Fulbright & Jaworski l.l.p.
A Registered Limited Liability Partnership
666 Fifth Avenue, 31st Floor
New York, New York 10103-3198
www.fulbright.com
mkraines@fulbright.com telephone: (212) 318-3000
direct dial: (212) 318-3261 facsimile: (212) 318-3400
December 22, 2006
VIA EDGAR AND FEDERAL EXPRESS
Mr. Jeffrey P. Riedler
Assistant Director
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Mail Stop 3561
Washington, D.C. 20549-3561
Re: Applied DNA Sciences, Inc.
Registration Statement on Form SB-2
Filed January 15, 2005
File No. 333-122848
Dear Mr. Riedler:
On behalf of Applied DNA Sciences, Inc. (the "Company") and in response to
the Staff's comment letter dated December 13, 2006 (the "Comment Letter") in
connection with Amendment No.8 to the Company's above-referenced Registration
Statement on Form SB-2 (the "Registration Statement"), we hereby submit proposed
changes to the financial statements for your review. We do not intend to file an
Amendment No.9 to the Registration Statement until financial statements for the
Company's fourth quarter are available and the Company's responses to the
Comment Letter have been approved. We hope this approach is satisfactory.
All responses to the comments set forth in this letter are submitted on
behalf of the Company at its request. All responses to the accounting comments
were prepared by the Company in consultation with its independent auditors. The
following numbered paragraphs repeat the comments in the Comment Letter for your
convenience, followed by the Company's responses to those comments.
General
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.
RESPONSE: Updated financial statements shall be provided in accordance
with Item 310 (g) of Regulation S-B prior to requesting effectiveness.
Condensed Consolidated Financial Statements
Statements of Stockholders' Deficit, page F-4
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 2
2. Please revise your interim and annual statements of stockholders' deficit
to retroactively change the par value of your common stock to the
beginning of the period presented as a result of the change in par value
from $0.50 to $.001 in March 2005.
RESPONSE: In March, 2005, the Company changed the par value of its common
stock from $.50 per share to $.001 per share. The Company's financial
statements accounted for and disclosed the change in par value. According
to generally accepted accounting principles, changes in the capital
structure must be retroactively adjusted for stock dividends, stock splits
or reverser splits. Accounting standards do not require an adjustment to
the capital structure for changes in par value of the common stock.
Accordingly, the Company believes its accounting and disclosure of the
change in par value of its common stock is reasonable and in accordance
with generally accepted accounting principles.
Notes to Condensed Consolidated Financial Information
Note A - Summary of Significant Accounting Policies, page F-20
Stock-Based Compensation, page F-23
3. Please tell us why you have not yet adopted SFAS No. 123(R), for which the
effective date is as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. Alternatively,
please revise your financial statements and related disclosures to reflect
your adoption of SFAS No. 123(R).
RESPONSE: The Company had no unvested employee stock options as of January
1, 2006. We propose to include the following disclosure:
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, to account for compensation costs under our stock option
plans. We previously utilized the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(as amended) ("APB 25"). Under the intrinsic value method prescribed by
APB 25, no compensation costs were recognized for our employee stock
options because the option exercise price equaled the market price on the
date of the grant. Prior to January 1, 2006 we only disclosed the pro
forma effects on net income and earnings per share as if the fair value
recognition provisions of SFAS 123(R) had been utilized.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 3
In adopting SFAS No. 123(R), we elected to use the modified prospective
method to account for the transition from the intrinsic value method to
the fair value recognition method. Under the modified prospective method,
compensation cost is recognized from the adoption date forward for all new
stock options granted and for any outstanding unvested awards as if the
fair value method had been applied to those awards as of the date of the
grant. We had no outstanding unvested awards as of the adoption date.
Note I - Restatement of Quarterly Financial Statements, page F-45
4. In general, please revise this note substantially to explain why you made
each correction of an error. The examples in the ensuing comment are not
all inclusive of the revisions that we believe you should make;
additionally, please ensure that your revised narrative discussion not
only discloses the amount of each change and the affected financial
statement line item, but why each change occurred.
RESPONSE: We propose to revise Footnote I as follows:
The Company has restated its financial statements for the nine and three
months ended June 30, 2005 and 2006 and for the period from September 16,
2002 (date of inception) through June 30, 2006 by filing amended Form
10-QSB's for the three month periods ended June 30, 2005 and June 30, 2006
to correct the following errors in the financial statements previously
filed:
o The Company erroneously accounted for and recorded as a current
period expense the cost of issuing its debt aggregating $390,000
during the quarter ended March, 2006. The restatement corrects the
$390,000 capitalized financing costs within the correct reporting
quarter.
o The Company erroneously accounted for and recorded the fair value of
warrants issued in previous quarters and corrected the year to date
fair value increasing the selling, general and administrative costs
by $563,750 for the nine months ended June 30, 2006.
o The Company erroneously accounted for and recorded the fair value of
non-debt related warrants in the amount of $5,940,556 to interest
expense in previous quarter(s) and corrected the year to date
interest expense and related warrant liability for the nine months
ended June 30, 2006.
o The Company erroneously accounted for and recorded the net gain on
change in fair value warrants in the amount of $1,156,698 and
$4,355,942 for the three and nine months ended June 30, 2006,
respectively.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 4
The net effect of the corrections of these errors was to:
o Increase the Company's profitability by $766,698 from a loss of
$5,611 to a profit of $761,087 for the three months ended June 30,
2006
o Increase the Company's net income by $2,148,264 from a profit of
$3,458,485 to $5,606,849 for the nine months ended June 30, 2006.
o Increase the Company's net loss by $136,400 from $84,181,303 to
$84,317,703 from the period from September 16, 2002 (date of
inception) through June 30, 2006.
The result of the Consolidated Balance Sheet restatement is to reflect
the:
o Increase in additional paid in capital by $136,400 from $81,860,606
as of June 30, 2006 to $81,997,006.
o Increase in deficit accumulated during development stage by $136,400
from $84,181,303 as of June 30, 2006 to $84,317,703.
