Mail Stop 3-9 January 12, 2005
Mr. David Parker
Chief Executive Officer
eRXSYS, Inc.
18662 MacArthur Blvd. #200-15
Irvine, CA 92162
Re: eRXSYS, Inc.
Registration Statement on Form SB-2
Filed December 15, 2004
File Number 333-121288
Dear Mr. Parker:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. Please revise the financial information to include the one
month
transition period ended December 31, 2003.
2. Please ensure to include a currently-dated consent of the
independent accountants in the amended version of this filing,
accordance with Rule 302 of Regulation S-T. Additionally, please
be
mindful of the requirements to update your financial statements
and
related disclosures in accordance with Rule 310(g) of Regulation
S-B.
Registration Statement Cover Page
3. You should calculate the fee for the registration of the shares
underlying the warrants using the $.60 exercise price. Please
revise.
Prospectus Cover Page
4. Please disclose your stock trading symbol on the cover page.
Summary Information, page 4
5. To make the disclosure more complete, balanced and specific,
you
should state in this subsection that the company:
* has curtailed its development of new pharmacies for 60 to 90
days;
* has a working capital deficit;
* needs to raise additional cash to continue its operations; and
* auditors have raised substantial doubt that the Company will
have
the ability to continue as a going concern.
6. Please clarify that the four pharmacies you list at the bottom
of
the page are not fully owned by you.
Risk Factors, page 6
7. Please delete the references to your current and periodic
reports.
All material information regarding the offering and your company
must
be included in this prospectus.
8. You state, "The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not
currently known to us or that we currently deem immaterial may
also
adversely affect our business, financial condition, and operating
results." Please expand the disclosure to describe the material
risks to investors and delete these two sentences.
If we do not obtain additional financing, our business will fail,
page 6
9. You state that your business plan calls for different types of
ongoing expenses and that cash on hand will be sufficient until
December 31, 2004. Please state how much these expenses are
currently anticipated to be and how you are continuing operations,
given that 2004 is over and you have not raised additional funds.
10. Create a new risk following this one regarding your inability
to
raise additional funds, and explain to potential investors that
they
could and likely will suffer significant dilution if you are in
fact
able to raise additional money.
Because we have only recently commenced business operations, we
expect to incur operating losses for the foreseeable future, page
6
11. You should state here that none of your pharmacies is
currently
or has ever been cash flow positive.
12. Quantify your current deficit here, define what that term
means,
and explain how it differs from profitability.
If we are unable to generate significant revenues from our
operations, our business will fail, page 7
13. This risk factor is very generic, in that it could apply to
any
start-up or early-stage company. Please explain in more detail
and
quantify this risk.
Because our auditor has raised substantial doubt about our ability
to
continue as a going concern, our business has a high risk of
failure,
page 7
14. Explain in this risk factor what it means to have been issued
a
going concern opinion and why the risk to investors is
significant.
If we are unable to retain or motivate key personnel or hire
qualified personnel, we may not be able to grow effectively and
execute our business plan, page 7
15. Please state whether or not you have "key man" or similar
insurance policies on Messrs. Parker and LaSota. Please disclose
whether or not you have employment agreements with your key
personnel.
We will not be able to compete effectively if we are unable to
attract, hire and retain qualified pharmacists, page 8
16. Please describe any problems you have had recruiting
pharmacists
in the past.
17. State the current number pharmacists you employ.
If we are unable to successfully manage growth, our business and
operating results could be harmed, page 8
18. This risk factor is very generic and may not apply to your
company at all given that you have curtailed your development
plans.
Please explain in more detail and quantify this risk or delete
this
risk factor.
If competition increases, our ability to attract and retain
customers
or expand our business could be impaired, page 8
19. Please explain in this risk factor why the competition in your
industry is intense and describe the key competitive factors. Are
there low barriers to entry?
20. Please name the companies which are your most direct
competitors
and describe the risk that you may not compete with those
companies
effectively.
If we have difficulty adapting our service to accommodate any
concerns of physicians and technological advances, our business
could
be harmed, page 9
21. You state that your business plan calls for you to continually
assess the technology you utilize and improve your efficiency by
continuously evaluating and implementing the most user-friendly
technology. In MD&A, discuss the associated costs the affect this
could have on liquidity.
Because we are dependent on one drug vendor to supply 94% of
our
inventory, there is an
Increased risk that our business could be harmed if our
relationship with this vendor is
terminated, page 10
The use of "either" in the second line of the risk factor
discussion
suggests you have only two vendors for your entire inventory.
