View:
January
10, 2006
Division
of Corporation Finance
100
F
Street, NE
Washington,
D.C. 20549
Attention:
John Reynolds, Esq.
|
Re:
|
Form
SB-2 filed August 1, 2005
Amendment
No. 1 to Form SB-2 filed October 28, 2005
File
No. 333-127071
|
This
letter sets forth the responses of Xenomics, Inc., a Florida corporation (the
“Company” or “we”), to the comments received from the Staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) by letter dated November
28, 2005 concerning the Company’s Registration Statement on Form SB-2 (File No.
333-127071) filed with the Commission on October 28, 2005 (the “Registration
Statement”). We are authorized by the Company to provide the responses contained
in this letter on behalf of the Company.
The
numbers of the responses in this letter correspond to the numbers of the Staff’s
comments as set forth in its letter to the Company dated November 28, 2005.
References in the text of the responses herein to captions and page numbers
are
to Amendment No. 2 to Form SB-2 which is being filed herewith. For your
convenience, we set forth each comment from your comment letter in bold typeface
and include the Company’s response below it.
Table
of Contents
| 1. |
Please
remove or relocate the boiler-plate paragraph following the table
of
contents.
|
We
have
removed the boiler plate paragraph following the table of contents in Amendment
No. 2 to Form SB-2.
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.
|
On
page 4
of Amendment No. 2 to Form SB-2 we have modified the Prospectus Summary to
include the background and development of Used Kar Parts, Inc. and Xenomics
Sub.
Risk
Factors, page 6
| 3. |
As
noted in prior comment 10 to our letter dated September 2, 2005,
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.
|
On
pages 5
to 11of Amendment No. 2 to Form SB-2 we have revised Risk Factors 10, 12, 14,
21, 26 and 27.
| 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.”
|
On
page 5
of Amendment No. 2 to Form SB-2 we have revised the second risk
factor.
| 5. |
The
23rd
and 24th
risk factors are
duplicative.
|
On
page 10
of Amendment No. 2 to Form SB-2 we have consolidated the 23rd
and
24th
risk
factor in to one risk factor.
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.
|
On
page 12
of Amendment No. 2 to Form SB-2 we have deleted the statement that we “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.”
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.
|
|
On
page 12 of Amendment No. 2 to Form SB-2 we have added the names and
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.
|
On
page 13
of Amendment No. 2 to Form SB-2 we have revised the fourth paragraph under
History to state that we anticipate that substantially all of the $9,643,738
raised will be used on development of the Tr-DNA technology.
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.
|
|
The
expenses related to the product development milestones listed in
the
fourth paragraph of Plan of Operations will primarily consist of
labor
costs and reagent and chemical costs. On page 14 of Amendment No.
2 to
Form SB-2, we have disclosed the aggregate amount of labor costs
and
reagent and chemical costs we believe will be sufficient for our
plan of
operations in 2006. It
is not possible to accurately predict the exact costs associated
with each
of these product development steps since our scientific personnel
work
simultaneously on multiple projects and the various projects may
proceed
faster or slower than expected, especially those for Down syndrome
that
are dependent upon gaining access to human clinical samples that
are
positive for the genetic disorder and the frequency of obtaining
such
positive sample is beyond our control. We
believe it would be misleading to the reader for us to estimate the
amount
of expenses allocated to each of our product development milestones
since
there are many variables associated with each product development
step and
we have no way of predicting the amount of labor costs allocated
to each
milestone. We believe that an estimate of the aggregate amount of
expenses
related to what we believe will be accomplished in 2006 is more relevant
to the reader.
|
| 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.
|
On
page 8
of Amendment No. 2 to Form SB-2 we have added a risk factor entitled
“We
have
limited manufacturing experience and once our products are approved, if at
all,
we may not be able to manufacture sufficient quantities at an acceptable
cost.
| 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.
|
On
page 15
of Amendment No. 2 to Form SB-2 we have modified the last paragraph in our
Plan
of Operations.
| 12. |
Update
the table of contractual obligations on page 16 to at least the most
recent balance sheet date.
|
On
page 16
of Amendment No. 2 to Form SB-2 we have updated the table of contractual
obligations to October 31, 2005.
| 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.
|
On
page 16
of Amendment No. 2 to Form SB-2 we have modified the paragraph following the
table of contractual obligations to state that $27,710 is paid every 30 days
until the registration statement is effective. We have also added the amount
paid to date to such selling stockholders.
| 14. |
Correct
the two references to “registration statement”, which apparently should be
“registration rights
agreement”.
|
On
page 16
of Amendment No. 2 to Form SB-2 we have corrected the two references to
registration statement.
