Security Intelligence Technologies, Inc.
145 Huguenot Street, New Rochelle, NY 10801
914-654-8700
February 28, 2005
VIA EDGAR
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Mr. John Hartz
Senior Assistant Chief Accountant
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: Security Intelligence Technologies, Inc.
Form 10- KSB for the fiscal year ended June 30, 2004
Form 10-QSB for the quarter ended September 30, 2004
File No. 0-31779
Dear Mr. Hartz:
In response to the Commission's letter of comments dated January 21, 2005, we
have repeated the Staff's comment and provided our answer as follows:
Form 10-KSB for the Year Ended June 30, 2004
Distribution Agreement, page 3
1. We note you entered into an exclusive distribution agreement in 2004.
Tell us and include in future filings a discussion of the key terms of
the agreement. We expect that a discussion of the nature and terms of
the agreement would include, among other things:
a. The duration of the agreement, including a discussion of renewal terms,
if any.
b. Whether the agreement is cancelable or non-cancelable, and by whom, and
whether there are contractual minimums or maximums.
c. The amount of revenues recognized for all periods presented.
d. The products covered by the agreement.
e. The royalty rates or other compensation terms of the agreement.
Registrant's Answer -
a) The agreement has a five year term and continues for an additional five
years unless terminated by either party prior to the expiration of the
initial five-year term.
b) The agreement can only be cancelled by either party for a material
breach by the other party of its obligations under the agreement. There
are no contractual minimums or maximums; however, the agreement
stipulates the parties will mutually determine annual minimum sales
volumes after each anniversary of the agreement.
c) There were no revenues recognized for any period prior to the quarter
ended December 31, 2004. The Registrant received $555,000 of orders
during the fiscal year ended June 30, 2004. These orders were filled
and revenues were recognized in the quarter ended December 31, 2004 and
are reflected in the Registrant's statements of operations for the
three and six months ended December 31, 2004.
d) The agreement covers many of the Registrant's RF Jamming and monitoring
products.
e) The distributor invoices the Registrant for products in accordance with
a contractual price list. There are no royalties payable.
2. In addition, the distribution agreement should be filed as a material
contract, or you should advise the staff of the reasons, you believe
the agreement need not be filed. Please refer to Item 601 of Regulation
S-B.
Registrant's Answer - The Registrant does not believe that the contract is a
material contract since the agreement relates to the sale of products regularly
offered by the Registrant at prices which are its dealer prices and there are no
obligations on the part of the either party other than the obligation of the
Registrant to deliver products when orders are placed, which is the same
obligation that it has with respect to all orders for products, whether placed
by customers or distributors.
Marketing and Distribution, page 9
3. We note you have significant customer deposits as of June 30, 2004 and
September 30, 2004. Please provide the staff with a detailed listing of
the deposits for the dates noted above. The listing should provide the
customer name, date of deposit, amount of deposit, and nature of the
underlying transaction. If there are any deposits that have been held
for 180 days or more, please explain further.
Registrant's Answer - The information is provided in Exhibit 1.
4. In addition, since you don't have receivables it appears that customer
deposits are an integral part of your business and therefore we would
expect an expanded discussion in future filings under Marketing and
Distribution to provide information about the typical payment terms of
your sales agreements with customers.
Registrant's Answer - The Registrant will expand discussion in Form 10-QSB for
the quarter ended March 31, 2005.
Warranties, page 9
5. In future filings disclose your accounting policy, methodology used in
determining your liability for product warranties, and provide a
tabular reconciliation of the changes in your aggregate product
warranty liability for the reporting period. See paragraph 14 of FIN 45
for guidance.
Registrant's Answer - The requested disclosure was included in the Registrant's
Form 10-QSB for the six months ended December 31, 2004.
General Overview, page 15
6. We note that in fiscal year 2004 you closed three retail operations, of
which two were converted to sales offices. Please tell us the status of
the third operation. If the location is vacant, as part of your
response please discuss how you are accounting for future lease
payments and the authoritative literature supporting your accounting.
Registrant's Answer - The location is vacant and the landlord has instituted a
lawsuit for collection of past due rents at the time we vacated plus three
additional months rent. The Registrant has accrued the entire balance being
sought.
Joint Venture Agreements, page 17
7. Please tell us why the joint ventures have not generated any revenue as
of June 30, 2004 and when you expect for this to change.