Please
revise to clarify.
Selling Security Holders, page 14
22. Please identify the person or persons who have voting or
investment control over the securities that the various selling-
stockholder entities own.
23. We note that selling security holders may distribute shares to
their partners. Please revise your disclosure to confirm that
these
unidentified selling security holders will be identified in pre-
effective or post-effective amendment(s) or prospectus
supplement(s),
as applicable. Normally, absent circumstances indicating that the
change is material, revisions in identified security holders may
be
reflected by the filing of a Rule 424 (b) prospectus supplement
describing the change and setting forth the information required
by
Item 507 of Regulation S-K. Of course, this assumes the change
does
not involve increasing the number of shares or dollar amount
registered, or include securities from a transaction other than
the
one to which the original filing related. Please note that the
ability to reflect changes in selling security holders by Rule 424
does not permit the names of known selling security holders to be
omitted from the original filing.
24. We note that some of the selling security holders may be
broker-
dealers. If these entities obtained these securities other than
as
compensation for underwriting services, then they will be deemed
to
be underwriters under the Securities Act. In that case, please
revise your disclosure to include any such parties as underwriters
in
the "plan of distribution" section and other sections of the
prospectus as appropriate.
25. If any of the selling security holders are affiliates of
broker-
dealers, they should be so identified. In addition, please revise
your disclosure to include the following representations:
* The selling security holder purchased in the ordinary course of
business; and
* At the time of the purchase, the selling security holder had no
agreements or understanding to distribute the securities.
If you are unable to make these statements in the prospectus,
please
revise the prospectus to state the seller is an underwriter.
Legal Proceedings, page 19
26. We note your dispute with the former employee that is being
litigated in the California Superior Court. Please disclose the
amount of the relief being sought, including the amount of
"additional compensation and stock issuances."
Directors, Executive Officers..., page 20
27. In Mr. Parker`s biography, please state the various types of
"consulting" he did during the mentioned periods. Also, please
briefly describe the business of RxSystems.
28. Please provide the disclosure required by Item 401 of
Regulation
S-B concerning Dr. Carroll, specifically what he has done for the
past five years.
Interests of Named Experts and Counsel, pages 25-26
29. Please revise this discussion to reference your former
accountants and the reliance on their report.
Description of Business, page 26
30. Please file the license agreement with Safescripts as an
exhibit
to the registration statement and disclose the total amount that
is
due currently under that agreement.
31. Please file the agreements with TPG and TAPG as exhibits to
the
registration statement. You should also file the
assignment/agreements with RxSystems and related agreements with
Mr.
Parker.
32. You state the amounts that your joint venture partners
contributed to build out the various pharmacies you mention.
Disclose how much the company contributed to the building of these
pharmacies.
33. Provide support for your assertion that a growing number of
pharmacies refuse to stock or dispense prescription narcotics.
34. Please expand the discussion to provide additional information
concerning your business operations. For example, how do
physicians
participate? Are there specific costs and fees and, if so, how
are
these expenses allocated? Is specific equipment required? Is
specific software required? How many physicians currently
participate? Has the level of physician participation increased
and,
if so, quantify the increase.
Principle Suppliers, page 30
35. You state that you "currently purchase 94% of our inventory of
prescription drugs from one wholesale drug vendor." This
statement
appears to contradict what you disclose on page F-11. Please
clarify
to which period the discussion of 94% relates.
Market for our Products and Services, page 30
36. Please disclose the number of physicians to whom you have
supplied e-scripting technology who have used the technology to
write
prescriptions in the last 90 days.
37. Disclose whether or not and how you generate revenue from
these
physicians. Do they pay you to use the technology? Do you pay
them?
Competition, page 30
38. In the first complete paragraph on page 31, you state your
pharmacies "exclusively dispense pharmaceutical products to
patients
who require medication for chronic pain management..." The
discussion in the summary on page 4 indicates you specialize in
pain
medication and that you do not keep non-prescription drugs in
inventory. Please clarify whether and the extent to which you
fill
prescriptions that are unrelated to chronic pain management.
Existing and Probable Government Regulation, page 32
39. Much of this discussion is generic, in that it could apply to
any
company in your industry. Please make the disclosure more
specific
to your company.
40. Please state whether or not you are currently in compliance
with
each of the laws, rules and regulations you mention in this
section.
Also, describe any incidence of noncompliance over the past three
years.
