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
March 6, 2007
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 January 25, 2007 (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.
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.
Amendment No. 8 to Registration Statement on Form SB-2
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 of
the Registration Statement.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 2
Notes to Condensed Consolidated Financial Information
Note A - Summary of Significant Accounting Policies, page F-20
Note I - Restatement of Quarterly Financial Statements, page F-45
2. We acknowledge your response to comments 4, 5 and 7 and reissue our
comments. You have not provided us with sufficiently detailed
disclosure that substantially revises your restatement footnote to
explain why you made each correction of an error for the three and nine
months ended June 30, 2006 and 2005 and the period from your inception
through June 30, 2006. Please revise Note I to not only disclose the
amount of each error and the related financial statement period and
financial statement line item affected, but why each change occurred.
That is, describe the nature of each error and the corresponding
financial statement line items that it affected; tell us how you
concluded that an adjustment was necessary; and tell us how you
calculated that adjustment. Additionally, if a particular adjustment
affects, for example, both your balance sheet and statements of
operations and cash flows for a particular period, you should clearly
illustrate that correlation in your description of the error. Your
disclosure should provide a clear illustration of how you progressed
from each financial statement line item "as reported" to "as adjusted"
in each period, disaggregating the total error affecting each line
item, preferably in tabular format with corresponding footnote
disclosure. Examples of items that we would like you to clarify based
on the information included in your December 22, 2006 supplemental
response follow; however, you should provide this enhanced information
for each error, as our list of examples is not exhaustive.
o It is unclear, based on your explanation regarding the
capitalization of debt issuance costs, why you recorded a $390,000
increase to selling, general and administrative (SG&A) expense for
the three months ended June 30, 2006 without a corresponding
decrease to your balance sheet. Please clarify.
o Explain why, in general, you would record the fair value effect of
stock-based compensation issued to non-employees/consultants to
your interest expense or gain on fair value of debt derivative and
wanrrant liabilities line items, as opposed to SG&A expense. It
appears that you recorded various adjustments of this nature for
the nine months ended June 30, 2006, as well as the cumulative
period from your inception through June 30, 2006; for example, you
recorded an increase in gain on fair value of debt derivative and
warrant liabilities of $ 1,156,598 for the three months ended June
30, 2006 and a decrease in interest expense of $5,940,556 for the
nine months ended June 30, 2006.
o Tell us why the increase in "non-cash income attributable to the
repricing of warrant and debt derivatives" of $4,131,604 in your
narrative explanation of the adjustments to your statements of
cash flows for the nine months ended June 30, 2006 and the period
from your inception through June 30, 2006 does not correlate
to the adjustment to the net gain on fair value of debt derivative
and warrant liabilities line item on page 6 of your response
letter (for both periods).
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 3
o Tell us why an error of $1,365,000 occurred in relation to your
issuance of common shares to settle related party debt and where
you recorded that error on your statements of operations for the
nine months ended June 30, 2005 and for the period from your
inception to June 30, 2006. Similarly, tell us why and where on
your statements of operations you recorded the other adjustments
to the "non-cash fair value of common stock issued in exchange for
services" that you have outlined on page 11 of your response
letter.
RESPONSE: We propose to amend the June 30, 2006 unaudited financial
statements to read as follows:
The accompanying condensed consolidated financial statements as of June
30, 2006 and the three and nine months ended June 30, 2006 and from
September 16, 2002 (date of inception) through June 30, 2006 have been
restated to correct its accounting for (a) the issuance of options and
warrants in exchange for compensation and financing activities, (b)
correcting the period reporting capitalized finance costs and current
operating expenses and (c) errors in report preparation and
miscellaneous accounting adjustments appropriate for the fair
presentation of the financial statements.
The effect of the adjustments in the restated financial statements is
an increase in net loss of $136,401 from September 16, 2002 (date of
inception) through June 30, 2006 and an increase in net income of
$766,698 and $2,148,364 for the three and nine month periods ended June
30, 2006, respectively. There was no effect on total cash flows
provided by (used in) operations, investing or financing activities.
