Room 4561
August 1, 2005
Mr. Robert M. Lewis
Chief Financial Officer
Imergent, Inc.
754 East Technology Avenue
Orem, UT 84097
Re: Imergent, Inc.
Form 10-K for Fiscal Year Ended June 30, 2004
File No. 000-32277
Dear Mr. Lewis,
We have reviewed your response letter dated July 27, 2005
and
have the following additional comments. We may ask you to provide
us
with supplemental information so we may better understand your
disclosure. Please be as detailed as necessary in your
explanation.
After reviewing this information, we may raise additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comment or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for Fiscal Year Ended June 30, 2004
Note 2. Summary of Significant Accounting Policies
(o) Revenue Recognition, page 50
1. We have read your response to prior comment number 2 and note
that
you plan to reclassify bad debt expense against revenue for all
prior
periods. Please explain to us why this "reclassification" will be
appropriate. Provide reference to the relevant authoritative
literature that supports your accounting.
2. We have read your response to prior comment number 6 and note
that
you have estimated the total cost for providing PCS to be
approximately $14,000 per month. Please explain to us, in detail,
how you estimated this cost and indicate whether this includes
indirect costs associated with providing the PCS such as the cost
of
equipment, facilities and personnel necessary to ensure that you
have
adequate customer service capacity available. In addition,
reconcile
for us your statements regarding the significance of your customer
service organization and the relatively low cost described in your
response.
3. We have read your response to prior comment number 7 and remain
unclear as to how you have concluded that a software sale and the
related hosting service should not be accounted for as a single
arrangement. In this regard, we note that you indicate that
customers may enter into a hosting arrangement within days after
the
software is purchased and that most do so within one year of
purchase. This appears to be an indication that these contracts
should be accounted for as a single arrangement according to the
guidance in AICPA Technical Practice Aid 5100.39. In addition, it
is
unclear why you believe that your customers` ability to create
websites without access to your servers or their ability to have
other providers host their websites serves as evidence that the
software and hosting services are not closely interrelated. In
this
regard, it appears that your software and hosting service are
closely
interrelated in terms of design, technology and function simply
based
on the nature of the arrangements. Specifically, you provide
software that customers primarily access from your servers and you
subsequently host the websites created using that software. In
addition, as discussed in your response to prior comment number 6,
you provide significant upgrades to your software only through the
hosting service. In view of these considerations, further explain
why your conclusion with respect to multiple-element arrangements
is
appropriate and in accordance with the technical practice aid.
4. We have read your response to prior comment 9 and the
information
provided on Attachment 3 for the fifteen fiscal quarters ended
March
31, 2005. This information indicates that your historical
consolidated reserve rate has been approximately 48%. This
suggests
that your historical consolidated collection rate has been
approximately 52%. Separately, the information in Attachment 3
appears to indicate that the collection rates for A and B
contracts
have been approximately 75% and 44%, respectively. These
collection
rates for A and B contracts appear to be supported by your recent
sale of domestic receivables as discussed in your response to
prior
comment number 2. These collection rates also appear to be
supported
by your discussion of A and B contract loss rates in the third
bullet
point of your response to prior comment number 3. Please confirm
to
us that these represent your approximate collection rates or
explain
how our analysis is incorrect.
5. Based on your response to prior comment number 9, it is not
clear
why you believe it is appropriate to conclude that the execution
of
an installment contract, expiration of the rescission period, and
the
receipt of a relatively small down payment (referred to herein,
collectively, as "upon execution") is sufficient to support
recognition of the entire arrangement fee, given your historical
collection rates on a consolidated basis.
Your responses indicate that your installment contracts fall into
two
distinct categories (A and B) with substantially different
collection
rates and credit risks. Your responses also indicate that you are
able to accurately classify the contracts into each category and
consistently predict the amounts that you will collect. It appears
that information such as that necessary to classify the contracts
and
predict the collection rates would be relevant and reasonably
obtainable upon execution for purposes of evaluating
collectibility.
Such information regarding your B contracts would appear to
directly
contradict the historical conclusions reached regarding whether
collection was probable upon execution. Please explain to us why
you
do not believe it is necessary to evaluate the collectibility of
each
individual installment contract as required by paragraph 8 of SOP
97-
2.
6. Notwithstanding our concerns regarding the methodology
discussed
in the preceding comment, we are unclear as to the basis for your
belief that historical rates that exceed 50% are sufficient to
support a conclusion that collection is probable. In order to be
considered probable in the context of SOP 97-2 (see footnote 5
that
refers to SFAS 5), the likelihood of collection must be
substantially
higher than 50%. The threshold that you have applied appears to
be
more accurately described as "more likely than not," which is not
appropriate in evaluating probability for purposes of software
revenue recognition. In view of these considerations, further
explain your basis for concluding that your historical collection
rates support a conclusion that collection under the terms of your
arrangements is probable.
7. In addition, please explain to us how the collectibility
criterion
is met upon execution considering that revenues and significant
corresponding bad debt charges that relate to the same installment
transactions exist in the same accounting period.
8. Please indicate whether you have consulted with Grant
Thornton`s
National Office regarding the issues raised in this review. If
so,
provide us with the contact information for the partner that has
approved your accounting.
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please submit all correspondence and supplemental materials on
EDGAR
as required by Rule 101 of Regulation S-T. You may wish to
provide
us with marked copies of any amendment to expedite our review.
Please furnish a cover letter with any amendment that keys your
responses to our comments and provides any requested information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
any
amendment and your responses to our comments.
You may contact Mark Kronforst at (202) 551-3451, Marc D.
Thomas at (202) 551-3452 or me at (202) 551-3489 if you have any
questions regarding these comments.
Very truly yours,
Brad Skinner
Accounting Branch Chief
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Robert M. Lewis
Imergent, Inc.
August 1, 2005
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