UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999 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
1127 West 2320 South, Suite A, 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.
Common Stock, $.001 par value 7,123,317
- ----------------------------- ---------
Title of Class Number of Shares
Outstanding as of
June 30, 1999
Series A Preferred, $.001 par value 8,077
- ----------------------------------- ---------
Title of Class Number of Shares
Outstanding as of
June 30, 1999
Series B Preferred, $.001 par value 31,236
- ------------------------------------ ---------
Title of Class Number of Shares
Outstanding as of
June 30, 1999
Series C Preferred, $.001 par value 500
- ------------------------------------ ---------
Title of Class Number of Shares
Outstanding as of
June 30, 1999
Series D Preferred, $.001 par value 323,644
- ----------------------------------- ---------
Number of Shares
Outstanding as of
June 30, 1999
Transitional Small Business Disclosure Format
YES NO X
---- ----
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PARADIGM MEDICAL INDUSTRIES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
No.
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<S> <C>
Item 1. Financial Statements
- -------
Balance Sheets (unaudited) - June 30, 1999 and
December 31, 1998....................................................................................... 3
Statements of Operations (unaudited) for the three months and the six months
ended June 30, 1999 and June 30, 1998 .................................................................. 5
Statements of Cash Flows (unaudited) for the six months
ended June 30, 1999 and June 30, 1998................................................................... 6
Notes to Financial Statements (unaudited)................................................................7
Item 2.
- -------
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................................................. 10
PART II - OTHER INFORMATION
Other Information...................................................................................... 13
Signature Page......................................................................................... 16
</TABLE>
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PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 661,000 $ 114,000
Restricted cash 495,000 -
Trade accounts receivable 1,204,000 580,000
Less: Allowance for Doubtful Accounts (30,000) (30,000)
Inventories 1,089,000 720,000
Current portion of note receivable 17,000 16,000
Prepaid expenses 61,000 14,000
------------- -------------
Total current assets 3,497,000 1,414,000
Capitalized engineering and design charges 203,000 235,000
Notes receivable 42,000 44,000
Ultrasound production rights and engineering 368,000 374,000
Property and equipment, net 272,000 173,000
------------- -------------
Total assets $ 4,382,000 $ 2,240,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 371,000 $ 209,000
Accounts payable - related parties 107,000 107,000
Accrued expenses 146,000 135,000
Note payable to bank - current 14,000 13,000
Purchase Deposits 35,000 28,000
------------- -------------
Total current liabilities 673,000 492,000
------------- -------------
Note payable, less current portion 6,000 8,000
Promissory note 100,000 -
Capital lease 19,000 25,000
------------- -------------
Total liabilities 798,000 525,000
------------- -------------
Stockholders' equity:
Preferred stock, authorized:
5,000,000 shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 8,077 shares at June 30, 1999 and
34,619 shares at December 31, 1998 - -
Series B
Authorized: 500,000 shares; issued and
outstanding: 31,236 shares at June 30, 1999
and 31,236 shares at December 31, 1998 - -
Series C
Authorized: 30,000 shares; issued and
outstanding: 500 shares at June 30, 1999
and 6,900 shares at December 31, 1998 - -
Series D
Authorized: 1,140,000 shares;
</TABLE>
3
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<TABLE>
<CAPTION>
<S> <C> <C>
Issued and outstanding: 323,644 shares at
June 30, 1999 and 0 shares at December 31, 1998 - -
Common stock, authorized: 20,000,000 shares, $.001 per value;
issued and outstanding: 7,123,317 shares at June 30, 1999
and 5,500,306 shares at December 31, 1998 7,000 5,000
Additional paid-in-capital 21,041,000 17,704,000
Treasury stock, 2,600 shares, at cost (4,000) (4,000)
Stock subscription receivable (8,000) (8,000)
Unearned Compensation - (94,000)
Accumulated deficit (17,452,000) (15,888,000)
------------- -------------
Total stockholders' equity 3,584,000 1,715,000
------------- -------------
Total liabilities and stockholders' equity $ 4,382,000 $ 2,240,000
============= =============
</TABLE>
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PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 1,011,000 $ 626,000 $ 1,109,000 $ 978,000
----------- ---------- ------------ -----------
