SCHNEIDER WEINBERGER & BEILLY LLP
Attorneys-at-Law
2200 Corporate Boulevard, N.W., Suite 210
Boca Raton, Florida 33431-7307
Telephone
James M. Schneider, P.A. (561) 362-9595
Steven I. Weinberger, P.A. Facsimile
Roxanne K. Beilly, P.A. (561) 362-9612
March 7, 2005
VIA EDGAR
United States Securities and Exchange
Commission
450 Fifth Street, NW
Washington, D.C. 20549
Att: Pamela Long, Assistant Director
RE: LIFESTREAM TECHNOLOGIES, INC.
FORM SB-2 FILED JANUARY 12, 2005
FILE NO. 333-121991
Gentlemen:
We are counsel to Lifestream Technologies, Inc. Reference is made to
the registration statement on Form SB-2 filed by Lifestream Technologies, Inc.
(the "Company") on January 12, 2005 (the "Registration Statement"), and the
Staff's comments under cover of its letter dated February 8, 2005.
Concurrently with the filing of this letter, the Company has filed
Amendment No. 1 to the Registration Statement ("Amendment No. 1"). Amendment No.
1 includes updated (unaudited) financial statements of the Company for the six
months ended December 31, 2004 and 2003, as well as updated disclosure,
including in response to the Staff's comments. The following numbered responses
correspond to the Staff's numbered comments in its February 8, 2005 letter.
In response to the Staff's comments, we have been requested to advise
you as follows:
FORM SB-2
- ---------
Fee Table
- ---------
1. Supplementally, we confirm the Staff's understanding that in the
event of an adjustment to the notes and/or warrants that require the
registration of more shares than are being registered in this Registration
Statement, a new registration statement will be filed to register those shares.
The paragraph below the registration table has been modified to track the
language of Rule 416.
United States Securities and
Exchange Commission
March 7, 2005
Page 2 of 12
Risk Factors - Page 3
- ----------------------
2. The introductory and last paragraphs of this section have been
revised to remove any inference that any material risks have not been disclosed.
Our continued sale of equity securities - Page 4
- -------------------------------------------------
3. This risk factor has been expanded to disclose the number of shares
issuable upon exercise of outstanding obligations and to discuss the effects of
their issuance.
We remain dependent upon Roche Diagnostics GmbH - Page 5
- ---------------------------------------------------------
4. The Company is concerned that disclosure of the amounts referenced
in the Staff's letter might adversely affect on-going settlement discussions
between Roche and the Company. Those discussions include "packaged" negotiations
covering both the amount of royalties and a renewed supply agreement. The
prospectus has been updated to disclose that the Company has reserved $257,535,
which represents the full amount invoiced by Roche, and that the amount of any
additional exposure to the Company would not have a material effect on the
financial statements. The Company believes that the revised disclosure provides
all material information about the status of this matter.
Government Regulation may delay or prevent - Page 7
- ----------------------------------------------------
5. The reference to subjective interpretation has been removed and the
Company has stated its belief that its products and operations comply in all
material respects will applicable laws, rules and regulations.
Forward-Looking Statements - Page 9
- ------------------------------------
6. This paragraph has been revised to remove references to inapplicable
statutes.
Cholesterol Monitor - Page 10
- -----------------------------
7. The prospectus has been revised to clarify that NCEP is a government
agency, and the significance of meeting the guidelines published by the NCEP.
Consumer Marketplace - Page 11
- ------------------------------
8. The prospectus included in Amendment No. 1 updates the information
attributed to the American Heart Association to conform to its "Heart Disease
and Stroke Statistics - 2005 Update". The study is publicly available and was
not commissioned by the Company. The study is approximately 60 pages in length
United States Securities and
Exchange Commission
March 7, 2005
Page 3 of 12
and can be viewed at the American Heart Association web site at
http://www.americanheart.org/presenter.jhtml?identifier=1928.
The information attributed to the NCEP, a subdivision of the National
Heart, Lung and Blood Institute ("NHLBI"), is publicly available on the NHBLI
website at www.nhlbi.nih.gove/guidelines/cholesterol/atp3_rpt.htm. The
information comes from a voluminous report published by the NCEP.
