[NATIONAL HEALTH PARTNERS, INC. LETTERHEAD]
September 30, 2005
VIA EDGAR AND OVERNIGHT MAIL
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Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn: Mr. Alan Morris, Esq.
RE: NATIONAL HEALTH PARTNERS, INC. REGISTRATION STATEMENT ON
FORM SB-2, REGISTRATION NO. 333 - 126315
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Dear Mr. Morris:
I am writing to you on behalf of National Health Partners, Inc. in
regards to the Registration Statement on Form SB-2, Registration No. 333 -
126315, filed by the company with the Securities and Exchange Commission on June
30, 2005. The company received comments to the registration statement from the
SEC by means of a letter faxed to the company on July 27, 2005.
Please find enclosed Amendment No. 1 to the Registration Statement on
Form SB-2. In addition, please find below each of the comments provided to the
company by the SEC along with the company's response to each comment. Each
comment is set forth in italics and is numbered to correspond to the numbered
paragraphs in the SEC's comment letter. The company's response to each comment
immediately follows the applicable comment.
Please note that the company has concurrently submitted an application
for confidential treatment to the Office of the Secretary of the SEC for certain
of the information contained in the agreements filed as Exhibits 10.7, 10.8,
10.9, 10.10 and 10.11 to Amendment No. 1 to the Registration Statement on Form
SB-2.
Fee Table
Selling Security Holders, page 56
Plan of Distribution, page 59
1. We note that the company's common stock does not trade on any established
market. Provide that selling shareholders will sell at a specified fixed price
per share until your shares are quoted on the OTC Bulletin Board (or other
specified market) and thereafter at prevailing market prices or at privately
negotiated prices. Revise your prospectus, including your plan of distribution,
accordingly.
The company has added the appropriate disclosure to the cover page of
the prospectus, the prospectus summary and the plan of distribution. The company
has chosen a fixed price of $1.50 per share, which exceeds the $.40 offering
price previously used in the registration statement to calculate the
registration fee. The company has adjusted the registration fee table to reflect
this increase and wired the additional fee to the SEC prior to filing Amendment
No. 1.
The company has added a new section to the registration statement
entitled "Determination of Offering Price" which describes the factors
considered by the company in determining the $1.50 per share offering price.
National Health Partners, Inc., page 1
2. We note in a press release by XRAYMedia.com dated October 23, 2003 that you
apparently operated under the name International Health Partners, Inc. at that
time. Please revise to discuss any former or alternative or trade style names
you used in the past five years.
The company has disclosed its d/b/a of "International Health Partners,
Inc." under "Description of Business - Overview." The company does not operate
under any other trade names.
3. Please expand the appropriate section to discuss in greater detail your
relationship with independent marketing representatives, such as the number of
representatives, the fees paid to them and the percentage of your revenues from
marketing representatives.
The company has provided a detailed discussion of its relationship with
independent marketing representatives under "Description of Business - Marketing
and Distribution - Independent Marketing Representatives." The number of
independent marketing representatives used by the company has been added to this
section, and the amount of fees paid to independent marketing representatives
has been disclosed in this section to the extent practicable. The company has
omitted the percentage of revenues derived from independent marketing
representatives. The company believes that any discussion of such percentages
would be speculative and unreliable as an indicator of the percentage of
revenues the company will derive from independent marketing representatives in
the future because the company has been selling its programs for only a short
period of time and has generated minimal revenues to date.
Risk Factors, page 2
4. Please expand the appropriate risk factor to highlight the going concern
opinion.
The company has highlighted the going concern opinion in the risk
factor entitled "We have a history of losses and expect to continue to incur
losses through the remainder of 2005."
Overview, page 15
5. Please provide us with support for the reference to "a leading national
healthcare savings organization."
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The company believes that it is a "leading national healthcare savings
organization" because the company has over 1 million providers participating in
its CARExpress health savings network and because the company provides a large
number of programs offering a wide range of services, including prescription and
hospital care. Based on the company's internal research, the CARExpress network
is one of the largest health savings networks in the United States and the range
of services provided by the company through the CARExpress network is broader
than those of most of the company's competitors.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 15
Comparison of Three-Month Periods Ended March 31, 2005 and 2004, page 17
6. Please tell us why you only discuss $57,562 of your total change of $111,464
in general and administrative expenses. Please disclose the causes of the other
significant changes, or tell us why additional disclosure is not necessary or
required. Please tell us why you expensed the fiscal 2004 audit fee of $74,232
in the three months ended March 31, 2005, and not within fiscal 2004.
Please note that the company has updated Management's Discussion and
Analysis of Financial Condition and Results of Operations so that the applicable
comparison is between the six-month periods ended June 30, 2005 and 2004. The
company believes that it has described all of the material components of the
change in its general and administrative expenses for these periods. The
remaining portion of the increase in general and administrative expenses that
has not been specifically described in this section is the result of numerous
items that the company believes are immaterial in amount.
The audit fee that accounted for a portion of the increase in
professional fees for the six-month period ended June 30, 2005 was incurred by
the company during the first quarter of 2005 and was comprised primarily of fees
paid to the company's independent accountant for services performed after
December 31, 2004 in connection with the preparation of the company's audited
financial statements as of and for the fiscal years ended December 31, 2004 and
2003. The company's independent accountants did not perform any audit or
audit-related services during 2004.
7. Please revise to discuss the nature of the significant cost elements included
within your cost of sales. Please also discuss the causes of significant changes
in your cost of sales and gross profit for each period presented in your
financial statements. Please note that you should not present separate line
items titled cost of sales and gross profit unless your cost of sales line item
includes all expenses related to your cost of sales. For example, we note that
you exclude all salary expenses and depreciation from your cost of sales and
gross profit. Please tell us how this presentation complies with SAB Topic 11.B.
The company has prepared its unaudited financial statements for the six
months ended June 30, 2005 in conformity with SAB Topic 11.B and has restated
its audited consolidated financial statements so that they now conform with the
requirements of SAB Topic 11.B. The company has added a new section entitled
"Cost of Sales" under "Comparison of Six-Month Periods Ended June 30, 2005 and
2004" and "Comparison of Fiscal Years Ended December 31, 2005 and 2004" to
describe the material components of the company's cost of sales and the reasons
for the changes in cost of sales between the applicable periods.
