| mkraines@fulbright.com direct dial: (212) 318-3261 | telephone: facsimile: | (212) 318-3000 (212) 318-3400 |
| Re: | Applied DNA Sciences, Inc. Registration Statement on Form SB-2 Filed January 15, 2005 File No. 333-122848 |
| 1. | Prior to requesting acceleration for effectiveness, please refer to Item 310(g) of Regulation S-B and amend your registration statement on Form SB-2 to provide updated financial statements. |
| 2. | We acknowledge your proposed revisions in response to comment 2 as well as the supplemental tabular restatement information that you have presented for the three and nine months ended June 30, 2006 and for the period from inception through June 30, 2006. Please provide us with the clarifying information that follows and revise the disclosure in your filing accordingly. |
| · | It appears based on your narrative in adjustment (b) of $390,000 you should be reducing selling, general, and administrative expenses. Clarify why the error occurred and the nature of the correction. Also, please clarify where the other side of the entry is recorded. |
| · | Based on the explanation provided in footnote (c), it is unclear why you recorded a $1,156,698 increase to “net gain (loss) in fair value of debt derivative and warrant liability.” If you recorded a derivative liability for warrants initially valued at $933,117 that you should have valued at $2,089,814, it appears that you would have incurred additional expense when you entered into the related financing transaction. Please tell us why you appear to have recorded income in correcting this error. Additionally, please revise footnote (c) to clarify the relationship between this error and the numerous financing transactions in “Note C” and tell us why you restated your June 30, 2006 Form 10-QSB to correct this error. |
| · | Based on the explanation provided in footnote (e), it is unclear why you recorded a net increase of $2,284,764 to your net income for the nine months ended June 30, 2006. According to the information in the table following footnote (e), you “undervalued” certain of the warrants issued to non-employees in connection with various financing transactions during your fiscal year ended September 30, 2005; it appears that correcting the related error would result in additional expense. Please also tell us why you appear to have restated your June 30, 2006 10-QSB rather than your September 30, 2005 Form 10-KSB to correct this error. Finally, please clarify what the $6,640,706 and $10,058,055 adjustments to other income (expense) represent since it is not apparent from the narrative discussion in footnote (e). |
| · | Please tell us where you recorded the $5,838,514 reduction to interest referenced in footnote (f). Please also clarify for us whether or not you should include a corresponding adjustment in your statements of operations for the three and nine months ended June 30, 2006. |
| · | Please refer to the table in footnote (g) and clarify how the $1,584,614 relates to footnote (a). Please also clarify why the reclass was an “error.” |
| · | Please address comment 2, bullet point 4 of our January 25, 2007 letter relating to the $1,365,000 error, as it is unclear how you have done so within the context of the proposed revisions and supplemental tabular disclosure that you have provided. |
| · | The $276,090 adjustment in your statement of cash flows does not appear to relate to footnote (k). Please clarify. |
| · | Clarify where you recorded the offsetting adjustment to the $1,846,500 in footnote (k). Please also clarify where you recorded this adjustment in your statement of operations. |
As Previously Reported | Adjustment | Reference | As Restated | ||||||||||
| Cash | $ | 1,931,173 | $ | $ | 1,931,173 | ||||||||
| Accounts receivable, net | $ | 18,900 | $ | $ | 18,900 | ||||||||
| Advances and other receivables | $ | 11,611 | $ | $ | 11,611 | ||||||||
| Prepaid expenses | $ | 146,667 | $ | $ | 146,667 | ||||||||
| Total current assets | $ | 2,108,351 | $ | $ | 2,108,351 | ||||||||
| Property, plant and equipment, net | $ | 38,286 | $ | $ | 38,286 | ||||||||
| Deposits | $ | 8,322 | $ | $ | 8,322 | ||||||||
| Capitalized finance costs | $ | 1,437,862 | $ | $ | 1,437,862 | ||||||||
| Patents, net | $ | 17,376 | $ | $ | 17,376 | ||||||||
| Intellectual property, net | $ | 8,083,629 | $ | $ | 8,083,629 | ||||||||
| total assets | $ | 11,693,826 | $ | $ | 11,693,826 | ||||||||
| Accounts payable and accrued liabilities | $ | 4,680,849 | $ | $ | 4,680,849 | ||||||||
| Notes payable, related party | $ | 410,429 | $ | $ | 410,429 | ||||||||
| Total current liabilities | $ | 5,091,278 | $ | $ | 5,091,278 | ||||||||
| Convertible notes payable, net | $ | 3,306,371 | $ | $ | 3,306,371 | ||||||||
| Debt derivative and warrant liability | $ | 5,698,286 | $ | $ | 5,698,286 | ||||||||
| Total liabilities | $ | 14,095,935 | $ | $ | 14,095,935 | ||||||||
| Preferred stock | $ | 6 | $ | $ | 6 | ||||||||
| Common stock | $ | 118,582 | $ | $ | 118,582 | ||||||||
| Common stock subscription | $ | (200,000 | ) | $ | $ | (200,000 | ) | ||||||
| Additional paid in capital | $ | 81,860,606 | $ | 136,400 | a | $ | 81,997,006 | ||||||
| Accumulated deficit | $ | (84,181,303 | ) | $ | (136,400 | ) | a | $ | (84,317,703 | ) | |||
| Total deficiency in stockholders’ equity | $ | (2,402,109 | ) | $ | $ | (2,402,109 | ) | ||||||
| Total liabilities and Deficiency in Stockholders’ equity | $ | 11,693,826 | $ | $ | 11,693,826 | ||||||||
| Sales | $ | 18,900 | $ | $ | 18,900 | ||||||||
| Cost of sales | $ | 15,639 | $ | $ | 15,639 | ||||||||
| Gross margin | $ | 3,261 | $ | $ | 3,261 | ||||||||
| Selling, general & administrative | $ | 1,190,967 | $ | 390,000 | b | $ | 1,580,967 | ||||||
| Research and development | $ | — | $ | — | |||||||||
| Depreciation and amortization | $ | 336,824 | $ | $ | 336,824 | ||||||||
| Total operating expenses | $ | 1,527,791 | $ | 390,000 | b | $ | 1,917,791 | ||||||
| Net loss from operations | $ | (1,524,530 | ) | $ | (390,000 | ) | b | $ | (1,914,530 | ) | |||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | 2,337,263 | $ | 1,156,698 | c | $ | 3,493,961 | ||||||
| Other income (expense) | $ | 8,483 | $ | $ | 8,483 | ||||||||
| Interest income (expense) | $ | (826,827 | ) | $ | $ | (826,827 | ) | ||||||
| Net income (loss) | $ | (5,611 | ) | $ | 766,698 | b,c | $ | 761,087 | |||||
| Net income (loss) per share-basic | $ | (0.00 | ) | 0.01 | $ | 0.01 | |||||||
| Net income (loss) per share-fully diluted | NA | 0.01 | $ | 0.01 |
| Sales | $ | 18,900 | $ | $ | 18,900 | ||||||||
| Cost of sales | $ | 15,639 | $ | $ | 15,639 | ||||||||
| Gross margin | $ | 3,261 | $ | $ | 3,261 | ||||||||
| Selling, general & administrative | $ | 4,955,055 | $ | (563,750 | ) | d | $ | 4,391,305 | |||||
| Research and development | $ | 75,276 | $ | 75,276 | |||||||||
| Depreciation and amortization | $ | 1,021,199 | $ | $ | 1,021,199 | ||||||||
| Total operating expenses | $ | 6,051,530 | $ | (563,750 | ) | d | $ | 5,487,780 | |||||
| Net loss from operations | $ | (6,048,269 | ) | $ | (563,750 | ) | d | $ | (5,484,519 | ) | |||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | 18,606,563 | $ | (4,355,942 | ) | e | $ | 14,250,621 | |||||
| Other income (expense) | $ | 17,976 | $ | $ | 17,976 | ||||||||
| (136,400 | ) | a | |||||||||||
| (563,750 | ) | d | |||||||||||
| 6,640,706 | e | ||||||||||||
| Interest income (expense) | $ | (9,117,785 | ) | $ | 5,940,556 | $ | (3,177,229 | ) | |||||
| Net income (loss) | $ | 3,458,485 | $ | 2,148,364 | $ | 5,606,849 | |||||||
| Net income (loss) per share-basic | $ | 0.03 | 0.02 | $ | 0.05 | ||||||||