Following are reconciliations of the Company's restatement of the
Consolidated Balance Sheet as of June 30, 2006:
June 30, 2006
-------------------------------
(As Restated) (As Reported)
------------ ------------
ASSETS $ 11,693,826 $ 11,693,826
============ ============
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities 4,680,849 4,680,849
Note payable - Related Party 410,429 410,429
------------ ------------
Total Current Liabilities 5,091,278 5,091,278
Convertible Note Payable, net of
unamortized discount 3,306,371 3,306,371
Debt Derivative and Note Liability 5,698,286 5,698,286
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 118,582 118,582
Common stock subscribed (200,000) (200,000)
Additional Paid-In-Capital 81,997,006 81,860,606
Deficit Accumulated During Development Stage (84,317,703) (84,181,303)
------------ ------------
Total Deficiency in Stockholders' Equity (2,402,109) (2,402,109)
Total Liabilities and Deficiency in
Stockholders' Equity $ 11,693,826 $ 11,693,826
============ ============
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 5
The result of the Consolidated Statement of Income (Losses) restatement
for the three and nine months ended June 30, 2006 and for the period from
September 16, 2002 (date of inception) through June 30, 2006 is:
o Increase in selling, general and administrative expenses for the
three months ended June 30, 2006 by $390,000 from $1,190,967 to
$1,580,967. The increase is to correct into the appropriate
reporting quarter the reclassification of previously expensed debt
issuance costs from selling, general and administrative expenses.
o Reduction in selling, general and administrative expenses for the
nine months ended June 30, 2006 by $563,750 from $4,955,055 to
$4,391,305 for the nine months ended June 30, 2006. The reduction is
a result of an error in recognizing and recording the fair value of
warrants issued to non-employees and consultants.
o Increase in selling and administrative expenses from September 16,
2002 (date of inception) to June 30, 2006 by $5,838,514 from
$70,072,368 to $75,910,882. The increase is a cumulative result of
an error in recognizing and recording the fair value of warrants
issued to non-employees and consultants, an error in recognizing and
recording at fair value common stock issued in settlement of debt
and recognizing and recording additional compensation expenses.
o Increase in net gain in fair value of debt derivative and warrant
liabilities by $1,156,698 from $2,337,263 to $3,493,961 for the
three months ended June 30, 2006. The increase is a result of an
error in recognizing and recording fair value of non-debt warrants
issued to non-employees and consultants leading to a revised change
in reported gain in the current reporting period.
o Decrease in net gain in fair value of debt derivative and warrant
liabilities by $4,355,942 from $18,606,563 to $14,250,621 for the
nine months ended June 30, 2006. The decrease is a result of an
error in recognizing and recording the fair value of non-debt
related warrants to non-employees and consultants of $5,940,556
erroneously charged to interest expense, net with the correction and
an error in fair value adjustment of non-debt related warrants of
$1,584,614.
o Decrease in net gain in fair value of debt derivative and warrant
liabilities by $4,355,942 from $35,307,553 to $30,951,611 for the
period from September 16, 2002 (date of inception) through June 30,
2006. The decrease is a result of an error in recognizing and
recording the fair value of non-debt related warrants to
non-employees and consultants of $5,940,556 erroneously charged to
interest expense, net with the correction and an error in fair value
adjustment of non-debt related warrants of $1,584,614.
o Decrease in interest expense by $5,940,556 from $9,117,785 to
$3,177,229 for the nine months ended June 30, 2006. This decrease is
a result of an error in recognizing and recording the initial fair
value of non-debt related warrants issued to non-employees and
consultants.
o Decrease in interest expense by $10,580,055 from $47,119,730 to
$37,061,675 for the period from September 16, 2002 (date of
inception) through ended June 30, 2006. This decrease is a
cumulative result of an error in recognizing and recording the
initial fair value of non-debt related warrants issued to
non-employees and consultants.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 6
The following chart sets forth reconciliations of the Company's
restatement of the Consolidated Statement of Income (Losses) for the
three and nine months ended June 30, 2006 as well as the period
September 16, 2002 (date of inception) through June 30, 2006.
For the Period September 16,
2002 (date of Inception of
Three Months Ended Nine Months Ended Development Stage) through
June 30, 2006 June 30, 2006 June 30, 2006
------------------------------ ------------------------------ ------------------------------
(As (As (As (As (As (As
Restated) Reported) Restated) Reported) Restated) Reported)
------------- ------------- ------------- ------------- ------------- -------------
Sales $ 18,900 $ 18,900 $ 18,900 $ 18,900 $ 18,900 18,900
Cost of sales 15,639 15,639 15,639 15,639 15,639 15,639
------------- ------------- ------------- ------------- ------------- -------------
Gross Profit 3,261 3,261 3,261 3,261 3,261 3,261
Operating Expenses:
Selling, General &
Administrative 1,580,967 1,190,967 4,391,305 4,955,055 75,910,882 70,072,368
Research and
Development -- -- 75,276 75,276 968,711 968,711
Depreciation and
Amortization 336,824 336,824 1,021,199 1,021,199 1,380,626 1,380,626
------------- ------------- ------------- ------------- ------------- -------------
Total Operating
Expenses 1,917,791 1,527,791 5,487,780 6,051,530 78,260,219 (72,421,705)
------------- ------------- ------------- ------------- ------------- -------------
Operating Income
(Loss) (1,914,530) (1,524,530) (5,484,519) (6,048,269) (78,256,958) (72,418,444)
Net gain (loss) in
fair value of debt
derivative and
warrant
liabilities 3,493,961 2,337,263 14,250,621 18,606,563 30,951,611 35,307,553
------------- ------------- ------------- ------------- ------------- -------------
Other income (expense) 8,483 8,483 17,976 17,876 49,319 49,318
Interest income
(expense) (826,827) (826,827) (3,177,229) (9,117,785) (37,061,675) (47,119,730)
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss)
before provision for
income taxes 761,087 (5,611) 5,606,849 3,458,485 (84,317,703) (84,181,303)
Provision for income
taxes -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net Income (Loss) $ 761,087 $ (5,611) $ 5,606,849 $ 3,458,485 $ (84,317,703) $ (84,181,303)
============= ============= ============= ============= ============= =============
Net income ( loss)
per common share-
basic $ 0.01 $ (0.01) $ 0.05 $ 0.03
------------- ------------- ------------- -------------
Net income ( loss)
per common share-
fully diluted 0.01 0.03 $ 0.02
Weighted average
shares outstanding 118,582,385 118,582,385 115,852,521 115,852,521
Basic
Diluted 177,501,849 181,716,985 181,716,985
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 7
The result of the Consolidated Statement of Income (Losses) restatement
for the three and nine months ended June 30, 2005 is:
o Decrease in selling, general and administrative expenses of $794,096
from $2,659,727 to $1,865,631 for the three months ended June 30,
2005. The reduction is a result of an error in recognizing and
recording the fair value of non-debt related warrants issued to
non-employees and consultants.
o Increase in selling, general and administrative expenses of
$1,952,275 from $22,236,607 to $24,550,027 for the nine months ended
June 30, 2005. The result is from an error in recording at fair
value common stock issued to a former Director in exchange for a
previously incurred debt of $1,365,000 and an error in recording the
fair value of non-debt related warrants to non-employees and
consultants of $587,275.
