THE O'NEAL LAW FIRM, P.C.
17100 East Shea Boulevard
Suite 400-D
Fountain Hills, Arizona 85268
(480) 812-5058 (Tel)
(480) 816-9241 (Fax)
February 9, 2006
Securities and Exchange Commission
100 F. Street, N.W.
Washington, D.C. 20549
Re: Tank Sports, Inc.
Registration Statement on Form SB-2
File No. 333-129910
Filed November 23, 2005
Dear Mr. Owings:
We are writing in response to your comment letter dated December 22, 2005 in
connection with the above-referenced filing.
General
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Comment #1: Please note that we provide examples to illustrate what we mean by
our comments, they are examples and not exhaustive lists. If our comments are
applicable to portions of the filing that we have not cited as examples, make
appropriate changes in accordance with our comments.
Response: Noted.
Comment #2: In your response letter, please state our comment and then explain
each change that has been made in response to a comment. In addition, you should
also reference each page number in which disclosure has been revised in response
to a comment so that we can easily place your revised disclosure in proper
context.
Response: Noted.
Comment #3: Please provide the independent accountants' report by Kabani &
Company on your financial statements as of February 28, 2005 and for each of the
years in the two-year period ended February 28, 2005.
Response: We have included the independent accountants' report by Kabani &
Company on the company's financial statements as of February 28, 2005 and for
each of the years in the two-year period ended February 28, 2005. The statements
are included under the Section entitled "Financial Statements" beginning on page
F-1 of the report.
Comment #4: Please provide information required by Item 304 of Regulation S-B.
Response: We have included the information required by Item 304.
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Prospectus Summary
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Our Business, page 6
Comment #5: In the summary you state that you market, sell and distribute
recreational and transportation motorcycles, all-terrain vehicles, dirt bikes,
scooters and Go-carts. However, in your risk factor section on page 11 you state
that your sales consisted solely of cruiser motorcycles in the year ended
February 28, 2005. Please revise the disclosure in the summary and elsewhere in
the prospectus as may be appropriate to reconcile these contradictory
statements. You should also expand the risk factor on page 11 by providing the
distribution of sales by product classes in the 6 month interim period ended on
August 31, 2005.
Response: We have revised to correct this contradiction. We have further
expanded the risk factor on page 11 to discuss distribution of sales by product
classes for the referenced period.
Comment #6: In the summary you state that you also sell your products
internationally in Mexico, Jamaica, Ecuador and Finland. However, in the risk
factor on page 13 you indicate that you intend to engage in international sales
in the future. Please reconcile these contradictory statements and revise
wherever appropriate throughout the prospectus.
Response: We have deleted the referenced risk factor so as not to be
contradictory with the statement in the summary that the company currently sells
its products internationally.
The Offering, page 6
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Comment #7: Please remove this section from the prospectus as you have already
provided the same information on the cover page of the prospectus. You should
avoid repetitive disclosures in the prospectus. Please refer to Rule 421 of
Regulation C.
Response: We have removed this section from the prospectus.
Risk Factors
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Sale of a substantial Number of Shares..... page 8
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Comment #8: This risk factor is written as if a market for your shares currently
exists. Please qualify your statements as to the possible effects of sales of
shares on the market price by prefacing it with language that indicates that
these effects could occur only if and when a market for your common stock is
established.
Response: We have qualified these statements as to the possible effects of sales
of shares on the market price by prefacing it with language that indicates that
these effects could occur only if and when a market for the company's common
stock is established.
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Additional issuances....page 8
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Comment #9: Disclose whether the company has any plans to issue additional
securities. Include the number of shares of common stock you might be obligated
to issue pursuant to all outstanding options, warrants, convertible securities
and contractual obligations.
Response: We have disclosed that the company has no current plans to issue
additional securities at this time or in the foreseeable future.
