SEC Company Response from COMPOSITE TECHNOLOGY CORP (CIK 0000317477) — Apr 14, 2005
COMPOSITE TECHNOLOGY CORP (CIK 0000317477)
Date: April 14, 2005 · CIK: 0000317477 · Accession: 0001144204-05-011444
AI Filing Summary & Sentiment
File numbers found in text: 333-122280
Referenced dates: March 17, 2005
Letter
Re: Composite Technology Corporation Registration Statement on Form S-3/A File No. 333-122280
RICHARDSON & PATEL LLP 10900 Wilshire Boulevard Suite 500 Los Angeles, CA 90024 Telephone (310) 208-1182 Facsimile (310) 208-1154
April 12, 2005
VIA EDGAR AND OVERNIGHT COURIER
Securities and Exchange Commission Division of Corporation Finance 450 Fifth Street, N.W. Washington DC, 20549 Attn.: Daniel F. Duchovny, Esq. Russel Mancuso, Esq.
Messrs. Duchovny and Mancuso:
On behalf of Composite Technology Corporation (the "Company"), we enclose for filing under the Securities Act of 1933, as amended, Amendment No. 1 to the above-referenced registration statement (the "Registration Statement"), together with exhibits thereto. Amendment No. 1 to the Registration Statement contains revisions that have been made in response to the comments received from the staff ("Staff") of the Securities and Exchange Commission in their letter dated March 17, 2005. Set forth below are the Company's responses to the Staff's comments. We have reproduced the Staff's comments in bold type and have followed each comment with our response. References in this letter to "we," "our" or "us" mean the Company or its advisors, as the context may require. Two marked copies of Amendment No. 1 to the Registration Statement and two marked copies of draft amendments to the Company's Form 10-KSB for the fiscal year ended September 30, 2004 and Form 10-Q for the quarter ended December 31, 2004 are being provided supplementally with a copy of this letter for the convenience of the Staff.
Form S-3
Fee Table
1. Please revise the fee table to reflect:
<PAGE> Securities and Exchange Commission April 12, 2005
o The original fee paid at the time you first filed the registration statement using the appropriate market price at that time. You should not recalculate the fee for those shares with the amendments.
o The additional fee for the additional shares registered in the amendment reflecting the appropriate market price at the time of the amendment.
In response to the Staff's comment, the fee table has been revised to clarify the original fee paid at the time we first filed the Registration Statement and the additional fee for the additional shares registered in the amendment. As described in more detail in the fee table and footnote (1) to the fee table, we added 926,170 shares of common stock and reduced the number of shares of common stock underlying warrants by 688,000 shares as reported in the form S-3 (amendment no. 1 to the SB-2) registration statement filed with the SEC on March 1, 2005. As a result of the revisions to the fee table in response to the Staff's comment, the total amount of registration fee has increased by $57.29.
Prospectus
2. Please revise your prospectus to comply with Rule 421. For guidance, please refer to our web site at http://www.sec.gov/hot/english.htm, noting particularly the comments at 41 comments at the end of Updated Staff Legal Bulletin No. 7 (June 7, 1999) at http://www.sec.gov/interps/legal/cfs1b7a.htm. For example:
o avoid reliance on defined terms like in quotation marks and parentheses throughout your document. Instead, you should use terms that are clear from context;
o avoid embedded lists like on page 2;
o avoid legalese like hereby, hereof and herein on page 3;
o use risk factor subheadings that reflect the risk in the subsequent text; and
o revise risk factors like your last risk factor that could apply to almost any issuer to instead clarify how the risk is particular to your company, industry or offering.
After you have revised your document consistent with the above-cited guidance, please supplementally provide us a printed version of your prospectus in the form that you will deliver it to investors.
We note the Staff's comment and have revised the prospectus throughout to comply with Rule 421. We will supplementally provide the Staff a printed version of our prospectus in the form that we will deliver to our investors.
<PAGE> Securities and Exchange Commission April 12, 2005
Prospectus Cover
3. Because your filing does not register the exercise of the warrants, your reference to the proceeds from the exercise is confusing. If you elect to include this disclosure, please move it to a more appropriate section of your document which is clearly distinct from any discussion of the use of proceeds from the offering you have registered. Also apply this comment to the "Use of Proceeds" disclosure on page 11.
The disclosure regarding the proceeds from the exercise of the warrants has been deleted throughout the prospectus.