| Net income (loss) per share-fully diluted | 0.02 | 0.01 | $ | 0.03 |
| Sales | $ | 18,900 | $ | $ | 18,900 | ||||||||
| Cost of sales | $ | 15,639 | $ | $ | 15,639 | ||||||||
| Gross margin | $ | 3,261 | $ | $ | 3,261 | ||||||||
| Selling, general & administrative | $ | 70,072,368 | $ | 5,838,514 | f | $ | 75,910,882 | ||||||
| Research and development | $ | 968,711 | $ | 968,711 | |||||||||
| Depreciation and amortization | $ | 1,380,626 | $ | $ | 1,380,626 | ||||||||
| Total operating expenses | $ | 72,421,705 | $ | 5,838,514 | $ | 78,260,219 | |||||||
| Net loss from operations | $ | (72,418,444 | ) | $ | (5,838,514 | ) | $ | (78,256,958 | ) | ||||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | 35,307,553 | $ | (4,355,942 | ) | f | $ | 30,951,611 | |||||
| Other income (expense) | $ | 49,318 | $ | $ | 49,318 | ||||||||
| Interest income (expense) | $ | (47,119,730 | ) | $ | 10,058,055 | f | $ | (37,061,675 | ) | ||||
| Net income (loss) | $ | (84,181,303 | ) | $ | (136,401 | ) | $ | (84,317,703 | ) |
| Cash flows from operating activities | |||||||||||||
| Net income (loss) | $ | 3,458,485 | $ | 2,148,364 | $ | 5,606,849 | |||||||
| Adjustments to reconcile to net used in operating activities | |||||||||||||
| Depreciation and amortization | $ | 1,021,199 | $ | $ | 1,021,199 | ||||||||
| Organization expenses | $ | $ | |||||||||||
| Preferred shares issued in exchange for services | $ | $ | $ | — | |||||||||
| Warrants issued to consultants | $ | 606,850 | $ | (563,750 | ) | d | $ | 43,100 | |||||
| Income attributable to repricing of warrants and debt derivatives | $ | (10,118,917 | ) | $ | (4,131,704 | ) | g | $ | (14,250,621 | ) | |||
| Financing costs attributable to issuance of warrants | $ | $ | 2,271,000 | h | $ | 2,271,000 | |||||||
Amortization of beneficial conversion feature –convertible notes | $ | — | $ | $ | — | ||||||||
| Amortization of capitalized finance costs | $ | 247,238 | $ | $ | 247,238 | ||||||||
| Amortization of debt discount attributable to convertible debenture | $ | — | $ | 276,090 | i | $ | 276,090 | ||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | $ | — | ||||||||
| Common stock issued in exchange for services | $ | 710,200 | $ | $ | 710,200 | ||||||||
| Common stock issued in exchange for intellectual property | $ | — | $ | $ | — | ||||||||
| Common stock issued as penalty in connection with financing | $ | 773,958 | $ | $ | 773,958 | ||||||||
| Common stock canceled-previously issued for services rendered | $ | (480,000 | ) | $ | $ | (480,000 | ) | ||||||
| Change in assets and liabilities: | |||||||||||||
| Increase in accounts receivable | $ | (18,900 | ) | $ | $ | (18,900 | ) | ||||||
| Increase in prepaid expenses and deposits | $ | (145,849 | ) | $ | $ | (145,849 | ) | ||||||
| Decrease in other assets | $ | 5,940 | $ | $ | 5,940 | ||||||||
| Decrease in due related parties | $ | (52,662 | ) | $ | $ | (52,662 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 1,685,792 | $ | $ | 1,685,792 | ||||||||
| Net cash used in operating activities | $ | (2,306,666 | ) | $ | $ | (2,306,666 | ) | ||||||
| Cash flows from investing activities: | |||||||||||||
| Payments for patent filing | $ | — | |||||||||||
| Capital expenditures | $ | (35,851 | ) | $ | $ | (35,851 | ) | ||||||
| Net cash used in investing activities | $ | (35,851 | ) | $ | $ | (35,851 | ) | ||||||
| Cash flows from financing activities | |||||||||||||
| Proceeds from sales of common stock, net | $ | — | $ | $ | |||||||||
| Proceeds from issuance of convertible notes | $ | 4,242,500 | $ | $ | 4,242,500 | ||||||||
| Proceeds from exercise of options and warrants | $ | — | $ | $ | — | ||||||||
| Payment of debt | $ | — | $ | $ | — | ||||||||
| Proceeds from loans | $ | — | $ | $ | — | ||||||||
| Advances from shareholders | $ | — | $ | $ | — | ||||||||
| Net cash provided by financing activities | $ | 4,242,500 | $ | $ | 4,242,500 | ||||||||
| Net increase in cash and cash equivalents | $ | 1,899,983 | $ | $ | 1,899,983 | ||||||||
| Cash and cash equivalents at beginning of period | $ | 31,190 | $ | $ | 31,190 | ||||||||
| Cash and cash equivalents at end of period | $ | 1,931,173 | $ | $ | 1,931,173 |
| Cash flows from operating activities | |||||||||||||
| Net income (loss) | $ | (84,181,303 | ) | $ | (136,400 | ) | a | $ | (84,317,703 | ) | |||
| Adjustments to reconcile to net used in operating activities | |||||||||||||
| Depreciation and amortization | $ | 1,374,467 | $ | (5,756 | ) | j | $ | 1,368,711 | |||||
| Organization expenses | $ | 88,500 | $ | 88,500 | |||||||||
| Preferred shares issued in exchange for services | $ | 1,500,000 | $ | $ | 1,500,000 | ||||||||
| Warrants issued to consultants | $ | 3,583,016 | $ | 5,838,514 | f | $ | 9,421,530 | ||||||
| Income attributable to repricing of warrants and debt derivatives | $ | (26,819,908 | ) | $ | (4,131,703 | ) | g | $ | (30,951,611 | ) | |||
| Financing costs attributable to issuance of warrants | $ | 27,265,174 | $ | (1,846,500 | ) | k | $ | 25,418,674 | |||||
| Amortization of beneficial conversion feature –convertible notes | $ | 10,461,000 | $ | $ | 10,461,000 | ||||||||
| Amortization of capitalized finance costs | $ | 247,238 | $ | $ | 247,238 | ||||||||
| Amortization of debt discount attributable to convertible debenture | $ | — | $ | 276,090 | i | $ | 276,090 | ||||||
| Fair value of common stock issued to related party in excess of debt | $ | 1,365,000 | $ | $ | 1,365,000 | ||||||||
| Common stock issued in exchange for services | $ | 31,284,573 | $ | $ | 31,284,573 | ||||||||
| Common stock issued in exchange for intellectual property | $ | 14,689,100 | $ | $ | 14,689,100 | ||||||||
| Common stock issued as penalty in connection with financing | $ | 1,550,487 | $ | $ | 1,550,487 | ||||||||
| Common stock canceled-previously issued for services rendered | $ | (1,343,845 | ) | $ | $ | (1,343,845 | ) |
| Change in assets and liabilities: | |||||||||||||
| Increase in accounts receivable | $ | (18,900 | ) | $ | $ | (18,900 | ) | ||||||
| Increase in prepaid expenses and deposits | $ | (163,472 | ) | $ | $ | (163,472 | ) | ||||||
| Decrease in other assets | $ | (3,128 | ) | $ | $ | (3,128 | ) | ||||||
| Decrease in due related parties | $ | — | $ | $ | — | ||||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 4,079,990 | $ | 5,755 | j | $ | 4,085,745 | ||||||
| Net cash used in operating activities | $ | (15,042,011 | ) | $ | $ | (15,042,011 | ) | ||||||
| Cash flows from investing activities: | |||||||||||||
| Payments for patent filing | $ | (25,698 | ) | $ | $ | (25,698 | ) | ||||||
| Capital expenditures | $ | (48,602 | ) | $ | $ | (48,602 | ) | ||||||
| Net cash used in investing activities | $ | (74,300 | ) | $ | $ | (74,300 | ) | ||||||
| Cash flows from financing activities | |||||||||||||
| Proceeds from sales of common stock, net | $ | 432,000 | $ | $ | 432,000 | ||||||||
| Proceeds from issuance of convertible notes | $ | 13,446,500 | $ | 13,446,500 | |||||||||
| Proceeds from exercise of options and warrants | $ | 343,750 | $ | $ | 343,750 | ||||||||
| Payment of debt | $ | (24,854 | ) | $ | $ | (24,854 | ) | ||||||
| Proceeds from loans | $ | 2,750,000 | $ | $ | 2,750,000 | ||||||||
| Advances from shareholders | $ | 100,088 | $ | $ | 100,088 | ||||||||
| Net cash provided by financing activities | $ | 17,047,484 | $ | $ | 17,047,484 | ||||||||
| Net increase in cash and cash equivalents | $ | 1,931,173 | $ | $ | 1,931,173 | ||||||||
| Cash and cash equivalents at beginning of period | $ | — | $ | $ | — | ||||||||
| Cash and cash equivalents at end of period | $ | 1,931,173 | $ | $ | 1,931,173 |
