SEC Comment Letter for Lifevantage Corp (LFVN) (CIK 0000849146) (LFVN) — Aug 17, 2006
Lifevantage Corp (LFVN) (CIK 0000849146)
Date: Aug. 17, 2006 · CIK: 0000849146 · Accession: 0000000000-06-039772
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-126288
Letter
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-7010 DIVISION OF CORPORATION FINANCE August 17, 2006 Mr. Stephen K. Onody, CEO Lifeline Therapeutics, Inc. 6400 South Fiddler`s Green Circle Suite 1970 Englewood, Colorado 80111
Re: Lifeline Therapeutics, Inc. Form SB-2 File No. 333-126288 June 30, 2005 Form 10-KSB File No. 0-30489
Dear Mr. Onody:
We have reviewed your letter filed July 20, 2006 and have the following comments. Please provide the requested info rmation in an EDGAR correspondence. We may have further comments afte r reviewing this information.
1. With respect to each of the following transactions please tell us whether related parties were involved and if so, describe the relationship with the related party and what percentage of the total consid eration received was from a related party.
• The $2.9 million of 10% bridge notes, convertible into common stock at $2 per share, issued between January and March of 2005. The March 31, 2005 Form 10-QSB states that the $60,000 of th ese securities was issued to related parties. • The $2.7 million private placement of wa rrants and common stock, at $2 per share, on April 18, 2005. • The $2.3 million private placement of wa rrants and common stock, at $2 per share, on May 18, 2005.
Stephen K. Onody Lifeline Therapeutics, Inc. Page 2 of 3
2. With respect to the above three transac tions, please describe for us how the restrictions on resale differ from the resale restrictions attached to the 1 million shares issued March 10, 2005 to Mr. Ba rber. The March 10, 2005 Settlement and Release Agreement appears to suggest that the securities issu ed to Mr. Barber have materially different restrictions. 3. On March 10, 2005 you acquired the remaini ng minority shareholder interest in Lifeline Nutraceuticals by issuing 1,0 00,000 shares of your common stock. We note that you allocated the entire purchase consideration to goodwill. It is unclear to us why you did not allocate a portion of the purchase price to the other intangible assets as required by paragr aph 37 of SFAS 141. In this regard, we note the discussion of intellectual proper ty rights on page 8 of the Form SB-2 filed June 30, 2005. Given that Protandi m sales commenced March 2005, it would appear that a substantial allocation should be made to the acquired interest in the product. Exhibit A to your May 26, 2006 letter also identifies “Intellectual Property in the form of patent applic ations…owned by Lifeline Nutraceuticals” as the number one reason that the minority inte rest was acquired. Th is asset must be separately valued pursuant to paragraphs 39 and A14e of SFAS 141. Paragraph A14 of SFAS 141 also lists other examples of intangible assets that meet the criteria for recognition apart from goodwill. 4. We note the Settlement and Release Agr eement included as exhibit 10.1 to your Form 8-K filed March 14, 2005. Part I.G. of the contract specifically states that the settlement addressed the parties “des ire to avoid the uncertainty, time, and expense of litigating their di spute”. Consequently, part of the consideration must be allocated to the legal settlement. This allocation should approximate the difference between the fair value of the 1 million shares and the equivalent fair value of the acquired business as dete rmined by your independent valuation specialist. Page 17 of th e Quist valuation report documents their conclusion that the fair value of Lifeline was $36 million which, in light of the 18,111,064 shares outstanding on March 31, 2005, equates to $2 per share. Based on management’s $5.31 fair value estimate, the portion allocable to the acquired minority interest would be $2 per share and the portion alloca ble to the legal settlement would be the remainder ($3.31 per share). Given th e specific language in the settlement agreement, it appears inappropriate that legal expense was not recognized. 5. Your letter states that the $5.31 fair value estimate was calculated by applying a 25% marketability (thinly traded) disc ount to a 108 day weighted average OTC:BB price. The use of a 108 day averag e does not conform to the requirement in paragraph 22 of SFAS 141 that fair valu e be determined based on stock prices a few days before and after the acquisiti on. See also paragraph 4 of EITF 99-12. Further, you have not provided objective a nd verifiable eviden ce to support the
Stephen K. Onody Lifeline Therapeutics, Inc. Page 3 of 3
25% marketability discount. It is not sufficient to simply cite the average marketability discount used by an investment specialist or to highlight that the amount of the discount used falls within a broad range published in an academic study. In evaluating a marketability di scount, it is important to address the duration of any restrictions , the volatility of the underlying stock, and any other specific, objective, and verifiable evid ence. The guidance in footnote 2 of SFAS 115 contains guidance that may be applicab le regarding the use of discounts for restricted stock. Specifically a security is generally not considered materially restricted if the securities in question can be reasonably expected to qualify for sale within one year. Please revise your fair value calculation to comply with the applicable guidance. 6. Based on the Company’s OTC:BB prices between January and March 2005, it does not appear that the be neficial conversion feature on the convertible bridge notes was properly valued. Specifically, it appears that the as-converted value of the stock underlying the securities substantially exceeded the proceeds received as well as the face value of the notes. Please pr ovide us with an analysis that clearly demonstrates your compliance with the applicable GAAP i.e. EITF 98-5, EITF 00-27, and/or SFAS 133.
You may contact Tracey McKoy, Staff A ccountant, at (202) 551-3772 or, in her absence, Al Pavot, Staff Accountant, at (202) 551-3738 if you have any questions regarding these comments. Pleas e contact Craig Slivka, Sta ff Attorney, at (202) 551-3729 with any other questions.