9. The prospectus has been revised to clarify the extent to which
consumers can use the Company's products to satisfy NCEP recommended cholesterol
testing.
Sales and Marketing Efforts - Page 11
- -------------------------------------
10. The prospectus has been revised to disclose the extent of the
Company's overseas sales and marketing efforts and the impact of government
regulation on those activities.
11. The prospectus contains updated disclosure relating to the
Company's outstanding obligation to advertise on radio.
Sales Concentrations with Major Customers - Page 12
- ---------------------------------------------------
12. The prospectus has been revised to include the names of customers
that accounted for more than 10% of the Company's sales during its two most
recently completed fiscal years, as well as to discuss the events leading to the
lost customer referenced in the Company's Form 10-QSB.
Principal Vendors and Related Assembly - Page 12
- ------------------------------------------------
13. The licensing and manufacturing agreement with Roche was filed as
exhibit 10.4 to the Company's Annual Report on Form 10-KSB on October 15, 2001.
This exhibit has now been listed in the index to Amendment No. 1 and
incorporated by reference to the prior filing.
14. The prospectus has been revised to update the disclosure regarding
the Company's requirement to exclusively purchase test strips from Roche, and to
clarify the automatic extension of the agreement with Roche for a period of one
year.
Intellectual Property - Page 13
- -------------------------------
15. The prospectus has been revised to list the Company's material
patents, the duration of each, and the products covered by the patents.
Disclosure has also been made of the patent that is the subject of a license
arising out of a settlement of a previously pending litigation.
United States Securities and
Exchange Commission
March 7, 2005
Page 4 of 12
16. The term "PCT" has been eliminated from disclosure as it relates to
a patent not deemed material and not included on the list referred to in
response 15, above.
Government Regulation - Page 15
- -------------------------------
17. This discussion has been revised to disclose that there is
currently no third-party reimbursement for the Company's products. Similar
revisions have been made to the corresponding risk factor.
Consolidated Results of Operations - First Fiscal Quarter - Page 19
- -------------------------------------------------------------------
18. The Consolidated Results of Operations have been updated to discuss
the Company's Second Fiscal 2005 Quarter. The discussion has been revised to
improve disclosure throughout the MD&A discussion, including quantifying the
extent to which various factors contributed to the changes.
19. The Company has reviewed its disclosure and the prospectus has been
revised to clarify the reduction in the patent's estimated useful life.
It is the Company's interpretation of SFAS No 142, paragraph 11(b) and
(e), that the best indication of the useful remaining life was provided by the
Company's settlement discussions with the defendant in a patent litigation that
resulted in the Company's grant of a license to the defendant to utilize the
technology underlying this patent. Under the settlement, the license could
become free, clear and unencumbered to the defendant/licensee after a three-year
period, thereby reducing the patent's estimated useful life to the Company to a
period of three years.
The Company does not believe that its patent is impaired under the
guidance of SFAS No. 142, paragraph 15, in that the carrying amount of the
patent appears to be supported by both a previously aborted purchase offer from
an unrelated third party of $750,000 (see footnote 9 to the consolidated
financial statements) and the previous litigation settlement discussions which
included certain settlement alternatives, including royalties to be received
over a three to seven-year period. Cash flow projections modeled over these
royalty periods also supported the value of the patent.
Consolidated Results of Operations; Fiscal 2004 - Page 21
- ---------------------------------------------------------
20. The prospectus has been revised to quantify the impact of the
increase in sales returns, sales returns allowance, and obsolete inventory in
the Consolidated Results of Operations for Fiscal 2004. In addition, the
prospectus has been revised to disclose that the short-term expiration related
to the Company's test strips and its effects on sales and inventory is not
expected to create an ongoing concern.
21. The prospectus has been revised to improve the disclosure regarding
the impact of initial sales orders from customers compared to future reorders by
these customers.
United States Securities and
Exchange Commission
March 7, 2005
Page 5 of 12
22. The prospectus has been revised to improve the discussion of gross
profit/loss and quantifies the impact of significant factors on gross margin.
23. The significant reduction in the Company's inventory allowance is
due to the write-off of inventory items that had been previously included in the
allowance for obsolete inventory. The majority of this inventory was comprised
of test strips with short-term expiration dates. The Company did not dispose of
any of this inventory by sale. The Company confirms that its inventory valuation
policy is in compliance with the guidance set forth in SAB Topic 5-BB.
