Larry A. Cerutti
Direct Dial: (714) 641-3450
E-mail: lcerutti@rutan.com
September 14, 2007
VIA FEDEX AND
EDGAR CORRESPONDENCE
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Russell Mancuso, Esq.
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 6010
100 F Street, N.E.
Washington, D.C. 20549
Re: Strasbaugh
Registration Statement on Form SB-2
Filed on July 23, 2007
File No. 333-144787
-----------------------------------
Dear Mr. Mancuso:
This letter responds to the comments of your letter dated August 20,
2007 relating to Strasbaugh (the "Company"), a copy of which letter is enclosed
for your convenience.
The enclosed clean and marked-to-show-changes copies of Amendment No. 1
to the Company's Registration Statement on Form SB-2, Reg. No. 333-144787 (the
"Registration Statement") contain revisions that are directly in response to
your comments. We have reproduced below in bold font each of your comments set
forth in your letter of August 20, 2007, together with the Company's responses
in regular font immediately following each reproduced comment. The Company's
responses in this letter correspond to the numbers you placed adjacent to your
comments in your letter of August 20, 2007. We have indicated below whether the
comment has been responded to in the Registration Statement or the reasons why
the Company believes a response is either inapplicable or inappropriate. The
page numbers referenced below correspond to the marked versions of the
Registration Statement enclosed herewith.
1. GIVEN THE NATURE AND SIZE OF THE TRANSACTION BEING REGISTERED, ADVISE
THE STAFF OF THE COMPANY'S BASIS FOR DETERMINING THAT THE TRANSACTION
IS APPROPRIATELY CHARACTERIZED AS A TRANSACTION THAT IS ELIGIBLE TO BE
MADE ON A SHELF BASIS UNDER RULE 415(A)(1)(I).
Russell Mancuso, Esq.
September 14, 2007
Page 2
As you know, in 1983 the Securities and Exchange Commission (the
"Commission") adopted Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act"), to permit the registration of offerings to be made on a
delayed or continuous basis. Rule 415 specifies certain conditions that must be
met by an issuer in order to avail itself of the Rule. Rule 415 provides in
relevant part as follows:
"(a) Securities may be registered for an offering to be made
on a continuous or delayed basis in the future, Provided, That:
(1) The registration statement pertains only to:
(i) Securities which are to be offered or sold solely by or on
behalf of a person or persons other than the registrant, a subsidiary
of the registrant or a person of which the registrant is a
subsidiary;... [or]
(ix) Securities the offering of which will be commenced
promptly, will be made on a continuous basis and may continue for a
period in excess of 30 days from the date of initial
effectiveness;...."
In an effort to assist registrants in determining whether an offering
by selling security holders may be characterized as a secondary offering that is
eligible to be made on a shelf basis under Rule 415(a)(1)(i), the Commission
issued Interpretation D.29 contained in the SEC Division of Corporation Finance
Manual of Publicly Available Telephone Interpretations (the "Telephone
Interpretations"). Interpretation D.29 provides as follows:
"It is important to identify whether a purported secondary offering is
really a primary offering, i.e., the selling shareholders are actually
underwriters selling on behalf of an issuer. Underwriter status may
involve additional disclosure, including an acknowledgment of the
seller's prospectus delivery requirements. In an offering involving
Rule 415 or Form S-3, if the offering is deemed to be on behalf of the
issuer, the Rule and Form in some cases will be unavailable (e.g.,
because of the Form S-3 `public float' test for a primary offering, or
because Rule 415(a)(1)(i) is available for secondary offerings, but
primary offerings must meet the requirements of one of the other
subsections of Rule 415). The question of whether an offering styled a
secondary one is really on behalf of the issuer is a DIFFICULT FACTUAL
ONE, not merely a question of who receives the proceeds. CONSIDERATION
SHOULD BE GIVEN TO HOW LONG THE SELLING SHAREHOLDERS HAVE HELD THE
SHARES, THE CIRCUMSTANCES UNDER WHICH THEY RECEIVED THEM, THEIR
Russell Mancuso, Esq.
September 14, 2007
Page 3
RELATIONSHIP TO THE ISSUER, THE AMOUNT OF SHARES INVOLVED, WHETHER THE
SELLERS ARE IN THE BUSINESS OF UNDERWRITING SECURITIES, AND FINALLY,
WHETHER UNDER ALL THE CIRCUMSTANCES IT APPEARS THAT THE SELLER IS
ACTING AS A CONDUIT FOR THE ISSUER." (emphasis added)
As Interpretation D.29 indicates, the question is a "difficult" and
"factual" one that involves an analysis of "all the circumstances." When
applying these factors to the offering made by the selling security holders in
the Registration Statement (the "Offering") as set forth in more detail below,
the Company believes that the Offering is appropriately characterized as a
secondary offering and, therefore, is eligible to be made on a shelf basis under
Rule 415(a)(1)(i).
A. How Long the Selling Shareholders Have Held the Shares.
-------------------------------------------------------
The shares of common stock to be covered by the Registration Statement
represent the number of shares of the Company's common stock (collectively, the
"Shares") that are issuable (i) upon the conversion of shares of the Company's
Series A Cumulative Redeemable Convertible Preferred Stock (the "Series A
Preferred Stock") held by 21 accredited investors (the "Investors"), each of
whom obtained the Securities (as defined below) in connection with the May 24,
2007 closing of the Securities Purchase Agreement among the Company and each of
the Investors (the "Purchase Agreement"), and (ii) upon the exercise of warrants
(the "Warrants" and collectively with the shares of Series A Preferred Stock,
the "Securities") held by the Investors, B. Riley and Co. Inc. ("B. Riley"), the
Company's placement agent in connection with the offering of the Securities (the
"Series A Preferred Stock Financing"), and certain assignees of B. Riley
(collectively, the "Selling Security Holders").
We believe that the longer the Securities are held, the less likely it
is that the Selling Security Holders would be considered acting as a mere
conduit for the Company. Although we are unable to definitively predict the time
period that may elapse between the date the Selling Security Holders acquire the
Shares (as a result of conversion of the Series A Preferred Stock and/or
exercise of the Warrants) and the date upon which they may eventually sell or
otherwise transfer the Shares, the Selling Security Holders have held the
Securities for over 100 days. As set forth below, this holding period is much
longer than required by the Staff of the Commission (the "Staff") for "PIPE"
transactions.
In the March 1999 Supplement to the Telephone Interpretations, the
Staff codified its "PIPEs" interpretation in Interpretation 35 (the "PIPEs
Interpretation") which provides in relevant part as follows:
Russell Mancuso, Esq.
September 14, 2007
Page 4
"In a PIPE transaction (private investment, public-equity), the staff
will not object if a company registers the resale of securities prior
to their issuance if the company has completed a Section 4(2)-exempt
sale of their securities (or in the case of convertible securities, of
the convertible security itself) to the investor, and the investor is
at market risk at the time of filing of the resale registration
statement... The closing of the private placement of the unissued
securities must occur within a short time after the effectiveness of
the resale registration statement."
The PIPEs Interpretation contemplates that a valid secondary offering
could occur IMMEDIATELY following the closing of a private placement. Because no
holding period is required for a PIPE transaction to be a valid secondary
offering, we respectfully submit that the holding period in this instance should
be more than sufficient to be considered a valid secondary offering.
B. The Circumstances Under Which They Received the Shares.
-------------------------------------------------------
Because the Shares being registered for resale under the Registration
Statement underlie securities that were issued in a properly conducted and
completed PIPE transaction, the circumstances under which the Selling Security
Holders received the Securities as outlined in Interpretation D.29 supports a
finding that the Offering is a secondary offering and, therefore, is eligible to
be made on a shelf basis pursuant to Rule 415(a)(1)(i).
Based upon the PIPEs Interpretation, there are two significant criteria
that must be met in order for the shares of common stock underlying convertible
securities and warrants issued in a PIPE transaction to be properly registered
for resale as a valid secondary offering. First, the issuance of the convertible
securities and warrants must have been made in a transaction exempt pursuant to
Section 4(2) under the Securities Act. Second, the private placement must be
"completed." (SEE ALSO Black Box Incorporated, SEC No-Action Letter (June 26,
1990) (the "Black Box No-Action Letter") regarding "completed" private placement
transactions.)
The Securities held by the Selling Security Holders were issued in an
exempt transaction pursuant to Section 4(2) of the Securities Act based on the
safe-harbor provided by Rule 506 of Regulation D promulgated under the
Securities Act. This exemption was claimed on the basis that the transaction did
not involve any public offering and the Selling Security Holders are all
"accredited investors" as that term is defined in Rule 501(a) of Regulation D.
Appropriate investment representations were obtained from each of the Selling
Security Holders and certificates representing the Securities were issued with
Russell Mancuso, Esq.
September 14, 2007
Page 5
appropriate restrictive legends. A Form D covering the Securities was filed with
the Commission on June 27, 2007. As a result, the Securities were issued in an
exempt transaction pursuant to Section 4(2) under the Securities Act.
The PIPEs Interpretation discussed above, as well as the Division of
Corporation Finance's position in the Black Box No-Action Letter, make it clear
that a private placement is "completed" if commitments are in place from all
investors subject only to conditions outside of their control so that there is
no further investment decision. The Investors became irrevocably bound to
purchase a set amount of shares of Series A Preferred Stock and Warrants for a
set purchase price upon the May 24, 2007 closing of the Purchase Agreement. On
that date, the full purchase price was paid by the Investors to the Company and
the shares of Series A Preferred Stock and the Warrants contemplated by the
Purchase Agreement were issued by the Company to the Investors. The Investors
were, and continue to be, at market risk as of and at all times after May 24,
2007, and there was no further investment decision by the Investors after May
24, 2007.
Based on the foregoing, the offering of the shares of common stock was
"completed" prior to the filing of the Registration Statement as required by the
Section 3S(b) of the PIPEs Interpretation and the Black Box No-Action Letter.
We also note that the terms of the Series A Preferred Stock and the
Warrants contain no "toxic" provisions or other terms that we believe would
merit any special concerns by the Staff. The mere fact that the Investors
insisted upon registration rights should not be interpreted to mean that the
Investors has an intent to effect a distribution. There are a number of reasons
why an Investor wants shares registered other than because it has a present
intention to sell those shares. For example, Investors such as Harvey SMidCap
Fund LP and Harvey SMidCap Offshore Fund LTD are required to mark their
portfolio to market. If securities within their portfolios are not registered,
they must be reflected at discounted prices. In addition, Investors such as
Newport Micro Fund II, LLC are fiduciaries of other people's money and have a
fiduciary responsibility to maintain maximum flexibility in their investment
decisions.
Further, under the current circumstances it would be virtually
impossible for the Investors to effect a distribution of the Shares even if they
desired to do so. The average daily trading volume of the Company's common stock
since May 25, 2007, the day after the closing of the Share Exchange Transaction,
is only approximately 723 shares. If Investors attempted to liquidate their
investment, it would take them years to do so, assuming no other person sold a
share of common stock during that period. Also, 1,271,797 of the Shares relate
to the Warrants which are not exercisable until November 24, 2007. In light of
the thin float, any attempt by the Investors to liquidate their positions would
be virtually impossible.
Russell Mancuso, Esq.
September 14, 2007
Page 6
In addition, there is no evidence that a distribution would occur or
that the Investors have an intention to distribute the shares they have the
right to acquire. Under the Commission's own rules, a "distribution" requires
special selling efforts. See Rule 100(b) of Regulation M which defines a
"distribution" as
"an offering of securities, whether or not subject to registration
under the Securities Act, that is distinguished from ordinary trading
transactions by the magnitude of the offering AND THE PRESENCE OF
SPECIAL SELLING EFFORTS AND SELLING METHODS." (emphasis added)
Accordingly, under the Commission's own rules, the mere size of a
potential offering does not constitute a proposed sale as a "distribution."
Special selling efforts and selling methods must be employed before the offering
will constitute a distribution. Here there is no evidence that indicates that
any special selling efforts or selling methods have or would take place if all
of the Shares were registered. To the Company's knowledge, none of the Investors
has conducted any road shows or taken any other actions to condition or "prime"
the market for their shares. To have done so would violate the detailed
representations made by them in the Purchase Agreement. Those representations
and warranties provide, among other things, that each of them was buying for
investment, for their own account and not for the purpose or intent to effect a
distribution in violation of the Securities Act.
C. Their Relationship to the Issuer.
---------------------------------
Prior to negotiating and entering into the Purchase Agreement, except
for Lloyd I. Miller, III, who served on the board of directors of the Company
until 2005, and Bryant Riley, who served on the board of directors of the
Company until May 2007, the Company had no prior relationship or dealings with
any of the Selling Security Holders or any affiliates of the Selling Security
Holders. Other than the Shares the Company is seeking to register under the
Registration Statement and shares of the Company's common stock underlying
options issued to Mr. Bryant Riley and Mr. Lloyd Miller under the Company's
Outside Directors' Stock Option Plan (which was terminated in 2005), the Company
has never registered any securities for the Selling Security Holders or any
affiliates of the Selling Security Holders. Other than the Company's obligations
under the Purchase Agreement and related agreements, the Company has no ongoing
relationship with any of the Selling Security Holders other than B. Riley, which
is providing on-going investment banking services to the Company.
Of the 30 Selling Security Holders, none beneficially owns, nor is
proposing to sell in the offering more than 12.4% of the Company's issued and
outstanding common stock. There are 12 distinct unaffiliated selling security
holder groups, only one of whom beneficially own more than 10% of the Company's
Russell Mancuso, Esq.
September 14, 2007
Page 7
issued and outstanding common stock. Given the breadth of holdings of the
Selling Security Holders and the lack of affiliation among the Selling Security
Holders and the Company, the Company believes that none of the Selling Security
Holders or selling security holder groups exerts control over the market for the
Company's common stock, and, accordingly, does not possess the ability to
dictate the market for the Company's common stock.
D. The Amount of Shares Involved.
------------------------------
We respectfully remind the Staff that the amount of shares is only one
factor to be considered by the Staff in applying Rule 415. However, in recent
applications of Rule 415 by the Staff, the amount of shares seems to have become
the primary factor. As we understand it, the Staff has taken the position that
an offering involving more than approximately one-third of the public float
implicates Staff concerns that a secondary offering may be a "disguised" primary
offering for Rule 415 purposes. As far as we are aware, no rationale for that
position has ever been articulated by the Staff. However, based on the Staff's
concern that a distribution is taking place, the number of shares being
registered appears to be one of the less important factors in the Staff's
analysis. An illegal distribution of shares can certainly take place when the
amount of shares involved is less than one-third.
In addition, the Staff's focus on one-third of the public float appears
to be inconsistent with prior interpretative positions. For example,
Interpretation D.44 of the Telephone Interpretations describes a scenario where
a holder of well over one-third of the outstanding stock is able to effect a
valid secondary offering. The interpretation states, in relevant part, as
follows:
"A controlling person of an issuer owns a 73% block. That person will
sell the block in a registered "at-the-market" equity offering. Rule
415(a)(4), which places certain limitations on "at-the-market" equity
offerings, applies only to offerings by or on behalf of the registrant.
A secondary offering by a control person that is not deemed to be by or
on behalf of the registrant is not restricted by Rule 415(a)(4)."
