Room 4561
April 28, 2006
Alfred H. Racine
President and CEO
Catuity Inc.
37650 Professional Center Drive, Suite 145A
Livonia, MI 48154
Re: Form 10-KSB for Fiscal Year Ended December 31, 2005
Filed March 31, 2006
Form 8-K/A Filed December 16, 2005
Dear Mr. Racine:
We have reviewed the above referenced filings 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.
Where
indicated, we think you should revise your document in response to
these comments. If you disagree, we will consider your
explanation
as to why our comment is inapplicable or a revision is
unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not raise additional
comments.
Form 10-KSB for the Fiscal Year Ended December 31, 2005
Management`s Discussion and Analysis (MD&A)
Liquidity and Capital Resources, page 13
1. Tell us how you considered providing disclosure regarding any
known operational commitments and expansions (e.g. leases,
contracts,
salaries etc.) for the next twelve months and how you will fund
these
commitments.
Consolidated Statement of Operations, page 23
2. We note your separate disclosure of "general and
administrative-
stock based compensation" expense. Tell us if this stock based
compensation expense is only related to general and administrative
activities. Stock-based compensation must be allocated to the
appropriate expense category to which it relates. For example,
stock
compensation relating to employees whose salaries are otherwise
reflected as cost of revenue must be reflected as cost of revenue
and
stock-based compensation issued to general and administrative
personnel must be reflected as such. The amount may be shown
parenthetically within the category or as a separate line item
within
the category.
3. We note the separate classification of amortization of
intangible
assets. Tell us how you considered recording amortization of
intangible assets in Cost of Revenues.
Note 2: Summary of Accounting Policies
Revenue Recognition, page 26
4. On page 11, you indicate that the Company sells hosted,
Application Services Provider (ASP) based systems to retailers.
You
also indicate that revenues from application processing and
hosting
services are recognized as revenue in the month that the services
are
performed. Provide us the general nature and terms of hosting
arrangements, the dollar amount of hosting revenues and whether
the
customer has the contractual right to take the possession of the
software. Tell us how you considered EITF 00-3 in accounting for
these arrangements.
Note 6: Acquisition, page 32
5. We note that based on common share issuance price in a private
placement, the stock issued in the Loyalty Magic Pty. Ltd.
acquisition was determined to have a value of approximately $7.50
per
share. We further note, however, that the Company`s common stock
was
trading at approximately $18.00 per share at the time of such
acquisition. Pursuant to paragraph 22 of SFAS 141, the quoted
market
price of an equity security issued to effect a business
combination
generally should be used to estimate the fair value of an acquired
entity. Paragraph 5 of SFAS 107 also indicates that the fair value
of
a financial instrument is the amount at which the instrument could
be
exchanged, requiring the use of a quoted market price if
available.
Furthermore, pursuant to paragraph 58 of SFAS 107, the Board
expressed their belief that quoted prices, even from thin markets,
provide useful information because investors and creditors rely on
those prices to make decisions. Tell us how you considered this
guidance in valuing the shares issued in the Loyalty Magic Pty.
Ltd.
acquisition.
Form 8-K/A Filed December 16, 2005
6. We note that the Company filed an amended Form 8-K to include
audited financial statements for Loyalty Magic. We further note
that
such audit was performed in accordance with auditing standards
generally accepted in Australia. Tell us how you considered the
requirements of Instruction 8.A.2 to Item 8 of Form 20-F to
include
audited financial statements as required by Article 3-05 of
Regulation S-X that were audited in accordance with US generally
accepted accounting standards. Also, tell us how the auditor
complied with the U.S independence standards. Further provide a
reconciliation to U.S. GAAP within the notes to the financial
statements.
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.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* 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.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Kari Jin, Staff Accountant, at (202) 551-
3481,
Tom Ferraro, Senior Staff Accountant at (202) 551-3225 or me at
(202)
551-3730 if you have questions regarding these comments.
Sincerely,
Kathleen Collins
Accounting Branch Chief
Mr. Alfred H. Racine
Catuity, Inc.
April 28, 2006
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