o Increase in fair value of debt derivative and warrant liabilities of
$5,679,175 from $-0- to $5,679,175 for the three months ended June
30, 2005. The increase is a result of an error in accounting for the
issuance of warrants subject to a registration rights agreement that
provides for the payment of liquidated damages if the stipulated
registration deadlines were not met. In accordance with SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," the
Company revalued the warrants issued subject to registration rights
as of June 30, 2005 (see Note G). The difference between the fair
value of the warrants as of June 30, 2005 and the previous valuation
has been recorded as a gain on revaluation of warrant liability.
o Increase in fair value of debt derivative and warrant liabilities of
$16,454,928 from $-0- to $16,454,928 for the nine months ended June
30, 2005. The increase is a result of an error in accounting for the
issuance of warrants subject to a registration rights agreement that
provides for the payment of liquidated damages if the stipulated
registration deadlines were not met. In accordance with SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," the
Company revalued the warrants issued subject to registration rights
as of June 30, 2005 (see Note G). The difference between the fair
value of the warrants as of June 30, 2005 and the previous valuation
has been recorded as a gain on revaluation of warrant liability.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 8
o Increase in interest expense of $23,148,214 from $9,224,929 to
$32,373,143 for the nine months ended June 30, 2005. The increase is
a result of an error in recording and recognizing the recording of
the initial valuation of warrants issued in conjunction with
financing as a liability subject to registration rights [as of June
30, 2005 (see Note G). The difference between the fair value of the
warrants as of June 30, 2005 of $16,454,928 and the previous
valuation has been recorded as a gain on revaluation of warrant
liability.
The following chart sets forth reconciliations of the Company's
restatement of the Consolidated Statement of Income (Losses) for the three
and nine month ended June 30, 2005.
Three Months Ended Nine Months Ended
June 30, 2005 June 30, 2005
------------------------------- -------------------------------
(As Restated) (As Reported) (As Restated) (As Reported)
------------- ------------- ------------- -------------
Sales $ -- -- $ -- --
Cost of sales -- -- -- --
------------- ------------- ------------- -------------
Gross Profit -- -- -- --
Operating Expenses:
Selling general and
administrative 1,865,631 2,659,727 24,188,882 22,236,607
Research and
Development 88,870 88,870 345,958 345,958
Depreciation and
amortization 3,160 3,160 15,187 15,187
------------- ------------- ------------- -------------
Total Operating
Expenses 1,957,661 2,751,757 24,550,027 22,597,752
------------- ------------- -------------
Operating Loss (1,957,661) (2,751,757) (24,550,027) (22,597,752)
Net gain (loss) in
fair value of debt
derivative and
warrant
liabilities 5,679,175 -- 16,454,928 --
Other income
(expense) 241 241 3,415 3,415
Interest income
(expense) (21,557) (21,557) (32,373,143) (9,224,929)
Net income (loss)
before provision for
income taxes 3,700,190 (2,773,073) (40,464,827) (31,819,266)
Provision for income
taxes -- -- -- --
------------- ------------- ------------- -------------
Net Income (Loss) $ 3,700,190 $ (2,773,073) $ (40,464,827) $ (31,819,266)
============= ============= ============= =============
Net loss per common
share - basic $ .06 $ (0.04) $ (0.83) $ (0.65)
------------- ------------- ------------- -------------
Net income ( loss)
per common share-
fully diluted $ .04 NA
------------- -------------
Weighted average
shares outstanding
Basic 66,308,115 66,298,115 48,810,599 48,810,599
Diluted 109,223,832 N/A
Weighted average
shares outstanding
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 9
Following are reconciliations of the Company's restatement of the
Statement of Cash Flows for the nine months ended June 30, 2006 and 2005
as well as the period from September 16, 2002 (date of inception of
development stage) through June 30, 2006.
Cash Flows from Operating Activities:
o Increase in net loss from $3,458,485 to $5,606,849 or $2,148,364 for
the nine months ended June 30, 2006 resulting from the items listed
above.
o Increase in net loss from $31,819,266 to $40,464,827 or $8,645,561
for the nine months ended June 30, 2006 resulting from the items
listed above.
o Increase in net loss from $84,181,303 to $84,317,703 or $136,400 for
the period from September 16, 2002 (date of inception) through June
30, 2006 resulting from the items listed above.
o Decrease in amortization and depreciation from $1,374,467 to
$1,368,711 or $5,756 for the period from September 16, 2002 (date of
inception) through June 30, 2006. The resulting decrease is the
result of a classification error within the cash flow statement.
o Decrease in non-cash value of warrants issued to consultants from
$606,850 to $43,100 or $563,750 for the nine months ended June 30,
2006. The reduction is a result of an error in recognizing and
recording the fair value of non-debt related warrants issued to
non-employees and consultants.
o Increase in the non-cash value of warrants issued to consultants
from $1,243,744 to $3,241,068 or $1,997,324 for the nine months
ended June 30, 2005. The increase is a result of an error in
recognizing and recording the fair value of non-debt related
warrants issued to non-employees and consultants.
o Increase in the non-cash value of warrants issued to consultants
from $3,583,016 to $9,421,530 or $5,838,514 for the period from
September 16, 2002 (date of inception) to June 30, 2006. The
increase is a result of an error in recognizing and recording the
fair value of non-debt related warrants to non-employees and
consultants.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 10
o Increase in the non-cash income attributable to repricing of warrant
and debt derivatives from $(10,118,917) to $(14,250,521) or
$4,131,604 for the nine months ended June 30, 2006. The increase is
the result of an error in recognizing and recording the initial fair
value of non-debt related warrants to non-employees and consultants.
o Increase in the non-cash income attributable to repricing of warrant
and debt derivatives from $-0- to $(16,454,929) or $16,454,929 for
the nine months ended June 30, 2005. The increase is the result of
an error in recognizing and recording the initial valuation of
warrants issued in conjunction with financing as a liability subject
to registration rights.
o Increase in the non-cash income attributable to repricing of warrant
and debt derivatives from $(26,819,908) to $(30,951,611) or
$4,131,604 for the period from September 16, 2002 (date of
inception) through June 30, 2006. The increase is the result of an
error in recognizing and recording the initial fair value of
non-debt related warrants to non-employees and consultants.
o Increase in non-cash financing costs attributable to issuance of
warrants from $-0- to $2,271,000 or $2,271,000 for the nine months
ended June 30, 2006. The increase is the result of an error in
recognizing and recording the initial valuation of warrants issued
in conjunction with financing as a liability subject to registration
rights.
o Increase in non-cash financing costs attributable to issuance of
warrants from $-0- to $23,148,214 or $23,148,214 for the nine months
ended June 30, 2005. The increase is the result of an error in
recognizing and recording the initial valuation of warrants issued
in conjunction with financing as a liability subject to registration
rights.
o Decrease in non-cash financing costs attributable to issuance of
warrants from $27,265,174 to $25,418,674 or $1,846,500 for the
period from September 16, 2006 (date of inception) through June 30,
2005. The decrease is the result of an error in recognizing and
recording the initial valuation of warrants issued in conjunction
with financing as a liability subject to registration rights.
o Increase in non-cash amortization of debt discount attributable to
convertible notes from $-0- to $276,090 or $276,090 for the nine
months ended June 30, 2006. The increase is a result of an error in
recognizing and recording convertible debt discounts associated with
debt financing.
o Increase in non-cash amortization of debt discount attributable to
convertible notes from $-0- to $276,090 or $276,090 for the period
from September 16, 2002 (date of inception) through June 30, 2006.