Summary
4. The introductory paragraph to your summary states that the summary is not complete. A summary, by its very nature, does not and is not required to contain all of the detailed information that is in the prospectus. However, if you have elected to include a summary in your prospectus, it must be complete. Do you mean to say that, because this is a summary, it may not contain all of the information that is important to your investors? Delete the reference to an incomplete summary from your prospectus.
In response to the Staff's comment, we have deleted reference to an incomplete summary from our prospectus.
5. Please remove the reference to the statutory safe harbor you cite in the first paragraph because it is not applicable to issuers of penny stock.
The referenced language in the first paragraph of the summary has been deleted.
6. Balance your disclosure about your product's benefits and development status with equally prominent disclosure of the product's disadvantages and hurdles to successful market deployment.
In response to the Staff's comment, the requested disclosure has been modified on page 1.
Debt Financing-Page 1
7. We note that given your current stock price (higher than 150% of the conversion price of the debentures), you are able to convert the debentures into shares of your common stock and you may be able to call the warrants held by Lane Capital. If this is true, please state so and disclose whether you have given notice to effect either transaction.
In response to the Staff's comment, the Company respectfully submits that it is not able to convert the debentures into shares of its common stock based on its current stock price of $2.60 as of April 8, 2005. Note that daily weighted average price of our common stock must exceed the conversion price of $1.67 by 150%, or $4.175. In addition, we respectfully submit that the inclusion of similar disclosure for the warrants held by Lane Capital is not necessary at this time because as of April 8, 2005, our current stock price as reported on the cover of the prospectus does not equal nor exceed 200% of the exercise price of $1.82 per share. Additionally, in order to force conversion or call the debentures or warrants, the underlying shares issuable on conversion or exercise must first be registered.
<PAGE> Securities and Exchange Commission April 12, 2005
8. Please explain the term "full ratchet" as used in this section and the clause stating that after the 12-month period the investor "will be extended weighted average anti dilution" on its debentures and warrants if a subsequent financing takes place.
In response to the Staff's comment, we have added an explanation of full ratchet and weighted average antidilution as such terms are described in the debenture financing documents.
Risk Factors-page 3
9. Please include sufficient facts in your risk factors to permit investors to evaluate the magnitude of the risk described. For example:
o on page 3, disclose when you acquired Transmission Technology Corporation,
o disclose the date of the release you cite on page 7, and
o cite with greater specificity the strategic relationship, cable partner, current customer contracts and current vendor agreements mentioned on page 9.
The requested disclosure has been added.
Our independent auditors have issued a qualified report-Page 3
10. If a risk is material, it should not be mitigated. Please revise the second sentence of the first paragraph accordingly. Also, please revise the first sentence of the risk factor captioned "Our product may not be accepted by our potential customers," the last sentence of the risk factor captioned "The application of the penny stock rules could adversely affect..." and the other mitigating language throughout the risk factors.
In response to the Staff's comment, the "Risk Factors" section has been revised throughout to explain more clearly the risk to the Company and prospective investors.
We are controlled by a small number of stockholders-Page 5
11. Please clarify how stockholders with 35% of your outstanding stock can control substantially all matters submitted to your stockholders and your management and affairs given the language of Section 2.9 of your bylaws requiring all corporate action to be determined by a majority of the votes cast on such matter.
We have revised this disclosure in this risk factor to clarify how stockholders with 35% have controlling influence over matters subject to stockholder vote. We supplementally note that to overcome a vote made by these two stockholders with 35% of the outstanding shares, more than 70% of the stockholders would need to vote on the corporate matter. Given the large number of our outstanding shares held in street form, it is often difficult to obtain such a level of participation on non-routine issues.
<PAGE> Securities and Exchange Commission April 12, 2005
Our Business May be Subject to International Risks-Page 5
12. We note your statement that you are pursuing opportunities in, among others, the Middle East and Africa. Please tell us which countries in these regions you are targeting, whether you have already effected any transactions and, if so, the value and nature of those transactions.
In response to the Staff's comment, we have added disclosure to identify the countries that we are targeting in the Middle East and Africa. To date, we have not entered into any transactions in these countries.
Changes in Industry Standards - Page 6
13. With a view toward clarified disclosure, tell us with specificity which legislative bills and regulatory rulings are pending that could improve your markets. Also, tell us when the bills and rulings were initiated and how they could improve your markets.
