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MAIL STOP 3561
November 28, 2005
V. Randy White, Ph.D
Chief Executive Officer
Xenomics, Inc.
420 Lexington Avenue, Suite 1701
New York, New York 10170
Re: Xenomics, Inc.
Amendment No. 1 to Registration Statement on Form SB-2
File No. 333-127071
Filed October 28, 2005
Dear Dr. White:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments.
Table of Contents
1. Please remove or relocate the boiler-plate paragraph following
the
table of contents.
Prospectus Summary
2. The background and development of both Used Kar Parts, Inc. and
Xenomics Sub should be fully discussed pursuant to Item 101 of
Regulation S-B.
Risk Factors, page 6
3. As noted in prior comment 10 to our letter dated September 2,
20052, several of your risk factors and subheadings are too broad
and
generic and should be revised to state the material risk that is
specific to Xenomics, Inc. As a general rule, a risk factor is
probably too generic if it is readily transferable to other
offering
documents or describes circumstances or factual situations that
are
equally applicable to other similarly situated businesses. Risk
factors 10, 12, 14, 21, 27 and 28 should be revised, deleted or
moved
to another section of the prospectus.
4. The second risk factor does not appear material in view of the
liquid assets of the company at the latest balance sheet date and
the
disclosure on page 16 that "we expect that existing capital
resources
will be sufficient...for at least the next twelve months."
5. The 23rd and 24th risk factors are duplicative.
Note Regarding Forward-Looking Statements, page 13
6. We continue to note the statement that you "undertake no
obligation to update or revise any of the forward-looking
statements
after the date of this prospectus to conform forward-looking
statements to actual results." As stated in prior comment 13 to
our
letter dated September 2, 2005, if new information or certain
events
arise that would make your current forward-looking statements
materially misleading, you would need to update your disclosure as
required by federal securities law and the undertakings in Item 28
to
the registration statement.
Management`s Discussion and Analysis of Financial Condition or
Plan
of Operation
History, page 13
7. As requested in prior comment 15 to our letter dated September
2,
2005, provide the name and the identity of the control persons and
promoters of the company and its predecessors.
8. We note that statement in the fourth paragraph that
substantially
all of the $9.6 million you have raised from the sale of your
securities as of July 31, 2005 has been used on development of the
TR-DNA technology. We also note that as of July 31, 2005, you
have
total current assets of $6.5 million, which we presume also was
generated from the sale of your securities. Given that you have
not
generated any revenue to date, we do not understand how you could
have expended substantially all of the $9.6 million raised to date
on
development of the TR-DNA technology and still show total current
assets of $6.5 million as of July 31, 2005. We further note that
from inception to July 31, 2005, only $2.8 million has been spent
on
R&D. Please revise.
Plan of Operations, page 15
9. Please allocate the amounts necessary over the next 12 months
to
cover the following budgeted expenses: (1) characterizing
molecular
markers for two prenatal tests; (2) optimizing detection methods;
(3)
demonstrating measurement of the markers; (4) converting existing
research into methods that can be commercialized; (5) making the
required changes to your existing facility or moving to a new
facility that meets cGMP guidelines; and (6) purchasing bulk
quantities of materials and reagents.
10. We note that you do not have any prior manufacturing
experience
and that this may result in your inability to develop reproducible
and effective manufacturing processes. Please consider discussing
this in a risk factor.
11. The disclosure in the fifth paragraph indicates that your
current
facility does not meet cGMP guidelines. In the last sentence of
the
same paragraph you also state that your facilities will be
adequate
for your anticipated level of activity during 2006. Given that
your
stated level of activity during the second half of 2006
anticipates
you operating under cGMP guidelines, we find these statements
confusing.
12. Update the table of contractual obligations on page 16 to at
least the most recent balance sheet date.
13. The paragraph following the table under Contractual
Obligations
and Commitments should be updated to the effective date to state
the
amount owing to the selling stockholders as a result of not having
the filing effective on October 25, 2005.
14. Correct the two references to "registration statement", which
apparently should be "registration rights agreement".