Our Auditors Have Issued a "Going-Concern" Qualification....page 9
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Comment #10: In the last sentence of this risk factor you refer to the
shareholders being "materially and adversely affected." Please revise the last
sentence to disclose the specific and likely effect of failure to obtain
alternative sources of cash and generate positive cash flow. Throughout the risk
factors section, in both the risk factor captions and in the text of the risk
factors, you refer to the company, its business or its shareholders being harmed
or shareholders and/or the company being adversely affected. Please replace all
these references with disclosures explaining the immediate, actual or specific
effect on the company and/or its shareholders.
Response: We have revised this risk factor to disclose that the specific and
likely effect of failure to obtain alternative sources of cash and generate
positive cash flow could be the failure of business. We have also replaced all
references to the company, its business or its shareholders being harmed or
shareholders and/or the company being adversely affected with disclosures
explaining the immediate, actual or specific effect on the company and/or its
shareholders as being the potential loss of their entire investment.
Failure to retain our existing management team....page 9
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Comment #11: If any of your key employees has plans to leave the company in the
near future, you should disclose this fact in this section.
Response: The company's management is not aware that any key employees have
plans to leave the company in the near future, thus no revision to the report
has been made.
We are also dependent for our success on our ability to attract and
retain....page 9
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Comment #12: To the extent that you have experienced problems attracting and
retaining key personnel in the recent past, please revise to describe these
problems.
Response: We have revised this disclosure to reflect that the company has not
experienced any such problems.
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Our business may be negatively impacted....page 10
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Comment #13: Please describe any history of problems that you have faced of the
type described by this risk factor.
Response: We have revised this disclosure to reflect that the company has not
experienced any such problems.
Economic, political, military or other events....page 10
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Comment #14: Please consider whether this risk factor is appropriate for the
company. Did the September 11 attacks materially alter sales or any other aspect
of the company's operations? Has political or military instability created
problems for the company in the past? Are the risks posed to the company from
international operations already captured in "Our international manufacturing
operations..." on page 11?
Response: In considering the issues raised by the Commission in this comment
#14, we have deleted this risk factor from the report. (Please cross-reference
comment #6).
Our operating results could be negatively impacted....page 11
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Comment #15: You have introduced this risk factor by indicating that "if" your
sales are concentrated. Given that 100% of sales are coming from one sales
category, you should refer to the concentration of sales as a fact rather than a
possibility.
Response: We have revised this disclosure to disclose the various product
categories from which sales are currently generated.
Our business could be harmed if our contract manufacturers....page 12
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Comment #16: We note that your header refers to violation of labor laws.
However, the body of the risk factor appears to describe the posed risks as
being related to your reputation. Isn't it possible that your contract
manufacturers will comply fully with the labor laws of their country but still
engage in conduct that affects your reputation?
If applicable, please consider dividing this risk into 2 separate risk factors.
The first risk factor would relate to your inability to control your contract
manufacturers. This risk factor might disclose a number of different potential
problems associated with this lack of control, including some that are not
currently disclosed, such as product quality, product liability, timeliness of
shipments and other potential hazards.
The second risk factor should describe any risks to you reputation or other
potential problems associated with labor laws, including legal consequences if
your contract manufacturers fail to comply with labor laws.
Response: We have revised this disclosure as suggested and addressed the
reputation issue. The company does not believe the first risk factor suggested
in the comment is a material risk as the company has not experienced such
problems in the past and that such issues are addressed contractually and
through the company's own internal inspection process.
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Comment #17: If your agreements with your contract manufacturers are material to
the business, please file them as exhibits to the registration statement. In
addition, you should describe all material terms of those agreements in the
Business section.
Response: The company has purchase orders instead of contracts, thus we have not
included any purchase orders as exhibits. We have removed the wording of
"contract manufacturers" to "manufacturers."
Our business is subject to seasonality....page 13
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Comment # 18: Please disclose any problems you have faced in the past as a
result of the risks posed in this risk factor.
Response: The company's management advises that the company has not had any past
problems with respect to seasonality issues, and therefore we have made no
revision to the report.
