January 4, 2006
VIA EDGAR AND OVERNIGHT MAIL
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. Amendment No. 3 to
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 Amendment No. 3 to the Registration Statement on Form SB-2,
Registration No. 333 - 126315, filed by the company with the Securities and
Exchange Commission on December 12, 2005. The company received comments to the
registration statement from the SEC by means of a letter faxed to the company on
December 22, 2005.
Please find enclosed Amendment No. 4 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 provided additional disclosure in this
letter subsequent to its responses to each of the comments to assist you in
reviewing additional changes reflected in Amendment No. 4 to the Registration
Statement on Form SB-2.
Please also note that the company previously submitted a revised
application for confidential treatment to the Office of the Secretary of the SEC
concurrently with the filing of Amendment No. 3 to the Registration Statement on
Form SB-2 for certain of the information contained in the agreements filed as
Exhibits 10.7, 10.8, 10.9, 10.10 and 10.11 to the Registration Statement on Form
SB-2.
We Have a History of Operating Losses and Expect Losses to Continue into the
Second Quarter of 2006, page 4
1. Please refer to prior comment 3. Please clarify whether expect to begin
generating net profits for the second quarter period of 2006. Also, the
disclosure appears to conflict with the disclosure on page 30 that you
expect cost of sales to increase, the disclosure on page 31 that you
expect salary expense to increase and the disclosure on page 32 that
you expect professional fees and rent expense to increase.
The company has clarified that it expects to begin generating net
profits by June 30, 2006 and that it expects its fiscal quarter ended
September 30, 2006 to be the first full fiscal quarter for which it
will generate a net profit.
The company has updated the disclosure in MD&A and elsewhere in the
document to reflect the company's current expectations regarding its
operating expenses. The company notes the disclosure under
"Professional Fees" that it expects its professional fees to decrease
substantially over the next 12 months because it has recognized all of
the consulting expense associated with fees paid to its consultants and
advisors for services and because it believes that any stock
compensation expense that it will incur over the next 12 months will be
substantially less in amount than the amount of stock compensation
expense that it incurred during the past 12 months. The company
incurred $1,370,449 in stock compensation expense for the 9 months
ended September 30, 2005 and recognized the remaining $904,219 of
deferred stock compensation expense related to its consultants and
advisors during the quarter ended December 31, 2005.
The company also notes the disclosure under "Common Stock Issued for
Releases" regarding its expectation that it will not incur additional
expense for common stock issued for releases over the next 12 months.
The company incurred $295,100 of expense for common stock issued for
releases during the 9 months ended September 30, 2005.
The company expects decreases in professional fees and expenses for
common stock issued for releases to greatly exceed increases in salary
expense, cost of sales and rent expense over the next 12 months. The
company believes that this overall decrease in its operating expenses
over the next 12 months coupled with the expected increase in its
revenues over the next 12 months is consistent with its disclosures
regarding profitability.
Operational Metrics, page 23
2. Please revise to clarify the degree of alignment of your receipt of
individual member's fees with your obligation to make payment of
related sales commissions. For example, clarify whether marketing
representatives and other agents earn commissions after the initial
sale, such as residual commissions for retained members. If so, please
describe, and explain your reference to a four-week expense recovery
period. In this regard, we note the disclosure in the fourth paragraph
of Note 1a to the financial statements of ongoing commission payments.
Clarify whether you pay commissions on free-trial memberships that do
not convert to paying memberships and whether a minimum member
retention period is required for commission payment to be earned.
Please conform related disclosure at Marketing and Distribution at page
55.
2
The company has revised this section as requested and has conformed the
related disclosure under "--Marketing and Distribution - Independent
Marketing Representatives."
Contractual Obligations, page 38
3. Please refer to prior comment 9 from our November 23, 2005 letter.
Please respond to the following comments:
o Please revise to include agreements to purchase goods or
services that are enforceable and legally binding on you that
specify all significant terms, including fixed or minimum
quantities to be purchased, fixed, minimum or variable price
provisions, and the approximate timing of the transaction as
purchase obligations within your table of contractual
obligations.
o Please disclose material changes outside the ordinary course
of your business in your contractual obligations. We note that
you issued promissory notes in November 2005.
The company's table of contractual obligations includes all material
agreements to purchase goods or services that are enforceable and
legally binding on the company.