The following tables summarize the effects of these adjustments on the
Company's condensed consolidated balance sheet as of June 30, 2006,
condensed consolidated statements of losses 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 and the condensed
consolidated statements of cash flows for the nine months ended June
30, 2006 and for the period from September 16, 2002 (date of inception)
through June 30, 2006:
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 4
Condensed Consolidated Balance Sheet
June 30, 2006
As Previously
Reported Adjustment Reference As Restated
-------------------------------------- -------------------------- -------------------
Cash $ 1,931,173 $ $ 1,931,173
Accounts receivable, net $ 18,900 $ $ 18,900
Advances and other receivables $ 11,611 $ $ 11,611
Prepaid expenses $ 146,667 $ $ 146,667
Total current assets $ 2,108,351 $ $ 2,108,351
Property, plant and equipment, net $ 38,286 $ $ 38,286
Deposits $ 8,322 $ $ 8,322
Capitalized finance costs $ 1,437,862 $ $ 1,437,862
Patents, net $ 17,376 $ $ 17,376
Intellectual property, net $ 8,083,629 $ $ 8,083,629
total assets $ 11,693,826 $ $ 11,693,826
Accounts payable and accrued liabilities $ 4,680,849 $ $ 4,680,849
Notes payable, related party $ 410,429 $ $ 410,429
Total current liabilities $ 5,091,278 $ $ 5,091,278
Convertible notes payable, net $ 3,306,371 $ $ 3,306,371
Debt derivative and warrant liability $ 5,698,286 $ $ 5,698,286
Total liabilities $ 14,095,935 $ $ 14,095,935
Preferred stock $ 6 $ $ 6
Common stock $ 118,582 $ $ 118,582
Common stock subscription $ (200,000) $ $ (200,000)
Additional paid in capital $ 81,860,606 $ 136,400 a $ 81,997,006
Accumulated deficit $ (84,181,303) $ (136,400) a $ (84,317,703)
Total deficiency in stockholders' equity $ (2,402,109) $ $ (2,402,109)
Total liabilities and Deficiency in
Stockholders' equity $ 11,693,826 $ $ 11,693,826
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 5
Condensed Consolidated Statement of Income (Losses)
For the Three Months Ended June 30, 2006
Sales $ 18,900 $ $ 18,900
Cost of sales $ 15,639 $ $ 15,639
Gross margin $ 3,261 $ $ 3,261
Selling, general & administrative $ 1,190,967 $ 390,000 b $ 1,580,967
Research and development $ - $ -
Depreciation and amortization $ 336,824 $ $ 336,824
Total operating expenses $ 1,527,791 $ 390,000 b $ 1,917,791
Net loss from operations $ (1,524,530) $ (390,000) b $ (1,914,530)
Net gain (loss) in fair value of debt derivative and
warrant liability $ 2,337,263 $ 1,156,698 c $ 3,493,961
Other income (expense) $ 8,483 $ $ 8,483
Interest income (expense) $ (826,827) $ $ (826,827)
Net income (loss) $ (5,611) $ 766,698 b,c $ 761,087
Net income (loss) per share-basic $ (0.00) 0.01 $ 0.01
Net income (loss) per share-fully diluted NA 0.01 $ 0.01
Condensed Consolidated Statement of Income (Losses)
For the Nine Months Ended June 30, 2006
Sales $ 18,900 $ $ 18,900
Cost of sales $ 15,639 $ $ 15,639
Gross margin $ 3,261 $ $ 3,261
Selling, general & administrative $ 4,955,055 $ (563,750) d $ 4,391,305
Research and development $ 75,276 $ 75,276
Depreciation and amortization $ 1,021,199 $ $ 1,021,199
Total operating expenses $ 6,051,530 $ (563,750) d $ 5,487,780
Net loss from operations $ (6,048,269) $ (563,750) d $ (5,484,519)
Net gain (loss) in fair value of debt derivative and
warrant liability $ 18,606,563 $ (4,355,942) e $ 14,250,621
Other income (expense) $ 17,976 $ $ 17,976
(136,400) a
(563,750) d
6,640,706 e
---------------
Interest income (expense) $ (9,117,785) $ 5,940,556 $ (3,177,229)
Net income (loss) $ 3,458,485 $ 2,148,364 $ 5,606,849
Net income (loss) per share-basic $ 0.03 0.02 $ 0.05
Net income (loss) per share-fully diluted 0.02 0.01 $ 0.03
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 6
Condensed Consolidated Statement of Income (Losses)
From September 16, 2002 (date of inception) through June 30, 2006
Sales $ 18,900 $ $ 18,900
Cost of sales $ 15,639 $ $ 15,639
Gross margin $ 3,261 $ $ 3,261
Selling, general & administrative $ 70,072,368 $ 5,838,514 f $ 75,910,882
Research and development $ 968,711 $ 968,711
Depreciation and amortization $ 1,380,626 $ $ 1,380,626
Total operating expenses $ 72,421,705 $ 5,838,514 $ 78,260,219
Net loss from operations $ (72,418,444) $ (5,838,514) $ (78,256,958)
Net gain (loss) in fair value of debt derivative and
warrant liability $ 35,307,553 $ (4,355,942) e $ 30,951,611
Other income (expense) $ 49,318 $ $ 49,318
Interest income (expense) $ (47,119,730) $ 10,058,055 e $ (37,061,675)
Net income (loss) $ (84,181,303) $ (136,401) $ (84,317,703)
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2006
Cash flows from operating activities
Net income (loss) $ 3,458,485 $ 2,148,364 $ 5,606,849
Adjustments to reconcile to net used in operating
activities
Depreciation and amortization $ 1,021,199 $ $ 1,021,199
Organization expenses $ $
Preferred shares issued in exchange for services $ $ $ -
Warrants issued to consultants $ 606,850 $ (563,750) d $ 43,100
Income attributable to repricing of warrants and debt
derivatives $ (10,118,917) $ (4,131,704) g $ (14,250,621)
Financing costs attributable to issuance of warrants $ $ 2,271,000 h $ 2,271,000
Amortization of beneficial conversion feature
-convertible notes $ - $ $ -
Amortization of capitalized finance costs $ 247,238 $ $ 247,238
Amortization of debt discount attributable to
convertible debenture $ - $ 276,090 k $ 276,090
Fair value of common stock issued to related party in
excess of debt $ - $ $ -
Common stock issued in exchange for services $ 710,200 $ $ 710,200
Common stock issued in exchange for intellectual
property $ - $ $ -
Common stock issued as penalty in connection with
financing $ 773,958 $ $ 773,958
Common stock canceled-previously issued for services
rendered $ (480,000) $ $ (480,000)
Change in assets and liabilities:
Increase in accounts receivable $ (18,900) $ $ (18,900)
Increase in prepaid expenses and deposits $ (145,849) $ $ (145,849)
Decrease in other assets $ 5,940 $ $ 5,940
Decrease in due related parties $ (52,662) $ $ (52,662)
Increase (decrease) in accounts payable and accrued
liabilities $ 1,685,792 $ $ 1,685,792
Net cash used in operating activities $ (2,306,666) $ $ (2,306,666)
