CINTEL CORP.
9900 Corporate Campus Drive, Suite 3000
Louisville, KY 40223
Tel: (502) 657-6077
Fax: (502) 657-6078
November 22, 2006
Via Edgar
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
Attention: Brad Skinner, Accounting Branch Chief
David Edgar, Staff Accountant
Re: Cintel Corp.
Form 10-KSB for Fiscal Year Ended December 31, 2005
Filed April 17, 2006
File No. 333-1000046
Ladies and Gentlemen:
The following addresses the additional comments of the reviewing staff
of the Commission set forth in its letter dated November 7, 2006, relating to
the Form 10-KSB for the fiscal year ended December 31, 2005 of Cintel Corp. (the
"Company"). We respond as follows:
Balance Sheet.
Accounts Receivable
1. We note your response to prior comment 2 and the accounts receivable
aging schedules provided supplementally to the Staff In your response
you indicate that the allowance for doubtful accounts was determined on
a specific account basis and only non-contested receivables from
customers with a good credit history and not in financial difficulty
would not be provided for. We note from your accounts receivable aging
schedule as of March 31, 2006 that approximately $822 thousand of your
accounts receivable were greater than three months old with no
corresponding reserve. Please explain to us the basis for not recording
an allowance for doubtful accounts against those receivable greater
than three months old. In your response tell us how you have complied
with the AICPA Technical Q&A Section 2130.7 "Requirement for Doubtful
Accounts Allowance."
Response:
There was no further provision made when management believed that the
amounts would be collectible.
All of the $822,000 receivables greater than 90 days were from the
company's major customers with good credit history. They acted as
distributors for our products and applied them in system integration
projects of their customers. Due to good credit records of the
customers, and to maintain good business relationships with them, we
provided them with longer payment terms, which enabled them to pay
after they had completed the relating projects and received payments
from their customers. These customers provided us with information
about the expected completion date at the time of the purchase. They
also kept us informed about any delay.
Subsequently, out of the $822,000 of account receivable greater than 90
days, $665,279 was collected. The remaining outstanding balance of
$156,312 is expected to be collected before the end of the `06 year per
the progress update provided by the customer.
Therefore, we believe we have complied with the AICPA Technical Q&A
Section 2130.7, because the accounts receivable balances meet FASB
Statement No. 5 paragraph 8, as the information available prior to
issuance of the financial statements did not indicate that it was
probable that an asset has been impaired at the date of the financial
statements nor could the amount of loss be reasonably estimated.
2. Based on information contained in your filings and response letter, it
appears that your allowance for uncollectible accounts represents a
critical accounting estimate. Given this, explain to us how you
considered Commission Guidance Regarding Management's Discussion and
Analysis of Financial Condition and Results of Operations, SEC
Interpretive Release No. 33-8350, V, Critical Accounting Estimates with
regard to your allowance for doubtful accounts.
Response:
The Company has modified the MD&A in accordance with your comment
3. Your response to prior comment number 2 indicates that, for direct
sales to customers, credit terms are 1$ to 45 days. Explain to us, in
detail, bow these credit terms are consistent with the collection and
aging history reflected in the accounts receivable analyses provided in
your response letter dated August 10, 2006. Address why, given the
apparent inability to enforce your credit terms, you are able to
conclude that your fees axe fixed or determinable and that
collectability is probable at the time you recognize revenue. As part
of your response, tell us the portion of sales during the year ended
December 31, 2005 and any subsequent interim periods that were made
directly to end customers and indirectly through distributors.
Response:
The 15 to 45 day terms relate to direct sales. In the 2005 fiscal year,
all sales were to distributors. Each sale had its own particular
repayment term that was designed to mirror the distributor's cash flow
from the sale to the end user. It was the company's decision whether to
delay collection if the distributor's cash flow was delayed by its
customer. The company had the ability to enforce payment, if it felt
that the payment was unreasonably delayed or the ability to collect the
fees would become impaired.
4. Your response to prior comment number 2 indicates, in part, that, when
you provide services as a subcontractor, credit leans depend on the
credit terms between the primary contractor and its customer. Your
response indicates that, in these circumstances "Basically, Cintel will
be paid when the customer pays the primary contractor." In view of
These payment terms, explain your basis for concluding that your fees
in these arrangements are fixed and determinable at the time you
recognize revenue.
Response:
As explained previously, based on credit records of the distributors
and terms of the agreements, the provision for uncollectible amounts
could not be determined. The distributor's legal obligation to pay
commenced when the products were shipped. The ultimate collection of
fees was not contingent upon whether the distributors got paid by their
customers. As credit checks were performed, all receivables were likely
to be collected regardless of whether the distributor received payment.
Subsequent collections as per note 1 also support management's initial
assessment.
Notes to Consolidated Financial Statements
General
5. We note your response to prier comment 3 where you indicate that since
the U.S. operating segment's profit or loss and assets constitute less
Than 10% of the related consolidated company amounts, no other
reportable segment are required pursuant to SFAS 131. While your
response indicates compliance with the geographic information
disclosure requirements of paragraph 38, it does not appear to address
the notion of separate operating segments based on different business
activities as outlined in paragraph 10. Further, your response does not
address disclosures about products and services as required by
paragraph 37. As previously requested by the Staff tell us bow you
considered the segment and product disclosure requirements of SFAS 131.
