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Response Letter

March 2, 2005

Mr. Daniel Gordon

Branch Chief

United States Securities and Exchange Commission

Washington, D.C. 20549

Re:  LXU Healthcare, Inc.

Form  10-K for the year ended June 30, 2004

Dear Mr. Gordon:

The purpose of this letter is to respond to your letter dated February 9, 2005 addressed to the undersigned Chief Operating Officer and Chief Financial Officer of LXU Healthcare, Inc. (the “Company”), related to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004. We appreciated the extension of the deadline for filing our response pursuant to the telephone communication between Paul Mattaini of Barley Snyder, our legal counsel, and Julie Sherman on February 10, 2005. To assist you in reviewing our response, we will precede each response below with the text comment set forth in your letter of February 9, 2005.

As Mr. Mattaini indicated to Ms. Sherman, the Company filed a Current Report on Form 8-K on February 4, 2005 (prior to receipt of the comment letter) disclosing the Company’s intention to amend certain filings which would include restatements addressing the matters in Comments 7 through 10 below. The restatements significantly changed the accounting for the Company’s Series G Redeemable, Convertible Preferred Stock from August 6, 2002, the date of original issuance, and our accounting for the related warrants, conversion and redemption features, and also changed our classification of the Series G Stock. The Company has now filed Amendment No. 2 to the Form 10-K for the year ended June 30, 2004 and Amendment No. 1 to the Form 10-Q for the quarter ended September 30, 2004, as well the Form 10-Q for the quarter ended December 31, 2004.

Mr. Shaun D. McMeans

LXU Healthcare, Inc.

Page 2

Form 10-K for the year ended June 30, 2004

Liquidity and Capital Resources - Page 32

1.   Comment: We noted that your Liquidity and Capital Resources discussion in Management’s Discussion & Analysis is, in part, a recitation of your cash flow in narrative form. In accordance with Item 303 of Regulation S-K please revise future filings to discuss the factors that drive cash flows rather than simply discuss the line items that appear on the cash flow statement. In addition, discuss those items which management specifically believes may be indicators of the company’s liquidity condition in both the short term and long term.

Response: As communicated with Ms. Julie Sherman on February 16, 2005, the Company will revise future filings, beginning with the 10-Q for the quarter ended December 31, 2004, to discuss factors that drive cash flows, including indicators of the Company’s liquidity in the short and long term.

Consolidated Statement of Operations - Page F-4

2.
Comment: Revise future filings to present revenues from the sale of products and revenues from the provision of services separately in the income statement in accordance with Rule 5-03(b)(1) of Regulation S-X. See paragraph 19 of EITF 99-19.

Response: The Company has reviewed EITF 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent (“EITF 99-19”), specifically paragraph 19, and agrees that agency commissions should be presented separately in the statements of income as service revenues. As requested, agency commissions will be reported on a separate revenue line item in future filings, including the June 30, 2004 Form 10-K/A (Amendment No. 2), the Form 10-Q/A (Amendment No. 1) for the quarter ended September 30, 2004 and the Form 10-Q for the quarter ended December 31, 2004.

Note 2. Summary of Significant Accounting Policies

Revenue Recognition - Page F-10

3.   Comment: In a supplemental response please tell us how you have concluded to recognize revenue gross for when you have the inventory on hand and net when you do not stock the vendor’s products. Please provide us with a complete EITF 99-19 analysis on how you determined a gross presentation versus a net presentation for both types of revenue. We note on page 10 where you state that you provide all of the fulfillment services for the revenue you record on a gross basis. Please cite the other factors in EITF 99-19 when determining to record revenues gross versus net

Response: The Company has two primary types of revenue generating activities, including sales of inventory owned, and arrangement of sales of product as an agent.

Mr. Shaun D. McMeans

LXU Healthcare, Inc.