In addition, Interpretation H.20 of the Telephone Interpretations,
regarding the use of Form S-3 to effect a secondary offering, provides as
follows:
"A number of persons have asked whether Form S-3 is available for
secondary offerings to be made by affiliates of the issuer. The concern
was that because the seller was an affiliate, the Division staff might
consider the secondary offering a sale on behalf of the issuer and, in
Russell Mancuso, Esq.
September 14, 2007
Page 8
reality, a primary offering requiring the affiliate-registrant to meet
the more stringent Form S-3 standards applicable to primary offerings
by issues. The Division staff had indicated, however, that secondary
sales by affiliates may be made under General Instruction I.B.3 to more
than 50% of the issuer's securities, UNLESS THE FACTS CLEARLY INDICATE
THAT THE AFFILIATE IS ACTING AS AN UNDERWRITER ON BEHALF OF THE ISSUER.
However, if the percentage is too high, it must be examined on a
case-by-case basis." (emphasis added)
The above interpretive positions support the proposition that the
holder of well in excess of one-third of the public float can effect a valid
secondary offering of its shares if other facts do not indicate that the
affiliate is acting as a conduit for the issuer.
E. Whether the Sellers are in the Business of Underwriting
Securities.
-------------------------------------------------------
Based solely on information supplied to us by the Selling Security
Holders, we do not believe that any of the Selling Security Holders, other than
B. Riley, an NASD-registered broker-dealer, are in the business of underwriting
securities. Consistent with the Commission's view with respect to selling
security holders who are also NASD-registered broker-dealers, the Company has
identified B. Riley as an underwriter on page __ of the Registration Statement.
(See response to Comment No. __.) In addition, with respect to the Offering
covered by the Registration Statement, each of the Investors who is affiliated
with a broker-dealer has represented to us that (i) it is not acting as an
underwriter in this offering, (ii) it received the shares of the Series A
Preferred Stock and/or Warrants in the ordinary course of business, and (iii) at
the time it acquired the Securities, it did not have had any agreement or
understanding, directly or indirectly, with any person to distribute the Series
A Preferred Stock and/or Warrants or the Shares.
F. Whether Under All the Circumstances it Appears that the Seller
is Acting as a Conduit for the Issuer.
--------------------------------------------------------------
Although we acknowledge that the offering represents well in excess of
the Company's public float, we do not believe that the facts and circumstances
of this offering lead to the conclusion that under the standards set forth in
Interpretation D.29 that this is a primary offering. In that regard, we
summarize the discussion above as follows:
o the shares of Series A Preferred Stock and the Warrants have a
conversion price and exercise price, respectively, that is
fixed; they do not include any variable provisions or other
toxic aspects that could lead to significant additional
dilution;
Russell Mancuso, Esq.
September 14, 2007
Page 9
o the Investors have already held the securities for over 100
days, since May 24, 2007;
o the Company has no reason to believe that the Investors desire
to sell their position in the Company in the near future;
o the Company's average daily trading volume is 723 shares. Even
if the Investors did begin to sell their shares immediately,
the sale of all of the Company common stock issued or issuable
in the connection with the transaction would take several
years, assuming that the Investors were able to sell the
entire average daily trading volume each day. The Investors
were aware of the Company's trading volume and must have been
aware that any investment in the Company's common stock would
require them to hold the shares for a significant period of
time;
o the shares of Series A Preferred Stock and the Warrants have
conversion prices and exercise prices in excess of the current
market price and the Warrants are not exercisable until
November 24, 2007; and
o registration does not equate to an intent to sell or
distribute. As discussed above, the Investors would not be
able to sell their securities quickly due to the market for
the Company's common stock.
Based upon the foregoing discussion and analysis, we respectfully
submit that, when considering all the circumstances, none of the Selling
Security Holders should be deemed to be acting as a conduit for the Company and
the Company should be allowed to register for resale that number of Shares set
forth on the cover page of the Registration Statement.
Prospectus Cover Page
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2. GIVEN THAT THERE IS NO MARKET FOR YOUR SECURITIES, PLEASE DISCLOSE THE
FIXED PRICE AT WHICH YOUR SELLING SHAREHOLDERS WILL SELL THEIR
SECURITIES. SEE SCHEDULE A ITEM 16 OF THE SECURITIES ACT AND REGULATION
S-B ITEM 501(A)(9)(IV). IF THIS TRANSACTION IS ELIGIBLE TO BE MADE ON A
SHELF BASIS UNDER RULE 415(A)(L)(I), WE WILL NOT OBJECT IF YOU DISCLOSE
THAT SELLING SHAREHOLDERS WILL SELL AT THE DISCLOSED FIXED PRICE UNTIL
YOUR SHARES ARE QUOTED ON THE OTC BULLETIN BOARD AND THEREAFTER AT
PREVAILING MARKET PRICES OR PRIVATELY NEGOTIATED PRICES. PLEASE ALSO
REVISE YOUR "PLAN OF DISTRIBUTION" DISCLOSURE ACCORDINGLY.
Russell Mancuso, Esq.
September 14, 2007
Page 10
Additional disclosure has been added to the cover page and in the "Plan
of Distribution" section on page 87 of the Registration Statement indicating the
price range at which Selling Security Holders may sell their Shares until a
public market develops for the Company's common stock. The Company has selected
the range of $2.20 and $4.40 because $2.20 is the price at which shares of
Series A Preferred Stock may be converted into shares of common stock and $4.40
is the price at which a share of common stock must trade before the Company can
force conversion of shares of its Series A Preferred Stock. The exercise price
of the Warrants is $2.42 (i.e., within the fixed price range).
3. IF TRUE, PLEASE REVISE YOUR STATEMENT THAT YOUR SHARES ARE "TRADED" ON
THE PINK SHEETS TO CLARIFY THAT PRICES OF YOUR COMMON STOCK ARE QUOTED
ON THE PINK SHEETS.
The Company has revised its disclosure throughout the Registration
Statement to clarify that shares of the Company's common stock are "quoted" on
the Pink Sheets(R) rather than "traded."
Prospectus Summary, page 2
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4. PLEASE PROVIDE US INDEPENDENT, OBJECTIVE SUPPORT FOR THE STATEMENTS
REGARDING YOUR LEADERSHIP AS WELL AS YOUR STATEMENTS ABOUT YOUR MARKET
SHARE AND MARKET STANDING. FOR EXAMPLE, YOU INDICATE IN THE SUMMARY AND
IN OTHER PARTS OF YOUR PROSPECTUS THAT YOU ARE POSITIONED AS A "LEADER
IN CERTAIN NICHE MARKETS AND A LOWER COST ALTERNATIVE... IN MORE
MAINSTREAM MARKETS.' AND YOU ARE "AN INDUSTRY LEADER" AND WITH A
"SIGNIFICANT BRAND IDENTITY."
The Company is unable to provide the Commission with independent,
objective support for any of the statements regarding the Company's leadership,
market share and market standing. Accordingly, the Company has elected to revise
its disclosure in the "Prospectus Summary" on page 2 of the Registration
Statement and in the "Business" section on page 35 of the Registration Statement
to delete any such statements.
5. WE NOTE YOUR STATEMENTS THAT YOU HAVE A "LARGE CUSTOMER BASE" OF
"LEADING COMPANIES" AND THAT YOUR INNOVATION AND LEADERSHIP HAVE
ALLOWED YOU TO "GAIN A LARGE CUSTOMER BASE OF WELL ESTABLISHED MARKET
PARTICIPANTS." PLEASE PROVIDE INDEPENDENT OBJECTIVE SUPPORT FOR THESE
STATEMENTS AND PLEASE BALANCE THESE STATEMENTS WITH EQUALLY PROMINENT
DISCLOSURE ABOUT YOUR RELIANCE ON A SMALL NUMBER OF CUSTOMERS AS
DESCRIBED ON PAGES 11 AND 40.
The Company is unable to provide the Commission with independent,
objective support for these statements. Accordingly, the Company has elected to
Russell Mancuso, Esq.
September 14, 2007
Page 11
revise its disclosure in the "Prospectus Summary" on page 2 of the Registration
Statement and in the "Business" section on page 35 of the Registration Statement
to delete these statements.
6. WE NOTE YOU IDENTIFIED TEN CUSTOMERS IN THE FIFTH PARAGRAPH. PLEASE
TELL US THE OBJECTIVE CRITERIA YOU USED TO DETERMINE WHICH CUSTOMERS TO
HIGHLIGHT HERE. ALSO TELL US WHETHER YOU IDENTIFIED IN THE SUMMARY ALL
CUSTOMERS THAT SATISFY THOSE CRITERIA.
The Company has revised its disclosure in the Prospectus Summary and
Business sections of the Registration Statement commencing on pages 2 and 35,
respectively, to identify three customers. These customers were the Company's
top three customers in terms of sales for 2006.
7. PROMINENTLY IN YOUR SUMMARY, PLEASE BRIEFLY HIGHLIGHT THE APPLICATIONS
ON WHICH YOU FOCUS AS MENTIONED ON PAGE 32.
The Company has provided additional disclosure in the "Prospectus
Summary" section commencing on page 2 of the Registration Statement highlighting
the applications on which the Company focuses.
8. IN THE SUMMARY, YOU ARE TO CAREFULLY CONSIDER AND IDENTIFY THOSE
ASPECTS OF THE OFFERING THAT ARE THE MOST SIGNIFICANT AND DETERMINE HOW
TO BEST HIGHLIGHT THOSE POINTS IN CLEAR, PLAIN LANGUAGE. AVOID MERE
REPETITION FROM THE BUSINESS SECTION. FURTHER, PLEASE TELL US WHY YOU
BELIEVE THE DETAILED DISCUSSION OF THE TERMS OF YOUR SERIES A PREFERRED
STOCK IS APPROPRIATE FOR THE SUMMARY.
The Company has revised the "Prospectus Summary" section commencing on
page 2 of the Registration Statement to include disclosure regarding those
aspects of the offering that the Company considers most significant in response
to the Staff's comments. The Company has also revised the discussion of the
terms of the Company's Series A Preferred Stock on page 5 of the Registration
Statement to make it more of a summary with a cross reference to a more detailed
description in the "Description of Capital Stock" section commencing on page 91
of the Registration Statement.
Continue to Develop Next Generation Products, page 3
- ----------------------------------------------------
9. PLEASE PROVIDE US THE BASIS FOR YOUR STATEMENTS IN THE LAST SENTENCE OF
THIS SECTION. ALSO, IF YOU ARE NOT ABLE TO DISCLOSE MORE SPECIFIC
INFORMATION, PLEASE TELL US HOW INVESTORS WILL HAVE SUFFICIENT
INFORMATION NECESSARY TO EVALUATE YOUR STATEMENT.
Russell Mancuso, Esq.
September 14, 2007
Page 12
The Company has revised its disclosure to delete this sentence from
page 4 of the Registration Statement.
Corporate information, page 5
- -----------------------------
10. PLEASE CLEARLY AND BRIEFLY HIGHLIGHT THE MATERIAL EFFECTS OF THIS
TRANSACTION, INCLUDING ANY CHANGE IN CONTROL AND MANAGEMENT.
The Company has provided additional disclosure in the "Prospectus
Summary" section under the heading "Share Exchange Transaction" on page 4 of the
Registration Statement to clearly and briefly highlight the material effects of
the Share Exchange Transaction, including the resultant change in control and
change in management.
Industry and market data, page 5
- --------------------------------
11. YOU MANY NOT DISCLAIM RESPONSIBILITY FOR YOUR DISCLOSURE. ACCORDINGLY,
PLEASE REVISE YOUR STATEMENT THAT YOU "DO NOT MAKE ANY REPRESENTATION
AS TO THE ACCURACY OF SUCH INFORMATION" IN YOUR DOCUMENT.
The Company has deleted the statement that it does "not make any
representation as to the accuracy of such information" in the "Industry and
Market Data" section on page 6 of the Registration Statement.
12. PLEASE TELL US WHETHER ALL INDUSTRY AND MARKET DATA YOU CITE IN YOUR
DOCUMENT IS PUBLICLY AVAILABLE AND WHETHER THE DATA WAS COMMISSIONED
FOR YOUR USE OR FOR USE IN THE REGISTRATION STATEMENT.
The Company has revised its disclosure throughout the Registration
Statement to provide that the only industry and market data cited within the
Registration Statement is industry and market data that the Company obtained
from Laredo Technologies. The Company has also revised its disclosure in the
"Prospectus Summary" section under the heading "Industry and Market Data" on
page 6 of the Registration Statement to clarify that the industry and market
data cited within the document was obtained from Laredo Technologies and that
portions of such data was commissioned specifically for the Company's use.
13. WE NOTE THAT YOUR STATEMENT OF CONSENT IS LIMITED TO LAREDO. PLEASE
TELL US WHETHER ALL OTHER SOURCES HAVE CONSENTED TO YOUR USE OF THE
DATA. ALSO, GIVEN THAT IT APPEARS THAT YOU ARE INTENDING THAT INVESTORS
RELY ON THE LAREDO CONSENT, PLEASE FILE IT AS AN EXHIBIT TO THE
REGISTRATION STATEMENT.
Russell Mancuso, Esq.
September 14, 2007
Page 13
Please see the Company's response to Comment No. 12. The Company has
included the consent of Laredo Technologies as Exhibit 99.1 to the Registration
Statement.
Summary Financial Information, page 7
- -------------------------------------
14. PLEASE REVISE TO INCLUDE A FOOTNOTE DISCUSSING THE FISCAL YEAR 2005
RESTATEMENT OR REFERRING TO WHERE THE RESTATEMENT IS DISCLOSED.
The Company has revised its disclosure in the "Summary Financial
Information" table on page 9 of the Registration Statement to include a footnote
cross-referencing the discussion of the 2005 restatement of the Company's
financial statements in the Notes to the Company's 2006 and 2005 financial
statements.
Risk Factors, page 8
- --------------------
15. PLEASE TELL US WHETHER YOU PLAN TO REGISTER YOU SECURITIES UNDER
SECTION 12 OF THE EXCHANGE ACT. IF YOU DO NOT, PLEASE ADD A RISK FACT
TO EXPLAIN THE EFFECTS OF THE AUTOMATIC SUSPENSION UNDER SECTION 15(D)
AND THE INAPPLICABILITY OF THE PROXY RULES AND SECTION 16 OF THE
EXCHANGE ACT.
The Company plans to register its common stock under Section 12 of
Securities Exchange Act of 1934, as amended (the "Exchange Act"). To that end,
the Company plans to file a Form 8-A with the Commission within ten days of the
filing of Amendment No. 1 to the Registration Statement.
16. PLEASE ADD A RISK FACTOR DISCUSSING THE RISKS ASSOCIATED WITH VOTING
CONTROL OF THE COMPANY BY YOUR SIGNIFICANT SHAREHOLDERS.
The Company has added a risk factor in the "Risk Factors" section
commencing on page 15 of the Registration Statement discussing the risks
associated with voting control on the Company by its significant shareholders.
Price Range of Common Stock, page 20
- ------------------------------------
17. PLEASE BRIEFLY HIGHLIGHT THE SIGNIFICANT CORPORATE DEVELOPMENTS THAT
OCCURRED IN THE PERIODS PRESENTED.