Management's Discussion and Analysis or Plan of Operation, page 15
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Comment #19: An objective of MD&A is to provide information about the quality
and potential variability of earnings and cash flow and the impact of known
trends, demands, commitments and uncertainties to facilitate investors'
determination of the likelihood that past performance is indicative of future
performance. We note that your MD&A does not explain the factors that determine
your operating results, particularly the significant growth in revenue and
operating profit for the six month period ended August 31, 2005. Also, we refer
you to your working capital deficit and cash and cash equivalent balances at
August 31, 2005, you do not discuss the impact of your recent revenue growth on
liquidity and capital resources. Please expand your MD&A discussion so that
investors can understand the key variable and other qualitative and quantitative
factors that determine your results of operations and cash flows.
Response: We have expanded our MD&A discussion with respect to the key variables
and other qualitative and quantitative factors that determine our results of
operations and cash flows.
Comment #20: Please discuss off balance sheet arrangements as required by Item
303(c) of Regulation S-B.
Response: We have noted that the company has no off balance sheet arrangements.
Comment #21: Disclosure of critical accounting estimates should provide
investors with a fuller understanding of the uncertainties in applying critical
accounting policies and the likelihood that materially different amounts would
be reported under different conditions or using different assumptions. It should
include quantification of the related variability in operating results that you
expect to be reasonably likely to occur. Please provide us information about the
uncertainties in applying your critical accounting policies, the historical
accuracy of these critical accounting estimates, a quantification of their
sensitivity to changes in key assumptions and the expected likelihood of
material changes in the future.
Response: We have revised this section to provide information about the
uncertainties in applying our critical accounting policies, the historical
accuracy of these critical accounting estimates, a quantification of their
sensitivity to changes in key assumptions and the expected likelihood of
material changes in the future.
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Comment #22: Please expand your critical accounting policies for revenue
recognition as follows:
o Describe your contractual arrangements with dealers/distributors.
o Explain your product return policy and how you estimate product
returns for new products.
o For all years presented, disclose the nature and amounts of all
significant adjustments to revenue (e.g., product returns,
chargebacks, incentives, fees, rebates, etc.), particularly for
significant recent product launches, in your comparisons of results
from operations. In your analysis, please consider the Commissions
Interpretative MD&A Guidance (Release No. 33-8350 dated December 19,
2003).
o If applicable, please disclose and discuss any shipments made to
dealers/distributors wherein such shipments are as a result of
incentives and/or in excess of the dealer/distributor's ordinary
course of business inventory level. Discuss your revenue recognition
policy for such shipments.
o Quantify the amount of changes in estimates in estimated returns,
chargebacks, rebates and other significant reserves in subsequent
periods or explicitly state that no material revisions were
recognized, if true.
Response: We have revised this section to describe our contractual arrangements
with dealers/distributors, explained our product return policy and accounting
estimation methods. For the accounting periods presented, we haven't any
significant adjustments to revenue. The company's product returns and chargeback
were insignificant (see following chart), therefore, not included in MD&A.
Please see the table below.
CHARGE BACK RETURNS
03/01/04-02/28/05 $516.43 $14,128.57
03/01/03-02/29/04 $1,569.91 $2,192.09
03/01/05-08/31/05 $0 $5,291
03/01/04-08/31/04 $273.19 $12,746.81
Furthermore, we have not had any shipment made to dealers/distributors wherein
such shipments are as a result of incentives and/or in excess of the
dealer/distributor's ordinary course of business inventory level.
Business, page 19
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Industry Background
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Motorcycles
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Comment #23: Please explain who MIC is the first time you reference it.
Response: We have explained who MIC is in this section.
Comment #24: You have included data that suggest international demand for
motorcycles will increase. However, we note that the company does not sell its
products in the nations that appear to be driving the increased demand. To avoid
confusion for investors, you should either delete this data or explain the
relevance to investors.
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Response: We have deleted this data to avoid further confusion to investors.
Description of Property, page 24
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Comment # 25: Disclose the name of your landlord and explain its affiliation to
the company.