OBRA 1990, page 35
41. We note your reference to California Senate Bill #151. Please
tell us supplementally whether the bill specifically provides that
the generation of a hard copy of an electronic prescription by the
pharmacy satisfies the requirement that Class 2 substances can be
dispensed only against a hard copy prescription. The language
could
be interpreted to require a hard copy from the physician prior to
dispensing the medication.
Employees, page 36
42. Formulate meaningfully titled employee functional categories,
such as sales and marketing, administrative, etc., and disclose
how
many of your employees work in each of these categories.
Plan of Operation, page 36
43. You state that it is the board of director`s and executive
management`s belief that all four of your stores are currently not
operating at their full potential. Please explain why this is the
case. Is it because of poor physician adoption of your
technology?
Pricing? Please expand the disclosure to explain.
44. Please expand the risk factors section to discuss the risks
associated with your evaluation and restructuring period. In this
new risk factor, you should mention that you may have to close
some
of the existing pharmacy locations. You should also mention the
time
gap between inventory replenishing and accounts receivable
collection
and explain that how this could negatively affect your liquidity,
financial condition and increase your losses and impede revenue
generation going forward.
45. Where you compare the results of operations from one period to
another, you should more specifically reference the factors that
contributed to the change from period to period. For example,
rather
than merely stating that sales increased, discuss the reasons for
the
increases. Revise the discussion to include the reasons the
various
line items of your financial statements changed and better explain
the reasons for the changes from period to period. Also, identify
any known trends. This comment also applies to future filings
which
contain MD&A.
46. Please revise this discussion to include a comparative
discussion
for the three and nine months ended September 30, 2004 and 2003.
Also revise the discussion to include a discussion of the two
latest
fiscal years. Refer to Item 303(b) (1) and (2) of Regulation S-B.
47. We note your present locations and locations for your next
four
pharmacies. Please expand the discussion to explain the need and
purpose of your regional office in Texas where you have no present
or
planned activities. We may have additional comments.
48. Please expand the discussion concerning the Medi-Cal
application
process to indicate when your application(s) was submitted, the
approximate length of time required to complete the process, and
your
current stage in the application approval process.
49. Please expand the discussion to indicate when specifically
CalOptima placed the moratorium on additional suppliers in Orange
County.
Liquidity and Capital Resources, page 40
50. Please expand your discussion to address material changes in
the
underlying drivers including the specific inflows and outflows
generated, rather than merely describing items identified on the
face
of the statement of cash flows. Consistent with Section IV of
Financial Reporting Release 72, your discussion should focus on
the
primary drivers of and other material factors necessary to an
understanding of the company`s cash flows and the indicative value
of
historical cash flows. Where there has been material variability
in
historical cash flows, focus on the underlying reasons for the
changes, as well as on the reasonably likely impact on future cash
flows and cash management decisions.
Critical Accounting Policies, pages 41-43
51. Please note that Critical Accounting Polices should
supplement,
not duplicate, the description of accounting policies that are
disclosed in the notes to the financial statements. Please revise
your critical accounting policies to disclose the uncertainties
involved in applying the principle and discuss the variability
that
is reasonably likely to result from the application. See Release
33-
8350.
Summary Compensation Table, page 48
52. The summary compensation table should disclose executive
compensation for the last completed fiscal year. See Item 402(b)
of
Regulation S-B. Please revise the table accordingly.
Financial Statements - November 30, 2003
Independent Auditors` Reports, pages F-2 - F-3
53. Please revise the audit reports to make reference to the
standards of the Public Company Oversight Board of the United
States
as the basis for the audits performed as the reports have been
reissued subsequent to the issuance of PCAOB Auditing Standard No.
1.
Statement of Cash Flows, pg. F-7
54. Please revise your statement of cash flows to ensure that your
ending cash balance on November 30, 2002 agrees to your beginning
cash balance on December 1, 2002.
55. It is unclear based on the information provided exactly what
the
caption "Minority interest" represents. Please revise this
caption
to include a more detailed description that allows investors to
clearly understand what these amounts represent.
Notes to Financial Statements
1. Organization
Organization and Nature of Operations, page F-8
56. Please revise your disclosure to include a more robust
discussion
of the reasons for consolidating these joint ventures. At a
minimum
include the following information:
a) Explain the basis under GAAP for consolidating the joint
venture.
b) Elaborate in detail on the rights of the minority owner.
Please disclose if the minority owners have substantive rights
under
the agreements or under law that may preclude consolidation of
this
entity. Include any references to the applicable authoritative
literature upon which management relied to us in the response.