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8. Please expand the disclosure about commissions received from the sale of
insurance products to discuss, if material, the insurance products.
The company's revenues to date have consisted almost exclusively of
monthly membership fees received from members of the company's CARExpress
membership programs. To date, commissions received from CARExpress membership
programs sold in combination with third-party insurance products have been
negligible. "Revenues" has been amended to disclose that revenues consist almost
exclusively of the monthly membership fees received from members of the
company's CARExpress membership programs, and to disclose that the company
expects to begin generating commissions from the sale of CARExpress membership
programs sold in combination with third-party insurance products over the next
12 months.
The company does not sell insurance products. Please see the company's
response to Comment # 20 for clarification on this point.
General and Administrative Expenses, pages 18 and 19
9. Please discuss the amount of commissions paid during each period, and the
principal factors bearing upon the percentage of revenues represented by
commission costs.
The company did not pay any commissions in 2004. The $3,065 of
commissions paid to marketing representatives, brokers and agents during the 6
months ended June 30, 2005 was immaterial to the company, and thus the company
has not provided a discussion comparing commissions paid during the applicable
6-month periods. The company believes that any discussion of the principal
factors bearing on the percentage of revenues represented by commission costs
would be speculative and unreliable as an indicator of the percentage of
revenues that will be represented by commission costs in the future because the
company has just begun to incur such costs and the amount of such costs is
minimal.
Comparison of Years Ended December 31, 2004 and 2003, page 19
10. We note from your disclosure on page 17 that you derive revenue from two
sources: monthly membership fees and commissions from the sale of insurance
products. Please disclose the extent to which each source contributed to your
revenues in each period presented and discuss the causes of significant changes
in each type of revenue. For membership fees, we note that you sell the
memberships directly or through retailers, outlets, unions and associations.
Please disclose the extent to which each of these sources contributed to your
revenues in the three months ended March 31, 2005 compared to the same period in
2004. Please explain why and how the difference in the source of your revenues
(i.e., direct vs. indirect) impacts your revenues and costs. We note the
significant reduction in your revenues between 2004 and 2003 as a result of a
change in the source of your revenues. Please also quantify to the extent
practicable the amount of revenues derived in each period related to new members
versus recurring revenues from old members. If practicable, quantify the number
of members in each period.
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Please see the company's response to Comment #8 for a discussion of
monthly membership fees and commissions from the sale of insurance products.
The company has added disclosure regarding the amount by which
retailers and outlets, on the one hand, and unions and associations, on the
other hand, contributed to revenues for the applicable periods. The company is
uncertain what impact the difference in the source of revenues is likely to have
on its revenues and costs because the company has only recently begun to
generate revenues and incur costs in connection therewith and because the amount
of such revenues and costs has been minimal to date. The company is unable to
determine the amount of revenues derived in each period from new members versus
recurring revenues from old members because it does not have sufficient
information available to accurately break out revenues in this manner. The
company does not believe it is practicable to quantify the number of members in
each period as the number of members was minimal.
11. Please also tell us why you only discuss $172,001 of your total change of
$328,543 in general and administrative expenses. Please disclose the causes of
the other significant changes, or tell us why additional disclosure is not
necessary or required. Please tell us why you include payroll taxes within
general and administrative expenses and not within salary expense. Due to the
significance of the amount of professional fees incurred in 2004, please revise
your discussion of the causes of significant changes for this item to quantify
each of the factors listed to the extent practicable. Please also disclose in
more detail the nature of the business transactions and the accounting and
marketing activities of January and February 2004 that you discuss in the first
paragraph of page 20.
The company has updated its description of general and administrative
expenses and professional fees and believes that it has described all of the
material components of its general and administrative expenses and professional
fees for these periods. The remaining portion of the increase in general and
administrative expenses and professional fees that has not been specifically
described in this section is the result of numerous items that the company
believes are immaterial in amount. The company has removed payroll taxes from
general and administrative expenses and included payroll taxes in salary
expense. The company has provided additional disclosure regarding the nature of
the business transactions and the accounting and marketing activities of January
and February 2004.
12. Please expand the appropriate section to discuss the services of $874,125
from your chief executive officer and any material offsetting expenses.
The company has provided a description of the services under
"Professional Fees."
Health Savings Industry, page 26
13. Please provide us with support for the references to $1 billion and
$27 billion.
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The company has added support in this section for the references to $1
billion and $27 billion.
Our CARExpress Membership Program, page 27
14. Your website discusses long term care facilities as providers. Please
discuss this aspect of your provider network and member benefit.
The company has added disclosure in this section regarding the
long-term care facilities services that it offers.
15. At an appropriate place please discuss the number of members you have at
relevant benchmark dates. Break down the number by sales channel and plan level.
Discuss your member retention rate.
The company believes that adding the number of members that the company
currently has and has had at other benchmark dates would not be helpful to the
reader due to the minimal number of members that the company currently has and
has had since its inception. In addition, the company believes that any
discussion of the number of members by sales channel and plan level, and any
discussion of member retention rates, would be speculative and unreliable as an
indicator of future member demographics and retention rates due to the lack of
accurate supporting information available to the company to determine such
numbers and rates and the minimal number of members the company currently has
and has had since its inception.
16. Please discuss, if material, how your program would be of interest to
persons enrolled in large publicly-funded health insurance/care programs such as
Medicare, Medicaid and the Veterans Health Administration.
The company's programs would not be applicable for large
publicly-funded health insurance/care programs such as Medicaid, Veteran's
Administration or similar programs since individuals participating in such
programs are typically fully covered for all of their healthcare needs. While
the company's programs could be utilized as a supplement by individuals covered
by Medicare, the company does not target Medicare recipients as prospective
customers. Thus, no disclosure has been added regarding these types of programs.
17. Please discuss how the provider verifies that the membership is currently
valid.
The company has added disclosure regarding how a provider may verify
the validity of an individual's membership status under "Description of Business
- - How CARExpress Works."
18. Please discuss in greater detail your arrangement with your contract
partner, such as identify the contract partner and discuss the material terms of
your agreement with the contract partner.
