10QSB 1 paradigm10q.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2007 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to Commission File Number: 0-28498 PARADIGM MEDICAL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 87-0459536 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2355 South 1070 West, Salt Lake City, Utah 84119 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (801) 977-8970 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [ X ] State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: Common Stock, $.001 par value 402,655,736 --------------- Title of Class Number of Shares Outstanding as of November 13, 2007 i PARADIGM MEDICAL INDUSTRIES, INC. FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 2007 INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements................................................ 1 Condensed Balance Sheet (unaudited) September 30, 2007....... 1 Condensed Statements of Operations (unaudited) for the six months ended September 30, 2007 and September 30, 2006.......... 2 Condensed Statements of Cash Flows (unaudited) for the six months ended September 30, 2007 and September 30, 2006 ......... 3 Notes to Condensed Financial Statements (unaudited).................. 4 Item 2. Management's Discussion and Analysis or Plan of Operation .......................................... 12 Item 3. Controls and Procedures .......................................... 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................. 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 20 Item 3. Defaults Upon Senior Securities.................................... 22 Item 4. Submission of Matters to a Vote of Security Holders................ 22 Item 5. Other Information.................................................. 22 Item 6. Exhibits and Reports on Form 8-K................................... 22 Signature Page ............................................................. 25 ii PARADIGM MEDICAL INDUSTRIES, INC. CONDENSED BALANCE SHEET (UNAUDITED) September 30, 2007 ASSETS Current Assets Cash and Cash Equivalents $ 129,000 Receivables, Net 515,000 Inventory 1,095,000 Prepaid Expenses 73,000 ------------- Total Current Assets 1,812,000 Property and Equipment, Net 17,000 Intangibles, Net 339,000 ------------- Total Assets $ 2,168,000 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts Payable $ 347,000 Accrued Expenses 1,075,000 ------------- Total Current Liabilities 1,422,000 Convertible Notes Payable 3,455,000 ------------- Total Long-term Liabilities 3,455,000 ------------- Total Liabilities 4,877,000 ------------- Commitements: - Stockholders' Deficit: Preferred Stock, Authorized: 5,000,000 shares, $.001 par value Series A Authorized: 500,000 shares; issued and outstanding: 5,627 shares at September 30, 2007 - Series B Authorized: 500,000 shares; issued and outstanding: 8,986 shares at September 30, 2007 - Series C Authorized: 30,000 shares; issued and outstanding: zero shares at September 30, 2007 - Series D Authorized: 1,140,000 shares; issued and outstanding: 5,000 shares at September 30, 2007 - Series E Authorized: 50,000 shares; issued and outstanding: 250 shares at September 30, 2007 - Series F Authorized: 50,000 shares; issued and outstanding: 4,398.75 shares at September 30, 2007 - Series G Authorized: 2,000,000 shares; issued and outstanding: 588,235 shares at September 30, 2007 1,000 Common Stock, Authorized: 800,000,000 shares, $.001 par value; issued and outstanding: 281,085,819 at September 30, 2007 281,000 Additional Paid-in-capital 63,005,000 Accumulated Deficit ($65,996,000) Total Stockholders' Deficit $ (2,709,000) ------------- Total Liabilities and Stockholders' Deficit $ 2,168,000 ============= The accompanying notes are an integral part to these condensed financial statements 1 PARADIGM MEDICAL INDUSTRIES, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Sales $ 534,000 $ 418,000 $ 1,190,000 $ 1,600,000 Cost of Sales 270,000 203,000 645,000 841,000 ----------- ----------- ----------- ----------- Gross Profit 264,000 215,000 545,000 759,000 Operating Expenses: Sales and Marketing 168,000 123,000 442,000 307,000 General and administrative 191,000 258,000 688,000 772,000 Research, development 71,000 130,000 261,000 388,000 ----------- ----------- ----------- ----------- Total Operating Expenses 430,000 511,000 1,391,000 1,467,000 ----------- ----------- ----------- ----------- Operating Income (Loss) (166,000) (296,000) (846,000) (708,000) Other Income and (Expenses): Other expense (financing costs) (70,000) (54,000) (1,185,000) (1,152,000) Interest expense (1,000) (3,000) (2,000) (7,000) Interest income 3,000 5,000 8,000 5,000 Settlement of liabilities -- 33,000 41,000 36,000 ----------- ----------- ----------- ----------- Total Other Expenses (68,000) (19,000) (1,138,000) (1,118,000) ----------- ----------- ----------- ----------- Income (loss) before provision for income (234,000) (315,000) (1,984,000) (1,826,000) Provision for income taxes -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) $ (234,000) $ (315,000) $(1,984,000) $(1,826,000) =========== =========== =========== =========== Net Loss Earnings (loss) Per Common Share - Basic $ (0.00) $ (0.00) $ (0.01) $ (0.01) ----------- ----------- ----------- ----------- Earnings (loss) Per Common Share - Diluted $ (0.00) $ (0.00) $ (0.01) $ (0.01) ----------- ----------- ----------- ----------- Weighted Average Common Share - Basic 247,755,000 198,546,000 219,259,000 166,459,000 ----------- ----------- ----------- ----------- Weighted Average Common Share - Diluted 248,614,000 199,415,000 220,118,000 166,459,000 ----------- ----------- ----------- ----------- The accompanying notes are an integral part to these condensed financial statements 2 PARADIGM MEDICAL INDUSTRIES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2007 2006 ------------- ------------- Cash Flows from Operating Activities: ------------------------------------ Net Income (loss) $ (1,984,000) $ (1,826,000) Adjustment to Reconcile Net Loss to Net Cash Used In Operating Activities: Depreciation and Amortization 4,000 28,000 Stock Option Valuation - 23,000 Beneficial Conversion Interest 939,000 964,000 Issuance of Stock Options and Warrants for Services 61,000 36,000 Provision for Losses on inventory (22,000) (24,000) Provision for Losses on receivables - (5,000) (Increase) Decrease from Changes in: Accounts Receivable (83,000) 114,000 Inventories (150,000) 4,000 Prepaid and Other Expenses (62,000) (46,000) Increase (Decrease) in: Accounts Payable (54,000) (123,000) Accrued Liabilities 274,000 89,000 ------------- ------------- Net Cash Used in Operating Activities (1,077,000) (766,000) ------------- ------------- Cash Flow from Investing Activities: ----------------------------------- Cash proceeds from sales of investment - (19,000) ------------- ------------- Net Cash Provided by (Used in) Investing Activities - (19,000) ------------- ------------- Cash Flows from Financing Activities: ------------------------------------ Principal Payments on Notes Payable and Long-term Debt - (14,000) Proceeds from Issuance of Convertible Notes 1,000,000 1,000,000 ------------- ------------- Net Cash (Used) Provided by Financing Activities 1,000,000 986,000 ------------- ------------- Net Change in Cash (77,000) 201,000 Cash, Beginning of Period 206,000 66,000 ------------- ------------- Cash, End of Period $ 129,000 $ 267,000 ============= ============= Supplemental Disclosure of Cash Flow Information: Cash Paid for Interest $ 2,000 $ 4,000 ------------- ------------- Cash Paid for Income Taxes $ - $ - ------------- ------------- The accompanying notes are an integral part to these condensed financial statements 3 PARADIGM MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Basis of Financial Statement Presentation ----------------------------------------- The accompanying condensed financial statements of the Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the periods presented. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-KSB for the year ended December 31, 2006. The results of operations for the six months ended September 30, 2007, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007. Going Concern ------------- The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Historically, the Company has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations, and the Company has incurred significant losses. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on its ability to generate sufficient income and cash flow to meet its obligations on a timely basis and/or obtain additional financing as may be required. The Company is actively seeking options to obtain additional capital and financing. In addition, the Company has taken significant steps to reduce costs and increase operating efficiencies. Specifically, the Company has significantly reduced the use of consultants, which has resulted in a large decrease in expenses. In addition, the Company has reduced the number of its direct sales representatives, which has resulted in less payroll, travel and other expenses. Although these cost savings have significantly reduced the Company's losses and ongoing cash flow needs, if the Company is unable to obtain equity or debt financing, it may be unable to continue development of its products and may be required to substantially curtail or cease operations. Net Loss Per Share ------------------ Net loss per common share is computed on the weighted average number of common and common equivalent shares outstanding during each period. Common stock equivalents consist of convertible preferred stock, common stock options and warrants. Common equivalent shares are excluded from the computation when their effect is anti-dilutive. Other common stock equivalents consisting of options and warrants to purchase 50,534,392 and 32,131,892 shares of common stock and preferred stock convertible into 858,688 and 869,000 shares of common stock at September 30, 2007and 2006, respectively, have not been included in loss periods because they are anti-dilutive. For the three months ended September 30, 2007, the options and warrants to purchase 46,034,392 shares of common stock were excluded because of the treasury stock method. The following table is a reconciliation of the net loss numerator of basic and diluted net loss per common share for the nine month periods ended September 30, 2007 and September 30, 2006: 4 Three Months Ended Nine Months Ended September 30, September 30, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Basic weighted average shares outstanding 247,755,000 198,546,000 219,259,000 166,459,000 Common stock equivalents - 859,000 869,000 859,000 -- convertible preferred stock Diluted weighted average shares outstanding 248,614,000 199,415,000 220,118,000 166,459,000 =========== =========== =========== =========== Convertible Notes ----------------- April 27, 2005 Sales 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 16,534,392 shares of its common stock. The sale of convertible notes and warrants occurred 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 filing a registration statement on June 22, 2005 to register the shares of common stock underlying the convertible notes and the 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 not, without the prior written consent of a majority-in-interest of the investors, to negotiate or contract with any party to obtain additional equity financing (including debt financing with an equity component) that involves (i) the issuance of common stock at a discount to the market price of the common stock on the date of issuance (taking into account the value of any warrants or options to acquire common stock in connection therewith), (ii) the issuance of convertible securities that are convertible into an indeterminate number of shares of common stock, or (iii) the issuance of warrants during the lock-up period beginning April 27, 2005 and ending on the later of (a) 270 days from April 27, 2005, 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 $.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 convertible notes mature in three years from the date of issuance, and are convertible into our common stock at the selling stockholders' option, at the lower of (i) $.09 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on the OTC Bulletin Board for the 20 trading days before but not including the conversion date. Accordingly, there is no limit on the number of shares into which the notes may be converted. The $2,500,000 in 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 convertible notes when due or to timely file a registration statement as required by the Company or obtain effectiveness with the Securities and Exchange 5 Commission of the registration statement. Prepayment of the convertible notes is to be made in cash equal to either (i) 125% of the outstanding principal and accrued interest for prepayments occurring within 30 days following the issue date of the notes; (ii) 130% of the outstanding principal and accrued interest for prepayments occurring between 31 and 60 days following the issue date of the notes; or (iii) 145% of the outstanding principal and accrued interest for prepayments occurring after the 60th day following the issue date of the notes. The warrants are exercisable until five years from the date of issuance at a purchase price of $.20 per share. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the investors exercise the warrants on a cashless basis, then the Company will not receive any proceeds therefrom. In addition, the exercise price of the warrants will be adjusted in the event the Company issues common stock at a price below market, with the exception of any securities issued as of the date of the warrants or issued in connection with the 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 our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. However, the noteholders may repeatedly sell shares of common stock in order to reduce their ownership percentage, and subsequently convert additional callable secured convertible notes. As of November 13, 2007, a total of $947,366 in convertible notes issued on April 27, 2005 had been converted by the noteholders. 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 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; $ $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 26, 2006 to register 60,000,000 shares of common stock issuable upon conversion of the convertible notes. $ $500,000 was disbursed on April 20, 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 agreed not, without the prior written consent of a majority-in-interest of the investors, to negotiate or contract with any party to obtain additional equity financing (including debt financing with an equity component) that involves (i) the issuance of common stock at a discount to the market price of the common stock on the date of issuance (taking into account the value of any warrants or options to acquire common stock in connection therewith), (ii) the issuance of convertible securities that are convertible into an indeterminate number of shares of common stock, or (iii) the issuance of warrants during the lock-up period beginning 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 bears 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 convertible notes mature in 6 three years from the date of issuance, and are convertible into our 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. The $1,500,000 in convertible notes are secured by the Company's assets, including the Company's inventory, accounts receivable and intellectual property. Moreover, the Company has a call option under the terms of the notes. The call option provides the Company with the right to prepay all of the outstanding convertible notes at any time, provided there is no event of default by the Company and the Company's stock is trading at or below $.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 (i) 125% of the outstanding principal and accrued interest for prepayments occurring within 30 days following the issue date of the notes; (ii) 130% of the outstanding principal and accrued interest for prepayments occurring between 31 and 60 days following the issue date of the notes; or (iii) 145% of the outstanding principal and accrued interest for prepayments occurring after the 60th day following the issue date of the notes. The warrants are exercisable until five years from the date of issuance at a purchase price of $.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, 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 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 our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. However, the noteholders may repeatedly sell shares of common stock in order to reduce their ownership percentage, and subsequently convert additional callable secured convertible notes. As of November 13, 2007, a total of $164,122 in convertible notes issued on February 28, 2006 had been converted by the noteholders. 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 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. 