Sincerely,
Pamela A. Long,
Assistant Director
Show Raw Text
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE
August 17, 2006
Mr. Stephen K. Onody, CEO
Lifeline Therapeutics, Inc.
6400 South Fiddler`s Green Circle
Suite 1970
Englewood, Colorado 80111
Re: Lifeline Therapeutics, Inc.
Form SB-2 File No. 333-126288
June 30, 2005 Form 10-KSB File No. 0-30489
Dear Mr. Onody:
We have reviewed your letter filed July 20, 2006 and have the following
comments. Please provide the requested info rmation in an EDGAR correspondence. We
may have further comments afte r reviewing this information.
1. With respect to each of the following transactions please tell us whether related parties were involved and if so, describe the relationship with the related party
and what percentage of the total consid eration received was from a related party.
• The $2.9 million of 10% bridge notes, convertible into common stock at $2 per share, issued between January and March of 2005. The March 31, 2005
Form 10-QSB states that the $60,000 of th ese securities was issued to related
parties.
• The $2.7 million private placement of wa rrants and common stock, at $2 per
share, on April 18, 2005.
• The $2.3 million private placement of wa rrants and common stock, at $2 per
share, on May 18, 2005.
Stephen K. Onody
Lifeline Therapeutics, Inc.
Page 2 of 3
2. With respect to the above three transac tions, please describe for us how the
restrictions on resale differ from the resale restrictions attached to the 1 million shares issued March 10, 2005 to Mr. Ba rber. The March 10, 2005 Settlement and
Release Agreement appears to suggest that the securities issu ed to Mr. Barber
have materially different restrictions.
3. On March 10, 2005 you acquired the remaini ng minority shareholder interest in
Lifeline Nutraceuticals by issuing 1,0 00,000 shares of your common stock. We
note that you allocated the entire purchase consideration to goodwill. It is unclear
to us why you did not allocate a portion of the purchase price to the other
intangible assets as required by paragr aph 37 of SFAS 141. In this regard, we
note the discussion of intellectual proper ty rights on page 8 of the Form SB-2
filed June 30, 2005. Given that Protandi m sales commenced March 2005, it would
appear that a substantial allocation should be made to the acquired interest in the
product. Exhibit A to your May 26, 2006 letter also identifies “Intellectual Property in the form of patent applic ations…owned by Lifeline Nutraceuticals” as
the number one reason that the minority inte rest was acquired. Th is asset must be
separately valued pursuant to paragraphs 39 and A14e of SFAS 141. Paragraph A14 of SFAS 141 also lists other examples of intangible assets that meet the
criteria for recognition apart from goodwill.
4. We note the Settlement and Release Agr eement included as exhibit 10.1 to your
Form 8-K filed March 14, 2005. Part I.G. of the contract specifically states that the settlement addressed the parties “des ire to avoid the uncertainty, time, and
expense of litigating their di spute”. Consequently, part of the consideration must
be allocated to the legal settlement. This allocation should approximate the
difference between the fair value of the 1 million shares and the equivalent fair value of the acquired business as dete rmined by your independent valuation
specialist. Page 17 of th e Quist valuation report documents their conclusion that
the fair value of Lifeline was $36 million which, in light of the 18,111,064 shares outstanding on March 31, 2005, equates to $2 per share. Based on management’s
$5.31 fair value estimate, the portion allocable to the acquired minority interest would be $2 per share and the portion alloca ble to the legal settlement would be
the remainder ($3.31 per share). Given th e specific language in the settlement
agreement, it appears inappropriate that legal expense was not recognized.
5. Your letter states that the $5.31 fair value estimate was calculated by applying a
25% marketability (thinly traded) disc ount to a 108 day weighted average
OTC:BB price. The use of a 108 day averag e does not conform to the requirement
in paragraph 22 of SFAS 141 that fair valu e be determined based on stock prices a
few days before and after the acquisiti on. See also paragraph 4 of EITF 99-12.
Further, you have not provided objective a nd verifiable eviden ce to support the
Stephen K. Onody
Lifeline Therapeutics, Inc.
Page 3 of 3
25% marketability discount. It is not sufficient to simply cite the average
marketability discount used by an investment specialist or to highlight that the
amount of the discount used falls within a broad range published in an academic
study. In evaluating a marketability di scount, it is important to address the
duration of any restrictions , the volatility of the underlying stock, and any other
specific, objective, and verifiable evid ence. The guidance in footnote 2 of SFAS
115 contains guidance that may be applicab le regarding the use of discounts for
restricted stock. Specifically a security is generally not considered materially
restricted if the securities in question can be reasonably expected to qualify for
sale within one year. Please revise your fair value calculation to comply with the applicable guidance.
6. Based on the Company’s OTC:BB prices between January and March 2005, it
does not appear that the be neficial conversion feature on the convertible bridge
notes was properly valued. Specifically, it appears that the as-converted value of
the stock underlying the securities substantially exceeded the proceeds received as well as the face value of the notes. Please pr ovide us with an analysis that clearly
demonstrates your compliance with the applicable GAAP i.e. EITF 98-5, EITF 00-27, and/or SFAS 133.
You may contact Tracey McKoy, Staff A ccountant, at (202) 551-3772 or, in her
absence, Al Pavot, Staff Accountant, at (202) 551-3738 if you have any questions
regarding these comments. Pleas e contact Craig Slivka, Sta ff Attorney, at (202) 551-3729
with any other questions.
Sincerely,
Pamela A. Long,
Assistant Director
cc: Alan Talesnick, Esq.
Jon Ploetz, Esq.
(303) 894-9239