Cash flows from investing activities:
Payments for patent filing $ -
Capital expenditures $ (35,851) $ $ (35,851)
Net cash used in investing activities $ (35,851) $ $ (35,851)
Cash flows from financing activities
Proceeds from sales of common stock, net $ - $ $
Proceeds from issuance of convertible notes $ 4,242,500 $ $ 4,242,500
Proceeds from exercise of options and warrants $ - $ $ -
Payment of debt $ - $ $ -
Proceeds from loans $ - $ $ -
Advances from shareholders $ - $ $ -
Net cash provided by financing activities $ 4,242,500 $ $ 4,242,500
Net increase in cash and cash equivalents $ 1,899,983 $ $ 1,899,983
Cash and cash equivalents at beginning of period $ 31,190 $ $ 31,190
Cash and cash equivalents at end of period $ 1,931,173 $ $ 1,931,173
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 7
Condensed Consolidated Statement of Cash Flows
From September 16, 2002 (date of inception) through June 30, 2006
Cash flows from operating activities
Net income (loss) $ (84,181,303) $ (136,400) a $ (84,317,703)
Adjustments to reconcile to net used in operating
activities
Depreciation and amortization $ 1,374,467 $ (5,756) j $ 1,368,711
Organization expenses $ 88,500 $ 88,500
Preferred shares issued in exchange for services $ 1,500,000 $ $ 1,500,000
Warrants issued to consultants $ 3,583,016 $ 5,838,514 f $ 9,421,530
Income attributable to repricing of warrants and debt
derivatives $ (26,819,908) $ (4,131,703) g $ (30,951,611)
Financing costs attributable to issuance of warrants $ 27,265,174 $ (1,846,500) k $ 25,418,674
Amortization of beneficial conversion feature
-convertible notes $ 10,461,000 $ $ 10,461,000
Amortization of capitalized finance costs $ 247,238 $ $ 247,238
Amortization of debt discount attributable to
convertible debenture $ - $ 276,090 k $ 276,090
Fair value of common stock issued to related party in
excess of debt $ 1,365,000 $ $ 1,365,000
Common stock issued in exchange for services $ 31,284,573 $ $ 31,284,573
Common stock issued in exchange for intellectual
property $ 14,689,100 $ $ 14,689,100
Common stock issued as penalty in connection with
financing $ 1,550,487 $ $ 1,550,487
Common stock canceled-previously issued for services
rendered $ (1,343,845) $ $ (1,343,845)
Change in assets and liabilities:
Increase in accounts receivable $ (18,900) $ $ (18,900)
Increase in prepaid expenses and deposits $ (163,472) $ $ (163,472)
Decrease in other assets $ (3,128) $ $ (3,128)
Decrease in due related parties $ - $ $ -
Increase (decrease) in accounts payable and accrued
liabilities $ 4,079,990 $ 5,755 j $ 4,085,745
Net cash used in operating activities $ (15,042,011) $ $ (15,042,011)
Cash flows from investing activities:
Payments for patent filing $ (25,698) $ $ (25,698)
Capital expenditures $ (48,602) $ $ (48,602)
Net cash used in investing activities $ (74,300) $ $ (74,300)
Cash flows from financing activities
Proceeds from sales of common stock, net $ 432,000 $ $ 432,000
Proceeds from issuance of convertible notes $ 13,446,500 $ 13,446,500
Proceeds from exercise of options and warrants $ 343,750 $ $ 343,750
Payment of debt $ (24,854) $ $ (24,854)
Proceeds from loans $ 2,750,000 $ $ 2,750,000
Advances from shareholders $ 100,088 $ $ 100,088
Net cash provided by financing activities $ 17,047,484 $ $ 17,047,484
Net increase in cash and cash equivalents $ 1,931,173 $ $ 1,931,173
Cash and cash equivalents at beginning of period $ - $ $ -
Cash and cash equivalents at end of period $ 1,931,173 $ $ 1,931,173
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 8
(a) During its review of the issuance and valuation of equity
instruments during the nine month period ended June 30, 2006, the
Company determined that certain warrants to acquire the Company's
common stock, which were issued to non-employees in connection with the
Company's financing activities, were not valued in accordance with SFAS
No. 123R. The Company corrected the valuation of these warrants as a
net charge to interest expense and a credit to additional paid in
capital in the amount of $136,400.
(b) During its review of the issuance and valuation of the March 2006
debt instruments during the three month period ended June 30, 2006, the
Company determined that $390,000, the cost related to the issuance of
these debt instruments, was charged in error to selling, general and
administrative expenses instead of capitalized debt issuance costs
interest expense in the previous reporting quarter. The Company reduced
the amounts recorded to selling general and administrative expenses for
the three month period ended June 2006. The correction is intended to
reflect the adjustment to capitalize financing costs in the proper
reporting period. The net effect of this adjustment on the three month
period ended June 30, 2006 is to increase operating expenses by
$390,000. The adjustment as a result of the correction of the error has
no net effect on operating expenses during the nine month period ended
June 30, 2006 and the period from September 16, 2002 (date of
inception) to June 30, 2006.
(c) During the Company's review of the outstanding warrants and options
to acquire the Company's common stock, it determined that the debt
instruments should be reclassified as derivative liabilities as a
result of distributing convertible notes containing embedded
derivatives (see Note C). After further review, the Company determined
that as of June 30, 2006, the derivatives were valued in error. The
warrants were initially valued at $933,117. The correct valuation is
$2,089,814, an increase of $1,156,698.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 9
(d) During its review of the issuance and valuation of equity
instruments, the Company determined that $563,750, the cost related to
the issuance of certain warrants to acquire the Company's common stock,
which were issued during the nine month period ended June 30, 2006 to
non-employees in connection with the Company's financing activities,
was recorded in error as selling, general and administrative expenses
instead of interest expense. The Company corrected the error by
reclassifying the amount of $563,750 to interest expense.