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The company has amended "Description of Business - How CARExpress
Works" to replace the term "contract partner" with "plan administrator" and
disclose that the current plan administrator is International Med-Care. The
general services performed by International Med-Care in its capacity as plan
administrator are described in this section. The company has discussed the
material terms of its agreement with First Access, Inc., through which we obtain
the services of International Med-Care, in "Description of Business - Suppliers"
and has filed a copy of this agreement as Exhibit 10.9 to the registration
statement.
CARExpress Insurance Programs, page 32
19. Please discuss the material terms of your agreement with National Health
Brokerage Group.
National Health Brokerage Group, Inc. is a wholly-owned subsidiary of
the company and is the company's sole subsidiary. The company has amended
"Description of Business - Products - CARExpress Insurance Programs" to describe
this relationship.
20. The disclosure on page 33 about the insurance products you offer conflicts
with disclosure elsewhere in your document, such as pages 6 and 28, about
insurance. Please advise or revise.
The company has amended "Description of Business - Products -
CARExpress Insurance Programs" to more accurately describe its CARExpress
insurance programs. As amended, this section is now consistent with the
disclosure contained elsewhere in the prospectus.
Suppliers, page 35
21. Please provide a description of the provider services you utilize from each
of your principal suppliers. Also, discuss the material terms of your agreements
with preferred provider organizations.
The company has added to this section a description of the provider
services utilized by its principal suppliers and the material terms of its
agreements with them. A copy of these agreements has been filed as Exhibits
10.7, 10.8, 10.9, 10.10 and 10.11 to the registration statement.
Marketing and Distribution, page 35
22. Please describe what you refer to as "healthcare contacts linked to our
executive officers." Explain the significance of these contacts in securing and
maintaining supplier relationships.
The company has amended the first sentence in this section to provide
that prior to 2004, the company generated sales leads from brokers, agents and
referrals from its executive officers and board of directors and the efforts of
sales professionals. These contacts were not significant in securing and
maintaining supplier relationships that are currently material to the company.
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23. Please describe in greater detail the arrangements you have with retailers
such as commission structure and incentives. Describe the methods they use to
sell your memberships. Provide similar information for unions and associations,
and small business and trade associations.
The company has provided additional disclosure regarding the
arrangements it has with retail chains and outlets, unions and associations, and
small businesses and trade associations, under the applicable subheadings in
this section.
24. Please disclose how small business, trade associations, unions and
associations are compensated for distributing your product.
Please see the company's response to Comment #23.
25. Please identify by name your principal marketing partners.
The company believes that the agreements it has with its principal
marketing partners are not sufficiently material to warrant disclosure of the
parties to these agreements or a discussion of the material terms of the
agreements.
26. Please describe your success with each principal distribution channel to
date.
The company believes that any discussion relating to an estimate of the
success of the company's various distribution channels would be speculative and
unreliable as an indicator of what, if any, success the company may have with
these channels in the future due to the minimal revenues it has generated to
date and the early stage of the company's business.
27. Please revise to describe the "network marketing" operations of your
representatives. We note discussion later of regulation of this business
practice.
The company is not a network marketing organization, nor does it employ
any network marketing representatives. The company has amended the disclosure
under "Description of Business - Marketing and Distribution - Independent
Marketing Representatives" and "Description of Business - Regulatory and
Legislative Issues - Marketing Laws and Regulations," and removed the second
paragraph appearing under "Description of Business - Regulatory and Legislative
Issues - Marketing Laws and Regulations," to clarify its use of independent
marketing representatives.
Customer Service, Training and Support, page 37
28. Please provide us with support for the reference to "superior customer
support."
The company has removed the term "superior" from the phrase "superior
customer support" so that the focus of this section is on the importance of
providing customer support generally and a description of the type of customer
support the company provides.
8
29. Please disclose the number of service agents as of the most recent practical
date.
The company has added disclosure regarding the number of customer
services representatives that it employs on a full-time and part-time basis.
Technology, page 38
30. Please quantify the "substantial investments."
The company has removed the reference to "substantial investments" by
removing the first sentence under "Description of Business - Technology."
31. Please explain the term "genealogy reporting."
The company has removed the reference to "genealogy reporting."
Competition, page 39
32. Please provide a comparative description of products, services, promotional
incentives and prices with your principal competitors.
The company has added a general comparative description of the
products, services, promotional incentives and prices of its principal
competitors to the extent such information is known to the company.
Regulatory and Legislative Issues, page 40
33. Please describe the "current regulations in certain states" that limit your
ability to operate.
The company has amended this section to describe and clarify the
regulations in particular states that may limit the company's ability to
operate.
34. Please describe the "recently enacted or introduced legislation and/or
regulations" that may affect your selling methods. Describe how you will be
affected to the extent practical.
The company has amended this section to clarify that the risk relates
to the possibility that states may in the future enact legislation and/or
regulations that may affect the company's business in a material, adverse
manner.
35. Please expand the first paragraph on page 42 to clarify the reference to
"certain markets" such as which markets and whether such markets are applicable
to your business.
The company has amended this section to clarify that the company does
not employ, nor does it intend to employ, any network marketing personnel, and
that the risks of non-compliance are applicable to the marketing representatives
and the organizations employing them.
9
36. Please clarify why you believe you are not currently required to comply with
HIPAA. Also, clarify the references to "certain of these regulations" and
"certain aspects," such as which regulations and which aspects. In addition,
please tell us why you have not included a risk factor that highlights this
matter.
The company has clarified in this section the reasons why it believes
it is not currently required to comply with HIPAA. In addition, the company has
amended its disclosure under the risk factor entitled "We may become subject to
government regulation much like an insurance company, which may have an adverse
effect on our business" to refer to HIPAA to the extent material.
Employees, page 43
37. Please clarify whether management executives, and call center and other
customer service personnel are included in the total employee count of nine.
The company has provided clarification in this section regarding the
status of its employees.
Properties, page 43
38. Please file material leases as exhibits to the registration statement.
The company has filed a copy of its two leases as Exhibits 10.12 and
10.13, respectively, to the registration statement.
Management, page 44
39. Please expand the appropriate section to clarify the nature and scale of the
company's business operations prior to 2004. For example, the statement of
operation for 2003 shows a total of only $160,000 for all salaries and general
and administrative expenses. Also, expand the disclosure to clarify the nature
and extent of the duties of Mr. Folts and Ms. Bathurst during that period.