In response to the Staff's comment, we have added disclosure concerning specific pending legislation.
We issued duly authorized shares to employees - Page 7
14. Please quantify the potential cost of a rescission of the issuance of all securities addressed in this risk factor.
To our knowledge, all securities addressed in this risk factor were issued to non-affiliates, who have since disposed of these holdings. We respectfully submit that since these securities are currently freely tradeable under Rule 144, it is not necessary for the protection of investors to disclose the potential cost of rescission, if any, at this time.
15. With a view toward disclosure, tell us how the violation came to your attention.
In response to the Staff's comment, we have added disclosure regarding the circumstances of how the violation came to our attention.
A large number of common shares are issuable upon exercise - Page 8
16. Please quantify the number of shares referred to in this risk factor. Also quantify the dilution based on a recent market price.
We have added the requested disclosure.
Our Intellectual Property - Page 10
<PAGE> Securities and Exchange Commission April 12, 2005
17. Clarify why you believe that your technology or products might infringe the intellectual property rights of others. Also, tell us how you resolved other companies' claims that you infringe on their technology.
In response to the Staff's comment, we have revised our disclosure and have deleted the referenced language regarding other companies' claims that we have infringed on their technology.
Use of Proceeds - Page 11
18. Please revise the sentence prior to the table in this section. We note that neither the warrants nor their issuance or resale are being registered.
In response to the Staff's comment, we have deleted the referenced sentence and the table in this section.
Selling Security Holders - Page 12
19. Please revise the fifth sentence to more closely track the language of Rule 416. Currently, it appears that you are intending the registration statement to cover more shares than permitted by Rule 416.
In response to the Staff's comment, we have deleted the referenced sentence.
20. Describe the material terms of the relationships mentioned at the end of the second paragraph.
We have added a description of the material terms of each relationship mentioned at the end of the second paragraph.
21. Supplementally provide a table that shows:
o How you calculated the number of shares underlying the outstanding securities held by the selling stockholders. Show your calculations and cite with specificity the provision of each exhibit that provides the basis for the calculation.
o The amount of consideration that each selling security provided for the securities included in the table.
o When the selling security holders provided that consideration. Note that if the consideration was paid in the past three yea
Show Raw Text
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RICHARDSON & PATEL LLP
10900 Wilshire Boulevard
Suite 500
Los Angeles, CA 90024
Telephone (310) 208-1182
Facsimile (310) 208-1154
April 12, 2005
VIA EDGAR AND OVERNIGHT COURIER
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington DC, 20549
Attn.: Daniel F. Duchovny, Esq.
Russel Mancuso, Esq.
Re: Composite Technology Corporation
Registration Statement on Form S-3/A
File No. 333-122280
Messrs. Duchovny and Mancuso:
On behalf of Composite Technology Corporation (the "Company"), we
enclose for filing under the Securities Act of 1933, as amended, Amendment No. 1
to the above-referenced registration statement (the "Registration Statement"),
together with exhibits thereto. Amendment No. 1 to the Registration Statement
contains revisions that have been made in response to the comments received from
the staff ("Staff") of the Securities and Exchange Commission in their letter
dated March 17, 2005. Set forth below are the Company's responses to the Staff's
comments. We have reproduced the Staff's comments in bold type and have followed
each comment with our response. References in this letter to "we," "our" or "us"
mean the Company or its advisors, as the context may require. Two marked copies
of Amendment No. 1 to the Registration Statement and two marked copies of draft
amendments to the Company's Form 10-KSB for the fiscal year ended September 30,
2004 and Form 10-Q for the quarter ended December 31, 2004 are being provided
supplementally with a copy of this letter for the convenience of the Staff.
Form S-3
Fee Table
1. Please revise the fee table to reflect:
<PAGE>
Securities and Exchange Commission
April 12, 2005
2
o The original fee paid at the time you first filed the
registration statement using the appropriate market price at
that time. You should not recalculate the fee for those shares
with the amendments.
o The additional fee for the additional shares registered in the
amendment reflecting the appropriate market price at the time
of the amendment.
In response to the Staff's comment, the fee table has been revised to
clarify the original fee paid at the time we first filed the Registration
Statement and the additional fee for the additional shares registered in
the amendment. As described in more detail in the fee table and footnote
(1) to the fee table, we added 926,170 shares of common stock and reduced
the number of shares of common stock underlying warrants by 688,000 shares
as reported in the form S-3 (amendment no. 1 to the SB-2) registration
statement filed with the SEC on March 1, 2005. As a result of the
revisions to the fee table in response to the Staff's comment, the total
amount of registration fee has increased by $57.29.
