertible Preferred Stock(3)
|
|
4.4
|
Specimen
Series D Convertible Preferred Stock Certificate (4)
|
|
4.5
|
Certificate
of the Designations, Powers, Preferences and Rights of the Series D
Convertible Preferred Stock (5)
|
|
4.6
|
Certificate
of Designations, Powers, Preferences and Rights of the Series G
Convertible Preferred Stock (6)
|
|
10.1
|
Exclusive
Patent License Agreement with PhotoMed(1)
|
|
10.2
|
1995
Stock Option Plan (1)
|
|
10.3
|
April
2005 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II,
LLP (the "Purchasers")(7)
|
|
10.4
|
Form
of Convertible Note with each Purchaser(7)
|
|
10.5
|
Form
of Stock Purchase Warrant with each Purchaser(7)
|
|
10.6
|
Security
Agreement with Purchasers(7)
|
|
10.7
|
Intellectual
Property Security Agreement with Purchasers(7)
|
|
10.8
|
Registration
Rights Agreement with Purchasers(7)
|
|
10.9
|
Employment
Agreement with Raymond P.L. Cannefax(8)
|
|
10.10
|
February
2006 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II,
LLP(9)
|
|
10.11
|
Form
of Callable Secured Convertible Note with each
Purchaser(9)
|
|
10.12
|
Form
of Stock Purchase Warrant with each Purchaser(9)
|
|
10.13
|
Security
Agreement with Purchasers(9)
|
|
10.14
|
Intellectual
Property Security Agreement with Purchasers(9)
|
|
10.15
|
Registration
Rights Agreement with Purchasers(9)
|
|
10.16
|
Settlement
Agreement with Dr. Joseph W. Spadafora (10)
|
|
10.17
|
Worldwide
OEM Agreement with MEDA Co., Ltd.
(11)
|
|
10.18
|
Second
Amendment to the Registration Rights Agreement dated April 27, 2005
(12)
|
|
10.19
|
Second
Amendment to the Registration Rights Agreement dated February 28, 2006
(12)
|
|
10.20
|
June
2007 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners L1,
LLP (13)
|
|
10.21
|
Form
of Convertible Note with each Purchaser (13)
|
|
10.22
|
Form
of Stock Purchase Warrant with each Purchaser (13)
|
|
10.23
|
Security
Agreement with Purchasers (13)
|
|
10.24
|
Intellectual
Property Agreement with Purchasers (13)
|
|
10.25
|
Registration
Rights Agreement with Purchasers (13)
|
|
10.26
|
December
2007 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II,
LLP (14)
|
|
10.27
|
Form
of Convertible Note with each Purchaser (14)
|
|
10.28
|
Form
of Stock Purchase Warrant with each Purchaser (14)
|
|
10.29
|
Security
Agreement with Purchasers (14)
|
|
10.30
|
Intellectual
Property Agreement with Purchasers (14)
|
|
10.31
|
Registration
Rights Agreement with Purchasers (14)
|
|
10.32
|
Agreement
with Equity Source Partners, LLC (15)
|
|
10.33
|
Distribution
Agreement with LACE Elettronica srl (15)
|
|
10.34
|
Letter
of Intent with Fairhills Capital Offshore, LLC
|
|
31.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbane's-Oxley Act of2002
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
|
(1)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on March
19, 1996.
|
|
(2)
|
Incorporated
by reference from Amendment No. 1 to Registration Statement on Form SB-2,
as filed on May 14, 1996.
|
|
(3)
|
Incorporated
by reference from Annual Report on Form 10-KSB, as filed on April 16,
1998.
|
|
(4)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on April
29, 1999.
|
|
(5)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on August 16,
2000.
|
|
(6)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on November 14,
2003.
|
|
(7)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on May 18,
2005.
|
|
(8)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on January 18,
2006.
|
|
(9)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on March 1,
2006.
|
|
(10)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on June
15, 2006.
|
|
(11)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on June 19,
2006.
|
|
(12)
|
Incorporated
by reference from Registration Statement on Form SB-2, as filed on April
16, 2007.
|
|
(13)
|
Incorporated
by reference from Report on Form 10-QSB, as filed on August 17,
2007.
|
|
(14)
|
Incorporated
by reference from Current Report on Form 8-K, as filed on January 7,
2008.
|
|
(15)
|
Incorporated
by reference from Annual Report on Form 10-KSB, as filed on May 16,
2008.
|
|
PARADIGM
MEDICAL INDUSTRIES, INC.
|
||
|
Dated:
April 14, 2009
|
By:
|
/s/ Stephen L. Davis |
|
Stephen
L. Davis
|
||
|
President
|
||
|
Signature
|
Title
|
Date
|
||
| /s/ Stephen L. Davis |
President
and Treasurer
|
April
14, 2009
|
||
|
Stephen
L. Davis
|
(Principal
Executive, Financial
|
|||
|
and Accounting Officer)
|
||||
| /s/ Randall A. Mackey |
Chairman
of the Board and Director
|
April
14, 2009
|
||
|
Randall
A. Mackey
|
||||
| /s/ David M. Silver, Ph.D. |
Director
|
April
14, 2009
|
||
|
David
M. Silver, Ph.D.
|
||||
| /s/ Keith D. Ignotz |
Director
|
April
14, 2009
|
||
|
Keith
D. Ignotz
|
||||
| /s/ John C. Pingree |
Director
|
April
14, 2009
|
||
|
John
C. Pingree
|
1 Year Paradigm Medical Industr... (CE) Chart |
1 Month Paradigm Medical Industr... (CE) Chart |
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