| Re: | Cardo Medical, Inc. Preliminary Information Statement on Schedule 14C Filed January 31, 2011 File No. 0-21419 |
| General | ||
| 1. | Please tell us your consideration of the need to include the historical financial statements of Cardo Medical, Inc. and the other information required by Item 14 of Schedule 14A. Please also tell us why you have not included pro forma financial information required by Article 11 and Rule 8-05 of Regulation S-X reflecting the sale of the reconstructive division. We see that the preliminary information statement was filed due to the sale or transfer of a substantial part of your assets. |
| BOCA RATON DALLAS
DENVER FORT LAUDERDALE JACKSONVILLE
LAS VEGAS LOS ANGELES MADISON
MIAMI NAPLES NEW YORK ORLANDO PALM BEACH TALLAHASSEE TAMPA TYSONS CORNER WASHINGTON, D.C. WEST PALM BEACH |
| (1) | A merger or consolidation; | ||
| (2) | An acquisition of securities of another person; | ||
| (3) | An acquisition of any other going business or the assets of a going business; | ||
| (4) | A sale or other transfer of all or any substantial part of assets; or |
| Solicited | ||||||||
| Shareholders | Consideration | Financial Statements | ||||||
Target only
|
Cash only | Financial statements of the target are not required in the proxy statement since security holders are presumed to have access to information about their company, unless it is a going private transaction. See Instruction 2(b) to Item 14 of Schedule 14A. | ||||||
| Financial statements of
the acquirer are not
required unless the
information is material to
an informed voting
decision (e.g., acquirer
financing is not assured).
See Instruction 2(a) to
Item 14 of Schedule 14A.
. . . . No pro forma information is required. |
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| • | cash and cash equivalents in the approximate amount of $11.3 million, excluding $900,000 held in escrow; | ||
| • | accounts receivable in the approximate amount of $450,000; and | ||
| • | the limited liability company interests of Cardo Medical, LLC. |
| If the Staff believes that we should expand this narrative discussion in the Information Statement to include additional items or considerations regarding the financial impact of the transaction, we would gladly consider such request and revise the Information Statement to provide additional disclosure. | ||
| Alternatively, if the Staff disagrees with the Company’s position set forth above, the Company is simultaneously pursuing a request for a waiver from the Office of the Chief Accountant with respect to providing financial statements for the year ended December 31, 2010 which have not been issued and are not publicly available. The Company in such waiver request is requesting the Staff to permit it to provide the historical financial statements for the years ended December 31, 2009 and 2008 and the financial statements for the nine months ended September 30, 2010. | ||
| 2. | As a related matter, please note that if financial statements as of a date on or after the date a component of your business has been disposed of or has been classified as held for sale are required in a proxy statement, retrospective reclassification of all prior periods to report the results of that component in discontinued operations is required. Please refer to FASB ASC 205-20 for guidance on reporting discontinued operations. In that regard, please tell us how you considered that the historical financial statements of Cardo Medical, Inc, to be included in the Schedule 14C should be retroactively reclassified to show discontinued operations. | |
| Please see our response to Comment #1. |
| 3. | Please tell us whether you plan to send another information statement with the material information regarding the spine division sale 20 days before the spine division sale. See Rule 14c-2(b). Cite all authority on which you rely, including any relevant authority regarding whether applicable state law permits you to consider a transaction approved by shareholders when you have not determined the terms of that transaction. | |
| In light of the Staff’s comment, we have determined to revise the Information Statement to remove the resolution acted upon by written consent of a majority of our stockholders providing the following, “authorized, as soon as practicable after the closing contemplated by the asset purchase agreement, Cardo Medical to sell all of the assets of its Spine Division on terms and conditions to be determined by the Board of Directors of Cardo Medical.” The Company will prepare and send a separate information statement providing the material information regarding the Spine Division sale at least 20 calendar days before its consummation if the Company determines that such sale constitutes a sale of substantially all of its assets under Delaware law. |
| 4. | Please expand the fourth bullet point on pages 3 and 9 and the section entitled “Use of Proceeds” on page 4 to quantify the amount of proceeds to be paid to each of your officers and directors. For example, are any of the proceeds to be used to pay accrued salaries of your officers? Also, please quantify the amount of your proceeds to be paid to other related parties. For example, we note the disclosure on page 10 of your latest Form 10-Q that you issued a promissory note to the brother of your chief executive officer. | |
| In response to the Staff’s comment, we have revised the disclosure on pages 3-5, 10 and 19 of the Information Statement. |
| 5. | Please expand the appropriate section to disclose who will be your officers and directors: |
| • | after the sale of your reconstructive division; and | ||
| • | after the sale of your spine division. |
| In response to the Staff’s comment, we have revised the disclosure on pages 5 and 20 of the Information Statement. |
| 6. | We note your reference to penny stock in your latest Form 10-K. The safe harbor you cite in the second sentence excludes penny stock issuers. Please do not invoke a safe harbor that is not applicable. | |
