BECKMAN, LIEBERMAN & BARANDES, LLP
100 Jericho Quadrangle
Suite 329
Jericho, New York 11753
Telpehone (516) 433-1200
Telecopier (516) 433-5858
December 8, 2005
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-0406
Attention: Barbara C. Jacobs, Assistant Director
Maryse Mills-Apenteng, Division of Corporate Finance
Marc Shuman, Division of Corporate Finance
Re: Direct Insite Corp.
Registration Statement on Form SB-2
Filed: September 1, 2005
File No. 333-128039
Form 10-KSB for the year ended December 31, 2004
Form 10-QSB for the periods ended March 31 and June 30, 2005
File No. 0-20660
Ladies and Gentlemen:
Following are our responses, including supplemental information, to the
comments of the Securities and Exchange Commission (the "SEC") set forth in its
letter dated September 19, 2005 with respect to the above-referenced documents
filed by Direct Insite Corp. (the "Company" or "Direct Insite"). Supplemental
information provided to you in this letter is based upon information and/or
documentation provided by the Company. The numbers of the Company's responses
parallel the numbers in your September 19, 2005 comment letter. We have
reflected all responses in Amendment No. 1 to the Company's Form SB-2, except
for those related to the Company's MD&A which have been reflected in the
Company's Form 10-QSB for the nine months ended September 30, 2005 filed on
November 15, 2005. We do not believe amendments to previously filed '34 Act
documents are necessary due to the changes the Company will incorporate in its
future Form 10- QSB's and, in our opinion, as there are no material changes to
either the substantive or financial information in previously filed reports.
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December 8, 2005
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Form SB-2
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General
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1. The Company has informed us that the inclusion of the interest shares in
the registration statement was made at the request of Sigma and MetVP. They had
informed the Company that each desired to receive its interest payments in the
form of shares of the Company's common stock. The Company believes that the
offer and sale of the interest shares was complete when it filed the
registration statement because:
(i) each of Sigma and MetVP had already expressed its desire to receive
any interest which may become due and payable in the form of shares of
common stock in lieu of cash;
(ii) the Company approves of the issuance of shares of common stock in lieu
of cash;
(iii) pursuant to the terms of the Senior Subordinated Secured Note, the
Company retains the right to approve or disapprove the election by
Sigma and MetVP to receive shares in lieu of cash which takes the
election out of their control, and in the event the Company does not
make an interest payment in cash by the interest payment date, such
interest is to be paid in shares of common stock;
(iv) the issuance of shares in payment of interest is part of the same
transaction for which the registration statement was originally filed
and to the same institutional accredited investors; and
(v) the inclusion of the shares in the registration statement is not for
capital raising purposes, but merely to fulfill the Company's
obligations in connection with the completed transaction.
Additionally, the Company believes that including the number of shares
potentially issuable is meaningful to an investor as it clearly shows the number
of shares which may be available for future sale and the impact of the issuance
of such shares to potential investors.
Selling Securityholders
2. The section on Selling Securityholders has been revised to include the
(i) information required by Item 507 of Regulation S-B, (ii) a detailed
introductory description of the transactions by which each Selling
Securityholder acquired their securities, and (iii) a materially complete
description of the securities. Additionally, we have included a materially
complete description of any material relationship between the Company and the
Selling Securityholders. See page 8.
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December 8, 2005
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3. We have revised the disclosure to identify the natural person or persons
who exercise voting or investment control with respect to the shares held of
record by each of three selling securityholders, none of which is an entity
which filed periodic reports pursuant to Section 13 or 15(d) of the Exchange
Act. See page 9.
Plan of Distribution
4. We confirm that Direct Insite is aware of Corporation Finance Telephone
Interp. A.65 (July 1997) regarding short sales.
Exhibits
5. We have revised the Exhibit List to include the agreement governing the
July 12, 2005 purchase warrants issued to Tall Oaks Group L.L.C. and are filing
same with Amendment No. 1.
6. We have incorporated by reference to the Company's Current Report on
Form 8-K filed March 31, 2005 the forms of Senior Subordinated Secured Note and
Common Stock Purchase Warrant issued in the March 29, 2005 transaction.
Signatures
7. Michael J. Beecher has been identified in his capacity as Principal
Accounting Officer on the signature page.