Description of Business, page 24
15. Research and development expenditures for each of the past two
fiscal years should be indicated; see Item 101(b)(10).
Directors and Executive Officers, page 25
16. Include the disclosure required pursuant to Item 401(a)(3) of
Regulation S-B.
17. Under "Compliance with Section 16(a) of the Exchange Act," you
indicate that during 2005, your common stock was not registered
under
Section 12 of the Exchange Act. Please advise how you satisfy the
OTCBB listing criteria that all companies be registered under
Section
12 prior to trading on the bulletin board.
Executive Compensation, page 28
18. Please move the discussion of the consulting agreement with
Mr.
Cerrone this section.
19. Under "Stock Option Plan," please advise to whom the 1,290,000
options were issued and the value attributed to these options. In
this regard, distinguish between third party consultants and
employees. Disclose when you will seek stock holder approval for
an
increase in the number of shares that can be granted under the
plan.
20. Clarify the reference to compensation of "$100,000 or more" in
the first paragraph.
Security Ownership of Certain Beneficial Owners and Management,
page
33
21. Reference is made to footnotes (1) and (3). Beneficial
ownership
is to be determined in accordance with the Instruction to Item 403
of
Regulation S-B and not in accordance with Rule 13d or Section 16
of
the Exchange Act. As such, revise the disclosure in footnotes one
and three regarding Rule 13d and Section 16 and delete the
disclaimer
of beneficial ownership in footnote three since Section 16 is not
applicable.
22. As requested in prior comment 37 to our letter dated September
2,
2005, please identify the control person(s) for Panetta Partners,
Ltd. Please also reconcile the reference to Mr. Cerrone as the
"Managing Partner" with page 37 which refers to him as "the
general
partner."
23. It is not clear whether the table reflects the common shares
issuable upon conversion of the Series A Convertible Preferred.
Indicate the holders of the preferred.
Selling Stockholders, page 37
24. Identify via footnotes the selling shareholders that are
parties
to the 2004 voting agreement, which we believe illustrates a
material
relationship with the company beyond a mere investor. See Item
507
of Regulation S-B.
Certain Relationships and Related Transactions, page 37
25. As requested in prior comment 40 to our letter dated September
2,
2005, please include the full disclosure regarding transactions
with
promoters during the past 5 years, including their identity, as
required under Item 404(d) of Regulation S-B. See Rule 405 of
Regulation C for the definition of "promoter."
Financial Statements, page F-1
26. We note your response to prior comment 52. Please revise the
financial statements to provide footnote disclosures describing
the
material terms of the contributed services.
27. We note the revisions made to the financial statements in
response to prior comments 52, 56, 64 and 65. Please disclose on
the
face of the financial statements that they have been restated,
disclose in a note the nature and amount of the restatements as
required by paragraph 37 of APB 20 and direct your independent
accountant to refer to the restatement of the annual financial
statements in its report and dual-date or redate the report.
Provide
similar disclosures in your amended Form 10-KSB and Form 10-QSB
filings for the affected periods.
Notes 5 and 4 - Stockholders` Equity, pages F-11 and F-24
28. We note your response to prior comment 63. Please clarify the
specific liquidated damage provisions that are applicable to each
of
the private placements that closed on January 28, 2005, February
5,
2005, April 7, 2005, and July 13, 2005. Based on the registration
rights agreement filed on February 3, 2005, it appears that, with
respect to the first three offerings, a penalty was incurred
relating
to the initial filing of the registration statement, but no
additional penalties will be incurred if the registration
statement
is not declared effective or effectiveness is not maintained.
Please
tell us whether this is the case, and revise your disclosures
accordingly.
29. Please disclose the fair value of the warrants issued to the
investors in the private placements that closed on each of January
28, 2005, April 7, 2005 and July 13, 2005, along with the major
assumptions used to value the warrants. We note that the fair
value
of the warrants issued to the placement agents is disclosed, but
not
the fair value of the warrants sold to the investors in each
offering.