The increase is a result of an error in recognizing and recording
convertible debt discounts associated with debt financing.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 11
o Increase in non-cash fair value of common stock issued to related
party in excess of previously incurred debt from $0- to $1,365,000
or $1,365,000 for the nine months ended June 30, 2005. The increase
is the result of an error in recording at fair value common stock
issued in settlement of a previously incurred debt.
o Increase in the non-cash fair value of common stock issued to
related party in excess of previously incurred debt from $0- to
$1,365,000 or $1,365,000 for the period from September 16, 2002
(date of inception) through ended June 30, 2006. The increase is the
result of an error in recording at fair value common stock issued in
settlement of a previously incurred debt.
o Increase in the non-cash fair value of common stock issued in
exchange for services from $12,471,727 to $13,396,202 or $924,475
for the nine months ended June 30, 2005. The increase is the result
of an error in recording at fair value common stock issued in
exchange for services.
o Decrease in non-cash common stock canceled for previously issued for
services rendered from $(642,098) to $(181,928) or $460,170 for the
nine months ended June 30, 2005. The decrease is the result of an
error in classification of common stock issued/cancelled.
Cash Flows from Financing Activities:
o Decrease in proceeds from sale of common stock from $10,481,055 to
$-0- or $10,481,055 for the nine months ended June 30, 2005. The
decrease is the result of an error in reclassification of common
stock issued in settlement of convertible debt.
o Increase in proceeds from issuance of convertible notes from
$1,575,000 to $9,079,000 or $7,504,000 for the nine months ended
June 30, 2005. The increase is the result of an error in
classification of proceeds received, net of related costs, in
conjunction with issuance of convertible debentures.
o Increase in proceeds from exercise of warrants and options from
$70,750 to $102,750 or $32,000 for the nine months ended June 30,
2005. The increase is the result of an error in recognizing and
recording cancellation of previously issued options.
Following are reconciliations of the Company's restatement of the
Consolidated Statement of Cash Flows for the three and nine months ended
June 30, 2006, and 2005 and for the period from September 16, 2002 (date
of inception) to June 30, 2006.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 12
For the Period September 16, 2002
Nine Months Ended Nine Months Ended (date of Inception of Development
June 30, 2006 June 30, 2005 Stage) through June 30, 2006
----------------------------- ----------------------------- -----------------------------
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
------------ ------------ ------------ ------------ ------------ ------------
Cash flows from
Operating Activities:
Net income (loss) $ 5,606,849 $ 3,458,485 $(40,464,827) $(31,819,266) $(84,317,703) $(84,181,303)
Adjustment to
reconcile net loss to
net cash used in
operating activities:
Amortization and
depreciation 1,021,199 1,021,199 15,187 15,187 1,368,711 1,374,467
Organization expenses
-- -- -- -- 88,500 88,500
Preferred shares
issued in exchange
for services -- -- -- -- 1,500,000 1,500,000
Warrants issued to
consultants 43,100 606,850 3,241,068 1,243,744 9,421,530 3,583,016
Income attributable
to repricing of
warrant and debt
derivatives (14,250,621) (10,118,917) (16,454,929) -- (30,951,611) (26,819,908)
Financing costs
attributable to
issuance of warrants 2,271,000 -- 23,148,214 -- 25,418,674 27,265,174
Amortization of
beneficial conversion
feature- convertible
notes -- -- 8,836,000 8,836,000 10,461,000 10,461,000
Amortization of
capitalized financing
costs 247,238 247,238 -- -- 247,238 247,238
Amortization of debt
discount
attributable to
convertible notes 276,090 -- -- -- 276,090 --
Fair value of common
stock issued to
related party in
excess of previously
incurred debt -- -- 1,365,000 -- 1,365,000 1,365,000
Common stock issued
in exchange for
services 710,200 710,200 13,396,202 12,471,727 31,284,573 31,284,573
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 13
Common stock issued
in exchange for
intellectual property
in connection with
costs of acquiring
intangible assets -- -- -- -- 14,689,100 14,689,100
Common stock issued
as penalty in
connection with
financing 773,958 773,958 -- -- 1,550,487 1,550,487
Common stock
canceled- previously
issued for services
rendered (480,000) (480,000) (181,928) (642,098) (1,343,845) (1,343,845)
Change in assets and
liabilities :
Increase in accounts
receivable (18,900) (18,900) -- (18,900) (18,900) --
Increase in prepaid
assets and deposits (145,849) (145,849) (33,921) (33,921) (163,472) (163,472)
Decrease in other
assets 5,940 5,940 -- -- (3,128) (3,128)
Decrease in due
related parties (52,662) (52,662) (20,631) (20,631) -- --
Increase (decrease)
in accounts payable
and accrued
liabilities 1,685,792 1,685,792 (833,465) (983,197) 4,085,745 4,079,990
------------ ------------ ------------ ------------ ------------ ------------
New cash used in
operating activities (2,306,666) (2,306,666) (7,986,770) (10,932,455) (15,042,011) (15,042,011)
Cash flows from
investing activities:
Payments foe patent
filing -- -- (4,347) (4,347) (25,698) (25,698)
Capital expenditures
(35,851) (35,851) -- -- (48,602) (48,602)
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities (35,851) (35,851) (4,347) (4,347) (74,300) (74,300)
------------ ------------ ------------ ------------
Cash Flows From
Financing Activities:
Proceeds from sale of
common stock, net of
costs -- -- -- 10,481,055 432,000 432,000
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 14
Proceeds from
issuance of
convertible notes 4,242,500 4,242,500 9,079,000 1,575,000 13,446,500 13,446,500
Proceeds from
exercise of warrants
and options -- -- 102,750 70,750 343,750 343,750
Payment of debt -- -- -- -- (24,854) (24,854)
Proceeds from loans -- -- -- -- 2,750,000 2,750,000
Advances from
shareholders -- -- -- -- 100,088 100,088
------------ ------------ ------------ ------------ ------------ ------------
Cash provided by
financing activities 4,242,500 4,242,500 9,181,750 12,126,805 17,047,484 17,047,484
Net (decrease)
increase in cash 1,899,983 1,899,983 1,190,633 1,190,633 1,931,173 1,931,173
Cash, beginning of
period 31,190 31,190 1,832 1,832 -- --
------------ ------------ ------------ ------------ ------------ ------------
Cash, end of period $ 1,931,173 $ 1,931,173 $ 1,192,465 $ 1,192,465 $ 1,931,173 $ 1,931,173
============ ============ ============ ============ ============ ============
5. Please revise your note disclosure regarding the errors and related
financial statement adjustments for the three and nine months ended June
30, 2006. For example, please clarify items that follow.
