eTotalSource, Inc.
1510 Pool Boulevard
Yuba City, California 95993
February 6, 2006
VIA EDGAR AND FED EX
Ms. Barbara C. Jacobs
Assistant Director
United States Securities and Exchange Commission
Division of Corporate Finance
100 F Street, N.E., Room 4561
Washington, D.C. 20549
Re: eTotalSource, Inc.
Registration Statement on Form SB-2 filed December 30, 2005
File No. 333-130800
Dear Ms. Jacobs:
This letter has been prepared in response to your request for
eTotalSource, Inc. ("ETLS" or the "Company") to respond to the comments of the
United States Securities and Exchange Commission (the "Commission") as
memorialized in your January 26, 2006 letter to me (the "Comment Letter")
concerning the Registration Statement on Form SB-2 filed by ETLS on December 30,
2005, File No. 333-130800 (the "Registration Statement").
Concurrently with the filing of this Response Letter with the
Commission, the Company has also filed Amendment No. 1 to the Registration
Statement (the "Amended Registration Statement") which incorporates, as
appropriate, the Company's responses set forth herein.
The Company's responses to the Comment Letter appear below in boldface
capitalization after a recitation of the relevant comment contained in the
Comment Letter.
Registration Statement on Form SB-2
COMMENT 1. We note your discussion of the November 2, 2005
secured convertible debenture financing transaction
throughout your registration statement. In such
discussion, you have indicated that one option for
the conversion price of the debenture is "an amount
equal to 120% of the closing bid price of [your]
common stock as listed on a principal market as
quoted by Bloomberg LP, on the date hereof." The
terms of your secured convertible debenture appear to
indicate that "the date hereof" is in reference to
the date of the debenture as opposed to the date of
your prospectus. If so, it would appear that this
option for a conversion price is determinable and,
for purposes of clarity, should be disclosed in lieu
of the formula.
RESPONSE: SECTION 3 (c) OF THE DEBENTURE PROVIDES AS FOLLOWS:
THE HOLDER IS ENTITLED, AT ITS OPTION, TO
CONVERT...THE DEBENTURE...INTO SHARES OF THE
COMPANY'S COMMON STOCK...AT THE PRICE PER SHARE EQUAL
TO THE LESSER OF (A) AN AMOUNT EQUAL TO ONE HUNDRED
TWENTY PERCENT (120%) OF THE CLOSING BID PRICE OF THE
COMMON STOCK AS LISTED ON A PRINCIPAL MARKET (AS
DEFINED HEREIN), AS QUOTED BY BLOOMBERG L.P., ON THE
DATE HEREOF (THE "FIXED PRICE") OR (B) AN AMOUNT
EQUAL TO EIGHTY PERCENT (80%) OF THE LOWEST CLOSING
BID PRICE OF THE COMMON STOCK FOR THE FIVE (5)
TRADING DAYS IMMEDIATELY PRECEDING THE CONVERSION
DATE WHICH MAY BE ADJUSTED PURSUANT TO THE OTHER
TERMS OF THIS DEBENTURE. SUBPARAGRAPHS (A) AND (B)
ABOVE ARE INDIVIDUALLY REFERRED TO AS A "CONVERSION
PRICE."
Ms. Barbara C. Jacobs
United States Securities and Exchange Commission
February 6, 2006
Page 2
ACCORDINGLY, THE CONVERSION PRICE UNDER THE "120%
PRICING MECHANISM" IS DETERMINABLE BASED ON THE
CLOSING BID PRICE ON THE DATE ON WHICH THE DEBENTURE
WAS EXECUTED. HOWEVER, THE CONVERSION PRICE UNDER THE
"80% PRICING MECHANISM" IS NOT ASCERTAINABLE ON THE
DATE ON WHICH THE DEBENTURE WAS EXECUTED.
SINCE THE CONVERSION PRICE IS EQUAL TO THE LESSER OF
THESE TWO PRICING MECHANISMS, AND SINCE WE CANNOT
DETERMINE THE CONVERSION PRICE UNDER THE "80% PRICING
MECHANISM", THE COMPANY CANNOT THEREFORE DETERMINE
THE ACTUAL CONVERSION PRICE UNDER THE DEBENTURE.
