-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LH6h+ecEBOJy1PSmaTxoY5jQdsaQnBGtP28/q7kiLClveaUO0S7mqcs1+8b1iM6Y QvbWjiOTZbzsv8Ssu/Z0Ww== 0001282695-06-000421.txt : 20080908 0001282695-06-000421.hdr.sgml : 20080908 20061222171658 ACCESSION NUMBER: 0001282695-06-000421 CONFORMED SUBMISSION TYPE: CORRESP PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20061222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED DNA SCIENCES INC CENTRAL INDEX KEY: 0000744452 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 592262718 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: CORRESP BUSINESS ADDRESS: STREET 1: 25 HEALTH SCIENCES DRIVE STREET 2: SUITE 113 CITY: STONY BROOK STATE: NY ZIP: 11790 BUSINESS PHONE: 631 444 6861 MAIL ADDRESS: STREET 1: 25 HEALTH SCIENCES DRIVE STREET 2: SUITE 113 CITY: STONY BROOK STATE: NY ZIP: 11790 FORMER COMPANY: FORMER CONFORMED NAME: PROHEALTH MEDICAL TECHNOLOGIES INC DATE OF NAME CHANGE: 20010504 FORMER COMPANY: FORMER CONFORMED NAME: DCC ACQUISITION CORP DATE OF NAME CHANGE: 19990211 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK CAPITAL CORP/TX/ DATE OF NAME CHANGE: 19980306 CORRESP 1 filename1.txt 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. -----END PRIVACY-ENHANCED MESSAGE-----