(e) During its review of the issuance and valuation of equity
instruments, the Company determined that certain warrants to acquire
the Company's common stock, which were issued to non-employees during
the year ended September 30, 2005 in connection with the Company's
financing activities, were erroneously recorded as having been issued
during the nine month period ended June 30, 2006. The effect of the
error was an overstatement of $4,355,942 in the net gain in the fair
value of the debt derivative and warrant liability and an overstatement
of $6,640,706 in the net interest expense in the original filing,
resulting in a net increase of $2,284,764 in income for the nine months
ended June 30, 2006. This amount of $2,284,764 is comprised of the
corrections of errors in the recording and valuation of the following
warrants:
Original amount Revised Amount Increase/(decrease)
Warrants issued in December 2004 $ 394,698 $ 3,169,052 $ 2,774,354
Warrants issued in February 2005 - 72,017 72,017
Warrants issued in June 2005 (Company
determined warrants were not properly
authorized and issued) 849,047 - (849,047)
Warrants previously cancelled, later
determined issued (287,440) - 287,440
---------- ------------ ------------
$ 956,305 $ 3,241,069 $ 2,284,764
========== ============ ============
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 10
The adjustment of $2,284,764, net of the additional cost of warrants
issued (see Note A above) of $136,400, results in an aggregate increase
of $2,148,364 in net income for the nine month period ended June 30,
2006, from $3,458,485 to $5,606,849.
(f) During its review of the issuance and valuation of equity
instruments, the Company determined that $5,838,514, the fair value of
certain warrants to acquire the Company's common stock that were issued
to non-employees during the period from September 16, 2002 (date of
inception) through June 30, 2006 in connection with payment for
services rendered to the Company, was erroneously recorded as interest
expenses instead of selling, general and administrative expenses.
(g) During its review of the issuance and valuation of equity
instruments, the Company reclassified the amortization of debt discount
attributable to the issuance of $4,131,704 of convertible debt
separately from the income attributable to repricing of warrants and
debt derivatives, as set forth below:
Reclassification of initial warrant valuations relating to financing from
interest to separate line item in cash flow statement: $2,271,000
Change in non warrant valuations as described in (a) above: 1,584,614
Reclassification of amortization of debt discount to separate cash flow
line item 276,090
----------
Total: $4,131,704
==========
(h) During its review of the issuance and valuation of equity
instruments, the Company separately reclassified from income
attributable to repricing of warrants and debt derivatives, the value
of warrants issued in connection with the issuance of debt having a
fair value of $2,271,000.
(i) During its review of the issuance and valuation of equity
instruments, the Company reclassified the amortization of debt discount
attributable to the issuance of convertible debt of $276,090 separately
from income attributable to repricing of warrants and debt derivatives.
(j) During its review of capital expenditures and related depreciation
and amortization, the Company corrected a classification error of
$5,756 between the depreciation and amortization expenses line item and
accounts payable within the cash used in operating expenses.
(k) During its review of the issuance and valuation of equity
instruments, the Company determined that $1,846,500, the fair value of
certain warrants to acquire the Company's common stock issued to
non-employees in connection with payment for services rendered to the
Company, was charged in error to interest expense instead of selling,
general and administrative expenses.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 11
3. Refer to comment number 5 and your reference to your response to
comment 4. It is not clear from your response to comment 4 whether you
have made any adjustments to additional paid-in capital, as initially
described in Note I of the financial statements in amendment number 8
to your Form SB-2. Please explain to us and clarify in the filing
whether you made any adjustments to additional paid-in capital and tell
us the basis for those adjustments. If the explanations previously
provided in Note I (as filed) were in error, please clarify.
RESPONSE: The Company charged selling, general and administrative costs
and increased additional paid in capital in the amount of $136,400 in
connection with that correction of errors in the accounting for and
recording of the issuance of warrants to acquire the Company's common
stock to non-employees during the nine months ended June 30, 2006. The
warrants were not valued in accordance with SFAS No. 123R. The Company
corrected the valuation of warrants issued as a net charge to interest
expense and a credit to additional paid in capital in the amount of
$136,400.
4. We acknowledge your response to comment 8 and reissue our comment.
Please clarify for us and in your filing why you believe that you
appropriately classified certain error corrections related to the
valuation of your warrant liabilities pursuant to EITF No, 00-19 within
interest income (expense) for all periods presented in Note I of your
interim financial statements and Note M of your annual financial
statements. We specifically refer you to the material increase in
"non-cash financing costs attributable to the issuance of warrants" of
approximately $23.1 million for the nine months ended June 30, 2005
discussed on page 10 of your response, which appears to correlate to
the increase in interest expense that we have noted above in comment 2.
Additionally, provide us with a detailed analysis of each correction
that aggregates to the $23.1 million and explain how each connection
relates to one of your various financing transactions.
RESPONSE: In connection with the issuance of convertible promissory
notes in 2005, the Company issued warrants with registration rights for
the underlying shares. As the registration rights agreement provides
for the delivery of registered shares and the delivery of the
registered shares is not controlled by the Company, pursuant to EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the
warrants at the date of issuance was recorded as a warrant liability on
the balance sheet $23,148,214 and charged to operations as interest
expense. Upon the registration statement being declared effective, the
fair value of the warrant on that date will be reclassified as equity.
The Company initially valued the warrants using the Black-Scholes
pricing model with the following assumptions: (1) a dividend yield of
0%; (2) an expected volatility of 152.59%, (3) a risk-free interest
rate of 3.67%, and (4) an expected life of 5 years.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 12
See response to comment 5 (Note E), below.
