Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas New York NY 10018
Tel 212 930 9700 Fax 212 930 9725 www.srff.com
April 6, 2005
Pamela A. Long, Assistant Director
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: American Ammunition, Inc.
Amendment No. 1 to Form SB-2
File No. 333-122056
Dear Ms. Long:
This firm represents American Ammunition, Inc. ("American" or the
"Company") in the above-referenced matter. Enclosed for filing is American's
Amendment No. 1 to its Form SB-2 for filing. Below, please find our responses to
your March 2, 2005 comment letter:
General
1. Please revise your registration statement to include audited financial
statements for the year ended December 31, 2004. See Regulation S-B, Item
310(g).
Response
We have included the financial statements for the year ended December 31,
2004.
2. We note your proposed response to comment 1 in our letter of February 11,
2005. Please revise your supplemental response to tell us why you believe
42,861,322 represented a good faith estimate of the number of shares
issuable upon the application of the floating conversion rate on the date
of your initial filing. Your supplemental response relates to market prices
on February 14, 2005, whereas at the time of your initial filing, your
estimate was exactly twice the number of shares that would be issued under
the conversion formula based on the market price at that date.
Response
In determining the number of shares to be registered on the
registration statement, the Company's analysis in determining that
42,861,322 represents a good faith estimate remains that same regardless of
whether the analysis was performed on the initial filing date or on
February 14, 2005. The share price on the initial filing date was $.16 as
opposed to $.12 on February 14, 2005. Accordingly, the Company, as of the
initial filing date, registered 200% of the issuable shares as of the
initial filing date. The registration of 200% of the issuable shares is a
good faith estimate due to the following:
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(i) the Company expects that the market price may decline due to the
issuance of shares upon conversion of the debenture; and
(ii) since February 2004, the Company's market price has declined from $.38
to the price of $.16 on January 14, 2005.
Due to the potential decrease in the market price as a result of the
issuance of additional shares and the Company's market price historical
performance, the Company believed, as of January 14, 2005, that the
42,861,322 shares represented a good faith estimate. Appropriate risk
factor disclosure is included to address these risks.
3. We note your proposed response to comment 2 in our prior letter. Please
revise the formula on page 2 to reflect the complete formula.
Response
We have revised the formula accordingly.
4. We note your proposed response to prior comment 3, including the deletion
of the statement that the debentures are convertible at a 24% discount to
the trading price of the common stock. Please tell us supplementally, with
a view toward disclosure that will provide context for understanding the
conversion formula, what the formula is intended to achieve. The
relationship between the value of the shares of common stock into which the
debentures are convertible and. the face amount of the debentures is not
clear from the formula. For example, it appears that if the market value of
the common stock is at least $1.32 per share, then the debenture should
convert into one share for each dollar's worth of the debenture that is
being converted (although the value of the shares received would by higher
than the face amount of the debenture being converted). However, if the
market value of the common stock is less than $1.32, the number of shares
and the total dollar value of the common stock per dollar of debenture
being converted increases dramatically. For example, if the common stock
market value is $1.00, then $50 face amount of debentures would convert
into 223 shares, or $223.00 worth of common stock. If the market value of
the common stock is $0.50, then $50 face amount of debentures would convert
into 947 shares, or $473.50 worth of common stock. Please consider
including a tabular presentation that illustrates this in your filing as
well as an explanation of what the formula is designed to achieve.
Response
La Jolla is contractually required to convert the debenture and
exercise the warrant concurrently. The formula in the debenture is intended
to balance the purchase price under the debenture with the purchase price
paid upon exercise of the warrant, resulting in a more consistent combined
discount to market price. Since the warrant exercise price is fixed, the
conversion price of the debenture fluctuates to provide La Jolla with
additional shares when the market price is lower and with fewer shares when
the market price is higher. As a result, the average purchase price paid by
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La Jolla upon conversion of the debenture and exercise of the warrant
remains similar. For example, as you have stated, if the market price is
$0.50, the Company would be required to issue 947 shares upon conversion of
$50 of the debenture. The value of the shares would be $474. However, La
Jolla would also be required to exercise warrants at $1.00 per share for
500 shares for an aggregate purchase price of $500. As a result, the
Company would have issued an aggregate of 1,447 shares in consideration for
$550 which reflects the 24% discount. If the stock price decreases, the
Company is required to issue additional shares under the debenture, which
is determined by dividing the debenture amount by the conversion price
(which formula is set forth in the debenture). However, La Jolla is also
required to exercise its warrant at $1.00 per share (which may be well
above the current market price). The combined issuances pursuant to the
debenture and the warrant result in shares purchased by La Jolla that is in
line with the discounted price the parties agreed to.
We do not believe that further disclosure is required. We have
provided extensive disclosure regarding the conversion formula and the fact
that the warrant must be exercised concurrently with the debenture.
5. Please consider renaming the "conversion price" component of the formula
for purposes of the disclosure in this filing, since the debenture does not
actually "convert" at this "price" and investors may become confused as to
how the formula operates.
Response
We have renamed the "conversion price" component. It is now referred
to as the "conversion formula".
6. The risk factor entitled "The continuously adjustable conversion price
feature of our convertible debentures..." provides a chart that illustrates
the number of shares issuable upon conversion of the debenture. Please
revise this risk factor to clarify that the table assumes that the entire
amount of the $266,350 debenture is being converted. Please also rename the
column headed "with discount at 24%", since the debenture actually converts
at a much higher discount to the market value of the common stock.
Response
We have revised the disclosure to state that the table assumes the
conversion of the entire $266,350. In addition, we have renamed the column
"with discount of 24%" to "effective conversion price".
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Should you have any further questions, please do not hesitate to contact
the undersigned at 212-398-1494
Sincerely,
/s/Stephen Fleming
Stephen Fleming
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