| March 31, 2006 (initial filing): | |||||||
| SGA | 390,000 | ||||||
| Cash, debt | 390,000 | ||||||
| To record expenditures relating to issuance of debt (in error) | |||||||
| March 31, 2006 (amended) | |||||||
| Capitalized financing costs | 390,000 | ||||||
| SGA | 390,000 | ||||||
| June 30, 2006 YTD and three month reporting (initial filing): | |||||||
| Capitalized financing costs | 390,000 | ||||||
| SGA | 390,000 | ||||||
| June 30, 2006 (three month period) amended ONLY | |||||||
| SGA | 390,000 | ||||||
| Capitalized finance costs | 390,000 | ||||||
| June 30, 2006 YTD (amended) (capitalized with initial filing) | |||||||
| NONE | ||||
| Net balance sheet effect: | ||||
| Capitalized financing costs: | ||||
| March 31, 2006 initial filing:: | $ | -0- | ||
| March 31, 2006 amended: | 390,000 | |||
| Net: | $ | 390,000 | ||
| BALANCE CARRYFORWARD (Initial filing): | $ | -0- | ||
| BALANCE CARRYFORWARD (amended) | 390,000 | |||
| June 30, 2006 initial filing: | $ | 390,000 | ||
| June 30, 2006 amended: | 390,000 | |||
| Net: | $ | -0- |
Original amount | Revised Amount | Increase/(decrease) | ||||||||
| Warrants issued in December 2004 | $ | 394,698 | $ | 3,169,052 | $ | 2,774,354 | ||||
| Warrants issued in February 2005 | — | 72,017 | 72,017 | |||||||
| Warrants issued in June 2005 (Company determined warrants were not properly authorized and issued) | 849,047 | — | (849,047 | ) | ||||||
| Warrants previously cancelled, later determined issued | (287,440 | ) | — | 287,440 | ||||||
| $ | 956,305 | $ | 3,241,069 | $ | 2,284,764 | |||||
Selling, general and administrative | Gain/Loss in fair value of warrant liability and debt derivative | Interest expense | ||||||||
Originally reported: | $ | 70,072,368 | $ | 35,307,553 | $ | 47,119,730 | ||||
| Reclassification on fair value of warrants issued for services rendered (above) | 5,838,514 | — | (5,838,514 | ) | ||||||
| Adjustment to fair value of warrants issued in previous year (see e above) | (4,355,942 | ) | (4,355,942 | ) | ||||||
| Fair value of unrecorded warrants issued in conjunction with financing (see a above) | 136,401 | |||||||||
| Amended reported | $ | 75,910,882 | $ | 30,951,611 | $ | 37,061,675 | ||||
| Reclassification of initial warrant valuations relating to financing from interest to separate line item in cash flow statement as described in (h) below: | $ | 2,271,000 | ||
| Change in non warrant valuations as described in (e) above: | 2,284,764 | |||
| Reclassification on non financing warrants to selling, general and administrative as described in (d) above | (563,750 | ) | ||
| Reclassification of warrants as described in (a) above | (136,400 | ) | ||
| Reclassification of amortization of debt discount to separate cash flow line item as described in (i) below | 276,090 | |||
| Total: | $ | 4,131,704 |
| 3. | It does not appear that you have addressed comment 2 of our January 25, 2007 letter in relation to the three and nine month periods ended June 30, 2005. As you present restatement information for those periods on pages F-48 through F-50 of your Form SB-2/A filed on November 13, 2006, we request that you present revised disclosure for Note J in a manner consistent with that you have provided for Note I. |
As Previously Reported | Adjustment | Reference | As Restated | ||||||||||
| Cash | $ | 1,192,465 | $ | $ | 1,192,465 | ||||||||
| Total current assets | $ | 1,192,465 | $ | $ | 1,192,465 | ||||||||
| Property, plant and equipment, net | $ | 20,663 | $ | $ | 20,663 | ||||||||
| Deposits | $ | 56,850 | $ | $ | 56,850 | ||||||||
| Patents, net | $ | 24,753 | $ | $ | 24,753 | ||||||||
| Total assets | $ | 1,294,731 | $ | $ | 1,294,731 | ||||||||
| Accounts payable and accrued liabilities | $ | 933,074 | $ | 104,951 | a | $ | 1,038,025 | ||||||
| Accrued liabilities, related parties | $ | 95,162 | $ | 41,312 | a | $ | 136,474 | ||||||
| Due related parties | $ | 91,312 | $ | (91,312 | ) | a | $ | — | |||||
| Notes payable | $ | 425,000 | $ | $ | 425,000 | ||||||||
| Total current liabilities | 1,544,548 | 54,951 | a | 1,599,499 | |||||||||
| Warrant liability | $ | $ | 9,802,137 | b | $ | 9,802,137 | |||||||
| Total liabilities | $ | 1,544,548 | $ | 9,857,088 | a,b | $ | 11,401,636 | ||||||
| Preferred stock | $ | 6 | $ | $ | 6 | ||||||||
| Common stock | $ | 66,412 | $ | $ | 66,412 | ||||||||
| Common stock subscription | $ | (37,000 | ) | $ | 1,000 | c | $ | (36,000 | ) | ||||
| Common stock receivable | $ | — | $ | (1,000 | ) | c | $ | (1,000 | ) | ||||
| Additional paid in capital | $ | 54,355,065 | $ | (1,211,527 | ) | d | $ | 53,143,538 | |||||
| Accumulated deficit | $ | (54,634,300 | ) | $ | (8,645,561 | ) | a,b,d | $ | (63,279,861 | ) | |||
| Total deficiency in stockholders’ equity | $ | (249,817 | ) | $ | (9,857,088 | ) | a,b,d | $ | (10,106,905 | ) | |||
| Total liabilities and Deficiency in Stockholders’ equity | $ | 1,294,731 | $ | $ | 1,294,731 | ||||||||
| Selling, general & administrative | $ | 2,659,727 | $ | (794,096 | ) | e | $ | 1,865,631 | |||||
| Research and development | $ | 88,870 | $ | 88,870 | |||||||||
| Depreciation and amortization | $ | 3,160 | $ | $ | 3,160 | ||||||||
| Total operating expenses | $ | 2,751,757 | $ | (794,096 | ) | e | $ | 1,957,661 | |||||
| Net loss from operations | $ | (2,751,757 | ) | $ | (794,096 | ) | e | $ | (1,957,661 | ) | |||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | — | $ | 5,679,175 | f | $ | 5,679,175 | ||||||
| Other income (expense) | $ | 241 | $ | $ | 241 | ||||||||
| Interest income (expense) | $ | (21,557 | ) | $ | $ | (21,557 | ) | ||||||
| Net income (loss) | $ | (2,773,073 | ) | $ | 6,473,271 | e,f | $ | 3,700,198 | |||||
| Net income (loss) per share-basic | $ | (0.04 | ) | 0.10 | $ | 0.06 | |||||||
| Net income (loss) per share-fully diluted | NA | 0.06 | $ | 0.04 |
| Selling, general & administrative | $ | 22,236,607 | $ | 1,952,275 | g | $ | 24,188,882 | |||||||
| Research and development | $ | 345,958 | $ | 345,958 | ||||||||||
| Depreciation and amortization | $ | 15,187 | $ | $ | 15,187 | |||||||||
| Total operating expenses | $ | 22,597,752 | $ | 1,952,275 | g | $ | 24,550,027 | |||||||
| Net loss from operations | $ | (22,597,752 | ) | $ | (1,952,275 | ) | g | $ | (24,550,027 | ) | ||||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | — | $ | 16,454,928 | h | $ | 16,454,928 | |||||||
| Other income (expense) | $ | 3,415 | $ | $ | 3,415 | |||||||||
| Interest income (expense) | $ | (9,224,929 | ) | $ | (23,148,214 | ) | b, h | $ | (32,373,143 | ) | ||||
| Net income (loss) | $ | (31,819,266 | ) | $ | (8,645,561 | ) | b,g,h | $ | (40,464,827 | ) | ||||
| Net income (loss) per share-basic | $ | (.65 | ) | (0.18 | ) | $ | (0.83 | ) | ||||||
| Net income (loss) per share-fully diluted | NA | NA | $ | NA |
| Selling, general & administrative | $ | 43,296,679 | $ | 1,713,740 | i | $ | 45,010,419 | |||||
| Research and development | $ | 345,958 | $ | 238,535 | i | 584,493 | ||||||
| Depreciation and amortization | $ | 18,348 | $ | $ | 18,348 | |||||||
| Total operating expenses | $ | 43,660,985 | $ | 1,952,275 | i | $ | 45,613,260 | |||||
| Net loss from operations | $ | (43,660,985 | ) | $ | (1,952,275 | ) | i | $ | (45,613,260 | ) | ||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | — | $ | 16,454,928 | h | $ | 16,454,928 | |||||
| Other income (expense) | $ | 29,800 | $ | 29,800 | ||||||||
| Interest income (expense) | $ | (11,003,115 | ) | $ | (23,148,214 | ) | b,h | $ | (34,151,329 | ) | ||
| Net income (loss) | $ | (54,634,300 | ) | $ | (8,645,561 | ) | b,h,i | $ | (63,279,861 | ) |
