| COMPANY RESPONSE: | In response to the Staff’s requested revisions as set forth in the Comment Letter, the Company filed an amended report on Form 10-KSB/A on the date hereof (the “Amended 10-KSB Filing”) to amend the Company’s Form 10-KSB filed November 6, 2008 and as amended by a Form 10-KSB/A filed November 7, 2008 (collectively, the “Original 10-KSB Filing”). A conformed copy of the Amended Filing is being filed herewith. Management’s Discussion and Analysis in the Amended 10-KSB Filing revises the Management’s Discussion and Analysis in the Original 10-KSB Filing to show, with respect to each of the Company’s major research and development projects, the costs incurred during each period and to date on the project. Also, the revised Management’s Discussion and Analysis includes additional disclosure for the Company’s major R&D projects regarding the current status, and the estimated completion dates, completion costs and capital requirements. |
| COMPANY RESPONSE: | In response to the Staff’s request in Item 2 of the Comment Letter regarding the calculation of the gain on derivative instruments, the Company provides the following supplemental information: |
The Company calculated the gain on derivative instruments by using a Black Scholes option pricing model, which takes into account the Company’s quoted stock price on each measurement date. As the value of our stock declined during the fiscal year, the value of our derivatives, which contain a fixed conversion price (subject to adjustments not relevant here), and resulting liability declined accordingly. This decline in value of the derivative liability resulted in gain recognition for financial accounting purposes. Our calculations and analysis, including a calculation of the fair value of the derivatives as of June 30, 2008, are attached hereto as Exhibit A and hereby submitted to the Staff as supplemental materials. |
Item 8A. Controls and Procedures, page 43. |
| · | the Commission’s release Amendment to Rules Regarding Management’s Report on Internal You can find this release at: |
| · | the Commission’s release Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Act of 1934 (Securities Act Release 8010/Financial Reporting Release 77). You can find this release at: |
| · | the “Sarbanes-Oxley Section 404 – A Guide for Small Business” brochure at: |
| COMPANY RESPONSE: | In response to the Staff’s request in Item 3 of the Comment Letter, the Company states that the Company intends to complete its evaluation and assessment of internal control over financial reporting as of June 30, 2008 by March 31, 2009 and to amend the Amended Filing accordingly at such time. |
| COMPANY RESPONSE: | In response to the Staff’s request in Item 4 of the Comment Letter, the Company states that the Company has in place appropriate controls and procedures to ensure timely and accurate disclosure of material events affecting the Company. These controls and procedures include weekly management and employee meetings to discuss material events and frequent updates to the Board and Audit Committee. |
| The Company’s management has considered its failure to complete its report on internal controls over financial reporting and the Company’s failure to file its Form 10-KSB in a timely manner and determined that these events do not impact its conclusion that the Company’s disclosure controls and procedures were effective as of June 30, 2008. |
| COMPANY RESPONSE: | In response to the Staff’s request in Item 5 of the Comment Letter, the Company states that the Company has updated its certifications with respect to the Amended Filing filed on the date hereof. Further, the Company intends to complete its evaluation and assessment of internal control over financial reporting as of June 30, 2008 by March 31, 2009 and to amend the Amended Filing, including the certifications provided pursuant to Item 601(b)(31), accordingly at such time. |
| COMPANY RESPONSE: | In response to the Staff’s request in Item 5 of the Comment Letter, the Company states that it is aware of the impact of the failure to complete management’s assessment and acknowledges the Staff's comment. |
| COMPANY RESPONSE: | In response to the Staff’s requested revisions as set forth in the Comment Letter, the Company sets forth below the language contained in the Company’s Form 10-Q filed November 19, 2008 (the “Original 10-Q Filing”). We performed an evaluation under the supervision and with the participation of our management, including our chief executive and chief financial officers, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d45(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2008. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Following the evaluation described above, our management, including our chief executive and chief financial officer, concluded that based on the evaluation, our disclosure controls and procedures were effective as of September 30, 2008. The Company believes that the disclosure requested by the Staff is contained in the Original 10-Q Filing and comports with the requirements of Item 307 of Regulation S-K. If the Company is incorrect, please assist us by identifying the inadequacies in the Company's disclosure, and we will amend the Form 10-Q to comport with the staff's guidance. |
| Derivative Liability Balance June 30, 2007 | (Gain)/Loss recorded for quarter ending Sept 30, 2007 | (Gain)/Loss recorded for quarter ending Dec 31, 2007 | (Gain)/Loss recorded for quarter ending Mar 31, 2008 | (Gain)/Loss recorded for quarter ending June 30, 2008 | Initial Valuation of New Warrants Issued During the Year | Total Derivative Liability Balance June 30, 2008 | Warrant Liability June 30, 2008 | Pref Stock Liability June 30, 2008 | ||||||||||||||||||||||||||||
| Note Warrant Liability | 14,423,756 | (14,001,445 | ) | (826,193 | ) | (148,648 | ) | 572,764 | 1,383,529 | 1,403,763 | ||||||||||||||||||||||||||
| Preferred Stock Warrant Liability | 7,349,311 | (6,525,555 | ) | (402,800 | ) | (71,545 | ) | 248,383 | - | 597,794 | 2,001,557 | |||||||||||||||||||||||||
| Preferred Stock liability | 14,927,546 | (12,309,439 | ) | (872,688 | ) | (91,861 | ) | 780,825 | - | 2,434,383 | 2,434,383 | |||||||||||||||||||||||||
| Total Derivative Liability | 36,700,613 | (32,836,439 | ) | (2,101,681 | ) | (312,054 | ) | 1,601,972 | 1,383,529 | 4,435,940 | 2,001,557 | 2,434,383 | ||||||||||||||||||||||||
Quarterly Change in Derivative Liabilities | (32,836,439 | ) | (2,101,681 | ) | (312,054 | ) | 1,601,972 | (33,648,202 | ) | |||||||||||||||||||||||||||
| Change for the Year | ||||||||||||||||||||||||||||||||||||
| Cumualtive Change in Derivative Liability | 23,242,752 | (9,593,687 | ) | (11,695,368 | ) | (12,007,422 | ) | (10,405,450 | ) | |||||||||||||||||||||||||||
| Stock price for Black Scholes calculation | 3.25 | 0.57 | 0.38 | 0.36 | 0.53 | |||||||||||||||||||||||||||||||
| Summary Reconciliation | ||||
| Deivative Liability Balance - June 30, 2007 | $ | 36,700,613 | ||
| Valuation of new Warrants issued during the year | 1,383,529 | |||
| Changes in derivative liability during the year | (33,648,202 | ) | ||
| Deivative Liability Balance - June 30, 2008 | $ | 4,435,940 | ||
