US Securities and Exchange Commission
Mail Stop 0305
Washington, D.C. 20549
Attention: Mr. Christian Windsor
RE: TETRAGENEX PHARMACEUTICALS, INC.
REGISTRATION STATEMENT ON FORM SB-2
FILED ON JUNE 13, 2006 FILE NUMBER 333-134987
Dear Mr. Windsor:
Thank you for your review Electronically filed on behalf of Tetragenex
Pharmaceuticals, Inc. (the "Company") please find Amendment No. 1 to the Form
SB-2. We have labeled our responses to correspond with the numbers in your
comment letter of July 7, 2006. We have received your comments and made the
following changes.
GENERAL
1. Please include a cover letter in your next submission and label it as
"cover" when filed on EDGAR.
Response 1: As per your request we have included a cover letter with our filing
on EDGAR labeled properly.
2. You should use no type size smaller than the one that predominates in
the filing. Currently, you use a smaller size type throughout the prospectus,
including but not limited to the section on the selling security-holders and the
antidepressant patent family status (and following sections). Please revise.
Response 2: We have revised the filing to have a consistent larger print format.
3. Please define or describe acronyms or abbreviations used in the Form
SB-2 so that they are clear from the context when first used, Such terms
include, for example, NDA and CNS.
Response 3: As per your comment we have properly defined the acronyms and
abbreviation used through out this registration statement, for example see page
18 for CNS and page 19 for NDA.
4. Please review your tables as supplemental information such as footnotes
are missing. For example, the "Shares Issuable Upon the Exercise of Warrants"
cites to a footnote C on page 68, yet the cited footnote does not appear.
Response 4: We omitted the footnote which error was due to a clerical/printing
mistake. We have made sure that all footnotes are properly explained.
5. We note that you are registering shares that are issuable upon exercise
of warrants. It also appears that the warrants are exercisable at this time and
appeared to be exercisable when issued. Please provide the staff with your
analysis as to how the exercise of the warrants was in compliance with Section 5
of the Securities Act of 1933.
Response 5: The Company has raised capital since 1994 through various Regulation
D private placements, allowing the investors of the Company to purchase units
composed of shares and warrants, therefore, all of those warrants are as of
today exercisable. Moreover, the private placements were in compliance with
Section 5 of the Securities Act of 1933 since none of the shares issued were
sold pursuant to a prospectus or other comparable medium There was no general
solicitation made. We are registering all of the shares issuable upon exercise
of the warrants herein and accordingly do not believe that their exercise would
violate section 5. Please note that all of the holders were afforded
registration rights and that this registration statement is intended to fulfill
our obligation to these investors.
6. We did not see disclosure regarding the determination of the offering
price. Please revise to include such disclosure in accordance with Item 505 of
Regulation S-B.
Response 6: Since there is no market for the underlying securities and as per
your comment and in compliance with Reg. ss.228.505 (Item 505) of Regulation S-B
the Company has determined that the initial offering price should be consistent
with the exercise price of the last warrants issued which was $1.65 per share.
We discuss the basis of our valuation for the offering price on page 2 and Page
12 of this registration statement. Most importantly all selling security holders
have agreed that any sales made prior to their being a market in place for the
shares shall be at a fixed price of $1.65 per share in which we disclose in the
prospectus, including on the front page.
7. Given the nature and size of the transaction being registered, advise
the staff of the company's basis for determining that the transaction is
appropriately characterized as a transaction that is eligible to be made on a
shelf basis under Rule 415(a)(1)(i).
Response 7: As discussed on our call, we do not believe that this transaction is
precluded under Rule 415. It is neither a shelf-registration nor a PIPE type of
transaction. All the shares registered under this registration statement have
already been issued in multiple private placements since 1994 or are issuable
upon the exercise of currently exercisable warrants. The Company has been able
to raise in excess of $75 million in capital since its creation. The investors
have been holding shares for many years and in many cases have invested many
times over the past years. The investors are entitled to see their stock
registered on the form SB-2. As for the Shares underlying the warrants it is
important to emphasize that the Company has already issued all of those Warrants
and most of them are part of transactions which included the purchase of Units
composed of shares of our common stock and warrants exercisable at a sum
certain. Most of our warrants are already exercisable and therefore, the holders
of those warrants may choose to exercise their warrants promptly following the
effectiveness of this Registration Statement.
