pmidef14a.htm
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC
20549
SCHEDULE
14A
(Rule
14a-101)
SCHEDULE 14A
INFORMATION
Proxy Statement Pursuant to
Section 14(a)
of the Securities Exchange
Act of 1934
Filed by
Registrant :
Filed by a Party other than
the Registrant 9
Check the appropriate
box:
9 Preliminary Proxy
Statement
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9
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Confidential, for Use
of the Commission Only (as permitted by Rule
14a-6(3)(2))
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: Definitive Proxy
Statement
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9
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Definitive Additional
Materials
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9
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Soliciting Material
Pursuant to §240.14a-12
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PARADIGM
MEDICAL INDUSTRIES, INC.
(Name of Registrant as
Specified In Its Charter)
_________________________________________
(Name of Person(s) Filing
Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check
the Appropriate box):
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9
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Fee computed on table
below per Securities Exchange Act Rules 15a-6(i)(4) and
0-11.*
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9
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Fee paid previously
with preliminary materials.
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(1)
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Title of each class of
securities to which transaction
applies:
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(2)
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Aggregate number of
securities to which transaction
applies:
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(3)
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Per unit price or other
underlying value of transaction computed pursuant to Securities Exchange
Act Rule 0-11 (set forth the amount on which the filing fee is calculated
and state how it was
determined):
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(4)
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Proposed maximum
aggregate value of
transaction:
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9
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Check box if any part
of the fee is offset as provided by Securities Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously
Paid:
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(2)
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Form, Schedule or
Registration Statement No.:
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PARADIGM MEDICAL INDUSTRIES,
INC.
2355 South 1070
West
Salt Lake City, Utah
84119
October 31,
2008
Dear
Shareholder:
On behalf of the Board of
Directors, it is my pleasure to invite you to attend the Special Meeting of
Shareholders (the "Special Meeting") of Paradigm Medical Industries, Inc. (the
"Company") to be held on Friday, December 5, 2008, at 10:00 a.m., Mountain
Standard Time, at 2355 South 1070 West, Salt Lake City, Utah
84119. The formal notice of the Special Meeting and the Proxy
Statement have been made a part of this invitation.
The matters to be addressed
at the Special Meeting are (i) the approval of a proposed 1-for-100 reverse
stock split of the Company's common stock, and (ii) the transaction of such
other business as may properly come before the meeting or any adjournments
thereof. Please refer to the Proxy Statement for detailed information
on the proposal and the Special Meeting of Shareholders.
Your vote is very
important. We hope you will take a few minutes to review the Proxy
Statement and complete, sign, and return your Proxy Card in the envelope
provided, even if you plan to attend the meeting. Please note that
sending us your Proxy will not prevent you from voting in person at the meeting,
should you wish to do so.
Thank you for your support of
Paradigm Medical Industries, Inc. We look forward to seeing you
at the Special Meeting.
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Sincerely
yours,
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/s/ Raymond P.S.
Cannefax
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Raymond P.L.
Cannefax
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President and Chief
Executive Officer
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PARADIGM
MEDICAL INDUSTRIES, INC.
2355 South 1070
West
Salt Lake City, Utah
84119
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD DECEMBER 5,
2008
_________________________
To our
Shareholders:
NOTICE IS HEREBY GIVEN that
the Special Meeting of Shareholders (the “Special Meeting”) of Paradigm Medical
Industries, Inc. (the “Company”) will be held on Friday, December 5, 2008,
beginning at 10:00 a.m. Mountain Standard Time, at the Company’s corporate
headquarters at 2355 South 1070 West, Salt Lake City,
Utah. At the Special Meeting, shareholders will consider and act upon
the following matter:
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1.
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To approve a 1-for-100
reverse stock split of the Company's common stock;
and
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2.
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To transact such other
business as may properly come before the meeting or any adjournment
thereof.
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The foregoing items of
business are more fully described in the Proxy Statement accompanying this
Notice. Also included is a single-page Proxy Card and a postage
prepaid return envelope. Only shareholders of record at the close of
business on October 24, 2008 are entitled to notice of, and to vote at, the
Special Meeting or any adjournment thereof.
If you do
not expect to attend the meeting in person, it is important that your shares be
represented. Please use the enclosed Proxy Card to vote on the
matters to be considered at the meeting, sign and date the proxy card and mail
it promptly in the enclosed envelope, which requires no postage if mailed in the
United States. You may revoke your proxy at any time before the
meeting by written notice to such effect, by submitting a subsequently dated
proxy or by attending the meeting and voting in person. If your shares
are held in “street name,” you should instruct your broker how to vote in
accordance with your Proxy Card.
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By order of the Board
of Directors,
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/s/ Luis A.
Mostacero
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Luis A.
Mostacero
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Vice President of
Finance, Chief Financial Officer,
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Treasurer
and Secretary
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October 31,
2008
Salt Lake City,
Utah
PARADIGM
MEDICAL INDUSTRIES, INC.
2355 South 1070
West
Salt Lake City, Utah
84119
PROXY
STATEMENT
INFORMATION CONCERNING
SOLICITATION AND VOTING
General
The enclosed Proxy is
solicited on behalf of the Board of Directors of Paradigm Medical Industries,
Inc., a Delaware corporation (the "Company") for use at the Special Meeting of
Shareholders (the "Special Meeting") to be held on Friday, December 5, 2008,
beginning at 10:00 a.m., Mountain Daylight Time, or at any adjournment(s)
thereof. The purpose of the meeting is set forth herein and in the
accompanying Notice of Special Meeting of Shareholders. The Special
Meeting will be held at the Company’s corporate headquarters at 2355 South 1070
West, Salt Lake City, Utah. This Proxy Statement and accompanying materials are
being mailed on or about October 31, 2008. The Company will bear the
cost of this solicitation.