Cost of sales 346,000 300,000 377,000 478,000
Amortization of capitalized engineering and
and design charges 19,000 19,000 37,000 37,000
Amortization of Ultrasound Production Rights 6,000 - 6,000 -
----------- ---------- ------------ -----------
Net cost of sales 371,000 319,000 420,000 515,000
----------- ---------- ------------ -----------
Gross profit 640,000 307,000 689,000 463,000
----------- ---------- ------------ -----------
Operating expenses:
Marketing and selling 199,000 201,000 401,000 359,000
General and administrative 277,000 298,000 748,000 632,000
Research and development 134,000 163,000 240,000 226,000
----------- ---------- ------------ -----------
Total operating expenses 610,000 (662,000) 1,389,000 1,217,000
----------- ---------- ------------ -----------
Operating income (loss) 30,000 (355,000) (700,000) (754,000)
----------- ---------- ------------ -----------
Other income (expense):
Interest income 10,000 33,000 18,000 44,000
Interest expense (5,000) (5,000) (10,000) (30,000)
Other expense (1,000) - (1,000) -
----------- ---------- ------------ -----------
Total other income 4,000 28,000 7,000 14,000
----------- ---------- ------------ -----------
Net income (loss) $ 34,000 $ (327,000) $ (693,000) $ (740,000)
----------- ---------- ------------ -----------
Net income (loss) per common share - basic and
diluted $ 0.00 $ (0.08) $ (0.11) $ (0.19)
=========== ========== ============ ===========
Weighted average outstanding shares - basic and
diluted 6,815,000 3,876,000 6,260,000 3,850,000
=========== ========== ============ ===========
</TABLE>
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PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (693,000) $ (740,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 63,000 52,000
Issuance of common stock for compensation, services and
payables 154,000 8,000
(Increase) decrease from changes in:
Trade accounts receivable (624,000) (518,000)
Inventories (369,000) (59,000)
Prepaid expenses (47,000) (20,000)
Debt financing cost - 165,000
Increase (decrease) from changes in:
Trade accounts payable 162,000 (211,000)
Trade accounts payable - related parties - (397,000)
Accrued expenses and deposits 18,000 18,000
------------ ------------
Net cash used in operating activities (1,336,000) (1,702,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (124,000) (4,000)
Proceeds from sale of stock 21,000 -
------------ ------------
Net cash used in investing activities (103,000) (4,000)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of warrants 242,000 -
Proceeds from 12% CV promissory note 100,000 -
Principle payments on notes payable (7,000) (2,000)
Net proceeds for series "C" stock issue - 1,747,000
Net proceeds for series "D" stock issue 1,651,000 399,000
Sale of Common stock 495,000 -
------------ ------------
Net cash provided by financing activities 2,481,000 2,144,000
------------ ------------
Net increase in cash and cash equivalents 1,042,000 438,000
Cash and cash equivalents at beginning of period 114,000 887,000
------------ ------------
Cash and cash equivalents at end of period $ 1,156,000 $ 1,325,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,000 $ 28,000
</TABLE>
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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 June 30, 1999 and the results of
its operations for the three months ended June 30, 1998 and 1999, and
its cash flows for the six months ended June 30, 1998 and 1999. The
results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year period.
Net Income (Loss) Per Share
---------------------------
Net income (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:
------------------
The company is not a party to any legal proceedings.
3. Preferred Stock Conversions:
----------------------------
Under the Company's Articles of Incorporation, holders of the Company's
Class A and Class B Preferred Stock have the right to convert such
stock into shares of the Company's common stock at the rate of 1.2
shares of common stock for each share of preferred stock. During the
three month period ended June 30, 1999 no shares of Series A Preferred
Stock or Series B Preferred Stock were converted into common stock.
In January 1998, the Company's Board of Directors authorized the
issuance of a total of 30,000 shares of non-voting Series C Preferred
Stock, $.001 par value, $100 stated value. Each share is convertible
into approximately 57.14 shares of common stock at an initial
conversion price, subject to adjustments for stock splits, stock
dividends and certain combinations or recapitalizations of the Common
stock, equal to $1.75 per share of common stock. Holders of the shares
of Series C Preferred stock are entitled to 12% non-cumulative
dividends. However, the shares shall be entitled to dividends declared
on the Company's common stock on an as-converted basis.