Notes to (Audited) Consolidated Financial Statements (Restated)
Note M - Restatement of Financial Statements, page F-91
5. We acknowledge your response to comments 6 and 10 and reissue our
comments. You have not provided us with sufficiently detailed
disclosure that substantially revises your restatement footnote to
explain why you made each correction of an error for the year ended
September 30, 2005 and the period from your inception through September
30, 2005. Please revise Note M to not only disclose the amount of each
error and the related financial statement period and financial
statement line item affected, but why each change occurred. That is,
describe the nature of each error and the corresponding financial
statement line items that it affected; tell us how you concluded that
an adjustment was necessary; and tell us how you calculated that
adjustment. Additionally, if a particular adjustment affects, for
example, both your balance sheet and statements of operations and cash
flows for a particular period, you should clearly illustrate that
correlation in your description of the error. Your disclosure should
provide a clear illustration of how you progressed from each financial
statement line item "as reported" to "as adjusted" in each period,
disaggregating the total error affecting each line item, preferably in
tabular format with footnote disclosure. Examples of items that we
would like you to clarify based on the information included in your
December 22, 2006 supplemental response follow; however, you should
provide enhanced information for each error, as our list of examples is
not exhaustive.
o In general, your use of the term "erroneously" does not
sufficiently tell us how you determined that your financial
statements were in error. For example, tell us what is meant by
your "erroneous" recording of the $1,365,000 error related to your
issuance of common shares to a former director in exchange for
previously incurred debt. Please also revise your proposed
disclosures to Note I accordingly.
o Tell us why you recorded the $3,960,000 decrease in "non-cash cost
of common stock issued pursuant to an employee stock option plan"
in your statement of cash flows for the year ended September 30,
2005 and clarify the line items that this adjustment affected in
your corresponding balance sheet and statement of operations.
o Tell us why you recorded the $9,079,000 adjustment to your
statement of cash flows for the year ended September 30, 2005,
which you attribute to stock subscription proceeds. Clarify the
other financial statement line items that this adjustment
affected.
RESPONSE: We propose to amend our Footnote M to the September 30, 2005
financial statements to read as follows:
The accompanying consolidated financial statements as of September 30,
2005 for the year ended September 30, 2005 and for the period from
September 16, 2002 (date of inception) through September 30, 2005 have
been restated to correct the accounting for (a) the issuance of
warrants in exchange for compensation and financing activities, (b) the
valuation of stock issued in settlement of related party debt, (c) the
unrecorded expense accruals relating to penalties due for late
registration, and (d) the errors in report preparation and
miscellaneous accounting adjustments appropriate for the fair
presentation of the financial statements.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 13
The effect of these adjustments is an increase in net loss of
$14,499,139 for the period from September 16, 2002 (date of inception)
through September 30, 2006 and for the year ended September 30, 2005.
The effect on cash flows used in operations was a reduction of $23,903
for the year ended September 30, 2005 and an increase of $5,604 from
September 16, 2002 (date of inception) to September 30, 2005. Cash flow
used in investing activities increased by $16,757 for the year ended
September 30, 2005 and decreased by $12,750 for the period from
September 16, 2002 (date of inception) through September 30, 2005. Cash
flow from financing activities increased by $7,146 for the year ended
September 30, 2005 and for the period from September 16, 2002 (date of
inception) through September 30, 2005.
The following tables summarize the effects of these adjustments on the
Company's consolidated balance sheet as of September 30, 2005,
consolidated statements of operations for the year ended September 30,
2005 and from September 16, 2002 (date of inception) through September
30, 2005 and the consolidated statements of cash flow for the year
ended September 30, 2005 and for the period from September 16, 2002
(date of inception) through September 30, 2005.
Condensed Consolidated Balance Sheet
September 30, 2005
As Previously
Reported Adjustment Reference As Restated
---------------------------------------------------------------
Cash $ 31,190 $ $ 31,190
Accounts receivables and advances $ 12,429 $ $ 12,429
Total current assets $ 43,619 $ $ 43,619
Property, plant and equipment, net $ 8,064 $ $ 8,064
Deposits $ 14,262 $ $ 14,262
Patents, net $ 22,493 $ $ 22,493
Intellectual property, net $ 9,094,082 $ $ 9,094,082
Total assets $ 9,182,520 $ $ 9,182,520
Accounts payable and accrued liabilities $ 2,185,468 $ 331,989 a $ 2,517,457
Accounts and notes payable, related party $ 410,429 $ 52,662 a $ 463,091
Total current liabilities $ 2,595,897 $ 384,651 a $ 2,980,548
Debt derivative and warrant liability $ - $ 13,673,574 b $ 13,673,574
Total liabilities $ 2,595,897 $ 14,058,225 a,b $ 16,654,122
Preferred stock $ 6 $ $ 6
Common stock $ 112,230 $ $ 112,230
Common stock subscribed $ 20,000 $ $ 20,000
Additional paid in capital $ 81,879,801 $ 440,914 c $ 82,320,715