The matters to be brought
before the Special Meeting are (1) to approve a 1-for-100 reverse stock split of
the Company's common stock; and (2) to transact such other business as may
properly come before the Special Meeting.
Record
Date
Shareholders of record of the
Company's Common Stock at the close of business on October 24, 2008 (the "Record
Date") are entitled to notice of and to vote at the meeting. As of
October 24, 2008, 1,400,000,000 shares of the Company's Common Stock, $.001 par
value, 5,627 shares of the Series A Preferred Stock, 8,986 shares of
Series B Preferred Stock, no shares of Series C Convertible Preferred Stock,
5,000 shares of Series D Convertible Preferred Stock, 250 shares of Series E
Convertible Preferred Stock, 4,398.75 shares of Series F Preferred Stock, and
588,235 shares of Series G Preferred Stock were issued and
outstanding. Shareholders of Series A, Series
B, Series C, Series D, Series E, Series F and Series G Preferred Stock are not
entitled to vote at the Annual Meeting. Shareholders holding at least
one-third of the outstanding shares of Common Stock represented in person or by
proxy shall constitute a quorum for the transaction of business at the Special
Meeting.
Revocability of
Proxies
Shareholders may revoke any
appointment of proxy given pursuant to this solicitation by delivering the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person. An appointment
of proxy is revoked upon the death or incapacity of the shareholder if the
Secretary or other officer of the Company authorized to tabulate votes receives
notice of such death or incapacity before the proxy exercises its authority
under the appointment.
Voting and
Solicitation
Each shareholder will be
entitled to one vote for each share of Common Stock held at the record
date. Assuming a quorum is present, a plurality of votes cast by the
shares entitled to vote on the amendment to the Company's Certificate of
Incorporation will be required to approve the amendment. Because the
shares of Series A, Series B, Series C, Series D, Series E, Series F and Series
G Preferred Stock are non-voting securities, the holders thereof will not be
entitled to vote at the Special Meeting. The Company's executive
offices are located at 2355 South 1070 West, Salt Lake City,
Utah. In addition to the use of the mails, proxies may be solicited
personally, by telephone, or by facsimile, and the Company may reimburse
brokerage firms and other persons holding shares in the Company in their names
or those of their nominees for their reasonable expenses in forwarding
soliciting materials to the beneficial owners.
APPROVAL OF REVERSE STOCK
SPLIT
Proposal
Subject to shareholder
approval, the Board of Directors has approved a 1-for-100 reverse stock split of
the Company's common stock. The Board of Directors believes that the
reverse stock split is in the Company's best interests in that it may increase
the trading price of the common stock. An increase in the price of
the common stock should, in turn, generate greater investor interest in the
common stock, thereby enhancing the marketability of the common stock to the
financial community. In addition, an increase in the price of the
common stock would enhance the attractiveness of the Company's common stock for
future acquisitions or mergers by the Company or to otherwise carry out the
Company's business objectives.
Although the reverse stock
split may increase the market price of the common stock, the actual effect of
the reverse split on the market price cannot be predicted. The market
price of the common stock may not rise in proportion to the reduction in the
number of shares outstanding as a result of the reverse stock
split. Further, there is no assurance that the reverse stock split
will lead to a sustained increase in the market price of the common
stock. The market price of the common stock may also change as a
result of other unrelated factors, including the Company's operating performance
and other factors related to its business as well as general market
conditions. The reverse stock split will affect all of the holders of
the Company's common stock uniformly and will not affect any shareholder's
percentage ownership interest in the Company or proportionate voting power,
except for insignificant changes that will result from the rounding up of
fractional shares, as discussion below.
The reverse stock split of
the Company's common stock will become effective upon shareholder approval at
the Special Meeting of Shareholders and on the date of filing of a Certificate
of Amendment to the Company's Amended and Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware (the "Effective
Date"). The reverse stock split will take place on the Effective
Date. Shareholders will affect the reverse stock split by physically
surrendering their current certificates for certificates representing the number
of shares of common stock each shareholder is entitled to receive as a result of
the reverse stock split. New certificates of common stock will be
issued.
No fractional shares will be
issued in connection with the reverse stock split. Shareholders who
would otherwise be entitled to receive fractional shares because they hold a
number of shares of common stock that is not evenly divisible by the reverse
stock split ratio will receive an additional share for their fractional
shares. For example, a shareholder who would be entitled to receive
one-fourth of a share would receive one share of the Company's common stock on
the date that the reverse stock split is
implemented.
Certain Risks Associated with
the Reverse Stock Split
The Company's total market
capitalization immediately after the proposed reverse stock split may be lower
than immediately before the proposed reverse stock split.
There are numerous factors
and contingencies that could affect the Company's stock price following the
proposed reverse stock split, including the status of the market for the
Company's stock at the time, the Company's reported results of operations in
future periods, and general economic market and industry
conditions. Accordingly, the market price of the Company's common
stock may not be sustainable at the direct arithmetic result of the reverse
stock split (for example, based on the closing price of the Company's common
stock on the OTC Bulletin Board on July 2, 2008 of $.0004 per share, the direct
arithmetic result of the reverse stock split would be a post-split market price
for the Company's common stock at $.04 per share). If the market
price of the Company's common stock declines after the reverse stock split, the
Company's total market capitalization (the aggregate value of all of the
Company's outstanding common stock at the then existing market price) after the
split will be lower than before the split.
The reverse stock split may
result in some shareholders owning "odd lots" that may be more difficult to sell
or require greater transaction costs per share to sell.
