UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
AMENDMENT NO. 3 TO FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997 Commission File
Number: 0-28498
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Exact Name of Registrant
DELAWARE 87-0459536
- ------------------------------- ---------------
(State or other jurisdiction IRS Identification
of incorporation or organization) Number
1772 West 2300 South, Salt Lake City, Utah 84119
- ------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including Area Code (801) 977-8970
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ------
State the number of shares outstanding of each of the issuer's
classes of common equity as of the close of the period covered by
this report.
Class A Common Stock, $.001 par value 3,735,723
- ------------------------------------- ----------------
Title of Class Number of Shares
Outstanding as of
June 30, 1997
Series A Preferred, $.001 par value 71,884
- ----------------------------------- -----------------
Title of Class Number of Shares
Outstanding as of
June 30, 1997
Series B Preferred, $.001 par value 62,335
- ------------------------------------ ----------------
Title of Class Number of Shares
Outstanding as of
June 30, 1997
Transitional Small Business Disclosure Format
YES NO X
----- -----
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
AMENDMENT NO. 3 TO FORM 10-QSB
QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
No.
----
Item 1. Financial Statements
Balance Sheets (unaudited) - June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Statements of Operations (unaudited) for the six months
ended June 30, 1997 and June 30, 1996 and for the
three months ended June 30, 1997 and June 30, 1996 . . 5
Statements of Cash Flows (unaudited) for the six months
ended June 30, 1997 and June 30, 1996 . . . . . . . . 6
Notes to Financial Statements (unaudited). . . . . 7 to 8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . 9 to 11
PART II - OTHER INFORMATION
Other Information. . . . . . . . . . . . . . . . . . 11
Signature Page . . . . . . . . . . . . . . . . . . . 12
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 474,766 $ 2,468,988
Restricted cash 715,464
Marketable debt securities
- restricted 517,817 509,411
Trade accounts receivable 154,106 18,228
Inventories 541,088 241,746
Prepaid expenses 17,418 14,093
------------ -----------
Total current assets 2,240,659 3,252,466
Deferred charges, net 346,524 10,000
Property and equipment, net 126,830 129,494
------------ -----------
Total assets $ 2,894,013 $ 3,391,960
============= ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 24,858 $ 35,767
Accounts payable -
related parties 126,947 -0-
Accrued expenses 132,704 477,473
Note payable to bank -
current 3,445 3,278
Line of credit 980,000 -0-
------------ -----------
Total current liabilities 1,267,954 516,518
Note payable, less
current portion 13,840 15,605
------------ -----------
Total liabilities 1,281,794 532,123
Contingencies (Note 2)
Stockholders' equity:
Preferred stock, Authorized:
5,000,000 $.001 par value shares
Series A, Authorized: 500,000
shares; issued and outstanding:
122,764 $.001 par value shares
at December 31, 1996 and 71,884
$.001 par value shares at
June 30, 1997 (aggregate
liquidation preference of
$287,536 at June 30, 1997) 72 122
Series B, Authorized: 500,000
shares; issued and outstanding:
448,398 $.001 par value shares
at December 31, 1996 and 62,335
$.001 par value shares at June
30, 1997 (aggregate liquidation
preference of $249,340 at June
30, 1997) 62 448
Additional paid-in capital,
preferred stock 157,542 1,900,637
Common stock, Authorized:
20,000,000 shares; issued and
outstanding: 3,194,061 $.001
par value shares at December 31,
1996 and 3,735,723 $.001 par
value shares at June 30, 1997 3,736 3,194
Additional paid-in capital,
common stock 8,068,593 6,261,097
Treasury stock, 2,600 shares,
at cost (3,777) (3,777)
Unearned compensation (25,256) (63,141)
Accumulated deficit (6,606,570) (5,248,412)
Unrealized gain
on marketable debt
securities, available-for-
sale 17,817 9,669
---------- ---------
Total stockholders'
equity 1,612,219 2,859,837
---------- ---------
Total liabilities and
stockholders' equity $ 2,894,013 $ 3,391,960
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
(Unaudited)(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Sales $ 360,407 $145,717 $103,992 $ 122,546
Cost of sales 195,063 83,791 83,043 65,443
Amortization of
deferred charges 24,312 18,564
---------- -------- --------- ---------