Registrant's Answer - All of the joint ventures require some amount of financing
to launch operations. Neither the Registrant nor the joint venture partner has
been able to obtain the necessary financing. Because of the Registrant's cash
position, the Registrant does not have the ability to fund the joint ventures.
Compliance with Section 16(A) of the Exchange Act, page 21
8. We note six late filings from Chris Decker, CFO and member of your
audit committee, and four from Jamil Ben, CEO. Please have them tell us
what measures these individuals have taken to prevent future late
filings. In addition, please explain the reason for the August 23, 2002
transaction in which Mr. Decker acquired 500,000 shares from Mr. Jamil.
Registrant's Answer - Both Mr. Decker and Mr. Jamil have been advised of the
requirement for timely filing of a Form 4, and they have advised the Registrant
that they will file any required Form 4 in a timely manner. The August 23, 2002
transaction was a privately negotiated purchase of 500,000 shares of the
Registrant's common stock by Mr. Jamil to Mr. Decker in order to increase Mr.
Decker's equity interest in the Registrant.
Deferred Revenue, page 33
9. Supplementally provide to us a description of your deferred revenue and
the revenue recognition criteria not met.
Registrant's Answer - Non-refundable advance payments received under marketing
and distribution arrangements are deferred and either applied as payments
towards customer purchases made pursuant to the terms of the respective
agreements, or recognized as income at the expiration or termination of the
agreement if specified purchase quotas have not been met by the customer. Since
the sale of the product is not generated until shipment of the products, there
is no recognition until shipment. To the extent that the customer does not make
the required purchases prior to the expiration or termination of the agreement,
the Registrant only has the right to the payments at the time of termination.
Prior to termination, the Company has an obligation to deliver products if
ordered.
Revenue recognition, page 38
10. Supplementally tell us and revise your disclosures in future filings to
discuss how and when you recognize revenue for support services that
you provide for the first three to twelve months following installation
of a system along with how you recognize revenue for long-term services
provided on a service-contract basis.
Registrant's Answer - There were no long-term service contracts outstanding for
the periods under review. However, we do offer long-term service contracts and
account for them in accordance with SAB Topic 13 and EITF 00-21.
11. We note that you recognize revenue when goods are shipped. Please
advise us whether substantive installation, testing, or other
obligations exist that would prevent immediate revenue recognition upon
shipment. Refer to SAB Topic 13 for guidance. In your response please
discuss what consideration, if any, that you gave to EITF 00-21 and
whether it was applicable to you.
Registrant's Answer - Sales of our sophisticated bomb jamming and cellular
monitoring systems sometimes include installation and testing by us and in these
situations we recognize revenue after installation, testing and customer
acceptance. We will modify our disclosure in future filings. We have considered
EITF 00-21 and believe we do not have a multiple-deliverable revenue arrangement
containing more than one unit of accounting.
Note 4 - Accounts Payable and Accrued Expenses, page 43
12. We note you have a payroll liability of $398,988 as of June 30, 2004. Tell
us whether you have remitted all withholding and payroll taxes to the
Internal Revenue Service. If not please tell us the liability at
September 30, 2004. Further, if you are in fact delinquent, please
provide this disclosure in future filings.
Registrant's Answer - We have not remitted all withholding and payroll taxes to
the Internal Revenue Service. The liability for delinquent payroll taxes to all
taxing authorities, including accrued interest and penalties of $64,269, was
$204,182 at September 30, 2004. We have disclosed delinquent payroll taxes as of
December 31, 2004 in our Form 10-QSB in Note 2 of Notes to Consolidated
Financial Statements.
Note 16 - Legal Proceedings, page 50
13. In the matters concerning Welcome Publishing Company, Inc., Ergonomic
Systems Philippines Inc., China Bohai Group and USA International
Business Connections Corp., Elektronik Sistemleri, and the litigation
brought by a former customer we note you believe you have a valid
defense in each claim, however, if it is probable that you will incur a
loss and the amount of the loss can be reasonably estimated the loss
should be accrued by a charge to income. For each matter referenced
above, tell us and revise future filings to include whether it is
reasonably possible that losses will be incurred and the possible range
of loss or state that such amounts cannot be estimated. Refer to
paragraph 8 - 10 of SFAS 5. Your response should clarify if an accrual
has been recorded for the pending claim.