The Company has revised its disclosure in the "Price Range of Common
Stock" section on page 23 of the Registration Statement highlighting the
significant corporate developments that occurred in the periods presented.
Russell Mancuso, Esq.
September 14, 2007
Page 14
18. PLEASE CLARIFY HOW THE DISCLOSURE IN THIS SECTION IS CONSISTENT WITH
YOUR STATEMENT IN YOUR FORM 8-K FILED JULY 11, 2005 THAT YOUR COMMON
STOCK WILL NOT LONGER ASSIGNABLE OR TRANSFERABLE ON THE BOOKS OF THE
COMPANY.
On March 10, 2005, the Company's prior board of directors approved a
plan of dissolution (the "Plan of Dissolution") for the Company and approved
solicitation of shareholder approval of the Plan of Dissolution. The
shareholders of the Company approved the Plan of Dissolution on June 3, 2005.
The election to wind up and dissolve the Company was a voluntary election
pursuant to Section 1900 of the California Corporations Code.
As a result of approval of the Plan of Dissolution and commencement of
the wind up of the Company, (i) the Company voluntarily delisted its common
stock from the NASDAQ Stock Market effective July 11, 2005, (ii) the Company's
common stock commenced quotation on the Pink Sheets(R) on July 11, 2005, and
(iii) the Company's transfer agent closed the transfer books for its common
stock effective July 11, 2005. During the wind up of the Company, the board of
directors of the Company were presented with the opportunity of entering into a
share exchange transaction (the "Share Exchange Transaction") with the
shareholders of Strasbaugh, a California corporation, and ultimately determined
that it would be in the best interests of the Company and its shareholders to
proceed with the Share Exchange Transaction in lieu of completing the wind up
and dissolution of the Company. As a result, on January 17, 2007, the board of
directors of the Company preliminarily authorized the Share Exchange Transaction
and authorized the officers of the Company to solicit from the shareholders of
the Company their vote in favor of the Share Exchange Transaction. The Company's
board of directors and shareholders approved the Share Exchange Transaction on
February 9, 2007 and March 14, 2007, respectively. The board of directors
ratified the Company's decision to enter into the Share Exchange Transaction on
May 7, 2007, and after due consideration authorized the closing of the Share
Exchange Transaction on May 24, 2007. Subsequent to receiving approval of the
board of directors and shareholders of the Company to close the Share Exchange
Transaction, the Company formally revoked the Plan of Dissolution pursuant to
Section 1904(a) of the California Corporations Code and consummated the Share
Exchange Transaction.
Because trading in shares of the Company's common stock continued while
shares of common stock were being quoted on the Pink Sheets(R) between July 11,
2005, the date on which the stock transfer books were initially closed by the
Company's transfer agent, and May 24, 2007, the date of the closing of the Share
Exchange Transaction, such trading was accomplished with "due bills" attached.
Prior to the closing of the Share Exchange Transaction and re-opening the
transfer books for the Company's common stock, the Company conducted meetings
Russell Mancuso, Esq.
September 14, 2007
Page 15
with representatives from Comptershare, the Company's transfer agent, NASDAQ and
the Depository Trust Company to ensure the stock transfer books for its common
stock reflected all trades of its common stock with due bills attached. During
these meetings, all stock transfer records were reconciled to accurately reflect
all trades of the Company's common stock made between July 11, 2005 and the
closing of the Share Exchange Transaction on May 24, 2007.
The Company has revised its disclosure in the "Price Range of Common
Stock" section on page 23 of the Registration Statement to provide additional
information regarding the trading of the Company's common stock between July 11,
2005 and May 24, 2007 with due bills attached.
Overview, page 21
19. WE NOTE MUCH OF YOUR FIRST FIVE PARAGRAPHS IN THIS SECTION ARE
IDENTICAL TO THE SUMMARY ON PAGE 2 AND THE BUSINESS SECTION ON PAGE 30.
PLEASE REVISE TO AVOID REPEATING DISCLOSURE. THE OVERVIEW IN THIS
SECTION SHOULD BE A BALANCED, EXECUTIVE-LEVEL DISCUSSION THAT
IDENTIFIES THE MOST IMPORTANT THEMES OR OTHER SIGNIFICANT MATTERS WITH
WHICH MANAGEMENT IS CONCERNED PRIMARILY IN EVALUATING THE COMPANY'S
FINANCIAL CONDITION AND OPERATING RESULTS. DISCUSS MATERIAL BUSINESS
OPPORTUNITIES, CHALLENGES AND RISKS, SUCH AS THOSE PRESENTED BY KNOWN
MATERIAL TRENDS AND UNCERTAINTIES, ON WHICH THE COMPANY'S EXECUTIVES
ARE MOST FOCUSED, AND THE ACTIONS THEY ARE TAKING IN RESPONSE TO THEM.
FOR FURTHER GUIDANCE ON THE CONTENT AND PURPOSE OF THE "OVERVIEW," SEE
COMMISSION GUIDANCE REGARDING MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTERPRETIVE RELEASE NO.
33-8350 (DECEMBER 19, 2003) ON OUR WEBSITE.
The Company has revised its disclosure in the "Overview" section
commencing on page 24 of the Registration Statement to provide a balanced,
executive level discussion and to avoid repetition of the disclosure contained
in the Prospectus Summary and Business sections of the Registration Statement.
Backlog, page 28
- ----------------
20. PLEASE CLARIFY WHETHER THE ORDERS ARE CANCELLABLE.
The Company has revised its disclosure in the "Backlog" section on page
33 of the Registration Statement to clarify that orders are not cancelable by
the Company's customers.
Russell Mancuso, Esq.
September 14, 2007
Page 16
Business, page 30
- -----------------
21. PLEASE DISCLOSE THE STATUS OF YOUR DISSOLUTION DESCRIBED IN YOUR PROXY
MATERIAL FILED MAY 5, 2005 AND YOUR FORM 10-K FILED JULY 29, 2005. ALSO
EXPLAIN HOW YOUR ACTIVITIES SINCE THOSE DATES ARE CONSISTENT WITH THE
DISSOLUTION PLAN ADOPTED BY YOUR SHAREHOLDERS AND DISCLOSED IN THOSE
FILINGS.
Please see the Company's response to Comment No. 18.
22. WITH A VIEW TOWARD DISCLOSURE IN AN APPROPRIATE SECTION OF YOUR
DOCUMENT, PLEASE TELL US WHETHER ANY OF THE REGISTRANT'S SHAREHOLDERS
OR PAST OR PRESENT AFFILIATES RECEIVED ANYTHING OF VALUE, OTHER THAN AS
DISCLOSED IN YOUR COMPENSATION TABLES OR RELATED-PARTY TRANSACTIONS
DISCLOSURE, SINCE THE DATE THAT THE DISSOLUTION WAS ANNOUNCED AND THE
DATE THAT THAT THE SHARE EXCHANGE WAS COMPLETED. INCLUDE ANYTHING THAT
THOSE PARTIES HAVE RECEIVED OR WILL RECEIVE IN CONNECTION WITH THE
SHARE EXCHANGE AGREEMENT.
Other than as disclosed in the compensation tables or related-party
transactions disclosures in the Registration Statement, none of the Company's
shareholders or past or present affiliates received anything of value between
June 3, 2005 (the date dissolution was announced) and May 24, 2007 (the date on
which the Share Exchange Transaction was consummated), except that on June 24,
2005 and December 22, 2005 the Company paid an extraordinary cash dividend of
$0.62 and $0.12 per share of common stock, respectively, to the shareholders of
record as of June 10, 2005 and July 22, 2005, respectively. The Company has
provided additional disclosure in the "Price Range of Common Stock" section on
page 23 of the Registration Statement with respect to these dividend payments.
23. WE NOTE YOUR DISCLOSURE ON PAGE 36 THAT YOU REQUIRE A PARTNER TO PURSUE
"MORE MAINSTREAM" APPLICATIONS. PLEASE CLARIFY WHY YOUR CURRENT
PRODUCTS ARE NOT USED IN MAINSTREAM APPLICATIONS.
The Company has revised its disclosure on page 42 of the Registration
Statement to clarify that the Company desires to partner with a China-based
semiconductor and silicon wafer manufacturer to assist the China-based partner
(rather than the Company) in its pursuit of more mainstream CMP and silicon
wafer fabrication applications in China and throughout the World using the
Company's technology and products. In addition, the Company has revised its
disclosure to provide information regarding its entry into a Memorandum of
Understanding with the 45th Research Institute in China, a government-funded
research agency. The Company's current products are being used in mainstream CMP
semiconductor and silicon wafer fabrication applications in the United States,
Europe and Asia.
Russell Mancuso, Esq.
September 14, 2007
Page 17
24. WE NOTE YOUR DISCLOSURE ON PAGE 2 THAT YOU ARE POSITIONED AS A LOWER
COST ALTERNATIVE. PLEASE CLARIFY WHY YOUR PRODUCTS CAN BE PRICED LOWER
THAN YOUR COMPETITORS.
The Company's products can be priced lower than its competitors because
of a number of factors including, among others, the following: (i) the Company's
products tend to have smaller footprints than products manufacturer by the
Company's competitors, thereby reducing the Company's direct and indirect
manufacturing costs as compared to its competitors, (ii) many of the Company's
products have fewer moving parts (i.e., robotic arms) than competitive products,
and (iii) the Company's engineering costs tend to be lower than its competition
as a result of the Company's significant technology base. In essence, because of
this existing technology base in many instances the Company may only need to
re-engineer an existing product to create a new product rather than engineer a
new product from the ground up.
25. PLEASE DISCLOSE WHEN STRASBAUGH WAS INCORPORATED AND BEGAN SIGNIFICANT
OPERATIONS.
Additional disclosure has been added under a new heading entitled
"Company History" commencing on page 35 of the Registration Statement to
provide, among other things, the dates when the Company and R. H. Strasbaugh
were incorporated and when R. H. Strasbaugh began significant operations.
26. WE NOTE YOUR RISK FACTOR ON PAGE 12 REGARDING ENVIRONMENTAL REGULATION.
PLEASE PROVIDE THE DISCLOSURE REQUIRED BY REGULATION S-B ITEM
101(B)(11).
The Company has revised its disclosure in the "Risk Factors" section
commencing on page 14 of the Registration Statement to delete the prior risk
factor regarding environmental regulation. Upon reflection, management of the
Company has determined that although the Company is subject to various
environmental regulations in connection with the conduct of its business, the
costs and effects of compliance with applicable environmental laws are not
material. As such, the Company believes that a risk factor regarding
environmental regulation would be generic and not reflective of the Company's
current business operations.
Silicon Wafer and Silicon Wafer Equipment Industry, page 33
- -----------------------------------------------------------
27. PLEASE PROVIDE US THE DATA THAT SUPPORTS THE 46% GROWTH DISCLOSED IN
THIS SECTION.
Russell Mancuso, Esq.
September 14, 2007
Page 18
The Company is unable to provide independent, objective support for the
statement regarding the projected 46% growth rate. Accordingly, the Company has
elected to revise its disclosure in the "Business" section under the heading
"Silicon Wafer and Silicon Wafer Equipment Industry" on page 39 of the
Registration Statement to delete this statement.
Products and Services, page 37
- ------------------------------
28. WITH A VIEW TOWARD CLARIFIED DISCLOSURE, PLEASE TELL US THE AMOUNT OF
REVENUE GENERATED FROM EACH PRODUCT DURING THE FISCAL PERIODS PRESENTED
IN YOUR FILING.
The Company has revised its disclosure in the "Products and Services"
section commencing on page 43 of the Registration Statement to disclose the
amount of revenue generated from each product during the fiscal periods
presented in the Registration Statement.
Customers, Page 40
- ------------------
29. IF YOU DO NOT HAVE LONG-TERM CONTRACTS WITH THE CITED CUSTOMERS OR
MAJOR CUSTOMERS MAY TERMINATE THEIR RELATIONSHIP WITH YOU AT ANY TIME,
PLEASE BALANCE YOUR DISCLOSURE REGARDING YOUR LONG-TERM RELATIONSHIPS
ACCORDINGLY. WE NOTE YOUR RISK FACTOR DISCLOSURE ON PAGE 9.
The Company has revised its disclosure in the "Customers" section on
page 46 of the Registration Statement to provide additional information about
the manner in which the Company's customers purchase products from the Company
and that the Company does not have any long-term purchase orders or commitments
with its customers.
Intellectual Property, page 43
- ------------------------------
30. PLEASE DISCLOSE THE DURATION OF YOUR MATERIAL PATENTS. ALSO, PLEASE
SEPARATELY CLARIFY THE EXTENT AND DURATION OF YOUR U.S. PATENT
PORTFOLIO, AND DESCRIBE THE SCOPE OF THE NON-EXCLUSIVE LICENSE.
The Company has provided additional disclosure in the "Intellectual
Property" section on page 50 of the Registration Statement stating the duration
of its material patents, the extent and duration of its entire U.S. patent
portfolio and the scope of the Company's non-exclusive license with Lam Research
Corporation.
Russell Mancuso, Esq.
September 14, 2007
Page 19
Management, page 46
- -------------------
31. PLEASE DESCRIBE MR. PORTER'S BUSINESS EXPERIENCE DURING THE PAST FIVE
YEARS.
The Company has revised its disclosure in the "Management" section on
page 53 of the Registration Statement to describe Mr. Porter's activities since
his retirement on January 1, 2000 from Ford Motor Company.
32. PLEASE PROVIDE US YOUR ANALYSIS OF WHETHER THE INDIVIDUALS YOU IDENTIFY
AS "KEY EMPLOYEES" ON PAGE 46 ARE EXECUTIVE OFFICERS AS DEFINED BY RULE
405. CITE ALL AUTHORITY ON WHICH YOU RELY.
The Company's board of directors, after due consideration, has
determined that each of the individuals identified as "key employees" do not
perform "policy-making functions" for the Company and consequently have
concluded that they are not executive officers as defined under Rule 405 of the
Securities Act. The Company's board of directors has also determined that the
individuals identified as "key employees" are not officers as defined by Rule
16a-1(f) of the Exchange Act.
The Company's board of directors, Chief Executive Officer and Chief
Financial Officer are solely responsible for the policy-making functions of the
Company. Each of the Company's key employees serves under the direction of the
Company's Chief Executive Officer.
Composition of the Board of Directors, page 47
- ----------------------------------------------
33. PLEASE DESCRIBE THE RIGHT OF THE PREFERRED SHAREHOLDERS TO NOMINATE
DIRECTORS AS MENTIONED ON PAGE 82. ALSO, IDENTIFY THE BOARD MEMBERS
NOMINATED BY THE PREFERRED SHAREHOLDERS.
Additional disclosure has been added to the "Composition of the Board
of Directors" section on page 54 of the Registration Statement describing the
right of the holders of the Company's Series A Preferred Stock to nominate
directors and the fact that such holders have nominated Wesley Cummins as a
member of the Company's board of directors.
Employment Agreements, page 52
- ------------------------------
34. WE NOTE YOUR DISCLOSURE IN THE FOURTH PARAGRAPH ON PAGE 53 DOES NOT
APPEAR TO COVER ALL THE SEVERANCE BENEFITS DESCRIBED IN SECTION 6 OF
THE EXECUTIVES' EMPLOYMENT AGREEMENTS. PLEASE DESCRIBE ALL MATERIAL
PROVISIONS OF SUCH SEVERANCE TERMS.