Form 10-KSB for the Fiscal Year Ended December 31, 2004 Item 6. Management's
Discussion and Analysis or Plan of Operation Critical Accounting Policies
8. Note 2 of the Notes to Consolidated Financial Statements, Significant
Accounting Policies, contains disclosure regarding the Company's policy and use
of estimates. As disclosed in the footnote, disclosures that are particularly
sensitive to estimation include management's liquidity plans as set forth in
Note 13. In future filings the Company will include in the MD&A section a
specific discussion of its Critical Accounting Policies and its estimates and
assumptions.
Item 8A. Controls and Procedures
9. In all future filings the Company will omit the language "as is typical
of small companies." Additionally, the Company advises the Commission that
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December 8, 2005
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currently, it's disclosure controls and procedures are designed to insure that
information required to be disclosed is recorded, processed, summarized and
reported within the time periods specified by the Commission in its rules and
forms.
10. Regarding the Company's disclosure controls and procedures, the Company
believes its disclosure controls and procedures are designed to ensure that
information required to be disclosed is recorded, processed and summarized
sufficiently to communicate to management items that require disclosure and
would, therefore, be reported within the time periods specified in the
Commission's rules and forms, however, as was disclosed in the Annual Report on
Form 10-KSB for the year ended December 31, 2004 (the "Form 10-KSB"), these
controls and procedures were not effective with respect to timeliness with
respect to the Form 10-KSB. The Company's evaluation of the disclosure controls
and procedures was for the 90 day period prior to the filing of the report and
for the period as of the date of the report. In future filings, the Company will
include the language required by Item 307 of Regulation S-B.
11. The Company confirms that during the Company's fourth fiscal quarter of
the year ended December 31, 2004, there were no changes in the internal controls
over financial reporting that has materially affected or is reasonably likely to
materially affect the Company's internal control over financial reporting.
12. The reportable condition and material weakness disclosed in Item 8A,
under Internal Controls and Financial Reporting refers to the limited personnel
resources in the Company's accounting and finance department. As a result of the
limited staff, the financial closing of accounts and books took longer than
anticipated due to other demands on these resources. The Company had only its
Chief Financial Officer and a part-time accountant to perform the closing
process and complete its financial reports. Also due to the limited staff there
is limited separation of duties requiring the Chief Financial Officer to be
principally responsible for accounting and financial reporting and thus limits
the ability to have alternate review and approval processes.
As resources permit, the Company intends to add to its accounting staff
thus permitting more segregation of duties and appropriate review and approval
procedures. In the interim the Company has expanded the use of the part-time
accountant (not to be confused with the Company's independent auditors) to
assist with the financial closing process, to review transactions and supplement
the accounting staff to insure timely financial closings.
13. The Company has informed us that the disclosure indicating that "the
Board of Directors has had confidence that there have been no irregularities in
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December 8, 2005
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the Company's financial reporting or in the protection of its assets" is meant
to indicate that the Board, based on discussions with the Company's independent
auditors and its Chief Financial Officer and Chief Executive Officer, were able
to conclude that there were no irregularities.
Included in the Internal Controls and Financial Reporting section, the
Company separately states management's responsibility to establish and maintain
adequate internal controls over financial reporting and further discloses that
the Company's independent auditors reported to the Board certain matters that
they deemed were material weaknesses in internal controls. With this separate
disclosure the Company believes that readers will not confuse these disclosures
with those required by Item 308(a) of Regulation S-B.
14. The mitigating procedures performed by management included (i)
additional time incurred by the Company's Chief Financial Officer in reviewing
the accounting records and financial statements specifically regarding revenue
recognition policies and procedures , (ii) engaging a consultant to assist with
the financial closing and financial statement preparation with the Chief
Financial Officer spending additional time reviewing the closing procedures and
the work performed by the consultant, and (iii) thorough discussion with the
Company's independent auditors regarding such policies and disclosures in the
Company's financial statements and notes thereto.
The Company's auditors considered the reportable condition and, in planning
and executing their audit plan they placed very little or no reliance on Direct
Insite's internal controls. Marcum & Kleigman LLP ("M&K") planned and performed
sufficient substantive audit procedures to obtain reasonable assurance to
determine whether the financial statements are free of material misstatements.
The substantive procedures performed by M&K were deemed sufficient to overcome
the material weaknesses related to the Company's financial closing process,
limited segregation of duties and the absence of appropriate reviews and
approvals of transactions and accounting entries.