2. Summary of Significant Accounting Policies
Inventory, page F-13
57. It appears that inventory is significant amount of your total
assets. As such, please advise us, and disclose in your filing,
what
Management`s policy is in regards to slow-moving and obsolete
inventory. In particular, please address the recoverability of
recorded amounts of inventory in light of your history of minimal
sales.
Intangible Assets, page F-15
58. Please revise this disclosure to include all of the applicable
disclosures required by paragraphs 44 and 45 of SFAS 142, i.e.
useful
life determination, accumulated amortization and amortization
expense
for the periods presented, etc.
Revenue Recognition, page F-15
59. It is unclear exactly why the company feels that the cash
method
is the most appropriate revenue recognition method related to its
operations. Please clarify to us and revise the revenue
recognition
disclosure to explain why the receipt of cash is the most
appropriate
point in time wherein the earnings process is complete. Please
formulate this response to specifically address how the revenue
recognized and deferred meets all four criteria in SAB 104 in the
response. Specifically explain why the company is unable to
determine the adjustment for sales returns and the contractual
allowance when it appears that the information should be known
based
on the payment agreements with the various insurance and
governmental
entities.
4. Intangible Assets, page F-21
60. Please clarify in this disclosure how management determined
the
fair value assigned to the stock that the company issued to settle
a
portion of the debt.
61. Please explain to us and disclose the business reasons for
paying
$3.0 million for license rights that were apparently valued at $0.
6. Notes Payable to Related Party and Stockholders, page F-22
62. Refer your disclosure of $370,000 note payable related to the
acquisition of the license ("Note B"). You state that the monthly
installment payments are scheduled to begin in January 2004.
Please
clarify in the disclosures on page 44 and page F-44 the timing of
the
repayment of this note.
7. Income Taxes, pagers F-23 - F-24
63. We note that the company only presents one deferred tax asset,
"Net Operating Losses," that is fully reserved. Please explain to
us
why the company does not have any other tax assets or liabilities.
12. Significant Fourth Quarter Adjustments, page F-29
64. Please explain to us the reason and support under GAAP for
reversing all of the amortization related to the intangible asset.
Financial Statements - September 30, 2004
Condensed Consolidated Statements of Cash Flows, pg. F-34
65. We note that depreciation and amortization of property and
equipment for the nine months ended September 30, 2003 was
$82,368.
However, for the year ended November 30, 2003, you disclose that
depreciation and amortization for the year of $4,022. Please
provide
to us a reconciliation of the amounts or revise accordingly.
Notes to Condensed Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Basic and Diluted Loss per Common Share, page F-41
66. You make the assertion here that "there were no dilutive
potential common shares" at the dates presented. This appears to
contradict the disclosures elsewhere that seem to indicate that
the
company issued warrants and options that would b potentially
dilutive. Please revise or advise.
3. Intangible Assets, page F-43
67. Please provide to us a more detailed discussion related to the
appropriateness of the timing of the impairment of this intangible
asset. Include specifically when each of the items described as
contributing factors was identified.
5. Equity Transactions, pages F-44 - F-45
68. Please include a discussion of the issuance of common stock
and
warrants in a private placement that are being registered.
Include a
discussion of the important terms of the warrants such as the call
option described on page 25 in this discussion.
Changes in and Disagreements with Accountants, page 51
69. Please revise this disclosure to include all of the
information
required by Item 304 of Regulation S-B.
Item 26. Recent Sales of Unregistered Securities, pages 53-55
70. Please clarify in the instances where warrants were issued in
connection with restricted shares the amount of compensation
recorded
related to the warrant issuances. Further consider the need to
include a discussion of each of these issuances in the notes to
the
interim financial statements as it appears that only certain
issuances are discussed there.
71. For each transaction mentioned, disclose the number of
purchasers
and whether or not they were accredited or unaccredited.
Signatures
72. Please have your principal accounting officer or controller
sign
each amendment to the registration statement and note who that
person
is.
* * *
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 urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
? should the Commission or the staff, acting pursuant to
delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
? the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
? the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
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.
You may contact Tabatha Akins at (202) 824-5547 or James
Atkinson at (202) 942-2826 if you have questions regarding
comments
on the financial statements and related matters. Please contact
Michael Reedich at (202) 942-1815 or me at (202) 942-1840 with any
other questions.
Sincerely,
Jeffrey Riedler
Assistant Director
cc: Chad Wiener
Cane & Associates
3273 E. Warm Springs Road
Las Vegas, NV 89120
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