Russell Mancuso, Esq.
September 14, 2007
Page 20
The Company has revised its disclosure in the "Employment Agreement"
section on page 60 of the Registration Statement to provide a description of all
severance benefits contained in each of the executive's employment agreements.
Certain Relationships and Related Transactions, page 66
- -------------------------------------------------------
35. WE NOTE THE FEBRUARY 2007 REPURCHASE OF PREFERRED STOCK AS DESCRIBED ON
PAGE F-43. PLEASE TELL US WHY YOU HAVE OMITTED THIS INFORMATION FROM
THE DISCLOSURE REQUIRED BY ITEM 404 OF REGULATION S-B.
The Company inadvertently omitted transactions entered into by the
Company's wholly-owned subsidiary, R. H. Strasbaugh. Accordingly, the Company
has revised its disclosure in the "Certain Relationships and Related
Transactions" section on page 76 of the Registration Statement to include a
description of the repurchase of preferred stock by R. H. Strasbaugh. The
Company has also provided disclosure regarding the repurchase by R. H.
Strasbaugh in May 2007 of shares of its common stock and warrants held by
Agility Capital, LLC.
36. PLEASE TELL US WHY THIS SECTION DOES NOT DESCRIBE THE AGILITY REPURCHASE
MENTIONED ON PAGE 27.
Please see response to Comment No. 35.
Share Exchange Transaction, page 67
- -----------------------------------
37. PLEASE TELL US HOW YOU DETERMINED WHICH SHAREHOLDERS IDENTIFIED IN
EXHIBIT A TO EXHIBIT 2.1 COULD BE EXCLUDED FROM THIS SECTION. FOR
GUIDANCE, REFER TO QUESTION AND ANSWER 2.01 OF OUR ITEM 404 COMPLIANCE
AND DISCLOSURE INTERPRETATIONS AVAILABLE ON OUR WEB SITE.
The Company made a determination to disclose transactions between the
Company and "related persons," as that term is defined in the instructions to
Section 404 of Regulation S-B. In light of the Compliance and Disclosure
Interpretations, the Company has revised its disclosure in the "Share Exchange
Transaction" section commencing on page 74 of the Registration Statement to
include disclosures related to Mr. Thomas Walsh and Mr. Michael Kirkpatrick,
both of whom became owners of more than 5% of the Company's common stock as a
result of the Share Exchange Transaction. With these additional disclosures, the
"Share Exchange Transaction" commencing section on page 74 of the Registration
Statement includes disclosures related to each of the shareholders identified on
Exhibit A to the Share Exchange Agreement who are "related persons" of the
Company, including those shareholders who beneficially own more than 5% of the
Company's common stock.
Russell Mancuso, Esq.
September 14, 2007
Page 21
38. PLEASE DISCLOSE THE PRINCIPLE FOLLOWED IN DETERMINING THE AMOUNT TO PAY
FOR THE SHARES YOU ACQUIRED IN THE SHARE EXCHANGE.
The Company has revised its disclosure in the "Share Exchange
Transaction" section on page 74 of the Registration Statement to describe the
manner in which the Company's board of directors determined the amount to pay
for the shares of R. H. Strasbaugh purchased in the share exchange.
39. WITH A VIEW TOWARD DISCLOSURE, PLEASE TELL US WHICH RELATED PARTIES
ACQUIRED THE SHARES THEY EXCHANGED WITHIN TWO YEARS PRIOR TO THE
EXCHANGE. ALSO TELL US THE COST OF THE SHARES TO THOSE PARTIES.
The Company has revised its disclosure in the "Share Exchange
Transaction" section commencing on page 74 of the Registration Statement to
provide that except for Mr. Walsh, none of the shareholders of R. H. Strasbaugh
acquired the shares they exchanged within two years prior to May 24, 2007. The
Company has also included disclosure commencing on page 74 of the Registration
Statement that on February 6, 2007, Mr. Walsh acquired 548,865 shares of R. H.
Strasbaugh common stock upon exercise of an option to purchase shares of R. H.
Strasbaugh's common stock that was originally granted to him on April 10, 2006
at an exercise price of $0.07 per share.
Facilities Lease, page 67
- -------------------------
40. PLEASE DESCRIBE THE MONTHLY PAYMENT AMOUNT FOR YOUR FACILITIES LEASE,
AND QUANTIFY THE PAYMENTS MADE IN 2005, 2006 AND 2007. ALSO, PLEASE
QUANTIFY MR. STRASBAUGH'S PERCENTAGE OWNERSHIP OF THE PROPERTY.
The Company has revised its disclosure in the "Facilities" section
commencing on page 50 of the Registration Statement and in the "Facilities
Lease" section on page 75 of the Registration Statement to describe the monthly
payment amount for the Company's facilities lease, the total amount of lease
payments made in 2005, 2006 and the first six months of 2007 and Mr.
Strasbaugh's percentage ownership in the property.
Repayment of Loan, page 68
- --------------------------
41. PLEASE MORE FULLY DESCRIBE THIS TRANSACTION, INCLUDING DATE, TOTAL
AMOUNT AND PURPOSE OF THE LOAN AND THE INTEREST RATE.
The Company has revised its disclosure in the "Repayment of Loan"
section on page 75 of the Registration Statement to more fully describe the
transaction, including the date, total amount and purpose of the loan and the
interest rate.
Russell Mancuso, Esq.
September 14, 2007
Page 22
Series A Preferred Stock Financing, page 68
- -------------------------------------------
42. PLEASE CLARIFY THE BASIS FOR B. RILEY AND CO.'S ASSIGNMENT OF ITS
WARRANTS TO RELATED PARTIES. DESCRIBE THE CONSIDERATION PAID BY YOUR
RELATED PARTIES.
The Company issued to B. Riley, the Company's placement agent, a
warrant to purchase 385,434 shares of the Company's common stock as compensation
for services rendered as placement agent in the Series A Preferred Stock
Financing. Subsequent to its receipt of the warrant, B. Riley assigned portions
of the warrant to several of its employees including Bryant Riley, who once
served on the Company's board of directors, and Wesley Cummins, who currently
serves on the Company's board of directors. Both Mr. Riley and Mr. Cummins, in
their capacity as employees of B. Riley, provided investment banking services to
the Company in connection with the Series A Preferred Stock Financing. B. Riley
has represented to the Company that the assignments made to both Mr. Riley and
Mr. Cummins were in consideration of services rendered by Mr. Riley and Mr.
Cummins, respectively, as employees of B. Riley, in connection with the
investment banking services B. Riley provided to the Company in connection with
the Series A Preferred Stock Financing. Additionally, both Mr. Riley and Mr.
Cummins have represented to the Company that they received the warrants assigned
to them by B. Riley in the ordinary course of business as transaction-based
compensation for investment banking services.
43. PLEASE DISCLOSE THE PRICE AT WHICH YOUR STOCK WAS QUOTED IN THE PINK
SHEETS ON THE DATE OF THIS TRANSACTION.
The Company has revised its disclosure in the "Series A Preferred Stock
Financing" section on page 76 of the Registration Statement to disclose the
price at which the Company's common stock was quoted in the Pink Sheets(R) on
the closing date of the Share Exchange Transaction.
Principal Shareholders, page 69
- -------------------------------
44. PLEASE TELL US WHY THE LEAD-IN SENTENCE TO THIS SECTION INDICATES THAT
YOU HAVE ONLY PROVIDED DISCLOSURE WITH RESPECT TO YOUR COMMON STOCK
GIVEN THE REQUIREMENTS OF REGULATION S-B ITEM 403 AS IT RELATES TO YOUR
SERIES A PREFERRED STOCK.
The Company has revised its disclosure in the "Principal Shareholders"
section on page 77 of the Registration Statement to state that the Company has
provided disclosure with respect to the Company's "voting stock," which stock
includes the Company's common stock and Series A Preferred Stock.
Russell Mancuso, Esq.
September 14, 2007
Page 23
45. PLEASE RECONCILE YOUR STATEMENT IN THE THIRD PARAGRAPH THAT THE 4.99%
LIMITATION MAY BE WAIVED UPON 61-DAYS' NOTICE WITH YOUR DISCLOSURE IN
THE FIRST PARAGRAPH UNDER "SERIES A PREFERRED STOCK FINANCING" ON PAGE
68 WHICH INDICATES THAT THAT THE WAIVER TOOK EFFECT IN ONE DAY.
The disclosure in the Principal Shareholders section accurately states
that the 4.99% limitation may be waived upon 61-days' notice. Additionally, the
discussion of Mr. Miller waiving the 4.99% limitation on page 75 of the
Registration Statement (previously page 68) does not indicate that the waiver
took effect in one day, but rather explains that the Mr. Miller and Milfam II
L.P. BECAME BENEFICIAL OWNERS of the securities with respect to which the 4.99%
limitation was waived on the day AFTER they notified the Company of such waiver.
Under Rule 13-d of the Exchange Act, a person is deemed to be the
beneficial owner of a security if he has the right to acquire beneficial
ownership of such security at any time within 60 days. Thus, while the 4.99%
limitation may be waived upon 61-days notice, a person becomes a beneficial
owner of the securities on the day after the notice of waiver is delivered
(i.e., 60 days before the effective date of the waiver).
In conclusion, while the 4.99% limitation ceases to be effective
61-days after it is waived, the person who waives the 4.99% limitation becomes a
beneficial owner of the securities with respect to which he waived the 4.99%
limitation on the day after the limitation is waived. The Company has revised
its disclosures in the "Certain Relationships and Related Transactions" section
under the heading "Series A Preferred Stock Financing" on page 75 of the
Registration Statement and the "Selling Security Holders" section under the
heading "Indemnification and Other Matters" on page 87 of the Registration
Statement to remove references to the date on which Mr. Miller and Milfam II
L.P. became beneficial owners of the securities to clarify the distinction
described above.
46. PLEASE INCLUDE A ROW IN THE TABLE FOR MR. GULLARD.
The Company has revised its disclosure in the "Principal Shareholder"
section commencing on page 78 of the Registration Statement to include
disclosure relating to Mr. Gullard.
Selling Security Holders, page 72
- ---------------------------------
47. REFER TO YOUR DISCLOSURE NOTED AT THE END OF THE TABLE WITH TWO
ASTERISKS. PLEASE TELL US WHETHER ANY OF THE SELLING STOCKHOLDERS ARE
BROKER-DEALERS OR AFFILIATES OF BROKER-DEALERS. A SELLING SHAREHOLDER
WHO IS A BROKER-DEALER MUST BE IDENTIFIED IN THE PROSPECTUS AS AN
Russell Mancuso, Esq.
September 14, 2007
Page 24
UNDERWRITER. IN ADDITION, A SELLING STOCKHOLDER WHO IS AN AFFILIATE OF
A BROKER-DEALER MUST BE IDENTIFIED IN THE PROSPECTUS AS AN UNDERWRITER
UNLESS THAT SELLING STOCKHOLDER IS ABLE TO MAKE THE FOLLOWING
REPRESENTATIONS IN THE PROSPECTUS: THE SELLING SHAREHOLDER PURCHASED
THE SHARES BEING REGISTERED FOR RESALE IN THE ORDINARY COURSE OF
BUSINESS, AND AT THE TIME OF THE PURCHASE, THE SELLING SHAREHOLDER HAD
NO AGREEMENTS OR UNDERSTANDINGS, DIRECTLY OR INDIRECTLY, WITH ANY
PERSON TO DISTRIBUTE THE SECURITIES. PLEASE REVISE AS APPROPRIATE.
The Company has revised its disclosure in the "Selling Security Holder
Table" section on page 81 of the Registration Statement stating that B. Riley,
as an NASD-member firm, is deemed to be acting as an underwriter as to the
shares of common stock such firm is offering under the prospectus. The Company
has also revised the table on page 82 of the Registration Statement to clarify
which selling security holders are affiliates of B. Riley.
48. PLEASE IDENTIFY THE INDIVIDUALS WITH BENEFICIAL OWNERSHIP OF THE SHARES
HELD BY THE ENTITIES IN THE TABLE. FOR EXAMPLE, WE NOTE PTR FUND, L.P.
The Company has revised its disclosure in the footnotes to the Selling
Security Holder Table commencing on page 83 of the Registration Statement to
identify the individuals with beneficial ownership of the shares held by
entities.
Overview, page 76
- -----------------
49. PLEASE TELL US THE PURPOSE AND THE AUTHORITY FOR THE LAST TWO SENTENCES
OF THE FIRST PARAGRAPH.
The Company has revised its disclosure in the first paragraph of the
"Overview" section on page 85 of the Registration Statement to delete the last
two sentences of the prior draft of this paragraph.
Indemnification, page 78
- ------------------------
50. PLEASE FILE AS AN EXHIBIT TO THE REGISTRATION STATEMENT THE ENGAGEMENT
AGREEMENT MENTIONED IN CLAUSE (III).
The Company has included the engagement agreement with B. Riley as
Exhibit 10.14 to the Registration Statement.
Russell Mancuso, Esq.
September 14, 2007
Page 25
Common Stock, page 80
- ---------------------
51. PLEASE CLARIFY WHETHER SHAREHOLDERS HAVE THE ABILITY TO CUMULATE THEIR
VOTES. WE NOTE SECTION 2.8 OF YOUR BYLAWS.
The Company has revised its disclosure in the "Common Stock" section on
page 90 of the Registration Statement to include a description of the ability of
the Company's common shareholders to cumulate their votes at a meeting of
shareholders to elect directors.
Anti-takeover effects, page 83
- ------------------------------
52. WE NOTE YOUR REFERENCE TO "OTHER PROVISIONS" IN THE SECOND PARAGRAPH.
PLEASE PROVIDE ALL DISCLOSURE REQUIRED BY REGULATION S-B ITEM
202(A)(4).
The reference to "and other provisions" has been deleted from the
description of anti-takeover effects under California law on page 94 of the
Registration Statement. The prior language was inadvertently included in the
prior description.
Change in Certifying Accountant, page 84
- ----------------------------------------
53. PLEASE REVISE YOUR FILING TO INCLUDE THE DISCLOSURES REQUIRED BY ITEM
304(A)(2) OF REGULATION S-B RELATED TO APPOINTMENT OF YOUR CURRENT
INDEPENDENT ACCOUNTANT.
The Company has revised its disclosure in the "Change in Certifying
Accountant" section commencing on page 94 of the Registration Statement to
include the disclosures required by Item 304(a)(2) of Regulation S-B.
Index to Financial Statements, page F-1
- ---------------------------------------
General
- -------
54. PLEASE UPDATE THE FINANCIAL STATEMENTS, AS APPLICABLE, AS REQUIRED BY
ITEM 310(G) OF REGULATION S-B.
The Company has updated its financial statements on pages F-2 to F-8,
as required by Item 310(g) of Regulation S-B. In providing updated financial
statements for the six months ended June 30, 2007, the Company would note the
following significant accounting matters:
Russell Mancuso, Esq.