o Explain what you mean by "...reclass fair value of previously issued
warrants from interest expense to additional paid-in capital." Per
your June 30, 2006 statement of shareholders' deficit on page F-17,
it appears that you actually reclassified the $1,584,614 from
additional paid-in capital to liabilities, which is not consistent
with your note disclosure.
o Explain what you mean by "...adjust for fair value of warrants
issued to additional paid-in capital."
o Explain what you mean by "...adjust for effect of warrant valuation
change of $4,355,942."
o Explain why you reclassified the "fair value of warrants" from
interest expense to additional paid-in capital.
o Explain the nature of the error adjustment to selling and
administrative expenses.
o Explain why your statement of cash flows for the nine months ended
June 30, 2006 reflects the adjustment of $1,584,614. It appears this
cash flow statement adjustment somehow relates to the amount that
you reclassified from additional paid-in capital to liabilities and
not to your net loss.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 15
RESPONSE: Please see response to comment 4.
6. Please separately detail the amounts included within the line item "other
operating activities-see cash flow statement for full details" and, in so
doing, ensure that the effect of each error on your statement of cash
flows is readily determinable. Additionally, please provide an
accompanying narrative discussion regarding your cash flow statement
adjustments. Finally, revise your statement of cash flows for the nine
months ended June 30, 2005 and Note M for the year ended September 30,
2005 as applicable.
RESPONSE: Please see response to comments 4 and 10.
7. Please clarify the nature of the errors/adjustments recorded to your
financial statements for the three and nine months ended June 30, 2005,
ensuring that your narrative discussion of those errors agrees with the
amounts reflected in the accompanying table. For example, please clarify
the items that follow.
o The increase in your selling, general, and administrative expense
line item of $54,951 does not agree with the increase shown in the
table for either the three or nine months ended June 30, 2005. In
addition, the net income amount of $2,851,151 does not agree with
the table.
o Tell us and disclose why your interest expense line item increased
by approximately $23.1 million.
o Clarify why the table reflects a $16.5 million change to "fair value
of warrants" when your narrative discussion reflects a $6.6 million
change.
o Tell us how you derived the $12,086,901 warrant valuation adjustment
reflected on your statement of cash flows, as it does not appear to
correlate to your related narrative discussion.
o Tell us and disclose why you appear to have adjusted subscriptions
receivable, common stock and additional paid-in capital. If these
adjustments relate to a change in how you recorded the amount of the
common stock that you issued in exchange for debt, clarify that fact
and detail the adjustment amounts that resulted from recording the
common stock issued at fair value.
o Please clarify the nature of the $749,640 change in "cash flows from
financing activities," as the adjustment disclosed does not
correspond to the change in the accompanying table.
RESPONSE: Please see response to comment 4.
8. Please clarify to us and in the filing why you believe that you
appropriately classified certain error corrections within interest income
(expense) for all periods presented in Note I of your interim financial
statements and Note M of your annual financial statements.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 16
RESPONSE: The Company determined the fair value of warrants and equity
issued to note holders was a financing cost and in addition to the
beneficial conversion feature embedded in the convertible notes has
classified the amounts as interest expense.
Please see responses to comments 4 and 10, respectively.
The Company believes its policy for accounting for interest is reasonable
and in accordance with generally accepted accounting principles.
Notes to (Audited) Consolidated Financial Statements (Restated)
Note D - Private Placement of Convertible Notes, page F-78
9. We acknowledge your response to comment 8 of our letter dated May 1, 2006.
We are aware that the EITF has not reached a consensus on the registration
rights/liquidating damages issue contemplated under EITF No. 05-4. Please
revise the disclosure in your Form SB-2 to indicate how you account for
your various registration rights agreements pursuant to the views
presented in Issue Summary No. 1 to EITF No. 05-4.
RESPONSE: We propose to include the following disclosure in Note D to the
financial statements:
In June 2005, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF 05-04, "The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". Under EITF 05-04,
liquidated damages clauses may qualify as freestanding financial
instruments for treatment as a derivative liability. Furthermore, EITF
05-04 addresses the question of whether a registration rights agreement
should be combined as a unit with the underlying financial instruments and
be evaluated as a single instrument. EITF 05-04 does not reach a consensus
on this question and allows for treatment as a combined unit (Views A and
B) as well as separate freestanding financial instruments (View C). On
September 15, 2005, the FASB staff postponed further discussion of EITF
05-04. As of June 30, 2006, the FASB has still not rescheduled EITF 05-04
for discussion.
In connection with the issuance of the convertible notes and related
warrants (see Note G), we granted liquidated damages pursuant to a
separate registration rights agreement. The Company adopted View C of EITF
05-04. Accordingly, the liquidated damages pursuant to this registration
right agreement were evaluated as a stand alone financial instrument. This
treatment did not have a significant different effect than if the Company
had adopted View A or B because the warrants were classified as derivative
liabilities. The Company believes that if the FASB staff reached a
consensus on EITF 05-04 and select combined treatment (View A or B), the
warrants would have to be evaluated as a combined unit with the liquidated
damages pursuant to the registration rights agreement, and accordingly, be
evaluated as derivative liabilities. The Company does not believe that its
measurement of the derivative liabilities under View A or View B would
significantly differ from its measurement of the derivative liabilities
under View C in these circumstances.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 17
Note M - Restatement of Financial Statements, page F-91
10. Please revise your disclosure to detail the nature of each restatement
line item; in so doing, ensure that the changes in the various financial
statement line items correlate to your the narrative discussion. For
example, clarify why selling, general, and administrative expense and
interest income (expense) changed significantly. Additionally, please
address our above comments with respect to your interim financial
statements as necessary.