Description
of Business, page 24
| 15. |
Research
and development expenditures for each of the past two fiscal years
should
be indicated; see Item
l0l(b)(10).
|
On
page 20
of Amendment No. 2 to Form SB-2 we have added in our Research and Development
expenditures for each of the past two fiscal years and the nine months ended
October 31, 2005 and 2004.
Directors
and Executive Officers, page 25
| 16. |
Include
the disclosure required pursuant to Item 401(a)(3) of Regulation
S-B.
|
On
page 24
of Amendment No. 2 to Form SB-2 we have added in 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.
|
With
all
due respect we believe that companies are not required to be registered under
Section 12 to be listed on the OTCBB. According to the OTCBB Eligibility Rule,
OTCBB issuers must be registered with the SEC under Section 13 or 15(d) of
the
Securities and Exchange Act of 1934.
Executive
Compensation, page 28
| 18. |
Please
move the discussion of the consulting agreement with Mr. Cerrone
to this
section.
|
The
discussion of the consulting agreement with Mr. Cerrone has been moved to
“Executive Compensation-Consulting Agreement” on page 28 of Amendment No. 2 to
Form SB-2.
| 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 stockholder approval for an increase in the number
of shares
that can be granted under the
plan.
|
On
page 29
of Amendment No. 2 to Form SB-2 we have disclosed to whom the 1,326,000 options
were granted to as well as the value of such options and the affiliation of
such
person to the Company. In addition we have disclosed that we will seek
stockholder approval in April 2006 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.
|
On
page 27
of Amendment No. 2 to Form SB-2 we have clarified the reference to compensation
of $100,000 or more.
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.
|
On
page 32
of Amendment No. 2 to Form SB-2 we have revised the disclosure in footnotes
one
and three regarding Rule 13d and Section 16 and deleted the disclaimer of
beneficial ownership in footnote three.
| 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.”
|
On
page 33
of Amendment No. 2 to Form SB-2 we have identified the control person of Panetta
Partners, Ltd. and changed the reference to Mr. Cerrone on page 24 to managing
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.
|
On
page 32
of Amendment No. 2 to Form SB-2 we have added a paragraph which states that
the
table does not give effect to the conversion of the Series A Convertible
Preferred Stock. In addition, none of the persons listed in the table own any
shares of Series A Convertible Preferred Stock.
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.
|
On
page 33
of Amendment No. 2 to Form SB-2 we have identified the selling stockholders
that
are parties to the 2004 voting agreement by adding footnote 3.
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.”
|
On
page 37
of Amendment No. 2 to Form SB-2 we have included disclosure regarding
transactions with promoters during the past 5 years, including their
identity.
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.
|
On
page
F-15 of Amendment No. 2 to Form SB-2 we have provided in Footnote 9 disclosure
concerning the terms of Founder’s deferred compensation.
| 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 restatements of
the
annual financial statements in the 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.
|
On
page
F-9 of Amendment No. 2 to Form SB-2 we have provided, in Footnote 2 to our
January 31, 2005 financial statements, disclosure as to the nature and amount
of
the restatement adjustments and their impact on operating results and loss
per
share. Our auditors have also referred to this Footnote in their revised and
redated report. We have noted on the face of the financial statements that
they
are restated.
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.
|
|
On
page F-12 and F-25 of Amendment No. 2 to Form SB-2 we have clarified,
in
Note 5 and 4 respectively, that pursuant to the January 28, 2005
Registration Rights Agreement there are no additional liquidated
damages
for failure to have the registration statement declared effective
by a
specified date, or for failure to maintain its effectiveness for
any
specified period of time.
|
| 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.
|
|
On
page F-11, F-12 and F-25 of Amendment No. 2 to Form SB-2 we have
added
disclosure in Footnote 5 and 4 respectively, as to 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.
|
The
liquidated damages are not required to be paid in registered shares and must
be
paid cash per Paragraph 2(a) second to last sentence in the paragraph. The
cash
payments are not outside the control of the Company and we therefore
respectfully submit that, other than the fair value disclosure we have added
in
response to comment 28 above, there is no requirement to account for these
options as liabilities under EITF 00-19.
| 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.
|
On
page
F-11 of Amendment No. 2 to Form SB-2 as discussed in Footnote 5 we have revised
our financial statements to record the stock based compensation associated
with
the Trilogy warrants on the date of issuance. While the matching principle
was
guiding our accounting, matching the expense to the service period benefited,
upon further review of EITF 96-18, in cases when no further service is required,
immediate expense is indicated.