Registrant's Answer - The following charges to income had been made at June 30,
2004 and September 30, 2004:
Welcome Publishing Company, Inc. - Accrued $80,000 of claim of
$140,430. (Subsequently settled for $60,000)
Ergonomic Systems Philippines Inc. - Accrued entire award of $120,223.
China Bohai Group and USA International Business Connections Corp. - No
charge to income as we believe we will win the action.
Elektronik Sistemleri - Accrued entire award of $223,620.
The accruals are unchanged at December 31, 2004. We have included this
disclosure in our Form 10-QSB in Note 10 of Notes to Consolidated Financial
Statements.
14. We note that you reached a settlement that is payable with 550,459
shares of common stock. Tell us how you accounted for this and as part
of your response please reference authoritative literature supporting
your accounting.
Registrant's Answer - Settlement was for $600,000 and was charged to income as
of June 30, 2004. The agreement pursuant to which the shares were issued by the
Registrant to settle this obligation contains a price guarantee that requires
CSS, the Registrant's wholly-owned subsidiary, to pay in cash any difference
between the original face amount of the debt and the value of the shares
computed as their average closing price for the 30 days beginning July 7, 2005
and ending August 5, 2005. CCS has guaranteed that the value of the shares will
be at least $300,000 and is responsible for the amount that $300,000 exceeds the
value of the shares. Ben Jamil, the Company's chief executive officer and
principal stockholder has guaranteed that the value of the shares will be at
least $150,000 and has guaranteed that the shares will have a value of at least
$150,000. The Company accounts for these transactions by recording the
obligation at fair value, based on the difference between the market price of
the common stock at the end of the quarter and the amount due, with quarterly
mark-to-market adjustments until the obligation is settled. Unrealized gains or
losses resulting from changes in fair value are reflected in the statements of
operation as unrealized gain (loss) on financial guarantees, and in the balance
sheet under accrued expenses.
Accounting Controls
15. On page 6, under the caption, "We may not be able to comply in a timely
manner with recently enacted corporate governance provisions", the
company states, in part, that it may be unable to implement certain
controls, including systems relating to accounting controls. Please
explain more precisely to the staff the facts and circumstances behind
the statement made. In addition, please provide us with the information
provided to the registrant's auditor and audit committee regarding
significant deficiencies and material weakness in the design or
operation of internal controls over financial reporting as contemplated
by paragraph 5 of the certificates filed as exhibits 31.1 and 31.2.
Also provide the staff with any deficiencies communicated to the
company by Demetrius & Company, LLC in connection with their audit of
the company's financial statements for the year ended June 30, 2004.
With respect to each deficiency noted, explain how the company intends
to address the matter.
Registrant's answer - The Sarbanes-Oxley Act (SOX), Section 404, requires
intensive documentation of our internal controls over financial data and the
reporting function. We would have to hire additional staff or consultants to
prepare for compliance with these requirements. Because of the Company's poor
cash position and lack of credit worthiness we may not be able to comply with
section SOX 404. As reported by to us by Demetrius & Company, L.L.C., our
independent auditors, in their letter dated October 4, 2004 and our audit
committee there is a weakness in financial reporting. The work of the Chief
Financial Officer (CFO) is not reviewed by anyone. The CFO prepares the
financial statement together with all the supporting schedules. The accounting
staff consists of clerical and bookkeeping types and lacks the qualifications to
either prepare the statements and support or review them. The company indents to
address the issue by hiring a qualified assistant to the CFO or a consultant.
However, unless sufficient funds are available, this may not be possible.
General
16. Give us a schedule of the components of Other Current Assets as of June
30, 2004 and September 30, 2004.
Registrant's Answer - Other assets consist of the following:
June 30, September 30,
2004 2004
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Deposit on product purchases $198,639 $ 233,293
Prepaid consulting services 15,313 --
Miscellaneous receivables 9,920 975
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$223,872 $ 234,268
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Form 10-QSB for the Quarter Ended September 30, 2004
General
17. Please address the comments above in your interim filings as
applicable. Registrant's Answer - Where applicable, the comments were
addressed in the Form 10-QSB for the quarter ended December 31, 2005 or
will be addressed in future 10-QSB filings.