30. With respect to the July 13, 2005 private placement, based on
the
registration rights agreement filed on July 19, 2005, it would
appear
that the fair value of the warrants should be recorded as a
liability
in your financial statements, because all of the conditions for
equity classification under EITF 00-19 are not met. Specifically,
we
note that the liquidated damage provisions of the agreement
effectively require the warrants to be settled in registered
shares,
which is considered to be outside of the control of the issuer.
The
warrants should be fair-valued at each subsequent balance sheet
date
and changes in fair value should be reflected in the statement of
operations. Provide the necessary disclosures in an explanatory
footnote.
31. We note your response to prior comment 64. Please tell us why
you believe that it is appropriate to amortize the stock-based
compensation expense over the one year period. We note the
warrants
are exercisable upon issuance, which would indicate that no future
service is required, and that the full amount of measured
compensation expense should be recognized at the date of issuance.
Alternatively, if future service is required, the warrants would
need
to be remeasured at each balance sheet date in accordance with
EITF
96-18. Please revise your financial statements and related
disclosures accordingly, or explain in more detail why you believe
that no revisions are required.
Note 6 - Stock Option Plan, page F-12
32. We note your response to prior comment 65. Please revise your
disclosure in the annual financial statements and MD&A to provide
similar disclosures to those made in the interim financial
statements. In addition, please revise your disclosure in
critical
accounting policies on page 18 to state the amount of additional
compensation expense that would be required to be recorded with
respect to these options at the most recent balance sheet date.
Refer to Section V of the Commission`s MD&A guidance in Release
33-
8350, which may be obtained at http://www.sec.gov/rules/interp/33-
8350.htm, and revise your disclosures accordingly. Also, please
revise your disclosures to specifically identify the option grants
that are subject to shareholder approval.
33. According to your response to prior comment 66 and Exhibit 1
to
your response, prior to January 31, 2005, you used the most recent
private placement price to determine stock-based compensation
because
you felt the closing price on the thinly traded over-the-counter
market was not indicative of market value. While this treatment
may
be appropriate for periods prior to July 27, 2004, when your
shares
were first traded on the Bulletin Board, this treatment does not
appear appropriate for options issued on and after that date.
Even
when the company`s stock is thinly traded, it is still necessary
to
use the quoted market price in valuing the stock award. In
paragraph
10 of APB 25, the Board acknowledges "market quotations at a given
date are not necessarily conclusive evidence" of fair value of
shares
of stock but concludes that, for purposes of the Opinion, the
unadjusted quoted market price of a share of stock should be used
in
measuring compensation. Please revise the financial statements
and
footnotes accordingly.
34. We note your response to prior comment 70. Please consider
the
impact of the option grants to Dr. White on the tax-qualified
status
of the option plan, as well as whether the grant of the options
represents an illegal act by the Company. If you believe there
may
be any resulting impact on the financial statements, please revise
your disclosures accordingly.
Note 5 - Commitments and Contingencies, page F-25
35. We note your response to prior comment 73. While the
acceleration has not yet resulted in the affected employees being
able to exercise options that would have otherwise expired
unexercised, this will be the case if any of the employees
terminate
their employment prior to the date they would have otherwise fully
vested in the award. If this were to occur, then you will be
required to record compensation expense based on the intrinsic
value
on the date of modification. Note that your situation is
analogous
to that outlined in Illustration 3(a) of FIN 44, except that with
a
relatively small number of affected employees, there would be no
basis for recording an estimate of future terminations.
Accordingly,
while compensation expense would be measured at the date of
modification, no compensation expense would actually be recorded
until the date of any future terminations prior to the original
vesting date. Please provide discussion of this matter in MD&A
and
the footnotes, and disclose the amount of intrinsic value
resulting
from the acceleration of options granted to Mr. Umansky and Mr.
Melkonyan that would be recognized in the future if these
individuals
terminated their employment prior to the original vesting dates.
Note that since Mr. Cerrone and Dr. Tomei are non-employees, the
modifications relating to these individuals should be accounted
for
under EITF 96-18 rather than FIN 44. Please revise accordingly.