The company has reviewed Item 303(a)(5) of Regulation S-K and notes
that Item 303(a)(5) does not require that material changes outside the
ordinary course of business be disclosed in the table of contractual
obligations. In addition, with respect to the promissory notes issued
by the company in November and December 2005, the company reviewed each
of the definitions set forth under Item 303(a)(5)(ii) of Regulation S-K
regarding the types of contractual obligations to be disclosed in the
table and determined that the promissory notes do not fall within any
of the specified categories. Item 303(a)(5) requires that long-term
debt obligations and other long-term liabilities be disclosed in the
table of contractual obligations. However, the promissory notes issued
by the company in November and December 2005 have a maturity date that
is 90 days after the date funds were received by the company and thus,
constitute short-term debt of the company. As a result, the company
believes that its table of contractual obligations complies in all
significant respects with the requirements of Item 303(a)(5) of
Regulation S-K.
The company notes the disclosure of the material terms of the
promissory notes issued in November and December 2005 under "MD&A -
Liquidity and Capital Resources."
Off-Balance Sheet Arrangement, page 36
4. We note that the warrants issued to consultants in 2005 appear to
qualify as off-balance sheet arrangements pursuant to Item
303(c)(2)(iii) of Regulation S-B. Please revise your disclosure to
include a discussion of these warrants, or tell us why you believe that
this disclosure is not required.
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The company believes that the warrants issued to consultants in 2005 do
not qualify as off-balance sheet arrangements pursuant to Item
303(c)(2)(iii) of Regulation S-B. Item 303(c)(2) defines "off-balance
sheet arrangement" as ". . . any transaction, agreement or other
contractual arrangement to which an entity unconsolidated with the
small business issuer is a party, under which the small business issuer
has . . ." one or more specified types of obligations or interests. The
warrants issued to consultants were not issued under an arrangement to
which an entity unconsolidated with the company was a party. The
consulting agreements were between the company and the applicable
consultant exclusively. No other entity unconsolidated with the company
was a party to the consulting agreements or arrangements. As a result,
the company has not revised the disclosure in this section. In making
this determination, the company also reviewed "Current Accounting and
Disclosure Issues in the Division of Corporation Finance" dated
December 1, 2005 and Final Rule 33-8182, "Disclosure in Management's
Discussion and Analysis about Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations."
Our CARExpress Healthcare Solutions, page 43
5. Please refer to prior comment 10 and your response. We reissue the
comment. It appears the "principles" cited in the comment all describe
limitations on healthcare access and utilization within the context of
third-party payers. However, you state on page 50 that your "primary
target customer group..." is persons "who have no health insurance of
any kind." Please tell us, with a view to disclosure, why you appear to
believe that your product would appeal to your target customers because
it addresses these third-party payer matters. It appears, rather, that
potential members that are all-cash payers would not be affected
third-party payments. Further, we note in the fourth bullet point that
even "underinsured" persons with high deductibles would still pay less
for medical services than your members. Please revise or advise.
The company has further revised this section to clarify how the
principles cited are addressed by the company's products.
Principle (i) highlights that many employers do not provide any health
benefits for their employees and many employers that do provide health
benefits have been reducing the scope of the coverage. As a result,
many individuals are uninsured or underinsured. To obtain health
products and services that are not covered by health benefits, these
individuals must either pay the full cost of the products or services
or forego obtaining the products or services. The company's products
assist these individuals in obtaining the health products or services
by making these health products and services available at a discounted
price, thus reducing the individuals' dependence on employers and
insurance companies to cover the cost. The company has further revised
principle (i) and believes that the manner in which this principle is
addressed by the company's products is clear.
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Former principle (iii) (now principle (ii)) highlights that health
products and services must be affordable. The company believes that the
ability of the company's products to make health products and services
more affordable to individuals is clear. This principle also highlights
that the healthcare providers must be paid adequately on a timely
basis. With insurance coverage, doctors and other healthcare providers
must submit claims to insurance companies after the products and
services are performed and wait to receive payment. The company's
products assist these healthcare providers in receiving payment more
quickly since the patient pays the healthcare provider for the products
or services at the time of purchase. The company has further revised
this principle and believes that the manner in which this principle is
addressed by the company's products is clear.
Suppliers, page 53
6. We note the second sentence of the third paragraph of this section.
Please revise this section to discuss the material terms of the
agreements.
The company has revised this paragraph to clarify that it has described
all of the material terms of the agreements in this section.