The reverse stock split may
result in some shareholders owning "odd lots" of less than 100 shares of the
Company's common stock on a post-split basis. Odd lots may be more
difficult to sell, or require greater transaction costs per share to sell, than
shares in "board lots" of even multiples of 100 shares.
Effect on Existing Shares of
Common Stock
The proposed reverse stock
split would affect all of the Company's shareholders uniformly and would not
affect any shareholder's percentage ownership interest in the Company, except to
the extent that the reverse stock split results in any of the Company's
shareholders owning a fractional share, as described
below. Proportionate voting rights and other rights and preferences
of the holders of the Company's common stock would not be affected by a reverse
stock split.
Effect on Authorized but
Unissued Shares of Common Stock
Currently, the Company is
authorized to issue up to a total of 1,400,000,000 shares of common stock, of
which 1,400,000,000 shares were outstanding on the Record Date. The
reverse stock split will not impact the total authorized number of shares of
common stock.
Effect on Authorized but
Unissued Shares of Preferred Stock
Currently, the Company is
authorized to issue up to a total of 5,000,000 shares of preferred stock,
612,497 of which are issued and outstanding or reserved for future
issuance. The reverse stock split will not impact the total
authorized number of shares of preferred stock.
Effect on Convertible
Debt
The number of shares into
which the $3,967,476 in callable secured convertible notes are convertible and
the conversion price for those notes will be automatically adjusted as a result
of the reverse stock split as provided in the terms of those
notes. In addition, the number of shares represented by the warrants
the Company sold concurrently with the convertible notes and the exercise prices
for the warrants will also be automatically adjusted as a result of the reverse
stock split pursuant to their terms.
Effect on Stock
Options
Currently, there are
outstanding stock options granted to the Company's executive officers and
employees to purchase 9,250,000 shares of common stock at exercise prices
ranging from $.01 per share to $2.75 per share, and outstanding stock options
granted to the Company's directors to purchase 2,250,000 shares of common stock
at exercise prices ranging from $.01 per share to $2.75 per
share. The reverse stock split would reduce the number of shares
authorized and available for issuance under 1995 Stock Option
Plan. In addition, the exercise price per share for each option would
be multiplied by 100.
Effect on Registration and
Stock Trading
The Company's common stock is
currently registered under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "1934 Act") and the Company is subject to the periodic reporting
and other requirements of the 1934 Act. The proposed reverse stock
split will not affect the registration of the Company's common stock under the
1934 Act.
If the proposed reverse stock
split is implemented, the Company's common stock will continue to be reported on
the OTC Bulletin Board under the symbol "PMED."
Effective
Date
The proposed reverse stock
split would become effective on the date of filing of a Certificate of Amendment
to the Company's Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware, in the form attached hereto as
Appendix A, to amend the Certificate with a provision effecting the reverse
stock split. The reverse stock split will become effective at such
time as the Certificate of Amendment effecting the reverse split is accepted and
approved by the Secretary of State of the State of Delaware.
Mechanics of Reverse Stock
Split
If this Proposal is approved
by the shareholders at the Special Meeting, shareholders will be notified that
the reverse stock split has been effected. The mechanics of the
reverse stock split will differ depending upon whether shares held are held
beneficially in street name or whether they are registered directly in a
shareholder's name.
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If
a shareholder's shares are held in street name, the number of shares the
shareholders hold will automatically be adjusted to reflect the reverse
stock split on the Effective Date.
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If
a shareholder's shares are registered directly in the shareholder's name,
the shareholder will receive a transmittal letter asking the shareholder
to surrender certificates representing pre-split shares in exchange for
certificates representing post-split shares. No new
certificates will be issued to the shareholder until the outstanding
certificate(s), together with the properly completed and executed letter
of transmittal, are delivered to Continental Stock Transfer & Trust
Co., 17 Battery Place, 8th
Floor, New York, New York 1004-1123, the exchange agent for the common
shareholders. Shareholders should not destroy any stock
certificates and should not submit any certificates until requested to do
so. The exchange agent will send each common shareholder a new
stock certificate promptly after receipt of that shareholder's properly
completed letter of transmittal and old stock
certificate(s).
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No Fractional
Shares
Whether shares are held in
street name or directly, the Company will not issue fractional shares of common
stock to its shareholders. Shareholders that would otherwise be
entitled to receive fractional shares because they hold a number of shares that
is not evenly divisible by the reverse split ratio will receive one additional
share of the Company's common stock in lieu of such fractional
share.
Accounting
Consequences
The reverse stock split will
not effect the par value of the Company's common stock. As a result,
as of the effectiveness of the reverse stock split, the stated capital
attributable to the common stock on the balance sheet will be reduced
proportionately based on the reverse stock split and the additional paid-in
capital account will be credited with the amount by which the stated capital is
reduced. The per-share net income or loss and net book value of the
Company's common stock will be restated because there will be fewer shares of
common stock outstanding.
No Appraisal
Rights
Under the Delaware General
Corporation Law, the Company's shareholders are not entitled to appraisal rights
with respect to the reverse stock split described in this Proposal, and the
Company will not independently provide its shareholders with any such
rights.
U.S. Federal Income Tax
Consequences
The following is a summary of
important tax considerations of the proposed reverse stock split: It addresses
only shareholders who hold the pre-reverse stock split shares and post-reverse
stock split shares as capital assets. It does not purport to be complete and
does not address shareholders subject to special rules, such as financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities, mutual funds, foreign shareholders, shareholders who hold the
pre-reverse stock split shares as part of a straddle, hedge or conversion
transaction, shareholders who hold the pre-reverse stock split shares as
qualified small business stock within the meaning of Section 1202 of the Code,
shareholders who are subject to the alternative minimum tax provisions of the
Code, and shareholders who acquired their pre-reverse stock split shares
pursuant to the exercise of employee stock options or otherwise as
compensation.