COVER PAGE
8. We note that you applied to list your shares on the Over the Counter
Bulletin Board, but also note that trading has not commenced. Furthermore, we
note your reliance upon Rule 415 for the price of the shares to be resold by the
selling shareholders. However, it does not appear that your shares have an
existing market at this time, and so sales of the shares at "market prices" does
not appear to be possible until such time that a trading market develops.
Therefore, please revise the cover page to price the securities.
Response 8: As previously mentioned there is no public market for our
securities, and therefore, until a public market is established, all selling
stockholders have agreed to a price of the Company valued the offering $1.65 per
share. This price was based upon the exercise price of our warrants issued in
the last round of capital raised. We discuss the basis of our valuation for
the offering price and the fact that all sales will be made at the $1.65 per
share fixed price until there is a market in the Common Stock on Page 1.
PROSPECTUS SUMMARY, PAGE 3
9. Revise the opening 3 paragraphs to:
o place them in normal type face and to avoid placing the text in all
capital letters;
o Remove the discussion about how the summary is not complete (the
Summary, by its nature does not contain all relevant information,
but it must be balanced and accurately reflect the rest of the
disclosure in the document,)
Response 9: As per your comment we have modified the type face. We have also
removed language requested to be removed.
10. Remove parenthetical from the Summary and Risk Factors section and
avoid using terms that are not clear from the context.
Response 10: We have reviewed our Summary as well as our Risk Factors section
and removed what could be unclear and/or parenthetical information.
11. Revise this section to discuss your current financial position
including your liquidity position.
Response 11: As per your comment we have included a section discussing our
financial condition including our liquidity position on page 4.
BANKRUPTCY, PAGE 4
12. We note that you privately placed securities as part of your
reorganization plan. Please describe the exemption or rule upon which you relied
and the factual circumstances related thereto here and throughout the document,
including on page 26.
Response 12: The funds were raised pursuant to a Regulation D private placement,
such disclosure has been corrected and is reflected on page 4 of this
registration statement. Please note that none of such shares were issued
pursuant to exemptions in the U.S. Bankruptcy Code.
RISK FACTORS
13. Remove the opening paragraph. Item 503 does not contemplate a
forward-looking statement caution, nor does it encourage the discussion of risks
that could apply to any company. To the extent that the "General Risks"
discussion touches on risks that uniquely or materially affect Tetragenex,
revise to provide appropriate disclosure.
Response 13: As per your request we have removed the opening paragraph of the
forward looking statement of the Risk Factors section in compliance with Item
503. We have revised in accordance to your comments the entire section to
provide necessary and appropriate disclosure.
14. We note that several risk factors discuss your inability to provide
assurance that a specific risk will not occur, Remove this language from the
risk factor section, as the risk that you are discussing is the stated risk, not
your inability to provide assurance.
Response 14: We have complied with comment 14 and modified the Risk Factors
section as requested.
RISKS RELATED TO OUR BUSINESS, PAGE 7
15. This section appears to discuss several unique risks that could have a
material effect upon the performance of your company or an investment in your
stock. Revise to discuss each risk completely, under appropriate risk
subheadings. Please refer to Item 503(c) or Regulation SB.
Response 15: We revised the Risk Factors section to eliminate the generic
discussion and to discuss each risk under the proper subheading. The Company
believes that all risks applicable to the Company are now described as
individual risks.
DESPITE EMERGENCE FROM BANKRUPTCY, WE MAY SUFFER FROM PAGE 10
16. We note that you mention investors may "seek more favorable terms for
future investments, which could result in greater dilution to existing
stockholders." Please disclose that your existing capital structure, including
warrants and options, already cause the potential for dilution to shareholders.
Response 16: As per your comment we have incorporated a subheading discussing
the dilution risk to our shareholders. Please note that the exercise price of
all warrants and/or options is in excess of the current net tangible book value
per share accordingly such exercises will not be dilutive from an economic
standpoint although they will dilute the percentage ownership of existing
shareholders.