September 14, 2007
Page 26
o On May 24, 2007, the Company completed the Share Exchange
Transaction and immediately thereafter closed the Series A
Preferred Stock Financing whereby it issued shares of Series A
Preferred Stock and Warrants to purchase common stock. In
making the decision to treat the Series A Preferred Stock as
"temporary equity," the Company considered applicable guidance
contained in SFAS No. 150, EITF Issue No. 00-19 and SFAS No.
133. An analysis of the Company's accounting treatment is
attached here as EXHIBIT A.
o In determining the appropriate accounting treatment of the
Registration Rights Agreement which contains certain
liquidated damages provisions, the Company considered relevant
applicable guidance contained in SFAS No. 5. An analysis of
the Company's accounting treatment is attached hereto as
EXHIBIT B.
o The Company considered and analyzed the offering costs of the
Series A Preferred Stock Financing and the liquidated damages
provisions contained in the Registration Rights Agreement for
potential beneficial conversion features. The Company
concluded, after considering relevant applicable guidance
contained in EITF Issue No. 00-27, EITF Issue No. 98-5, SFAS
No. 133 and EITF Issue No. 00-19, that there is no beneficial
conversion feature as the conversion price would exceed the
fair value of the underlying common stock. An analysis of the
Company's accounting treatment is attached hereto as EXHIBIT
C.
o In determining the Company's revenue recognition policies, the
Company considered relevant applicable guidance contained in
EITF Issue No. 00-21 and SAB No. 104. An analysis of the
Company's revenue recognition policy is attached here as
EXHIBIT D.
55. INCLUDE UPDATED ACCOUNTANTS' CONSENTS WITH ALL AMENDMENTS TO THE
FILING.
The Company has included an updated accountant's consent as Exhibit
23.2 to the Registration Statement.
Interim Condensed Financial Statements, page F-2
- ------------------------------------------------
General
- -------
56. AS APPLICABLE, PLEASE REVISE YOUR UNAUDITED CONDENSED FINANCIAL
STATEMENTS TO ALSO ADDRESS THE COMMENTS ISSUED BELOW IN CONNECTION WITH
YOUR ANNUAL AUDITED FINANCIAL STATEMENTS.
Russell Mancuso, Esq.
September 14, 2007
Page 27
The Company has revised its unaudited condensed combined financial
statements commencing on page F-2 of the Registration Statement to address the
comments issued below in connection with its annual audited financial
statements.
Notes to Condensed Financial Statements, page F-5
- -------------------------------------------------
Note 1. Summary of Significant Accounting Policies, page F-5
- ------------------------------------------------------------
- -SAB 108--Misstatements in Prior Periods, page F-6
- --------------------------------------------------
57. WE NOTE YOUR DISCLOSURE THAT YOU RECORDED A NET $22,000 ADJUSTMENT FOR
ERRORS IN YOUR FINANCIAL STATEMENTS. PLEASE TELL US WHETHER THE
ADJUSTMENT WAS RECORDED IN YOUR MARCH 31, 2007 OR 2006 FINANCIAL
STATEMENTS. ADDITIONALLY, PLEASE TELL US HOW THIS ADJUSTMENT IS IN
ACCORDANCE WITH SAB 108 WHICH IS REQUIRED TO BE ADOPTED IN YOUR
FINANCIAL STATEMENTS FOR THE PERIOD ENDING AFTER NOVEMBER 15, 2006,
WHICH IN YOUR CASE IS DECEMBER 31, 2006.
The $22,000 was not recorded in the Company's financial statements, but
represents a $22,000 net effect of errors for the quarter. The Company did not
record an immaterial price testing error of $34,000 at December 31, 2005.
Correction of this price testing error during the first quarter would have
resulted in income of $34,000 which would have offset the $56,000 of expense
recognized during the first quarter.
Due to an error in recording interest expense on the note payable since
the fourth quarter of 2005, a correcting entry to record the cumulative effect
of the error was recorded in the quarter ended March 31, 2007. The total amount
of the correcting entry was $56,000. In analyzing the proper disposition of the
error, the Company considered the provisions of SAB 108, SAB 99, SAS 154 and APB
28. The error was not intentional, but rather it was due to an incorrect
amortization schedule for a note payable. The payments due on the note in prior
periods were not paid as scheduled because the Company was short of cash and
this led to an improper interest accrual on the balance owed which grew from
quarter to quarter until paid.
The quantitative analysis of the impact of the error on the prior
period financial statements is as follows:
FISCAL 2005:
- ------------
Approximately $12,000 related to the fiscal year ended December 31,
2005, which amount is approximately 8% of pretax profit and approximately 2% of
interest expense for the year. The error had no impact on cash flows and was
insignificant both quantitatively and qualitatively in relation to sales, total
Russell Mancuso, Esq.
September 14, 2007
Page 28
assets and net equity. Based on the relative insignificance of the error, the
Company considers the financial statements for the year ended December 31, 2005
to be fairly stated in all material respects. As such, no restatement is
required.
FISCAL 2006:
- ------------
Approximately $44,000 related to the fiscal year ended December 31,
2006, which amount is less than 4% of pretax profit and approximately 5% of
interest expense for the year. The error had no impact on cash flows and was
insignificant both quantitatively and qualitatively in relation to sales, total
assets and net equity. Based on the relative insignificance of the error, the
Company considers the financial statements for the year ended December 31, 2006
to be fairly stated in all material respects. As such, no restatement is
required.
INTERIM PERIODS:
- ----------------
For the proper treatment of the adjustment for the error the Company
considered the impact on the financial statements for the quarters ended March
31, 2007 and 2006. In accordance with APB 28, "Interim Financial Reporting," for
purposes of determining materiality for correction of an error the guidance
states as follows:
"...AMOUNTS SHOULD BE RELATED TO THE ESTIMATED INCOME FOR THE FULL
FISCAL YEAR AND ALSO TO THE EFFECT ON THE TREND OF EARNINGS. CHANGES
THAT ARE MATERIAL WITH RESPECT TO AN INTERIM PERIOD BUT NOT MATERIAL
WITH RESPECT TO THE ESTIMATED INCOME FOR THE FULL FISCAL YEAR OR TO THE
TREND OF EARNINGS SHOULD BE SEPARATELY DISCLOSED IN THE INTERIM
PERIOD."
Accordingly, as described above, the Company considers the impact of
the error insignificant for the year ended December 31, 2006. Management
considered the quantitative and qualitative aspects of the error. The error
occurred somewhat ratably over the course of the year ($8,000 in Q1, $10,000 in
Q2, $12,000 in Q3, and $14,000 in Q4) and the Company does not consider it
significant to the trend in earnings. Likewise, the Company expects to report
pretax profits of a sufficient amount for the year ending December 31, 2007,
such that management does not consider the $56,000 adjustment recognized in the
quarter ended March 31, 2007 material to the expected results for the year
ending December 31, 2007, or to the trend in earnings for the fiscal quarters in
the year ending December 31, 2007.
Management believes that the adjustment for the error is significant
enough, however, to require disclosure in the financial statements for the
quarter ended March 31, 2007. As such, the Company has disclosed the adjustment
of $56,000 in the interim statements for the period, pursuant to APB 28, and
will not restate the prior period balances.
Russell Mancuso, Esq.
September 14, 2007
Page 29
Annual Financial Statements, page F-18
- --------------------------------------
Statements of Income, page F-20
- -------------------------------
58. WE NOTE THAT YOU RECOGNIZED $100,236 IN INCOME FROM THE CANCELLATION OF
LIABILITIES AND $379,178 FROM THE CANCELLATION OF ACCRUED ROYALTIES IN
FISCAL 2005. PLEASE TELL US AND REVISE YOUR FILING TO EXPLAIN THE
NATURE OF THE ORIGINAL LIABILITIES AND ACCRUED ROYALTIES THAT YOU WERE
OBLIGATED TO PAY AND WHY IT WAS APPROPRIATE TO RECOGNIZE INCOME RELATED
TO THE CANCELLATION OF THESE OBLIGATIONS. CITE THE ACCOUNTING
LITERATURE RELIED UPON AND EXPLAIN HOW YOU APPLIED THIS LITERATURE TO
YOUR SITUATION.
Pursuant to paragraph 16 of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities a Replacement
of FASB Statement 125," a debtor shall derecognize a liability if and only if it
has been extinguished. A liability has been extinguished if either of the
following conditions has been met:
(a) The debtor pays the creditor and is relieved of its
obligation for the liability. Paying the creditor includes delivery of
cash, other financial assets, goods, or services or reacquisition by
the debtor of its outstanding debt securities whether the securities
are canceled or held as so-called treasury bonds.
(b) The debtor is legally released from being the primary
obligor under the liability, either judicially or by the creditor.
The $100,236 of miscellaneous accrued expenses and the $379,178 of
accrued royalties represent claims from unsecured creditors from 1998 through
2001 which the Company will not pay. These amounts resulted from the balance of
creditor claims against the Company prior to its restructuring and extended
work-out arrangement made during 2001 with all of the Company's creditors. The
Company's financial condition during that period was very poor and it is
unlikely that the Company could have continued without the restructuring of many
of its liabilities, the sale of certain technology, and the sale of 20 percent
of its equity. Many of these unsecured creditors have ceased to exist and the
statute of limitations for unsecured creditors in California is four years. (See
California Code of Civil Procedure Section 337.) During the year ended December
31, 2005, the Company derecognized these liabilities because the statute of
limitations had expired and, as such, these balances were no longer legal claims
Russell Mancuso, Esq.
September 14, 2007
Page 30
against the Company. In essence, because of the running of the statute of
limitations, the Company was "legally released" from being the obligor under the
liability and therefore no legal claim against the Company exists with respect
to these amounts. There have not been any discussions with any of the creditors
for several years.
The Company has revised its disclosure to add Note 12 - Cancellation of
Liabilities on page F-59 of the Registration Statement to provide disclosure
regarding the cancellation of the liabilities.
Notes to Financial Statements, page F-23
- ----------------------------------------
Note 1. Summary of Significant Accounting Policies, page F-23
- -------------------------------------------------------------
- -Segment Information, page F-24
- -------------------------------
59. PLEASE REVISE YOUR FILING TO PROVIDE THE DISCLOSURES FOR PRODUCT SALES
AND SERVICES REQUIRED BY PARAGRAPH 37 OF SFAS 131.
The Company has revised its disclosure in the Condensed Consolidated
Statement of Income on page F-4 and the Statements of Income on page F-35 to
break out sales and cost of goods sold for product goods and services as
required by paragraph 37 of SFAS 131. These revisions had no impact to gross
profit.
- -Revenue Recognition, page F-26
- -------------------------------
60. WE NOTE ON PAGE 40 AND THROUGHOUT THE FILING THAT YOU PROVIDE
INSTALLATION SERVICES TO YOUR CUSTOMERS AND OTHER SERVICES TO
CUSTOMERS. PLEASE TELL US AND REVISE YOUR FILING TO EXPLAIN THE NATURE
OF THE SERVICES THAT YOU PROVIDE TO YOUR CUSTOMERS AND HOW YOU
EVALUATED YOUR SALES ARRANGEMENTS FOR MULTIPLE-ELEMENTS. REFER TO EITF
00-21 AND SAB TOPIC 13.
The Company derives revenues principally from the sale of tools, parts
and services, as follows:
o Tools - The Company recognizes revenue once a customer has
visited the plant, signed off on the tool and the tool is
completed and shipped. A provision for the estimated future
cost of warranty is recorded when revenue is recognized.
o Parts - The Company recognizes revenue when the parts are
shipped.
Russell Mancuso, Esq.
September 14, 2007
Page 31
o Service - Revenue from maintenance contracts is deferred and
recognized over the life of the contract, which is generally
one to three years. Maintenance contracts are separate
components of revenue and not bundled with our tools. If a
customer does not have a maintenance contract, then the
customer is billed for time and material and the Company
recognizes revenue the after the service has been completed.
Installation is an inconsequential or perfunctory obligation and not
considered a separate element from the sale of the tool in the purchase order.
The Company's installation services are minor in relation to the total value of
the purchase. At the time the tools are shipped, they are complete in virtually
every respect. They have been inspected, tested and signed-off by the customer
and the Company's re-assembly obligation, if any, is inconsequential. Customers
visit the Company and inspect the tool, conduct on-site experiments, and
sign-off on the tool prior to shipment. Some parts on the tools are then removed
for shipping purposes and reattached at the customer site. The customers then
re-test the tools to duplicate the testing previously conducted prior to their
sign-off and the shipment of the tool. These re-assembly procedures can be
performed by Strasbaugh employees, the customers themselves, or various customer
representatives or distributors throughout the world.
The Company offers a suite of products known as "Enhancements" which
are generally upgrades of existing Company and non-Company tools. These
enhancements are not required for the tools to function and are not part of the
original contract. The Company recognizes revenue once these upgrades and
enhancements are complete.
The Company has evaluated its sales arrangements for multiple
deliverables under EITF Issue No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables," and determined that its components of revenue are
separate units of accounting. Each unit has value to the customer on a
standalone basis, there is objective and reliable evidence of the fair value of
each unit, and there is no right to cancel, return or refuse an order.
o The Company's tools, parts, and services have value on a
standalone basis. Although modified pursuant to customer
needs, the tools may be used for similar applications for a
wide range of customers. Parts are sold separately as ordered
from customers for both Company and non-Company tools. A
customer may hire the Company to perform services on Company
tools or non-Company tools and a customer may hire an outside
vendor for services on a Company tool. Service fees and
contracts are priced on a customer by customer and job by job
basis.
Russell Mancuso, Esq.
September 14, 2007
Page 32
o There is objective evidence for the fair value of the
Company's tools, parts, and services. Tools may be purchased
from a variety of vendors, Company and non-Company parts may
be used for Company and non-Company tools, and Company may
perform services on its own tools or its competitors tools and
the customer may use Company representatives or non-Company
representatives to perform services on Company tools. Each
tool, part, and service is sold under separate purchase
orders.
o The Company's tool sales have no right of return, or
cancellation rights. Tools are typically modified to some
degree to fit the needs of the customer and, therefore, once a
purchase order has been accepted by the Company and the
manufacturing process has begun, there is no right to cancel,
return or refuse the order. Generally, the Company obtains a
non-refundable down-payment from the customer. These fees are
deferred and recognized as the tool is shipped in accordance
with the policy for revenue recognition under tool sales
discussed above.
Since each component is a separate unit of accounting pursuant to EITF
Issue No. 00-21, the Company recognizes its revenue pursuant to SAB No. 104,
"Revenue Recognition." Under SAB 104, revenue is recognized when the following
criteria are met: (i) persuasive evidence of an arrangement, such as a purchase
order, exists, (ii) delivery has occurred or services have been rendered, (iii)
our price to the customer is fixed or determinable, and (iv) collection is
reasonably assured.
The Company has revised its disclosure in the Revenue Recognition
sections on pages F-14 and F-43 of the Registration Statement to more fully
describe these services and the Company's accounting treatment.
61. WE ALSO NOTE ON PAGE 28 THAT YOU PROVIDE UPGRADES TO YOUR CUSTOMERS.
PLEASE TELL US AND REVISE YOUR FILING TO EXPLAIN THE NATURE AND YOUR
ACCOUNTING FOR THESE UPGRADES. INCLUDE IN YOUR DISCUSSION THE SPECIFIC
ACCOUNTING LITERATURE YOU RELIED UPON.