HOWEVER, THE COMPANY HAS NOTED, IN THE APPROPRIATE
LOCATIONS THROUGHOUT THE AMENDED REGISTRATION
STATEMENT, THE ACTUAL FIXED PRICE (I.E., THAT
DETERMINED BY APPLICATION OF THE 120% PRICING
MECHANISM), WHICH IS DETERMINABLE, AND THE FORMULA TO
DETERMINE THE VARIABLE PRICE (I.E., THAT DETERMINED
BY APPLICATION OF THE 80% PRICING MECHANISM), WHICH
IS NOT DETERMINABLE AT THIS TIME.
COMMENT 2. Please advise us whether the escrow arrangement in
your secured convertible debenture financing
transaction has since been terminated and, if so,
when the proceeds from the financing transaction were
released from escrow and funded to you.
RESPONSE: THE ESCROW ARRANGEMENT IN THE DEBENTURE FINANCING
TRANSACTION HAS BEEN TERMINATED AS THE PROCEEDS FROM
THE FINANCING TRANSACTION WERE RELEASED FROM ESCROW
AND FUNDED TO THE COMPANY ON NOVEMBER 4, 2005.
COMMENT 3. Exhibit 99.5 to your Form 8-K filed November 8, 2005
is a warrant for 2,000,000 shares of your common
stock issued to Cornell Capital on November 2, 2005.
The warrant was issued as part of the secured
convertible debenture financing transaction. Your
disclosure in the Form 8-K and in your registration
statement, however, do not discuss this warrant.
Please revise your disclosure regarding the secured
convertible debenture financing transaction to
discuss this warrant. In addition, please advise us
whether any shares being registered in your
registration statement underlie the shares of common
stock issuable upon exercise of this warrant.
RESPONSE: WHILE THE COMPANY DID DISCUSS IN SEVERAL PLACES IN
THE REGISTRATION STATEMENT WARRANTS ISSUED TO CORNELL
CAPITAL PARTNERS, LP ("CORNELL"), THE COMPANY HAS
EXPANDED ITS DISCUSSION OF THE WARRANTS IN THE
AMENDED REGISTRATION STATEMENT AS REQUESTED BY THE
COMMISSION.
Ms. Barbara C. Jacobs
United States Securities and Exchange Commission
February 6, 2006
Page 3
AS NOTED IN THE REGISTRATION STATEMENT, 7 MILLION
SHARES BEING REGISTERED IN THE REGISTRATION STATEMENT
UNDERLIE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF WARRANTS ISSUED TO CORNELL, WHICH
AGGREGATE AMOUNT IS COMPRISED OF THE FOLLOWING: (I) A
WARRANT FOR 5 MILLION SHARES ISSUED IN CONNECTION
WITH THE AUGUST 24, 2005 DEBENTURES, AND (II) A
WARRANT FOR 2 MILLION SHARES ISSUED IN CONNECTION
WITH THE NOVEMBER 2, 2005 DEBENTURES.
Selling Stockholders, page 12
COMMENT 4. Your tabular presentation of information with respect
to your selling stockholders appears to indicate that
Cornell Capital plans to sell shares of your common
stock acquired under the standby equity distribution
agreement. It appears that such agreement and
financing arrangement has been terminated. Please
confirm the termination of such financing arrangement
and revise, as appropriate. Please review your
disclosure throughout in light of this comment.
