July 20, 2005
Brian R. Cascio, Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Mr. Cascio:
The following are our responses to your comments contained in your letter dated
July 8, 2005:
QUESTION 1
PLEASE TELL US HOW YOU RECORDED THE $1.9 MILLION LITIGATION SETTLEMENT. WE SEE
$0.2 MILLION HAS BEEN RECORDED AS LEGAL SETTLEMENT INCOME IN 2003. PLEASE
CLARIFY THE ACCOUNTING FOR THE BALANCE OF THE AMOUNT. IN ADDITION, TELL US
WHETHER YOU CONSIDERED THIS SETTLEMENT IN YOUR ACCOUNTING FOR THE SALE OF YOUR
DISCONTINUED OPERATIONS.
In 2003, we recorded a receivable of $1,871,945 from Endocare as a result of the
favorable judgment from our lawsuit against Endocare. We credited "Other
Comprehensive Loss" by $1,434,263 to reverse the previous entry made in 2002
which was made when the value of the Endocare shares was determined to be $0. We
recorded Interest Income in the amount of $128,202 based on a 6.25% interest
rate. In addition, we credited "Legal Fees" in the amount of $94,808 and a Gain
on Endocare Settlement in the amount of $214,672. The entry in 2003 was as
follows:
db A/R - Endocare Settlement $1,871,945
cr Acc Other Comp Loss 1,434,263
cr Interest Income 128,202
cr Legal Fees 94,808
cr Gain on Endocare Settlement 214,672
Upon receipt of the settlement funds in 2004, our entry was:
db Cash Account $1,887,474
cr Interest Income 15,529
cr A/R - Endocare Settlement 1,871,945
QUESTION 2
WE READ THAT IN NOTE 5 YOU ACCOUNT FOR YOUR SHARES OF ENDOCARE AS
AVAILABLE-FOR-SALE. PLEASE TELL US THE BASIS FOR THIS CLASSIFICATION,
CONSIDERING THE RESTRICTIONS ON THE SHARES, THAT FACT THAT ENDOCARE WAS UNABLE
TO REGISTER THE SHARES, AND SINCE YOU ARE UNABLE TO SELL THE SHARES.
We classified the shares of Endocare stock as "available-for-sale" securities in
accordance with FAS No. 115. Since these shares do not meet the FAS definition
of "trading securities" or "held-to-maturity securities" they then fall into the
category of "available-for-sale". Based on discussions with legal counsel, we
expected a decision requiring Endocare to register the shares (or pay the
damages in cash) to occur in the first half of 2003. As such, the shares were
treated as marketable securities.
QUESTION 3
WE READ IN NOTE 5 THAT YOU DETERMINED IN 2002 THE FAIR VALUE WAS ZERO AND
RECORDED AN UNREALIZED LOSS. PLEASE TELL US WHY THIS DOES NOT REPRESENT AN
OTHER-THAN-TEMPORARY DECLINE, WHICH RESULTS IN A NEW BASIS FOR THE SECURITIES.
We considered and accounted for the decline in the value of the Endocare
securities in 2002 to be "temporary" rather than "other-than-temporary" after
numerous discussions with legal counsel. Following the guidance of FAS No. 115
and supported by the guidance of subsequently issued EITF 03-1 we determined
that the evidence indicating that the cost of the investment was recoverable
within a reasonable period of time outweighed evidence to the contrary. We felt
that we had a strong legal case in our suit against Endocare and that we would
recover our investment in a relatively short period of time by winning our law
suit against Endocare. We subsequently won the suit on October 10, 2003 and
after an appeal by Endocare we settled on a full recovery on February 4, 2004.
QUESTION 4
WE SEE YOU REPORT THE RECOVERY OF UNREALIZED LOSS IN 2003. HOWEVER, THE MARKET
PRICE OF ENDOCARE SHARES HAS REMAINED LOW SINCE THE FOURTH QUARTER OF 2002. TELL
US HOW THERE HAS BEEN A RECOVERY OF THE PREVIOUSLY UNRECOGNIZED LOSS IN VALUE.
WE READ IN NOTE 5 THAT YOU RETURNED THE SHARES, RATHER THAN SOLD THEM. PLEASE
CLARIFY YOUR ACCOUNTING TREATMENT.