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 7 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 (i) 125% of the outstanding principal and accrued interest for prepayments occurring within 30 days following the issue date of the notes; (ii) 130% of the outstanding principal and accrued interest for prepayments occurring between 31 and 60 days following the issue date of the notes; or (iii) 145% of the outstanding principal and accrued interest for prepayments occurring after the 60th day following the issue date of the notes. The warrants are exercisable until 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 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 callable secured convertible notes plus accrued interest are to be applied for each month the registration is not effective within the required time. The penalty may be paid in cash or stock at the Company's option. As of November 13, 2007, none of the convertible notes issued on June 11, 2007, had been converted by the noteholders. Simple Conversion Calculation ----------------------------- The number of shares of common stock issuable upon conversion of the convertible notes issued on April 27, 2005, February 28, 2006 and June 11, 2007 is determined by dividing that portion of the principal of the notes to be converted and interest, if any, by the conversion price. For example, assuming conversion of the $3,388,496 principal amount of convertible notes on November 13, 2007 (consisting of $4,500,000 in convertible notes that were sold to the four investors pursuant to the securities purchase agreements dated April 27, 2005, February 25, 2006, and June 11, 2007, less $1,111,504 in notes that were converted during the period from July 12, 2005 to November 13, 2007) and a conversion price of $.0024 per share, the number of shares issuable upon conversion would be: $3,388,496/$.0024= 1,411,873,000 shares. The Company's obligation to issue shares upon conversion of the convertible notes issued on April 27, 2005, February 28, 2006, and June 11, 2007 is essentially limitless. The following is an example of the amount of shares of common stock that are issuable upon conversion of $3,388,496 principal amount of convertible notes, based on market prices 25%, 50%, and 75% below the market price, as of October 26, 2007 of $.0024: 8 % Below Price Per With 40% Number of % of Market Share Discount Shares Issuable Outstanding* ------ ----- -------- --------------- ----------- 25% $.0018 $.00108 3,137,496,000 779.2% 50% $.0012 $.00072 4,706,244,000 1,168.8% 75% $.0006 $.000036 94,124,889,000 23,376.0% *Based on 402,655,736 shares outstanding as of November 13, 2007. As illustrated, the number of shares of common stock issuable upon conversion of the Company's convertible notes will increase if the market price of the Company's common stock declines, which will cause dilution to existing stockholders. Adjustable Conversion Price of Convertible Notes ------------------------------------------------ The convertible notes are convertible into shares of the Company's common stock at a 40% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the noteholders convert and sell material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The noteholders could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may have a depressive effect on the market price of the common stock. Possible Dilution to Stockholders --------------------------------- The issuance of shares upon conversion of convertible notes and exercise of warrants may result in substantial dissolution to the interests of other stockholders since the holders of the convertible notes may ultimately convert and sell the full amount issuable upon conversion. Although the noteholders may not convert their convertible notes and/or exercise their warrants if such conversion or exercise price would cause them to own more than 4.99% of the Company's outstanding common stock, this restriction does not prevent the noteholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the noteholders could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued, which will have the effect of further diluting the proportionate equity interest and voting power of holders of the Company's common stock. Failure to Repay Convertible Notes May Require Company Operations to Cease -------------------------------------------------------------------------- On April 27, 2005, the Company entered into a securities purchase agreement for the sale of an aggregate of $2,500,000 principal amount of convertible notes. On February 28, 2006, the Company entered into another securities purchase agreement for the sale of an aggregate of $1,500,000 principal amount of convertible notes. On June 11, 2007, the Company entered into a third securities purchase agreement for the sale of an aggregate of $500,000 principal amount of convertible notes. These convertible notes are all due and payable, with 8% interest, three years from the date of issuance, unless sooner converted into shares of the Company's common stock. The Company currently has $3,388,496 in convertible notes outstanding. Any event of default such as the Company's failure to repay the principal or interest when due on the notes, the Company's failure to issue shares of common stock upon conversion by the noteholders, the Company's breach of any covenant, representation or warranty in the securities purchase agreement or related convertible notes, the assignment or appointment of a receiver to control a substantial part of the Company's property or business, the filing of a money judgment, writ or similar process against the Company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against the Company, and the delisting of the Company's common stock could require the early repayment of the convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured within the specified grace period. The Company anticipates that the full amount of convertible notes will be converted into shares of its common stock, in accordance with the terms of the convertible notes. If the Company is required to repay the convertible notes, it would be required to use its limited working capital and raise additional funds. If the Company were unable to repay the notes when required, the noteholders could commence legal action against the Company and foreclose on all of its assets to recover the amounts due. Any such action would require the Company to curtail or cease operations. 9 Preferred Stock Conversions --------------------------- Under the Company's Certificate of Incorporation, holders of the Company's Class A and Class B preferred stock have the right to convert such stock into shares of the Company's common stock at the rate of 1.2 shares of common stock for each share of preferred stock. During the nine months ended September 30, 2007 no shares of Series A preferred stock and no shares of Series B preferred stock were converted to the Company's common stock. Holders of Series D preferred have the right to convert such stock into shares of the Company's common stock at the rate of one share of common stock for each share of preferred stock. During the nine months ended September 30, 2007 no shares of Series D preferred stock were converted to the Company's common stock. Holders of Series E preferred have the right to convert such stock into shares of the Company's common stock at the rate of 53.3 shares of common stock for each share of preferred stock. During the nine months ended September 30, 2007 no shares of Series E preferred stock were converted to the Company's common stock. Holders of Series F preferred have the right to convert such stock into shares of the Company's common stock at the rate of 53.3 shares of common stock for each share of preferred stock. During the nine months ended September 30, 2007, no shares of Series F preferred stock were converted to the Company's common stock. Holders of Series G preferred have the right to convert such stock into shares of the Company's common stock at the rate of one share of common stock for each share of preferred stock. During the nine months ended September 30, 2007, no shares of Series G preferred stock were converted to shares of the Company's common stock. Warrants -------- The fair value of warrants granted as described herein is estimated at the date of grant using the Black-Scholes option pricing model. The exercise price per share is reflective of the then current market value of the stock. No grant exercise price was established at a discount to market. All warrants are fully vested, exercisable and nonforfeitable as of the grant date. As a result of the financing the Company completed on April 27, 2005 involving the sale of $2,500,000 in convertible