Prospectus
2. Please revise your prospectus to comply with Rule 421. For guidance,
please refer to our web site at http://www.sec.gov/hot/english.htm,
noting particularly the comments at 41 comments at the end of
Updated Staff Legal Bulletin No. 7 (June 7, 1999) at
http://www.sec.gov/interps/legal/cfs1b7a.htm. For example:
o avoid reliance on defined terms like in quotation marks and
parentheses throughout your document. Instead, you should use
terms that are clear from context;
o avoid embedded lists like on page 2;
o avoid legalese like hereby, hereof and herein on page 3;
o use risk factor subheadings that reflect the risk in the
subsequent text; and
o revise risk factors like your last risk factor that could
apply to almost any issuer to instead clarify how the risk is
particular to your company, industry or offering.
After you have revised your document consistent with the above-cited
guidance, please supplementally provide us a printed version of your
prospectus in the form that you will deliver it to investors.
We note the Staff's comment and have revised the prospectus throughout to
comply with Rule 421. We will supplementally provide the Staff a printed
version of our prospectus in the form that we will deliver to our
investors.
<PAGE>
Securities and Exchange Commission
April 12, 2005
3
Prospectus Cover
3. Because your filing does not register the exercise of the warrants,
your reference to the proceeds from the exercise is confusing. If
you elect to include this disclosure, please move it to a more
appropriate section of your document which is clearly distinct from
any discussion of the use of proceeds from the offering you have
registered. Also apply this comment to the "Use of Proceeds"
disclosure on page 11.
The disclosure regarding the proceeds from the exercise of the
warrants has been deleted throughout the prospectus.
Summary
4. The introductory paragraph to your summary states that the summary
is not complete. A summary, by its very nature, does not and is not
required to contain all of the detailed information that is in the
prospectus. However, if you have elected to include a summary in
your prospectus, it must be complete. Do you mean to say that,
because this is a summary, it may not contain all of the information
that is important to your investors? Delete the reference to an
incomplete summary from your prospectus.
In response to the Staff's comment, we have deleted reference to an
incomplete summary from our prospectus.
5. Please remove the reference to the statutory safe harbor you cite in
the first paragraph because it is not applicable to issuers of penny
stock.
The referenced language in the first paragraph of the summary has
been deleted.
6. Balance your disclosure about your product's benefits and
development status with equally prominent disclosure of the
product's disadvantages and hurdles to successful market deployment.
In response to the Staff's comment, the requested disclosure has
been modified on page 1.
Debt Financing-Page 1
7. We note that given your current stock price (higher than 150% of the
conversion price of the debentures), you are able to convert the
debentures into shares of your common stock and you may be able to
call the warrants held by Lane Capital. If this is true, please
state so and disclose whether you have given notice to effect either
transaction.
In response to the Staff's comment, the Company respectfully submits
that it is not able to convert the debentures into shares of its
common stock based on its current stock price of $2.60 as of April
8, 2005. Note that daily weighted average price of our common stock
must exceed the conversion price of $1.67 by 150%, or $4.175. In
addition, we respectfully submit that the inclusion of similar
disclosure for the warrants held by Lane Capital is not necessary at
this time because as of April 8, 2005, our current stock price as
reported on the cover of the prospectus does not equal nor exceed
200% of the exercise price of $1.82 per share. Additionally, in
order to force conversion or call the debentures or warrants, the
underlying shares issuable on conversion or exercise must first be
registered.
<PAGE>
Securities and Exchange Commission
April 12, 2005
4
8. Please explain the term "full ratchet" as used in this section and
the clause stating that after the 12-month period the investor "will
be extended weighted average anti dilution" on its debentures and
warrants if a subsequent financing takes place.
In response to the Staff's comment, we have added an explanation of
full ratchet and weighted average antidilution as such terms are
described in the debenture financing documents.
Risk Factors-page 3
9. Please include sufficient facts in your risk factors to permit
investors to evaluate the magnitude of the risk described. For
example:
o on page 3, disclose when you acquired Transmission Technology
Corporation,
o disclose the date of the release you cite on page 7, and
o cite with greater specificity the strategic relationship,
cable partner, current customer contracts and current vendor
agreements mentioned on page 9.