RESPONSE: We propose to amend Note M as follows:
The Company has restated its financial statements for the year ended
September 30, 2005 and the period from September 16, 2002 (date of
inception) through September 30, 2005 by filing an amended Form 10-KSB for
the fiscal year ended September 30, 2005 to correct the following errors
in the financial statements previously filed:
o The Company did not recognize and record as a current period
expense, warrants issued to consultants and non-employees having a
fair value of $7,358,568 (see Note G).
o The Company erroneously recorded the value of shares issued to a
former Director in exchange for previously incurred debt of
$1,365,000 (see Note E).
o The Company did record the fair value of warrants issued to note
holders and consultants having registration rights, $23,148,214 in
the aggregate, as a charge of operations and a liability in
accordance with EITF 00-19 (see Note D).
o The Company did not record the gain of $16,700,991 on revaluation
for the warrant liability as of September 30, 2005 (see Note D).
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 18
The results of the correction of these errors include:
o Increase in the Company's reported net loss for the year ended
September 30, 2005 by $14,499,139 from $52,610,380 to $67,109,529.
o Increase in the Company's current liabilities as of September 30,
2005 by $384,651 from $2,595,897 to $2,980,548.
o Increase in the Company's other liabilities, representing
warranty liabilities, as of September 30, 2005 by $13,673,574
from $0 to $13, 673,574.
The result of the Consolidated Balance Sheet restatement is:
o Increase in accounts payable and accrued expenses as of September
30, 2005 from $2,185,468 to $2,570,119, or $384,651. The increase is
a result of an error in recognizing, recording and accruing the fair
value of warrants issued to non-employees and consultants of
$384,651 as of September 30, 2005.
o Increase in warrant liability as of September 30, 2005 $0 to
$13,673,574. The increase is a result of an error in accounting for
the issuance of warrants subject to a registration rights agreement
that provides for the payment of liquidated damages if the
stipulated registration deadlines were not met (see Note D). In
accordance with SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities," the Company revalued the warrants issued
subject to registration rights as of September 30, 2005 (see Note
G). The fair value of the warrants as of September 30, 2005 was
$13,673,574 and has been recorded as a warrant liability.
The following chart sets forth reconciliations of the Company's
restatement of the Consolidated Balance Sheet as of September 30, 2005.
September 30, 2005
-----------------------------
(As Restated) (As Reported)
------------ ------------
ASSETS
Current Assets:
Cash $ 31,190 $ 31,190
Accounts receivable and advances 12,429 12,429
------------ ------------
Total current assets 43,619 43,619
Property, plant and equipment 12,750 12,750
Less: accumulated depreciation (4,686) (4,686)
8,064 8,064
Other Assets:
Deposits 14,262 14,262
Intangible assets :
Patents , net of accumulated amortization 22,493 22,493
Intellectual Property ,net of accumulated
amortization 9,094,082 9,094,082
------------ ------------
9,130,837 9,130,837
$ 9,182,520 $ 9,182,520
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 2,570,119 $ 2,185,468
Note payable - Related Party 410,429 410,429
------------ ------------
Total Current Liabilities 2,980,548 2,595,897
Warrant liability 13,673,574 --
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 112,230 112,230
Common stock subscribed 20,000 20,000
Additional Paid-In-Capital 82,320,715 81,879,801
Deficit Accumulated During Development Stage (89,924,553) (75,425,414)
------------ ------------
Total (Deficiency) in Stockholders'
Equity (7,471,602) 6,586,623
------------ ------------
$ 9,182,520 $ 9,182,520
============ ============
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 19
The result of the Consolidated Statement of Losses restatement is:
o Increase in selling, general and administrative expenses for the
year ended September 30, 2005 from $42,662,152 to $50,714,015, or
$8,051,863. The increase is a result of an error in recognizing and
recording the fair value of warrants issued to non-employees and
consultants of $6,402,264, an error in recognizing and recording the
fair value of stock issued in settlement of debt of $1,365,000 and
an error in recognizing and recording additional compensation
expense of $284,599.
o Increase in selling, general and administrative expenses for the
period from September 16, 2002 (date of inception) through September
30, 2005 from $63,483,689 to $71,535,604, or $8,051,915. The
increase is a result of an error in recognizing and recording the
fair value of warrants issued to non-employees and consultants of
$6,402,264, an error in recognizing and recording the fair value of
stock issued in settlement of debt of $1,365,000 and an error in
recognizing and recording of additional compensation expense of
$284,599.
o Increase in the net gain on the revaluation of warrant liability for
the year ended September 30, 2005 from $0 to $16,700,990, or
$16,700,990. The increase is a result of an error in accounting for
the issuance of warrants subject to a registration rights agreement
that provides for the payment of liquidated damages if the
stipulated registration deadlines were not met (see Note D). In
accordance with SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities," the Company revalued the warrants issued
subject to registration rights as of September 30, 2005 (see Note
G). The difference of $16,700,991 between the fair value of the
warrants as of September 30, 2005 and the previous valuation has
been recorded as a gain on revaluation of warrant liability.
o Increase in the net gain on the revaluation of warrant liability for
the period September 16, 2002 (date of inception) through September
30, 2005 from $0 to $16,700,990, or $16,700,990. The increase is a
result of an error in accounting for the issuance of warrants
subject to a registration rights agreement that provides for the
payment of liquidated damages if the stipulated registration
deadlines were not met (see Note D). In accordance with SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," the
Company revalued the warrants issued subject to registration rights
as of September 30, 2005 (see Note G). The difference of $16,700,991
between the fair value of the warrants as of September 30, 2005 and
the previous valuation has been recorded as a gain on revaluation of
warrant liability.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 20
o Increase in the interest expense for the year ended September 30,
2005 from $8,958,046 to $32,106,310, or $23,148,264. The increase is
a result of an error in recording and recognizing the recording of
the initial valuation of warrants issued in conjunction with
financing as a liability subject to registration rights.
o Increase in the interest expense for the period September 16, 2002
(date of inception) through September 30, 2005 from $10,736,232 to
$33,884,446, or $23,148,214. The increase is a result of an error in
recording and recognizing the initial valuation of warrants issued
in conjunction with financing as a liability subject to registration
rights.
The following chart sets forth reconciliations of the Company's
restatement of the Consolidated Statement of Losses for the year ended
September 30, 2005 as well as the period from September 16, 2002 (date of
inception of development stage) through September 30, 2005.