17. Please revise to provide a section discussing capitalization and
addressing dilution in accordance with Item 506 of Regulation S-B. Be sure to
include dilution information if the options are exercised. We have a history of
little or no revenue and have experienced net. See page 10.
Response 17: As we are not selling any securities to the public we respectfully
do not believe that the inclusion of the charts would be applicable.
WE HAVE A HISTORY OF LITTLE OR NO REVENUE AND HAVE EXPERIENCED NET.... PAGE 10
18. We note that you state, "we cannot assure," a certain result when the
real risk is not your inability to give assurance, but the underlying situation.
Please revise to eliminate this and similar language.
Response 18: Please note that we have corrected the language in accordance with
your comment.
MANAGEMENT'S DISCUSSION AND ANALYSIS, PAGE 15
19. Revise to provide a more complete discussion of your liquidity, capital
resources and a more detailed discussion of your monthly uses of cash and your
"burn rate."
Response 19: As of the date of the filing we currently have approximately $2.6
million in liquid funds available to us. Our current core burn rate is
approximately $100,000. Employee and consultant salary is the major component in
our burn rate. Our current payroll is approximately $36,000 per month.
Additionally our scientific consultants receive approximately $16,000 per
month and work on a part time basis. Our rent expense is currently $10,200 per
month. D&O insurance and product liability insurance total about $6,000 per
month and insurance for employees is currently $3,000 per month. Included in the
remainder are car allowances, telephone and internet access, general corporate
expenses, outsourced accounting and legal fees and office supplies. This may
increase to approximately $120,000 upon the need for additional staff should we
become a public entity. Future funds will be derived from additional sale of our
common stock in the public or private markets, a potential licensing agreement
with a pharmaceutical company and/or the continuing sales of our state tax
losses through the New Jersey Development Plan. Our only debt consists of the
$1.8 million convertible note payable to the former holders of our Preferred D
securities in April 2009. We have added this in the MD&A section. See pages 16
and 17.
BUSINESS, PAGE 17
20. The presentation in the Business Section and throughout the prospectus
must be balanced. Revise the section entitled "Advantages of
Nemifitide" to discuss the potential problems raised in the "dog
study."
Response 20: As per your request we added a paragraph discussing the FDA ban
pursuant to the animal clinical trials. The FDA informed us that they were
placing Nemifitide on clinical hold due to brain and muscle lesions found during
a routine three-month dog study. We completed additional dog and monkey studies,
which prompted the FDA to remove the clinical hold, see page 21 of the
registration statement. While we have made the section more balanced, the
Company respectfully does not believe that the dog study will have a further
negative impact because the Company has taken the necessary steps to have the
hold lifted.
LEGAL PROCEEDINGS, PAGE 24
21. We note your historical legal events in that you have settled suits out
of court. Please revise to discuss whether the settlement is final or subject to
further litigation (e.g., you obtain a release from the opposing party). If
there is future liability related thereto, please include as part of your
disclosure on risk factors.
Response 21: We do not have any law suit pending nor settlements pending. We are
not aware of any possible litigation or dispute arising in the near future. The
settlement referred to is final and not subject to further litigation.
22. We see that you discuss your third plan of reorganization and that you
previously discuss your "Plan" on page 4. Please revise to discuss how many
plans of reorganization you have had and any continuing adverse affects from
your emergence from bankruptcy.
Response 22: We have had three (3) Plan of reorganization as referenced on page
4, the Company did not suffer from any related adverse effect except for the
adverse effects of general Bankruptcy as disclosed in our Risk Factor section.
TETRAGENEX CODE OF ETHICS, PAGE 32
23. We note that you mention a code of ethics; however, we see no
discussion of it in the registration statement. Please revise your disclosure in
accordance with Item 406 of Regulation S-B.
Response 23: The Code Of Ethics of Tetragenex is incorporated to the filing of
this registration statement on form SB-2 and referred to in page 35 and is filed
as Exhibit 14 with the registration statement. The Code Of Ethics is an internal
document requiring managers in the financials spheres of the Company to abide by
a high degree of moral and fiduciary duties.