Selling Security Holders, page 91
7. Please refer to prior comment 20. If applicable, please delete any
shares registered pursuant to the Trident option agreement when the
option expires. Trident did not achieve any of the performance criteria
under the option. As a result, the option is not exercisable into any
shares of common stock. The company has removed all 400,000 shares
underlying the option from the registration statement and has made all
necessary revisions to the registration statement in connection
therewith. The company specifically notes the revised disclosure under
"Marketing and Distribution - Independent Marketing Representatives" as
it relates to the option.
Financial Statements, page F-1
Consolidated Statements of Operations, page F-4
8. Please refer to prior comments 23 and 24 from our November 23, 2005
letter. Selling expenses should generally be included as part of other
operating expenses and not within cost of sales. Refer to Item 5-03 of
Regulation S-X. Please revise or advise.
The company has reviewed Rule 5-03 of Regulation S-X and believes that
its selling expenses are appropriately reflected in its cost of sales.
The selling expenses that the company incurs consist of costs
associated directly or indirectly with the sale of its products and
payments made to others in connection with the sale of its products.
These selling expenses are an integral part of the company's cost of
sales. As a result, the company has included its selling expenses in
its cost of sales in accordance with Rule 5-03.2 of Regulation S-X,
"Costs and Expenses Applicable to Sales and Revenues."
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Note 1. Nature of Organization, F-8
9. We note that you have revised your pro forma stock compensation
disclosure in the annual and interim financial statements as requested
in our prior comment 28. We note that you have disclosed reported
diluted loss per share amounts that differ from your reported basic
loss per share, and the reported diluted per share amounts decrease the
loss per share from the reported basic measure. Pursuant to SFAS 128,
if the calculation of diluted per share amounts results in a per share
amount that is antidilutive, then diluted per share amount reported
would equal the basic per share amount. Please tell us how you have
calculated the reported diluted per share amounts in these disclosures.
The company has revised Note 1j. to its audited financial statements
and Note 1c. to its interim financial statements to clarify that its
reported and pro forma basic earnings per share amounts are equal to
its reported and pro forma diluted earnings per share amounts,
respectively, and to disclose that shares issuable upon the exercise of
stock options have been excluded from the company's calculation of the
diluted per share amounts because they are anti-dilutive in nature. The
company calculated its reported diluted earnings per share amounts by
dividing: (x) the reported net loss for the applicable period by (y)
the sum of the weighted average number of options outstanding during
the applicable period and the weighted average number of shares
outstanding during the applicable period.
Note 7. Equity Transactions, page F-21
10. Please refer to prior comment 29 from our November 23, 2005 letter. One
of the factors considered in estimating expected volatility is
historical volatility of the underlying common stock over the most
recent period that is generally commensurate with the expected
option/warrant life. If the option/warrant being valued is
transferable, it is generally inappropriate to use an expected life
shorter than the contractual term. We have evaluated your response and
believe that the expected volatilities of similar entities along with
your limited historical volatility may provide a more meaningful
volatility measure. In addition, it appears unlikely that you have no
readily comparables entities. In evaluating similarity of entities, you
should consider factors such as industry, stage of life cycle, and
financial leverage. Please refer to the guidance in paragraphs 277 and
285 of SFAS 123, paragraphs A22 and A43 of SFAS 123(R), and Question 6
of SAB Topic 14.D.1, including footnote 64 thereto, and revise the
filing accordingly. Please also refer to Question 3 of SAB Topic 14.D.2
regarding the expected term used in your valuation.
The company acknowledges that expected volatilities of similar entities
may provide a more meaningful volatility measure. The company and its
independent accounting firm each performed an extensive amount of
research searching for similar entities, but were unable to locate any.
The company reviewed the guidance noted and continues to believe that
management's calculation of volatility is the best available
presentation of past and expected future volatility. The company notes
that the volatility calculation is a management function and that
management is responsible to continually update the expected
volatility. The company notes the guidance in paragraph A12 of SFAS
123R which states "...The assumptions used in a fair value measurement
are based on expectations at the time the measurement is made, and
those expectations reflect the information that is available at the
time of measurement. The fair value of those instruments will change
over time as factors used in estimating their fair value subsequently
change, for instance, as share prices fluctuate... Changes in the fair
value of those instruments are a normal economic process to which any
valuable resource is subject and do not indicate that the expectations
on which previous fair value measurements were based were incorrect.
