FORM
8-K/A-2
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report (Date of Earliest Event Reported): March 26, 2008
PARADIGM MEDICAL INDUSTRIES,
INC.
(Exact
name of registrant as specified in this Charter)
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Delaware
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0-28498
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87-0459536
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(State
or other jurisdiction of incorporation)
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(Commission
File Number)
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(IRS
Employer Identification No.)
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2355 South 1070 West,
Salt Lake City, Utah
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84119
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (801)
977-8970
Does Not
Apply
(Former
name or former address, if changed since last report)
SECTION
4 Matters Related
to Accountants and Financial Statements
ITEM
4.02 Non-reliance of
Previously Issued Financial Statements or Related Audit Report or Completed
Interim Review
On
December 17, 2007, Paradigm Medical Industries, Inc. (the "Company") received a
letter from the Securities and Exchange Commission (the "Commission") stating
that the staff had reviewed the financial statements and related documents in
the Company's Form 10-KSB for the fiscal year ending December 31,
2006. As a result of its review, the staff had several comments on
the disclosures in the financial statements of the December 31, 2006 Form
10-KSB. The letter additionally stated that in future filings the
Company's Form 10-KSB should be revised in response to the
comments.
On March
14, 2008, the Company filed a letter with the Commission responding to the
December 17, 2007 comment letter from the Commission. After reviewing
the Company's response to the December 17, 2007 comment letter, the Commission
staff arranged for a telephone conference with the Company's executive officers
on March 26, 2008 to discuss the Company's March 14, 2008 letter. The
staff expressed its view during the telephone conference that the $5,139,010 in
convertible notes the Company issued to investors during the period from April
27, 2005 to December 24, 2007 to obtain funding for the Company's ongoing
operations contained embedded derivatives. As a
consequence, in disclosing these convertible notes in the financial statements
of the Company's Form 10-KSB for the fiscal year ending December 31, 2006, the
Company did not correctly follow the disclosure requirements of Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative
Instruments and Hedging Activities, which was issued by the Financial
Accounting Standards Board. The staff requested that in order to
comply with the disclosure requirements of SFAS No. 133, the Company would need
to value the convertible notes in the financial statements of its Form-KSB using
a binomial lattice model that values all embedded derivatives in the convertible
notes, such as conversion options, interest rate resets and put
options.
On April
17, 2008 the Company's executive officers had another telephone conference with
the Commission staff to discuss further issues concerning compliance with SFAS
No. 133 by valuing the convertible notes in the financial statements using the
binomial lattice model. The Company was advised during the conference
by the Commission staff that it would not be required to amend its Form 10-KSB
for the fiscal years ended December 31, 2006 and 2005, but the Form 10-KSB for
the fiscal year ended December 31, 2007 must include revised financial
information and disclosures for fiscal 2006 and 2005 as a result of valuing the
convertible notes using the binomial lattice model.
On April
24, 2008, the Company entered into an agreement with Monarch Bay Management
Company to value the Company's convertible notes pursuant to SFAS No. 133 using
the binomial lattice model. Monarch Bay completed its valuation work
on the convertible notes on May 5, 2008. The Company paid a total of
$32,000 for Monarch Bay's valuation report.
Upon
receipt of Monarch Bay's valuation report on the Company's convertible notes,
Louis A. Mostacero, the Company's Vice President of Finance and Chief Financial
Officer, refigured and recalculated the financial statements in the Company's
Form 10-KSB reports for the years ended December 31, 2006 and 2005 and the
Company's Form 10-QSB reports for the periods ended March 31, 2006, June 30,
2006, September 30, 2006, March 31, 2007, June 30, 2007, and September 30,
2007. Mr. Mostacero completed the revisions of these financial
statements on May 9, 2008. On May 9, 2008, an initial draft of these
revised financial statements was forwarded to the Company's independent
accountants, Chisholm, Bierwolf & Nilson, LLC, and the Company's legal
counsel, Mackey Price Thompson & Ostler.