notes, the Company granted warrants to the noteholders to purchase 16,534,392 shares of its common stock. The warrants have an exercise price of $.20 per share and expire on April 27, 2010. As a result of the financing the Company completed on February 28, 2006, involving the sale of $1,500,000 in convertible notes, the Company granted that warrants to the noteholders to purchase 12,000,000 shares of its common stock. The warrants have an exercise price of $.10 per share and expire on February 27, 2011. As a result of the financing the Company completed on June 11, 2007, involving the sale of $500,000 in convertible notes, the Company granted warrants to the noteholders to purchase 10,000,000 shares of its common stock. The warrants have an exercise price of $.005 per share and expire on June 11, 2014. Related Party Transactions -------------------------- Payments for legal services to the firm of which the Company's Chairman of the Board is a partner were $5,000 and $30,000 for the three months ended September 30, 2007 and 2006 respectively. $150,000 and $113,000 for the nine months ended September 30, 2007 and 2006, respectively. Accrued Expenses ---------------- Accrued expenses consist of the following at September 30, 2007: Accrued consulting and litigation reserve $ 730,000 Accrued payroll and employee benefits 46,000 Sales taxes payable 14,000 Customer deposits 2,000 Accrued Royalties 1,000 Warranty and return allowance 229,000 Other accrued expenses 53,000 ------------- Total $ 1,075,000 ============= 10 Item 2: Management's Discussion and Analysis or Plan of Operation This report contains forward-looking statements and information relating to the Company that is based on beliefs of management as well as assumptions made by, and information currently available to management. These statements reflect its current view respecting future events and are subject to risks, uncertainties and assumptions, including the risks and uncertainties noted throughout the document. Although the Company has attempted to identify important factors that could cause the actual results to differ materially, there may be other factors that cause the forward-looking statements not to come true as anticipated, believed, projected, expected or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, projected, estimated, expected or intended. Critical Accounting Policies Revenue Recognition. The Company recognizes revenue in compliance with Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB 101), as revised by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 101 and SAB 104 detail four criteria that must exist before revenue is recognized: 1. Persuasive evidence of an arrangement exits. Prior to shipment of product, the Company required a signed purchase order and, depending upon the customer, a down payment toward the final invoiced price or full payment in advance with certain international product distributors. 2. Delivery and performance have occurred. Unless the purchase order requires specific installation or customer acceptance, the Company recognizes revenue when the product ships. If the purchase order requires specific installation or customer acceptance, the Company recognizes revenue when such installation or acceptance has occurred. Title to the product passes to its customer upon shipment. This revenue recognition policy does not differ among its various different product lines. The Company guarantees the functionality of its product. If its product does not function as marketed when received by the customer, the Company either makes the necessary repairs on site or has the product shipped to the Company for the repair work. Once the product has been repaired and retested for functionality, it is re-shipped to the customer. The Company provides warranties that generally extend for one year from the date of sale. Such warranties cover the necessary parts and labor to repair the product as well as any shipping costs that may be required. The Company maintains a reserve for estimated warranty costs based on its historical experience and management's current expectations. 3. The sales price is fixed or determinable. The purchase order received from the customer includes the agreed-upon sales price. The Company does not accept customer orders, and therefore does not recognize revenue, until the sales price is fixed. 4. Collectibility is reasonably assured. With limited exceptions, the Company requires down payments on product prior to shipment. In some cases the Company requires payment in full prior to shipment. The Company also performs credit checks on new customers and ongoing credit checks on existing customers. The Company maintains an allowance for doubtful accounts receivable based on historical experience and management's current expectations. Recoverability of Inventory. Since its inception, the Company has purchased several complete lines of inventory. In some circumstances the Company has been able to utilize certain items acquired and others remain unused. On a quarterly basis, the Company attempts to identify inventory items that have shown relatively no movement or very slow movement. Generally, if an item has shown little or no movement for over a year, it is determined not to be recoverable and a reserve is established for that item. In addition, if the Company identifies products that have become obsolete due to product upgrades or enhancements, a reserve is established for such products. The Company intends to make efforts to sell these items at significantly discounted prices. If items are sold, the cash received would be recorded as revenue, but there would be no cost of sales on such items due to the reserve that has been recorded. At the time of sale, the inventory would be reduced for the item sold and the corresponding inventory reserve would also be reduced. 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 11 indicate that the carrying amount may not be recoverable. Intangibles with an indefinite life, such as goodwill, are not amortized but are tested for impairment on an annual basis or when events and circumstances indicate that the asset may be impaired. Impairment tests include comparing the fair value of a reporting unit with its carrying net book value, including goodwill. To date, the Company's determination of the fair value of the reporting unit has been based on the estimated future cash flows of that reporting unit. Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts to offset estimated uncollectible accounts receivable. Bad debt expense associated with the increases in the allowance for doubtful accounts is recorded as part of general and administrative expense. The Company's accounting policy generally is to record an allowance for receivables over 90 days past due unless there is significant evidence to support that the receivable is collectible. General The following Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements, which involve risks and uncertainty. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors discussed in this section. The Company's fiscal year is from January 1 through December 31. The Company is engaged in the design, development, manufacture and sale of high technology diagnostic and surgical eye care products. Given the "going concern" status of the Company, management has focused efforts on those products and activities that will, in its opinion, achieve the most resource efficient short-term cash flow. As seen in the results for the three months ended June 30, 2006, diagnostic products have been the major focus and the Photon(TM) and other extensive research and development projects have been put on hold pending future evaluation when the Company's financial position improves. The Company does not focus on a specific diagnostic product or products but, instead, on the entire diagnostic group. Results of Operations Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006 Net sales for the three months ended September 30, 2007 increased by $116,000, or 28%, to $534,000 as compared to $418,000 for the same period of 2006. This increase in sales was primarily due to an increase in sales of the P37, P2700, and P3700 Ocular Ultrasound A/B Scan Diagnostic, the P2000 A-Scan Biometric Ultrasound Analyzer, and the P2200 Pachymetric Analyzer. For the three months ended September 30, 2007, sales from the Company's diagnostic products totaled $492,000, or 92% of total revenues, compared to $348,000, or 83% of total revenues for the same period of 2006. The remaining 8% of sales, or $42,000 during the three months ended September 30, 2007 was from parts, disposables, and service revenue. Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes increased by $37,000 to $77,000, or 14% of total revenues, for the three months ended September 30, 2007, compared to $40,000, or 10% of total revenues, for the same period last year. Sales of the Blood Flow Analyzer(TM) increased by $19,000 to $61,000, or 11% of total revenues, for the three months ended September 30, 2007, compared to net sales of $42,000, or 10% of total revenues, during the same period in 2006. Sales from the P37, P37-II and P2700 A/B Scan Ocular Ultrasound Diagnostic devices, the P55, P2200,and P2500 Pachymetric Analyzer, and the P2000 A-Scan Biometric Ultrasound Analyzer increased to $222,000, or 42% of total revenues, for the three month period ended September 30, 2007, compared to $92,000, or 15% of total revenues, for the same period of 2006. Combined sales of the LD 400 and TKS 5000 Autoperimetry Systems and the CT 200 Corneal Topography System decreased by $44,000 to $131,000, or 25% of the total revenues, for the three months ended September 30, 2007, compared to $175,000, or 42% of total revenues, for the same period of 2006. Sales have been higher during the three months ended September 30, 2007 for the Company due to a variety of reasons. Sales increased for the P37, P37-II and P2900 A/B Scan, the P55, P2200, and P2500 pachymeters, and the 2000 A-Scan. Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes were reduced primarily due to the introduction of new software for the P60, which received FDA 510(k) premarket approval on May 26, 2005,and to the necessity for hardware reconfiguration on the P40 and P45. The perimeters experienced a major reduction 12 in sales due to the current redesign and reconfiguration of the LD 400 and the ongoing software development for the LD700. The Blood Flow Analyzer(TM) sales were higher during the third quarter by $19,000. The hardware configuration problems have since been resolved and the Company has recently completed a new software package for the P60. The Company anticipates reversing the downward trend in sales through additional efforts by the Company to increase support for the P60 through increased clinical awareness, increased product development, improved marketing plans, and ongoing development of the new perimeters. Gross profit for the three months ended September 30, 2007 decreased by 2% to 49% of total revenues, compared to 51% of total revenues for the same period in 2006. The reduction in gross profit was mainly due to an increase in the price of materials, an increase in inventory, and an increase in the cost of developing a new domestic sales force. There has been no increase to cost of sales as a result of a charge to the reserve for obsolete inventory in 2007. Marketing and selling expenses increased by $45,000, or 37%, to $168,000, for the three months ended September 30, 2007, from $123,000 for the comparable period in 2006. This increase was due primarily increased salaries for domestic and international sales representatives, an increased number of sales representatives, and higher travel related and associated sales expenses. General and administrative expenses decreased by $67,000, or 26%, to $191,000 for the three months ended September 30, 2007, from $258,000 for the comparable period in 2006. This reduction in general and administrative expenses was primarily due to reduce legal and consulting fees. Also during 2007, the Company collected $16,000 in receivables that were previously allowed in the allowance for doubtful accounts. During 2007, the Company decreased the allowance for doubtful accounts by $22,000. Research, development and service expenses decreased by $59,000, or 45%, to $71,000 for the three months ended September 30, 2007, compared to $130,000 in the same period of 2006. Most of the decrease was due to a reduction in salaries in the engineering department and a reduction in reengineering costs. Due to our ongoing cash flow difficulties, most of the Company's vendors and suppliers were contacted during 2006 and 2005 with attempts to negotiate reduced payments and settlement of outstanding accounts payable. Although 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 resulted in a gain of $34,000 and $12,000 during the years ended December 31, 2006 and 2005 respectively. In 2007 the Company is continuing its negotiations with certain vendors and suppliers. Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006 Net sales for the nine months ended September 30, 2007 decreased by $410,000, or 26%, to $1,190,000 as compared to $1,600,000 for the same period of 2006. This reduction in sales was primarily due to reduced sales of the P40, P45, P60 UBM Ultrasound Biomicroscopes and the LD 400 and the TKS 5000 Autoperimetry Systems. For the nine months ended September 30, 2007, sales from the Company's diagnostic products totaled $1,060,000, or 89% of total revenues, compared to $1,374,000, or 86% of total revenues for the same period of 2006. The remaining 11% of sales, or $130,000 during the nine months ended September 30, 2007, was from parts, disposables, and service revenue. Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes decreased by $21,000 to $272,000, or 23% of total revenues, for the nine months ended September 30, 2007, compared to $293,000, or 18% of total revenues, for the same period ended September 30, 2006. Sales of the Blood Flow Analyzer(TM) decreased by $1,000 to $127,000, or 11% of total revenues, for the nine months ended September 30, 2007, compared to net sales of $128,000, or 8% of total revenues, during the same period in 2006. Sales from the P37, P37-II and P2700 A/B Scan Ocular Ultrasound Diagnostic devices, the P55, P2200, and P2500 Pachymetric Analyzers, and the P2000 A-Scan Biometric Ultrasound Analyzer increased by $162,000 to $401,000, or 34% of total revenues, for the nine month period ended September 30, 2007, compared to $239,000, or 15% of total revenues, for the same period of 2006. Combined sales of the LD 400 and TKS 5000 Autoperimetry Systems and the CT 200 Corneal Topographer decreased by $454,000 to $261,000, or 22% of the total revenues, for the nine months ended September 30, 2007, compared to $715,000, or 45% of total revenues, for the same period of 2006. Sales have been lower during the nine months ended September 30, 2007 for the Company due to a variety of reasons. Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes were reduced primarily due to the introduction of new software for the P60, which received FDA 510(k) premarket approval on May 26, 2005,and to the necessity for hardware reconfiguration on the P40 and P45. The perimeters experienced a major reduction in sales due to the current redesign 13 and reconfiguration of the LD 400 and the ongoing software development for the LD700. The hardware configuration problems have since been resolved and the Company has recently completed a new software package for the P60. The Company anticipates reversing the downward trend in sales through additional efforts by the Company to increase support for the P60 through increased clinical awareness, increased product development, improved marketing plans, and ongoing development of the new perimeters. Sales of surgical products are at a standstill pending FDA approval of the Photon(TM) laser system. In the nine month period ended September 30, 2007, the Company realized no sales in the surgical line consisting of the Precissionist Thirty Thousand(TM) and the Photon(TM) laser system. There were also no sales in the surgical line for the comparable period of 2006. Gross profit for the nine months ended September 30, 2006 decreased by 1% to 46% of total revenues, compared to 47% of total revenues for the same period in 2006. The decrease in gross profit was mainly due to an increase in the price of materials, an increase in inventory and an increase in the cost of developing a new domestic sales force. There was no increase to cost of sales as a result of a charge to the reserve for obsolete inventory in 2007. Marketing and selling expenses increased by $135,000, or 44%, to $442,000, for the nine months ended September 30, 2007, from $307,000 for the comparable period in 2006. The increase was due primarily to increased salaries for domestic and international sales representatives, an increased number of sales representatives, and higher travel related and associated sales expenses. General and administrative expenses decreased by $84,000, or 11%, to $688,000 for the nine months ended September 30, 2007, from $772,000 for the same period in 2006. This reduction in general and administrative expenses