For the Period September 16, 2002
For the Year Ended (date of Inception of Development
September 30, 2005 Stage) through September 30, 2005
--------------------------------- ---------------------------------
(As Restated) (As Reported) (As Restated) (As Reported)
------------ ------------ ------------ ------------
Operating Expenses:
Selling general and
administrative $ 50,714,017 $ 42,662,152 $ 71,535,604 $ 63,483,689
Research and
Development 638,873 638,873 877,408 877,408
Depreciation and
amortization 356,266 356,266 359,427 359,427
------------ ------------ ------------ ------------
Total Operating
Expenses 51,709,156 43,657,291 72,772,439 64,720,524
------------ ------------ ------------ ------------
Operating Income
(Loss) (51,709,156) (43,657,291) (72,772,439) (64,720,524)
Net gain (loss) in
fair value of debt
derivative and
warrant liabilities 16,700,990 -- 16,700,990 --
------------ ------------ ------------ ------------
Other income
(expense) 4,957 4957 31,342 31,342
Interest income
(expense) (32,106,310) (8,958,046) (33,884,446) (10,736,232)
------------ ------------ ------------ ------------
Provision for income
taxes -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $(67,109,569) $(52,610,380) $(89,924,553) $(75,425,414)
============ ============ ============ ============
Basic and diluted
loss per common
share $ (1.05) $ (0.82) $ (2.53) $ (2.12)
------------ ------------ ------------ ------------
Weighted average
shares outstanding 63,517,009 63,517,009 35,590,871 35,570,559
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 21
The results of the restatement of the cash flow include:
Cash Flows From Operating Activities
o Increase in net loss for the year ended September 30, 2005 from
$52,610,380 to $67,109,519, or $14,499,139, resulting from items
listed above.
o Increase in net loss for the period from September 16, 2002 (date of
inception) through September 30, 2005 from $75,425,414 to
$89,924,553, or $14,499,139 resulting from items listed above.
o Increase in the non-cash value of warrants issued to consultants for
services rendered for the year ended September 30, 2005 from
$956,304 to 7,358,568, or $6,402,264. The increase is a result of an
error in recognizing and recording the fair value of warrants to
acquire our common stock issued to non-employees and consultants and
charged to operations (see Note G).
o Increase in the non-cash value of warrants issued to consultants for
services rendered for the period from September 16, 2002 (date of
inception) through September 30, 2005 from $956,304 to 7,358,568, or
$6,402,264. The increase is a result of an error in recognizing and
recording the fair value of warrants to acquire our common stock
issued to non-employees and consultants and charged to operations
(see Note G).
o Increase in the non-cash income attributable to re-pricing the
warrant liability and debt derivatives for the year ended September
30, 2005 from $0 to 16,700,991, or $16,700,991. The increase is a
result of an error in accounting for the issuance of warrants
subject to a registration rights agreement that provides for the
payment of liquidated damages if the stipulated registration
deadlines were not met (see Note D). In accordance with SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," the
Company revalued the warrants issued subject to registration rights
as of September 30, 2005 (see Note G).
o Increase in the non-cash income attributable to re-pricing the
warrant liability and debt derivatives for the period from September
16, 2002 (date of inception) through September 30, 2005 from $0 to
$16,700,991, or $16,700,991. The increase is a result of an error in
accounting for the issuance of warrants subject to a registration
rights agreement that provides for the payment of liquidated damages
if the stipulated registration deadlines were not met (see Note D).
In accordance with SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities," the Company revalued the warrants issued
subject to registration rights as of September 30, 2005 (see Note
G).
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 22
o Increase in the non-cash financing costs attributable to the
issuance of warrants for the year ended September 30, 2005 from $0
to $23,148,214, or $23,148,264. The increase is a result of an error
in recording and recognizing the recording of the initial valuation
of warrants issued in conjunction with financing as a liability
subject to registration rights.
o Increase in the non-cash financing costs attributable to the
issuance of warrants for the period from September 16, 2002 (date of
inception) through September 30, 2005 from $0 to $23,148,214, or
$23,148,214. The increase is a result of an error in recording and
recognizing the recording of the initial valuation of warrants
issued in conjunction with financing as a liability subject to
registration rights.
o Increase in the non-cash cost of the fair value of common stock
issued to a related party in excess of previously incurred debt for
the year ended September 30, 2005 from $0 to $1,365,000, or
$1,365,000. The increase is a result of an error in recording and
recognizing the fair value of stock issued in settlement of debt of
$1,365,000 to a former Director of the Company (See Note E).
o Increase in the non-cash cost of the fair value of common stock
issued to a related party in excess of previously incurred debt for
the period from September 16, 2002 (date of inception) through
September 30, 2005 from $0 to $1,365,000, or $1,365,000. The
increase is a result of an error in recording and recognizing the
fair value of stock issued in settlement of debt of $1,365,000 to a
former Director of the Company (See Note E).
o Increase in the non-cash cost of the fair value of common stock
issued in exchange for services for the period from September 16,
2002 (date of inception) through September 30, 2005 from $27,202,860
to $30,574,373, or $3,371,513. The increase is a result of an error
in recording and recognizing the fair value of stock issued for
services by employees and non-employees and a reclassification
common stock previously disclosed as stock issued pursuant to a
employee stock option plan (See Note F).
o Decrease in non-cash cost of common sock issued pursuant to an
employee stock option plan for the year ended September 30, 2005
from $3,960,000 to $0 , or $3,960,000. The decrease is a result of
reclassifying common stock issued pursuant to an employee stock
option plan to common stock issued in exchange for services (See
Note F).
o Decrease in non-cash cost of common sock issued pursuant to an
employee stock option plan for the period from September 16, 2002
(date of inception) through September 30, 2005 from $3,960,000 to
$0, or $3,960,000. The decrease is a result of reclassifying common
stock issued pursuant to an employee stock option plan to common
stock issued in exchange for services (See Note F).
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 23
o Decrease in non-cash cost of common sock cancelled-previously issued
for services rendered for the year ended September 30, 2005 from
$1,078,270 to $578,270 , or $500,000. The decrease is a result of an
error in recording and recognizing the fair value of stock issued
for services by employees and non-employees that was subsequently
cancelled (See Note F).
o Decrease in non-cash cost of common sock cancelled-previously issued
for services rendered for the period from September 16, 2002 (date
of inception) through the year ended September 30, 2005 from
$1,363,845 to $863,845, or $500,000. The decrease is a result of an
error in recording and recognizing the fair value of stock issued
for services by employees and non-employees that was subsequently
cancelled (See Note F).
o Decrease in cost of capital expenditures for the year ended
September 30, 2005 from $16,757 to $0, or $16,757. The decrease is a
result of reclassifying disbursement for the acquisition of
equipment from operating activities to investing activities.
o Increase in the amount of net proceeds from sale of equipment for
the period from September 16, 2002 (date of inception) through the
year ended September 30, 2005 from $12,750 to $0 , or $12,750. The
increase is a result of reclassifying net proceeds received the sale
of equipment from operating activities to investing activities.
o Increase in change of accounts payable and accrued liabilities for
the year ended September 30, 2005 from $297,755 to $663,748, or
$365,993. The increase is a result of an error in recognizing,
recording and accruing the fair value of warrants issued to
non-employees and consultants as of September 30, 2005.
o Increase in change of accounts payable and accrued liabilities for
the period from September 16, 2002 (date of inception) through
September 30, 2005 from $2,053,464 to $2,419,457, or $365,993. The
increase is a result of an error in recognizing, recording and
accruing the fair value of warrants issued to non-employees and
consultants as of September 30, 2005.