In March 1998, the Company closed a private placement of Series C
Preferred Stock, selling 20,030 shares at a price of $100 per share.
The net proceeds to the Company from the private placement were
approximately $1.7 million.
In January 1998, the Company offered to the holders of the Notes,
through an exchange offer, the right to exchange their Notes for shares
of Series C Preferred Stock. In March 1998, Notes totaling $995,000
were exchanged for 9,950 shares of Series C Preferred Stock, at $100
per share, totaling $995,000. The exchange offer has now expired.
In September 1998, the Company filed a registration statement with the
Securities and Exchange Commission on Form SB-2 under the Securities
Act of 1933, registering for resale the common shares underlying the
Series C Preferred Stock issue.
7
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During the three months ended June 30, 1999, 900 shares of Series C
Preferred stock were converted into 51,426 shares of the Company's
Common stock.
In January 1999, the Company's Board of Directors authorized the
issuance of a total of 1,140,000 shares of non-voting Series D
Preferred Stock, $.001 par value per share, $1.75 stated value. Each
share initially is convertible into one share of Common Stock. Each
share which remains outstanding on January 1, 2002, shall be
automatically converted into one share of Common Stock. Holders of the
shares of Series D Preferred Stock are entitled to 10% non-cumulative
dividends.
In March 1999, the Company closed a private placement of Series D
Preferred Stock, selling 1,140,000 shares at a price of $1.75 per
share. The net proceeds to the Company from the private placement were
approximately $1.6 million.
During the three months ended June 30, 1999, 816,356 shares Series D
Preferred stock were converted to 816,356 shares of the Company's
Common stock.
In June 1999, the Company sold 199,908 shares Common stock at a price
of $2.75 per share. Net proceeds to the Company were approximately
$495,000.
5. Warrants:
---------
In connection with the private placement of Series C Preferred Stock,
the Company issued to Win Capital a warrant to purchase 100,000 shares
of the Company's common stock at a price of $3.00 per share, expiring
March, 2001. The Company has recorded the fair value of the warrant at
$336,000, which is being recognized as a cost of raising the capital in
the private placement.
In March 1999, in connection with the private placement of Series D
Preferred Stock, the Company issued to KSH Investment Group warrants to
purchase 208,000 shares Common Stock at an average price of $2.41 per
share, expiring February, 2004. The Company recorded the fair value of
the warrant at $361,580, which is being recognized as a cost of raising
the capital in the private placement. Also in connection with the
private placement, the Company issued 105,000 warrants to CynDel & Co.
and 35,000 warrants to Win Capital Corp., exercisable at $2.30 per
share, expiring January, 2004. The Company has recorded the fair value
of these warrants at $229,600, which is being recognized as a cost of
raising the capital in the private placement.
In March, 1999, the Company issued a warrant to an officer of the
Company to purchase 125,000 shares of the Company's Common Stock at a
price of $2.63 per share, expiring March, 2004, in connection with his
retirement agreement.
In June 1999 CynDel & Co. exercised 105,000 warrants at $2.30 per
share. Net proceeds to the Company were $241,500.
6. Related Party Transactions:
----------------------------
The Company has subcontracted the manufacturing of its Precisionist
ThirtyThousand and Photon laser cataract systems to a company that is a
shareholder. As of June 30, 1999, the Company owed that company
$106,878, which is included in accounts payable.
In August, 1997, the Company entered into an investment banking
agreement with Win Capital Corp. (Win Capital) for a two-year period
that may be extended for an additional year. The Company pays a
retainer to Win Capital of $2,000 per month for the first six months,
$4,000 per month for the second six months, and $6,000 per month for
the remainder of the contract. The Company also issued a warrant to Win
Capital to purchase up to 191,000 shares of common stock at a purchase
8
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price of $3.00 per share. The warrant expires on August 19, 2000. On
February 12, 1999, Win Capital agreed to accept 24,200 shares Common
Stock at $2.50 per share for the balance of the contract. A new
consulting agreement replaced the prior agreement which provides for
twelve months payments at $6,000 per month.