The company has provided a more detailed discussion of its background
and operations under "Management's Discussions and Analysis of Financial
Condition and Results of Operations - Overview."
40. Please describe in greater detail the nature and extent of the "financing
and management consulting services" provided by Mr. Daniels from 1998 to 2004.
The company has provided a more detailed discussion in this section of
the financing and management consulting services provided by Mr. Daniels from
1998 to 2004.
10
Security Ownership of Certain Beneficial Owners and Management, page 50
41. Please add a risk factor to highlight the control of the officers and
directors.
The company has added a risk factor entitled "If our executive
officers, directors and principal stockholders choose to act together, they may
be able to control our management and operations, which may prevent us from
taking actions that may be favorable to you" under "Risk Factors - Risks
Associated With Our Stock."
42. Please clarify your relationship with Ronald Westman and Jay Rosen.
The company's relationship with Ronald Westman and Jay Rosen is
summarized under "Selling Security Holders." Please note that Ronald Westman and
Jay Rosen resigned as members of the company's board of directors effective
September 26, 2005.
43. Please disclose the exercise price of the warrants and options.
The company has added disclosure in this section regarding the exercise
price of the warrants and options.
Shares Eligible for Future Sale, page 54
44. Please expand the second paragraph to clarify the number of shares subject
to outstanding warrants and options that will be freely tradable upon exercise.
The company has clarified the number of shares of common stock that
will be freely tradable and the number of shares of common stock underlying
options and warrants that will be freely tradable upon exercise.
45. Please state the warrant expiration date(s) and exercise price(s).
The company has added disclosure to this section regarding the
expiration dates and exercise prices of the warrants being registered under the
subheading "-- Offering Period Restrictions". The company has also described the
expiration dates and exercise prices for all of the outstanding warrants in a
new section of the registration statement entitled "The Offering" and has added
the warrant expiration dates for all outstanding warrants to the disclosure
under "Item 26 - Recent Sales of Unregistered Securities."
46. Disclose any offering period restrictions. For example, we note in Item 26
of the registration statement that the exercisability of some warrants expires
after a fixed period following effectiveness of this registration statement.
The company has added disclosure of the offering period restrictions to
this section under a new subsection entitled "-- Offering Period Restrictions."
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Rule 144, page 54
47. Please clarify the final sentence in this subsection.
The company has clarified the final sentence in this subsection.
Selling Security Holders, page 55
48. Please disclose the transactions in which the registered shares were
acquired by each selling shareholder.
The company has described each of the transactions in which the
registered shares were acquired by the selling shareholders generally under a
new section of the registration statement entitled "The Offering," and has added
a description of the specific transactions in which each selling shareholder
acquired its registered shares under "Selling Security Holders."
49. Please tell us whether any of the selling shareholders are broker-dealers or
affiliates of broker-dealers.
The company has added disclosure in this section of the names of all
selling shareholders that it believes are broker-dealers or affiliates of
broker-dealers.
50. Please describe any position, office or other material relationship that
each selling security holder has had within the past three years with you or any
of your predecessors or affiliates. See Item 507 of Regulation S-B.
The company has described in this section each position, office or
other material relationship that each selling security holder has had with the
company or any of its predecessors or affiliates within the past three years.
Registration Rights, page 55
51. Please file the registration rights agreement, as well as any securities
sale agreements to the extent required by Reg. S-B Item 601(b)(10).
The company has described all registration rights granted to its
shareholders under a new section to the registration statement entitled "The
Offering" and has added disclosure of the registration rights under "Item 26 -
Recent Sales of Unregistered Securities." The company has filed a Form of
Securities Purchase Agreement as Exhibit 10.14 to the registration statement
containing a form of the registration rights granted by the company to
shareholders that participated in the company's unit offerings. The company has
also filed the Securities Purchase Agreement between the company and Ronald F.
Westman as Exhibit 10.15 to the registration statement which relates to Mr.
Westman's purchase of company securities for $720,000 in April 2005.
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Where you can find more information, page 64
52. Please clarify the last paragraph of this section about your listing.
The company has clarified the last paragraph of this section regarding
its listing.
Annual Financial Statements, page F-1
Consolidated Statements of Stockholders' Equity, page F-6
53. Please reconcile the descriptions, number of shares, and related amounts in
2004 to your disclosures of equity transactions on pages 22 and II-2.
The company has revised the disclosure of the number of shares issued
in February and March 2004 in connection with the extinguishment of company debt
and in exchange for services described in the Consolidated Statements of
Stockholders' Equity and "Item 26. Recent Sales of Unregistered Securities." The
618,200 shares appearing under "Common stock issued for extinguishment of debt"
of the Consolidated Statements of Stockholders' Equity are comprised of the
618,200 shares issued in February and March 2004 in connection with the
extinguishment of company debt described under "Item 26. Recent Sales of
Unregistered Securities." The 2,098,250 shares appearing under "Common stock
issued for services" of the Consolidated Statements of Stockholders' Equity are
comprised of 100,000 shares issued to a consultant in February 2004, 1,748,250
shares issued to David M. Daniels in connection with Mr. Daniels accepting his
appointment as our Chief Executive Officer in February 2004, 150,000 shares
issued to consultants in March 2004, and 100,000 shares issued to a consultant
in August 2004, all of which are now separately described under "Item 26. Recent
Sales of Unregistered Securities." The company has omitted the disclosure of the
618,200 shares and 2,098,250 shares, respectively, from the description of the
company's primary sources of capital located under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" because such shares were not issued in capital-raising
transactions and thus, the company did not receive any capital as a result of
the issuance of such shares.
The 5,232,250 shares appearing under "Units issued for cash at an
average price of $0.47 per unit" of the "Consolidated Statements of
Stockholders' Equity" are comprised of 2,777,000 shares issued in the offering
completed in August 2004, 174,000 shares issued in the offering completed in
September 2004, and 2,281,250 shares issued through December 31, 2004 in the
offering completed in February 2005. The company has revised the disclosure of
the offerings completed in September 2004 and February 2005 appearing under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Item 26. Recent Sales of
Unregistered Securities."