Financial Statements
Consolidated Statement of Operations, page F-4
15. The Company has informed us that Management has considered separately
reporting cost of revenue and gross profit during the past few years and
determined that the presentation was not meaningful for the following reasons:
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December 8, 2005
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a. Leading up to and including the calendar year ended December 31, 2004
the Company has focused on developing and modifying their invoice
presentment technology. This development work has been undertaken
Company wide in an effort to meet the needs of the Company's
significant customer, IBM. As the Company focused on product
development, tracking costs on a specific project by project was not
deemed a priority unless the development was associated with a long
term agreement where percentage of completion calculations would be
required.
b. The Company has incurred net losses during the past few years as a
result of investing a significant amount of time and money into
research and development related to expanding and improving its
produced offering. Part of this research and development initiative
has been incurred working directly with the Company's significant
customers in an attempt to meet customer needs. As a result of this
significant, ongoing development project, management has not focused
on the Company's gross margin level and does not utilize gross margin
levels in the decision making process. Management is tightly focused
on product development and reducing the Company's losses. Therefore,
presentation of cost of goods sold and gross profit has not been
deemed significant.
c. Management has noted several other publicly traded technology
companies which do not present cost of services and gross margin
including but not limited to Datawatch Corporation and Cray, Inc.
In summary, management does not currently require or utilize gross margin
information in its decision making process. As a result, capturing and reporting
expenses required to properly present gross margin has not been a priority.
Management believes that gross margin levels are not currently meaningful to
readers of the financial statement as the focus has been and will continue to be
improving the Company's bottom line. Once the Company becomes profitable and the
Company's produced offering becomes more stable, presentation and analysis of
the Company's gross margin may become meaningful to management and the financial
statement users.
Notes to Consolidated Financial Statements
Note 2 - Significant Accounting Policies
Revenue Recognition, page F-9
16. SOP 97-2, paragraph 7, indicates that if an arrangement to deliver
software or a software system, either alone or together with other products or
services, requires significant production, modification or customization, the
entire arrangement should be accounted for in conformity with ARB 45, Long- term
Construction Type Contracts and the guidance of included in SOP 81-1, accounting
for Performance of Construction Type and Certain Production Type Contracts. The
Company's principal product is an on-line invoice presentment and payment system
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December 8, 2005
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offered as an Application Service Provider which is a service offering excluded
under SOP 97-2. As described in response to comment 17 below the Company does
customize this service offering under separate contract and thereby accounts for
these separate contracts using the guidance in SOP 81-1 as provided in SOP 97-
2.
17. The Company has informed us that Custom Engineering Services involves
customizing the Company's software to specific requirements of each of its
customers. This service is provided under separate contracts or agreements with
customers for each customization project and is separate and distinct from its
ongoing Application Service Provider Services. The customization projects are
usually of relatively short duration, have specific deliverables and are
separately priced on a project by project basis. Since the revenue can be
matched to specific deliverables as defined in the contracts the Company
believes that contract accounting is the appropriate accounting principal used
in accounting for these projects. These projects are not "service arrangements"
as defined in SOP 81-1.
Note 4 - Accounts Receivable and Short-Term Revolving Loans
18. The material terms of the agreement with DIRI Rec Fund LLC (the "Rec
Fund" is as follows):
The Company may receive loans from the Rec Fund upon pledging certain accounts
receivable to the Rec Fund.
The Company pays interest to the Rec Fund at the rate of 1% per month on the
maximum amount available to the Company for such loans. In addition the Company
pays the Rec Fund the administrative costs of the Rec Fund, principally the
costs of the third party administrator (Trustee) of the Rec Fund.
The Company accounts for the costs as incurred.
The Company has no obligation to pay any losses that may be incurred by the Rec
Fund.
The Company, which reviewed and discussed this issue with its independent
auditors, considered whether or not the DIRI Rec Fund qualified as a Variable
Interest Entity and required consolidation under FIN-46. The Company considered
the qualifying criteria defined in FIN 46 Par. 5. The evaluation considered was
as follows:
- The DIRI Rec Fund has been fully funded by equity investments.
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December 8, 2005
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- The total equity at risk is sufficient to permit the entity to finance
its activities without subordinated financial support from any
parties.
- The equity investors of the fund have full control of the entity
including the ability to make decisions and the obligation to absorb
any losses.
- The equity investors have appropriate voting rights based upon their
respective investments.
The Company has concluded that the DIRI Rec Fund does not qualify for
consolidation treatment under FIN-46.
Please call me at (516) 433-1200 if you have any questions you wish to
discuss with us concerning this letter or any of the enclosed materials.
Very truly yours,
/s/ David H. Lieberman
David H. Lieberman
cc: James A. Cannavino, Chairman
and Chief Executive Officer
Direct Insite Corp.