RESPONSE: PURSUANT TO THE TERMS CONTAINED IN THE TERMINATION
AGREEMENT EXECUTED BY CORNELL AND THE COMPANY ON
NOVEMBER 2, 2005 (THE "TERMINATION AGREEMENT"), THE
STANDBY EQUITY DISTRIBUTION AGREEMENT (THE "SEDA")
WAS TERMINATED. NOTWITHSTANDING SUCH TERMINATION, THE
TERMINATION AGREEMENT SPECIFICALLY PROVIDED THAT
CORNELL SHALL RETAIN ALL STRUCTURING AND COMMITMENT
FEES UNDER THE SEDA. UNDER THE TERMS OF THE SEDA, THE
COMMITMENT FEES WERE TO BE PAID BY THE ISSUANCE OF
3,833,334 SHARES OF THE COMPANY'S COMMON STOCK. UNDER
THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT
RELATED TO THE SEDA, THE COMPANY WAS REQUIRED TO
REGISTER SAID 3,833,334 SHARES IN THE COMPANY'S NEXT
REGISTRATION STATEMENT. ACCORDINGLY, THE COMPANY
INCLUDED SAID 3,833,334 SHARES IN THE TOTAL NUMBER OF
SHARES BEING REGISTERED IN THE REGISTRATION STATEMENT
(PLEASE REFER TO PAGE 1 AND ELSEWHERE IN THE
REGISTRATION AGREEMENT). FURTHER, CORNELL INFORMED
THE COMPANY THAT CORNELL INTENDS TO SELL SUCH
3,833,334 SHARES UPON THE REGISTRATION STATEMENT
GOING EFFECTIVE.
THE COMPANY HAS REVISED THE RELEVANT DISCLOSURES IN
THE AMENDED REGISTRATION STATEMENT TO CLARIFY THESE
MATTERS.
Shares Acquired in Financing Transactions with Cornell, page 13
COMMENT 5. Your bulleted discussion of the 2005 transactions
appears to suggest that Cornell Capital may still
purchase from you up to $1,000,000 of secured
convertible debentures. Disclosure elsewhere,
however, suggests that the secured convertible
debenture financing transactions has been fully
subscribed. Please revise as appropriate. Further,
please advise us of the material terms and conditions
of any arrangements whereby securities may be sold to
Cornell Capital in the future.
RESPONSE: THE SECURED CONVERTIBLE DEBENTURES IN THE PRINCIPAL
AMOUNT OF $1 MILLION, WHICH WERE REFERRED TO IN THE
NOVEMBER 2005 SECURITIES PURCHASE AGREEMENT DISCUSSED
ON PAGE 15 OF THE REGISTRATION STATEMENT, HAVE BEEN
FULLY SUBSCRIBED. THE COMPANY HAS DRAFTED THE AMENDED
REGISTRATION STATEMENT TO CLARIFY THIS POINT ON SAID
PAGE AND ELSEWHERE IN THE AMENDED REGISTRATION
STATEMENT.
Ms. Barbara C. Jacobs
United States Securities and Exchange Commission
February 6, 2006
Page 4
THERE ARE CURRENTLY NO ARRANGEMENTS IN PLACE WHEREBY
SECURITIES OF THE COMPANY MAY BE SOLD TO CORNELL IN
THE FUTURE.
Facing Page
COMMENT 6. The registration number you have inserted on the
facing page is incorrect. Please revise.
RESPONSE: THE COMPANY HAS INSERTED THE CORRECT REGISTRATION
NUMBER ON THE FACING PAGE OF THE AMENDED REGISTRATION
STATEMENT.
Item 27. Exhibits
COMMENT 7. We will review counsel's opinion with respect to the
shares being registered when that document is
submitted, and may have comments at that time. We
will review a "form of" opinion included with a
pre-effective amendment if you elect to provide such
a document; however, the final amendment should
include a currently dated legality opinion.
RESPONSE: THE COMPANY HAS ATTACHED AS EXHIBIT 5.1 TO THE
AMENDED REGISTRATION STATEMENT A COPY OF ITS
COUNSEL'S OPINION WITH RESPECT TO THE SHARES BEING
REGISTERED.
Item 28. Undertakings
COMMENT 8. The undertaking set forth in Item 512(a) of
Regulation S-B has recently been revised. Please
revise accordingly.
RESPONSE: THE AMENDED REGISTRATION STATEMENT CONTAINS THE
CORRECT, UPDATED UNDERTAKINGS SET FORTH IN ITEM
512(a) OF REGULATION S-B.
Should you have any questions concerning this Response Letter or the
Amended Registration Statement, please contact me at (530) 751-9615.
Very truly yours,
/s/ Terry L. Eilers
Terry L. Eilers
Chief Executive Officer and Chairman of the Board
cc: Clayton E. Parker, Esq., Kirkpatrick & Lockhart Nicholson Graham, LLP
(via facsimile) Gaylen Hansen, Gordon Hughes & Banks, LLP
(via facsimile)