Accumulated deficit $ (75,425,414) $ (14,499,139) $ (89,924,553)
Total deficiency in stockholders' equity $ 6,586,623 $ (14,058,225) $ (7,471,602)
Total liabilities and Deficiency in Stockholders' equity $ 9,182,520 $ $ 9,182,520
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 14
Condensed Consolidated Statement of Losses
For the Year Ended September 30, 2005
Operating expenses:
Selling, general & administrative $ 42,662,152 $ 8,051,865 d $ 50,714,017
Research and development $ 638,873 $ $ 638,873
Depreciation and amortization $ 356,266 $ $ 356,266
Total operating expenses $ 43,657,291 $ 8,051,865 d $ 51,709,156
Net loss from operations $ (43,657,291) $ (8,051,865) d $ (51,709,156)
Net gain (loss) in fair value of debt
derivative and warrant liability $ - $ 16,700,990 e $ 16,700,990
Other income (expense) $ 4,957 $ $ 4,957
Interest income (expense) $ (8,958,046) $ (23,148,264) f $ (32,106,310)
Net loss $ (52,610,380) $ (14,499,139) d,e,f $ (67,109,519)
Net loss per share-basic and fully diluted $ (0.82) $ (0.23) $ (1.05)
Condensed Consolidated Statement of Losses
From September 16, 2002 (date of inception) through September 30, 2005
Operating expenses:
Selling, general & administrative $ 63,483,689 $ 8,051,915 d $ 71,535,604
Research and development $ 877,408 $ 877,408
Depreciation and amortization $ 359,427 $ $ 359,427
Total operating expenses $ 64,720,524 $ 8,051,915 d $ 72,772,439
Net loss from operations $ (64,720,524) $ (8,051,915) d $ (72,772,439)
Net gain (loss) in fair value of debt
derivative and warrant liability $ - $ 16,700,990 e $ 16,700,990
Other income (expense) $ 31,342 $ $ 31,342
Interest income (expense) $ (10,736,232) $ (23,148,214) f $ (33,884,446)
Net loss $ (75,425,414) $ (14,499,139) d,e,f $ (89,924,553)
Net loss per share-basic and fully diluted $ (2.12) (0.41) $ (2.53)
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 15
Condensed Consolidated Statement of Cash Flows
For the Year Ended September 30, 2005
Cash flows from operating activities
Net income (loss) $ (52,610,380) $ (14,499,139) d,e,f $ (67,109,519)
Adjustments to reconcile to net used in operating
activities
Depreciation and amortization $ 350,107 $ $ 350,107
Organization expenses $ $
Preferred shares issued in exchange for services $ - $ $ -
Warrants issued to consultants $ 956,304 $ 6,402,264 d $ 7,358,568
Income attributable to repricing of warrants and debt
derivatives $ $ (16,700,991) e $ (16,700,991)
Financing costs attributable to issuance of warrants $ $ 23,148,214 f $ 23,148,214
Amortization of beneficial conversion feature
-convertible notes $ 8,836,000 $ $ 8,836,000
Fair value of common stock issued to related party in
excess of debt $ - $ 1,365,000 d $ 1,365,000
Common stock issued in exchange for services $ 14,805,128 $ 3,371,513 g $ 18,176,641
Common stock issued in exchange for intellectual
property $ 14,689,100 $ $ 14,689,100
Common stock issued for ESOP $ 3,960,000 $ (3,960,000) g $ -
Common stock issued as penalty in connection with
financing $ 776,529 $ $ 776,529
Common stock canceled-previously issued for services
rendered $ (1,078,270) $ 500,000 g $ (578,270)
Change in assets and liabilities:
Increase in accounts receivable $ $ (12,429) g $ (12,429)
Increase in other assets $ (12,429) $ 12,429 g $ -
Decrease in security deposits $ 9,297 9,297
Capital expenditures $ 16,757 $ (16,757) h $ -
Increase (decrease) in accounts payable and accrued
liabilities $ 297,755 $ 365,993 a,i $ 663,748
Increase in due related parties $ (111,943) (111,943)
Net cash used in operating activities $ (9,116,045) $ (23,903) a,d,e,f,g,h,i $ (9,139,948)
Cash flows from investing activities:
Payments for patent filing $ (4,347) (4,347)
Capital expenditures $ $ 16,757 h $ 16,757
Net cash used in investing activities $ (4,347) $ 16,757 h $ 12,410
Cash flows from financing activities
Proceeds from sales of common stock, net $ - $ $
Proceeds from subscription of common stock $ 9,079,000 (9,079,000) j
Proceeds from issuance of convertible notes $ $ 9,079,000 j $ 9,079,000
Proceeds from exercise of options and warrants $ 70,750 $ 32,000 g $ 102,750
Payment of debt $ - $ (24,854) i $ (24,854)
Proceeds from loans $ - $ $ -
Advances from shareholders $ - $ $ -
Net cash provided by financing activities $ 9,149,750 $ 7,146 g,i,j $ 9,156,896
Net increase in cash and cash equivalents $ 29,358 $ - $ 29,358
Cash and cash equivalents at beginning of period $ 1,832 $ - $ 1,832
Cash and cash equivalents at end of period $ 31,190 $ - $ 31,190
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 16
Condensed Consolidated Statement of Cash Flows
From September 16, 2002 (date of inception) through September 30, 2005
Cash flows from operating activities
Net income (loss) $ (75,425,414) $ (14,499,139) d,e,f $ (89,924,553)
Adjustments to reconcile to net used in operating
activities
Depreciation and amortization $ 353,268 $ $ 353,268
Organization expenses $ 88,500 $ 88,500
Preferred shares issued in exchange for services $ 1,500,000 $ $ 1,500,000
Warrants issued to consultants $ 2,976,166 $ 6,402,264 d $ 9,378,430
Income attributable to repricing of warrants and
debt derivatives $ - $ (16,700,991) e $ (16,700,991)
Financing costs attributable to issuance of warrants $ - $ 23,148,214 f $ 23,148,214
Amortization of beneficial conversion feature
-convertible notes $ 10,461,000 $ $ 10,461,000
Fair value of common stock issued to related party
in excess of debt $ - $ 1,365,000 d $ 1,365,000
Common stock issued in exchange for services g
$ 27,202,860 $ 3,371,513 $ 30,574,373
Common stock issued for ESOP $ 3,960,000 $ (3,960,000) g $
Common stock issued in exchange for intellectual
property $ 14,689,100 $ $ 14,689,100
Common stock issued as penalty in connection with
financing $ 776,529 $ $ 776,529