Cash Flows From Investing Activities:
o Increase in the cash provided by the sale of equipment for the year
ended September 30, 2005 from $0 to $16,757, or $16,757. The
increase is a result of an error in properly classifying proceeds
from the sale of equipment as an investing activity.
o Decrease in the cash used in capital expenditures for the period
from September 16, 2002 (date of inception) through September 30,
2005 from $0 to $12,750, or $12,750. The decrease is a result of an
error in properly classifying net disbursements in connection with
acquiring equipment as an investing activity.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 24
Cash Flows From Financing Activities:
o Increase in the cash used in repayment of previously incurred debt
for the year ended September 30, 2005 from $0 to $24,854, or
$24,854. The increase is a result of an error in classifying
repayment of debt as a financing activity.
o Increase in the cash used in repayment of previously incurred debt
for the period from September 16, 2002 (date of inception) through
September 30, 2005 from $0 to $24,854, or $24,854. The increase is a
result of an error in properly classifying repayment of debt as a
financing activity.
o Increase in proceeds from the sale of options to acquire the
Company's common stock for the year ended September 30, 2005 from
$70,750 to $102,750, or $32,000. The increase is a result of an
error in recognizing and recording $32,000 of proceeds from the
exercise of options as issuance of common stock (see Note F).
o Increase in proceeds from the sale of options to acquire the
Company's common stock for the period from September 16, 2002 (date
of inception) through September 30, 2005 from $311,750 to $343,750,
or $32,000. The increase is a result of an error in recognizing and
recording $32,000 of proceeds from the exercise of options as
issuance of common stock (see Note F).
o Decrease in proceeds from subscription of common stock for the year
ended September 30, 2005 from $9,079,000 to $0, or $9,079,000. The
decrease is a result of an error in recognizing and recording the
proceeds from the issuance of convertible notes that were exchanged
for the Company's common stock ( see Note D).
o Decrease in proceeds from subscription of common stock for the
period September 16, 2002 (date of inception) through September 30,
2005 from $9,204,000 to $0, or $9,204,000. The decrease is a result
of an error in recognizing and recording the proceeds from the
issuance of convertible notes that were exchanged for the Company's
common stock ( see Note D).
The following chart sets forth reconciliations of the Company's
restatement of the Consolidated Statement of Cash Flows for the year ended
September 30, 2005 as well as the period September 16, 2002 (date of
inception of development stage) through September 30, 2005.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 25
For the Period September 16, 2002
For the Year Ended (date of Inception of Development
September 30, 2005 Stage) through September 30, 2005
------------------------------- ---------------------------------
(As Restated) (As Reported) (As Restated) (As Reported)
------------ ------------ ------------ ------------
Cash flows from
Operating Activities:
Net income (loss) (67,109,519) (52,610,380) (89,924,553) (75,425,414)
Adjustment to
reconcile net loss
to net cash used in
operating activities:
Amortization and
depreciation 350,107 350,107 353,268 353,268
Organization expenses -- -- 88,500 88,500
Preferred share
issued in exchange
for services -- -- 1,500,000 1,500,000
Warrants issued to
consultants in
exchange for
services rendered 7,358,568 956,304 9,378,430 2,976,166
Income attributable
to repricing of
warrant and debt
derivatives (16,700,991) -- (16,700,991) --
Financing costs
attributable to
issuance of warrants 23,148,214 -- 23,148,214 --
Amortization of
beneficial
conversion feature-
convertible notes 8,836,000 8,836,000 10,461,000 10,461,000
Amortization of
capitalized
financing costs -- -- -- --
Amortization of debt
discount
attributable to
convertible notes -- -- -- --
Fair value of common
stock issued to
related party in
excess of previously
incurred debt 1,365,000 -- 1,365,000 --
Common stock issued
in exchange for
services 18,176,641 14,805,128 30,574,373 27,202,860
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 26
Common stock issued
to ESOP -- 3,960,000 -- 3,960,000
Common stock
exchanged for
intellectual
property in
connection with
costs of acquiring
intangible assets 14,689,100 14,689,100 14,689,100 14,689,100
Common stock issued
as penalty in
connection with
financing 776,529 776,529 776,529 776,529
Common stock
canceled- previously
issued for services
rendered (578,270) (1,078,270) (863,845) (1,363,845)
Change in assets and
liabilities :
Increase in accounts
receivable (12,429) (12,429) (12,429) (12,429)
Increase in prepaid
assets and deposits 9,297 9,297 (14,262) (14,262)
Decrease in other
assets -- -- (13,890) (13,890)
Capital expenditures -- 16,757 -- (12,750)
Increase (Decrease)
in due related
parties (111,943) (111,943) 40,753 40,753
Increase (decrease)
in accounts payable
and accrued
liabilities 663,748 297,755 2,419,457 2,053,464
------------ ------------ ------------ ------------
Net cash used in
operating activities (9,139,948) (9,116,045) (12,735,346) (12,740,950)
Cash flows from
investing
activities:
Payments for patent
filing (4,347) (4,347) (25,689) (25,698)
Capital expenditures
(disposals) 16,757 -- (12,750) --
------------ ------------ ------------ ------------
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 27
Net cash used in
investing activities 12,410 (4,347) (38,448) (25,689)
Cash Flows From
Financing
Activities:
Proceeds from sale
of common stock ,
net of costs -- -- 432,000 432,000
Proceeds from
subscription of
common stock -- 9,079,000 -- 9,204,000
Proceeds form
issuance of
convertible notes 9,079,000 -- 9,204,000 --
Proceeds from sale
of options 102,750 70,750 343,750 311,750
Payment of debt (24,854) -- (24,854) --
Proceeds from loans -- -- 2,750,000 2,750,000
Advances from (to)
shareholders -- -- 100,088 100,088
------------ ------------ ------------ ------------
Cash provided by
financing activities 9,156,896 9,149,750 12,804,984 12,797,838
Net (decrease)
increase in cash and
cash equivalents 29,358 29,358 31,190 31,190
Cash, beginning of
period 1,832 1,832 -- --
------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
period $ 31,190 $ 31,190 $ 31,190 $ 31,190
============ ============ ============ ============
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
December 22, 2006
Page 28
If you have any additional comments or questions, please feel free to
contact the undersigned at (212) 318-3261
Very truly yours,
/s/Merrill M. Kraines
Merrill M. Kraines
Enclosures
cc: Mr. John Krug, Senior Staff Attorney
Mary Mast, Senior Accountant
Amy Bruckner, Staff Accountant
James A. Hayward, Applied DNA Sciences, Inc.