EMPLOYMENT AGREEMENTS AND CONSULTING AGREEMENTS, PAGE 33
24. Given the importance of the consulting and employment agreements,
please advise the staff how you determined that the contracts were not material
contracts. Please refer to Item 601(b)(10) of Regulation SB.
Response 24: The Employment Agreement with its co-Chief Executive Officer
("co-CEO") and co-Chairman of the Board Martin Schacker is the only Employment
Agreement. It is disclosed in the Management-Executive Compensation portion of
the prospectus and is now included as an Exhibit.
The Company took the position that it considered agreements as material, which
met the following criteria.
1. They were not made in the Ordinary Course of Business;
2. Any contract to which Directors, Officers, Promoters, Voting Trustees,
Security holders named in the registration statement or report or
underwriter are parties other than contracts involving only the purchase
or sale of current assets having a determinable market price, at such
market price.
3. Any contract for the purchase and sale of property, plant or equipment for
a consideration exceeding 15% of such assets of the small or
4. Any material lease held by the Company
5. Any management contract or compensatory plan, contract or arrangement,
including plans relating to warrants, options, pension, retirement or
deferred compensation or bonus.
6. Any compensatory plan, contract or arrangement adopted without the
approval of the security holders pursuant to which equity may be awarded,
including but not limited to, options, warrants, etc.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PAGE 34
25. We note your footnote number 2 regarding shares to be received in 60
days to the table regarding beneficial ownership, however, we do not see to what
it refers, Please revise to clarify.
Response 25: Please note that we have corrected footnote number 2 and properly
referred to it in the chart as per your comment on page 35 of the registration
statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PAGE 35
26. We note that you list beneficial owners here and selling
security-holders on page 41. Please provide the requirements of Item 507 of
Regulation S-K in one section. For example, when you refer to David Abel on
pages 35 or 41, his position and the percentage of the class to be owned by
him are not mentioned. Please revise for other similarly situated selling
security-holders in accordance with Regulation S-K and make sure that the
amounts in each are consistent with each other.
RESPONSE 26: We have included the name, the position held within the Company, as
well as the percentage of ownership for each beneficial owner and managers in
compliance with Item 507 of Regulation S-K. See pages 38 and 39.
CHANGE IN AUDITORS, PAGE 37.
27. We note you replaced your prior auditors with Demetrius & Company LLC
in August 2005. Please revise to disclose whether your prior auditors resigned,
declined to stand for re-election or were dismissed, In addition, revise to
file, as an exhibit to this registration statement, a letter from your prior
auditors addressed to the Commission stating whether they agree with the
statements made in your disclosures. Refer to Item 304 of Regulation S-B.
Response 27: On August 2005, the Audit Committee of the Company based on
recommendations from our Board of Directors in accordance with its rotation of
independent auditors policy, replaced our auditing firm Hays and Co. LLC as
independent auditors and appointed Demetrius & Company, L.L.C, as independent
auditors. There were no disagreements as to policies or pronouncements between
Hays and Co and ourselves which led to the replacement as described in a letter
prepared by Hays and Co to the SEC. See page 40 and see Exhibit 16.
COMMON STOCK PURCHASE WARRANTS AND OPTIONS, PAGE 38
28. Please provide the staff with a complete breakdown of when each of the
warrants, or group of warrants was issued, their original terms, and the terms
following the bankruptcy or the merger.
Response 28: As discussed above the amount of warrant and shares issued and
outstanding is considerable, therefore, in order to facilitate such a
description we have included a supplemental chart with a legend allowing you to
understand exactly when the warrant was issued to whom, pursuant to what group
of transactions, the original term of the warrant and its renewed term pursuant
to the bankruptcy or the merger. See Appendix Supplemental A.
SELLING SECURITY-HOLDERS, PAGE 41
29. Please advise the staff whether or not any of your selling stockholders
are brokerdealers or affiliates of broker-dealers. For any selling stockholders
that are affiliates of broker-dealers, revise to confirm that the seller
purchased the stock in the ordinary course of business, and at the time of
purchase of the stock to be resold, the seller had no agreements or
understandings, directly or indirectly, with any person to distribute the stock.
If not, please revise to state that such selling stockholders are underwriters.