Response: We have disclosed the name of the company's landlord and explained the
affiliation to the company.
Executive Compensation, page 26
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Comment #26: Please advise us as to whether the registrant has any compensation
or employment agreements with any of the three individuals included in the
table. If so, describe the material terms and file the agreements as exhibits to
the registration statement.
Response: We have revised this disclosure to clarify that the company has no
compensation or employment agreements with any of the three individuals included
in the table.
Certain Relationships and Related Transactions, page 26
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Comment #27: For each transaction or agreement disclosed, please file your
agreements as exhibits to the registration statement.
Response: We have provided the written agreements as exhibits where they exist.
With respect to the April 2001 Steady Star loan of $90,000, there is no written
agreement.
Comment #28: For each transaction or agreement, disclose all material terms or
provisions or other relevant information. For example, you reference a $90,000
loan but you provide no information regarding the interest rate or maturity or
what the company did with the proceeds of the loan. You provide information
regarding two leases but you do not provide any information about the location,
size or nature of the facilities or the uses and adequacy of the facility for
the company. We also note that the second of the two leases was for
substantially higher monthly payments. Please clarify if both leases pertain to
the same property or facility and explain why the substantial increase in lease
payments occurred after the company entered into the second lease agreement.
Response: We have revised this section to disclose all material terms and other
relevant information.
Security Ownership of Certain Beneficial Owners, page 27
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Comment #29: The beneficial ownership table should include shares that could be
obtained by individuals within the next 60 days. See Rule 13d-3. If this is true
for the ownership you have currently listed, you should represent that such
shares are included in the table. If the table does not reflect shares that
could be obtained within 60 days, you should revise the table to include this
information and then provide the representation.
Response: We have included such a representation in the opening paragraph of
this section.
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Plan of Distribution, page 28
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Comment # 30: Please explain how the $1.00 per share was determined to be the
fixed price for the shares.
Response: In the opening paragraph of this section we have explained that the
$1.00 per share price was determined arbitrarily by the Selling Shareholders and
bears no relationship to the company's book value.
Selling Shareholders, page 30
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Comment #31: Please explain how the selling shareholders originally obtained
their shares.
Response: We have included an explanation on how the selling shareholders
originally obtained their shares in an additional column to the selling
shareholders table.
Financial Statements
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Notes to Financial Statements
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Note 2. Summary of Significant Accounting Policies, page 40
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Comment #32: We note an apparent contradiction in your revenue recognition
accounting policy. You state sales revenue is recognized at the date of shipment
for customers and when delivery is complete. Please clarify this accounting
policy disclosure.
Response: The revenue recognition policy has been modified:
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 104. Sales revenue is recognized when the delivery is
completed, the price is fixed or determinable, no other significant obligations
of the Company exist and collectability is reasonably assured. Payments received
before all of the relevant criteria for revenue recognition are satisfied to be
recorded as unearned revenue.
Comment #33: We note that you account for inventory at the lower of cost or
market. A departure from the cost basis for inventory pricing is required if the
utility of the goods is impaired by damage, deterioration, obsolescence, changes
in price levels or other causes. Please describe the nature of such inventory
impairments and quantify related adjustments for each period presented,
including write downs relating to damage, obsolescence and returned products.
Tell us the basis for your determination of market value and the location of
your inventory at August 31, 2005.
Response: We agree with this comment; however, the company did not have any
material impairment of inventory during the year ended February 28, 2005,
February 29, 2004 and six months ended August 31, 2005 and 2004.
The basis for determination of market value is the current selling price of the
products at the balance sheet date, less cost of completion and disposal.
At August 31, 2005. the inventory in the company's warehouse located at August
31, 2005 was 1718 Floradale Ave., S. El Monte, CA 91733.