| Cash flows from operating activities | |||||||||||||
| Net income (loss) | $ | (31,819,266 | ) | $ | (8,645,561 | ) | j | $ | (40,464,827 | ) | |||
| Adjustments to reconcile to net used in operating activities | |||||||||||||
| Depreciation and amortization | $ | 15,187 | $ | $ | 15,187 | ||||||||
| Warrants issued to consultants | $ | 1,243,744 | $ | 1,997,324 | j | $ | 3,241,068 | ||||||
| Income attributable to repricing of warrants and debt derivatives | $ | $ | (16,454,929 | ) | j | $ | (16,454,929 | ) | |||||
| Financing costs attributable to issuance of warrants | $ | $ | 23,148,214 | j | $ | 23,148,214 | |||||||
| Amortization of beneficial conversion feature –convertible notes | $ | 8,836,000 | $ | $ | 8,836,000 | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | 1,365,000 | j | $ | 1,365,000 | ||||||
| Common stock issued in exchange for services | $ | 12,471,727 | $ | 924,475 | j | $ | 13,396,202 | ||||||
| Common stock canceled-previously issued for services rendered | $ | (642,098 | ) | $ | 460,800 | j | $ | (181,298 | ) | ||||
| Change in assets and liabilities: | |||||||||||||
| Payments of security deposits | $ | — | $ | (33,291 | ) | j | $ | (33,291 | ) | ||||
| Decrease in due related parties | $ | (20,631 | ) | $ | $ | (20,631 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | (983,197 | ) | $ | 149,732 | j | $ | (833,465 | ) | ||||
| Net cash used in operating activities | $ | (10,898,534 | ) | $ | 2,911,764 | j | $ | (7,986,770 | ) | ||||
| Cash flows from investing activities: | |||||||||||||
| Payments for patent filing | $ | (4,347 | ) | (4,347 | ) | ||||||||
| Payments of security deposits | $ | (33,291 | ) | 33,291 | j | ||||||||
| Capital expenditures | $ | — | $ | $ | |||||||||
| Net cash used in investing activities | $ | (37,638 | ) | $ | 33,291 | j | $ | (4,347 | ) | ||||
| Cash flows from financing activities | |||||||||||||
| Proceeds from sales of common stock, net | $ | 8,141,055 | $ | (8,141,055 | ) | j | $ | — | |||||
| Proceeds from subscription of common stock | $ | 2,340,000 | (2,340,000 | ) | j | — | |||||||
| Proceeds from notes converted to stock | $ | 1,575,000 | (1,575,000 | ) | j | — | |||||||
| Proceeds from issuance of convertible notes | $ | — | $ | 9,079,000 | j | $ | 9,079,000 | ||||||
| Proceeds from exercise of options and warrants | $ | 70,750 | $ | 32,000 | j | $ | 102,750 | ||||||
| Net cash provided by financing activities | $ | 12,126,805 | $ | (2,945,055 | ) | j | $ | 9,181,750 | |||||
| Net increase in cash and cash equivalents | $ | 1,190,633 | $ | $ | 1,190,633 | ||||||||
| Cash and cash equivalents at beginning of period | $ | 1,832 | $ | $ | 1,832 | ||||||||
| Cash and cash equivalents at end of period | $ | 1,192,465 | $ | $ | 1,192,465 |
| Cash flows from operating activities | |||||||||||||
| Net income (loss) | $ | (54,634,300 | ) | $ | (8,645,561 | ) | k | $ | (63,279,861 | ) | |||
| Adjustments to reconcile to net used in operating activities | |||||||||||||
| Depreciation and amortization | $ | 18,348 | $ | $ | 18,348 | ||||||||
| Organization expenses | $ | 88,500 | $ | 88,500 | |||||||||
| Preferred shares issued in exchange for services | $ | 1,500,000 | $ | $ | 1,500,000 | ||||||||
| Warrants issued to consultants | $ | 3,263,606 | $ | 1,997,324 | k | $ | 5,260,930 | ||||||
| Income attributable to repricing of warrants and debt derivatives | $ | — | $ | (16,454,929 | ) | k | $ | (16,454,929 | ) | ||||
| Financing costs attributable to issuance of warrants | $ | — | $ | 23,148,214 | k | $ | 23,148,214 | ||||||
| Amortization of beneficial conversion feature – convertible notes | $ | 10,461,000 | $ | $ | 10,461,000 | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | $ | 1,365,000 | k | $ | 1,365,000 | |||||||
| Common stock issued in exchange for services | $ | 24,819,459 | $ | 974,475 | k | $ | 25,793,934 | ||||||
| Common stock canceled-previously issued for services rendered | $ | (927,673 | ) | $ | 460,800 | k | $ | (466,873 | ) | ||||
| Change in assets and liabilities: | |||||||||||||
| Payments for security deposits | $ | $ | (56,850 | ) | k | $ | (56,850 | ) | |||||
| Increase in prepaid expenses and deposits | $ | $ | $ | ||||||||||
| Decrease in other assets | $ | (13,890 | ) | $ | $ | (13,890 | ) | ||||||
| Decrease in due related parties | $ | 132,065 | $ | $ | 132,065 | ||||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 822,512 | $ | 99,732 | k | $ | 922,244 | ||||||
| Net cash used in operating activities | $ | (14,470,373 | ) | $ | 2,888,205 | k | $ | (11,582,168 | ) | ||||
| Cash flows from investing activities: | |||||||||||||
| Payments for patent filing | $ | (25,698 | ) | $ | $ | (25,698 | ) | ||||||
| Payments of security deposits | $ | (56,850 | ) | 56,850 | k | ||||||||
| Capital expenditures | $ | (29,507 | ) | $ | $ | (29,507 | ) | ||||||
| Net cash used in investing activities | $ | (112,055 | ) | $ | 56,850 | k | $ | (55,205 | ) | ||||
| Cash flows from financing activities | |||||||||||||
| Proceeds from sales of common stock, net | $ | 8,573,055 | $ | (8,141,055 | ) | k | $ | 432,000 | |||||
| Proceeds from subscription of common stock | $ | 2,465,000 | (2,465,000 | ) | k | ||||||||
| Proceeds from notes converted to common stock | $ | 1,575,000 | (1,575,000 | ) | k | ||||||||
| Proceeds from issuance of convertible notes | $ | $ | 9,204,000 | k | 9,204,000 | ||||||||
| Proceeds from exercise of options and warrants | $ | 311,750 | $ | 32,000 | k | $ | 343,750 | ||||||
| Proceeds from loans | $ | 2,750,000 | $ | $ | 2,750,000 | ||||||||
| Advances from shareholders | $ | 100,088 | $ | $ | 100,088 | ||||||||
| Net cash provided by financing activities | $ | 15,774,893 | $ | (2,945,055 | ) | k | $ | 12,829,838 | |||||
| Net increase in cash and cash equivalents | $ | 1,192,465 | $ | $ | 1,192,465 | ||||||||
| Cash and cash equivalents at beginning of period | $ | — | $ | $ | — | ||||||||
| Cash and cash equivalents at end of period | $ | 1,192,465 | $ | $ | 1,192,465 |
Accounts Payable and accrued liabilities | Accrued liabilities, related parties | Due to related parties | ||||||||
| Per previously reported | $ | 933,074 | $ | 95,162 | $ | 91,312 | ||||
| Accrual of penalties as described above | 54,951 | |||||||||
| Reclassification of non related party debt | 50,000 | (50,000 | ) | |||||||
| Consolidation of liabilities due related parties | 91,312 | (91,312 | ) | |||||||
| Per restatement | $ | 1,038,025 | $ | 136,474 | $ | -0- | ||||
Debt derivative and warrant liability (Balance Sheet) | Interest Expense (Statement of Income (Loss) | Gain/Loss in fair value of debt derivative and warrant liability | ||||||||
| Originally reported: | $ | -0- | $ | 9,224,929 | $ | -0- | ||||
| Initial warrant valuation related to financing (separated on cash flow statement) | 23,148,214 | 23,148,214 | ||||||||
| Reclassification of warrant liability from equity to liability | 3,108,851 | |||||||||
| Adjustment to fair value of debt derivative and warrant liability (mark to market change) | (16,454,928 | ) | 0 | 16,454,928 | ||||||
| As per amended | $ | 9,802,137 | $ | 32,373,143 | $ | 16,454,928 |
Additional paid in capital | ||||
| Per previously reported | $ | 54,355,065 | ||
| Reclassification of warrants related to financing activities to warrant liability | (3,108,851 | ) | ||
| Correction of valuation of non financing warrants issued to non employees, net of cancellations | 1,997,324 | |||
| Correction of subscription for common stock | (100,000 | ) | ||
| Per restatement | $ | 53,143,538 | ||
Selling, general and administrative for the three months ended June 30, 2005 | ||||
| Per previously reported | $ | 2,659,727 | ||
| Cancellation of unauthorized warrants issued to non employees | (849,047 | ) | ||
| Accrual of penalties as described in (a) above | 54,951 | |||
| Per restatement | $ | 1,865,631 | ||
Selling, general and administrative for the nine months ended June 30, 2005 | ||||
| Per previously reported | $ | 22,236,607 | ||
| Correction of valuation of non financing warrants issued to non employees, net of cancellation of warrants having a fair value of $ 849,047 of as described in (d) above | 1,997,324 | |||
| Correction of subscription for common stock as described in (d) above | (100,000 | ) | ||
| Accrual of penalties as described in (a) above | 54,951 | |||
| Per restatement | $ | 24,188,882 | ||
| Selling, general and administrative from September 16, 2002 (date of inception) through June 30, 2005 | ||||
| Per previously reported | $ | 43,296,679 | ||
| Correction of valuation of non financing warrants issued to non employees, net of cancellations as described in (d) above | 1,997,324 | |||
| Correction of subscription for common stock as described in (d) above | (100,000 | ) | ||
| Accrual of penalties as described in (a) above | 54,951 | |||
| Reclassification of research and development costs | (238,535 | ) | ||
| Per restatement | $ | 45,010,419 | ||
| Cash flows from operating activities | Component Classification Reference | ||||||||||||
| Net income (loss) | $ | (31,819,266 | ) | $ | $ | ||||||||
| Initial warrant valuation as described in (f) above | $ | $ | (23,148,214 | ) | (1) | $ | |||||||
| Income attributable to repricing of warrants as described in (h) above | $ | $ | 16,454,929 | (2) | $ | ||||||||
| Adjustment for warrants issued to non employees as described in (d) above | $ | $ | (1,997,324 | ) | (3) | $ | |||||||
| Accrual of penalties as described in (a) above | $ | $ | (54,951 | ) | (4) | $ | |||||||
| Correction of common stock subscription as described in (d) above | $ | $ | 100,000 | (5) | $ | ||||||||
| $ | $ | (1 | ) | Rounding | $ | ||||||||
| Net income (loss) restated | $ | $ | (8,645,561 | ) | $ | (40,464,827 | ) | ||||||
| Adjustments to reconcile to net used in operating activities | $ | $ | $ | ||||||||||
| Depreciation and amortization | $ | 15,187 | $ | $ | 15,187 | ||||||||
| Warrants issued to consultants | $ | 1,243,744 | $ | 1,997,324 | (3) | $ | 3,241,068 | ||||||
| Income attributable to repricing of warrants and debt derivatives | $ | $ | (16,454,929 | ) | (2) | $ | (16,454,929 | ) | |||||
| Financing costs attributable to issuance of warrants | $ | $ | 23,148,214 | (1) | $ | 23,148,214 | |||||||
Amortization of beneficial conversion feature – convertible notes | $ | 8,836,000 | $ | $ | 8,836,000 | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | $ | $ | ||||||||||
| Reclassification of fair value of common stock issued in excess of debt as described in Note C | $ | $ | 1,365,000 | (6) | $ | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | 1365,000 | $ | 1,365,000 | |||||||
| Common stock issued in exchange for services | $ | 12,471,727 | $ | $ | |||||||||
| Correction of common stock subscription as described in (d) above | $ | $ | (100,000 | ) | (5) | $ | |||||||
| Reclassification of fair value of common stock issued in excess of debt as described in Note C | $ | $ | (1,365,000 | ) | (6) | $ | |||||||
| Correct net common stock canceled-previously issued for services rendered | $ | $ | (460,800 | ) | (7) | $ | |||||||
| Correct classification of common stock issued for services rendered classified in error under financing activities | $ | $ | 2,850,275 | (8) | $ | ||||||||
| Common stock issued for services rendered-restated | $ | $ | 924,475 | $ | 13,396,202 | ||||||||
| Common stock canceled-previously issued for services rendered | $ | (642,098 | ) | $ | $ | ||||||||
| Correct net common stock canceled-previously issued for services rendered | $ | $ | 460,800 | (7) | $ | ||||||||
| Common stock canceled-previously issued for services rendered-restated | $ | $ | 460,800 | $ | (181,298 | ) | |||||||
| Change in assets and liabilities: | $ | $ | $ | ||||||||||
| Payments of security deposits | $ | — | $ | $ | |||||||||
| Reclassification of security deposit to operating activities | $ | $ | (33,291 | ) | (9) | $ | |||||||
| Payments of security deposits | $ | — | $ | (33,291 | ) | $ | (33,291 | ) | |||||
| Decrease in due related parties | $ | (20,631 | ) | $ | $ | (20,631 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | (983,197 | ) | $ | $ | (833,465 | ) | ||||||
| Accrual of penalties as described in (a) above | $ | $ | 54,951 | (4) | $ | ||||||||
| Reclassification of changes in accrued expenses due related parties | $ | $ | 94,781 | (10) | $ | ||||||||
| Increase (decrease) in accounts payable and accrued liabilities-restated | $ | $ | 149,732 | $ | (833,465 | ) | |||||||
| Net cash used in operating activities | $ | (10,898,534 | ) | $ | 2,911,764 | $ | (7,986,770 | ) | |||||
| Cash flows from investing activities: | $ | $ | $ | ||||||||||
| Payments for patent filing | $ | (4,347 | ) | $ | $ | (4,347 | ) | ||||||
| Payments of security deposits | $ | (33,291 | ) | $ | 33,291 | (9) | $ | ||||||
| Capital expenditures | $ | — | $ | $ | |||||||||
| Net cash used in investing activities | $ | (37,638 | ) | $ | 33,291 | $ | (4,347 | ) | |||||
| Cash flows from financing activities | $ | $ | $ | ||||||||||
| Proceeds from sales of common stock, net | $ | 8,141,055 | $ | $ | — | ||||||||
| Correct classification of common stock issued for services rendered classified in error under financing activities | $ | $ | (2,850,275 | ) | (8) | $ | |||||||
| Reclassification of changes in accrued expenses due related parties | $ | $ | (94,781 | ) | (10) | $ | |||||||
| Reclassification of proceeds form convertible notes | $ | $ | (5,195,999 | ) | (11) | $ | |||||||
| Proceeds from sales of common stock, net | $ | $ | (8,141,055 | ) | $ | — | |||||||
| Proceeds from subscription of common stock | $ | 2,340,000 | $ | (2,340,000 | ) | (11) | $ | — | |||||
| Proceeds from notes converted to stock | $ | 1,575,000 | $ | (1,575,000 | ) | (11) | $ | — | |||||
| Proceeds from issuance of convertible notes | $ | — | $ | 9,079,000 | (11) | $ | 9,079,000 | ||||||
| Proceeds from exercise of options and warrants | $ | 70,750 | $ | 32,000 | (11) | $ | 102,750 | ||||||
| Net cash provided by financing activities | $ | 12,126,805 | $ | (2,945,055 | ) | $ | 9,181,750 | ||||||
| Net increase in cash and cash equivalents | $ | 1,190,633 | $ | $ | 1,190,633 | ||||||||
| Cash and cash equivalents at beginning of period | $ | 1,832 | $ | $ | 1,832 | ||||||||
| Cash and cash equivalents at end of period | $ | 1,192,465 | $ | $ | 1,192,465 |
| Cash flows from operating activities | |||||||||||||
| Net income (loss) | $ | (54,634,300 | ) | $ | $ | ||||||||
| Initial warrant valuation as described in (f) above | $ | $ | (23,148,214 | ) | (1) | $ | |||||||
| Income attributable to repricing of warrants as described in (h) above | $ | $ | 16,454,929 | (2) | $ | ||||||||
| Adjustment for warrants issued to non employees as described in (d) above | $ | $ | (1,997,324 | ) | (3) | $ | |||||||
| Accrual of penalties as described in (a) above | $ | $ | (54,951 | ) | (4) | $ | |||||||
| Correction of common stock subscription as described in (d) above | $ | $ | 100,000 | (5) | $ | ||||||||
| $ | $ | (1 | ) | Rounding | $ | ||||||||
| Net income (loss) restated | $ | $ | (8,645,561 | ) | $ | (63,279,861 | ) | ||||||
| Adjustments to reconcile to net used in operating activities | $ | $ | $ | ||||||||||