Response 29: As per you comment please note that we updated our schedule on page
41 and under footnote 103 have listed all the persons that are registered
representatives of a broker dealer and therefore deemed to be an underwriter,
they have indicated in a questionnaire that they not entered into any agreement
to sell their securities. Except as indicated in the chart, none of the selling
stockholders have held any position or office with us, nor are any of the
selling stockholders associates or affiliates of any of our officers or
directors. Except as indicated under footnote 103, no other selling stockholder
is a registered broker-dealer or an affiliate of a broker-dealer.
Please state that the selling shareholders may be deemed underwriters.
We have indicated that the selling shareholders may be deemed to be
underwriters. We have indicated that these individuals will be deemed to be
underwriters. 30. We note that the column titled "Ownership After the Offering"
is blank.
Response 30: Please note that the column is not blank but is filed with a "0".
See pages 44-70.
31. We note the Bloch Trust listed on page 43 and the Cebron Family Trust
on page 46; however, we do not see the name of the natural person who holds
voting and investment power, Please revise to disclose, if applicable, the names
of the natural person who hold voting and investment power for all selling
security holders.
Response 31: Please note that we made the proper corrections.
32. We note your disclosure on page 72, regarding options to officers and
directors. Please include disclosure of all long-term compensation, including
options, as applicable in the summary compensation table. Please refer to Item
402 of Regulation S-B.
Response 32: As per Item 402 of Regulation S-B we have incorporated a chart
describing all long term compensation including options issued to officers and
directors.
33. Please revise to include a table for options/SARs grants in accordance
with Item 402 of Regulation S-B.
Response 33: Pursuant to Item 402 we have added a table describing options/SARs
granted.
34. Please revise to enhance disclosure of how selling securities holders
acquired the shares.
Response 34: As per your request we have described how the selling shareholders
have acquired their shares and when.
PLAN OF DISTRIBUTION, PAGE 74
35. Please revise to provide a discussion regarding your underwriting plans. If
you plan to have the offering self-underwritten, please provide disclosure in
accordance with Rule 3a4.1 of the Securities Exchange Act.
Response 35: As per your comment we have modified the section "Plan of
Distribution" and confirmed that it complies with Rule 3a4.1 of the Securities
Exchange Act. See pages 79 and 80.
ADDITIONAL INFORMATION, PAGE 75
36. Please delete the fourth sentence of this paragraph. If you include a
brief description in your prospectus, it must be complete.
Response 36: Please note that the fourth sentence has been deleted. See page 81.
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE F-3
37. Please tell us what "Relief from liabilities" represents for the year
ended December 31, 2004.
Response 37: As part of the bankruptcy plan of reorganization the Company
settled all claims with its creditors. The difference between the original
claims by the creditors and the amount they received was classified as relief
from liabilities at the time we went effective.
38. Please tell us the reasons for the significant decrease in interest
expense from 2004 to 2005.
Response 38: During the bankruptcy we raised funds to keep the company alive as
part of a Debtor in Possession financing. The terms of the financing were for a
$100,000 investment, the investor received 50,000 warrants to purchase
Tetragenex common stock at $1 per share as well as a note for the invested
amount plus 10% interest per annum. The note was to automatically convert into
equity upon the first closing of our private placement. This closing occurred
November 23, 2004. Up until that date, the notes were accruing interest however
all interest was converted to equity as of that date and the notes were
eliminated. Additionally, the warrants issued to investors as part of the DIP
financing were valued using the black scholes method and resulted in a charge to
interest expense of $573,000. Two small investments did not convert until April
6, 2005. The only interest expenses in fiscal year 2005 was the interest
accruing on the long term preferred notes.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), PAGE F-4
39. We note you issued 36,218 shares of common stock for services received
during 2005. We also note the issuance of these shares resulted in
additional paid-incapital of $7,877,413. Please tell us and revise your
filing to describe the nature of the services received and how you
determined the fair value of those services, In addition, quantify the
amount charged to income as a result of this transaction.
and tell us where that amount is reported in your Statements of Operations.