Common stock canceled-previously issued for services g
rendered $ (1,363,845) $ 500,000 $ (863,845)
Change in assets and liabilities:
Increase in accounts receivable $ - $ (12,429) g $ (12,429)
Increase other current assets $ (12,429) $ 12,429 g $
Increase in security deposits $ (14,262) $ $ (14,262)
Increase in capital expenditures $ (12,750) 12,750 h
Increase in other assets $ (13,890) $ $ (13,890)
Increase in due related parties $ 40,753 $ $ 40,753
Increase (decrease) in accounts payable and accrued
liabilities $ 2,053,464 $ 365,993 a,i $ 2,419,457
Net cash used in operating activities $ (12,740,950) $ 5,604 a,d,e,f,g,h,i $ (12,735,346)
Cash flows from investing activities:
Payments for patent filing $ (25,698) $ $ (25,698)
Capital expenditures $ $ (12,750) h $ (12,750)
Net cash used in investing activities $ (25,698) $ (12,750) h $ (38,448)
Cash flows from financing activities
Proceeds from sales of common stock, net $ 432,000 $ $ 432,000
Proceeds from subscription of common stock $ 9,204,000 $ (9,204,000) j $
Proceeds from issuance of convertible notes $ - $ 9,204,000 j 9,204,000
Proceeds from exercise of options and warrants $ 311,750 $ 32,000 g $ 343,750
Payment of debt $ $ (24,854) i $ (24,854)
Proceeds from loans $ 2,750,000 $ $ 2,750,000
Advances from shareholders $ 100,088 $ $ 100,088
Net cash provided by financing activities $ 12,797,838 $ 7,146 g.i,j $ 12,804,984
Net increase in cash and cash equivalents $ 31,190 $ - $ 31,190
Cash and cash equivalents at beginning of period $ - $ $ -
Cash and cash equivalents at end of period $ 31,190 $ - $ 31,190
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 17
(a) Accounts payable and accrued expenses:
As previously reported $ 2,185,468
Adjustment, net 331,989
-----------
As restated $ 2,517,457
In connection with the placement of convertible promissory notes in the
amount of $1,465,000 in December 2004 and $1,675,000 in 2003,
aggregating $3,140,000, the Company was obligated pursuant to the terms
of a registration rights agreement to pay liquidated damages of 3.5% of
the aggregate convertible note financing amount each month in the event
it failed to have a registration statement registering the shares
underlying the convertible notes declared effective by the specified
deadline. During its comment process on the Company's Registration
Statement on Form SB-2, as amended, the Securities and Exchange
Commission requested that the Company provide additional disclosure
regarding the Company's accounting policies in connection with the
accounting for previously issued common stock, convertible notes and
warrants issued pursuant to the registration rights agreement. The
Company initially did not calculate the penalties incurred in
connection with its failure to meet the deadline to file an effective
registration statement. Following its review, the Company concluded
that such penalties should be calculated as 3.5% multiplied by
$3,140,000 multiplied by 3.5 months, which resulted in an increase of
$384,651. The failure to properly account for such penalties resulted
in an understatement of liquidated damage penalties (included in
selling, general and administrative expense in the accompanying
restated statement of losses) and an underestimate of accrued expenses
as of September 30, 2005 aggregating $384,651.
Separately, the Company reclassified $52,662 of previously incurred
debt to an officer from accounts payable and accrued expenses to
accounts and notes payable - related parties. As a result of the
reclassification, accounts payable and accrued expenses were overstated
by $52,662 and accounts and notes payable - related parties were
understated by $52,662. There was no adjustment to the Company's
statement of operations or cash flows as a result of the
reclassification of the liability.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 18
(b) In conjunction with raising capital through the issuance of
convertible promissory notes, the Company issued warrants that have
registration rights for the underlying shares. As the contract must be
settled by the delivery of registered shares and the delivery of the
registered shares is not controlled by the Company, pursuant to EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the
warrants at the date of issuance was recorded as a warrant liability on
the balance sheet charged to operations as interest expense. Upon the
registration statement being declared effective, the fair value of the
warrants on that date will be reclassified to equity. The Company did
not record the fair value of warrant liability of $13,673,574 as of
September 30, 2005 with the original filing. The net effect of the
adjustment is an increase in liabilities of $13,673,574 as of September
30, 2005.
(c) In February, 2005 the Company issued 1,500,000 shares of its
restricted common stock to a Company officer and Director in exchange
for $600,000 of previously incurred debt. The debt was in the form of a
promissory note. The Company initially valued and recorded the issuance
of the common stock based on the face value of the promissory note.
Upon subsequent review the Company determined that the shares should be
valued at $1.31 per share for a total of $1,965,000, which represents
the fair value of the common stock on the date of the exchange.
$1,365,000, the difference between the fair value of the common stock
of $1,965,000 and the face value of the debt of $600,000, has been
charged to current period selling, general and administrative expense.
The Company initially recorded the value of the common stock at
$600,000. The net effect of the adjustment is an increase of $1,365,000
in selling, general and administrative expense during the year ended
September 30, 2005.