was primarily due to reduced depreciation expenses, reduced travel expenses, and reduced legal and consulting fees. Also during 2007, the Company collected $19,000 in receivables that were previously allowed in the allowance for doubtful accounts. During 2007, the Company reduced the allowance for doubtful accounts by $22,000. Research, development and service expenses decreased by $127,000, or 33%, to $261,000 for the nine months ended September 30, 2007, compared to $388,000 in the same period of 2006. This reduction was mainly due to lower costs of development and compliance with regulatory requirements compared to the higher costs associated with development of the new P60 UBM, including the cost of compliance with regulatory requirements, for the comparable period in 2006. Due to our ongoing cash flow difficulties, most of the Company's vendors and suppliers were contacted during 2006 and 2005 with attempts to negotiate reduced payments and settlement of outstanding accounts payable. Although 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 resulted in a gain of $34,000 and $12,000 during the years ended December 31, 2006 and 2005 respectively. In 2007 the Company is continuing its negotiations with certain vendors and suppliers. Liquidity and Capital Resources The Company used $1,077,000 in cash in operating activities for the nine months ended September 30, 2007, compared to $766,000 for the nine months ended September 30, 2006. The increase in cash used for operating activities for the nine months ended September 30, 2006 was primarily attributable to the Company's net loss and decreases in accounts payable, accounts receivable, and accrued liabilities and a decrease in inventory, specifically for the P60 UBM. The Company used zero in investing activities for the nine months ended September 30, 2007, compared to $19,000 used for the nine months ended September 30, 2006. Net cash received in financing activities was $1,000,000 for the nine months ended September 30, 2007, versus cash received from financing activities of $986,000 in the same period in 2006. The Company had working capital of $389,000 as of September 30, 2006, compared to working capital of $360,000 as of September 30, 2006. As of September 30, 2007, the Company had net operating loss carry-forwards (NOLs) of approximately $55 million. These loss carry-forwards are available to offset future taxable income, if any, and have begun to expire in 2001 and extend for twenty years. The Company's ability to use net operating loss carryforwards (NOLs) to offset future income is dependant upon certain 14 limitations as a result of the pooling transaction with Vismed and the tax laws in effect at the time of the NOLs can be utilized. The Tax Reform Act of 1986 significantly limits the annual amount that can be utilized for certain of these carryforwards as a result of change of ownership. As of September 30, 2007, the Company had accounts payable of $347,000, a significant portion of which was over 90 days past due, compared to accounts payable of $336,000 as of September 30, 2006. The Company has contacted many of the vendors or companies that have significant amounts of payables past due in an effort to delay payment, renegotiate a reduced settlement payment, or establish a longer-term payment plan. While some companies have been willing to renegotiate the outstanding amounts, others have demanded payment in full. Under certain conditions, including but not limited to judgments rendered against the Company in a court of law, a group of creditors could force the Company into bankruptcy due to its inability to pay the liabilities arising out of such judgments at that time. In addition to the accounts payable noted above, the Company also has non-cancelable capital lease obligations and operating lease obligations that required the payment of approximately $105,000 in 2006 and $107,000 in 2007. The Company has taken numerous steps to reduce costs and increase operating efficiencies. These steps consist of the following: 1. The Company closed its San Diego facility. In so doing, numerous manufacturing, accounting and management responsibilities were consolidated. In addition, such closure resulted in significant headcount reductions as well as savings in rent and other overhead costs. 2. The Company has significantly reduced the use of consultants, which has resulted in a large decrease to these expenses. 3. The Company has increased its direct sales force to seven representatives, which has resulted in less payroll, travel and other selling expenses. Because the Company has significantly fewer sales representatives, its ability to generate sales has been reduced. The Company has taken measures to reduce the amount of uncollectible accounts receivable such as more thorough and stringent credit approval, improved training and instruction by sales personnel, and frequent direct communication with the customer subsequent to delivery of the system. The allowance for doubtful accounts was 11% of total outstanding receivables as of September 30, 2007 and 15% as of December 31, 2006 compared to 25% of total outstanding receivables as of September 30, 2006. The allowance for doubtful accounts decreased from $72,000 at December 31, 2006 to $50,000 at September 30, 2007. The Company intends to continue its efforts to reduce the allowance for doubtful accounts as a percentage of accounts receivable. The Company has ongoing efforts to collect a significant portion of the sales price in advance of the sale or in a timely manner after delivery. During the six months ended June 30, 2007, the Company decreased a net of $22,000 to the allowance for doubtful accounts. The Company believes that by requiring a large portion of payment prior to shipment, it has greatly improved the collectibility of its receivables. The Company carried an allowance for obsolete or estimated non-recoverable inventory of $1,320,000 at September 30, 2007 and $1,333,000 at September 30, 2006, or 55% and 60% of total inventory, respectively. The Company's means of expansion and development of product has been largely from acquisition of businesses, product lines, existing inventory, and the rights to specific products. Through such acquisitions, the Company has acquired substantial inventory, some of which the eventual use and recoverability was uncertain. In addition, the Company has a significant amount of inventory relating to the Photon(TM) laser system, which does not yet have FDA approval in order to sell the product domestically. Therefore, the allowance for inventory was established to reserve for these potential eventualities. On a quarterly basis, the Company attempts to identify inventory items that have shown relatively no movement or very slow movement. Generally, if an item has shown little or no movement for over a year, it is determined not to be recoverable and a reserve is established for that item. In addition, if the Company identifies products that have become obsolete due to product upgrades or enhancements, a reserve is established for such products. The Company intends to make efforts to sell these items at significantly discounted prices. If items are sold, the cash received would be recorded as revenue, but there would be no cost of sales on such items due to the reserve that has been recorded. At the time of sale, the inventory would be reduced for the item sold and the corresponding inventory reserve would also be reduced. At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation requires regulatory FDA approval in order to be sold in the United States. Any possible future efforts to complete the clinical trials on the Photon(TM) in order to file for FDA approval would depend on the Company obtaining adequate 15 funding. The Company estimates that the funds needed to complete the clinical trials in order to obtain the necessary regulatory approval on the Photon(TM) to be approximately $225,000. Effect of Inflation and Foreign Currency Exchange The Company has not realized a reduction in the selling price of its products as a result of domestic inflation. Nor has it experienced unfavorable profit reductions due to currency exchange fluctuations or inflation with its foreign customers. All sales transactions to date have been denominated in U.S. dollars. The Company has experienced an increase in product being manufactured in England and in parts being acquired from the European Community due to the fluctuations of the dollar compared to the Euro and the Pound Sterling. This has increased the cost of several products. There may be an impact on profits as a result of this decrease