This summary is based upon
current law, which may change, possibly even retroactively. It does not address
tax considerations under state, local, foreign and other laws. The Company has
not obtained a ruling from the Internal Revenue Service or an opinion of legal
or tax counsel with respect to the consequences of the reverse stock split. Each
shareholder is advised to consult his or her tax advisor as to his or her own
situation. The reverse stock split is intended to constitute a reorganization
within the meaning of Section 368 of the Code. Assuming the reverse stock split
qualifies as a reorganization, a shareholder generally will not recognize gain
or loss on the reverse stock split, except to the extent of cash, if any,
received in lieu of a fractional share interest in the post-reverse stock split
shares. The aggregate tax basis "of the post-split shares received will be equal
to the aggregate tax basis of the pre-split shares exchanged therefor (excluding
any portion of the holder's basis allocated to fractional shares), and the
holding period of the post-split shares received will include the holding period
of the pre-split shares exchanged. A holder of the pre-split shares who receives
cash will generally recognize gain or loss equal to the difference between the
portion of the tax basis of the pre-split shares allocated to the fractional
share interest and the cash received. Such gain or loss will be a capital gain
or loss and will be short term if the pre-split shares were held for one year or
less and long term if held more than one year. No gain or loss will be
recognized by the Company as a result of the reverse stock
split.
Vote Required and Board
Recommendation
The affirmative vote of the
holders of a majority of the outstanding shares of the Company's common stock
will be required to approve the reverse stock split, assuming a quorum is
present.
The Board recommends that the
shareholders vote "FOR" the approval of the reverse stock
split.
OUTSTANDING COMMITMENTS TO
ISSUE SHARES
The following table
identifies the Company's outstanding commitments to issue shares, including the
shares underlying the convertible notes and warrants issuable upon conversion of
the notes and exercise of the warrants:
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Security
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Underlying
Shares
of Common
Stock
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Notes
(1)
Warrants
(2)
Preferred Stock
(3)
Stock Options
(4)
Total
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22,041,533,000
63,834,392
862,438
11,500,000
22,117,759,830
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(1)
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Assumes full conversion
of $3,967,476 of notes issued to AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC, and New Millennium Capital Partners II, LLC
at a conversion price of $.0004 per share (based upon a market price of
$.0004 as of July 2, 2008 with a 55%
discount).
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(2)
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Consisting of warrants
exerciseable at prices ranging from $.001 per share to $6.75 per share,
including warrants issued to AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC, and New Millennium Capital Partners II, LLC to
purchase 16,534,392 shares of common stock at an exercise price of $.20
per share, exerciseable through the period from April 27, 2010 to June 30,
2010; warrants to purchase 12,000,000 shares of common stock at an
exercise price of $.10 per share, exerciseable through the period from
February 28, 2011 to April 20, 2012; warrants to purchase 10,000,000
shares of common stock at an exercise price of $.005 per share,
exerciseable through June 11, 2012; warrants to purchase 15,000,000 shares
of common stock at an exercise price of $.001 per share, exerciseable
through December 24, 2014; and warrants to purchase 10,000,000 shares of
common stock at an exercise price of $.001 per share, exerciseable through
June 30, 2015.
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Consisting of 6,752
shares of common stock issuable upon conversion of 5,627 shares of Series
A preferred stock, 10,783 shares of common stock issuable upon conversion
of 8,986 shares of Series B preferred stock, 8,750 shares of common stock
issuable upon conversion of 5,000 shares of Series D preferred stock,
13,333 shares of common stock issuable upon conversion of 250 shares of
Series E preferred stock, 234,585 shares of common stock issuable upon
conversion of 4,398.75 shares of Series F preferred stock, and 588,235
shares of common stock issuable upon conversion of 588,235 shares of
Series G preferred stock.
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Consisting of stock
options granted to executive officers and employees to purchase 9,250,000
shares of common stock at exercise prices ranging from $.01 per share to
$2.75 per share, and stock options granted to directors to purchase
2,250,000 shares of common stock at exercise prices ranging from $.01 per
share to $2.75 per share.
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There are a total of
22,117,759,830 shares underlying the Company's convertible notes, warrants,
preferred stock and stock options, assuming full conversion of the outstanding
notes and preferred stock and the exercise of all the outstanding warrants and
stock options. The current number of the Company's authorized shares
of common stock is 1,400,000,000 shares. The large number
of shares of common stock underlying the notes, warrants, preferred
stock and stock options will require the Company to increase the number of
authorized shares. Failure to obtain shareholder approval to increase
the number of authorized shares could result in the noteholders commencing legal
action against the Company and foreclosing on all of its assets to recover
damages. Any such action would require the Company to curtail or
cease its operations.
CALLABLE SECURED CONVERTIBLE
NOTES AND WARRANTS
April 27,
2005 Sale of $2,500,000 in Callable Secured Convertible
Notes: To obtain funding for the
Company's ongoing operations, the Company entered into a securities purchase
agreement with four accredited investors on April 27, 2005 for the sale of (i)
$2,500,000 in convertible notes and (ii) warrants to purchase 16,534,392 shares
of its common stock. The sale of the convertible notes and warrants
occurred in three traunches and the investors provided the Company with an
aggregate of $2,500,000 as follows:
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$850,000
was disbursed on April 27, 2005;
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$800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of the warrants;
and
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$850,000
was disbursed on June 30, 2005, the effective date of the registration
statement.