On May 6, 1999, the Company's Board of Directors authorized an
agreement to be entered into with John W. Hemmer, Vice President of
Finance, Treasurer and Chief Financial Officer of the Company,
regarding the remaining term of his Employment Agreement and the Change
of Control Agreement. Under the terms of the proposed agreement, Mr.
Hemmer's salary continued until June 1, 1999, at which time his
employment with the Company terminated. Thereafter, Mr. Hemmer became
an independent consultant to the Company and received an initial
payment of $12,500 with annual payments of $25,000 being paid on
January 2000 and each subsequent year for two additional years and the
final payment in year number four in the amount of $12,500, for a total
consulting contract payment of $100,000. In addition, the Company
issued Warrants to Mr. Hemmer to purchase 125,000 shares of Common
stock at an exercise price of $2.63 per share, with the underlying
Common stock to be registered in the Company's May 9, 1999 registration
statement. Finally, the Company is to issue Warrants to Mr. Hemmer to
purchase 75,000 shares of Common stock at the same exercise price as
the Class A Warrants, or $7.50 per share. In consideration for the
payments under the consulting contract and the Warrants to be issued to
Mr. Hemmer, the Employment Agreement and the Change of Control
Agreement with Mr. Hemmer was canceled as of June 1, 1999.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
General
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.
We are engaged in the design, development, manufacture and sale of high
technology eye care products. Our surgical equipment is designed to perform
minimally invasive cataract surgery and is comprised of surgical devices and
related instruments and accessories, including disposable products. Our
ultrasound diagnostic products include a pachymeter, an A-Scan, an A/B Scan and
a biomicroscope, the technology for which we acquired from Humphrey Systems in
1998. In addition, we market our Blood Flow Analyzer. Our activities for the
three months ended June 30, 1999, included domestic and international sales of
the Precisionist ThirtyThousand Ocular Surgery Workstation cataract surgery
systems, the Blood Flow Analyzer, the Humphrey Systems Ultrasound diagnostic
equipment, and research and development on the Photon laser cataract removal
system, which received FDA approval for expansion to Phase II Clinical Trials on
May 19, 1998.
We commenced delivery of the Pachymetric Analyzer, which measures
corneal thickness, in December 1998, and the Ultrasound A-Scan, which measures
the axial length of the eye, in March 1999. We began shipments of the Ultrasound
A/B Scan, which is used by retinal specialists to identify foreign bodies in the
posterior chamber of the eye and in evaluating the structural integrity of the
retina, in June 1999. We also commenced shipments of the Ultrasonic
Biomicroscope ("UBM"), which creates a high-resolution computer image of the
unseen parts of the eye providing a map for the glaucoma surgeon, in June 1999.
In summary, all four instruments were in production in the second quarter of
1999.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Sales increased by $385,000, or 62%, to $1,011,000 for the three months
ended June 30, 1999, from $626,000 for the comparable period in 1998. This
increase in sales was primarily due to shipments of A/B Scans and UBMs during
the second quarter of 1999. Net cost of sales increased $52,000, or 16%, to
$371,000 for the three months ended June 30, 1999, from $319,000 for the
comparable period in 1998,
The gross margin for the three months ended June 30, 1999 of 63% was
higher than the gross margin of 49% for the comparable period in 1998. The
increase in the gross margin in the second quarter of 1999 over the second
quarter of 1998 is primarily attributable to a higher percentage of the sales
mix attributable to Ultrasound products. If the amortization of capitalized
engineering and design charges and Ultrasound production rights, non-cash
expenses, are excluded for the three months ended June 30, 1999 and the same
period in 1998, the gross margin was 66% and 52%, respectively.
Marketing and selling expenses decreased by $2,000, or 1%, to $199,000
for the three months ended June 30, 1999, from $201,000 for the comparable
period in 1998. Marketing and selling expense for second quarter 1999 did not
change significantly in spite of the marked increase in sales. This is because
the high sales in second quarter were the result of pent-up demand for the
Ultrasound products, which commenced shipment during this time. Marketing
dollars which had been spent previously on the Blood Flow Analyzer were shifted
to the Ultrasound diagnostic products.