Consolidated Liquidity and Capital Resources - Page 23
- ------------------------------------------------------
24. This discussion has been expanded to describe expected sources of
capital and to disclose that the Company does not have sufficient cash to carry
out operations for the short or long term.
The Company believes that it has addressed its ability to continue on a
long-term basis on page 22 of the prospectus, under the heading "Consolidated
Liquidity and Capital Resources," by stating that: "our independent registered
public accountants have included an explanatory paragraph in their report on our
accompanying consolidated financial statements for the fiscal years ended June
30, 2004 and 2003, that expresses substantial doubt regarding our ability to
continue as a going concern."
25. The prospectus has been revised to disclose whether the same source
provided the financing in more than one financing transactions and whether the
same person holds debt or equity securities from more than one transaction.
26. The prospectus has been revised and clarified to quantify the
number of shares into which the convertible debentures could be converted into,
and the debenture principal outstanding on February 19, 2004.
27. The prospectus has been revised to expand the discussion relating
to changes in working capital deficiency for the second quarter of fiscal 2005.
Contractual Obligations - Page 27
- ---------------------------------
28. The prospectus has been revised to clarify that the escrowed funds
referred to on page F-15 and page 24 were required under the terms of the note
payable to serve as additional collateral for the outstanding note payable.
The prospectus has been revised on page F-15 to more fully describe the
reasons for and terms of the escrow.
United States Securities and
Exchange Commission
March 7, 2005
Page 6 of 12
Legal Contingencies - Page 30
- -----------------------------
29. Supplementally, please be advised that the patent litigation
referred to in Comment #29 of the Staff's letter has been settled and is no
longer pending. The settlement was previously reported in the Company's Current
Report on Form 8-K, filed on November 22, 2004. The Company therefore believes
that disclosure pursuant to Item 103 of Regulation S-B is not required. The
disclosure under Results of Operations - Second Quarter and First Half of Fiscal
2005 Compared to Second Quarter and First Half of Fiscal 2004 has been revised
to improve disclosure relating to this settlement.
30. Please see response to Comment #29. The Settlement Agreement with
Polymer Technology Systems, Inc. has been filed as an exhibit to the Company's
Form 10-QSB for its fiscal 2005 second quarter, and that exhibit has been
incorporated by reference into Amendment No. 1.
Executive Compensation - Page 32
- --------------------------------
31. The prospectus has been revised to reconcile Mr. Maus' and Mr.
Siemens' salaries in the disclosures relating to the summary compensation table.
Certain Relationships and Related Transactions - Page 35
- --------------------------------------------------------
32. The following table reconciles each transaction discussed under
Certain Relationships and Related Transactions to the corresponding exhibit.
Part II of the Registration Statement has been revised to more specifically
describe each exhibit and to incorporate by reference additional exhibits
required to be included in the Registration Statement.
- ----------------------------------------------------------------------------------------------------------------------
TRANSACTION EXHIBIT
- ----------------------------------------------------------------------------------------------------------------------
Shares Issued to Employees/Board Members Agreements not available -issued pursuant to Board Minutes
- ----------------------------------------------------------------------------------------------------------------------
Brett Sweezy, CPA Not deemed to be a material agreement
- ----------------------------------------------------------------------------------------------------------------------
Neil Luckianow Not deemed to be a material agreement
- ----------------------------------------------------------------------------------------------------------------------
Robert Boyle and Brett Sweezy Exhibits 4.5 - 4.6
- ----------------------------------------------------------------------------------------------------------------------
Christopher Maus Note Receivable Note paid and no longer deemed a material contract
- ----------------------------------------------------------------------------------------------------------------------
RAB 2001 Private Placement Exhibit 4.1 - 4.3
- ----------------------------------------------------------------------------------------------------------------------
RAB 2003 conversion adjustment Exhibits 10.4 - 10.5
- ----------------------------------------------------------------------------------------------------------------------
RAB 2004 assignment Exhibits 10.20 - 10.24
- ----------------------------------------------------------------------------------------------------------------------
Michael Crane Note Payable Same as form of Note filed as Exhibit 4.1
- ----------------------------------------------------------------------------------------------------------------------
33. The prospectus has been revised to add a table detailing the number
of shares granted to each director effective April 28, 2004 in lieu of payment
for board services previously provided.