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Comment #34: You state that all motorcycle and ATV products are manufactured
under contracts with firms located in China and Mexico. Please describe any key
terms of your contractual arrangements with these manufacturers, including
purchase commitments, pricing, product warranties, product returns and
contingent obligations. In addition, please clarify how you determine title
transfer and revenue recognition for products shipped directly from these
contract manufacturers to your distributors/customers. Tell us how you account
for product returns made by your distributors/customers and warranty claims made
to these contract manufacturers.
Response: The Company issues purchase orders to manufacturers in China, and such
vendors are paid by Steady Star, an affiliate company owned by two of the
Company's shareholders. We do not have any manufacturer located in Mexico. We
have revised the SB2 to remove this incorrect information. We have included this
disclosure under CERTAIN RELATIONSHIP AND RELATED PARTY TRANSACTIONS. There's no
other contractual agreement other than the purchase orders with certain terms
and conditions specified on the purchase orders. Tank has no purchase commitment
with any of its manufacturers. Unit pricings, product warranties, and returns
are negotiated for each purchase order. There's no other contingent obligations.
The Company determines title transfer and revenue recognition on delivery date.
There are only 2 customers that require direct shipments from the contract
manufacturers with different shipping terms. One is FOB shipping point, the
Company recognizes sales and determines title transferred when delivery of items
takes place. The other one is CNF (cost and freight), the Company recognizes
sales and determines title has passed when goods arrive in the port of
destination .
The Company records all the product returns by distributors/customers as a
reduction of sales as "Returns and Allowances" at the date of receipt of the
returned items. To date, we have not made any warranty claims directly to the
contract manufacturers as the amounts were insignificant. However, warranty
claims will be recorded as reduction of cost of goods sold..
Comment #35: We note that you have not provided a liability or disclosure
related to product warranties. Please tell us the terms of your product
warranties to distributors/customers, costs incurred in connection with these
obligations for each period presented and why you have not recorded a liability
for these obligations.
Response: We have disclosed that Tank provides a limited warranty for parts only
for a period of six months for its ATVs, Dirt bikes, Go Cars, and Scooters with
a 50cc engine. Warranty is provided for a period of one year for cruiser
motorcycles with Trademark "VISION" and Scooters with 150cc and 250 cc engines.
Tank's standard warranties require the Company or its dealers to repair or
replace defective products during such warranty periods at no cost to the
consumer. Major cost incurred in connection with warranty obligations is the
cost of new parts for replacing the damage/defective parts. For each of the 12
month ended 2/29/2004 and 2/28/2005, and 6 months ended 8/31/2005, the costs of
replacing damage parts were approximately $531, $11,012 and $11,785,
respectively. The Company has not recorded a liability for warranty obligations
because such costs were immaterial for the periods presented. The Company has
charged such cost to cost of goods sold in the period these costs were actually
incurred.
Comment #36: We note that you provide no disclosure of threatened litigation or
historical claims and assessments. Please describe the terms of your product
liability insurance program, quantify related costs incurred for each period
presented and tell us the basis for your decision to exclude disclosure
described in SFAS 5.
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Response: We have disclosed that Tank is subject to product liability claims in
the normal course of business. Tank insures its product liability claims with
ACORD Jordan and Jordan Insurance Agency, LLC. The product liability coverage
are up to $1,000,0000 limit per occurrence, $50,000 limits on damage to rented
premises, $1,000,000 to personal injury, $2,000,000 to general aggregate and
$2,000,000 limit to products comp/or aggregate. Historically, the Company has
not experienced any threatened litigation or product liability claim. The
Company believes that based on its historical product liability claim
experience, the product liability insurance will be sufficient to cover any such
claim. Accordingly, the basis for excluding disclosures described in SFAS 5 is
the Company's believe that future loss contingency will be remote based on its
past experience.
Signature Page
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Comment #37: Your signature page must include the signature of your Chief
Accounting Officer and your Chief Financial Officer.
Response: We have included the signatures of the company's Chief Accounting
Officer and Chief Financial Officer on the signature page.
Please do not hesitate to contact us if you have any further questions.
Very truly yours,
/s/William D. O'Neal
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William D. O'Neal
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