Net cost of sales 219,375 83,791 101,607 65,443
Gross profit 141,032 61,926 2,385 57,103
--------- -------- --------- ---------
Gross margin 39% 42% 2% 47%
Operating expenses:
Marketing and
selling 251,752 71,462 139,600 37,425
General and
administrative 775,056 316,770 316,268 176,156
Research and
development 513,914 50,186 119,281 26,351
--------- --------- --------- ---------
Total operating
expenses 1,540,722 438,418 575,149 239,932
---------- --------- --------- ---------
Operating loss $(1,399,690) (376,492) (572,764) (182,829)
Interest income 42,438 4,913 17,963 2,175
Interest expense (906) (41,334) (443) (24,057)
--------- --------- --------- ---------
Total other income
(expense) 41,532 (36,421) 17,520 (21,882)
--------- --------- --------- ---------
Net Loss (1,358,158) (412,913) (555,244) (204,711)
Net loss attributable
to common
shareholders $(1,358,158) $(412,913) $(555,244) $(204,711)
Net loss per common
share $(0.39) $(0.18) $(0.16) $(0.09)
Shares used in
computing net
loss per common
share 3,464,890 2,352,031 3,386,356 2,352,031
</TABLE>
The accompanying notes are an integral
part of the financial statement
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1997 1996
--------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,358,158) $(412,913)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 18,281 9,531
Common stock issued for compensation 60,760 37,885
Amortization of debt offering costs -0- 15,497
Issuance of bridge notes and
warrants for services -0- 25,000
Increase (decrease) from changes in:
Trade accounts receivable (135,878) 14,768
Inventories (299,342) (248)
Prepaid expenses (3,325) 5,567
Deferred public offering costs -0- (80,826)
Accounts payable - related parties (73,053) -0-
Trade accounts payable (10,909) (133,797)
Accrued expenses (144,769) 74,008
-------- -------
Net cash used in
operating activities (1,946,393) (445,528)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (11,216) ( 31,047)
Purchase of marketable debt
securities - available for sale (258) -0-
Purchase of engineering services (340,925) -0-
--------- ---------
Net cash used in investing
activities (352,399) (31,047)
------- -------
Cash flows from financing activities:
Proceeds from issuance of promissory
notes and warrants -0- 500,000
Proceeds from exercise of warrants 41,632 -0-
Principal payments on notes payable (1,598) (11,197)
Proceeds from lines of credit 980,000 -0-
Restricted cash (715,464) -0-
------- -------
Net cash provided by
financing activities 304,570 488,803
------- -------
Net increase (decrease) in cash
and cash equivalents $(1,994,222) $12,228
Cash and cash equivalents
at beginning of period $2,468,988 $192,454
--------- -------
Cash and cash equivalents
at end of period $ 474,766 $204,682
=========== ========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 906 $ 4,164
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Significant Accounting Policies:
-------------------------------
In the opinion of management, the accompanying financial
statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial
position of Paradigm Medical Industries, Inc. (the Company) as of
December 31, 1996 and June 30, 1997, and the results of its
operations for the six months ended June 30, 1996 and 1997, and
its cash flows for the six months ended June 30, 1996 and 1997.
The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full
year period.
Net Loss Per Share
- ------------------
Net loss per common share is computed on the weighted
average number of common and common equivalent shares outstanding
during each period. Common stock equivalents consist of
convertible preferred stock, common stock options and warrants.
Common equivalent shares are excluded from the computation when
their effect is anti-dilutive. Other common stock equivalents
have not been included in loss years because they are
anti-dilutive.
2. Legal Proceedings:
------------------
On March 31, 1995, the Company entered into an agreement
with an investment banking company to obtain capitalization
through a public offering. The agreement was deemed terminated
if the required capitalization was not obtained by December 31,
1995. In a complaint filed in November 1996, the investment
banking company and its principal officer requested
356,780 shares of the Company's common stock, along with monthly
payments of $3,000 for three years, as compensation under the
agreement. Shortly after the filing of the complaint, the
principal officer of the investment banking company passed away.