Page 3

Regarding the sales of inventory owned by the Company, EITF 99-19 discusses the following indicators of gross reporting for sales:

·
The company is the primary obligor in the arrangement

·
The company has general inventory risk (before customer order is placed or upon customer return)

·
The company has latitude in establishing price

·
The company changes the product or performs part of the service

·
The company has discretion in supplier selection

·
The company is involved in the determination of product or service specifications

·
The company has physical loss inventory risk (after customer order or during shipping)

·
The company has credit risk

For product sales, the Company’s arrangements contain a majority of the conditions above. For example, it has discretion in supplier selection, acquires and stocks the product bearing title and all risks of loss prior to delivery and upon return by the customer, determines the product pricing to the end customer, is responsible for the fulfillment and acceptability of the product to the end customer, and is responsible for collection of the related receivable after the sale. Accordingly, these revenues are recorded gross with sales reported at sales price, and the cost of the inventory recorded in costs of sales.

Regarding agency commissions revenue, EITF 99-19 lists the following indicators of net reporting:

·
The supplier (not the company) is the primary obligor in the arrangement

·
The amount the company earns is fixed

·
The supplier (and not the company) has credit risk

The Company believes our agency revenues represent commissions earned because it earns a fixed percentage of the invoiced sales price of the suppliers’ products. The Company acts as the suppliers’ sales agent. The Company does not take title to the product or bear the risk of loss for delivery, return or non-collectibility of the related receivable. Additionally, the Company is not responsible for fulfillment or acceptability of the product to the end customer. Accordingly, as the Company is performing as an agent in these transactions, it records revenue only for the commission received, on a net basis.

4.
Comment: We note from page 28 in your MD&A that the company offers discounts and rebates to customers:

·
Explain the nature of your discounts and rebates and how you account for the programs. Cite the accounting literature upon which you relied.

·
Address how the company considers these concessions with respect to the fixed and determinable criteria of SAB 104.

·
Please quantify the total price concessions recognized in each period presented, including the interim periods.

Mr. Shaun D. McMeans

LXU Healthcare, Inc.

Page 4

Response: The Company offers discounts to prime vendors. The Company accounts for the discounts as a reduction of the selling price of the Company’s products in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).

Prime vendors represent hospitals, group purchasing organizations and integrated distribution networks that have volume purchasing arrangements with certain manufacturers, some of which the Company represents. These prime vendors receive a reduced price on products from certain manufacturers.

When a sale to a prime vendor occurs, the Company recognizes revenue in the amount of the gross sales price, and simultaneously establishes an accrual for the anticipated discount on the sale as a reduction of product sales. The prime vendor discount amounts are set by the manufacturer and accrued by the Company based on current sales activity and the Company’s historical experience with each prime vendor. Historically, the Company’s actual prime vendor discounts have not resulted in significant differences to the original estimates recorded by the Company. Total prime vendor discounts for the years ended June 30, 2004, 2003 and 2002 were less than one percent of the Company’s net revenues.

Total prime vendor discounts for the periods presented are as follows:

Fiscal Year Total

Quarter ended
 September 30

Quarter ended December 31

Quarter ended March 31

Quarter ended June 30

        Fiscal year ended June 30, 2002

$

147,567

$

-

$

1,617

$

37,665

$

108,285

        Fiscal year ended June 30, 2003

$

339,270

$

105,522

$

35,724

$

100,782

$

97,242

        Fiscal year ended June 30, 2004

$

548,946

$

190,959

$

120,452

$

114,688

$

122,847

        6 months ended December 31, 2004

$

221,689

$

108,174

$

113,515

The fixed and determinable criteria in SAB 104 require that a Company determine that the seller’s price to the buyer is fixed and determinable. SAB 104 refers to SOP 97-2, which defines a “fixed fee” as a “fee required to be paid at a set amount that is not subject to refund or adjustment.” The prime vendor pricing is determined at the date of the sale by the manufacturer, and the prices ultimately paid by the customer are not subject to adjustment. The Company records the sale to a prime vendor at our invoice price; however, we follow the guidelines of SAB 104, under 4. b. Estimates and changes in estimates, in estimating the discounts to be taken for our sales to prime vendors. SAB 104 does not specifically refer to recording of discounts, but refers to estimating other reductions of revenue, specifically returns. SAB 104 refers to SFAS No. 48, Revenue Recognition When Right of Return Exists, in its paragraph 6, which discusses requirements for recording revenues. The Company believes that all of our sales meet the requirements in paragraph 6 of SFAS No. 48, relating both to our discounts and our returns, and that several years of historical experience with these existing customers support our estimation of discounts and is consistent with paragraph 7 of SFAS No. 48. Paragraph 7 of SFAS No. 48 states that “If sales revenue is recognized because the conditions of paragraph 6 are met, any costs or losses that may be expected in connection with any returns shall be accrued in accordance with SFAS No. 5, Accounting for Contingencies.”