| In our Form 10-K for the year ended December 31, 2009 and filed on March 31, 2010, we provided in a risk factor that our common stock may be a penny stock in certain circumstances and disclosed the risks associated with a “penny stock” characterization. In response to the Staff’s comment, we respectfully advise the Staff that we have reviewed Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended, which states that “penny stock” shall mean any equity security other than a security whose issuer has: |
| 1. | Net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2,000,000, if the issuer has been in continuous operation for at least three years, or $5,000,000, if the issuer has been in continuous operations for less than three years; or | ||
| 2. | Average revenue of at least $6,000,000 for the last three years. |
| Intangible Assets | Net Tangible | |||||||||||||||||||
| Year Ended | Total Assets | — | and Liabilities | = | Assets | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
December 31, 2009 |
15,588 | — | 5,204 (4,353 + 851 | ) | = | 10,384 | ||||||||||||||
December 31, 2008 |
11,474 | — | 5,780 (5,003 + 777 | ) | = | 5,694 | ||||||||||||||
| 7. | Please reconcile the disclosure in the penultimate paragraph on page 14 regarding three preliminary indications of interest with the disclosure in the first paragraph on page 15 regarding four preliminary indications of interest. | |
| At the time of the Board of Directors meeting on December 3, 2010, the Company had received three preliminary indications of interest. Subsequent to the December 3, 2010 Board of Directors meeting and prior to the December 14, 2010 Board of Directors meeting, the Company received an additional preliminary indication of interest for a total of four indications of interest. Accordingly, at the December 14, 2010 Board of Directors meeting, Inverness summarized the four preliminary indications of interest received by the Company. In response to the Staff’s comment, we have revised the disclosure on page 15 of the Information Statement to clarify the disclosure. | ||
| 8. | Please expand the references on page 15 to your negotiations with Arthrex to disclose in greater detail the negotiations that took place, why the structure of the transaction was changed and how the purchase price was determined. Include a description of the negotiation of the agreements with affiliates. |
| In response to the Staff’s comment, we have revised the disclosure on pages 16-17 of the Information Statement. | ||
| 9. | Please tell us, with a view to disclosure, whether the purchase price for only the reconstructive division was greater than the amounts in the indications of interest mentioned in the third paragraph on page 15. | |
| The purchase price for the sale of substantially all of the assets in the Company’s Reconstructive Division to Arthrex is greater than the amounts referenced in the other preliminary indications of interest referred to in the third paragraph on page 15. In response to the Staff’s comment, we have revised the disclosure on pages 16-17 of the Information Statement to clarify the disclosure. | ||
| 10. | Please tell us, with a view to disclosure, whether you have begun to negotiate the sale of your spine division with any of the three or four parties from whom you received indications of interest or otherwise. | |
| Subsequent to filing the Information Statement on January 31, 2011, we began negotiations with an unaffiliated third party for the sale of substantially all of the assets of the Spine Division, but as of this date we have not executed a definitive agreement with this third party. This third party is one of the four parties from whom we received an indication of interest referenced in the “Background of the Asset Sale” section of the Information Statement. In response to the Staff’s comment, we have revised the disclosure on pages 3, 10 and 20 of the Information Statement. |
| 11. | Please provide greater specificity regarding the reasons for the transactions. For example: |
| • | When did you reduce your workforce? By what amount? Why? | ||
| • | What led to the conclusion that you are unable to raise funds? | ||
| • | How did payments to related persons affect the decision? | ||
| • | How did the “Special Factors”- mentioned in the next subsection affect your reasons for the transactions? |
| In response to the Staff’s comment, we have revised the disclosure on page 16 of the revised Information Statement. Please note that other than the repayment of the indebtedness owed to the brother of the Company’s Chairman and Chief Executive Officer, there are no payments being made to related persons. This repayment of indebtedness was not a reason for entering into the transaction and did not affect any decisions relating to the transaction. Additionally, the “Special Factors” mentioned in the next subsection are factually true and impact the Company on a going forward basis giving effect to the transaction, but were not reasons for entering into the transaction and did not affect any decisions relating to the transaction. |
| 12. | Please clarify how Inverness’ January 12, 2011 analysis mentioned on page 15 differed from the January 24 analysis. | |
| Inverness’ January 24, 2011 analysis differed from Inverness’ January 12, 2011 analysis in order to properly reflect (i) the change in deal structure from a sale of substantially all of the assets of both the Reconstructive Division and the Spine Division, and (ii) other underlying facts that changed with the passage of time, such as movements in the stock prices of the selected public companies that were used as part of the financial analysis. In response to the Staff’s comment, we have revised the disclosure on page 17 of the Information Statement. | ||
| 13. | Provide us a copy of all written materials that the financial advisor provided to the board. | |
| In response to the Staff’s comment, the written materials that were provided by Inverness to the Board of Directors in connection with the January 24, 2011 meeting of the Board of Directors are being provided by the Company to the Staff under separate cover on a confidential and supplemental basis pursuant to Rule 12b-4 under the Exchange Act and Rule 418 under the Securities Act of 1933, as amended (the “Securities Act”). In accordance with such rules, we respectfully request that these materials be returned to us promptly following completion of the Staff’s review thereof. By separate letter, we also request confidential treatment of these materials pursuant to the provisions of 17 C.F.R. §200.83. | ||
| 14. | We note the limitation on reliance by shareholders in the last full paragraph on the penultimate page of the opinion attached as Annex C. The limitation should be deleted because it is inconsistent with the disclosures relating to the opinion. Otherwise: |
| • | Disclose the basis for the financial advisor’s belief that shareholders cannot rely upon the opinion to support any claims against the financial advisor arising under state law, such as the inclusion of an express disclaimer in the financial advisor’s engagement letter with you. |
| • | Describe any applicable state-law authority regarding the availability of-such a potential defense. In the absence of applicable state-law authority, disclose that the availability of such a defense will be resolved by a court of competent jurisdiction. | ||
| • | Disclose that resolution of the question of the availability of such a defense will have no effect on the rights and responsibilities of the board of directors under applicable state law. | ||
| • | Disclose that the availability of such a state-law defense to the financial advisor would have no effect on the rights and responsibilities of either the financial advisor or the board of directors under the federal securities laws. |
| In response to the Staff’s comment, we have revised the fairness opinion attached as Annex C to the Information Statement. | ||
| 15. | We note the disclaimer in the first paragraph on page 26 that Inverness assumed no responsibility relating to the forecasts. While it may be acceptable to include qualifying language concerning subjective analyses, it is inappropriate to disclaim responsibility for statements made in the document. Please revise. | |
| In response to the Staff’s comment, we have revised the disclosure on page 28 of the Information Statement and the fairness opinion attached as Annex C to the Information Statement. | ||
| 16. | We note your disclosure that Inverness used the projections provided by you in its analyses. Please provide us your analysis as to whether disclosure of the projections may be material to a shareholder in evaluating your disclosure. | |
| The Company believes that the projections that the Company’s management provided to Inverness are not material to a stockholder reviewing the Company’s disclosure in the Information Statement, for a number of reasons. First, these projections were not a material basis for the determination by the Company’s board of directors to recommend approval of the transaction to the Company’s stockholders. Rather, this determination was based on the factors discussed in the Information Statement in the section entitled “Summary-Reasons for the Asset Sale.” Second, these projections were not provided to Arthrex and do not show a value for the Reconstructive Division assets being sold in excess of the purchase price for the transaction. Thus, the projections did not constitute material information upon which Arthrex formulated the price it was willing to pay for such assets. Third, these projections are not the kind of information that the Company has disclosed either historically or intends to disclose subsequent to this transaction; they simply constituted a portion of the facts, circumstances and other inputs that Inverness took into account in developing the analyses underlying its opinion. If projections such as these were ever made public by the Company, they would need to be heavily footnoted, limited and qualified in order to make their limited relevance and utility clear to the reader. All in all, for the foregoing reasons, we believe that the inclusion of these projections in the Information Statement is not only not required under applicable securities laws, but could result in confusion for the Company’s stockholders by implying a level of mathematical certainty and relevance beyond that which existed in the minds of the members of the Company’s board of directors in considering the transaction. |
| 17. | Refer to the last sentence of the penultimate paragraph on page 30. With a view toward clarified disclosure, please tell us with specificity the nature of the services that Inverness and its affiliates have provided you, the dates of those services, the amount you paid for those services, and the nature of any agreement to provide future services. | |
| Other than this transaction, Inverness has not provided services to the Company and there is no agreement in place with respect to Inverness providing any future services. In response to the Staff’s comment, we have revised the disclosure on page 33 of the Information Statement. | ||
| 18. | We note the statement in the penultimate sentence of the last full paragraph on the penultimate page of Annex C regarding Inverness’ prior written consent. If true, please disclose that Inverness has consented to the use of the opinion in this document and to your summary of the opinion as it appears in your information statement. | |
| Inverness has consented to the use of its fairness opinion in the Information Statement as well as the summary of its fairness opinion set forth in the Information Statement. In response to the Staff’s comment, we have revised the disclosure on page 27 of the Information Statement and have included Inverness’ written consent as Annex D to the Information Statement. |
| • | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| • | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| • | the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
| cc: | United States Securities and Exchange Commission Tom Jones, Examiner Brian Cascio, Accounting Branch Chief Kristin Lochhead Cardo Medical, Inc. Joshua B. Weingard, Chief Legal Officer Derrick Romine, Chief Financial Officer Akerman Senterfitt Mary Carroll, Esq. |
| • | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| • | Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| • | the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
| Cardo Medical, Inc. |
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| By: | /s/ Derrick Romine | |||
| Derrick Romine | ||||
| Chief Financial Officer | ||||