Room 4561
February 2, 2006
Mr. David M. Otto
President
Techalt, Inc.
3311 N. Kennicott, Avenue, Suite A
Arlington Heights, IL 60004
Re: Techalt, Inc.
Form 10-KSB/A for the Fiscal Year Ended
December 31, 2004
Filed January 18, 2006
File No. 000-27867
Dear Mr. Otto:
We have reviewed your response letter dated December 19,
2005
related to our prior comment letter dated July 18, 2005 in
connection
with our review of the above referenced filing and have the
following
comments. Please note that we have limited our review to only
your
financial statements and related disclosures and do not intend to
expand our review to other portions of your document. 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 comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Report of Independent Registered Public Accounting Firm, page F-1
1. We note the revisions to your financial statements as well as
your
footnote on page F-17 titled, "Restatement." Tell us how your
auditors considered including a reference in their audit report to
the restatement. We refer you to AU 561.06.
Note 1 - Description Of Business And Summary Of Significant
Accounting Policies
Revenue Recognition, page F-7
2. Please refer to prior comment 3 in our letter dated July 18,
2005.
We have reviewed your response and note your statement that in
2004,
the only revenue earned was from the sale of hardware and services
that were billed upon delivery to the customer and that you do not
have arrangements that include multiple elements. We also note on
page 4 that you offer integration services, implementation
services
and maintenance and support services. Tell us whether you have
sold
any of your hardware products to customers in which any of these
services have been provided to the same customer. In this regard,
tell us if you provide maintenance and support services to
customers
in which you provided hardware and network implementation
services.
3. We note that you do not disclose your revenue recognition
policy
for the services you offer on page 4. Tell us and disclose your
revenue recognition policy for each of the services you offer.
4. We also note from your response that software products sold to
customers are recognized upon delivery. This does not appear to
be
consistent with your revenue recognition policy on page F-7 which
states that "revenue from sales of software licenses and software
maintenance support are recognized on a straight-line basis over
the
subscription term." We also note in your response that you do not
sell bundled solutions. This also does not appear consistent with
your disclosure in which it appears that you sell software with
software maintenance support. Tell us and disclose to clarify
your
correct revenue recognition policy related to your software
products
and your software maintenance support. Additionally, if you
intend
to recognize sales of your software product upon delivery, tell us
how you have established vendor specific objective evidence (VSOE)
for your software maintenance and how that complies with
paragraphs
10 and 57 of SOP 97-2. In this regard, tell us whether you have
had
separate sales of your maintenance (i.e. maintenance renewals) or
if
it has historically been sold together with the license. Clarify
the
initial period of maintenance support and whether you have
experienced renewals following the initial maintenance support
period. Note that in situations where VSOE of fair value of
maintenance is determined by management having relevant authority
and
has not yet been sold separately, the period of time until the
element is expected to be sold separately should be relatively
short.
Note 2 - Agreement And Plan Of Merger And Settlement Agreement
Settlement Agreement, page F-9
5. Please refer to comment 4 in our letter dated July 18, 2005.
We
note in your response and your disclosures on page F-14 of your
amended 10-K that you have revised your computations of warrants
issued to non-employees to include a volatility factor of 71%.
However, we also note that in your 8-K filed February 14, 2005
that
you used a volatility factor of 123% in valuing warrants
associated
with the settlement agreement. Tell us the reasons for the change
in
the volatility factor.
Note 6 - Stockholders` Equity
Series A Convertible Preferred Stock, Warrants and Additional
Investment Rights, page F-13
6. Please refer to comment 6 in our letter dated July 18, 2005.
We
note in your response and your amended 10-K that you recorded a
beneficial conversion value of $1,806,125 that was treated as a
constructive dividend debit and credit to APIC and recognized
immediately. Tell us how you considered paragraph 20 of EITF 00-
27
in determining what period to recognize the beneficial conversion
feature.
7. We also note in your response your analysis and consideration
of
EITF 00-19 related to the warrants issued with your Series A
Convertible Preferred Stock and in your amended 10-K that the
warrants should be classified within equity. We also note that
you
have exercise price reset provisions. Clarify what these exercise
price reset provisions are and tell us how you considered these
provisions in your evaluation of whether you have sufficient
authorized common shares available for these warrants if the
exercise
price resets.
Convertible Debenture and Conversion to Series A Preferred, page
F-14
8. Please refer to comment 7 in our letter dated July 18, 2005.
We
note in your response that there was no intrinsic value associated
with the issuance of the Series A Convertible Preferred Stock with
warrants in exchange for the $100,000 debenture. Clarify whether
the
beneficial conversion feature valued at $1,806,125 and the value
of
the derivative liability related to the registration rights
agreement
included in your response to comment 6 in our letter dated July
18,
2005 included this issuance of Series A Convertible Preferred
Stock
with warrants. If this issuance is not included in these values,
tell
us the differences in the issuance of Series A Convertible
Preferred
Stock for cash as opposed to the issuance of Series A Convertible
Preferred Stock for the conversion of debt that would result in
different accounting (e.g. beneficial conversion feature,
registration rights agreement, etc.).
Item 8A. Controls and Procedures, page 13
9. Tell us how you considered the revisions to your financial
statements in disclosing information relating to your disclosure
controls and procedures and your internal controls, pursuant to
Item
307 and 308 of Regulation S-B in your periodic Exchange Act
reports.
In this regard, we note your current disclosure in your Form 10-
KSB/A
and subsequent 10-QSB`s that your Chief Executive Officer and
Chief
Financial Officer have concluded that your disclosure controls and
procedures were effective.
10. Tell us whether you consider your disclosure controls and
procedures effective as of the end of the periods covered by these
reports in view of the recent restatement in your 10-KSB for the
year
ended December 31, 2004 and your 10-QSB`s for the quarters ended
March 31, 2005, June 30, 2005 and September 30, 2005.
11. Also tell us whether you considered Exchange Act Rule 13a-
15(e)
and the requirement that your controls and procedures ensured that
information required to be disclosed by you in the reports that
are
filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the
Commission`s rules and forms and that this information is
accumulated
and communicated to management to allow timely decisions regarding
required disclosure. If necessary, please revise to expressly
identify any material weaknesses in your internal controls over
financial reporting and any significant deficiency that, when
combined with other significant deficiencies, is determined to be
a
material weakness or conversely state that even as a result of the
internal control concerns that caused your recent restatement, you
did not have a material weakness or significant deficiencies.
Form 10-QSB for the Quarterly Period Ended September 30, 2005
Note 1 - Description of Business and Summary of Significant
Accounting Policies
Restatement, page 6
12. We note that you have restated your December 31, 2004
consolidated financial statements as a result of the revaluation
of
warrants issued, the registration rights agreement that should
have
been accounted for as a derivative liability and the beneficial
conversion feature related to your Series A Convertible Preferred
Stock. Tell us what consideration you gave to amending your Forms
10-QSB for the quarters ended March 31, 2005 and June 30, 2005 as
a
result of this restatement.
* * * * *
As appropriate, please amend your filing and 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 Patrick Gilmore at (202) 551-3406 or me at
(202) 551-3730 if you have questions regarding comments on the
financial statements and related matters.
Sincerely,
Craig Wilson
Senior Assistant Chief
Accountant
??
??
??
??
Mr. David M. Otto
Techalt, Inc.
February 2, 2006
Page 1