Mr. Shaun D. McMeans

LXU Healthcare, Inc.

Page 5

5.
Comments: We also noted in the Business section that the company provides additional services and “solutions” to customers as well as hands on training of clinicians and medical personnel related to use of your products. Tell us and expand your revenue recognition policy in future filings to address the following:

·
Please tell us the nature of any additional services and post shipment obligations that the company provides to its customers, and

·
Provide details of whether the revenue arrangements have multiple deliverables and the impact of EITF 00-21.

Response: The Company’s primary business is as a distributor of specialty medical products. Revenues are earned through sales of product, or through commissions received for arranging sales of product. Training or additional services provided to customers by sales representatives are part of the marketing and sales process, and are not separate or discrete earnings events. That is, these services are provided at our option, and not sold separately by the Company. Furthermore, the Company has no contractual obligation to provide any of these services as part of any sales agreement, as all the Company’s sales are contracted through a normal purchase order process, and not through any contract or statement of work arrangements that include multiple deliverables. In fact, in many of the Company’s sales, we provide no additional services. Accordingly, the Company does not believe that any of our sales under purchase orders from customers qualify as arrangements with multiple deliverables (i.e., service and product deliverables) that would require evaluation under EITF 00-21, Revenue Arrangements with Multiple Deliverables. The Company will revise all future filings, including the June 30, 2004 Form 10-K/A (Amendment No. 2), the Form 10-Q/A (Amendment No. 1) for the quarter ended September 30, 2004 and the Form 10-Q for the quarter ended December 31, 2004 to describe the nature of the Company’s business and our revenue recognition policies as follows:

Sales Recognition Policy

The Company’s policy is to recognize revenues from product sales when earned, as defined by accounting principles generally accepted in the United States of America. Specifically, product and commissions revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured.

Mr. Shaun D. McMeans

LXU Healthcare, Inc.

Page 6

Product sales are recognized as revenue when the title transfers, generally when shipped.

Revenues earned under agency agreements are recognized when the customer has received the product, and amounts are recorded as commissions in net revenues, at the net amount retained by the Company.

Provisions for vendor discounts and product returns are provided for at the time the related sales are recorded, and are reflected as a reduction of product sales. The Company estimates customer discounts and product returns at the time of sale based on historical experience. These estimates are reviewed periodically and, if necessary, revised, with any revisions recognized immediately as adjustments to product sales.

The Company periodically and systematically evaluates the collectibility of accounts receivable and determines the appropriate allowance for doubtful accounts. In determining the amount of the allowance, management considers historical credit losses, the past due status of receivables, payment history and other customer-specific information, and any other relevant factors or considerations.

Loss Per Common Share - Page F-12

6.   Comment: We noted that the company did not include any of the options or warrants outstanding in the computation of dilutive earnings per share and that you state that all outstanding options and warrants are antidilutive. However, we also noted that approximately 7.5 million shares were issued in fiscal 2002 at $0.32 per share and an additional 1.3 million shares were issued in fiscal 2003 at $0.32 per share. Tell us how it was determined that these shares were anti-dilutive

Response: The Company issued common stock in fiscal 2002 at $0.32 per share in connection with the reverse merger of PrimeSource Surgical, Inc. into Luxtec Corporation, a non-trading registrant. The Company issued common stock in fiscal 2003 at an original estimate of $0.32 per share in connection with the restructuring and recapitalization of the Company’s equity structure (the “Recapitalization”). Neither the 2002 nor 2003 shares were issued for cash, and most shares were issued to related parties who were existing stockholders. As the Company’s common and preferred stock is not traded on a recognized stock exchange, our common share price has been determined by the Company’s Board of Directors using the last determinable sales price and in consideration of events that have occurred since the last sale of equity instruments. The Company originally believed the common stock had a value of $0.32 per share at August 6, 2002, however, we determined subsequent to the original accounting for the Recapitalization, based on a valuation of the overall value of the Company as of July 1, 2002, that the Company’s common stock had a fair value of less than $0.01 per share. The Company determined that the