The requested disclosure has been added.
Our independent auditors have issued a qualified report-Page 3
10. If a risk is material, it should not be mitigated. Please revise the
second sentence of the first paragraph accordingly. Also, please
revise the first sentence of the risk factor captioned "Our product
may not be accepted by our potential customers," the last sentence
of the risk factor captioned "The application of the penny stock
rules could adversely affect..." and the other mitigating language
throughout the risk factors.
In response to the Staff's comment, the "Risk Factors" section has
been revised throughout to explain more clearly the risk to the
Company and prospective investors.
We are controlled by a small number of stockholders-Page 5
11. Please clarify how stockholders with 35% of your outstanding stock
can control substantially all matters submitted to your stockholders
and your management and affairs given the language of Section 2.9 of
your bylaws requiring all corporate action to be determined by a
majority of the votes cast on such matter.
We have revised this disclosure in this risk factor to clarify how
stockholders with 35% have controlling influence over matters
subject to stockholder vote. We supplementally note that to overcome
a vote made by these two stockholders with 35% of the outstanding
shares, more than 70% of the stockholders would need to vote on the
corporate matter. Given the large number of our outstanding shares
held in street form, it is often difficult to obtain such a level of
participation on non-routine issues.
<PAGE>
Securities and Exchange Commission
April 12, 2005
5
Our Business May be Subject to International Risks-Page 5
12. We note your statement that you are pursuing opportunities in, among
others, the Middle East and Africa. Please tell us which countries
in these regions you are targeting, whether you have already
effected any transactions and, if so, the value and nature of those
transactions.
In response to the Staff's comment, we have added disclosure to
identify the countries that we are targeting in the Middle East and
Africa. To date, we have not entered into any transactions in these
countries.
Changes in Industry Standards - Page 6
13. With a view toward clarified disclosure, tell us with specificity
which legislative bills and regulatory rulings are pending that
could improve your markets. Also, tell us when the bills and rulings
were initiated and how they could improve your markets.
In response to the Staff's comment, we have added disclosure
concerning specific pending legislation.
We issued duly authorized shares to employees - Page 7
14. Please quantify the potential cost of a rescission of the issuance
of all securities addressed in this risk factor.
To our knowledge, all securities addressed in this risk factor were
issued to non-affiliates, who have since disposed of these holdings.
We respectfully submit that since these securities are currently
freely tradeable under Rule 144, it is not necessary for the
protection of investors to disclose the potential cost of
rescission, if any, at this time.
15. With a view toward disclosure, tell us how the violation came to
your attention.
In response to the Staff's comment, we have added disclosure
regarding the circumstances of how the violation came to our
attention.
A large number of common shares are issuable upon exercise - Page 8
16. Please quantify the number of shares referred to in this risk
factor. Also quantify the dilution based on a recent market price.
We have added the requested disclosure.
Our Intellectual Property - Page 10
<PAGE>
Securities and Exchange Commission
April 12, 2005
6
17. Clarify why you believe that your technology or products might
infringe the intellectual property rights of others. Also, tell us
how you resolved other companies' claims that you infringe on their
technology.
In response to the Staff's comment, we have revised our disclosure
and have deleted the referenced language regarding other companies'
claims that we have infringed on their technology.
Use of Proceeds - Page 11
18. Please revise the sentence prior to the table in this section. We
note that neither the warrants nor their issuance or resale are
being registered.
In response to the Staff's comment, we have deleted the referenced
sentence and the table in this section.
Selling Security Holders - Page 12
19. Please revise the fifth sentence to more closely track the language
of Rule 416. Currently, it appears that you are intending the
registration statement to cover more shares than permitted by Rule
416.
In response to the Staff's comment, we have deleted the referenced
sentence.
20. Describe the material terms of the relationships mentioned at the
end of the second paragraph.
We have added a description of the material terms of each
relationship mentioned at the end of the second paragraph.
21. Supplementally provide a table that shows:
o How you calculated the number of shares underlying the
outstanding securities held by the selling stockholders. Show
your calculations and cite with specificity the provision of
each exhibit that provides the basis for the calculation.
o The amount of consideration that each selling security
provided for the securities included in the table.
o When the selling security holders provided that consideration.
Note that if the consideration was paid in the past three
yea