The Company does not provide upgrades as part of an original sale. The
Company's CMP Enhancement represents a line of products and software offered for
sale as an upgrade to an existing product. The CMP Enhancement is not necessary
for the continued use of the product and is not part of the original sale of the
tool being enhanced. The CMP Enhancement is priced accordingly, generally around
$80,000. These "Enhancements" can represent the addition of parts, as well as a
software upgrade. Customers may purchase these upgrades or not. The same suite
of upgrade products are offered for sale to customers using our competitors'
equipment as well. Revenue is recognized when the upgrade is complete.
Russell Mancuso, Esq.
September 14, 2007
Page 33
The Company has revised its disclosure in the "Revenue Recognition"
sections on pages F-14 and F-43 of the Registration Statement to more fully
describe its upgrades and the Company's accounting treatment of such upgrades.
62. WE FURTHER NOTE ON PAGE 2 AND THROUGHOUT THE FILING THAT YOU ENTER INTO
ARRANGEMENTS TO SELL YOUR PRODUCTS THROUGH DISTRIBUTORS AND
MANUFACTURERS' REPRESENTATIVES. PLEASE TELL US AND REVISE YOUR FILING
TO DESCRIBE THE SIGNIFICANT TERMS OF YOUR AGREEMENTS WITH DISTRIBUTORS,
INCLUDING PAYMENT, RETURN, EXCHANGE, PRICE PROTECTION, DISCOUNTS, SALES
INCENTIVES AND OTHER SIGNIFICANT MATTERS. REFER TO SAB TOPIC 13, EITF
01-09, AND SFAS 48, AS NECESSARY.
The Company uses a direct sales force within the United States
comprised of sales personnel who are employees of the Company and who are paid a
base salary plus commission. The Company uses a distributor in Europe who
purchases the Company's products and re-sells the products to end-user
customers. The distributor pays the Company the full domestic retail price and
then marks-up the price for their sale in Europe. Neither the distributor nor
the customer have return or exchange rights as these tools are customized based
on the customer's specifications. Also, the Company does not offer any further
sales incentives, such as advertising or exclusivity charges. The distributor
may enter into a maintenance contract with the customer directly in which case
the distributor pays the Company for time and material should the Company's
employees be used.
The Company sells its products in Asia, South Korea, Israel and other
parts of the world using sales representatives. Sales representatives are paid a
commission of 12%-15% for sales. No other incentives are offered to these sales
representatives. The Company has revised its disclosure on page 47 of the
Registration Statement to describe the significant terms of the Company's
agreements with its distributors and sales representatives as set forth above.
- -Shipping Costs, page F-26
- --------------------------
63. WE NOTE THAT YOU CLASSIFY SHIPPING COSTS THAT YOU BILLED YOUR CUSTOMERS
WITHIN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. PARAGRAPH 5 OF
EITF 00-10 INDICATES ALL SHIPPING AMOUNTS BILLED TO A CUSTOMER IN A
SALE TRANSACTION RELATED TO SHIPPING AND HANDLING, IF ANY, REPRESENT
REVENUES EARNED FOR THE GOODS PROVIDED AND SHOULD BE CLASSIFIED AS
REVENUE. PLEASE REVISE OR ADVISE.
Russell Mancuso, Esq.
September 14, 2007
Page 34
The Company has revised its disclosure in the "Shipping Costs" section
commencing on page F-43 of the Registration Statement to clarify the
classifications of shipping costs.
- -New Accounting Pronouncements, page F-29
- -----------------------------------------
64. WE NOTE YOUR DISCLOSURE THAT YOU WILL BE REQUIRED TO ADOPT SAB 108 IN
YOUR FISCAL YEAR 2006 AND THAT YOU DO NOT EXPECT IT TO HAVE A MATERIAL
IMPACT ON YOUR FINANCIAL STATEMENTS. HOWEVER, SAB 108 IS EFFECTIVE FOR
FISCAL YEARS ENDING AFTER NOVEMBER 15, 2006, WHICH IN YOUR CASE IS THE
FISCAL YEAR ENDED DECEMBER 31, 2006. PLEASE REVISE OR ADVISE TO TELL US
WHAT IMPACT THE ADOPTION OF SAB 108 HAD ON YOUR FISCAL 2006 FINANCIAL
STATEMENTS.
The Company has revised its disclosure in the "New Accounting
Pronouncements" section on page F-46 of the Registration Statement to clarify
that the Company has adopted SAB 108 for the fiscal year ended December 31,
2006.
Note 8. Commitments and Contingencies, page F-34
- ------------------------------------------------
65. WE NOTE YOUR DISCLOSURES ON PAGE 44 RELATED TO A COMPLAINT FILED BY MR.
RZEZUSKI FOR WHICH YOUR INSURANCE CARRIER HAS ASSUMED THE DEFENSE OF
THIS ACTION. SFAS 5 ASSESSMENTS SHOULD BE MADE ON A GROSS BASIS, BEFORE
CONSIDERATION OF ANY POSSIBLE INSURANCE CLAIMS. PLEASE REVISE YOUR
FILING TO PROVIDE YOUR ASSESSMENT OF THIS CONTINGENCY UNDER SFAS 5 AND
THE DISCLOSURES REQUIRED BY PARAGRAPHS 9 - 12 OF SFAS 5.
The Company has revised its disclosure in the "Legal Proceedings,"
"Litigation," and "Litigations" sections on pages 51, F-21 and F-52,
respectively, of the Registration Statement to provide the Company's assessment
of this contingency.
Note 10. Stock Compensation Plan, page F-36
- -------------------------------------------
66. WE NOTE THAT YOU IMMEDIATELY VESTED OPTIONS TO PURCHASE 548,866 SHARES
OF COMMON STOCK DURING FISCAL 2006 AND RECORDED $7,000 IN COMPENSATION
EXPENSE FOR THIS MODIFICATION UNDER SFAS 123(R) AND APB 25. WE FURTHER
NOTE THAT YOU ISSUED THESE OPTIONS BASED ON A STOCK PRICE OF $0.07 PER
SHARE. PLEASE ADDRESS THE FOLLOWING:
o PLEASE TELL US AND REVISE YOUR FILING TO PROVIDE THE FAIR
VALUE OF YOUR COMMON STOCK ON THE DATE OF MODIFICATION. WITHIN
YOUR DISCUSSION, PLEASE EXPLAIN HOW YOU DETERMINED THE FAIR
VALUE OF YOUR COMMON STOCK ON THE DATE OF THE MODIFICATION.
Russell Mancuso, Esq.
September 14, 2007
Page 35
o PLEASE EXPLAIN TO US WHY YOU RECOGNIZED $7,000 IN COMPENSATION
EXPENSE FOR THIS MODIFICATION UNDER SFAS 123(R) AND APB 25
SINCE YOU ADOPTED SFAS 123(R) ON JANUARY 1, 2006.
The Company believes that the $0.07 stock price is justified as
follows:
(a) The last known sales price was $0.07;
(b) Dalton Group sold their stock back to R. H.
Strasbaugh for $1,000.00 (less than a penny per
share);
(c) The stock was not liquid (i.e., no ready market for
the stock); and
(d) At that date, R. H. Strasbaugh was not in the process
of going public (e.g., it had yet to engage
investment bankers to attempt a public offering).
The 548,866 option grant had expired and was re-issued or extended by the
Company's board of directors. Under SFAS123(R) this "re-issuance" or "extension"
is treated as an entirely new grant, for accounting purposes. The old options
are treated as if they had expired. There was approximately 1.75 years from
grant or re-issue date to expiration date. Approximately .75 years had expired
in 2006. Given the other inputs into the Black Scholes model the estimated fair
market value of the compensation expense of approximately $7,000 for these
options.
The Company has revised its disclosure in the "2000 Stock Option
Agreement" section on page F-57 of the Registration Statement to provide the
fair value of the Company's common stock on the date of modification.
67. FURTHER TO THE ABOVE, WE FURTHER NOTE THAT YOU USED THE
GRANT/MODIFICATION DATE FAIR VALUE OF 0.09% WITHIN THE BLACK SCHOLES
MODEL TO VALUE THESE STOCK OPTIONS. PLEASE TELL US AND REVISE YOUR
FILING TO EXPLAIN WHAT IS MEANT BY "GRANT/MODIFICATION DATE FAIR VALUE
PERCENTAGE" AND HOW YOU DETERMINED THIS ASSUMPTION.
The Company has revised its disclosure in the "Stock Compensation Plan"
section on page F-57 of the Registration Statement to correctly state the fair
value as approximately $0.01.
Russell Mancuso, Esq.
September 14, 2007
Page 36
Note 14. Supplemental Disclosure of Cash Flow Information, page F-42
- --------------------------------------------------------------------
68. WE NOTE HERE AND ON PAGE F-31 THAT YOU HAVE TRANSFERRED EQUIPMENT TO
INVENTORY FOR RESALE AND HAVE TRANSFERRED CERTAIN INVENTORY TO PROPERTY
AND EQUIPMENT. PLEASE REVISE YOUR FILING TO ADDRESS THE FOLLOWING:
o THE NATURE OF THE EQUIPMENT AND YOUR ACCOUNTING POLICIES
RELATED TO TRANSFERS OF THIS EQUIPMENT TO AND FROM INVENTORY
AND PROPERTY AND EQUIPMENT;
o THE AMOUNT OF THIS EQUIPMENT INCLUDED WITHIN INVENTORY AND
PROPERTY AND EQUIPMENT AS OF DECEMBER 31, 2006 AND 2005;
o THE BASIS AT WHICH YOU TRANSFERRED THIS EQUIPMENT FROM
INVENTORY TO PROPERTY AND EQUIPMENT;
o THE BASIS AT WHICH YOU TRANSFER THIS EQUIPMENT FROM PROPERTY
AND EQUIPMENT TO INVENTORY;
o DESCRIBE HOW YOU RECORD AMORTIZATION EXPENSE, HOW IT IS
REFLECTED IN THE FINANCIAL STATEMENTS AND WHY YOU BELIEVE THE
CLASSIFICATION IS APPROPRIATE.
The equipment being transferred between inventory and property and
equipment represents the Company's product line, or machines and equipment which
is generally sold to end-user customers. It is the Company's practice to try and
maintain a "lab" tool, or a "spare" tool which is used for customer
demonstrations or used to duplicated technical problems which may appear at a
customer's site. Once the decision is made to maintain a particular tool it is
transferred at net book value, or cost, from inventory to property and
equipment. Generally, the Company's inventory is built based on specific
customer orders but from time to time the Company will receive an order for a
tool that is already being used as a "lab" tool. If the Company decides to sell
the "lab" tool as opposed to building a new tool, in order to meet a customer's
time constraint, for example, then the tool is transferred from property and
equipment back to inventory at its current net book value, net of depreciation
taken, and subsequently sold and delivered to the customer. While the tool is
used as a "lab" tool, it is included in property and equipment and is
depreciated over its estimated useful life.
The Company has revised its disclosure in the "Property, Plant and
Equipment" section commencing on page F-41 of the Registration Statement to
address this comment.
Russell Mancuso, Esq.
September 14, 2007
Page 37
We trust that the foregoing is responsive to your comments in your
letter of comments dated August 20, 2007. If you have any questions, please call
me at (714) 641-3450.
Sincerely yours,
RUTAN & TUCKER, LLP
/s/ Larry A. Cerutti
---------------------------
Larry A. Cerutti
LAC:jss
cc: Jay Mumford, Esq. (w/enc.)
Ms. Tara Harkins (w/enc.)
Mr. Chuck Schillings (w/enc.)
Mr. Richard Nance (w/enc.)
Mr. Fred Furry (w/enc.)
EXHIBIT A
---------
STRASBAUGH
FAS 150 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
BACKGROUND
- ----------
Strasbaugh completed a share exchange transaction on May 24, 2007 with a
simultaneous investment through the sale of Redeemable Convertible Preferred
Stock ("Stock"). The Stock is redeemable after 5 years and carries an 8% coupon
rate. The Stock is convertible into common shares on a one-to-one basis at the
option of the holder. The Stock is subject to a "forced-conversion" feature
which allows, at the option of Strasbaugh, to force conversion of the Stock to
common stock if the common trades publicly for $4.40 for 20 days, and the stock
is "registered."
ISSUE
- -----
The issue is the treatment of the Stock for presentation purposes and accounting
for the dividend payments. Under one scenario the Stock is treated under FAS 150
as a "liability" with the dividend payments accounted as interest expense. This
treatment is appropriate if the Stock is within the scope of FAS 150 as 1)
"un-conditionally mandatorily" redeemable financial instruments in the form of
shares, or 2) if convertible into a variable number of shares with a monetary
value that is fixed and known at inception. If a "condition" exists whereby the
Stock may not be redeemed and is not convertible into a variable number of
shares, FAS 150 does not apply and SEC guidance provides for presentation
"outside" of equity with dividends treated as a charge to equity. The
presentation, so long as the "condition" exists is one of "temporary equity",
outside of "permanent" equity, until that condition is met, and the Stock is
then "un-conditionally mandatorily redeemable".
CONCLUSION
- ----------
After careful review, management has determined the redemption feature of the
Stock has a "condition" to redemption which means it is NOT mandatorily
redeemable and is not within the scope of FAS 150 for the first 5 years, and
should be treated as "temporary equity", outside of permanent equity and below
liabilities.
DISCUSSION
- ----------
A review of all the terms of the Stock indicates the Stock is:
o Redeemable in 5 years
o Can be converted into a fixed number of common shares;
approximately 5.9 million shares of common stock
o Conversion is "outside the control of the issuer"; in this
case Strasbaugh
o Conversion can occur with registered or un-registered stock
In order to come to the conclusions drawn, management first had to assess
whether the preferred stock fell within the scope of FAS 150, which is the
conclusion drawn. Subsequently, management assessed the criteria under paragraph
12 of FAS 133 and the exception paragraph under 11(a). FAS 133 states, "FOR
A-1
PURPOSES OF APPLYING PARAGRAPH 11(A) OF STATEMENT 133 IN ANALYZING AN EMBEDDED
FEATURE AS THOUGH IT WERE A SEPARATE INSTRUMENT, PARAGRAPHS 9-12 OF THIS
STATEMENT SHALL NOT BE APPLIED TO THE EMBEDDED FEATURE. EMBEDDED FEATURES SHALL
BE ANALYZED BY APPLYING OTHER APPLICABLE GUIDANCE." AND PARAGRAPH 11 STATES
"NOTWITHSTANDING THE CONDITIONS OF PARAGRAPHS 6-10, THE REPORTING ENTITY SHALL
NOT CONSIDER THE FOLLOWING CONTRACTS TO BE DERIVATIVE INSTRUMENTS FOR PURPOSES
OF THIS STATEMENT: A. CONTRACTS ISSUED OR HELD BY THAT REPORTING ENTITY THAT ARE
BOTH (1) INDEXED TO ITS OWN STOCK AND (2) CLASSIFIED IN STOCKHOLDERS' EQUITY IN
ITS STATEMENT OF FINANCIAL POSITION." Also, paragraph 61-l of FAS 133 states
"CONVERTIBLE PREFERRED STOCK. BECAUSE THE CHANGES IN FAIR VALUE OF AN EQUITY
INTEREST AND INTEREST RATES ON A DEBT INSTRUMENT ARE NOT CLEARLY AND CLOSELY
RELATED, THE TERMS OF THE PREFERRED STOCK (OTHER THAN THE CONVERSION OPTION)
MUST BE ANALYZED TO DETERMINE WHETHER THE PREFERRED STOCK (AND THUS THE
POTENTIAL HOST CONTRACT) IS MORE AKIN TO AN EQUITY INSTRUMENT OR A DEBT
INSTRUMENT." The aspect of this section is determining whether, after all terms
and conditions are considered, the instrument is more akin to equity than debt.