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/33-83
50.htm,
and revise your disclosures accordingly. Also, please revise your
disclosures to specifically identify the option grants that are
subject to
shareholder
approval.
|
On
page 17
of Amendment No. 2 to Form SB-2 we have added disclosure to our Critical
Accounting Policies section of MD&A that a total of 5,000,000 shares of
common stock have been reserved for issuance under the Xenomics Stock Option
Plan, as amended (the "Plan"). As of October 31, 2005, options for 6,326,000
shares were outstanding under the Plan. 1,326,000 of such options have been
granted to employees and directors subject to stockholder approval of an
increase in the number of shares that can be granted under the Plan. With
respect to the options granted prior to stockholder approval a measurement
date
has not occurred and accordingly no compensation expense has been recorded.
When
such measurement date does occur, stock based compensation expense will be
recorded for any excess of the fair value on that date over the exercise price.
Had the 1,326,000 options granted subject to shareholder approval been approved
on October 31, 2005 (the measurement date, at which date the market price of
the
Company’s stock was $1.95 per share) the Company would have recognized
approximately $150,000 of additional stock-based compensation during the nine
months ended October 31, 2005 and would have approximately $600,000 of
additional deferred stock based compensation as of October 31, 2005.
On
page F-
23 of Amendment No. 2 to Form SB-2 we have also included this disclosure in
Footnote 3, Summary of Significant Accounting Policies of our interim financial
statements as of October 31, 2005.
On
page
F-12 of Amendment No. 2 to Form SB-2 we have also included similar disclosure
in
Footnote 6, Stock Option Plan of our annual financial statements as of January
31, 2005
| 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.
|
|
We
have restated our financial statements to record stock based compensation
in accordance with APB 25 paragraph 10 using the unadjusted quoted
market
price of a share of stock on the date of grant to measure
compensation.
|
On
page
F-9 of Amendment No. 2 to Form SB-2 we have provided, in Footnote 2,disclosure
as to the nature and amount of the restatement adjustments and their impact
on
operating results and loss per share for the year ended January 31,
2005.
On
page F-
28 of Amendment No. 2 to Form SB-2 we have provided, in footnote 6 to our
October 31, 2005 financial statements, disclosure as to the nature and amount
of
the restatement adjustments and their impact on operating results and loss
per
share for the year ended January 31, 2005 and the six months ended July 31,
2005.
| 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.
|
On
page 29
of Amendment No. 2 to Form SB-2 we have previously disclosed in our Executive
Compensation section that the options we grant under the Plan may be either
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-statutory stock options
at
the discretion of the Board of Directors and as reflected in the terms of the
written option agreement. The Plan is not a qualified deferred compensation
plan
under Section 401(a) of the Code, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA). We do
not
believe the grants to Dr. White will have any impact on the tax qualified status
of the Plan because the Plan is not a qualified deferred compensation plan
and
the options granted to Dr. White are non-statutory. Accordingly we have no
reason to believe these grants represent an illegal act by the Company.
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.
|
On
page 30
of Amendment No. 2 to Form SB-2 under Executive Compensation we have revised
our
disclosure concerning this modification as follows:
“The
acceleration did not result in the two affected employees (Mr. Umansky and
Mr.
Melkonyan) being able to exercise options that would have otherwise expired
unexercised therefore no change to our original accounting treatment is required
under FIN 44. However if any of the employees terminate their employment prior
to the date they would have otherwise fully vested in the award we will be
required to record compensation expense based on the intrinsic value on the
date
of modification. Because there were a relatively small number of affected
employees, we have no basis for recording an estimate of future terminations
and
accordingly no compensation expense can be recorded until the date of any future
terminations prior to the original vesting date. The compensation expense
associated with the options granted to the two affected non-employee Directors
(Mr. Cerrone and Mr. Tomei), who perform consulting services outside of their
Board duties, was measured using the fair value method in accordance with EITF
96-18. Because these grants were awarded in conjunction with consulting
agreements the fair value was remeasured (“marked to market”) each quarter
during the original vesting (service) period. The acceleration of these options
established the measurement date prior to the original vesting therefore we
expensed the remaining balance of deferred stock based compensation totaling
$3,197,694 during the quarter ended July 31, 2005”
On
page 17
of Amendment No. 2 to Form SB-2 we have added disclosure to our Critical
Accounting Policies section of MD&A concerning this
modification
On
page
F-23 of Amendment No. 2 to Form SB-2 we have also included disclosure in
Footnote 3, Summary of Significant Accounting Policies of our interim financial
statements as of October 31, 2005. We have restated our July 31, 2005 financial
statements recording stock based compensation in accordance with EITF 96-18,
expensing the remaining balance of deferred stock based compensation as of
the
date of the modification for Mr. Cerrone and Dr. Tomei.