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Note 1. Nature of Organization, page F-9
a. Organization and Business Activities, page F-9
54. Please explain to us in more detail the structure of your relationship with
marketing representatives. Tell us the nature and significant terms of these
relationships and any related agreements. Discuss whether or not these
representatives must pay you any initial or ongoing fees as a result of their
relationship to you.
The company has revised Note 1a. to better describe the business
activities that it conducts.
e. Basic Loss Per Share, page F-9
55. We note your disclosure that the Company has excluded 10,724,791 common
stock equivalents for the year ended December 31, 2004. Please revise to discuss
why these shares have been excluded from the computation of basic loss per
share.
The company has revised the financial statements to disclose that the
company excluded the common stock equivalents because of the anti-dilutive
nature of the net loss.
g. Revenue Recognition, page F-11
56. We note that you record revenues upon the receipt of payment. Please tell us
why you believe that this revenue recognition method is appropriate and
consistent with U.S. GAAP. Explain methods of billing, timing of receipt of
payment, and the related timing of the services you provide. Discuss why you
refer to pre-billing revenues and recording a deferral for the amount. We note
no accounts receivable. Please explain the entries you record for this
transaction. Tell us and disclose the nature of any refund obligations, rights
of return, money-back guarantees, etc. and how you account for those obligations
and why. Cite the accounting literature upon which you relied. Discuss how you
considered both the accounting and disclosure requirements of SAB Topic 13.A,
Question 4(a) and why. Reconcile with the disclosures on page 16.
The company has revised Note 1g. to better describe the company's
revenue recognition policy. The company has considered the disclosure
requirements of SAB Topic 13.A, Question 4(a) and believes that its accounting
and disclosures complies with such. The company does not recognize revenue until
all fees are fixed and determinable, meaning that during a period of time when a
customer may cancel, no revenue is recognized.
57. We note from page 36 that you are offering features to encourage new
subscribers to try out CARExpress membership programs, including early
cancellation privileges, refund guarantees and trial periods of free or
discounted membership. Please tell us and disclose the nature of these programs
and how you account for them. Cite the accounting literature upon which you
relied and explain how you applied that literature to your situation. Tell us
the extent to which you offered the programs in the periods presented, including
interim periods in fiscal 2005.
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The company was offering early cancellation privileges and refund
guarantees in 2004 and 2005, and was offering trial periods of free or
discounted memberships in 2005. The company has revised Note 1g. of the audited
consolidated financial statements and added disclosure to Note 1b. to the
unaudited financial statements for the six months ended June 30, 2005 to
disclose the features offered by the company and the manner by which the company
accounted for these features to the extent such features were offered during the
applicable periods. As noted in the company's response to Comment #56, the
company has relied upon the revenue recognition requirements of SAB 101 and has
reviewed the accounting noted in SAB Topic 13.A. The company believes that it
has been consistent in its application.
58. Please tell us and disclose the significant terms of your agreements with
health care providers and how you account for those agreements and why.
The company has added disclosure regarding the significant terms of its
supplier agreements under Note 1a. to the audited financial statements. The
company was not presented with any accounting issues in connection with its
decision to enter into these agreements, and thus has not added any disclosure
regarding the manner by which the agreements were accounted for.
h. Newly Issued Accounting Pronouncements, page F-11
59. Since you are a small business issuer, it appears that you must adopt SFAS
123R as of the beginning of your annual reporting period that begins after
December 15, 2005. Please revise and clarify when you plan to adopt the new
statement. You should clearly describe in MD&A the change in accounting policy
that will be required by Statement 123R in subsequent periods and the reasonably
likely material future effects. See SAB's 74 and 107 and
www.sec.gov/news/press/2005-57.htm.
The company has revised Note 1h. to provide that the company will adopt
SFAS 123R for its fiscal year ended December 31, 2006. The company has described
the change in accounting policy that will be required by SFAS 123R in subsequent
periods under "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Recent Accounting Pronouncements" and has revised the
disclosure to describe when the company will adopt SFAS 123R and the impact it
will have on the company's results of operations for future periods.
k. Fixed Assets, page F-13
60. We note that you have capitalized costs related to your website. We note in
your discussion of results of operations on page 18 that you also expense a
portion of your website development costs. Please tell us how you have
considered the guidance in EITF 00-2 in accounting for your website development
costs.
15
The company followed the provisions of EITF 00-2 in determining what
amounts to capitalize for its website. The company did not capitalize any
portion of the costs incurred in the planning stage. The company only
capitalized the costs of the website once the feasibility of the website was
determined and the appropriate determinations made per EITF 00-2 and SOP 98-1.
All costs of maintenance and upkeep are and will be expenses as they are
incurred.
Note 3. Accrued Expenses and Note 4. Notes Payable, page F-14
61. We note that you have accrued expenses of $75,955 and notes payable of
$80,993 to U.S. Script as of December 31, 2004. Please tell us and disclose the
nature of your relationship with U.S. Script. That is, discuss whether or note
U.S. Script is a related party and the nature of the services, goods, etc.
provided in exchange for the notes and accounts payable.
The company has revised Note 3 to disclose the company's relationship
with U.S. Script.
Note 7. Equity Transactions, page F-16
62. We note that on February 17, 2005 you issued 1.7 million shares of common
stock to your Chief Executive Officer for services rendered, resulting in total
consideration of $874,125. Tell us and revise to disclose the time period in
which the services were rendered and how the amounts are reflected in the
statements of operations.
The company has revised Note 7 to describe that the shares were issued
to David M. Daniels as an incentive for him to accept employment with the
company as its Chief Executive Officer. The value of the incentive is included
in professional fees.
63. Please tell us why the losses on extinguishment of debt of $11,710 and
$13,260 on March 4, 2004 were accounted for as a debit to additional paid-in
capital and show us the accounting entries you made for these transactions. Cite
the accounting literature upon which you relied.