United States Securities and
Exchange Commission
March 7, 2005
Page 7 of 12
Security Ownership of Certain Beneficial Owners - Page 37
- ---------------------------------------------------------
34. The prospectus has been amended so that beneficial ownership of RAB
Special Situations LLP under "Selling Security Holders" reconciles with the
disclosure in the table under "Security Ownership of Certain Beneficial Owners."
35. Footnote 3 to the beneficial ownership table has been revised to
clarify that beneficial ownership includes shares of common stock subject to
options or warrants that are currently exercisable or will become exercisable
within 60 days, instead of after 60 days.
Description of Securities - Page 38
- -----------------------------------
36. This section has been expanded to disclose the information required
by Item 510 of Regulation SB.
Selling Security Holders - Page 39
- ----------------------------------
37. The Company has received confirmation from each selling security
holder that it is not a broker-dealer or affiliated with a broker-dealer.
Accordingly, no further disclosure has been included in Amendment No. 1.
38. The price used in arriving at the number of shares registered for
issuance under the convertible promissory note (the "Note") was $0.024. The
following is an analysis of how that price was determined and how the number of
shares being registered was calculated:
The Note is convertible at $.05 per share, and is payable, at the
Company's election, in shares of common stock, at a 20% discount to the average
of the five (5) lowest closing bid prices for the Company's shares on the OTC
Bulletin Board. At the time of registration, the Company assumed the worst-case
scenario - the entire $500,000 note would be paid at a 20% discount to current
market price (which is less than the $.05 conversion price of the note). The
closing bid price for the common stock on the date the registration fee was
calculated was $0.03, and a 20% discount to that price was calculated to be
$0.024 (the "Calculation Rate").
In order to determine the number of shares to be registered, the
Company initially divided $500,000 (the principal amount of the Note) by the
Calculation Rate, resulting in 20,833,333 shares to be registered.
39. The prospectus has been revised to identify the individuals who
beneficially own the shares held by RAB Special Situations LP and Equitilink.
40. The agreements with Mr. Czirr, Equitilink and Mr. Schmitt have been
filed as exhibits to Amendment No. 1. We confirm that the shares issued to
Equitilink and Mr. Schmitt were issued in January 2005 and the prospectus has
been revised accordingly.
United States Securities and
Exchange Commission
March 7, 2005
Page 8 of 12
Plan of Distribution - Page 41
- ------------------------------
41. The discussion has been revised to disclose that, in the event a
transfer referred to by the Staff takes place, the Company will file a
post-effective amendment to the Registration Statement if the change is
material.
42. The discussion has been revised to disclose that, in the event a
transfer referred to by the Staff takes place, the Company will file a
prospectus supplement under Rule 424(b) to disclose the change; provided that if
the change is material, a post-effective amendment will be filed.
FINANCIAL STATEMENTS
- --------------------
Note 3. Summary of Significant Accounting Policies - Page F-10
- ---------------------------------------------------------------
Revenue Recognition and Accounts Receivable - Page F-11
- -------------------------------------------------------
43. The prospectus has been revised to specifically disclose the
revenue recognition criteria of SAB 104 and how these criteria are applied to
the Company's sales transactions.
44. The Company has agreed to a "pay-on-scan" arrangement with a major
new retail customer (reseller) whereby any shipments for the first year this
customer is a reseller of the Company's products does not transfer risk of
ownership until the reseller has sold the products to the reseller's customers
(the consumers). If the reseller is unsuccessful in selling the Company's
products to a consumer, the inventory may be returned to the Company.
The Company does not recognize revenue from these types of agreements
until the third party retailer has made a sale to its customers, and then has
subsequently provided the Company with a detail listing of sales transactions by
date. The Company continues to record the inventory on its balance sheet as
finished goods at retail locations (see Footnote 5 on page F-14). The Company
has based its accounting policy for not recognizing revenue for these
"pay-on-scan" arrangements on its understanding of SFAS No. 48, paragraph 6(b),
which states, "The buyer has paid the seller, or the buyer is obligated to pay
the seller and the obligation is not contingent on resale of the product".