Response 39: The title of that line should have been issuance of common stock,
warrants, and options for services. In addition, to the common shares issued,
warrants and options were issued as well to officers, directors, employees and
consultants during the year. Valuing these options using the black scholes
formula resulted in the additional paid in capital for a total of $7,841,252.
The 36,218 common shares issued resulted in a charge of $36,181 to additional
paid in capital. We subsequently have broken up the lines to reflect the
difference between the common stock and the options/warrants.
40. We note your conversions of Class D Preferred Stock into notes and
Class D Preferred Notes into common stock resulted in additional paid in capital
of $4,455,140 and ($5,404,876), respectively. To help us gain a better
understanding of these transactions, please provide us with the journal entries
you used to record them. In addition, provide us with detailed calculations of
the amounts reported in additional paid-in-capital and describe for us how those
amounts were calculated.
Response 40: Please find as Appendix B the journal entries of the above
mentioned transactions.
NOTE - THE COMPANY, PAGE F-7
41. Please tell us whether you considered identifying the Company as a
Development Stage Enterprise as defined by paragraph 8 of SFAS 7. If you
determine the Company is a Development Stage Enterprise, please revise your
filing to disclose the information required by paragraphs 11 and 12 of SFAS 7.
Response 41: We did consider identifying the Company as a Development Stage
Enterprise as defined by paragraph 8 of SFAS7 however, it was determined that
our company was not a Development stage enterprise because at one time during
the 1990's our company was acting as a Contract Research Organization. At the
time the company had material revenues and had over 100 employees participating
in that business and accordingly were active in that business thus eliminating
us as a development stage enterprise.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PAGE F-7 RESEARCH AND
DEVELOPMENT, PAGE F-9
42. Please revise your filing to include the details you refer to at the
end of this paragraph or delete the reference to such details.
Response 42: That reference was erroneously left in the document and thus has
now been deleted.
STOCK BASED COMPENSATION, PAGE F-9
43. Please revise your filing to disclose the date upon which you early
adopted the provisions of SFAS 123-R. In addition, describe the method you use
to apply the provisions of the Standard, Refer to paragraphs 74-78 of SFAS
123-R.
RESPONSE 43: On December 16, 2004 immediately following the revised
pronouncement of SFAS 123-R we early adopted the provisions of SFAS 123-R
retroactively to January 1, 2003. We applied the provisions of the standard by
directly expensing the fair value of options and warrants under the black
scholes method to the statement of operations. This enabled the company to treat
employees and others on an equal basis. Had we not adopted 123-R, the Company
would have had to calculate employee options differently which management felt
would lead inconsistency in the reflection of the value of options and warrants.
RECENTLY ISSUED ACCOUNTING STANDARDS, PAGE F-9
44. We note your disclosure that you do not anticipate that the adoption of
recently issued accounting pronouncements will have a significant impact on your
results of operations, financial position or cash flows. Please revise your
filing to provide a brief description of the new standards applicable to you,
the date adoption is required and the date you plan to adopt, if earlier. Refer
to Question 2 of SAB Topic 11.M.
RESPONSE 44:
NOTE 4 - INCOME TAXES, PAGE F-10
45. We note during 2005 and 2004, you participated in the Technology Tax
Certificate Transfer Program sponsored by the New Jersey Economic Development
Authority and were able to transfer a portion of your State operating loss carry
forwards in exchange for $315,278 and $399,450, respectively. Please tell how
you reported the receipt of cash for the State
Response 45: The receipt of cash for the State operating loss carry forwards is
included in the statement of operations as a tax benefit and is reflected in the
net losses for the years 2004 and 2005 which is shown on the first line of the
statement of cash flows.
NOTE 6 - STOCKHOLDERS' EQUITY STOCK OPTIONS,
PAGE F-14
46. We note you recognized a credit of $597,216 to Compensation Expense
resulting from the cancellation of the existing 2,698,189 options
during 2005. Please tell us how you determined that crediting
compensation expense was appropriate, including the specific accounting
guidance upon which you relied.