The losses on the extinguishment of debt noted were debited to
additional paid-in capital because the loss was generated in a related-party
transaction. The company credited common stock and additional paid-in capital
for the fair value of the common stock and debited debt for the amount of the
debt. The resulting difference was debited to additional paid-in capital because
the loss was generated in a related-party transaction. The company concluded
that since a gain on the extinguishment of debt with related parties would
typically be credited to additional paid-in capital as opposed to other income
in the income statement, the reverse would be true as well. The company notes
that there is no established trading market for the company's common stock and
that the amount recorded as debits to additional paid-in capital are minimal.
The company has considered by analogy APB 26 footnote 1 which states "...
Moreover, extinguishment transactions between related entities may be in essence
capital transactions."
64. Please disclose the dates that you issued the shares in each of your three
private placements in fiscal 2004. Please disclose the significant terms of the
private placement agreements, including the warrants and any registration rights
and related penalties associated with the stock and underlying warrants. Tell us
and disclose how you are accounting for and valuing the warrants and tell us
why. Cite the accounting literature upon which you relied. See EITF 00-19 and
SFAS 133.
16
The company has revised Note 7 to disclose the dates that it issued
shares in each of the private placements that were initiated in fiscal 2004 and
the significant terms of the private placement agreements.
The company accounted for the private placements as sales of units. The
company has not ascribed any separable, identifiable value to the warrants
because there is no established trading market for the warrants. The units were
sold for cash solely; no services or other consideration was received by the
company. Additionally, the company notes that the warrants have exercise prices
substantially higher than the price per share of the common stock underlying the
units.
The company has reviewed the issues noted in EITF 00-19 and does not
believe that this EITF applies to this transaction. Particularly, EITF 00-19
indicates as follows:
"This Issue applies only to freestanding derivative financial
instruments (for example, forward contracts, options, and warrants).
This Issue applies to security price guarantees or other financial
instruments indexed to, or otherwise based on, the price of the
company's stock that are issued in connection with a purchase business
combination and that are accounted for as contingent consideration only
if those instruments meet the criteria in Issue No. 97-8 , "Accounting
for Contingent Consideration Issued in a Purchase Business
Combination," for recording as part of the cost of the business
acquired in a purchase business combination (see discussion of Issue
97-8 in paragraph 60 of the STATUS section). This Issue does not
address the accounting for either the derivative component or the
financial instrument when the derivative component is embedded in and
not detachable from the financial instrument. This Issue also does not
address the accounting for contracts that are issued to acquire goods
or services from nonemployees when performance has not yet occurred.
However, this Issue applies to contracts issued to acquire goods or
services from nonemployees when performance has occurred. This Issue
does not address the accounting for contracts that are indexed to, and
potentially settled in, the stock of a consolidated subsidiary (see
discussion of Issue No. 00-6, "Accounting for Freestanding Derivative
Financial Instruments Indexed to, and Potentially Settled in, the Stock
of a Consolidated Subsidiary," and Issue No. 00-4, "Majority Owner's
Accounting for a Transaction in the Shares of a Consolidated Subsidiary
and a Derivative Indexed to the Minority Interest in That Subsidiary,"
in paragraphs 64 and 65 of the STATUS section).
17
4. The Task Force observed that, pursuant to and 12(c) of Statement
133, if an embedded derivative is indexed to the reporting entity's own
stock and would be classified in stockholders' equity if it was a
freestanding derivative, that embedded derivative is not considered a
derivative for purposes of Statement 133. The Task Force reached a
consensus that for purposes of evaluating under Statement 133 whether
an embedded derivative indexed to a company's own stock would be
classified in stockholders' equity if freestanding, the requirements of
paragraphs 12-32 of this Issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only
realize the value of the conversion option by exercising the option and
receiving the entire proceeds in a fixed number of shares or the
equivalent amount of cash (at the discretion of the issuer). However,
the Task Force observed that the requirements of paragraphs 12-33 of
this Issue do apply when an issuer is evaluating whether any other
embedded derivative instrument is an equity instrument and thereby
excluded from the scope of Statement 133.
5. The issue is how freestanding contracts that are indexed to, and
potentially settled in, a company's own stock should be classified and
measured by the company."
The company believes that these warrants which are part of the unit sales are
not freestanding, and their realization as an asset, i.e. cash depends upon a
future event which cannot be predicted. The company has allocated the entire
purchase price of the units to the shares of common stock because there is no
indication that the warrants have any intrinsic value. As noted the exercise
prices of the warrants exceed the deemed fair market values of the shares of
common stock which are being sold for cash.
For the reasons noted in the preceding paragraph, the company does not
believe that SFAS 133 is applicable to these unit sales.
Note 8. Stock Options, page F-18
65. We note that you granted 7,015,000 options to your employees, officers and
directors at $0.40 per share in September and December 2004 that fully vested on
the grant date. We also note that you issued common stock in private placements
during 2004 at $0.50 per share and valued common stock issued for services
during this time at $0.50 per share. Since it appears that the exercise price is
below the fair market value of the common stock on the date of grant, please
tell us why you did not record stock compensation expense related to these stock
options.
On September 15, 2004, the company approved a private placement to
issue up to 9,000,000 shares of common stock, 3,000,000 Class A warrants and
3,000,000 Class B warrants, as more fully described in Note 7. The shares and
warrants were sold in units comprised of 3 shares of common stock, 1 Class A
warrant and 1 Class B warrant at a purchase price of $1.20 per unit, or $.40 per
share. The reduction in purchase price from $.50 per share to $.40 per share was
based on a reassessment by management of the fair market value of the company's
common stock at that time. The company granted the 7,015,000 options to its
employees subsequent to September 15, 2004. Thus, the options were issued at an
exercise equal to the then-current fair market value of the company's common
stock and accordingly, the company did not record stock compensation expense
related to these options.
18
66. Please revise the notes to your annual and interim financial statements to
move your stock option pro forma disclosure from this footnote to your summary
of significant accounting policies footnote in accordance with paragraph 45 of
SFAS 123.
The company has revised the notes to its annual and interim financial
statements to move its stock option pro forma disclosure from Note 8 to Note 1j.
in accordance with paragraph 45 of SFAS 123.
March 31, 2005 Financial Statements, page F-21
Review Report of Auditors, page F-21
67. Please request your auditors to include the city and state of issue on their
report. Additionally, we note that the report does not refer to your subsidiary
or consolidated financial statements. As such, please either remove this review
report, or include a review report that addresses your consolidated interim
financial statements and not just the financial information of the parent.