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Under the terms of the
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
April 27, 2005 and ending on the later of (A) 270 days from April 27, 2005, and
(B) 180 days from the date the registration statement is declared
effective.
In addition, the Company
agreed not to conduct any equity financing (including debt financing with an
equity component) during the period beginning April 27, 2005 and ending two
years after the end of the above lock-up period unless it has 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 the Company's common stock at the
noteholders' option, at the lower of (i) $.09 or (ii) 60% of the average of the
three lowest intraday trading prices for the common stock on the OTC Bulletin
Board for the 20 trading days before but not including the conversion
date. Accordingly, there is no limit on the number of shares into
which the notes may be converted. On June 16, 2008, the Company
agreed to reduce the applicable percentage for calculating the conversion price
from 60% to 45% of the average of the three lowest intraday trading prices of
the Company's common stock. The Company agreed to this change as a
condition to receiving further funding for its ongoing operations on June 16,
2008.
The convertible notes are
secured by the Company's assets, including the Company's inventory, accounts
receivable and intellectual property. Moreover, the Company has
a call option under the terms of the notes. The call option provides
the Company with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by the Company and its stock is
trading at or below $.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 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; and (iii) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date
of the notes.
The warrants are exercisable
until five years from the date of issuance at a purchase price of $.20 per
share. The investors may exercise the warrants on a cashless basis if
the shares of common stock underlying the warrants are not then registered
pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, 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 callable secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible
notes.
As of December 31, 2007,
there was an outstanding balance of $1,443,000 in principle on these convertible
notes. During the years ended December 31, 2007 and 2006, the Company
issued 283,017,246 and 105,529,700 shares of common stock for the conversion of
$212,000 and $381,000 of these convertible notes, respectively. As of
June 30, 2008, there was an outstanding balance of $1,256,745 in principle
remaining on these convertible notes. During the six months ended
June 30, 2008, the Company issued 752,570,008 common shares for the
conversion of $186,081 of these convertible notes.
February
28, 2006 Sale of $1,500,000 in Callable Secured Convertible
Notes: To obtain additional funding
for the Company's ongoing operations, the Company entered into a second
securities purchase agreement on February 28, 2006 with the same four accredited
investors for the sale of (i) $1,500,000 in convertible notes and (ii) warrants
to purchase 12,000,000 shares of its common stock. The sale of the
convertible notes and warrants is to occur in three traunches and the investors
are obligated to provide the Company with an aggregate of $1,500,000 as
follows:
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|
•
|
$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 21, 2006 to register 60,000,000 shares of common
stock issuable upon conversion of the convertible
notes;
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•
|
$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
February 28, 2006 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 February 28, 2006 and ending on the later of (a) 270 days from
February 28, 2006, or (b) 180 days from the date the registration statement
is declared effective.
In addition, the Company
agreed not to conduct any equity financing (including debt financing with an
equity component) during the period beginning February 28, 2006 and ending two
years after the end of the above lock-up period unless it first provided each
investor an option to purchase its pro-rata share (based on the ratio of each
investor's purchase under the securities purchase agreement) of the securities
being offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and the
option must be extended to each investor during the 15-day period following
delivery of such notice.
The $1,500,000 in convertible
notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0275, for each trading day during that month. Any amount of
principal or interest on the callable secured convertible notes that is not paid
when due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The convertible notes mature in
three years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii) 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. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
The convertible notes are
secured by the Company's assets, including the Company's inventory, accounts
receivable and intellectual property. Moreover, the Company has
a call option under the terms of the notes. The call option provides
the Company with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by the Company and its stock is
trading at or below $.02 per share. An event of default includes the
failure by the Company to pay the principal or interest on the convertible notes
when due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be
made in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date
of the notes.
The warrants are exercisable
until 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, 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.
As of December 31, 2007,
there was an outstanding balance of $1,334,000 in principle on these convertible
notes. During the years ended December 31, 2007, the Company issued
60,000,000 shares of common stock for the conversion of $167,000 of these
convertible notes. As of June 30, 2008, there was an outstanding
balance of $1,334,275 in principle remaining on these convertible
notes. During the six months ended June 30, 2008, the Company issued
no shares of common stock for the conversion of these convertible notes, and
there were no conversions of such convertible notes.
June 11,
2007 Sale of $500,000 in Callable Secured Convertible
Notes: To obtain further funding for
the Company's ongoing operations, the Company entered into a third securities
purchase agreement on June 11, 2007 with the same four accredited investors for
the sale of (i) $500,000 in callable secured convertible notes and (ii) warrants
to purchase 10,000,000 shares of its common stock. The investors
disbursed $500,000 to the Company on June 11, 2007.
Under the terms of the June
11, 2007 securities purchase agreement, the Company agreed that it would not,
without the prior written consent of a majority-in-interest of the investors,
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning June 11, 2007 and ending on the later of (a) 270 days from June
11, 2007, or (b) 180 days from the date the registration statement is declared
effective.
In addition, the Company
agreed not to conduct any equity financing (including debt financing with an
equity component) during the period beginning June 11, 2007 and ending two years
after the end of the above lock-up period unless it first provided each investor
an option to purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and the
option must be extended to each investor during the 15-day period following
delivery of such notice.
The $500,000 in convertible
notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0275, for each trading day during that month. Any amount of
principal or interest on the callable secured convertible notes that is not paid
when due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The convertible notes mature in
three years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii) 50% of
the average of the three lowest intraday trading prices for the common stock on
the OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
The convertible notes are
secured by the Company's assets, including the Company's inventory, accounts
receivable and intellectual property. Moreover, the Company has
a call option under the terms of the notes. The call option provides
the Company with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by the Company and its stock is
trading at or below $.10 per share. An event of default includes the
failure by the Company to pay the principal or interest on the convertible notes
when due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be
made in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date
of the notes.