36. We note your response to prior comment 74. Please revise the
biographical information on page 25 to include the services
performed
by Mr. Cerrone on behalf of the Company prior to June 2005.
37. In your supplemental response to prior comment 74, you state
Mr.
Cerrone`s options were subject to shareholder approval. Please
explain why these 1,050,000 options were subject to shareholder
approval, since they appear to be among the first 5,000,000 shares
issued under the plan.
38. In your supplemental response to prior comment 75, you discuss
Dr. Tomei`s 2005 options, but do not address the options for
1,012,500 shares issued in 2004. Please explain to us how you
have
complied with EITF 96-18 in accounting for the issuance and
subsequent acceleration of these options.
39. We note your response to prior comments 74 and 75. Note that
since EITF 96-18 is applicable to the option grants to Mr. Cerrone
and Dr. Tomei, accounting recognition appears to be required
irrespective of whether a measurement date has occurred. The
options
should initially be measured at fair value, and should be
remeasured
at each balance sheet date until the later of the date the awards
are
fully vested, or when a final measurement date is determined.
Refer
to Issues 3 and 4(b) and Examples 12-14 of EITF 96-18. Please
revise
the financial statements to reflect the compensation expense
relating
to these grants in accordance with EITF 96-18. Provide
appropriate
disclosures regarding the transactions in a footnote.
40. We note your response to prior comment 76. Please revise the
disclosure in Note 5 to include the signing bonus and performance
bonus provisions of the agreement as previously requested.
41. We note your response to prior comment 78. As previously
requested, please revise your disclosure to include the material
terms of the Series A preferred stock, including dividend rights,
conversion rights, and liquidation preferences. Disclose the fair
value that was allocated to each of the Series A preferred stock
and
the warrants issued to the investors, along with the assumptions
used
to value the warrants.
42. We note your response to prior comment 78. Please explain in
detail how you evaluated the preferred stock for a beneficial
conversion feature under EITF 98-5. We note the market price of
your
common stock on the date of issuance was $2.40, and the conversion
price of the Series A preferred stock is $2.15.
Part II
Item 26. Recent Sales of Unregistered Securities
43. We note from Note 4 to the financial statements that 5,000
shares
were issued by the company to a law firm for services. Please
identify the law firm, the value of the shares issued, and the
basis
for and facts supporting an exemption from registration as
required
by Item 701 of Regulation S-B.. Advise whether the issuance of
such
shares implicates the disclosure requirements of Item 509 of
Regulation S-B.
44. Identify the "certain investors" of the July 13, 2005 private
placement.
45. Jeannine Karklins is indicated as the "company`s founder". As
such, this person is considered a promoter of the company or one
of
its predecessors and must be named as such in the prospectus and
all
of the applicable disclosure of Items 401(d) and 404(d) added.
Item 27. Exhibits
46. Exhibits 10.6 and 10.8 are incorporated by reference from
exhibits 99.2 and 99.3 to a Form 8-K filed July 19, 2004. Please
confirm these references. In addition, we are unable to locate
exhibit 10.5 as incorporated to exhibit 2.4 to the Form 8-K filed
July 19, 2004.
34 Act Reports
Form 10-KSB for the Year Ended January 31, 2005
Item 8A. Controls and Procedures
47. Revise to clarify, if true, that your officers concluded that
your disclosure controls and procedures are also effective to
ensure
that information required to be disclosed in the reports that you
file or submit under the Exchange Act is accumulated and
communicated
to your management, including your chief executive officer and
chief
financial officer, to allow timely decisions regarding required
disclosure. See Exchange Act Rule 13a-15(e).
48. Please amend your Form 10-KSB for the year ended January 31,
2005
and all subsequent periodic reports in accordance with the above
comments.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
Any questions regarding the accounting comments may be
directed
to Carlton Tartar at (202) 551-3387. Questions on other
disclosure
issues may be directed to William Bennett at (202) 551-3389.
Sincerely,
John Reynolds
Assistant Director
cc: Jeffrey J. Fessler
Fax: 212-930-9725
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V. Randy White, Ph.D
Xenomics, Inc.
November 28, 2005
p. 1