Response 46: Auditors
WARRANTS, PAGE F-16
47. We note on April 6, 2005, as part of your private placement and warrant
exchange, all existing employee options and warrants not previously
converted, were converted into warrants to purchase your common shares
at either $1 per share or $6 per share. We also note you recorded an
aggregate expense of $3,030,256 to reflect the cancellation of existing
warrants and issuance of new warrants based on the Black Sholes
calculation, Please tell us:
o the number of warrants and options pre-conversion and the number of
warrants post-conversion;
o whether the aggregate expense represents the excess of the fair
value of the new warrants over the fair value of the cancelled
warrants and options;
o how the aggregate expense reconciles with the warrant restructuring
expense of $2,451,419 recorded on your Statements of Operations and
the $2,433,041 recorded on your Statements of Stockholders' Equity;
and
o the assumptions you used for determining the fair values of the new
warrants based on the Black Scholes calculation,
Response 47: On December 31, 2004, the Company had 2,698,189 options and
4,458,482 warrants. During the first quarter of 2005, an aggregate of 3,787,500
options and 430,000 warrants were issued. The aggregate expense does in fact
represent the excess of the fair value of the new warrants over the fair value
of the cancelled warrants and options. On April 6, 2005, the 2,698,189 options
that existed prior to December 31, 2004 were cancelled and using the black
scholes method to value the options resulted in a credit of $597,215.
Additionally on April 6th an aggregate of 3,290,789 of the existing warrants
were cancelled resulting in another credit based on the black scholes valuation
of $149,576. Finally on April 6th, 2005 an aggregate of 5,114,005 warrants were
issued in exchange for the preexisting options and warrants that were cancelled
resulting in an expense of $3,179,832. Netting out the expense versus the credit
resulted in the expense of $2,433,041, which appears on the statement of
operations.
During the 3rd quarter of 2005 a total of 32,268 warrants were issued
to correct mistakes in existing shareholders accounts based on previous
agreements. This resulted in an expense of $18,378 and appears on the statement
of operations with the $2,433,041 from the Statement of Stockholders Equity.
The assumptions we used for the volatility in each quarter 2005
respectively were 1.25, 1.22, 1.19 and 1.17. This was derived from the beta of
the BBH biotech index. We felt that index was a good fit for us because there
are several smaller companies such as ourselves amongst it. The discount rate
used in each quarter respectively was 4.17, 3.72, 4.375. This is from the strip
rate which expired closest to the average length of the options outstanding at
the end of each quarter
See the list of our entire Warrants page F16.
STOCK OPTIONS, PAGE F-14
48. We note your reference to disclosures of proforma net loss and net loss
per share amounts as required by SFAS 123, however, we are unable to locate
these disclosures. Please revise your filing as necessary or advise us.
Response 48: We deleted the proforma figures ITEM 26. RECENT SALES OF
UNREGISTERED SECURITIES
49. Please revise to describe upon which exemptions or rules you have
relied andfactual basis for such exemption or reliance.
Response 49: We believed Section 4(2) was available because:
o the offer and sale did not involve a public offering;
o all certificates were marked with restrictive legends;
o each investor represented they were sophisticated enough to evaluate
the merits of the investment; and each investor or consultant had a
preexisting relationship with Martin Scharter, the co-Chief
Executive Officer of the company
ITEM 28. UNDERTAKINGS.
50. We note that you plan to offer securities on a delayed or continuous
basis pursuant to Rule 415 of the Securities Act; however, we do not see the
required undertaking. Please revise to include such undertakings under Item 512
of Regulation S-B.
RESPONSE 50: Please find in part II the proper Undertaking under Item 512 of
Regulation S-B.
EXHIBIT 5.1
51. Please revise to include the law of the state under which you will
issue your opinion and that the opinion is subject to the, judicial decisions
and interpretations of such state.
Response 51: We have included the state of the law under which our attorney
issued its opinion see Exhibit 5.1.
SIGNATURES
52. In accordance with the requirements of Form S-B, please provide the
signatures of your principal accounting officer and your principal financial
officer.
Response 52: On Page II-4 we have provided with the signature of our Principal
Accounting Officer, Mr. Martucci in accordance with the requirements on Form
S-B.
If you desire any additional information or have any comments or
questions during your review please feel free to contact the undersigned.
Sincerely,
[s] Arthur S. Marcus
Arthur S. Marcus, Esq.