The warrants are exercisable
until seven years from the date of issuance at a purchase price of $.005 per
share. The investors may exercise the warrants on a cashless basis if
the shares of common stock underlying the warrants are not then registered
pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of
the warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed
to restrict their ability to convert their convertible notes or exercise their
warrants and receive shares of the Company's common stock such that the number
of shares of common stock held by them in the aggregate and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. However, the noteholders may
repeatedly sell shares of common stock in order to reduce their ownership
percentage, and subsequently convert additional convertible notes, provided,
however, that such conversions do not exceed $75,000 per calendar month, or the
average daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar month, per
calendar month.
The Company is required to
register the shares of its common stock issuable upon the conversion of the
convertible notes and the exercise of the warrants that were issued to the
noteholders pursuant to the securities purchase agreement the Company entered in
to on June 11, 2007. The registration statement must be filed with
the Securities and Exchange Commission within 60 days of the June 11, 2007
closing date and the effectiveness of the registration is to be within 135 days
of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required
time. The penalty may be paid in cash or stock at the Company's
option.
As of June 30, 2008, there
had been no conversions of these convertible notes. Upon conversion
of these convertible notes, the Company extinguishes the convertible debt and
related embedded derivatives and no gain or loss is recorded on the Company's
statements of operations as a result of said conversion.
December
19, 2007 Issuance of $389,010 in Callable Convertible Notes: On December 19, 2007, the
Company was notified by the holders of the convertible notes that there was a
past due interest owing on the outstanding convertible notes. The total amount
of interest owed was $389,010. To pay this interest, the noteholders were
willing to accept $389,010 in additional convertible notes due on December 31,
2010. Accordingly, on December 19, 2007, the Company issued $389,010 in
convertible notes to the noteholders as full payment of the past due
interest.
The $389,010 in convertible
notes bear interest at 2% per annum from December 31, 2007. Interest is computed
on the basis of a 365-day year and is payable quarterly in cash, with six months
of interest payable up front. The interest rate resets to zero percent for any
month in which the stock price is greater than 125% of the initial market price,
or $.0275, for each trading day during that month. Any amount of principal or
interest on the callable secured convertible notes that is not paid when due
will bear interest at the rate of 15% per annum from the date due thereof until
such amount is paid. The convertible notes mature on December 31, 2010, 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. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
The convertible notes have a
call option under the terms of the notes. The call option provides the Company
with the right to prepay all of the outstanding convertible notes at any time,
provided there is no event of default by the Company and its stock is trading at
or below $.04 per share. An event of default includes the failure by the Company
to pay the principal or interest on the convertible notes when due. Prepayment
of the convertible notes is to be made in cash equal to either (a) 135% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (b) 145% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; or (c) 150% of the outstanding principal
and accrued interest for prepayments occurring after the 60th day following the issue date
of the notes.
The noteholders have agreed
to restrict their ability to convert their convertible notes and receive shares
of the Company's common stock such that the number of shares of common stock
held by them in the aggregate and their affiliates after such conversion does
not exceed 4.9% of the then issued and outstanding shares of common stock.
However, the noteholders may repeatedly sell shares of common stock in order to
reduce their ownership percentage, and subsequently convert additional
convertible notes, provided, however, that such conversions do not exceed the
average daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar month, per
calendar month.
As of June 30, 2008, there
had been no conversions of these convertible notes. Upon conversion
of the convertible notes, the Company extinguishes the convertible debt and
related embedded derivatives and no gain or loss is recorded on the Company's
statements of operations as a result of said conversion.
December
24, 2007 Sale of $250,000 in Callable Secured Convertible
Notes: To obtain further funding for
the Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with three accredited investors for the
sale of (i) $250,000 in callable secured convertible notes and (ii) warrants to
purchase 15,000,000 shares of its common stock. The investors
disbursed $250,000 to the Company on December 24, 2007.
Under the terms of the
December 24, 2007 securities purchase agreement, the Company agreed that it
would not, without the prior written consent of a majority-in-interest of the
investors, negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) that involves (i)
the issuance of common stock at a discount to the market price of the common
stock on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning December 24, 2007 and ending on the later of (a) 270 days from
December 24, 2007, or (b) 180 days from the date the registration statement is
declared effective.
In addition, the Company
agreed not to conduct any equity financing (including debt financing with an
equity component) during the period beginning December 24, 2007 and ending two
years after the end of the above lock-up period unless it first provided each
investor an option to purchase its pro-rata share (based on the ratio of each
investor's purchase under the securities purchase agreement) of the securities
being offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and the
option must be extended to each investor during the 15-day period following
delivery of such notice.
The $250,000 in convertible
notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0275, for each trading day during that month. Any amount of
principal or interest on the callable secured convertible notes that is not paid
when due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The convertible notes mature in
three years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii) 50% of
the average of the three lowest intraday trading prices for the common stock on
the OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
The convertible notes are
secured by the Company's assets, including the Company's inventory, accounts
receivable and intellectual property. Moreover, the Company has
a call option under the terms of the notes. The call option provides
the Company with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by the Company and its stock is
trading at or below $.02 per share. An event of default includes the
failure by the Company to pay the principal or interest on the convertible notes
when due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be
made in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date
of the notes.