10
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General and administrative expenses decreased $21,000, or 7%, to
$277,000 for the three months ended June 30, 1999, from $298,000 for the
comparable period in 1998. This decrease was primarily due to the engagement of
Tanner + Company for a second audit in the second quarter of 1998 pertaining to
the 1996 and 1997 fiscal and calendar years.
Research and development expenses decreased $29,000, or 18%, to
$134,000 for the three months ended June 30, 1999, from $163,000 for the same
period in 1998. This decrease was primarily the result of lower consulting fees
with regard to the Photon clinical study.
Other income decreased $24,000, or 86 %, for the quarter ended June 30,
1999 compared with the same period in 1998. This was primarily due to interest
income received from various investment instruments held in second quarter 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Sales increased by $131,000, or 13%, to $1,109,000 for the six months
ended June 30, 1999, from $978,000 for the same period in 1998. The lower
percentage increase in sales for the six month period versus the three month
period is attributable to the Precisionist systems and Photon upgrades shipped
in second quarter of 1998 pertaining to the Phase II Clinical trials. Increased
sales for the six month period in 1999 is the result of shipments of Ultrasound
diagnostic equipment.
The gross margin for the six months ended June 30, 1999, of 62%, is
higher than the gross margin for the comparable period in 1998, of 47%, due to
the higher percentage of Ultrasound diagnostic sales in 1999. If the
amortization of capitalized engineering and design charges and Ultrasound
production rights, non-cash expenses, are excluded for the first six months in
1999 and the same period in 1998, the gross margin was 66% and 51% respectively.
Marketing and selling expenses increased by $42,000, or 12%, to
$401,000 for the six months ended June 30, 1999, from $359,000 for the same
period in 1998. This is primarily due to the higher number of sales personnel in
the first six months of 1999.
General and administrative expenses increased by $116,000, or 18%, to
$748,000 for the six months ended June 30, 1999, from $632,000 for the parallel
period in 1998. This is primarily due to the expensing of vested stock
compensation for services of an officer and director of the Company in first
quarter 1999, and satisfaction of an investment banking agreement with
WinCapital Corp via a stock transaction in February 1999.
Research and development expenses increased by $14,000, or 6% to
$240,000 for the six months ended June 30, 1999, from $226,000 for the same
period in 1998. This is due to the increase in engineering and technician staff
in the first six months of 1999.
Upgrades
To garner sales, we offer the ultrasonic Precisionist system with an
unconditional arrangement under which the customer may trade in its Precisionist
system to upgrade to a Precisionist ThirtyThousand Ocular Surgery System. Under
this arrangement, the customer receives full credit for the trade-in purchase
price of the Precisionist system against the price of the new Precisionist
ThirtyThousand Ocular Surgery System. As of June 30, 1999, we had distributed
approximately 51 Precisionist 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, we would exchange the
Precisionist system for our new Precisionist ThirtyThousand Ocular Surgery
System and refurbish the ultrasonic Precisionist system and sell them in the
international market. Any losses on the sale of the refurbished Precisionist
systems, which are not expected to be significant, would reduce the gross margin
on the Precisionist ThirtyThousand Ocular Surgery System sales. The total gross
margin on the upgrade sales is estimated to be $1,677,000, or 41%. During the
quarter ended June 30, 1999 there were no trade-in sales. There were, in the
11
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quarter ended June 30,1998 two trade-in sales totaling $76,000, in which the
customer upgraded a Precisionist system to a Precisionist ThirtyThousand Ocular
Surgery Workstation, or Photon.
