CELL WIRELESS CORPORATION
1790 EAST RIVER ROAD, SUITE 142
TUCSON, ARIZONA 85750
PHONE 520-603-6979
FAX 520-577-2585
April 3, 2006
Attn: Mr. Larry Spirgel
Assistant Director
United States
Securities & Exchange Commission
Washington DC 20549
Dear Mr. Spirgel:
We have received your letter dated March 16, 2006 concerning Form 10KSB for
December 31, 2004 and the subsequent filed Forms 10QSB for 2005 and the 8-K/A
filed January 12, 2006. There are six items of comment in your letter and we
will address all of those concerns in this letter.
1. Your letter questions the issue to Mr. Peppitoni of 1,000,000
additional warrants to acquire Cell Wireless common stock at $.30 per
share. Our Footnote 4 also discusses another warrant to acquire
1,000,000 shares at $1.00 per share. Your questions are:
a. Who issued the warrants?
Answer: The surviving entity is the public company which became Cell
Wireless. The warrants are the obligation of the surviving entity Cell
Wireless.
b. Were the warrants previously outstanding or issued during the
acquisition?
Answer: The warrants were not previously outstanding and had only to do
with the acquisition.
c. Do these warrants have any registration rights?
Answer: These warrants have no registration rights.
d. What was the accounting treatment?
Answer: The accounting treatment is to record them in the footnotes.
The value is so far out of the money that no expense has been recorded
and does not need to be. Black Scholes formula does not result in a
charge to expense. Our stock is still trading for less than $.05 at the
date of this letter.
2. You noted that $3.9 million of liabilities remained the responsibility
of the Seller, 1Cellnet, LLC and that the state of Delaware cancelled
the Company's charter.
a. Tell us whether the creditors have raised any claims against
Cell Wireless.
Answer: No
b. Could Cell Wireless have a contingent liability as it acquired
all of the assets and intellectual property of 1Cellnet, LLC?
Answer: The footnote says "selected assets" not "all of the assets."
There is no recognition or expectation of a contingent liability and
Cell Wireless did not agree to accept any contingent liabilities. As
certain assumed liabilities known at the time of merger have come due,
they have been paid in the regular course of business. 1Cellnet used
some of their assets and the acquired shares to retire their debt that
was not assumed by Cell Wireless. We have honored the debt we assumed,
and challenged those we do not owe in the regular course of business.
The total assets acquired of $476,664 barely covered the assumption of
liabilities of $369,362 and resulted in a net of $107,302. All other
assets and liabilities were satisfied by the predecessor company and 17
months after the original agreement, no predecessor debt has the
appearance of a contingent liability.
3. Tell us and also please disclose how interest earned for the year was
$19,074 considering average cash balance was only $85,671. Answer: In
the year ended December 31, 2004 interest was earned during a quarter
when cash balances were in excess of $3,620,081 dollars. The audit
report does not report cash balances on a quarterly basis and only
makes the beginning and the ending balance available. This does not
provide an average balance for the year. The interest was earned in the
first and second quarter of 2004. The cash balances were:
----------------------------------------------------------
Period: Balance USD
----------------------------------------------------------
Beginning balance 12-31-03 $32,766
Quarter ended:
----------------------------------------------------------
March 31, 2004 3,620,081
June 30, 2004 576,840
September 30, 2004 435,238
December 31, 2004 166,474
----------
Total $4,831,399
==========
We trust this will adequately explain the interest earned and audited
and reported.
4. It is unclear to you what we mean by forward purchase of specified
amount of airtime by customers.
a. Are you a reseller of airtime?
Answer: Yes, we resell airtime. We buy exact time used by customers
from MCI and others and direct sell the time to our customers.
b. Are you a wireless service provider?
Answer: Yes. We are a wireless service provider as explained in our
description of business. The term forward purchase means that the
customer prepays the time and it is credited to their account. When the
customer uses the phone at the designated rate for the location of the
placement of the call their account is debited. When the customer runs
out of credit, he acquires or "forward purchases" another block of
time.
2
5. Your revenue recognition policy states that connection fees are
recognized as revenue when contracts are signed with customers. Tell us
what guidance you used to conclude that recognition upon initial
signing of contract is appropriate.
Answer: The guidance is STAFF ACCOUNTING BULLETIN NO. 104 REVENUE
RECOGNITION. A contract with our customers contains two or more revenue
recognition items that are prepaid at the time of enrollment. The first
is a fee to become a member/customer. This fee is non-refundable and is
recognized when the customer signs onto the system. The revenue is
"earned" at this point. The remainder of the deposit is unearned
prepaid telephone time. Revenue is recognized when the customer uses
the time and we then consider it "earned revenue".
6. Revenue and Expenses related to credit card charge backs
a. Tell us where we recorded the expense relating to the reserves
for credit card charge backs.
Answer: We charged the chargeback as a reduction of revenues for the
period during the charge backs.
b. Did you recognize revenue on the amount of related to the
reserve?
Answer: The original revenue resulted in a credit to revenue. The
charge back resulted in a reduction to revenue. We therefore do not
recognize revenue on the charge-backs.
c. If so, tell us how you concluded that you met the criteria for
revenue recognition. Refer to SAB 101 as amended by SAB 104.
Answer: We met the criteria for revenue recognition according to SAB
101 as explained herein. The chargeback debit to revenue resulted in a
0 increase in sales. This is because the revenue was not earned.
Non-earned revenue results in non-recognition of revenue.
I trust that these answers are adequate since they completely cover all of your
questions. The answers are clear herein and in the footnotes to the audit report
and the 8 KA as filed.
If you have additional questions, do not hesitate to call or write.
Best Regards,
/s/ David L. Shorey, CFO
Cell Wireless Corporation