The warrants are exercisable
until seven years from the date of issuance at a purchase price of $.001 per
share. The investors may exercise the warrants on a cashless basis if
the shares of common stock underlying the warrants are not then registered
pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of
the warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed
to restrict their ability to convert their convertible notes or exercise their
warrants and receive shares of the Company's common stock such that the number
of shares of common stock held by them in the aggregate and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. However, the noteholders may
repeatedly sell shares of common stock in order to reduce their ownership
percentage, and subsequently convert additional convertible notes, provided,
however, that such conversions do not exceed $75,000 per calendar month, or the
average daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar month, per
calendar month.
The Company is required to
register the shares of its common stock issuable upon the conversion of the
convertible notes and the exercise of the warrants that were issued to the
noteholders pursuant to the securities purchase agreement the Company entered in
to on December 24, 2007. The registration statement must be filed
with the Securities and Exchange Commission within 60 days of the December 24,
2007 closing date and the effectiveness of the registration is to be within 135
days of such closing date. Penalties of 2% of the outstanding
principal balance of the convertible notes plus accrued interest are to be
applied for each month the registration is not effective within the required
time. The penalty may be paid in cash or stock at the Company's
option.
As of June 30, 2008, there
had been no conversions of these convertible notes. Upon conversion
of these convertible notes, the Company extinguishes the convertible debt and
related embedded derivatives and no gain or loss is recorded on the Company's
statements of operations as a result of said conversion.
June 16,
2008 Sale of $310,000 in Callable Secured Convertible
Notes: To obtain additional funding
for the Company's ongoing operations, the Company entered into a fifth
securities purchase agreement on June 16, 2008 with three accredited investors
for the sale of (i) $310,000 in convertible notes and (ii) warrants to purchase
10,000,000 shares of its common stock. The sale of the convertible
notes and warrants is to occur in three traunches and the investors are
obligated to provide the Company with an aggregate of $310,000 as
follows:
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$110,000
were disbursed on June 16, 2008;
|
|
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•
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$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and
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•
|
$100,000
will be disbursed upon the effectiveness of the reverse stock
split.
|
Under the terms of the June
16, 2008 securities purchase agreement, the Company agreed that it would not,
without the prior written consent of a majority-in-interest of the investors,
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning June 16, 2008 and ending on the later of (a) 270 days from
June 16, 2008, or (b) 180 days from the date the registration statement is
declared effective.
In addition, the Company
agreed not to conduct any equity financing (including debt financing with an
equity component) during the period beginning June 16, 2008 and ending two years
after the end of the above lock-up period unless it first provided each investor
an option to purchase its pro-rata share (based on the ratio of each investor's
purchase under the securities purchase agreement) of the securities being
offered in any proposed equity financing. Each investor must be
provided written notice describing any proposed equity financing at least 20
business days prior to the closing of such proposed equity financing and the
option must be extended to each investor during the 15-day period following
delivery of such notice.
The $310,000 in convertible
notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$.0275, for each trading day during that month. Any amount of
principal or interest on the callable secured convertible notes that is not paid
when due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The convertible notes mature in
three years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $.02 or (ii) 45% of
the average of the three lowest intraday trading prices for the common stock on
the OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted.
The convertible notes are
secured by the Company's assets, including the Company's inventory, accounts
receivable and intellectual property. Moreover, the Company has
a call option under the terms of the notes. The call option provides
the Company with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by the Company and its stock is
trading at or below $.02 per share. An event of default includes the
failure by the Company to pay the principal or interest on the convertible notes
when due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be
made in cash equal to either (a) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 130% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 145% of the outstanding principal and accrued interest for
prepayments occurring after the 60th day following the issue date
of the notes.
The warrants are exercisable
until seven years from the date of issuance at a purchase price of $.001 per
share. The investors may exercise the warrants on a cashless basis if
the shares of common stock underlying the warrants are not then registered
pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of
the warrants will be adjusted in the event the Company issues common stock at a
price below market, with the exception of any securities issued as of the date
of the warrants or issued in connection with the convertible notes issued
pursuant to the securities purchase agreement.
The noteholders have agreed
to restrict their ability to convert their convertible notes or exercise their
warrants and receive shares of the Company's common stock such that the number
of shares of common stock held by them in the aggregate and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. However, the noteholders may
repeatedly sell shares of common stock in order to reduce their ownership
percentage, and subsequently convert additional convertible notes, provided,
however, that such conversions do not exceed $75,000 per calendar month, or the
average daily dollar volume calculated during the ten business days prior to
conversion multiplied by the number of trading days of that calendar month, per
calendar month.
The Company is required to
register the shares of its common stock issuable upon the conversion of the
convertible notes and the exercise of the warrants that were issued to the
noteholders pursuant to the securities purchase agreement the Company entered in
to on June 16, 2008. The registration statement must be filed with
the Securities and Exchange Commission within 60 days of the June 16, 2008
closing date and the effectiveness of the registration is to be within 135 days
of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required
time. The penalty may be paid in cash or stock at the Company's
option.
As of June 30, 2008, there
had been no conversions of these convertible notes. Upon conversion
of these convertible notes, the Company extinguishes the convertible debt and
related embedded derivatives and no gain or loss is recorded on the Company's
statements of operations as a result of said conversion.
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, June 11, 2007, December 19, 2007 December 23,
2007, and June 16, 2008 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 $3,840,030 principal
amount of the convertible notes on December 31, 2007 (consisting of $5,139,010
in convertible notes that were sold to accredited investors pursuant to the
securities purchase agreements dated April 27, 2005, February 28, 2006, June 11,
2007, December 19, 2007, December 24, 2007, and June 16, 2008, plus 389,010 in
convertible notes issued on December 19, 2007 in payment of past due interest on
the notes, less $1,408,980 in notes converted during the period from June 12,
2005 to June 30, 2008) and a conversion price of $.0004 per share with a 55%
discount, the number of shares issuable upon conversion would
be:
$3,840,030/$.0004 x 45% =
36,624,034,355 shares.