The company has removed the review report.
Consolidated Statements of Cash Flows, page F-25
68. Please tell us why you classified the increase in your certificate of
deposit as net cash used by financing activities.
The company has reclassified the increase in its certificate of deposit
from net cash provided by financing activities to net cash used by operating
activities.
Note 5. Equity Transactions, page F-29
69. Please reconcile the descriptions, number of shares and related amounts and
type of consideration received in 2005 to your disclosures of equity
transactions in Note 7 on page F-31, and pages 22 and II-2. Please reconcile the
disclosures for 2005 on pages 22 and II-2, including your March 2005 offering,
June 2005 offering of 2,587,000 shares and the nature of the consideration
received for the May 2005 offering where you acquired shares of Infinium Labs.
The company has revised the disclosure in Note 5 to state that the
company issued 167,500 shares of common stock for $67,000 in the private
offering approved in September 2004. The 2,448,750 shares sold in this offering
are comprised of the 2,281,250 shares issued in 2004 plus the 167,500 shares
issued in 2005. The company also revised the disclosure in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Item 26. Recent Sales of Unregistered
Securities" to disclose that 2,448,750 shares were sold in the offering.
The company has further revised the disclosure in Note 5 to state that
the company issued 737,500 shares of common stock to previous investors in
exchange for an amendment to the offering documents. This ties to the disclosure
provided in "Item 26. Recent Sales of Unregistered Securities." The company has
omitted disclosure of this offering from the description of the company's
primary sources of capital located under "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" because the shares were not issued in capital-raising transactions
and thus, the company did not receive any capital as a result of the issuance of
such shares.
19
The subsequent event disclosure appearing in Note 7 have been removed
in connection with the company's update of the unaudited financial statements
from the 3 months ended March 31, 2005 to the 6 months ended June 30, 2005. The
updated subsequent event disclosures appear in Note 8.
The company has omitted disclosure of the March 2005 offering to
previous investors in exchange for an amendment of their offering documents and
the June 2005 issuance of 2,587,000 shares to consultants for services rendered
that is provided in revised Note 5 and "Item 26. Recent Sales of Unregistered
Securities" from the description of the company's primary sources of capital
located under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" because the shares were
not issued in capital-raising transactions and thus, the company did not receive
any capital as a result of the issuance of such shares.
The company has revised the disclosure under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" to clarify that the $720,000 of aggregate consideration
consisted of 2,740,000 shares of Infinium Labs.
70. On page II-3 you discuss the issuance of 737,742 common shares, Class A
warrants to acquire 368,871 shares of common stock and Class B warrants to
acquire 368,871 shares of common stock to investors of your 2004 private
placements in exchange for an extension of the date by which you would use your
best efforts to file a registration statement for the securities underlying the
shares and the warrants. Please reconcile with your descriptions of the reason
for issuing the shares on page F-29. Please also tell us why you assigned no
value to these additional shares and cite the accounting literature upon which
you relied. Discuss the significant terms of the agreement with the investors
including any registration rights and penalties associated with the shares and
warrants.
The company has revised the disclosure in Note 5 to its unaudited
financial statements for the 6 months ended June 30, 2005 to clarify the reason
for issuing the shares and the reason no value was assigned to these shares, and
to discuss the significant terms of the agreements with investors. The company
has also revised the disclosure in "Item 26. Recent Sales of Unregistered
Securities." The company believes that the shares issued are deemed to be shares
issued for cash in that the additional shares issued bring down the cash
investing price of the original private placements to be that of the current
private placements. As noted there is no established market for the company's
common stock. The company believes that since these shares are being issued to
the persons who subscribed to the original stock sales for cash, and that no
additional consideration was received in the form of services, that the
valuation is appropriate.
20
Note 6. Stock Options, page F-29
71. We note that you cancelled the vested options that you granted to your
officers and directors in September 2004 to purchase 7,000,000 common shares at
$0.40 per share, and that none of these outstanding options were exercised. We
note that you replaced these options with options to purchase 4,500,000 shares
at $0.40 per share, and that the new options do not fully vest as of the grant
date. Please tell us if you recorded stock compensation expense related to the
modification of the awards in accordance with paragraphs 32-37 of FIN 44.
The company has not recorded any stock compensation expenses related to
the modification of the awards. Paragraphs 23 through 27 of FIN 44 require the
company to remeasure the intrinsic value of the options granted and to recognize
any intrinsic value in excess of the amount measured at the original measurement
date as compensation cost. Upon completing this review, the company concluded
that there is no intrinsic value in excess of the intrinsic value at the
original measurement date. Additionally, the company notes that the vesting
dates were extended rather than accelerated. The company notes that the
modification did not change the value of the options granted, it did however
decrease the vesting time, rather than being fully vested at the date of grant,
the options now vest over a period of time. The company believes that there is
no additional intrinsic value and that the modification to the options did not
add any additional value to the employees. The company has considered paragraphs
32 - 37 and believes that its accounting is appropriate.
Note 7. Subsequent Events, page F-31
72. Please reconcile the following with page II-4:
o The name of the company whose shares you acquired. That is, page F-31
refers to Infiniom Lass, Inc. and page II-4 refers to Infinium Labs, Inc.
o The number of common shares underlying Class A and Class B warrants.
That is, page F-31 refers to the sale of 600,000 units with each unit including
one Class A warrant and one Class B warrant each exercisable into 1.5 shares of
your common stock. Page II-4 refers to Class A and Class B warrants to each
acquire 1,800,000 shares of your common stock.
The description of this transaction now appears under Note 5 of the
unaudited financial statements for the 6 months ended June 30, 2005. The company
has revised the disclosure in Note 5 to clarify that the name of the company is
Infinium Labs, Inc. and to clarify the material terms of the transaction. The
disclosure in Note 5 now ties to the disclosure under "Item 26. Recent Sales of
Unregistered Securities."
73. Please tell us how you have accounted for and valued the sale of the 600,000
units in exchange for the 2.7 million shares of Infinium Labs common stock and
why. Cite the accounting literature upon which you relied. We note that the
price of the stock of Infinium Labs has significantly decreased since May 2005.