| 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.
|
On
page 24
of Amendment No. 2 to Form SB-2 we have revised the biographical information
of
Mr. Cerrone to include the services performed by Mr. Cerrone 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.
|
These
options are not subject to shareholder approval. Please see our response to
comment 35 above concerning our revised accounting treatment of Mr. Cerrone’s
1,050,000 option grant.
| 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. |
Please
see
our response to Comment 35 above concerning our revised accounting treatment
of
Dr. Tomei’s 1,012,500 option grant in 2004.
|
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.
|
|
We
have restated our July 31, 2005 financial statements recording stock
based
compensation in accordance with EITF 96-18, for option grants to
Mr.
Cerrone and Dr. Tomei. Please also see our response to comment 35
above.
|
|
On
page F-23 of Amendment No. 2 to Form SB-2 we have added appropriate
disclosure in Footnote 3, Summary of Significant Accounting Policies,
of
our interim financial statements as of October 31,
2005.
|
| 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.
|
On
page
F-27 of Amendment No. 2 to Form SB-2 we have added appropriate disclosure
regarding the signing bonus and performance bonus provisions of Mr. Cerrone’s
agreement in
Footnote 5 of our interim financial statements as of October 31,
2005.
|
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.
|
|
On
page F-25 of Amendment No. 2 to Form SB-2 we have added disclosure
in
Footnote 4 to our October 31, 2005 financial
statements.
|
| 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.
|
On
page
F-25 of Amendment No. 2 to Form SB-2 we have added the following disclosure
in
Footnote 4 to our October 31, 2005 financial statements:
As
per
EITF 00-27 “Application of Issue 98-5 to Certain Convertible Instruments” the
Company evaluated the preferred stock transaction and accordingly found that
there was an associated beneficial conversion feature. The cash purchase and
existing conversion were found to contain a beneficial conversion feature
totaling $322,209 and the preferred stock was further discounted by this amount.
The beneficial conversion amount was then accreted back to the preferred stock
in accordance with the conversion provision which allowed for 100% to be
converted immediately. The total amount accreted back to the preferred and
charged to dividends was $322,209 as of July 31, 2005
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.
|
On
page
II-2 of Amendment No. 2 to Form SB-2 we have identified the law firm, the value
of the shares issued and the basis for and facts supporting an exemption from
registration. We do not believe the issuance of such shares implicates the
disclosure requirements of Item 509 of Regulation S-B because the value of
the
shares issued is under $50,000.
| 44. |
Identify
the “certain investors” of the July 13, 2005 private
placement.
|
On
page
II-2 of Amendment No. 2 to Form SB-2 we have identified the investors from
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.
|
On
pages
4, 12, 37 and II-3 of Amendment No. 2 to Form SB-2, we have disclosed Jeannine
Karklins as a promoter of a predecessor of the Company.
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.
|
Exhibit
10.6 is incorporated by reference from Exhibit 2.5 to the Company’s Current
Report on Form 8-K filed on July 19, 2004. Exhibit 10.8 is incorporated by
reference from Exhibit 99.2 to the Form 8-K filed July 19, 2004. Exhibit
10.5 is incorporated by reference from Exhibit 2.4 to the Form 8-K filed July
19, 2004. Unfortunately Exhibit 2.4 to the Form 8-K filed July 19, 2004 is
listed on EDGAR as Exhibit 24. When you click into Exhibit 24, the header of
such document says Exhibit 2.4. We believe there is limited confusion regarding
this issue because investors clicking into the Form 8-K filed July 19, 2004
will
see the list of exhibits and Exhibit 24 falls between Exhibit 2.3 and Exhibit
2.5.
34
Act Reports
Form
l0-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).
|
On
page 19
of Amendment No. 2 to Form 10-KSB we have revised the Controls and Procedures
paragraph to disclose that our officers
concluded that our disclosure controls and procedures are also effective to
ensure that information required to be disclosed in the reports that we file
or
submit under the Exchange Act is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosure.
| 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.
|
We
have
amended our Form 10-KSB for the year ended January 31, 2005 and all subsequent
periodic reports in accordance with relevant comments set forth
above.
| Very truly yours, | |
| /s/ Jeffrey J. Fessler | |
| Jeffrey J. Fessler |