The continuously adjustable
conversion price feature of the convertible notes could require the Company to
issue a substantially greater number of shares, which will cause dilution to the
existing shareholders.
The Company's obligation to
issue shares upon conversion of the convertible notes issued on April 27, 2005,
February 28, 2006, June 11, 2007, December 19, 2007, December 24, 2007, and
June 16, 2008 is essentially limitless. The following is an example
of the amount of shares of common stock that are issuable upon conversion of
$3,840,030 principal amount of the convertible notes (including accrued
interest), based on market prices 25%, 50%, and 75% below the market price, as
of July 2, 2008 of $.0004 with a 55% discount:
|
%
Below
Market
|
Price
Per
Share
|
With
55%
Discount
|
Number
of
Shares
Issuable
|
% of
Outstanding
Shares*
|
|
25%
50%
75%
|
$.0003
$.0002
$.0001
|
$.000135
$.00009
$.000045
|
28,445,000,000
42,667,000,000
85,334,000,000
|
2,192%
3,288%
6,577%
|
*Based on 1,297,554,315
shares outstanding as of June 30, 2008.
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 stock declines, which
will cause dilution to the Company's existing shareholders.
The continuously adjustable
conversion price feature of the convertible notes may encourage investors to
make short sales in the Company's common stock, which could have a depressive
effect on the price of the Company's common stock.
The convertible notes are
convertible into shares of the Company's common stock at a 55% 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 the further downward pressure on the stock
price. In addition, not only could the sales of shares issuable upon
conversion or exercise of notes, warrants and options, but also the mere
perception that these sales could occur, may adversely affect the market price
of the common stock.
The issuance of shares upon
conversion of the convertible notes may cause immediate and substantial dilution
to existing shareholders.
The issuance of shares upon
conversion of convertible notes may result in substantial dilution to the
interests of other shareholders since the noteholders may ultimately convert and
sell the full amount issuable on conversion. Although the noteholders
may not convert their convertible notes if such conversion 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 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, and December 24, 2007, the
Company entered into third and fourth securities purchase agreements for the
sale of an aggregate of $750,000 principal amount of convertible
notes. On December 19, 2007, the Company issued an additional
$389,010 in convertible notes as payment of past due interest owing on the
outstanding convertible notes. On June 16, 2008, the Company entered
into a fifth securities purchase agreement for the sale of an aggregate of
$310,000 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 $3,840,030 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.
Because the Company failed to
hold an Annual Shareholders Meeting in fiscal 2007 and fiscal 2008, the Delaware
Court of Chancery may order an Annual Meeting to be held upon request by a
shareholder.
The Company did not hold an
Annual Meeting of the Shareholders (the "Annual Meeting") for fiscal 2007 or for
fiscal 2008 in order to avoid the costs of such a meeting, including the cost of
preparing and mailing a Proxy Statement and Annual Report to each of its
shareholders. Under Delaware law, the Company is required to hold an
Annual Meeting each year. A failure to hold an Annual Meeting does
not affect otherwise valid corporate acts or work a forfeiture or dissolution of
the Company. Moreover, under Delaware law, directors continue to
serve as directors despite lack of an Annual Meeting until the next Annual
Meeting and until their successors have been elected and
qualified. However, if the Company fails to hold an Annual Meeting
for a period of 30 days after the date designated in its bylaws for the Annual
Meeting, the Delaware Court of Chancery may order an Annual Meeting to be held
upon the application of any of the Company's shareholders, if an Annual Meeting
is ordered to be held by the court, the Company would have to incur the costs of
holding the meeting, including the cost of preparing and mailing the Proxy
Statement and Annual Report to each of its shareholders. The Company
anticipates holding an Annual Meeting in 2009.
ANNUAL REPORT AND FINANCIAL
STATEMENTS
Shareholders are referred to
the Company's amended Annual Report, including financial statements, for the
year ended December 31, 2007, and the Company's amended Quarterly Reports,
including unaudited financial statements, for the periods ended March 31, 2008
and June 30, 2008. The Company will provide without charge to each
shareholder, upon written request, a copy of the Company's amended Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2007, excluding certain
exhibits thereto, and the Quarterly Reports on Form 10-QS for the period ended
March 31, 2008 and June 30, 2008, as filed with the Securities and Exchange
Commission. Written requests for such information should be directed
to Luis A. Mostacero, Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary, Paradigm Medical Industries, Inc., 2355 South 1070
West, Salt Lake City, Utah 84119.
OTHER
MATTERS
As of the date of this Proxy
Statement, the Company knows of no business that will be presented for
consideration at the Special Meeting other than the items referred to
above. However, if any other matters are properly brought before the
meeting, it is the intention of the persons named as proxies in the accompanying
Proxy to vote the shares they represent on such business in accordance with
their best judgment. In order to assure the presence of the necessary
quorum and to vote on the matters to come before the Special Meeting, please
indicate your choices on the enclosed Proxy and date, sign and return it
promptly in the postage prepaid envelope provided. The signing and
delivery of a Proxy by no means prevents one from attending the Special
Meeting.
|
|
By order of the Board
of Directors,
|
|
|
|
|
|
/s/ Luis A.
Mostacero
|
|
|
Luis A.
Mostacero
|
|
|
Vice President of
Finance, Chief Financial Officer,
|
|
|
Treasurer
and Secretary
|
October 31,
2008.