Please discuss the ability of the investor to issue the additional shares or
cash under the agreement's make-whole provisions.
21
The company valued the 600,000 units sold by the company under the
securities purchase agreement at $720,000 based on the $1.20 per unit offering
price. The company valued the shares of Infinium Labs received at $720,000 based
on the fair market value of the 2,740,000 shares received on the date of
transaction was entered into and the price protection provisions of the
agreement. The price protection provisions provided that: (i) in the event the
company obtained less than $720,000 from the sale of the Infinium Labs shares,
the investor would pay the difference to the company in cash or additional
shares of Infinium Labs common stock, and (ii) in the event the company obtained
more than $720,000 from the sale of the Infinium Labs shares, the company would
pay the difference to the investor in cash. The company notes that it has
accounted for the sale of 600,000 units as a stock sales for cash. The
transaction is deemed to be an arms length 3rd party transaction which
establishes the fair market value of the transaction. Please note that the
company has fully received the $720,000 of cash from the sale of the units, as
more fully described below in the company's response to this comment. Please
also refer to the subsequent event footnote of the unaudited June 30, 2005
financial statements.
The company originally accounted for the transaction by recording
$1,800 as par value and $718,200 as additional paid-in-capital. As of June 30,
2005, 1,129,425 shares of Infinium Labs had been sold by the company and
1,610,575 shares remained to be sold. On that date, the shares had an adjusted
closing price of $.11 on the OTC Bulletin Board, and were thus valued at
$177,163. The company recorded securities and investments for $177,163, and
reclassified the remaining stock by recording stock subscriptions receivable for
$319,702. The $319,702 was comprised of the original $720,000 purchase price,
less the $223,135 in gross proceeds received by the company from the sale of the
1,129,425 shares, less the $177,163 for the fair market value of the remaining
shares on June 30, 2005.
We completed our sale of all of the shares of Infinium Labs on
September 7, 2005 for aggregate gross proceeds of $320,506. We received the
remaining funds from the investor on Friday, September 16th, and have thus
received the full $720,000 agreed upon by the parties in the securities purchase
agreement.
74. Please disclose the date upon which you sold the 600,000 units. Please also
disclose all the significant terms of the unit, including the warrants. We note
the additional disclosure on page II-4.
The company sold the 600,000 units to the investor on April 12, 2005.
The company has summarized the significant terms of the units and underlying
securities under Note 5 of the unaudited financial statements for the 6 months
ended June 30, 2005.
75. Please tell us and disclose the nature of the consulting services to be
rendered to the company in exchange for the issuance of 2,587,000 shares of your
common stock in June 2005. Discuss the relationship of the company to the person
who will provide the services. Please tell us and disclose how you are
accounting for and valuing these shares and tell us why. Cite the accounting
literature upon which you relied.
22
The company has provided disclosure of the consulting services to be
rendered to the company in exchange for the shares and the methods by which the
shares were accounted for and valued under Note 4 to the unaudited financial
statements for the 6 months ended June 30, 2005. None of the persons that
provided or will be providing the services are related parties of the company.
These shares have been valued at the deemed fair market value of the surrounding
shares of common stock which have been sold for cash or $0.40 per share. The
value of the shares was established and will be amortized over the lives of the
contracts on a straight line basis or as the services are provided to the
company. The company has reviewed the accounting requirements of EITF 96-18 and
SFAS No. 123.
Item 26, page II-2
76. For each of the private placements to multiple investors demonstrate for us
the basis for your claim of Section 4(2) or Rule 506 exemption. For example, how
did you verify that each purchaser was an "accredited investor?"
For each private placement made by the company to multiple investors,
the company evaluated such factors as the nature and amount of the offering, the
type and number of investors involved, and the form of consideration paid by the
investors. For all private placements upon which Rule 506 was relied upon as the
exemption, the company obtained investment representations from each investor in
the securities purchase agreement executed by the investor prior to completing
the sale to the investor to ensure that the investor was an "accredited
investor." A form of the investment representations is set forth in Section 3 of
the Form of Securities Purchase Agreement that has been filed as Exhibit 10.14
to this registration statement. For all private placements upon which Section
4(2) was relied upon as the exemption, the company obtained an executed
investment letter from each investor prior to completing the sale to the
investor to ensure that the investor was an "accredited investor." The
investments representations contained in the investment letters are very similar
to the investment representations contained in the Form of Securities Purchase
Agreement.
77. Please tell us the consideration you gave to possible integration of your
private placement offerings and the effect on your registration exemptions. We
note that several sales occurred over a period of a few months.
The company gave consideration to possible integration issues with each
private placement that it carried out, including such factors as the type of
securities being offered, the nature and amount of the offering, the type and
number of investors involved, and the form of consideration paid by the
investors. In the case of private placements upon which Rule 506 was relied upon
as the exemption, the company reflected in the applicable Form D filed with the
SEC all private placements that it believed may be deemed subject to integration
with the offering to which the Form D related.
78. For transactions not involving cash consideration disclose the basis for
valuing the other consideration, such as consulting services.
23
The company valued such services by determining the amount of cash
consideration that would ordinarily be paid for such services in arms-length
transactions, and then issuing an amount of non-cash consideration that it
believed was equivalent in value to the value of the services rendered, as
adjusted to reflect such factors as the company's desire to pay for such
services in equity so as to retain its minimal cash resources to the extent
possible and the applicable consultant's desire to obtain that amount of equity
necessary to compensate the consultant for the additional risk associated with
receiving equity in a private company in lieu of cash.
Item 27, page II-5
79. Please file all material contracts made within the last two years or to be
performed after the effective date. In this regard we note that you describe
numerous contractual relationships with marketing partners and suppliers. See
Reg. S-B Item 601(b)(10).
The company has filed all contracts made within the last two years or
to be performed after the effective date of the registration statement that it
believes are material to the company.
* * * * *
The company believes that it has adequately responded to the SEC's
comments. Please feel free to contact me by phone at (215) 682-7114 ext. 102 or
by fax at (215) 682-7116 if you have any questions regarding this letter or if
you have any additional comments.
Very truly yours,
/s/ Alex Soufflas
--------------------------
Alex Soufflas
cc: Thomas A. Jones
Thomas Dyer
Michelle Goehlke