Management assessed the applicability of EITF 05-2 and determined it does not
apply
Guidance states that Financial Instruments should be reported separately from
"stockholders' equity" if redeemable at the OPTION OF HOLDER (IN THIS CASE THE
PREFERRED STOCKHOLDERS), or at fixed date at fixed price, or redemption is
otherwise BEYOND THE CONTROL OF REGISTRANT (STRASBAUGH). This presentation is
required even though the likelihood of the redemption event is considered
remote.
The consideration here is the Stockholders (Preferred) have the right and
ability to convert their stock anytime during the five year period at their
option, whether or not the underlying shares are registered. In other words,
they can convert their shares immediately into "un-registered" shares if they
choose and without the approval of Strasbaugh. Paragraph A-9 below mirrors this
condition...."BECAUSE THE REDEMPTION IS CONDITIONAL, CONTINGENT UPON THE
HOLDER'S NOT EXERCISING ITS OPTION TO CONVERT INTO COMMON SHARES."
Additional language in Guidance follows:
FAS 150 - SCOPE AND REQUIREMENTS OF THIS STATEMENT
- --------------------------------------------------
This Statement requires an issuer to classify the following instruments as
liabilities (or assets in some circumstances): o A financial instrument issued
in the form of shares that is MANDATORILY redeemable--that embodies an
UNCONDITIONAL obligation requiring the issuer to redeem it by transferring its
assets at a specified or determinable date (or dates) or upon an event that is
certain to occur
9. A MANDATORILY REDEEMABLE FINANCIAL INSTRUMENT shall be classified as a
liability unless the redemption is required to occur only upon the liquidation
or termination of the reporting entity. A financial instrument issued in the
form of shares is mandatorily redeemable if it embodies an unconditional
obligation requiring the issuer to redeem the instrument by transferring its
assets at a specified or determinable date (or dates) or upon an event certain
to occur.
12. A financial instrument that embodies an unconditional obligation, or a
financial instrument other than an outstanding share that embodies a conditional
obligation, that the issuer must or may settle by issuing a VARIABLE NUMBER OF
A-2
ITS EQUITY SHARES shall be classified as a LIABILITY (or an asset in some
circumstances) if, at inception, the monetary value of the obligation is based
solely or predominantly on any one of the following:
A7. If a financial instrument will be redeemed ONLY UPON THE OCCURRENCE OF A
CONDITIONAL EVENT (IN STRASBAUGH'S CASE, THE CONDITIONAL EVENT IS THAT 5 YEARS
HAVE PASSED AND THE HOLDERS HAVE NOT CONVERTED THEIR SHARES WHICH IS OUTSIDE THE
CONTROL OF STRASBAUGH), REDEMPTION OF THAT INSTRUMENT IS CONDITIONAL and,
therefore, the instrument DOES NOT MEET the definition of MANDATORILY REDEEMABLE
FINANCIAL INSTRUMENT in this Statement. However, that financial instrument would
be assessed at each reporting period to determine whether circumstances have
changed such that the instrument now meets the definition of mandatorily
redeemable (that is, the event is no longer conditional). If the event has
occurred, the condition is resolved, or the event has become certain to occur,
the financial instrument is reclassified as a liability.
A9. FOR ANOTHER EXAMPLE OF A CONDITIONALLY REDEEMABLE INSTRUMENT, an entity may
issue preferred shares with a stated redemption date 30 years hence that also
are CONVERTIBLE AT THE OPTION OF THE HOLDERS INTO A FIXED NUMBER OF COMMON
SHARES DURING THE FIRST 10 YEARS. Those instruments are NOT MANDATORILY
REDEEMABLE FOR THE FIRST 10 YEARS because the redemption is CONDITIONAL,
CONTINGENT UPON THE HOLDER'S NOT EXERCISING ITS OPTION TO CONVERT INTO COMMON
SHARES.(THIS IS EXACTLY THE CASE WITH THE STRASBAUGH STOCK AS THE HOLDERS CAN
CONVERT ANYTIME THEY WANT FOR THE FIVE YEAR PERIOD) However, when the conversion
option (the condition) expires, the shares would become mandatorily redeemable
and would be reclassified as liabilities, measured initially at fair value.
SEC GUIDANCE: TOPIC: Classification and Measurement of Redeemable Securities
DATES DISCUSSED: July 19, 2001; May 15, 2003; March 17-18, 2004; September 15,
2005
1. The SEC staff has received inquiries about the financial statement
classification and measurement of securities subject to mandatory redemption
requirements or whose redemption is outside the control of the issuer.
[Note: See Subsequent Developments section below.]
SCOPE
2. RULE 5-02.28 OF REGULATION S-X(1) requires preferred securities that
are redeemable for cash or other assets to be classified outside of
permanent equity if they are redeemable (1) at a fixed or determinable
price on a fixed or determinable date, (2) at the OPTION OF THE HOLDER,
or (3) upon the occurrence of an event that is NOT SOLELY WITHIN THE
CONTROL OF THE ISSUER. Although the rule specifically describes and
discusses preferred securities, the SEC staff believes that Rule
5-02.28 of Regulation S-X also provides analogous guidance for other
equity instruments including, for example, common stock and derivative
instruments that are classified as equity pursuant to Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."
A-3
3. As noted in Accounting Series Release No. 268 (ASR 268), the
Commission reasoned that "[t]here is a significant difference between a
security with mandatory redemption requirements or whose redemption is
outside the control of the issuer and conventional equity capital. The
Commission believes that it is necessary to highlight the future cash
obligations attached to this type of security so as to distinguish it
from permanent capital."2 Upon a reporting entity's adoption of FASB
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, certain instruments
that previously were reported as part of shareholder's equity
(including temporary equity) will be reported as liabilities. [Note:
See Subsequent Developments section below.] Consequently, the
presentation requirements outlined in ASR 268 (Rule 5-02.28 of
Regulation S-X), and the interpretive guidance in this staff
announcement, do not apply to those instruments after the effective
date of Statement 150. ASR 268 and the interpretive guidance in this
staff announcement continue to be applicable for instruments that are
not within the scope of Statement 150. Classification
4. Rule 5-02.28 of Regulation S-X requires securities with redemption
features that are not solely within the control of the issuer to be
classified outside of permanent equity. The SEC staff believes that all
of the events that could trigger redemption should be evaluated
separately and that the possibility that any triggering event that is
not solely within the control of the issuer could occur--without regard
to probability--would require the security to be classified outside of
permanent equity.
A-4
REVISED SEC STAFF ANNOUNCEMENT
TOPIC: EITF ABSTRACTS, Topic D-98, "Classification and Measurement of Redeemable
Securities" DATE DISCUSSED: JUNE 14, 2007 At the June 14, 2007 EITF meeting, the
SEC Observer announced the SEC staff's position regarding certain balance sheet
classification practices for financial instruments (or host contracts) that meet
the conditions for temporary equity classification under Accounting Series
Release No. 268, PRESENTATION IN FINANCIAL STATEMENTS OF "REDEEMABLE PREFERRED
STOCKS," and Topic D-98, and the related impact on the guidance in paragraph
8(f) of FASB Statement No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES. The following paragraphs are added to Topic D-98:
STATEMENT 159
37. In February 2007, the FASB issued FASB Statement No. 159, THE FAIR
VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES. Statement
159 permits entities to choose to measure many financial instruments
and certain other items at fair value. Paragraph 8(f) of Statement 159
prohibits an issuer from electing the fair value option for financial
instruments that are, in whole or in part, classified as a component of
shareholder's equity (including "temporary equity").
38. The SEC staff has previously not objected to liability
classification on the balance sheet for certain financial instruments
(or host contracts) that meet the conditions for temporary equity
classification under ASR 268 and Topic D-98. In these circumstances,
registrants recorded dividends and changes in carrying amount currently
in earnings, rather than recording such items as direct adjustments to
retained earnings. At the June 14, 2007 meeting, the SEC Observer
announced the SEC staff's position regarding these classification
practices and the related impact on the guidance in paragraph 8(f) of
Statement 159. THE SEC STAFF WILL NO LONGER ACCEPT LIABILITY
CLASSIFICATION FOR FINANCIAL INSTRUMENTS (OR HOST CONTRACTS) THAT MEET
THE CONDITIONS FOR TEMPORARY EQUITY CLASSIFICATION UNDER ASR 268 AND
TOPIC D-98. CONSISTENT WITH SEC REGULATION S-X, ARTICLES 5-02, 7-03,
AND 9-03, THESE FINANCIAL INSTRUMENTS SHOULD BE CLASSIFIED ON THE
BALANCE SHEET BETWEEN CAPTIONS FOR LIABILITIES AND SHAREHOLDER'S
EQUITY. As a consequence, the fair value option may not be applied to
any financial instrument (or host contract) that meets the conditions
for temporary equity classification under ASR 268 and Topic D-98. The
measurement guidance in Topic D-98 applies to these financial
instruments.
The final consideration is one of an "equity" investor vs. a debt-holder. The
preferred stockholders will share in the increased value of the Company as the
market value of stock increases. Debt holders have no such benefit. The Stock
clearly has elements of both liability and equity, but since it does not meet
the requirement of "un-conditional" presentation belongs outside of equity and
below liabilities in accordance with the guidance. In addition, the redeemable
convertible preferred stock is more akin to equity that debt for the following
reasons:
o The company cannot be forced to pay dividends, if it is unable
to make those payments, via a creditor-like action such as a
forced bankruptcy
A-5
o Number of shares for conversion is "fixed", therefore the
holders are benefiting from any increases in the equity value
of the company, which is unlike debt-holders
o The preferred stock is not collateralized
o The preferred shareholders have voting rights as-if converted,
which is unlike debt holders
o There is no requirement for future timely filing requirements
GUIDANCE
- --------
FAS 150 - ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY
Regulation SX 5-02.28
EITF Abstracts, Topic D-98, "CLASSIFICATION AND MEASUREMENT OF REDEEMABLE
SECURITIES"
FAS 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
EITF 00-19 - "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLE IN A COMPANY'S OWN STOCK"
EITF 05-02 - The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19
A-6
EXHIBIT B
---------
FAS 5 - ACCOUNTING FOR CONTINGENCIES
STRASBAUGH - LIQUIDATED DAMAGES AND REGISTRATION RIGHTS
DATE: SEPTEMBER 5, 2007
BACKGROUND
Strasbaugh issued convertible preferred stock in an offering which included
registration rights. Those rights require the company to file a registration
statement with the SEC within 60 days of the offering, and must be effective
within 130 days of the offering. The offering closed on May 24, 2007 and the
penalty for non-compliance with this term is the payment of $130,000 per month
for each month it is not in compliance, up to 10% of the offering of
$13,000,000, or a potential total of $1,300,000. The original filing was made
within the 60 days and the deadline for the effective date is October 5, 2007
ISSUES
The issue is whether or not Strasbaugh is required to accrue or otherwise
disclose the penalty for liquidated damages if the company is unsuccessful in
getting the registration statement effective in the time required.
CONCLUSION
Management has concluded that no accrual is required on the 6/30/07 financial
statements, but will disclose the POTENTIAL liability in the footnotes to those
financials.
DISCUSSION
Management has been brief by SEC attorneys as to the timeliness of the filing as
well as to the matter of ever becoming effective. Management and counsel is
confident the filings will be made on-time and the registration statement will
ultimately become effective. Management will assess the issue on an on-going
basis but at this time believes there is only a REMOTE possibility the statement
will not be declared effective by October 5, 2007 and virtually NO POSSIBILITY
of it never being declared effective.
Management considered FAS 5 - ACCOUNTING FOR CONTINGENCIES in its assessments.
Language in FAS 5 states in Paragraph 8. "An estimated loss from a loss
contingency (as defined in paragraph 1) shall be accrued by a charge to income
if BOTH of the following conditions are met:
a. Information available prior to issuance of the financial statements indicates
that it is PROBABLE that an asset had been impaired or a liability had been
incurred AT THE DATE OF THE FINANCIAL STATEMENTS. It is implicit in this
condition that it MUST BE PROBABLE that one or more future events will occur
confirming the fact of the loss.
b. The amount of loss can be reasonably estimated."
Paragraph 9 states "Disclosure of the nature of an accrual made pursuant to the
provisions of paragraph 8, and in some circumstances the amount accrued, may be
necessary for the financial statements not to be misleading.
B-1
10. IF NO ACCRUAL IS MADE FOR A LOSS CONTINGENCY because one or both of the
conditions in paragraph 8 are not met, or if an exposure to loss exists in
excess of the amount accrued pursuant to the provisions of paragraph 8,
DISCLOSURE OF THE CONTINGENCY SHALL BE MADE when there is at least a REASONABLE
POSSIBILITY that a loss or an additional loss may have been incurred. The
disclosure shall indicate the nature of the contingency and shall give an
estimate of the possible loss or range of loss or state that such an estimate
cannot be made. Disclosure is not required of a loss contingency involving an
unasserted claim or assessment when there has been no manifestation by a
potential claimant of an awareness of a possible claim or assessment unless it
is considered probable that a claim will be asserted and there is a reasonable
possibility that the outcome will be unfavorable.
11. After the date of an enterprise's financial statements but before those
financial statements are issued, information may become available indicating
that an asset was impaired or a liability was incurred after the date of the
financial statements or that there is at least a reasonable possibility that an
asset was impaired or a liability was incurred after that date. The information
may relate to a loss contingency that existed at the date of the financial
statements, e.g., an asset that was not insured at the date of the financial
statements. On the other hand, the information may relate to a loss contingency
that did not exist at the date of the financial statements, e.g., threat of
expropriation of assets after the date of the financial statements or the filing
for bankruptcy by an enterprise whose debt was guaranteed after the date of the
financial statements. In none of the cases cited in this paragraph was an asset
impaired or a liability incurred at the date of the financial statements, and
the condition for accrual in paragraph 8(a) is, therefore, not met. Disclosure
of those kinds of losses or loss contingencies may be necessary, however, to
keep the financial statements from being misleading. If disclosure is deemed
necessary, the financial statements shall indicate the nature of the loss or
loss contingency and give an estimate of the amount or range of loss or possible
loss or state that such an estimate cannot be made. Occasionally, in the case of
a loss arising after the date of the financial statements where the amount of
asset impairment or liability incurrence can be reasonably estimated, disclosure
may best be made by supplementing the historical financial statements with pro
forma financial data giving effect to the loss as if it had occurred at the date
of the financial statements. It may be desirable to present pro forma
statements, usually a balance sheet only, in columnar form on the face of the
historical financial statements.