His estate was substituted as a plaintiff party. On May 9,
1997, the Company entered into an agreement with the principal
officer's estate to settle the action by the Company paying the
estate an initial payment of $5,000, plus $1,500 per month for 36
months in return for dismissal of the action with prejudice and
release of all claims. The settlement date was June 6, 1997.
Amounts payable under this settlement are included in accrued
expenses in the accompanying balance sheet.
3. Preferred Stock Conversions:
----------------------------
Under the Company's Articles of Incorporation, holders of
the Company's preferred stock have the right to convert such
stock into shares of the Company's common stock at the rate of
1.2 shares of common stock for each share of preferred stock.
During the six month period ended June 30, 1997, 44,520 shares
of Series A Preferred Stock and 386,063 shares of Series B
Preferred Stock were converted into 53,424 and 463,275 shares of
the Company's common stock, respectively.
4. Common Stock Issuances
---------------------
As of June 30, 1997, 12,500 shares of the Company's
common stock had been issued for the exercise of warrants. An
additional 6,098 shares of the Company's common stock was issued
to a former employee for past services rendered and recorded as
compensation expense.
5. Related Party Transactions:
--------------------------
On January 8, 1997, the Company subcontracted the
subassembly of the Laser Module piece of the Photon(trademark)
laser cataract system. During the six month period ended June
30, 1997, the Company purchased 10 Laser Module subassemblies for
a total purchase price of $160,000, from a manufacturer whose
President was a member of the Company's Board of Directors, and
as of June 30, 1997 owed that company $64,000 which is included
in accounts payable.
The Company has subcontracted the manufacturing of its
Precisionist and Photon laser cataract systems to a company that
is a shareholder. During the six month period ended June 30,
1997, the Company purchased design and manufacturing services
from that company in the amount of $983,844, and as of June 30,
1997 owed that company $64,000 which is included in accounts
payable.
In 1988, the Company signed an exclusive patent license
agreement with a company which owns the patent for the
laser-based Photon(trademark) laser system. This company is
owned by a shareholder of the Company. The agreement provides
for the payment of a 1% royalty on all sales proceeds related
directly or indirectly, to the Photon machine. The agreement
terminates on July 7, 2003. Through September 30, 1996, no
significant royalties have been earned under this agreement. The
Company has also entered into a consulting agreement with this
individual which provides for annual consulting fees of $25,000
through July 7, 2003.
A law firm, of which a director of the Company is a
partner, has rendered legal services to the Company. During the
six month period ended June 30, 1997, the Company paid this
firm $12,558 for legal services, and as of June 30, 1997, owed
this firm $40,701, which is included in accounts payable.
6. Lines of Credit:
---------------
In May 1997, the Company established a $630,000 line of
credit with a financial institution which bears interest at 2.4%
above the 30-day commercial paper rate (5.6% at June 30, 1997).
Interest is due monthly with principal due June 30, 1998. The
line of credit is collateralized by cash and investments held by
the institution. At June 30, 1997, the Company has $630,000 in
outstanding borrowings on the line.
Subsequent to June 30, 1997, both lines of credit were paid
off from restricted cash and investments.
Also, in May 1997, the Company established a $350,000 line
of credit with a financial institution which bears interest at
.25% above the Broker's Daily Call Money Rate as quoted by Bear
Sterns. Interest is due monthly with principal due June 30,
1998. the line of credit is collateralized by cash and
investments held by the institution. At June 30, 1997, the
Company has $350,000 in outstanding borrowings on the line.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and results of Operations contains forward
looking statements which involve risks and uncertainties. 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 runs from January 1 to and including December 31.
General
The Company is engaged in the development, manufacture and
sale of ophthalmic surgical devices designed to perform minimally
invasive cataract removal surgery. Paradigm's activities for the
six months ended June 30, 1996 include international and
domestic sales of the Precisionist 3000 Plus(trademark) Phaco
system, research and developments of the Precisionist
ThirtyThousand(trademark) and the Photon(trademark) laser
cataract system, and primary research for other new products and
businesses. Paradigm's activities for the six months ended June
30, 1997 include international and domestic sales of the
Precisionist 3000 Plus(trademark) and Precisionist
ThirtyThousand(trademark) and Photon(trademark) laser cataract
systems, as well as primary research for other new products and
businesses.
Results of Operations
Sales increased by $214,690, or 149%, to $360,407 for the
six months ended June 30, 1997 from $145,717 for the comparable
period in 1996. Sales of product in the surgical equipment
market are contingent upon customer evaluation. Based on the
evaluation of the products shipped in the initial new product
launch, 5 units were returned during the quarter ended June 30,
1997, and certain software and hardware revisions were identified
and corrected. The increase in sales was a result of the Company
launching the Photon Ocular Surgery System(trademark) and the
Precisionist ThirtyThousand(trademark), the latest generation of
Paradigm products on March 31, 1997.
Cost of sales and amortization of deferred charges
increased $135,584, or 162%, to $219,375 for the six months ended
June 30, 1997 from $83,791 for the comparable period in 1996, as
a result of the increased sales. The gross margin for the six
months ended June 30, 1997 of 39% was less than the gross margin
for the comparable period in 1996 of 42% principally due to the
amortization of deferred charges.
Marketing and selling expenses increased by $180,290, or
252%, to $251,752 for the six months ended June 30, 1997 from
$71,462 for the comparable period in 1996. The increase was a
result of the Company adding two additional sales representatives
and increasing promotional activities in anticipation of the
launching the Photon Ocular Surgery System and the Precisionist
ThirtyThousand during the first quarter of 1997, and the
resulting service expenses associated with installing identified
software and hardware revisions.
General and administrative expenses increased by $458,286,
or 145%, to $775,056 for the six months ended June 30, 1997
from $316,770 for the comparable period in 1996. This was the
result of an increase in personnel and costs associated with
pre-production and new product launch activities.
Research and development expenses increased by $463,728, or
924%, to $513,914 for the six months ended June 30, 1997 from
$50,186 for the comparable period in 1996. This was the result
of hiring four additional employees and costs associated with
developing the Company's new products.
Upgrades
To garner sales, the Company offers the ultrasonic
Precisionist(trademark) system with an unconditional arrangement
under which the customer may trade in their
Precisionist(trademark) system to upgrade to a Precisionist
ThirtyThousand(trademark) Ocular Surgery System(trademark) or,
upon FDA clearance, a Photon(trademark) laser cataract system
when that system becomes available. Under this arrangement, the
customer receives full credit for the trade in purchase price of
the Precisionist(trademark) system against the price of the new
Precisionist ThirtyThousand(trademark) Ocular Surgery
System(trademark) or Photon(trademark) laser cataract system As
of June 30, 1997, the Company has distributed approximately 51
Precisionist(trademark) systems under this provision. The gross
margin on these original sales was approximately $295,000 or 32%.
If all of these customers were to exercise their upgrade
privilege, the Company would exchange the Precisionist(trademark)
system for the Company's new Precisionist
ThirtyThousand(trademark) Ocular Surgery System(trademark) or
Photon(trademark) system and refurbish the ultrasonic
Precisionist(trademark) systems and sell them in the
international market. Any losses on the sale of the refurbished
Precisionist(trademark) systems, which is not expected to be
significant, would reduce the gross margin on the Precisionist
ThirtyThousand(trademark) Ocular Surgery System(trademark) or
Photon(trademark) system sales. The total gross margin on the
upgrade sales is estimated to be $1,677,000 or 41%. As of June
30, 1997, there have been 2 trade in sales in which the customer
has upgraded a Precisionist(trademark) system to the Precisionist
ThirtyThousand(trademark) Ocular Surgery System(trademark).
Liquidity and Capital Resources
The Company used cash in operating activities of $1,946,393
for the six months ended June 30, 1997 compared to $445,528
for the comparable period in 1996. The Company used cash in
investing activities of $352,399 for the six months ended June
31, 1997 compared to $31,047 for the comparable period in 1996.