Basis of Financial Statement Presentation, page 7
18. We note that your auditors` report for the year ended June 30, 2004
contains a going concern modification. In future quarterly and annual
filings, provide a more complete update of management's viable plan to
overcome the uncertainty of your ability to continue as a going
concern, including a reasonably detailed discussion of your ability or
inability to generate sufficient cash to support your operations during
the twelve month period following the date of the financial statements
being reported upon. Refer to FRC 607.02 and Section IV of Release
33-8350. Your disclosures should provide enough detail that your
readers gain insight into management's analysis and concerns related to
your ability to continue to operate, including the probability of
success for the various actions you are proposing. Discuss trends that
you are seeing in the current year's results, such as decreased
revenues and improved gross margin, whether or not you expect these
trends to continue throughout the year, and how these trends will
affect your viable plan to continue as a going concern.
Registrant's Answer - The Registrant's Form 10-QSB for December 31, 2004
responds to this comment in Note 1 under "Going Concern and Liquidity".
Controls and Procedures, page 16
19. Amend your filing to provide the disclosures required by Item 307 of
Regulation S-B. Your revised disclosure should include an evaluation
date as of the end of the period rather than within 90 days of the
filing of the report.
Registrant's Answer - We will amend previous filing. The Registrant's Form
10-QSB for December 31, 2004 responds to this comment.
Certifications
20. Please amend your filing to include revised certifications to include
an evaluation date as of the end of the period rather than within 90
days of the filing. Refer to exhibit 31 as specified by Item 601 of
Regulation S-B for guidance.
Registrant's Answer - We will amend previous filing. The Registrant's Form
10-QSB for December 31, 2005 responds to this comment.
* * * *
In executing this letter, the Registrant hereby acknowledges that:
o the Registrant is responsible for the adequacy and accuracy of the
disclosure in its filings;
o 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
o the Registrant 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.
If you have any questions, please do not hesitate to contact Chris R. Decker,
Chief Financial Officer at (914) 654-8700, ext. 228.
Very truly yours,
Ben Jamil
Chief Executive Officer
Chris R. Decker
Chief Financial Officer
Exhibit 1
Comment 3
Customer Deposits
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Date of Balance @ Balance @ Nature of
Customer Name Deposit 6/30/04 9/30/04 Transaction
- ------------------------------------------- ------------- ------------- -------------
Eximp Corp. May-02 649,514 649,514 (1)
Curtis Marks Oct-01 6,269 6,269 (1)
Annie Ramierz Aug-01 5,729 5,729 (1)
Intergeo Corp Mar-02 75,000 75,000 (1)
APK Trading Aug-02 4,460 4,460 (1)
Net Smart Mar-03 192,500 192,500 (2)
Ness Motley Dec-02 51,000 51,000 (1)
Enrique Gameros Dec-02 11,158 11,158 (1)
Garper Group Mar-03 11,492 11,492 (1)
Bolivar Gonzales Nov-03 2,500 2,500 (1)
Mario Escamilla Nov-03 70,000 70,000 (3)
Tel & Power Mar-04 40,000 40,000 (3)
Eamess De Mexico Feb-04 86,240 86,240 (3)
Mario Parra Jun-04 30,000 30,000 (3)
Mobile Communications Jun-04 14,500 14,500 (3)
UXB International Jun-04 416,250 555,000 (3)
Commora Systems Aug-04 437 195,879 (3)
Imdicol May-04 50,000 50,000 (3)
Bosse Sep-04 30,000 30,000 (3)
Technoimport Sep-04 25,000 25,000 (3)
Rodrogues Sep-04 5,000 5,000 (3)
Dimitrov May-04 12,461 12,461 (1)
Al Muzaimi Aug-04 - 18,065 (1)
Loay J Al Kharafi Jun-04 161,325 - (3)
Ebrahaim A Al Mutawa Sep-04 - 18,081 (3)
Various retail customers in
London 26,196 7,607 (3)
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Totals 1,977,031 2,167,455
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Nature of Transaction types:
(1) Remaining balance from a larger deposit paid for goods to be ordered
later. To the extent that the goods have not been ordered and shipped,
the customer deposit is not changed. The outstanding balance will be
reduced when the customer orders additional equipment and the
equipment is shipped.
(2) Deposit against a sales contract for a monitoring system. Customer has
made repeated changes to the specifications of the system and the
system is still under development.
(3) Deposit against a specific order, goods subsequently delivered and
sale recorded.