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Mail Stop 7010
March 6, 2006
Stephen K. Onody
Chief Executive Officer
Lifeline Therapeutics, Inc.
6400 South Fiddler`s Green Circle
Suite 1970
Englewood, Colorado 80111
Re: Lifeline Therapeutics, Inc.
Registration Statement on Form SB-2
File No. 333-126288
Amended February 3, 2006
Form 10-QSB for the Fiscal Quarter Ended March 31, 2005
Dear Mr. Onody:
We have reviewed your amended registration statement and have
the following comments. Please contact any of the individuals
listed
at the end of this letter.
General
1. Please update your financial statements to include the period
ended December 31, 2005. Refer to Item 310(g) of Regulation S-B
for
guidance.
Prospectus Summary, page 1
2. Please briefly disclose the nature of your operations between
1988
and October 2004 when you acquired an interest in Lifeline
Nutraceuticals.
3. We note your response to comment four of our July 27th letter.
Please disclose in the Summary section, the information in the new
paragraph of Note 1.
Risk Factors, page 4
"Our Manufacturing is dependent on our ability to continue to
obtain
sufficient raw materials," page 7
4. Please name the raw material that is in limited supply. Why is
this product limited and how difficult is it to replace? Disclose
whether you have supply contracts to secure future quantities of
all
of these materials.
Business, page 18
5. We partially reissue comment 18 of our July 27th letter. We
note
that, as of June 30, 2005, you had paid $1.2 million to Chemins
Company for the 108,000 bottles already delivered and for the
purchase of materials for the manufacture of one million bottles
of
product. Please update this information as of your most recent
balance sheet date and clarify your arrangements with Chemins with
regard to the remainder of the 1 million bottles of product. For
example, clearly state the amount of cash paid to your supplier
and
the number of total bottles received and how much additional cash
must be paid to Chemins in order for you to receive the remaining
bottles of product.
Employees, page 26
6. We partially reissue comment 25 of our July 27th letter.
Please
disclose the how many of your employees are full-time.
Material Changes in Operating Results - Three Months ended
September
30, 2005 as compared to the Three Months ended September 30, 2004,
page 27
7. Please disclose what comprised your cost of sales during the
interim period.
Material Changes in Financial Condition - Year ended June 30, 2005
as
compared to the Year ended June 30, 2004, page 29
8. Please discuss your advertising and marketing initiatives and
their costs. We note disclosure in the footnotes to the financial
statements regarding your agreement with Robert Sgarlata
Associates,
Inc. Please file it as an exhibit or supplementally tell us why
you
do not believe it is a material agreement.
Revenue Recognition, page 31
9. On page 31 you disclose you have experienced monthly returns
approximating 2%, while on page F-5 you disclose returns
approximating 3%. Please correct this inconsistency in your
disclosures.
10. Please disclose the amount, if any, of product returns from
GNC
as of the most recent balance sheet date presented.
Security Ownership of Certain Beneficial Owners and Management,
page
34
11. We partially reissue comment 34 of our July 27th letter. The
number of shares reported to be owned by H. Leigh Severance, James
Crapo and Daniel Streets in the Selling Security Holder table
differs
from the amounts listed in the Security Ownership of Certain
Beneficial Owners and Management table. Please reconcile these
amounts.
Employment Agreements, page 37
12. Please file the employment agreement with Mr. Baz and your
agreement with Tatum CFO Partners, LP as exhibits.
Note 3, p. F-21
13. We note that the accounting for the 3/10/05 settlement has
been
changed from expense recognition to the capitalization of
goodwill.
This revised accounting treatment appears inconsistent with the
substance of the transaction as described in the settlement
contract
filed with the 3/14/05 Form 8-K. In this regard, it appears that
the
primary intent of the 3/10/05 transaction was to settle a
disagreement between the company and Mr. Barber regarding the
validity of his claim to the 4.5 million shares of LN common
stock.
The contract states that Mr. Barber signed an employment agreement
on
7/15/03 and that he received the 4.5 million shares on 8/15/03.
Mr.