45. The Company's policy for recognizing revenue on test strips is
consistent with its recognition policy relative to cholesterol devices. Revenue
is recognized when the Company is in a position to comply with all aspects of
SFAS No. 48 paragraph 6. As it relates to the Company's test strips, the Company
continually monitors and updates its sales return reserve on a quarterly basis
since fiscal 2001, when it began to recognize revenue on these products.
Normally, the return rate is fairly consistent on a month-to-month basis, and is
United States Securities and
Exchange Commission
March 7, 2005
Page 9 of 12
directly related to the proximity to the expiration date on each test strip
batch. During fiscal 2004, the Company sold strips with a shorter remaining life
until the expiration date. In connection with these sales, the Company provided
a more significant return allowance than its historical average, because of the
shorter life remaining until the batches of test strip would begin to expire as
compared to their shipment date. At the request of the Company's customers, and
to better serve the ultimate consumer, it no longer ships test strips with less
than six months until expiration, and, therefore, does not expect to experience
this increase in sales returns from test strips in the future.
We direct your attention to the Company's increased disclosure in Note
3 of its consolidated financial statements regarding revenue recognition for
test strips.
46. During the period of time that the Company transitioned from its
predecessor cholesterol monitor to its current cholesterol monitor, the Company
offered a reduced sales price to customers willing to continue to purchase the
predecessor monitor in order to deplete the Company's inventory of its
predecessor monitor. Under these instances, the revenue was recorded at the
actual price the monitors were sold to customers.
The Company has also negotiated volume discounts in instances that a
customer was willing to reorder (not an initial order) a substantial quantity of
cholesterol monitors and test strips, as a method to further deplete the
inventory of the predecessor monitor. In these instances, the Company recorded
the volume discount as a sales discount (contra revenue)..
Sales Returns Allowance - Page F-12
- -----------------------------------
47. The Company recognizes an accrued liability for both a warranty
reserve and for the sales return allowance to comply with the matching principle
as it has recognized the revenue associated with these items. We direct your
attention to the response to Comment #43 and #45 and to our additional
disclosure in the amended registration statement.
We supplementally provide you with the following rollforward of the sales
returns allowance account on a gross basis, as requested.
FOR THE FISCAL YEARS ENDING FOR THE SIX MONTHS ENDING
------------------------------ --------------------------------------
June 30, 2004 June 30, 2003 December 31, 2004 December 31, 2003
------------- ------------- ----------------- -----------------
Sales Returns Allowance at
Beginning of Period 103,947 54,278 238,064 103,947
Returns Received (536,698) (389,974) (373,078) (190,358)
Increases to Allowance 670,815 439,643 342,890 310,744
-------- -------- -------- --------
Sales Returns Allowance at End
of Period 238,064 103,947 207,876 224,333
======== ======== ======== ========
Note 9. Accrued Liabilities - Page F-15
- ----------------------------------------
United States Securities and
Exchange Commission
March 7, 2005
Page 10 of 12
48. The Company's warranty expense and related accrual is less than
$15,000 per year and has therefore been determined to be immaterial for
disclosures required under 14(b) of FIN 45.
Note 10. Option and Purchase Agreement - Page F-15
- ---------------------------------------------------
49. Pursuant to an option and purchase agreement dated November 20,
2002, the Company received $250,000 from an unrelated party in exchange for
granting them an option to purchase, for an additional $500,000, the unutilized
technology patent resulting in a total purchase price of $750,000. At the time
of entering into the option and purchase agreement, the Company was the
plaintiff in a patent infringement litigation surrounding this patent and was
vigorously defending its rights to the patent. The unrelated third party
subsequently decided not to exercise their option to purchase the patent and the
option expired unexercised on July 10, 2003, primarily due to the uncertainty
surrounding the litigation, which remained ongoing at the time the option
expired. The value of the patent is recorded at $400,002 as of December 31,
2004.
Note 13. Convertible Debt - Page F-16
- --------------------------------------
50. The prospectus has been revised to include a table detailing the
items outlined in the Staff's comment.
September 2003 Issuances - Page F-17
- ------------------------------------
51. Supplementally, please be advised that the additional financing
charge of $1,488,889 was calculated based on the difference in the original
conversion price ($0.13) as compared to the revised conversion price ($0.09),
multiplied by the number of shares to be issued on conversion (37,222,222). The
Company accounted for this amount by debiting financing expense and crediting
additional paid in capital.