| Depreciation and amortization | $ | 18,348 | $ | $ | 18,348 | ||||||||
| Organization costs | $ | 88,500 | $ | $ | 88,500 | ||||||||
| Preferred shares issued in exchange for services | $ | 1,500,000 | $ | $ | 1,500,000 | ||||||||
| Warrants issued to consultants | $ | 3,263,606 | $ | 1,997,324 | (3) | $ | 5,260,930 | ||||||
| Income attributable to repricing of warrants and debt derivatives | $ | $ | (16,454,929 | ) | (2) | $ | (16,454,929 | ) | |||||
| Financing costs attributable to issuance of warrants | $ | $ | 23,148,214 | (1) | $ | 23,148,214 | |||||||
| Amortization of beneficial conversion feature -convertible notes | $ | 10,461,000 | $ | $ | 10,461,000 | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | $ | $ | ||||||||||
| Reclassification of fair value of common stock issued in excess of debt as described in Note C | $ | $ | 1,365,000 | (6) | $ | ||||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | 1,365,000 | $ | 1,365,000 | |||||||
| Common stock issued in exchange for services | $ | 24,819,459 | $ | $ | |||||||||
| Correction of common stock subscription as described in (d) above | $ | $ | (100,000 | ) | (5) | $ | |||||||
| Reclassification of fair value of common stock issued in excess of debt as described in Note C | $ | $ | (1,365,000 | ) | (6) | $ | |||||||
| Correct net common stock canceled-previously issued for services rendered | $ | $ | (460,800 | ) | (7) | $ | |||||||
| Correct classification of common stock issued for services rendered classified in error under financing activities | $ | $ | 2,900,275 | (8) | $ | ||||||||
| Common stock issued for services rendered-restated | $ | $ | 974,475 | $ | 25,793,934 | ||||||||
| Common stock canceled-previously issued for services rendered | $ | (927,673 | ) | $ | $ | ||||||||
| Correct net common stock canceled-previously issued for services rendered | $ | $ | 460,800 | (7) | $ | ||||||||
| Common stock canceled-previously issued for services rendered-restated | $ | $ | 460,800 | $ | (466,873 | ) | |||||||
| Change in assets and liabilities: | $ | $ | $ | ||||||||||
| Payments of security deposits | $ | — | $ | $ | |||||||||
| Reclassification of security deposit to operating activities | $ | $ | (56,850 | ) | (9) | $ | |||||||
| Payments of security deposits | $ | — | $ | (56,850 | ) | $ | (56,850 | ) | |||||
| Decrease in other assets | $ | (13,890 | ) | $ | $ | (13,890 | ) | ||||||
| Decrease in due related parties | $ | (132,065 | ) | $ | $ | (132,065 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 822,512 | $ | $ | (833,465 | ) | |||||||
| Accrual of penalties as described in (a) above | $ | $ | 54,951 | (4) | $ | ||||||||
| Reclassification of changes in accrued expenses due related parties | $ | $ | 44,781 | (10) | $ | ||||||||
| Increase (decrease) in accounts payable and accrued liabilities-restated | $ | $ | 99,732 | $ | 922,244 | ||||||||
| Net cash used in operating activities | $ | (14,470,373 | ) | $ | 2,888,205 | $ | (11,582,168 | ) | |||||
| Cash flows from investing activities: | $ | $ | $ | ||||||||||
| Payments for patent filing | $ | (25,698 | ) | $ | $ | (25,698 | ) | ||||||
| Payments of security deposits | $ | (56,850 | ) | $ | 56,850 | (9) | $ | ||||||
| Capital expenditures | $ | (29,507 | ) | $ | $ | (29,507 | ) | ||||||
| Net cash used in investing activities | $ | (112,055 | ) | $ | 56,850 | $ | (55,205 | ) | |||||
| Cash flows from financing activities | $ | $ | $ | ||||||||||
| Proceeds from sales of common stock, net | $ | 8,573,055 | $ | $ | — | ||||||||
| Correct classification of common stock issued for services rendered classified in error under financing activities | $ | $ | (2,900,275 | ) | (8) | $ | |||||||
| Reclassification of changes in accrued expenses due related parties | $ | $ | (44,781 | ) | (10) | $ | |||||||
| Reclassification of proceeds form convertible notes | $ | $ | (5,195,999 | ) | (11) | $ | |||||||
| Proceeds from sales of common stock, net | $ | $ | (8,141,055 | ) | $ | 432,000 | |||||||
| Proceeds from subscription of common stock | $ | 2,465,000 | $ | (2,465,000 | ) | (11) | $ | — | |||||
| Proceeds from notes converted to stock | $ | 1,575,000 | $ | (1,575,000 | ) | (11) | $ | — | |||||
| Proceeds from issuance of convertible notes | $ | — | $ | 9,204,000 | (11) | $ | 9,204,000 | ||||||
| Proceeds from exercise of options and warrants | $ | 311,750 | $ | 32,000 | (11) | $ | 343,750 | ||||||
| Net cash provided by financing activities | $ | 15,774,893 | $ | (2,945,055 | ) | $ | 12,829,838 | ||||||
| Net increase in cash and cash equivalents | $ | 1,192,465 | $ | $ | 1,192,465 | ||||||||
| Cash and cash equivalents at beginning of period | $ | $ | $ | ||||||||||
| Cash and cash equivalents at end of period | $ | 1,192,465 | $ | $ | 1,192,465 |
| 4. | We acknowledge your supplemental response to comment 4 and substantially reissue our comment. Please provide us with a detailed analysis or calculation of each correction that aggregates to the $23.1 million adjustment for the nine months ended June 30, 2005, as well as information regarding the various financing transactions affected by this adjustment. Additionally, it remains unclear why you charged the $23.1 million warrant liability to interest expense; please clarify your accounting treatment in the context of EITF No. 00-19. |
| 5. | Please ensure that we can clearly relate the information that you have provided regarding the $23.1 million adjustment for the nine months ended June 30, 2005 to the revised tabular restatement disclosure that we have requested in this letter. |
| 6. | Please confirm that you will timely amend your June 30, 2006 Form 10-QSB to reflect the revised restatement information that you ultimately present in your Form SB-2 at the conclusion of our related comment process. |
| 7. | Refer to adjustment (a) and include a cross-reference to the statement of operations adjustment that you reference in footnote (d). |
As Previously Reported | Adjustment | Reference | As Restated | ||||||||||
| Cash | $ | 31,190 | $ | $ | 31,190 | ||||||||
| Accounts receivables and advances | $ | 12,429 | $ | $ | 12,429 | ||||||||
| Total current assets | $ | 43,619 | $ | $ | 43,619 | ||||||||
| Property, plant and equipment, net | $ | 8,064 | $ | $ | 8,064 | ||||||||
| Deposits | $ | 14,262 | $ | $ | 14,262 | ||||||||
| Patents, net | $ | 22,493 | $ | $ | 22,493 | ||||||||
| Intellectual property, net | $ | 9,094,082 | $ | $ | 9,094,082 | ||||||||
| Total assets | $ | 9,182,520 | $ | $ | 9,182,520 | ||||||||
| Accounts payable and accrued liabilities | $ | 2,185,468 | $ | 331,989 | a | $ | 2,517,457 | ||||||
| Accounts and notes payable, related party | $ | 410,429 | $ | 52,662 | a | $ | 463,091 | ||||||
| Total current liabilities | $ | 2,595,897 | $ | 384,651 | a | $ | 2,980,548 | ||||||
| Debt derivative and warrant liability | $ | — | $ | 13,673,574 | b | $ | 13,673,574 | ||||||
| Total liabilities | $ | 2,595,897 | $ | 14,058,225 | a,b | $ | 16,654,122 | ||||||
| Preferred stock | $ | 6 | $ | $ | 6 | ||||||||
| Common stock | $ | 112,230 | $ | $ | 112,230 | ||||||||
| Common stock subscribed | $ | 20,000 | $ | $ | 20,000 | ||||||||
| Additional paid in capital | $ | 81,879,801 | $ | 440,914 | c | $ | 82,320,715 | ||||||
| Accumulated deficit | $ | (75,425,414 | ) | $ | (14,499,139 | ) | $ | (89,924,553 | ) | ||||
| Total deficiency in stockholders’ equity | $ | 6,586,623 | $ | (14,058,225 | ) | $ | (7,471,602 | ) | |||||
| Total liabilities and Deficiency in Stockholders’ equity | $ | 9,182,520 | $ | $ | 9,182,520 | ||||||||
| Operating expenses: | |||||||||||||
| Selling, general & administrative | $ | 42,662,152 | $ | 8,051,865 | d | $ | 50,714,017 | ||||||