GUIDANCE
FAS 5 - DISCLOSURE OF LOSS CONTINGENCIES
B-2
EXHIBIT C
---------
STRASBAUGH
EITF 00-19 - ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLE IN A COMPANY'S OWN STOCK
BACKGROUND
- ----------
Strasbaugh completed a share exchange transaction on May 24, 2007 with a
simultaneous investment through the sale of Redeemable Convertible Preferred
Stock ("Stock") with Warrants. The warrants are issued in two categories; (1) to
the Preferred Stockholders and (2) to the Placement Agent as part of their
incentive/commission. The warrants can be exercised at anytime into common for a
purchase price of $2.42 and for up to 10 years. If the underlying common stock
is not registered, the holders may exercise under a cashless exercise feature.
Otherwise, the warrants may be exercised into registered, or un-registered at
the option of the warrant holder. A separate registration rights agreement was
entered into between the parties.
ISSUE
- -----
The issue is the treatment of the warrants for presentation purposes either in
equity or treated as an asset/liability.
CONCLUSION
- ----------
After careful review, management has determined both classes of warrants will be
treated as permanent equity in accordance with the applicable accounting
guidance.
DISCUSSION
- ----------
In order to access the accounting treatment of the warrants management analyzed
terms of the warrants to determine whether they are within the scope of FAS 150,
the application of EITF-00-19 and whether it met the definition of a derivative
under FAS 133. A review of the key terms of the warrants includes the following
features:
o Exercisable at anytime by the holders at their option
o Can be exercised into a fixed number of common shares at a
fixed price
o Can be exercised into registered or un-registered common stock
o If un-registered, holders may exercise under a
cashless exercise feature.
- There is no economic difference with a
cashless exercise as the holders receive the
same "value" in number of shares.
- This language in the agreement clearly
offers an alternative to the delivery of
registered shares and the allowance of the
delivery of un-registered shares
Management evaluated the application of FAS 150 to the warrants and determined
the warrants are outside the scope of FAS 150. Paragraph 15 of FAS 150 states
"THIS STATEMENT DOES NOT APPLY TO FEATURES EMBEDDED IN A FINANCIAL INSTRUMENT
THAT IS NOT A DERIVATIVE IN ITS ENTIRETY. AN EXAMPLE IS AN OPTION ON THE
ISSUER'S EQUITY SHARES THAT IS EMBEDDED IN A NON-DERIVATIVE HOST CONTRACT."
Management then considered the application of EITF 00-19. Guidance on the matter
states certain conditions for equity treatment including "THE CONTRACT PERMITS
THE COMPANY TO SETTLE IN UNREGISTERED SHARES", PARAGRAPH 14 OF EITF 00-19. The
warrant agreement clearly states the exercise may be registered into
un-registered shares as there is an option of the cashless exercise feature in
C-1
the event of not having a registration in place. And, "DELIVERY OF UNREGISTERED
SHARES IN A PRIVATE PLACEMENT TO THE COUNTERPARTY IS WITHIN THE CONTROL OF A
COMPANY, AS LONG AS A FAILED REGISTRATION STATEMENT (THAT IS, A REGISTRATION
STATEMENT THAT WAS FILED WITH THE SEC AND SUBSEQUENTLY WITHDRAWN) HAS NOT
OCCURRED WITHIN SIX MONTHS PRIOR TO THE CLASSIFICATION ASSESSMENT DATE. IF A
FAILED REGISTRATION STATEMENT HAS OCCURRED WITHIN SIX MONTHS OF THE
CLASSIFICATION ASSESSMENT DATE, WHETHER A COMPANY CAN DELIVER UNREGISTERED
SHARES TO THE COUNTERPARTY IN A NET-SHARE OR PHYSICAL SETTLEMENT IS A LEGAL
DETERMINATION. ACCORDINGLY, ASSUMING (A) A FAILED REGISTRATION STATEMENT DOES
NOT PRECLUDE DELIVERY OF UNREGISTERED SHARES, (B) THE CONTRACT PERMITS A COMPANY
TO NET-SHARE SETTLE THE CONTRACT BY DELIVERY OF UNREGISTERED SHARES, AND (C) THE
OTHER CONDITIONS IN THIS ISSUE ARE MET, THE CONTRACT SHOULD BE CLASSIFIED AS A
PERMANENT EQUITY INSTRUMENT.
Another requirement for equity treatment in 00-19 states "THE COMPANY HAS
SUFFICIENT AUTHORIZED AND UN-ISSUED SHARES AVAILABLE TO SETTLE THE CONTRACT
AFTER CONSIDERING ALL OTHER COMMITMENTS THAT MAY REQUIRE THE ISSUANCE OF STOCK
DURING THE MAXIMUM PERIOD THE DERIVATIVE CONTRACT COULD REMAIN OUTSTANDING." The
company clearly meets this test as it has 100 million shares authorized and
approximately 22million shares either outstanding or committed. Also in 00-19
"THE CONTRACT CONTAINS AN EXPLICIT LIMIT ON THE NUMBER OF SHARES TO BE DELIVERED
IN A SHARE SETTLEMENT", paragraph 20. The warrants are specific in number of
shares and exercise price. In the event of a cashless exercise, there would be
even fewer shares issued.
Other considerations are included in paragraph 25 of EITF 00-19 as the company
has no such requirement or penalties in the event the company fails to make
timely filings with the SEC and no requirement for to offer an updated
prospectus in the future.
Management also assessed FAS 133 in this matter. FAS 133 states "FOR PURPOSES OF
APPLYING PARAGRAPH 11(A) OF STATEMENT 133 IN ANALYZING AN EMBEDDED FEATURE AS
THOUGH IT WERE A SEPARATE INSTRUMENT, PARAGRAPHS 9-12 OF THIS STATEMENT SHALL
NOT BE APPLIED TO THE EMBEDDED FEATURE. EMBEDDED FEATURES SHALL BE ANALYZED BY
APPLYING OTHER APPLICABLE GUIDANCE." AND PARAGRAPH 11 STATES "NOTWITHSTANDING
THE CONDITIONS OF PARAGRAPHS 6-10, THE REPORTING ENTITY SHALL NOT CONSIDER THE
FOLLOWING CONTRACTS TO BE DERIVATIVE INSTRUMENTS FOR PURPOSES OF THIS STATEMENT:
A. CONTRACTS ISSUED OR HELD BY THAT REPORTING ENTITY THAT ARE BOTH (1) INDEXED
TO ITS OWN STOCK AND (2) CLASSIFIED IN STOCKHOLDERS' EQUITY IN ITS STATEMENT OF
FINANCIAL POSITION." Also, paragraph 61-l of FAS 133 states "CONVERTIBLE
PREFERRED STOCK. BECAUSE THE CHANGES IN FAIR VALUE OF AN EQUITY INTEREST AND
INTEREST RATES ON A DEBT INSTRUMENT ARE NOT CLEARLY AND CLOSELY RELATED, THE
TERMS OF THE PREFERRED STOCK (OTHER THAN THE CONVERSION OPTION) MUST BE ANALYZED
TO DETERMINE WHETHER THE PREFERRED STOCK (AND THUS THE POTENTIAL HOST CONTRACT)
IS MORE AKIN TO AN EQUITY INSTRUMENT OR A DEBT INSTRUMENT." Management has
determined, in its assessment of the host contract, the convertible preferred
stock meets the criteria to be treated as temporary equity.
GUIDANCE
- --------
EITF 00-19 - "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLE IN A COMPANY'S OWN STOCK"
FASB 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
FASB 150 - "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY"
C-2
EXHIBIT D
---------
STRASBAUGH
SAB 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
6/30/07
BACKGROUND
- ----------
Strasbaugh recognizes revenue when product is shipped, title is transferred to
the customer and when the revenue is realized, or realizable and earned. The
company sells tools/machines, parts, upgrades maintenance service and provides
installation services.
ISSUE
- -----
The primary issues under EITF 00-21 - REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES and SAB 104 is when should the revenues of these components be
recognized and when should they be deferred.
CONCLUSION
- ----------
Management believes its current revenue recognition policy is correct and
complies with SAB 104. Those policies include:
o Tools - Recognized once customer has visited the plant, signed
off on the tool and the tool is shipped.
o Parts - Recognized when shipped
o Service - If a maintenance contract is entered into, revenue
is deferred and recognized over the life of the contract which
is generally one to three years. If no maintenance contract,
the customer is billed for time and material after the service
is complete. These contracts are an option for the customer.
o Installation - The company does not charge for installation as
this is an inconsequential or perfunctory obligation and not
considered a separate element of the sales contract.
o Upgrades - The Company offers a suite of products known as
"Enhancements" which are generally upgrades of existing
Strasbaugh and non-Strasbaugh tools. These enhancements are
not required for the tools to function and are not part of the
original contract. The Company recognizes revenue once these
upgrades and enhancements are complete
DISCUSSION
- ----------
The Company derives revenues principally from the sale of tools, parts and
services. The Company has evaluated its revenue recognition under Emerging
Issues Task Force ("EITF") 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH
MULTIPLE DELIVERABLES, and determined that its components of revenue are
separate units of accounting. Each unit has value to the customer on a
standalone basis, there is objective and reliable evidence of the fair value of
each unit, and there is no right to cancel, return or refuse an order. Since
each component is a separate unit of accounting pursuant to EITF 00-21, the
Company recognizes its revenue pursuant to Staff Accounting Bulletin ("SAB")
104, "REVENUE RECOGNITION." Under SAB 104, revenue is recognized when the
following criteria are met: (i) persuasive evidence of an arrangement, such as a
purchase order, exists, (ii) delivery has occurred or services have been
D-1
rendered, (iii) our price to the customer is fixed or determinable, and (iv)
collection is reasonably assured. Based on Staff guidelines, revenue should not
be recognized until it is realized or realizable and earned. Concepts Statement
5, paragraph 83(b) states that "an entity's revenue-earning activities involve
delivering or producing goods, rendering services, or other activities that
constitute its ongoing major or central operations, and revenues are considered
to have been earned when the entity has substantially accomplished what it must
do to be entitled to the benefits represented by the revenues" Paragraph 84(a)
continues "the two conditions (being realized or realizable and being earned)
are usually met by the time product or merchandise is delivered or services are
rendered to customers, and revenues from manufacturing and selling activities
and gains and losses from sales of other assets are commonly recognized at time
of sale (usually meaning delivery)".
SAB 104 states the staff believes that revenue generally is realized or
realizable and earned when all of the following criteria are met:
o PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS,
o Strasbaugh requires the receipt of a PO which details
terms of each sale including price, delivery date(s),
terms of payment, etc.
o DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN RENDERED
o Shipping/receipt documentation is evident
o THE SELLER'S PRICE TO THE BUYER IS FIXED OR DETERMINABLE
o PO's and SO's include a fixed price
o COLLECTIBILITY IS REASONABLY ASSURED.
DELIVERY AND PERFORMANCE
BILL AND HOLD ARRANGEMENTS
On occasion, the Company will enter into a Bill and Hold arrangement at the
request of the customer. These arrangements are rare for the company. SAB 104
addresses the criteria necessary for revenue recognition which the Company
follows. SAB 104 states:
"The Commission has set forth criteria to be met in order to recognize revenue
when delivery has not occurred.17 These include:
1. The risks of ownership must have passed to the buyer;
2. The customer must have made a fixed commitment to purchase the
goods, preferably in written documentation;
3. The buyer, not the seller, must request that the transaction be on a
bill and hold basis. The buyer must have a substantial business purpose
for ordering the goods on a bill and hold basis;
4. There must be a fixed schedule for delivery of the goods. The date
for delivery must be reasonable and must be consistent with the buyer s
business purpose (e.g., storage periods are customary in the industry);
5. The seller must not have retained any specific performance
obligations such that the earning process is not complete;
6. The ordered goods must have been segregated from the seller's
inventory and not be subject to being used to fill other orders; and
D-2
7. The equipment [product] must be complete and ready for shipment. The
Company meets all of the above criteria for revenue recognition under
this arrangement."
CUSTOMER ACCEPTANCE
SAB 104, Questions Section, Particularly Questions B 2 and 5 addresses "customer
acceptance" and when revenue recognition is appropriate. The fundamental ideas
cover a couple of areas including whether or not the right to return, or refuse
a shipment exists with a customer, and whether or not substantial performance
exists with regard to installation, performance and acceptance. In Strasbaugh's
case customers do not have a right to return or refuse shipment of a product
once a purchase order has been issued. Additionally, customers generally inspect
and run each machine at the Strasbaugh facility prior to shipment and "accept"
the performance at that time under agreed to criteria. Those machines are then
typically crated, shipped and installed at customer sites and tested to exact
customer criteria (typically secret processes not known to Strasbaugh). SAB 104
states: "The staff would not object to revenue recognition for the equipment
upon delivery (presuming all other revenue recognition criteria have been met
for the equipment) if the seller demonstrates that, at the time of delivery, the
equipment already meets all of the criteria and specifications in the
customer-specific acceptance provisions. This may be demonstrated if conditions
under which the customer intends to operate the equipment are replicated in
pre-shipment testing, unless the performance of the equipment, once installed
and operated at the customer's facility, may reasonably be different from that
tested prior to shipment."
and...." While the staff presumes that customer acceptance provisions are
substantive provisions that generally result in revenue deferral, that
presumption can be overcome ..."
Strasbaugh "rarely" ships a product, other than "new" technology and yet to be
proven in the market place, under a "conditional" purchase order. Generally,
these terms allow the customer to assess the machine, test and improve results
and the customer does have a right to return. Under the circumstances of a
"conditional" purchase order, the Company does NOT recognize revenue until
customer acceptance is achieved and all other criteria for revenue recognition
are realized.
INCONSEQUENTIAL OR PERFUNCTORY PERFORMANCE OBLIGATIONS
SAB 104 states "Assuming all other recognition criteria are met, revenue for the
unit of accounting may be recognized in its entirety if the seller's remaining
obligation is inconsequential or perfunctory." And
"When applying the substantially complete notion, the staff believes that only
inconsequential or perfunctory actions may remain incomplete such that the
failure to complete the actions would not result in the customer receiving a
refund or rejecting the delivered products or services performed to date. "
D-3
NONREFUNDABLE UP-FRONT FEES
Strasbaugh defers revenue recognition on up-front fees and/or down-payments in
accordance with SAB 104.
FIXED OR DETERMINABLE SALES PRICE
The Company's sales price is fixed at the time a PO is issued and accepted. The
customer has no right of return or cancellation.
ESTIMATES AND CHANGES IN ESTIMATES
The company makes no estimates for "returns" since the customers have no such
right.
DISCLOSURES
Disclosure requirements under SAB 104 have been reviewed and are included in the
Company's accounting policy disclosures of its financial statements.
GUIDANCE
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Staff Accounting Bulletin No. 104 - SAB 104 REVENUE RECOGNITION IN FINANCIAL
STATEMENTS
EITF 00-21 - REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLE
FASB 48 - REVENUE RECOGNITION WHEN RIGHT OF RETURN EXISTS
FASB Concepts Statement No. 5 - RECOGNITION AND MEASUREMENT IN FINANCIAL
STATEMENTS OF BUSINESS ENTERPRISES
SAB 101 - REVENUE RECOGNITION IN FINANCIAL STATEMENTS
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