The investing activities for six months ended June 30, 1997
included $11,266 used for the purchase of property and equipment
and $340,925 in connection with the purchase of engineering
services. The Company received cash from financing activities of
$304,570 for the six months ended June 30, 1997 compared to
$488,803 in the comparable period in 1996. The financing
activities for the six months ended June 30, 1997 included
$980,000 from the Company's line of credit and $41,632 in
proceeds from the exercise of warrants. These amounts were
offset by $715,464 in cash which was restricted to secure the
lines of credit.
The Company has borrowed the total amount of a $636,000
line of credit with Merrill Lynch and a $350,000 line of credit
with Bear Stearns for accounts receivable and inventory financing.
The Company may seek funding to meet its working capital
requirements through collaborative arrangements and strategic
alliances, additional public offerings and/or private placements
of its securities, or bank borrowings. There can be no
assurance, however, that additional funds, if required, will be
available from any of the foregoing or other sources on favorable
terms, if at all.
At June 30, 1997, the Company had net operating loss
carryforwards (NOLs) of approximately $6,606,570 and research and
development tax credit carryforwards of approximately $47,700.
These carryforwards are available to offset future taxable
income, if any, and expire in the years 2005 through 2011.
Because the Company has yet to recognize significant revenue from
the sale of its Photon(trademark) laser cataract system, a 100%
valuation allowance has been provided for these deferred
tax assets. The Company's ability to use its NOLs to offset
future income taxes may be subject to restrictions enacted in the
United States Internal Revenue Code of 1986, as amended. These
restrictions could limit the Company's future use of its NOLs if
there is a cumulative ownership change of more than 50%, which
would include the changes of ownership related to any public
offering.
Effect of Inflation and Foreign Currency Exchange
The Company has not realized a reduction in the selling
price of the Precisionist phaco system as a result of domestic
inflation. Nor has the Company experienced unfavorable profit
reductions due to currency exchange fluctuations or inflation
with its foreign customers.
Impact of New Accounting Pronouncements
The Company intends to adopt the disclosure approach
provided for in Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation, with
respect to options and warrants granted to employees. Because
the Company has only a minimal investment in long-lived assets,
the adoption of SFAS 121, Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of, and which will occur October
1, 1996, is not expected to have an impact on the Company.
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share. This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies
to entitles with publicly held common stock or potential common
stock. This statement simplifies the standards for computing EPS
and makes them comparable to international EPS standards. This
statement is effective for financial statements for both interim
and annual periods ending after December 15, 1997.
The Company has reviewed all other recently issued, but not
yet adopted, accounting standards in order to determine their
effects, if any, on the results of operations or financial
position of the Company. Based on that review, the Company
believes that none of these pronouncements will have a
significant effect on current or future earnings or operations.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Restated Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
REGISTRANT
PARADIGM MEDICAL INDUSTRIES, INC.
---------------------------------
Registrant
DATED: October 29, 1997 By:Michael W. Stelzer
President and Chief
Executive Officer
(Principal Executive
Officer)
DATED: October 29, 1997 By:John W. Hemmer
Treasurer and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET OF PARADIGM MEDICAL INDUSTRIES, INC. AS OF JUNE 30,
1997, AND THE RELATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 474,766
<SECURITIES> 517,817
<RECEIVABLES> 154,106
<ALLOWANCES> 0
<INVENTORY> 541,088
<CURRENT-ASSETS> 2,420,659
<PP&E> 145,111
<DEPRECIATION> (18,281)
<TOTAL-ASSETS> 2,894,013
<CURRENT-LIABILITIES> 1,267,954
<BONDS> 0
0
134
<COMMON> 3,736
<OTHER-SE> (6,617,786)
<TOTAL-LIABILITY-AND-EQUITY> 2,894,013
<SALES> 360,407
<TOTAL-REVENUES> 402,845
<CGS> 195,063
<TOTAL-COSTS> 1,540,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (906)
<INCOME-PRETAX> (1,358,158)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,358,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,358,158)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