Response:
Major business activities (96% of the company's 2005 revenue) of the
company were the sale of hardware assembled by us and from the resale
of other manufacturers' computer hardware.
As it was impractical to separate overhead expenses between the two
similar activities, no discrete financials was prepared, and as such,
there was no separate operating segment per SFAS 131, paragraph 10.
The company did disclose sales and cost of sales from its finished
goods sales, merchandise sales, and services revenue in accordance with
SFAS 131 paragraph 37. Costs of maintenance services (4% of the
company's 2005 revenue) were mainly insignificant labor costs and not
separately disclosed.
Note 2. Summary of Significant Accounting Policies
e) Revenue Recognition, page F-7
6. Your response to prior comment number 4 from our letter dated May 19,
2006 indicates, in part, that SOP 97-2 did not apply to you during 2005
as you did not have any multiple element arrangements. Please note that
SOP 97-2 provide guidance on when revenue should be recognized and in
what amounts for licensing, selling, leasing or otherwise marketing
computer software. It is not limited to multiple element arrangements.
In view of this, clarify how you have evaluated the applicability of
SOP fl-2 for the periods reported in your 2005 10 KSB and all
subsequent interim periods.
Response:
Cintel's sales were sales of finished goods (hardware) and merchandise,
or maintenance services. There was no revenue from licensing, selling,
leasing, or otherwise marketing computer software. SOP 97-2 is not
applicable.
7. We have read your response to prior comment number 4 and do not believe
you have addressed, in sufficient detail, the items addressed in that
comment. As previously requested, provide the following:
o Clearly identify the products or services from which you
derive material amounts of revenue;
o Describe to us the extent to which you sell software as part
of your arrangements and indicate whether you account for
any such sales in accordance with SOP 97-2. For arrangements
that include software and are not accounted for under SOP
97-2k explain how you considered paragraph 2 of the SOP.
o Describe the material terms of the arrangements under which
you provide your products or services;
o Identify the elements included in each material type of
revenue transaction;
o Identify all criteria considered in determining when to
recognize revenue and explain how you determine when each of
the identified criteria have been met;
o For transactions with multiple elements, describe each
element and explain to us bow you recognize the related
revenue. Support your basis for accounting for any elements
separately and explain how you determine whether the
appropriate criteria have been met in order to recognize
revenue; and
o Identify all authoritative literature that you have relied
on in developing your revenue recognition policies. Indicate
your basis for concluding that the identified literature is
applicable, and that your policies comply with that
literature.
Your response should address the periods reported in your 2005
10-KSB and all subsequent interim periods. Further, your
response should include sufficient detail to provide a clear
understanding of the terms of each type of revenue arrangement
and the related accounting.
Response:
During 2005, 24% of sales ($546,942) were from finished goods sales,
72% of sales ($1,594,311) from Merchandise sales, and 4% from sale of
services ($67,207).
Finished goods sales in 2005 were mainly generated from selling iCache
(hardware) and related parts. After the shipment of products, the
company was only responsible for repair of faulty products. The repairs
were rare and insignificant. Revenue was recognized upon shipment of
the products.
iCache is a hardware device which provides the following function; to
view or download content on the Web or LAN (Local Area Network), where
the user would access the corresponding Web server through the router
to WAN (Wide Area Network). Such contents are then stored on a local
cache server and become available for sharing with other users on the
same LAN. In other words, the other users can promptly access such
contents on the local cache server.
Merchandise sales were generated from the reselling of various
hardware. The merchandise products for resale did not require any
modification. Revenue was recognized upon shipment of the products.
Service revenue was derived from miscellaneous maintenance service
provided to customers for their Cintel products. Revenue is recognized
as the services were rendered.
Note 10. Income Taxes page, F -17
8. Your response to prior comment number 6 indicates that you have
concluded that your deferred tax assets are recoverable based on
projections of future results. In support of those projections, you
identify various factors, including profitable operations in 2001,
improvements in the Korean economy, recent increases in your gross
revenue, and cist reduction efforts. However, we note that you reported
losses for the years 2002 through 2005 and were in a cumulative loss
position as of December 31, 2004 and December 31, 2005.
SFAS 109, paragraph 23 indicates, in part, that forming a conclusion
that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years. SFAS 109,
paragraph 24 provides examples of the types of evidence that might
support a conclusion that a valuation allowance is not needed when
there is negative evidence. SFAS 109, paragraph 25 indicates that the
weight given to positive and negative evidence should be commensurate
with the extent to which it can be objectively verified, In view of the
degree and objective verifiability of the negative evidence represented
by your cumulative losses, the projections and other factors described
in your response arc not sufficient to support a conclusion that a
valuation allowance is not required
Response:
Audited statements for the year ended December 31, 2005, and Interim
Statements for periods ended March 31, 2006 and June 2006 have been
restated. Valuation allowances for all of the deferred tax assets have
been set up to be consistent with recent earnings history and SFAS 109.
Should you have any questions, please do not hesitate to contact the
undersigned at (502) 657-6077.
Very truly yours,
/s/ Sang Don Kim
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Sang Don Kim