52. The Company accounts for convertible debt securities issued with
detachable stock purchase warrants according to the guidance provided by EITF
98-5 "Accounting for convertible securities with beneficial conversion features
or contingently adjustable conversion ratios" and EITF 00-27 "Application of
Issue No. 98-5 to Certain Convertible Instruments".
In accordance with the Company's understanding of this guidance, it
first determined the debt discount based on ascribing a value to the detachable
stock purchase warrants based on fair value determined by application of the
Black/Scholes method of valuation. It then determined the debt discount
attributable to the beneficial conversion feature as based on the number of
shares of common stock that would be issuable on conversion of the debt to
equity securities at the stated conversion rate as compared to the current
trading price of such equity securities.
United States Securities and
Exchange Commission
March 7, 2005
Page 11 of 12
As it specifically relates to the fiscal 2004 debt issuances, the
Company has determined that the aggregated fair value of both the detachable
stock purchase warrants and the beneficial conversation feature exceeded the
total proceeds (or face of the debt). Accordingly, it was the Company's
interpretation of EITF 98-5 that the discount that should be recognized on such
debt issuance was in fact limited to the total face amount of the debt.
February 2004 Issuances - Page F-17
- -----------------------------------
53. Supplementally, please be advised that the $500,000 original issue
discount related to the February 2004 transaction was determined in accordance
with the financing agreements (see exhibits 10.12 through and 10.15 incorporated
by reference into the Registration Statement). The $500,000 represents an
effective rate of return of 9% per annum for the investors of the transaction.
The subscription amounts paid by the purchasers of the debentures were reduced
by this amount and the debentures are non-interest bearing. The $500,000 was
recorded as deferred financing costs and is being amortized to financing expense
over the term of the debentures.
Note 14. Stockholders' Deficit - Page F-19
- -------------------------------------------
Common shares issued upon Conversion of Convertible Debt - Page F-19
- --------------------------------------------------------------------
54. The Company has revised the prospectus to clarify that the $6
million in debt converted into common shares is gross of any related debt
discount recorded on the convertible debentures. Supplementally, please be
advised that the debt balances on the face of the balance sheet are shown net of
any related debt discounts.
Note 15. Stock Options and Warrants - Page F-19
- ------------------------------------------------
55. The prospectus has been revised to disclose that there were no
options issued to vendors or others for services during the fiscal periods
presented.
Note 17. Commitments and Contingencies - Page F-21
- ---------------------------------------------------
Patent Litigation
- -----------------
56. We direct your attention to the response to Comment #19, above.
Additionally, please note that the Company did not record impairment to its
patent - but, rather, it revised its estimated useful life based on the evidence
available.
SEPTEMBER 30, 2004 FINANCIAL STATEMENTS
- ---------------------------------------
Note 8. Stockholders' Deficit - Page F-33
- ------------------------------------------
United States Securities and
Exchange Commission
March 7, 2005
Page 12 of 12
Common Shares Issued for Services - Page F-33
- ---------------------------------------------
57. The Company accounts for common stock issued for services provided
by its consultants as per the guidance of SFAS No. 123, paragraph 8, which
states in part, `all transactions in which goods or services are the
consideration received for the issuance of equity instruments shall be accounted
for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable."
Accordingly, the Company uses the invoice provided by its third party consultant
to determine the total expense to recognize. The number of shares of common
stock to be issued is determined by the total cost of the service (per the
invoice) divided by the then current trading price of our common stock.
PART II
- -------
Recent Sales of Unregistered Securities
- ---------------------------------------
58. Part II, Item 26 has been revised to (a) identify the specific
exemption from Section 5 relied upon, (b) disclose the specific facts relied
upon to support the exemption in each transaction and (c) the identity of the
person or class of persons to whom the securities were sold.
A currently dated consent of the Company's independent registered
public accounting firm is filed as an exhibit to Amendment No. 1.
If you have any further questions or comments, please contact us.
Very truly yours,
SCHNEIDER WEINBERGER & BEILLY LLP
By: /s/ Steven I. Weinberger
------------------------
Steven I. Weinberger