in the value of the dollar because the profit margins will decrease if higher product pricing has a negative impact on sales. New Accounting Pronouncements In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement is an amendment of FASB Statements Nos. 133 and 140 to address what had been characterized as a temporary exemption from the application of the bifurcation requirements of Statement No. 133 to beneficial interests in securitized financial assets. Prior to the effective date of Statement No. 133, the FASB received inquiries on the application of the exception in paragraph 14 of Statement No. 133 to beneficial interests in securitized financial assets. In response to the inquiries, Implementation Issue D1 indicated that, pending issuance of further guidance, entities may continue to apply the guidance related to accounting for beneficial interests in paragraphs 14 and 362 of Statement No. 140. Those paragraphs indicate that any security that can be contractually prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment should be subsequently measured like investments in debt securities classified as available-for-sale or trading under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and may not be classified as held-to-maturity. Further, Implementation Issue D1 indicated that holders of beneficial interests in securitized financial assets that are not subject to paragraphs 14 and 362 of Statement No. 140 are not required to apply Statement No. 133 to those beneficial interests until further guidance is issued. The Company believes the adoption of new standards will not have a material effect on its financial position, results of operations, cash flows, or previously issued financial reports. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. This statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. In this statement the board decided to broaden the scope of the project to include all servicing assets and servicing liabilities. Servicing assets and servicing liabilities may be subject to significant interest rate and prepayment risks, and many entities use financial instruments to mitigate those risks. Currently, servicing assets and servicing liabilities are amortized over the expected period of estimated net servicing income or loss and assessed for impairment or increased obligation at each reporting date. The board acknowledged that the application of the lower of carrying amount or fair value measurement attribute to servicing assets results in asymmetrical recognition of economic events, because it requires recognition of all decreases in fair value but limits recognition of increases in fair value to the original carrying amount. Statement No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The board concluded that fair value is the most relevant measurement attribute for the initial recognition of all servicing assets and servicing liabilities, because it represents the best measure of future cash flows. This statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under this statement, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class, thus simplifying its accounting and providing for income statement recognition of the potential offsetting changes in fair value of the servicing assets, servicing liabilities, and related derivative instruments. An entity that elects to subsequently measure servicing assets and servicing liabilities at fair value is expected to recognize declines in fair value of the servicing assets and servicing liabilities at fair value is expected to recognize declines in fair value of the servicing assets and servicing liabilities more consistently than by reporting other-than-temporary impairments. The Company believes the adoption of new standards will not have a material effect on its financial position, results of operations, cash flows, or previously issued financial reports. 16 Item 3. Controls and Procedures a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2007. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms. b) Changes in internal controls over financial reporting. During the nine months ended September 30, 2007, there has been no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II Other Information Item 1. Legal Proceedings An action was brought against the Company on September 11, 2000 by PhotoMed International, Inc. and Daniel M. Eichenbaum, M.D. in the Third District Court of Salt Lake County, State of Utah. The action involves an amount of royalties that are allegedly due and owing to PhotoMed International, Inc. and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to the sale of certain equipment, plus costs and attorneys' fees. Certain discovery has taken place and the Company has paid royalties of $15,717, which the Company believes brings all payments current as of the date of last payment on January 7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure that the calculations have been correctly made on the royalties paid as well as the proper method of calculation for the future. It is anticipated that once the parties can agree on the correct calculations on the royalties, the legal action will be dismissed. An issue in dispute concerning the method of calculating royalties is whether royalties should be paid on returned equipment. Since July 1, 2001, only one Photon(TM) laser system has been sold and no systems returned. Thus, the amount of royalties due, according to the Company's calculations, is $981. The Company made payment of this amount to Photomed and Dr. Eichenbaum on January 5, 2005 and, as a result, seeks to have the legal action dismissed. However, if the parties are unable to agree on a method for calculating royalties, there is a risk that PhotoMed and Dr. Eichenbaum might amend their complaint to request termination of the license agreement and, if successful, the Company would lose its right to manufacture and sell the Photon(TM)laser system. An action was filed on June 20, 2003, in the Third Judicial District Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that $49,626 plus interest is due for the leasing of three copy machines that were delivered to the Company's Salt Lake City facilities on or about April of 2000. The action also seeks an award of attorney's fees and costs incurred in the collection. The Company 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. After an initial meeting with new counsel, the Company provided initial disclosures to the new counsel. On September 10, 2003, an action was filed against the Company by Larry Hicks in the Third Judicial District Court, Salt Lake County, State of Utah, (Civil No. 030922220), for payments due under a consulting agreement with the Company. The complaint claims that monthly payments of $3,083 are due for the months of October 2002 to October 2003 under the consulting agreement and, if 17 the agreement is terminated, for the sum of $110,000 minus whatever the Company has paid Mr. Hicks prior to such termination, plus costs, attorney's fees and a wage penalty pursuant to Utah law. The Company has filed an answer in which it denies any liability to Mr. Hicks. Formal discovery in the matter has commenced. A trial is scheduled to begin on December 6, 2007. The Company disputes the amount allegedly owed and intends to vigorously defend against such action. The Company is not a party to any other material legal proceedings outside the ordinary course of its business or to any other legal proceedings, which, if adversely determined, would have a material adverse effect on its financial condition or results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Callable Secured Convertible Notes and Warrants February 28, 2006 Sale of $1,500,000 in Convertible Notes. To obtain funding for the Company's ongoing operations, the Company entered into a securities purchase agreement on February 28, 2006 with 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; $ $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 26, 2006 to register 60,000,000 shares of common stock issuable upon conversion of the convertible notes; and $ $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 agreed not, without the prior written consent of a majority-in-interest of the investors, to negotiate or contract with any party to obtain additional equity financing (including debt financing with an equity component) that involves (i) the issuance of common stock at a discount to the market price of the common stock on the date of issuance (taking into account the value of any warrants or options to acquire common stock in connection therewith), (ii) the issuance of convertible securities that are convertible into an indeterminate number of shares of common stock, or (iii) the issuance of warrants during the lock-up period beginning 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 bears 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 convertible notes mature in three years from the date of issuance, and are convertible into our 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. The $1,500,000 in convertible notes are secured by the Company's assets, including the Company's inventory, accounts receivable and intellectual property. Moreover, the Company has a call option under the terms of the notes. The call option provides the Company with the right to prepay all of the outstanding convertible notes at any time, provided there is no event of default by the Company and the Company's stock is trading at or below $.