On May
12, 2008, on the basis of discussions with the Company's independent accountants
and legal counsel, the Company's executive officers determined that the
financial statements in the Company's form 10-KSB reports for the years ended
December 31, 2006 and 2005, and the Company's Form 10-QSB reports for the
periods ended March 31, 2006, June 30, 2006, September 30, 2006, March 31, 2007,
June 30, 2007, and September 30, 2007, should no longer be relied upon because
of errors in such financial statements. These errors required
material changes to the Company's financial statements for the years ended
December 31, 2006 and 2005 and the interim periods for the years ended December
31, 2007 and 2006.
As a
result of using the binomial lattice model to value the convertible notes in the
financial statements, certain amounts that were recorded in the financial
statements for the fiscal year ended December 31, 2006 were
incorrect. In the Statement of Operations for the twelve months ended
December 31, 2006, the net loss was overstated by $618,000. It should
have been reported as a net loss of $1,198,000 rather than a net loss
of $1,816,000 as previously reported. This difference in the net loss
was primarily the result of recognizing in the previously reported financial
statements an expense of $1,207,000 in other expenses rather than an expense of
$207,000 and not recognizing in the previously reported financials an expense of
$952,000 for interest expense-accretion of debt discount, which was partially
offset by a $570,000 gain on derivative valuation. In the Balance
Sheet as of December 31, 2006, total long-term liabilities were overstated by
$1,122,000. They should have been reported as $1,533,000 rather than
$2,655,000 as previously reported. This difference in total long-term
liabilities was primarily the result of recognizing in the previously reported
financial statements a $1,288,000 decrease in convertible notes payable, net of
discount.
Certain
amounts in the financial statements for the fiscal year ended December 31, 2005
were also incorrect as a result of valuing the convertible notes using the
binomial lattice model. In the Statement of Operations for the twelve
months ended December 31, 2005, the net loss was overstated by
$4,004,000. It should have been reported as a net loss of $1,385,000
rather than a net loss of $5,389,000 as previously reported. The
difference in the net loss was primarily the result of recognizing in the
previously reported financial statements an expense of $2,870,000 in other
expenses rather than an expense of $370,000 and not recognizing in the
previously reported financials a $3,974,000 gain in derivative
valuation, which was partially offset by a $1,669,000 expense in initial fair
value of derivative and warrant. In the Balance Sheet as of December
31, 2005, total long-term liabilities were overstated by
$1,504,000. They should have been reported as $534,000 rather than
$2,038,000 as previously reported. This difference in total long-term
liabilities was primarily the result of recognizing in the previously reported
financial statements a $1,669,000 decrease in convertible notes payable, net of
discount.
On May
16, 2008, the Company filed a Form 10-KSB for the fiscal year ended December 31,
2007, which included revised financial information and disclosures for the years
ended December 31, 2006 and 2005, as a result of valuing the convertible notes
using the binomial lattice model. Also included in the Form 10-KSB
for the year ended December 31, 2007 were revised and restated financial
statements for the periods ended March 31, 2006, June 30, 2006, September 30,
2006, March 31, 2007, June 30, 2007, and September 30, 2007.
As the
certifying officers, Mr. Mostacero and I believe that, as of the end of the
years ended December 31, 2006 and 2005, the Company's disclosure controls and
procedures were not effective and adequate because, in disclosing the
convertible notes in the financial statements of the Company's Form 10-KSB
reports for the years ended December 31, 2006 and 2005 and the interim periods
for the years ended December 31, 2007 and 2006, the Company did not correctly
follow the disclosure requirements of SFAS No. 133. However, because
the Company utilized Monarch Bay's valuation reports to value the convertible
notes in the financial statements of the Company's Form 10-KSB for the year
ended December 31, 2007 in compliance with the disclosure requirements of SFAS
No. 133, the certifying officers believe the Company's disclosure controls and
procedures were effective and adequate as of the end of the year ended December
31, 2007.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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PARADIGM
MEDICAL INDUSTRIES, INC.
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(Registrant)
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Date:
June 12, 2008
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By
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/s/ Raymond P.L.
Cannefax
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Raymond
P.L. Cannefax
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President
and Chief Executive Officer
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