| Research and development | $ | 638,873 | $ | $ | 638,873 | ||||||||
| Depreciation and amortization | $ | 356,266 | $ | $ | 356,266 | ||||||||
| Total operating expenses | $ | 43,657,291 | $ | 8,051,865 | d | $ | 51,709,156 | ||||||
| Net loss from operations | $ | (43,657,291 | ) | $ | (8,051,865 | ) | d | $ | (51,709,156 | ) | |||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | — | $ | 16,700,990 | e | $ | 16,700,990 | ||||||
| Other income (expense) | $ | 4,957 | $ | $ | 4,957 | ||||||||
| Interest income (expense) | $ | (8,958,046 | ) | $ | (23,148,264 | ) | f | $ | (32,106,310 | ) | |||
| Net loss | $ | (52,610,380 | ) | $ | (14,499,139 | ) | d,e,f | $ | (67,109,519 | ) | |||
| Net loss per share-basic and fully diluted | $ | (0.82 | ) | $ | (0.23 | ) | $ | (1.05 | ) | ||||
| Operating expenses: | |||||||||||||
| Selling, general & administrative | $ | 63,483,689 | $ | 8,051,915 | d | $ | 71,535,604 | ||||||
| Research and development | $ | 877,408 | $ | 877,408 | |||||||||
| Depreciation and amortization | $ | 359,427 | $ | $ | 359,427 | ||||||||
| Total operating expenses | $ | 64,720,524 | $ | 8,051,915 | d | $ | 72,772,439 | ||||||
| Net loss from operations | $ | (64,720,524 | ) | $ | (8,051,915 | ) | d | $ | (72,772,439 | ) | |||
| Net gain (loss) in fair value of debt derivative and warrant liability | $ | — | $ | 16,700,990 | e | $ | 16,700,990 | ||||||
| Other income (expense) | $ | 31,342 | $ | $ | 31,342 | ||||||||
| Interest income (expense) | $ | (10,736,232 | ) | $ | (23,148,214 | ) | f | $ | (33,884,446 | ) | |||
| Net loss | $ | (75,425,414 | ) | $ | (14,499,139 | ) | d,e,f | $ | (89,924,553 | ) | |||
| Net loss per share-basic and fully diluted | $ | (2.12 | ) | (0.41 | ) | $ | (2.53 | ) | |||||
| Cash flows from operating activities | ||||||||||||||
| Net income (loss) | $ | (52,610,380 | ) | $ | (14,499,139 | ) | d,e,f | $ | (67,109,519 | ) | ||||
| Adjustments to reconcile to net used in operating activities | ||||||||||||||
| Depreciation and amortization | $ | 350,107 | $ | $ | 350,107 | |||||||||
| Organization expenses | $ | $ | ||||||||||||
| Preferred shares issued in exchange for services | $ | — | $ | $ | — | |||||||||
| Warrants issued to consultants | $ | 956,304 | $ | 6,402,264 | d | $ | 7,358,568 | |||||||
| Income attributable to repricing of warrants and debt derivatives | $ | $ | (16,700,991 | ) | e | $ | (16,700,991 | ) | ||||||
| Financing costs attributable to issuance of warrants | $ | $ | 23,148,214 | f | $ | 23,148,214 | ||||||||
Amortization of beneficial conversion feature – convertible notes | $ | 8,836,000 | $ | $ | 8,836,000 | |||||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | 1,365,000 | d | $ | 1,365,000 | |||||||
| Common stock issued in exchange for services | $ | 14,805,128 | $ | 3,371,513 | g | $ | 18,176,641 | |||||||
| Common stock issued in exchange for intellectual property | $ | 14,689,100 | $ | $ | 14,689,100 | |||||||||
| Common stock issued for ESOP | $ | 3,960,000 | $ | (3,960,000 | ) | g | $ | — | ||||||
| Common stock issued as penalty in connection with financing | $ | 776,529 | $ | $ | 776,529 | |||||||||
| Common stock canceled-previously issued for services rendered | $ | (1,078,270 | ) | $ | 500,000 | g | $ | (578,270 | ) | |||||
| Change in assets and liabilities: | ||||||||||||||
| Increase in accounts receivable | $ | $ | (12,429 | ) | g | $ | (12,429 | ) | ||||||
| Increase in other assets | $ | (12,429 | ) | $ | 12,429 | g | $ | — | ||||||
| Decrease in security deposits | $ | 9,297 | 9,297 | |||||||||||
| Capital expenditures | $ | 16,757 | $ | (16,757 | ) | h | $ | — | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 297,755 | $ | 365,993 | a,i | $ | 663,748 | |||||||
| Increase in due related parties | $ | (111,943 | ) | (111,943 | ) | |||||||||
| Net cash used in operating activities | $ | (9,116,045 | ) | $ | (23,903 | ) | a,d,e,f,g,h,i | $ | (9,139,948 | ) | ||||
| Cash flows from investing activities: | ||||||||||||||
| Payments for patent filing | $ | (4,347 | ) | (4,347 | ) | |||||||||
| Capital expenditures | $ | $ | 16,757 | h | $ | 16,757 | ||||||||
| Net cash used in investing activities | $ | (4,347 | ) | $ | 16,757 | h | $ | 12,410 | ||||||
| Cash flows from financing activities | ||||||||||||||
| Proceeds from sales of common stock, net | $ | — | $ | $ | ||||||||||
| Proceeds from subscription of common stock | $ | 9,079,000 | (9,079,000 | ) | j | |||||||||
| Proceeds from issuance of convertible notes | $ | $ | 9,079,000 | j | $ | 9,079,000 | ||||||||
| Proceeds from exercise of options and warrants | $ | 70,750 | $ | 32,000 | g | $ | 102,750 | |||||||
| Payment of debt | $ | — | $ | (24,854 | ) | i | $ | (24,854 | ) | |||||
| Proceeds from loans | $ | — | $ | $ | — | |||||||||
| Advances from shareholders | $ | — | $ | $ | — | |||||||||
| Net cash provided by financing activities | $ | 9,149,750 | $ | 7,146 | g,i,j | $ | 9,156,896 | |||||||
| Net increase in cash and cash equivalents | $ | 29,358 | $ | — | $ | 29,358 | ||||||||
| Cash and cash equivalents at beginning of period | $ | 1,832 | $ | — | $ | 1,832 | ||||||||
| Cash and cash equivalents at end of period | $ | 31,190 | $ | — | $ | 31,190 | ||||||||
| Cash flows from operating activities | ||||||||||||||
| Net income (loss) | $ | (75,425,414 | ) | $ | (14,499,139 | ) | d,e,f | $ | (89,924,553 | ) | ||||
| Adjustments to reconcile to net used in operating activities | ||||||||||||||
| Depreciation and amortization | $ | 353,268 | $ | $ | 353,268 | |||||||||
| Organization expenses | $ | 88,500 | $ | 88,500 | ||||||||||
| Preferred shares issued in exchange for services | $ | 1,500,000 | $ | $ | 1,500,000 | |||||||||
| Warrants issued to consultants | $ | 2,976,166 | $ | 6,402,264 | d | $ | 9,378,430 | |||||||
| Income attributable to repricing of warrants and debt derivatives | $ | — | $ | (16,700,991 | ) | e | $ | (16,700,991 | ) | |||||
| Financing costs attributable to issuance of warrants | $ | — | $ | 23,148,214 | f | $ | 23,148,214 | |||||||
Amortization of beneficial conversion feature – convertible notes | $ | 10,461,000 | $ | $ | 10,461,000 | |||||||||
| Fair value of common stock issued to related party in excess of debt | $ | — | $ | 1,365,000 | d | $ | 1,365,000 | |||||||
| Common stock issued in exchange for services | $ | 27,202,860 | $ | 3,371,513 | g | $ | 30,574,373 | |||||||
| Common stock issued for ESOP | $ | 3,960,000 | $ | (3,960,000 | ) | g | $ | |||||||
| Common stock issued in exchange for intellectual property | $ | 14,689,100 | $ | $ | 14,689,100 | |||||||||
| Common stock issued as penalty in connection with financing | $ | 776,529 | $ | $ | 776,529 | |||||||||
| Common stock canceled-previously issued for services rendered | $ | (1,363,845 | ) | $ | 500,000 | g | $ | (863,845 | ) | |||||
| Change in assets and liabilities: | ||||||||||||||
| Increase in accounts receivable | $ | — | $ | (12,429 | ) | g | $ | (12,429 | ) | |||||
| Increase other current assets | $ | (12,429 | ) | $ | 12,429 | g | $ | |||||||
| Increase in security deposits | $ | (14,262 | ) | $ | $ | (14,262 | ) | |||||||
| Increase in capital expenditures | $ | (12,750 | ) | 12,750 | h | |||||||||
| Increase in other assets | $ | (13,890 | ) | $ | $ | (13,890 | ) | |||||||
| Increase in due related parties | $ | 40,753 | $ | $ | 40,753 | |||||||||
| Increase (decrease) in accounts payable and accrued liabilities | $ | 2,053,464 | $ | 365,993 | a,i | $ | 2,419,457 | |||||||
| Net cash used in operating activities | $ | (12,740,950 | ) | $ | 5,604 | a,d,e,f,g,h,i | $ | (12,735,346 | ) | |||||