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 18 and Exchange Commission of the registration statement. Prepayment of the convertible notes is to be made in cash equal to either (i) 125% of the outstanding principal and accrued interest for prepayments occurring within 30 days following the issue date of the notes; (ii) 130% of the outstanding principal and accrued interest for prepayments occurring between 31 and 60 days following the issue date of the notes; or (iii) 145% of the outstanding principal and accrued interest for prepayments occurring after the 60th day following the issue date of the notes. The warrants are exercisable until five years from the date of issuance at a purchase price of $.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, then the Company will not receive any proceeds therefrom. In addition, the exercise price of the warrants will be adjusted in the event the Company issues common stock at a price below market, with the exception of any securities issued as of the date of the warrants or issued in connection with the callable secured convertible notes issued pursuant to the securities purchase agreement. The noteholders have agreed to restrict their ability to convert their convertible notes or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. However, the noteholders may repeatedly sell shares of common stock in order to reduce their ownership percentage, and subsequently convert additional convertible notes. As of November 13, 2007, a total of $164,122 in convertible notes issued on February 28, 2006 had been converted by the noteholders. 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 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. 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 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 19 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 (i) 125% of the outstanding principal and accrued interest for prepayments occurring within 30 days following the issue date of the notes; (ii) 130% of the outstanding principal and accrued interest for prepayments occurring between 31 and 60 days following the issue date of the notes; or (iii) 145% of the outstanding principal and accrued interest for prepayments occurring after the 60th day following the issue date of the notes. The warrants are exercisable until 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 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 November 13, 2007, none of the convertible notes issued on June 11, 2007 had been converted by the noteholders. The Company's obligation to issue shares upon conversion of the convertible notes issued on April 27, 2005, February 28, 2006, and June 11, 2007 is essentially limitless. The following is an example of the amount of shares of common stock that are issuable upon conversion of $3,388,496 principal amount of convertible notes (excluding accrued interest), based on market prices 25%, 50%, and 75% below the market price, as of October 26, 2007 of $.0024: % Below Price Per With 40% Number of % of Market Share Discount Shares Issuable Outstanding* ------ ----- -------- --------------- ----------- 25% $.0018 $.00108 3,137,496,000 779.2% 50% $.0012 $.00072 4,706,244,000 1,168.8% 75% $.0006 $.000036 94,124,889,000 23,376.0% *Based on 402,655,736 shares outstanding as of November 13, 2007. As illustrated, the number of shares of common stock issuable upon conversion of the Company's convertible notes will increase if the market price of the Company's common stock declines, which will cause dilution to existing stockholders. Adjustable Conversion Price of Convertible Notes ------------------------------------------------ The callable secured convertible notes are convertible into shares of the Company's common stock at a 40% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the noteholders convert and sell material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The noteholders could sell common stock into the market in anticipation of covering the short sale by 20 converting their securities, which could cause further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may have a depressive effect on the market price of the common stock. Possible Dilution to Stockholders --------------------------------- The issuance of shares upon conversion of convertible notes and exercise of warrants may result in substantial dissolution to the interests of other stockholders since the holders of the convertible notes may ultimately convert and sell the full amount issuable upon conversion. Although the noteholders may not convert their callable secured convertible notes and/or exercise their warrants if such conversion or exercise price would cause them to own more than 4.99% of the Company's outstanding common stock, this restriction does not prevent the noteholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the noteholders could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued, which will have the effect of further diluting the proportionate equity interest and voting power of holders of the Company's common stock. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-B or are incorporated by reference to previous filings. Exhibit No. Document Description ------- -------------------- 2.1 Amended Agreement and Plan of Merger between Paradigm Medical Industries, Inc., a California corporation and Paradigm Medical Industries, Inc., a Delaware corporation(1) 3.1 Certificate of Incorporation(1) 3.2 Amended Certificate of Incorporation(13) 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 Consulting Agreement with Dr. Daniel M. Eichenbaum(1) 10.3 1995 Stock Option Plan (1) 10.4 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) 10.5 Form of Convertible Note with each Purchaser(7) 10.6 Form of Stock Purchase Warrant with each Purchaser(7) 10.7 Security Agreement with Purchasers(7) 10.8 Intellectual Property Security Agreement with Purchasers(7) 10.9 Registration Rights Agreement with Purchasers(7) 21 10.10 Stock Purchase Agreement with Mackey Price Thompson & Ostler(8) 10.11 Employment Agreement with Raymond P.L. Cannefax(9) 10.12 2006 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II, LLP(10) 10.13 Form of Callable Secured Convertible Note with each Purchaser(10) 10.14 Form of Stock Purchase Warrant with each Purchaser(10) 10.15 Security Agreement with Purchasers(10) 10.16 Intellectual Property Security Agreement with Purchasers(10) 10.17 Registration Rights Agreement with Purchasers(10) 10.18 Settlement Agreement with Dr. Joseph W. Spadafora (11) 10.19 Worldwide OEM Agreement with MEDA Co., Ltd. (12) 10.20 Second Amendment to the Registration Rights Agreement dated April 27, 2005 (14) 10.21 Second Amendment to the Registration Rights Agreement dated February 28, 2006 (14) 10.22 2007 Securities Purchase Agreement with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium Capital Partners II, LLP 10.23 Form of Convertible Note with each Purchaser 10.24 Form of Stock Purchase Warrant with each Purchaser 10.25 Security Agreement with Purchasers 10.26 Intellectual Property Agreement with Purchasers 10.27 Registration Rights Agreement with Purchasers 31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ----------------- (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2007. 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARADIGM MEDICAL INDUSTRIES, INC. November 14, 2007 /s/ Raymond P.L. Cannefax ------------------------------------------------- Raymond P.L. Cannefax President and Chief Executive Officer November 14, 2007 /s/ Luis A. Mostacero ------------ ------------------------------------ Luis A. Mostacero, Vice President of Finance, Treasurer and Secretary 23 --------------------------------------------------------------------------------