Separately, the Company initially recorded the fair value of warrants
issued to non-employees in connection with its financing activities as
a charge to interest expense with the offset to additional paid in
capital. Pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", the net value of the warrants at the date of issuance was
recorded as a warrant liability on the balance sheet. The net effect of
the adjustment is a decrease of $924,086 in interest expense during the
year ended September 30, 2005.
The following summarizes the adjustments:
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 19
Summary:
Adjustment for Fair value of stock issued in settlement of related party debt: $ 1,365,000
Reclassification of fair value of financing warrants issued pursuant to EITF 00-19 (924,086)
--------------
Net effect: $ 440,914
(d) In July 2005, the Company entered into an agreement with Trilogy
Capital Partners, Inc. and Joff Pollon ("Trilogy" and "Pollon") to
provide marketing services to the Company for a term of one year,
terminable thereafter by either party upon 30 days prior written
notice. In connection with the agreement, the Company agreed to pay
Trilogy a monthly fee of $12,500. The Company also issued Trilogy and
Pollon warrants to purchase an aggregate of 9,000,000 shares of common
stock at $0.55 per share, exercisable for a period of three years from
issuance. As the contract must be settled by the delivery of registered
shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", the Company recorded the net value of the
warrants at the date of issuance as a warrant liability of $4,117,500
and charged to operations as consulting fees. Upon the registration
statement being declared effective, the fair value of the warrants on
that date will be reclassified to equity. The Company initially valued
the warrants using the Black-Scholes pricing model with the following
assumptions: (1) a dividend yield of 0%; (2) an expected volatility of
155.3%, (3) a risk-free interest rate of 3.82%, and (4) an expected
life of 3 years.
During the quarter ended December 31, 2004, the Company granted
warrants to purchase 6,063,500 shares of its common stock to
non-employees in exchange for services and financing expenses. The
estimated fair value of the compensatory warrants granted to the
non-employees in exchange for services and financing expenses was
initially determined using the Black-Scholes pricing model and the
following assumptions: a contractual term of 2 to 5 years, a risk free
interest rate from 2.47% to 3.53%, a dividend yield of 0% and a
volatility from 65.7% to 148.7%. The amount of the expense charged to
operations for compensatory warrants granted in exchange for services
and financing expenses was $3,169,052 for the quarter ended December
31, 2004.
During the quarter ended March 31, 2005, the Company granted warrants
to purchase 55,000 shares of its common stock to non-employees in
exchange for services. The estimated fair value of the compensatory
warrants granted to the non-employees in exchange for services was
determined using the Black-Scholes pricing model with the following
assumptions: a contractual term of 5 years, a risk free interest rate
of 3.67%, a dividend yield of 0% and volatility of 152.59%. The amount
of the expense charged to operations for compensatory warrants granted
in exchange for services was $72,017 for the quarter ended March 31,
2005.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 20
Summary:
Total value of warrants described above: $ 7,358,569
Less previously recorded (956,305)
---------------
Net: 6,402,264
Adjustment to fair value of common stock issued in settlement of related party
debt (see (b) above) 1,365,000
Penalties accrued due to late registration (see (a) above) 384,651
Correction in value of shares issued for services rendered (100,000)
---------------
Net effect: $ 8,051,915
(e) In conjunction with raising capital through the issuance of
convertible promissory notes, the Company issued warrants with
registration rights for the underlying shares. As the contract must be
settled by the delivery of registered shares and the delivery of the
registered shares is not controlled by the Company, pursuant to EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the Company recorded
the net value of the warrants at the date of issuance as a warrant
liability of $23,148,214 and charged to operations as interest expense.
Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The
Company initially valued the warrants using the Black-Scholes pricing
model with the following assumptions: (1) a dividend yield of 0%; (2)
an expected volatility of 152.59%, (3) a risk-free interest rate of
3.67%, and (4) an expected life of 5 years.
In accordance with SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities", the Company revalued the warrants with underlying
shares subject to registration rights as of September 30, 2005 using
the Black-Scholes option pricing model. Assumptions regarding the life,
the expected dividend yield and volatility were left unchanged but the
Company applied a risk free interest rate of 4.18%, a volatility of
155.91% and a deemed fair value of common stock of $0.57, which was the
closing price of the Company's common stock on September 30, 2005. The
difference of $16,700,991 between the fair value of the warrants as of
September 30, 2005 and the previous valuation as of February, 2005 has
been recorded as a gain on revaluation of warrant liability and
included in the restated consolidated financial statements.
(f) Please refer to paragraph 1(e) above.
(g) The Company misclassified a number of line items within the cash
flow statement; the adjustments to correct these line items are as set
forth below:
1 Common stock issued for services $ 3,371,513
2 Correction of shares issued originally labeled ESOP (3,960,000)
3 Correction of amount of shares cancelled, previously issued for services 500,000
4 Decrease in change in accounts receivable (12,429)
5 Increase in change in other assets 12,429
6 Correction of proceeds from exercise of options and warrants 32,000
7 Accounts payable correction 56,487
-------------------
Net effect: $ 0
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 21
(h) The Company initially classified capital expenditures as usage in
cash flow for operations. The correct classification of the capital
expenditures is under the investing activity.
(i) The correction of the errors affecting accounts payable is
summarized below:
1 Recording of accrual for penalties as described in (a) above: $ 384,651
2 Misclassification of debt payments (24,854)
3 Accrual adjustments 6,196
----------------
Net effect $ 365,993
(j) In connection with its financing activities, the Company issued
convertible debt, which was converted to common stock within the same
accounting period. The Company has revised its description of the
financing as proceeds received from the issuance of convertible debt
instead of a sale of common stock.
Mr. Jeffrey P. Riedler
U.S. Securities and Exchange Commission
Division of Corporation Finance
March 6, 2007
Page 22
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.