| Cash flows from investing activities: | ||||||||||||||
| Payments for patent filing | $ | (25,698 | ) | $ | $ | (25,698 | ) | |||||||
| Capital expenditures | $ | $ | (12,750 | ) | h | $ | (12,750 | ) | ||||||
| Net cash used in investing activities | $ | (25,698 | ) | $ | (12,750 | ) | h | $ | (38,448 | ) | ||||
| Cash flows from financing activities | ||||||||||||||
| Proceeds from sales of common stock, net | $ | 432,000 | $ | $ | 432,000 | |||||||||
| Proceeds from subscription of common stock | $ | 9,204,000 | $ | (9,204,000 | ) | j | $ | |||||||
| Proceeds from issuance of convertible notes | $ | — | $ | 9,204,000 | j | 9,204,000 | ||||||||
| Proceeds from exercise of options and warrants | $ | 311,750 | $ | 32,000 | g | $ | 343,750 | |||||||
| Payment of debt | $ | $ | (24,854 | ) | i | $ | (24,854 | ) | ||||||
| Proceeds from loans | $ | 2,750,000 | $ | $ | 2,750,000 | |||||||||
| Advances from shareholders | $ | 100,088 | $ | $ | 100,088 | |||||||||
| Net cash provided by financing activities | $ | 12,797,838 | $ | 7,146 | g.i,j | $ | 12,804,984 | |||||||
| Net increase in cash and cash equivalents | $ | 31,190 | $ | — | $ | 31,190 | ||||||||
| Cash and cash equivalents at beginning of period | $ | — | $ | $ | — | |||||||||
| Cash and cash equivalents at end of period | $ | 31,190 | $ | — | $ | 31,190 | ||||||||
| As previously reported | $ | 2,185,468 | ||
| Adjustment, net | 331,989 | |||
| As restated | $ | 2,517,457 |
Debt derivative and warrant liability (Balance Sheet) | Interest Expense (Statement of Income (Loss) | Gain/Loss in fair value of debt derivative and warrant liability | ||||||||
| Originally reported: | $ | -0- | $ | 8,958,046 | $ | -0- | ||||
| Reclassification on fair value of warrants issued for services rendered (above) | 5,838,514 | — | (5,838,514 | ) | ||||||
| Adjustment to fair value of warrants issued in previous year (see above) | (4,355,942 | ) | (4,355,942 | ) | ||||||
| Fair value of unrecorded warrants issued in conjunction with financing (see a above) | 136,401 | |||||||||
| Amended reported | $ | 75,910,882 | $ | 30,951,611 | $ | 37,061,675 | ||||
| Summary: | ||||
| Adjustment for Fair value of stock issued in settlement of related party debt: | $ | 1,365,000 | ||
| Reclassification of fair value of financing warrants issued pursuant to EITF 00-19 | (924,086 | ) | ||
| Net effect: | $ | 440,914 |
| Summary: | ||||
| Total value of warrants described above: | $ | 7,358,569 | ||
| Less previously recorded | (956,305 | ) | ||
| Net: | 6,402,264 | |||
| Adjustment to fair value of common stock issued in settlement of related party debt (see (b) above) | 1,365,000 | |||
| Penalties accrued due to late registration (see (a) above) | 384,651 | |||
| Correction in value of shares issued for services rendered | (100,000 | ) | ||
| Net effect: | $ | 8,051,915 |
| 1 | Common stock issued for services | $ | 3,371,513 |
| 2 | Correction of shares issued originally labeled ESOP | (3,960,000) | |
| 3 | Correction of amount of shares cancelled, previously issued for services | 500,000 | |
| 4 | Decrease in change in accounts receivable | (12,429) | |
| 5 | Increase in change in other assets | 12,429 | |
| 6 | Correction of proceeds from exercise of options and warrants | 32,000 | |
| 7 | Accounts payable correction | 56,487 | |
| Net effect: | $ | 0 |
| 1 | Recording of accrual for penalties as described in (a) above: | $ | 384,651 |
| 2 | Misclassification of debt payments | (24,854) | |
| 3 | Accrual adjustments | 6,196 | |
| Net effect | $ | 365,993 | |
| 8. | Refer to adjustment (b) and clarify where you recorded the $13,673,574 adjustment to interest expense. |
| 9. | We refer to adjustment (c). We do not see the $1,365,000 increase in selling, general, and administrative expenses on your statement of operations. Please cross-reference to adjustment (d) to clarify where you recorded this adjustment. Please also clarify why you recorded a $924,086 reduction to interest expense and tell us where you presented that amount on your statement of operations. |
| 10. | We acknowledge your proposed revisions in response to comment 5 as well as the supplemental tabular restatement information that you have presented for the two years ended September 30, 2005 and for the period from inception to September 30, 2005. We refer you to footnote (e) and request that you revise your disclosure to incorporate any additional information that results from your response to comment 4 of this letter. Additionally, please provide us with a detailed analysis or calculation of the $16.7 million gain you recorded for the nine months ended September 30, 2005. Clarify how you reflected this adjustment on your balance sheet. |
| 11. | Please confirm that you will timely amend your September 30, 2005 Form 10-KSB to reflect the revised restatement information that you ultimately present in your Form SB-2 at the conclusion of our related comment process. |
| Very truly yours, | |||
| /s/ Merrill M. Kraines | |||
Merrill M. Kraines |
| cc: | Mr. John Krug, Senior Staff Attorney |
1.465M Promissory Notes | 7.371M Promissory Notes | |||||||||
| Number of warrants: | 2,930,000 | 14,742,000 | ||||||||
| Specifics: | ||||||||||
| Strike Price: | $ | 0.75 | $ | 0.75 | ||||||
| Term | 3 yrs | 5 yrs | ||||||||
| Initial data (assumptions): | ||||||||||
| Market price of stock | $ | 1.50 | $ | 1.39 | ||||||
| Remaining term (initial valuation) | 3 years | 5 years | ||||||||
| Expected dividend yield | — | — | ||||||||
| Volatility: | 148.66 | % | 152.59 | % | ||||||
| Risk free rate: | 3.21 | % | 3.67 | % | ||||||
| Option value: | 1.3123 | 1.3094 | ||||||||
| TOTAL | ||||||||||
| Initial Valuation: | 3,845,039 | 19,303,175 | 23,148,214 | |||||||
Date | Initial Warrant Valuation | Q/E 3/31/05 Fair Values | Q/E 6/30/05 Fair Values | Q/E 9/30/05 Fair Values | Yearly | ||||||||
Quarter ending March 05: | |||||||||||||
| $1.465M Promissory Notes | 1/28/05 | 3,845,039 | 2,130,403 | 1,276,894 | 1,224,740 | ||||||||
| $7.371M Promissory Notes | 2/5/05 | 19,303,175 | 12,091,388 | 7,735,127 | 7,485,988 | ||||||||
| Sub total | 23,148,214 | ||||||||||||
| Warrants reclassified from equity: | |||||||||||||
| $1.675M Bridge Note $0.10 wts | 1/28/05 | 70,186 | 91,089 | 60,199 | 57,457 | ||||||||
| $1.675M Bridge Note $0.60 wts | 1/28/05 | 3,038,665 | 1,168,432 | 729,917 | 703,290 | ||||||||
| Subtotal | 3,108,851 | ||||||||||||
| Total March 05: | 26,257,065 | ||||||||||||
Quarter ending September 05: | |||||||||||||
| Warrants issued in conjunction with services rendered with registration rights | |||||||||||||
| Trilogy | 07/05/2005 | 3,431,250 | 3,501,750 | ||||||||||
| Pollon | 07/05/2005 | 686,250 | 700,350 | ||||||||||
| Subtotal | 4,117,500 | ||||||||||||
| Total | 30,374,565 | 15,481,312 | 9,802,137 | 13,673,575 | |||||||||
| Change-Gain (loss) | 10,775,753 | 5,679,175 | 246,063 | 16,700,991 | |||||||||
SUMMARY RECONCILIATION: | |||||||||||||
| Initial warrant valuation at 3/31/05: | 26,257,065 | ||||||||||||
| Valuation at 3/31/05: | (15,481,312 | ) | |||||||||||
| Gain as per Q/E 3/31/05: | 10,775,753 | ||||||||||||
| Valuation at 6/30/05: | 9,802,137 | ||||||||||||
| Previous (3/31/05) valuation: | (15,481,312 | ) | |||||||||||
| Gain at Q/E 6/30/05: | 5,679,175 | ||||||||||||
| Valuation at 9/30/05: | 13,673,575 | ||||||||||||
| Less initial valuation of warrants | (4,117,500 | ) | |||||||||||
| Sub total | 9,556,075 | ||||||||||||
| Previous Valuation (6/30/05): | (9,802,137 | ) | |||||||||||
| Gain Q/E 9/30/05: | 246,062 | ||||||||||||
| Yearly gain: | 16,700,990 | rounding $1 |