Liquidity and Capital Resources
The Company used cash in operating activities of $1,336,000 for the
six months ended June 30, 1999, compared to $1,702,000 for the six months ended
June 30, 1998. The decrease in cash used by operating activities for the first
six months of 1999 is primarily attributable to the issuance of common stock
valued at $154,000 for compensation and services, and the increase in accounts
payable relative to the purchase of inventory for the production of Ultrasound
diagnostic products. The Company used cash from investing activities of $103,000
for the six months ended June 30, 1999, compared to $4,000 in the same quarter
in 1998. The increase in cash used in investing activities in 1999 is the result
of purchases of production and testing equipment relating to the Ultrasound
diagnostic products. The net cash provided by financing activities for the six
months ended June 30, 1999 was 2,481,000, compared with $2,144,000 for the
similar period in 1998. In March 1998, the Company completed the private
placement of 20,030 shares of Series C Preferred Stock at $100 per share
resulting in net proceeds of $1,747,000. In addition, the Company exchanged
$995,000 of promissory notes for 9,950 shares of Series C Preferred Stock at
$100 per share and converted a $75,000 note into Common Stock.
In March 1999, the Company completed a private placement of 1,140,000
shares of Series D Convertible Preferred Stock at $1.75 per share with the net
proceeds approximating $1.6 million. In June 1999, net proceeds of $242,000 were
received from the exercise of 105,000 warrants by CynDel Corp. Also in June
1999, 199,908 shares Common stock were sold for net proceeds of $495,000. This
amount was held in a separate escrow account as "Restricted cash" pending
receipt of confirmation that all stock certificates had been received, and was
deposited in the Company account in July, 1999. Based on our 1999 budget and the
net proceeds from the 1999 Preferred Stock offering, we believe that funds are
sufficient to continue operations through December 31, 1999. However, no
assurances can be given that our plan will be successful in achieving positive
cash flow or profitability.
We will seek funding to meet our working capital requirements through
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of our securities or bank borrowings. There can be no
assurance, however, that additional funds, if required, will be available from
any of these or other sources on favorable terms, if at all.
Our ratio of inventory to sales for the six month period ended June
30, 1999 was .98, compared with .74 for a similar period in 1998. With the
launching of four new products within the past eighteen months, we have had to
build inventory in anticipation of sales. In addition, delays in receiving the
new fluidic system for the Precisionist ThiryThousand Workstation have limited
shipments of this product from inventory and the collection of outstanding
receivables.
At June 30, 1999, we had net operating loss carryforwards (NOLs) of
approximately $10,200,000 and research and development tax credit carry forwards
of approximately $34,000. These carryforwards are available to offset future
taxable income, if any, and begin to expire in the year 2006. Our ability to use
NOLs to offset future income is dependant upon the tax laws in effect at the
time the NOLs can be utilized. The tax Reform Act of 1996 significantly limits
the annual amount that can be utilized for certain of these carryforwards as a
result of change of ownership.
Effect of Inflation and Foreign Currency Exchange
We have not realized a reduction in the selling price of the
Precisionist phaco system as a result of domestic inflation. Nor have we
experienced unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers.
12
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Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. We believe the adoption of SFAS 133
will not have any material effect on our financial statements.
We have reviewed all other recently issued accounting standards in
order to determine their effects, if any, on the results of operations or
financial position. Based on that review, we believe that none of these
pronouncements will have a significant effect on current or future earnings or
operations.
Year 2000
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Management of
the Company does not anticipate that any significant modification or replacement
of the Company's software will be necessary for its computer systems to properly
utilize dates beyond December 31, 1999 or that the Company will incur
significant operating expenses to make any such computer system improvements.
The Company is not able to determine, however, whether any of its suppliers,
lenders, or service providers will need to make any such software modifications
or replacements or whether the failure to make such software corrections will
have an effect on the Company's operations or financial condition.
Part II: Other Information
On June 26, 1998, the Company entered into a Co-Distribution Agreement
(the "Co-Distribution Agreement") with Pharmacia & Upjohn Company ("Pharmacia &
Upjohn") and National Healthcare Manufacturing Corporation ("National
Healthcare") which provides for the marketing and sale of a range of ophthalmic
products. Under the terms of the Co-Distribution Agreement, the Company,
Pharmacia & Upjohn, and National Healthcare, will offer a comprehensive package
of products to cataract surgeons, including cataract surgical equipment,
intraocular lens implants, intraocular pharmaceuticals, surgical instruments and
sterile procedural packs. The Company will provide the Precisionist Thirty
Thousand&trade for distribution and sale under the Co-Distribution Agreement.