Barber terminated his employment less than 8 months later. Section
III.C of the contract infers an uncertainty over whether the
company
had an obligation to Mr. Barber for unpaid services rendered.
Section
III.D of the contract infers an uncertainty over whether Mr.
Barber
had an obligation to repay any of the compensation he had received
as
an employee of the company. The 3/10/05 settlement agreement
essentially granted Mr. Barber 1 million shares of the
registrant`s
stock in exchange for the surrender of his 4.5 million shares of
LN
stock and the mutual release of certain legal rights. We note that
the 1 million shares Mr. Barber accepted in this settlement is
substantially less than the 3.6 million shares (4.5 million X .8
exchange ratio) that he presumably would have received under the
terms of the 10/26/04 recapitalization transaction that governed
the
consideration received by all other LN shareholders. Based on the
share price of the 1/05-4/05 private placement common stock
transactions, the difference in value is significant and suggests
that the issues in the dispute were not trivial. Given the stated
uncertainty over whether Mr. Barber`s stock was validly obtained,
and
the implied uncertainty over the legal rights attached to the
stock,
it appears inappropriate to account for the transaction as the
acquisition of a minority equity interest resulting in the
capitalization of goodwill. If the 1 million shares were indeed
issued to settle a legal dispute (see also the "Contingent
Liabilities" disclosure in the 12/31/04 Form 10-QSB), then an
expense
should have been immediately recognized for the fair value of the
1
million shares issued in the settlement. The valuation of the 1
million shares should be consistent with the stock price received
in
the significant private placement stock sale transactions that
occurred between January and April of 2005. The size of these
transactions with independent third parties would appear to
provide
the most relevant and objective evidence with which to estimate
the
fair value of the 1 million shares issued to Mr. Barber. Please
revise the financial statements by filing amendments to the Form
SB-
2, as well as the 6/30/05 10-KSB and the 3/31/05, 9/30/05 and
12/31/05 10-QSB filings.
14. We remind you that when you file your restated Form 10-KSB and
Forms 10-QSB you should appropriately address the following:
* an explanatory paragraph in the reissued audit opinion,
* full compliance with APB 20, paragraphs 36 and 37,
* fully update all affected portions of the document, including
MD&A
and selected financial data,
* updated Items 8A and 3. disclosures should include the
following:
* a discussion of the restatement and the facts and circumstances
surrounding it,
* how the restatement impacted the CEO and CFO`s original
conclusions
regarding the effectiveness of their disclosure controls and
procedures,
* changes to internal controls over financial reporting, and
* anticipated changes to disclosure controls and procedures and/or
internal controls over financial reporting to prevent future
misstatements of a similar nature. Refer to Items 307 and 308(c)
of
Regulation S-B.
* include all updated certifications.
Legal Opinion
15. Please reconcile the amount of securities referenced in the
legal
opinion (12,323,867) with the amount being offered in the
prospectus
(12,323,330).
Form 10-QSB for the Fiscal Quarter Ended March 31, 2005
16. Please amend your filing to include the required disclosures
of
APB 20, paragraphs 36 and 37. Additionally, in your revised filing
please denote on each of your statements that it has been
restated.
17. In light of the material restatement, please disclose in
reasonable detail the basis for your officers` conclusions that
the
company`s disclosure controls and procedures were nonetheless
effective as of the end of the period covered by the report.
18. We note that you previously re-stated the financial statements
in
your March 31, 2005 Form 10-QSB. In future filings, we remind you
about the requirement to file an Item 4.02 Form 8-K. The Form 8-K
provides communication to investors that you materially restated
your
financial information and discloses the financial statements that
can
no longer be relied upon. Refer to Item 4.02 of Form 8-K for
guidance.
Closing Comments
As appropriate, please amend your periodic reports to
respond
to these comments within 10 business days or tell us when you will
provide us with a response. You may contact Tracey McKoy, Staff
Accountant, at (202) 551-3772 or, in her absence, Al Pavot, Senior
Staff Accountant, at (202) 551-3738 if you have any questions
regarding comments on the financial statements. Please contact
Craig
Slivka, Staff 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
Stephen K. Onody
Lifeline Therapeutics, Inc.
Page 1 of 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE