Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas New York NY 10018
Tel 212 930 9700 Fax 212 930 9725 www.srff.com
July 22, 2005
Jennifer G. Williams, Special Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: GameZnFlix, Inc.
Amendment No. 1 to the Form SB-2 filed May 5, 2005
File No. 333-122162
Dear Ms. Williams:
This firm represents GameZnFlix, Inc. (the "Company") in the
above-referenced matter. Enclosed for filing is the Company's
Amendment No. 2 to its Form SB-2 for filing. Below, please find our
responses to your June 3, 2005 comment letter:
General
1. We note your response to prior comment 2 and reissue. We also
note that you have opened another distribution center in
Scranton, Pennsylvania. Please update your filing as necessary
to reflect recent events.
Response
We have revised the SB-2 to include disclosure regarding the
Company's Scranton's distribution center.
2. Additionally, we note that Mr. Hohman assumed the position of
president of your subsidiary, GameZnFlix Racing and
Merchandising. Please revise your disclosure throughout to
discuss the material aspects of your GameZnFlix Racing and
Merchandising subsidiary or advise.
Response
Mr. Hohman is no longer with the Company. In February 2005, Mr.
Hohman was appointed as an executive officer of the Company's
subsidiary. However, due to family issues, in late 2005, Mr.
Hohman resigned from all positions with the Company and its
subsidiary.
We have revised the Business-Marketing description to provide a
brief description of the activities of GameZnFlix Racing and
Merchandising.
3. We note your response to prior comment 5 that you do not have
meaningful data on your customer base. We note, however, that in
the fifth new paragraph on page 31, you disclose that you
estimate 15% of your customer base is comprised of college
students. Additionally, in the last paragraph on page 16, you
disclose that your subscriber base has averaged approximately
3,800 subscribers per month. We believe that information about
your customer base would be material to an investor at this
stage of your business and should be discussed in the filing,
where appropriate, such as the summary, risk factors and
business sections.
Response
We have revised the summary, business and risk factor sections
to discuss the Company's customer base and the rate of retention
for new customers.
Registration Statement Cover Page
4. Please refer to footnote 1. We note your good faith estimate
includes adjustments for "market fluctuations." However, Rule
416 does not apply to fluctuations resulting from operation of
the conversion formula. See Telephone Interpretation #3S under
the Securities Act section of the March 1999 supplement to the
Manual of Publicly-Available Telephone Interpretations. Please
disclose that you may not rely on Rule 416 for the registration
of shares that become issuable as a result of a decline in your
floating conversion rate. Also delete references to "market
fluctuations" in the summary section.
Response
Please note that footnote 1 discloses that the Company will not
rely on Rule 416 for the registration of shares that become
issuable as a result of a decline in your floating conversion
rate as set forth below:
"Should the conversion ratio of our convertible
debentures result in our having insufficient
shares, we will not rely upon Rule 416, but will
file a new registration statement to cover the
resale of such additional shares should that
become necessary."
We have deleted the reference to market fluctuations
in the summary section.
Prospectus Cover Page, page 1
5. Please revise to disclose here that your auditors have issued a
going concern opinion.
Response
We have revised to state that the Company's auditors have issued
a going concern opinion.
Prospectus Summary, page 3
General
6. Please refer to the November 11, 2004 Securities Purchase
Agreement for the sale of $150,000 Convertible Debentures
("Debentures") and warrants to buy 15 million shares of common
stock and your accounting treatment disclosed in Note S on page
F45. Please expand the Prospectus Summary and Liquidity and
Capital Resources sections of the filing to provide appropriate
disclosures regarding the accounting treatment and the impact on
the financial statements related to the Securities Purchase
Agreement.
Response
We have expanded the Prospectus Summary and Liquidity and
Capital Resources sections to include a discussion regarding the
accounting treatment and the impact on the financial statements.
GameZnFlix, Inc., page 3
7. We note your response to prior comment 11 and your disclosure
that you had $62,500 of cash as of March 31, 2005. However, in
the Liquidity and Capital Resources section on page 21, you
disclose a cash balance of $77,657 as of March 31, 2005. Please
revise to clarify this discrepancy or advise why no revision is
necessary.
Response
We have revised to disclose that the Company's cash balance as
of March 31, 2005 was $77,657.
8. We note your disclosure that you will only be able to stay in
operation for one month. We also note in the risk factors
section, on page 6 under the subheading, "We have a history of
losses which may continue" that "Based on our current funding
arrangement with Golden Gate, we do not anticipate that we will
require additional funds to continue our operations for the next
twelve months." Please revise to reconcile these two statements
or advise.
Response
We have clarified the risk factor to state that upon
effectiveness of this registration statement, the Company
expects to commence receiving funding pursuant to the Golden
Gate financing and that upon receipt of this funding the Company
will be able to satisfy its financing needs for a period of 12 months.
We have also revised the Summary section to state that the
Company has received cash from employees and consultants that
have exercised stock options.
9. We note your financing facility with Golden Gate Investors, Inc.
that you disclose in the third paragraph of this section. Please
revise to quantify the amount you have available through this
financing facility and briefly discuss the terms of the
financing facility.
Response
We have briefly described the Golden Gate financing at the end
of the third paragraph. Please note that the Golden Gate
financing is more completely described immediately below the
Offering table following the third paragraph. Further
description of the Golden Gate financing in the third paragraph
would be unnecessarily repetitive and would only serve to
confuse the reader.
Risk Factor, page 5
General
10. We note your response to prior comment 17 and reissue. We
continue to believe that the current number of subscribers would
be material to an investor and should be disclosed. Please
revise the risk factor "If our efforts to attract subscribers
are not successful" on page 6 to disclose your current number of
subscribers as of the most recent period or advise us why no
revision is necessary.
Response
We have revised the risk factor to include the Company's
customer or subscriber numbers.
We have a history of losses which may continue, page 6
11. Please revise this risk factor to disclose your burn rate and
the amount you need to continue your operations for the next
twelve months.
Response
We have revised the risk factor to disclose the monthly burn
rate of $150,000 and that it will need $1,800,000 to maintain
its current operations.
If we experience excessive rates of subscriber churn, page 7
12. We continue to believe that information about your churn rates
would be material to an investor and should be discussed. We
note your supplemental response to prior comment 17 that you are
not able to provide meaningful churn figures. If you do not have
this information available, please disclose that fact in this
risk factor.
Response
We acknowledge your comment and we have include the churn
figures in the risk factor.
There are a large number of shares underlying convertible
debentures, page 10
13. We note that the convertible debentures may be converted into an
estimated 1,997,195,122 shares of common stock. We also note
your disclosure under the subheading "The Shares of Common Stock
Allocated For Conversion" on page 11 that you are currently not
authorized to issue that amount of common stock. Please revise
your disclosure here to disclose the amount you are authorized
to issue. In addition, please revise your disclosure to explain
the type of corporate actions you will need to take before all
of the shares of common stock you discuss in this risk factor
may be sold without restriction
Response
The Company has increased its authorized shares of common stock
to 4,000,000,000. Accordingly, this comment is no longer
applicable.
The Shares of Common Stock Allocated For Conversion, page 11
14. Please explain why you expressed doubt in obtaining an increase
to your authorized shares of common stock. If this is the case,
please add a separate risk factor to briefly discuss the
penalties that you must pay in the event you cannot issue common
stock under your Securities Purchase Agreement. In addition,
please provide a more detailed description of the penalties in
your MD&A section.
Response
The Company has increased its authorized shares of common stock
to 4,000,000,000. As a result, the Company currently has an
adequate amount of shares for issuance upon conversion of the
debenture and we have removed the risk factor titled "The Shares
of Common Stock Allocated for Conversion". However, regardless
of the fact that the Company has adequate shares, we have
incorporated a new risk factor and revised the MD&A discussing
the penalties the Company is required to pay if it should run
out of shares.
Management's Discussion and Analysis of Financial Condition, page 13
15. We note your response to prior comment 20; however, continue to
believe that you should expand your disclosure to discuss any
changes to your subscriber base. If true, disclose that you did
not have subscribers during a particular time period. Please
revise accordingly.
Response
We have revised the disclosure to state that since November
2004, when the Company commenced tracking the number of its
customers, it has historically had approximately 3,800 active
customers.
Results of Operations-Three Months Ended March 31, 2005
Compared..,page 16
Net Loss, page 17
16. We note your response to prior comment 23. Please relocate the
"Net Loss" section on page 17 to appear below "Revenues." In
addition, please identify the specific "factors" that account
for the change in your net loss for this period as well as the
period for the year ending December 31, 2004.
Response
We have relocated the "Net Loss" section to appear below
"Revenues" and have identified the factors that account for the
Company's net loss for the relevant period. We do not believe a
comparison of the net loss from period to period is beneficial
as the figures from the prior period (December 2003 and March
2004) do not relate to the Company's current operations, which
were commenced in September 2004.
17. We note your response to prior comment 21 and reissue. Please
revise this section to discuss any material impact your
increased advertising in 2004 had, or was reasonably expected to
have on your subscriptions and/or revenue.
Response
The 2004 advertising was to brand the company within the United
States and to launch the Company. However, the Company has
advised that due to software issues the advertising in which it
engaged cannot be measured with relation to subscribers. We
have disclosed this in the SB-2.
The Company developed new software which it incorporated into
its computer system in November 2004 that has allowed the
Company to measure results both for advertising dollars spent
and membership results. We have incorporate membership
information into the SB-2.
Results of Operations-Year Ended December 31, 2004 Compared.., page
18
General, page 18
18. We note that you compare your cash flows from 2004 to 2003.
Please revise throughout this section to compare the results of
operations for fiscal year 2004 versus 2003 for consistency. In
the alternative, disclose the reasons why a comparison between
the two fiscal years would not be material to investors.
Response
We do not believe a comparison of the two fiscal years would be
material to investors as the Company did not commence operations
under its current line of business until September 2004. As a
result, any comparison of the three months ended March 2004 and
the year ended December 2003 to the three months ended March
2005 and the year ended December 2004 would result in a
comparison of the Company under its previous lines of business
with the Company as it exists today including its line of DVD
and game rental business. Accordingly, revenue, expenses and
net income/loss from prior periods would have no relation to the
Company's current operations.
Liquidity and Capital Resources, page 21
19. Please revise to disclose your burn rate.
Response
As requested, we have disclosed the monthly burn rate.
20. We note that your current cash flow will not be sufficient to
maintain your capital requirements and that you will need to
raise additional capital. Please disclose how long you can
satisfy your cash requirements, given your current amount of
working capital. Refer to Item 303(a)(l)(i) of Regulation S-B.
Response
We have disclosed that the Company's current cash reserve will
satisfy the Company's capital requirements for a period of one
month. In addition, we have also disclosed that several
employees and consultants have been exercising options for cash,
which has provided interim funding for the Company and that upon
effectiveness of the registration statement, the Company expects
to satisfy its capital requirements through funds received in
connection with the exercise of warrants by Golden Gate.
21. Please expand this section to discuss the proceeds raised from
issuing common stock during the three months ended March 31,
2005 that you disclose on page II-2, Item 26. Recent Sales of
Unregistered Securities. Also, ensure that these transactions
are adequately disclosed in the notes to your financial
statements for the quarter ended March 31, 2005.
Response
We have expanded to include a discussion of the proceeds raised
from issuing common stock during the three months ended March
31, 2005.
22. We note your response to prior comment 33. Please identify the
"affiliates" to which you refer. For example, what is the nature
of the affiliates (i.e., websites, companies and/or persons)? In
addition, are these entities affiliated with your company?
Please revise accordingly.
Response
The affiliates consist of web sites that drive consumers to the
Company's web site in consideration for a fee. The participants
in this program are not affiliated with the Company outside of
its participation of the affiliate program.
We have revised the disclosure to clarify.
Selling Stockholders, page 30
23. Please revise footnote 4 to clarify that you are referring to
the securities to be registered and not the total shares of
common stock issuable upon conversion of debentures and
warrants.
Response
We have revised the footnote to clarify that the reference is to
the securities to be registered and not the total shares
issuable upon conversion of the debentures. Please note that
the Company is registering all of the shares issuable upon
exercise of the warrants.
Financial Statements for the Year Ended December 31, 2004
General
24. Please refer to prior comment 44. Please revise the Notes to the
financial statements to separately quantify the dollar amounts
of revenues and the related cost of sales associated with the
sale of products and revenues and the related cost from
providing services. See paragraph 37 of SFAS 131.
Response
The Company has revised the Notes as requested.
Consolidated Balance Sheet, page F-7
25. Please revise the balance sheet to appropriately reflect the
Convertible Debentures at face value less the unamortized
discount related to the warrants and the beneficial conversion
feature. Also, supplementally tell us, with a view toward
expanded disclosure, why you have classified the entire amount
related to the Convertible Debentures as a current liability in
your balance at December 31, 2004.
Response
The Company has revised the balance sheet pursuant to your
request.
Note 1-Summary of Significant Accounting Policies, page F-11
Revenue Recognition and Cost of Revenue, page F-12
26. Please refer to prior comment 43. You state in the second
paragraph under the caption, Product and Service Description, on
page 28 that you own all titles that are rented to your
subscribers. In this regard, please disclose this fact in Note 1
and supplementally provide us with your analysis, in appropriate
detail, using the indicators set forth in EITF 99-19 to support
your gross reporting accounting treatment for your online movie
and video game rental operations as well as your online movie
and video game sales operations. We may have further comments
upon receipt of your response.
Response
As requested, the Company has revised Note 1.
EITF 99-19 describes several indicators providing guidance for
determining the proper gross or net reporting of revenues.
Based on these indicators, the Company believes that its gross
reporting is appropriate. The following is a discussion of our
analysis as set forth following the guidelines of EITF 99-19.
a) The Company is the primary obligor in the arrangement (with
its fulfillment houses).
The Company is responsible for fulfillment because it, not
the fulfillment houses, are in charge of all new DVD and
game purchased, whether they are purchased for the resale
or rental component of our business. The Company bears the
risk of damaged assets. Routinely, rented items may be
damaged in the mail or wear out and must be retired. The
fulfillment houses bear no risk associated with this aspect
of the Company's business. The Company retains the right
to refuse any customer order. The Company used outsourced
fulfillment houses as a means of meeting demands in the
interim and recently moved all of its fulfillment functions
inhouse, eliminating the outside fulfillment house.
b) The Company assumes the general inventory risk.
The Company has ownership of all titles, whether they are
purchased for resale or rental purposes.
b) The Company has latitude in establishing pricing.
The Company has established a tiered pricing structure
enabling the customer to choose their level of service and
the cost of their service. The Company has sole discretion
in setting the price on their resale merchandise.
Periodically, the Company offers reduced prices on their
resale products and offers subscription price incentives to
encourage new subscriptions.
d) The Company performs part of the service.
The Company allows subscribers to choose their rental
selections in advance. The Company maintains the customers
lists and automatically ships the next title the customer
wishes to rent when the customer returns their previous
rental or when the selected title becomes available.
e) The Company has sole discretion in supplier selection.
The Company may purchase its rental library or resale items
from any supplier they wish.
f) The Company maintains sole determination of service
specifications.
The Company establishes their own rental and membership policies.
g) The Company assumes physical loss inventory risk.
The Company bears the sole risk of inventory loss. In the
normal course of business, library and inventory titles may
become lost or damaged. The Company bears sole financial
burden and risk when this occurs.
h) The Company bears credit risk.
In the event that a customer fails to pay for their
subscription or purchase, the Company bears the sole loss
of the associated revenues. The fee paid to the
fulfillment houses for their services are not tied to
revenues in any way and is incurred regardless of the
volume of service in any given month.
Net Income (Loss) Per Share, page F-13
27. Please disclose the number of potential shares of common stock
that were excluded from the computation of diluted earnings per
share because their effect was anti-dilutive for each period
presented. See paragraph 40(c) of ISFAS 128. Also, expand the
note to disclose how you calculated your net income (loss) per
share information for each period presented.
Response
The requested changes have been made.
28. Please revise the note to explain where the amortization of the
discount in the amount of $5,602 is reflected in your
consolidated statements of operations for the year ended
December 3 1, 2004. Please note that the discoim should be
amortized to interest expense using the effective interest
method. See Issue 6 of EITF 00-27 for guidance. Also, revise
Note 8 and MD&A to explain your accounting treatment regarding
the discount and the impact on your financial statements.
Response
The requested changes have been made.
29. Please ensure that the conversion feature as disclosed in Note 8
is the same as your description of the conversion feature in the
last paragraph on page 22 (MD&A) and in other sections of the
filing. In this regard, please revise the filing for consistency.
Response
The requested changes have been made.
Note 9 - Gain From Extinguishment of Debt
30. Please refer to the third paragraph. Expand your disclosure to
incorporate your response to prior comment 47.
Response
The requested changes have been made.
Note 10 - Stock Compensation Plans, page F-15
31. Please refer to the second paragraph. It appears that you
granted stock options during 2003 and 2004 at exercise prices
that were less than the fair market value of your stock on the
dates in which the stock options were granted. In this regard,
please revise the filing to recognize compensation expense for
the difference between the exercise price of the options and the
fair market value of your common stock on the respective dates
in which the stock options were granted. See paragraph 10 of APB 25.
Response
The requested changes have been made.
32. lease expand the note to disclose how you recognized expenses
(j.~, the fair market value of the common stock issued or the
fair market value of the services rendered) related to common
stock issued under your Non-Employee Directors and Consultants
Retainer Stock Plan.
Response
The requested changes have been made.
Item 26 - Recent Sale of Unregistered Securities, page II-2
33. Please refer to the seventh paragraph of this section that
begins with "Between October 30, 2003." We note that you sold
shares to two non-accredited investors. But in the last
paragraph of this section you disclose that all of the
"offerings and sales were made to a limited number of persons,
all of whom were accredited investors." We also note in the
eighth paragraph that only 89 of the 112 investors who
participated in private placements from November 29, 2003 to
September 1, 2004 were accredited. Please revise to clarify
these discrepancies or advise why no revision is necessary.
Response
We have revised the two referenced paragraphs to include a
description of the exemption for which these sales were made
under.
34. Please refer to the last paragraph of this section. We note that
the securities transfers were restricted by "Radix." Please
revise to clarify or advise.
Response
We have revised to remove the reference to Radix.
35. Please refer to page 11-3, the paragraph that begins with "From
January 24, 2005 to March 17, 2005." Please revise to quantify
the total number of options issued to each party. Also, if true,
revise to clarify whether the employee was an officer or
director of Gameznflix.
Response
We have revised to include a description of each issuance. The
employee that received options was not an executive officer of
the Company.
Exhibits
36. Please provide manually signed currently dated independent
accountants' consents with any amendment.
Response
We included a signed currently dated independent accountants'
consents with this amendment.
37. Please comply with our comments as they apply to your Form 10-
KSB for the year ended December 31, 2004 and your Form 10-QSB
for the quarterly period ended March 31, 2005 (including the
interim period financial statements for the quarterly period
ended March 31, 2005 included in this filing).
Response
We do not believe the comments are of a material nature that
rise to the level of requiring the Company to amend its Form 10-
KSB and Form 10-QSB.
38. You are reminded to consider the requirement to update your
financial statements and related information pursuant to Item
310(g) of Regulation S-B.
Response
We acknowledge your comment.
***
Should you have any further questions, please do not hesitate to
contact the undersigned at 212-398-1494
Sincerely,
/s/Stephen Fleming
Stephen Fleming
AI
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