The Pharmacia & Upjohn products to be distributed as part of the Co-Distribution
Agreement include the Healon(R) and Healongv(R) viscoelastic solution and the
CeeOn line of foldable, small intraocular lens implants, designed to replace the
natural lens removed during cataract surgery.
On July 23, 1998, the Company entered into an Agreement for Purchase
and Sale of Assets (the "Agreement") with the Humphrey Systems Division of Carl
Zeiss, Inc. ("Humphrey Systems") to acquire the ownership and manufacturing
rights to certain assets of Humphrey Systems that are diagnostic instruments,
including the Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the
Ultrasound Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and
all accessories, packaging, and end-user collateral materials for each of the
product lines for the sum of $500,000, payable in the form of 78,947 shares of
Common Stock which were issued to Humphrey Systems, and 26,316 shares of Common
Stock which were issued to Douglas Adams. However, if the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
is less than $375,000 (after payment of commissions, transfer taxes and other
expenses relating to the sale of such shares), then the Company is required to
issue additional shares of Common Stock, or pay additional funds to Humphrey
Systems as is necessary to increase Humphrey Systems' 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 Paradigm's common stock, Paradigm issued 80,000
additional shares in January 1999, to enable Humphrey Systems to receive its
guaranteed amount. Excess proceeds from the sale of this additional stock in the
amount of $21,431 is due and payable to the Company.
The rights to the ophthalmic diagnostic instruments that have been
purchased from Humphrey Systems under the Agreement complement both the
Company's cataract surgical equipment and its ocular Blood Flow Analyze&trade.
The Ultrasonic Biometer calculates the prescription for the intraocular lens to
be implanted during cataract surgery. The Ultrasound Pachymeter measures corneal
thickness for the new refractive surgical applications that eliminate the need
for eyeglasses and for the optometric applications including contact lense
13
<PAGE>
fitting. The A/B Scan System combines the Ultrasonic Biometer and ultrasound
imaging for advanced diagnostic testing throughout the eye, and is a viable tool
for retinal specialists. The Ultrasound Biomicroscope utilizes microscopic
digital ultrasound resolution for detection of tumors and improved glaucoma
management.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
<TABLE>
<CAPTION>
Table No. Document
- --------- --------
<S> <C>
2.1 Amended Agreement and Plan of Merger between Paradigm Medical Industries, Inc., a California
corporation and Paradigm Medical Industries, Inc., a Delaware corporation(1)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust Company(3)
4.2 Specimen Common Stock Certificate (2)
4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge financing(1)
4.7 Warrant to purchase Common Stock with Mackey Price & Williams(1)
4.8 Warrant to Purchase Common Stock with Win Capital Corp.(6)
4.9 Specimen Series C Convertible Preferred Stock Certificate(6)
4.10 Certificate of the Designations, Powers, Preferences and Rights of the Series C Convertible
Preferred Stock(6)
4.11 Specimen Series D Convertible Preferred Stock Certificate(10)
4.12 Certificate of the Designations, Powers, Preferences and Rights of the Series D Convertible Preferred
Stock(10)
4.13 Warrant to Purchase Common Stock with Win Capital Corp.(10)
4.14 Warrant to Purchase Common Stock with Cyn Del & Co.(10)
4.15 Warrant Agreement with KSH Investment Group, Inc.(10)
4.16 Warrant to Purchase Common Stock with John W. Hemmer(11)
5. Opinion of Mackey Price & Williams(10)
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M.Eichenbaum(1)
10.3 Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4 Indemnity Agreement with Zevex International, Inc.(1)
10.5 Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6 Royalty Agreement dated January 30, 1992, with Dennis L. Oberkamp Design Services(1)
10.7 Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp Design Services(1)
10.8 Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L. Oberkamp Design Services(1)
10.9 Lease Agreement with Eden Roc(6)
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.13 Form of Promissory Note with Note Holders re bridge financing(1)
10.14 Employee's Lock-Up Agreement(1)
10.15 Registering Shareholders Lock-Up Agreement(3)
10.16 Amendment of Settlement and Release Agreement with Douglas A. MacLeod(3)
10.17 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(5)
10.18 License and Manufacturing Agreement with O.B.F. Labs, Ltd.(6)
10.19 Settlement Agreement with Estate of H.L. Federman(6)
14
<PAGE>
10.20 Agreement with Win Capital Corp.(6)
10.21 12% Convertible, Redeemable Promissory Note(6)
10.22 Securities Exchange Agreement(6)
10.23 Stock Exchange for Satisfaction of Debt Agreement with Zevex International, Inc. (7)
10.24 Co-Distribution Agreement with Pharmacia & Upjohn Company and National Healthcare
Manufacturing Corporation (7)
10.25 Agreement for Purchase and Sale of Assets with Humphrey Systems Division of Carl Zeiss, Inc. (7)
10.26 Employment Agreement with Thomas F. Motter(9)
10.27 Employment Agreement with Robert W. Millar(9)
10.28 Employment Agreement with John W. Hemmer(9)
10.29 Employment Agreement with Michael W. Stelzer(9)
10.30 Change of Control Termination Agreement with Thomas F. Motter(9)
10.31 Change of Control Termination Agreement with Robert W. Millar(9)
10.32 Change of Control Termination Agreement with John W. Hemmer(9)
10.33 Change of Control Termination Agreement with Michael W. Stelzer(9)
10.34 Promissory Note with Win Capital Corp.(10)
10.35 Promissory Note with Cyn Del & Co.(10)
10.36 Consulting Agreement with Win Capital Corp.(10)
10.37 Agreement with Win Capital Corp.(11)
10.38 Agreement with Cyn Del & Co.(11)
23.1 Consent of Medical Laser Insight(3)
23.2 Consent of Frost & Sullivan(3)
23.3 Consent of Ophthalmologists Times(3)
23.4 Consent of Mackey Price & Williams(10)
23.5 Consent of Tanner & Co.(11)
27. Financial Data Schedule
- -------
(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 Amendment No. 2 to Registration Statement on Form SB-2, as filed
on June 13, 1996.
(4) Incorporated by reference from Amendment No. 3 to Registration Statement on Form SB-2, as filed
on June 28, 1996.
(5) Incorporated by reference from Annual Report on Form 10-KSB, as filed on December 30, 1996.
(6) Incorporated by reference from Annual Report on Form 10-KSB, as filed on April 16, 1998.
(7) Incorporated by reference from Quarterly Report on Form 10-QSB, as filed on August 19, 1998.
(8) Incorporated by reference from Registration Statement on Form SB-2, as filed on June 15, 1998.
(9) Incorporated by reference from Quarterly Report on Form 10-QSB, as filed on November 12, 1998.
(10) Incorporated by reference from Registration Statement on Form SB-2, as filed on April 29, 1999.
(11) Incorporated by reference from Amendment No. 1 to Registration Statement on Form SB-2, as filed
on May 7, 1999.
</TABLE>
(b) Reports on Form 8-K
-------------------
On January 7, 1998, the Company filed a report on Form 8-K regarding
pro forma financial statements as of November 30, 1997.
On February 18, 1998, the Company filed a report on Form 8-K regarding
pro forma financial statements as of December 31, 1997.
On February 27, 1998, the Company filed a report on Form 8-K regarding
pro forma financial statements as of January 31, 1998.
15
<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: August 11, 1999 By: Michael W. Stelzer
------------------
Michael W. Stelzer
Chief Financial Officer, Secretary and
Chief Operating Officer
DATED: August 11, 1999 By: Thomas F. Motter
----------------
Thomas F. Motter
President and Chief Executive Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PARADIGM
MEDICAL INDUSTRIES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,156,000
<SECURITIES> 0
<RECEIVABLES> 1,204,000
<ALLOWANCES> 30,000
<INVENTORY> 1,089,000
<CURRENT-ASSETS> 3,497,000
<PP&E> 385,000
<DEPRECIATION> 113,000
<TOTAL-ASSETS> 4,382,000
<CURRENT-LIABILITIES> 673,000
<BONDS> 125,000
0
0
<COMMON> 7,000
<OTHER-SE> 3,577,000
<TOTAL-LIABILITY-AND-EQUITY> 4,382,000
<SALES> 1,109,000
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<CGS> 420,000
<TOTAL-COSTS> 1,809,000
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