The recovery of the full value of the securities and the recording of the
unrealized gain was based on the favorable outcome of our law suit against
Endocare. See Question 3 above.
QUESTION 5
TELL US AND CLARIFY IN FUTURE FILINGS THE AMOUNTS PAID TO RELATED PARTIES FROM
THE FUNDS RECEIVED IN THE ENDOCARE SETTLEMENT. WE READ DISCLOSURES THAT YOU PAID
SALARIES AND THAT YOU REPAID A NUMBER OF SHAREHOLDER NOTES PAYABLE.
From the funds received from the Endocare settlement, the Company was able to
pay back accrued salaries in the amount of $132,385.50. In addition, the Company
paid shareholder notes payable in the amount of $650,000 plus accrued interest
of $81,597.89.
QUESTION 6
IN FUTURE FILINGS, PLEASE DISCLOSE THE COSTS AND OPERATING EXPENSES PAID TO
RELATED PARTIES. WE READ IN NOTE 9 YOUR R&D IS OUTSOURCED TO YOUR CEO'S COMPANY.
We will disclose costs and operating expenses paid to related parties in future
filings. R&D is outsourced to a company owned by the son of the CEO, Dr. John M
Baust. Dr. John M Baust is also a former employee of the Company.
QUESTION 7
WE READ IN YOUR PRESS RELEASE OF MARCH 3, 2003 THAT YOU RECEIVED AN UP-FRONT
PAYMENT FOR THE MULTI-YEAR CONTRACT FROM T-CUBED AS REVENUE. PLEASE TELL US AND
DISCLOSE IN FUTURE YOUR ACCOUNTING POLICY FOR UP-FRONT PAYMENTS.
Our accounting policy for up-front payments is to record the payment as Unearned
Revenue until our obligation is fulfilled with respect to the payment. Upon
fulfillment of our obligation, or when we "earn" the cash received, we would
record the revenue at that time and offset the Unearned Revenue.
QUESTION 8
PLEASE TELL US AND DISCLOSE IN FUTURE FILINGS MORE DETAILS OF EACH TRANSACTION
INVOLVING THE ISSUANCE OF WARRANTS, INCLUDING THE METHODOLOGY AND SIGNIFICANT
ASSUMPTIONS USED TO DETERMINE THE FAIR VALUE OF THE WARRANTS.
We will disclose in future filings more details of each transaction involving
the issuance of warrants, including the methodology and significant assumptions
used to determine the fair value of the warrants. For the Series G issuance, our
methodology was as follows:
The 2003 unit offering consisted of the sale of 55.125 Units. Each Unit contains
(1) one Series G Convertible Preferred share, convertible into 312,500 shares of
Common Stock, and (2) one 10-year warrant to purchase 312,500 shares of Common
Stock at $0.08 per share.
To allocate the value of the $1,378,125 of Units sold in November and December
of 2003, between the warrants and the Series G Preferred stock, we performed a
Black-Scholes calculation to determine the value of the warrants. We calculated
this Black-Scholes value for each of the warrants issued to investors, based on
the fair market value of the Company's common stock at the time of the issuance
of the respective warrants ($0.11 on 11/18/03, $0.12 on 11/20/03, $0.10 on 11/24
and 11/26/03 and $0.13 on 12/18/03), an implied stock price volatility of 70%
and a 4.5% risk-free rate.
We applied a preferred stock discount to the value of the fair market value
(FMV) of the Series G Preferred stock, to reflect the requirements of EITF 98-5
and EITF 00-27. For each investor, we calculated the effective conversion price
(number of common shares the Series G Preferred stock is convertible into
divided by the FMV of the Series G Preferred stock). The difference between this
effective conversion price and the FMV of the Company's Common Stock at the time
of issuance was then multiplied by the number of shares the Series G Preferred
stock is convertible into. Finally, in order to remain consistent with EITD
98-5, we applied a 50% discount to the value of the preferred stock discount.
The Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of the disclosure
in the filing;
o staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
o the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of the United States
If you have any additional questions, please feel free to contact me at
607-687-4487. Thank you.
Sincerely,
Dr. John G. Baust
President and CEO