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1.
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Please
provide us with a more detailed description of the nature of the
accounting errors underlying the conclusion that your financial statements
for the year ended December 31, 2008 can no longer be relied upon and
should be restated. In addition, please tell us: (i) how you
originally valued and accounted for the transactions; (ii) the change in
valuation methodology and/or accounting to correct the accounting errors;
and (iii) the authoritative literature that supports your revised
accounting treatment. Further, please tell us why the
accounting errors did not have an effect on your interim financial
statements for the each of the quarters in fiscal years 2008 and 2009
reported on Form 10-Q, and why those previously issued financial
statements can still be relied upon. Finally, you should
clarify the nature of the accounting errors in an
amendment.
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A.
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Beneficial conversion
feature. The beneficial conversion feature relates to
the convertible debenture disclosed in our Form 8-K dated September 22,
2008. Originally, the Company calculated the beneficial
conversion feature using a Black-Scholes methodology. However,
based on EITF 98-5, that methodology was not correct (emphasis added and
footnotes deleted):
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B.
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Stock option
expense. Relating to the options granted in the fourth
quarter of 2008, the Company originally did not follow certain provisions
of SAB 107 and SFAS 123r. Based on the accounting guidance, the
stock based compensation was recalculated using revised Black-Scholes
inputs for the spot price, expected term, and volatility. The
result was an increase to stock option expense of $129,912 (included in
General & Administrative expenses on the statement of operations) and
an increase to paid in capital.
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As reported
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Adjustments
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Corrected
Amount
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||||||||||
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Consolidated
Balance Sheet - September 30, 2008:
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Convertible
Notes Payable, net
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$ | 18,686 | $ | 240,000 | $ | 258,686 | ||||||
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Total
Liabilities
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990,029 | 240,000 | 1,230,029 | |||||||||
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Additional
Paid in Capital
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13,799,675 | (240,000 | ) | 13,559,675 | ||||||||
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Accumulated
Deficit
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(14,065,205 | ) | (14,065,205 | ) | ||||||||
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Total
Stockholders’ Deficit
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(252,223 | ) | (240,000 | ) | (492,223 | ) | ||||||
| As reported | Adjustments | Corrected Amount | ||||||||||
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Consolidated
Balance Sheet - March 31, 2009:
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Convertible
Notes Payable, net
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$ | 387,777 | $ | 551,745 | $ | 939,522 | ||||||
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Total
Liabilities
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1,399,924 | 551,745 | 1,951,669 | |||||||||
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Additional
Paid in Capital
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14,728,057 | (410,088 | ) | 14,317,969 | ||||||||
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Accumulated
Deficit
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(15,494,179 | ) | (141,657 | ) | (15,635,836 | ) | ||||||
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Total
Stockholders’ Deficit
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(660,194 | ) | (551,745 | ) | (1,211,939 | ) | ||||||
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Consolidated
Balance Sheet – June 30, 2009:
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Convertible
Notes Payable, net
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$ | 557,777 | $ | 551,745 | $ | 1,109,522 | ||||||
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Total
Liabilities
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1,871,467 | 551,745 | 2,423,213 | |||||||||
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Additional
Paid in Capital
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14,976,865 | (410,088 | ) | 14,566,777 | ||||||||
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Accumulated
Deficit
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(15,988,631 | ) | (141,657 | ) | (16,130,288 | ) | ||||||
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Total
Stockholders’ Deficit
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(996,901 | ) | (551,745 | ) | (1,548,646 | ) | ||||||
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2.
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We
note your plans to include restated financial statements in the
forthcoming Form 10-K for the fiscal year ended December 31, 2009 that is
expected to be filed in March 2010. Since the filing of that
Form 10-K is not imminent you should amend Form 10-K filed March 26, 2009
as soon as practicable to provide the restated financial
statements. In that regard, since the Public Company Accounting
Oversight Board (PCAOB) revoked the registration of Moore &
Associates, Chartered (Moore) on August 27, 2009, you may not include
Moore’s audit report in the amended filing and you will need to have a
firm that is registered with the PCAOB re-audit all periods
presented. In the amendment, please describe the effect of the
restatement on your conclusions regarding the effectiveness of your
disclosure controls and procedures and internal control over financial
reporting at the end of the year. If management concludes that
your internal control over financial reporting and disclosure controls and
procedure are effective despite the restatement, describe the basis for
the conclusions. Refer to Items 307 and 308T of Regulation
S-K.
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A.
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Materiality: FASB
Concepts Statement No. 2, Qualitative Characteristics of
Accounting Information, indicates that materiality determinations
are based on whether “it is probable that the judgment of a reasonable
person relying upon the report would have been changed or influenced by the inclusion or correction
of the item” (emphasis
added).
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i.
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The
adjustments are of a non-cash
nature.
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ii.
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Working
capital is not impacted.
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iii.
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The
Company’s 2008 net loss of $529,500 was already significant before this
correction. As restated, the net loss would be
$671,157.
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iv.
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There
is only a nominal impact to the loss per share. The restated
loss per share would be $0.063, as compared to $0.049 in the 2008
financial statements as filed.
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v.
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The
Company’s 2008 liquidity factors were not materially
changed.
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B.
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Timing: The
re-audit of 2008 is in the completion stage, and will be completed in
connection with the 2009 audit. If we were to undertake an
amended filing of the 2008 Form 10-K, our auditors would be required to
opine on our year ended December 31, 2007, in addition to
2008. We estimate that we would not be able to prepare an
amended 2008 Form 10-K until late February 2010, as a result of the normal
due course that would be required in re-auditing 2007. This
would delay our 2009 Form 10-K and we do not believe it would be in the
best interest of our investors and the general public to delay that filing
in order to present re-audited 2007 information which is now less relevant
than the upcoming 2009 information. For this reason, we advise
that the 2009 Form 10-K is imminent, since any other alternative would
delay this filing.
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C.
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Amended Form 8-K Item
4.02: We propose that we amend our 8-K filed on November
20, 2009, to include a summary of the adjustments as well as the restated
2008 balance sheet, statement of operations, statement of stockholders’
equity (deficit), and statement of cash flows. This will
provide our investors and the general public with the relevant information
that we currently have available.
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·
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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·
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
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·
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the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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