The fair value of those instruments at a single point in time is not a
forecast of what the estimated fair value of those instruments may be
in the future." The company believes that it has appropriately
discharged its responsibility in estimating and measuring the
volatility that was used in the Black-Scholes pricing model.
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The company utilized the weighted-average contractual term of the
options as the expected term in the Black-Scholes pricing model in
accordance with Question 3 of SAB Topic 14.D.2. The company has revised
Note 8 to the audited financial statements and Note 1c. to the interim
financial statements to clarify that the weighted-average contractual
term of the options was used in the Black-Scholes pricing model, and
has revised Note 4 to the interim financial statements to clarify that
the weighted-average contractual term of the warrants was used in the
Black-Scholes pricing model.
Interim Financial Statements, page F-23
Consolidated Statements of Operations, page F-26
11. The cost of stock issued to previous investors for an amendment and
release to their securities purchase agreements would generally be
classified within other non-operating expenses as this item is not an
expense related to your ongoing operating activities. Please revise or
advise.
The company has reclassified the cost of the stock issued to previous
investors for the amendment and release to their securities purchase
agreements from "General and Administrative Expenses" to "Other Income
(Expense)" in its interim financial statements and has revised its MD&A
accordingly.
Note 1. Basis of Financial Statement Presentation, page F-28
12. Please refer to prior comment 27 from our November 23, 2005 letter. We
note from the revised disclosure on page F-28 that you recognize the
shipping and handling fees as services are rendered. Please tell us and
revise to disclose the method and period of amortization for the
shipping and handling fees. That is, you should amortize the fees over
the term of the arrangement or the expected period of performance on a
systematic basis. The revenue recognition period should extend beyond
the initial contractual period if the relationship with the customer is
expected to extend beyond the initial term and the customer continues
to benefit from the payment of the up-front fee. A systematic method
would be on a straight-line basis, unless evidence suggests that
revenue is earned or obligations are fulfilled in a different pattern,
in which case that pattern should be followed. Please refer to SAB
Topic 13.A.3.f.
The company recognizes shipping and handling fees on a straight-line
basis over the initial monthly membership period. The company believes
that it would be inappropriate to recognize the fees over a longer
period of time because, at the end of the initial monthly membership
period, members may elect to either continue the membership for an
additional monthly membership period or cancel the membership. Since
members may cancel the membership at the end of the initial monthly
membership period and are not contractually obligated to continue the
membership for additional monthly membership periods, the company is
unable to estimate what, if any, period beyond the initial contractual
period members are expected to continue to benefit from the payment of
the up-front fee. Accordingly, the company recognizes the fees on a
straight-line basis over the initial monthly membership period. In
making this determination, the company considered SAB Topic 12.A.3.f.
The company has revised Note 1b. to its interim financial statements to
clarify the method by which, and period over which, it recognizes
shipping and handling fees as revenue.
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Note 7. Equity Transactions, page F-38
13. We have reviewed your response to prior comment 31 and note that you
have deleted from the table amounts related to Park Financial, because
you have determined that there is no longer a commitment or contingency
related to Park Financial. Please revise to put these amounts back in
the table due to the fact that the table contains consulting expense
information for the nine months ended September 30, 2005, of which
amounts paid to Park Financial are a part.
The company has revised Note 7 to put the amounts related to Park
Financial back in the table as requested.
Exhibits
14. Please refer to prior comment 34. Regarding Exhibit 10.28, we note
reference in Section 3 to "Exhibit B" (the "Payment Schedule"). This
portion of the contract has still been omitted from the filed document.
This comment also applies to Exhibit 10.31. Please file both these
exhibits in complete form.
The company has filed both of these exhibits in complete form.
15. Exhibit 5.1 must be current as of the date of effectiveness. If the
updating disclaimer in the final paragraph is retained, please refile
this exhibit with current date to coincide with the date of
effectiveness.
The company has refiled this exhibit with the current date.
16. Please file Exhibit 10.35 in its executed form, not as a "form of" document.
The company has filed each of the promissory notes in their executed
form as Exhibits 10.35 through 10.38, respectively.
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Additional Information
Please note that the following additional changes are reflected in
Amendment No. 4 to the Registration Statement on Form SB-2:
1. The company notes that it has updated the Registration Statement in
accordance with the provisions of Regulation S-B to reflect the completion of
its fiscal year ended December 31, 2005.
* * * * *
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
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Alex Soufflas
General Counsel
cc: Thomas A. Jones
Thomas Dyer
Kate Tillan
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