May 5, 2006
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
Amendment No. 1 filed on December 8, 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 January 3, 2006 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 January 3, 2005 comment letter. . Since the Company
has now filed its Form 10KSB for the year ended December 31, 2005, which
incorporates the Staffs' comments, we have not amended any prior '34 Act
filings.
Securities and Exchange Commission
May 5, 2006
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Form SB-2
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General
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1. The Company has removed the interest shares from the registration statement..
Item 8A. Controls and Procedures, page __
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2. The Company has revised the disclosure regarding the conclusions of its Board
of Directors as now set forth in its recently filed Form 10KSB for the year
ended December 31, 2005.
Notes to Consolidated Financial Statements
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Note 2 - Significant Accounting Policies
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Revenue Recognition, page F-9
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In response to the Staff's comment as it relates to the Company's revenue
recognition process and SOP 81-1, the Company recognizes revenue in two
categories, Application Service Provider ("ASP") Services and Custom
Engineering Services. Each of these arrangements is under separate
contracts and is viewed as separate profit centers.
ASP Services consists of data processing using the Company's ASP software
solution in the form of on line presentment of customers' invoices to their
customers and payment systems (Invoice Online or IOL). The customer is
charged a fixed rate on a per use basis or a fixed fee is determined by
estimated monthly invoice presentment volumes based on contractually agreed
upon terms ( with no adjustment for under/over usage). These arrangements
are on a stand alone basis and are not bundled or part of multiple element
arrangements. There are no licensing arrangements of the Company's
proprietary software solution and title to the solutions is not transferred
to the Company's customers. Revenue from these services is recognized in
the period the service is provided. As noted in our previous response, in
ASP service arrangements the customer has no contractual right to the
software. SOP 97-2 states in paragraph 66, "Revenue allocated to the
service element should be recognized as the services are provided or, if no
pattern of pattern of performance is discernable, on a straight-line basis
over the period during which the services are performed. As such these
revenues are not recognized pursuant to SOP 81-1.
Custom Engineering involves modifying the base IOL solution to meet custom
specifications and or additional functionality requirements of customers.
This work is performed pursuant to separate contracts or agreements with
customers for each customization project and is separate and distinct from
the ASP Services. These customization services have specific required
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May 5, 2006
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deliverables. These types of arrangements vary in size, term and complexity
on a project by project basis. The Company evidences the achievement of its
contractual deliverable through the form of customer acceptance. It has
been the Company's policy to recognize revenue upon the receipt of customer
acceptance of achieving these contractual milestones at the lesser of the
milestone amount or the percentage of completion of the contract.
SOP 97-2 paragraph 7 states "if an arrangement to deliver software or a
software system, either alone or together requires significant production,
modification, or customization of software, the entire arrangement should
be accounted for in conformity with Accounting Research Bulletin (ARB) No
45, Long-Term Construction-Type Contracts, using the relevant guidance
herein and in SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." SOP 97-2 goes on in paragraphs 63-65 to
state that "Certain arrangements include both software and service elements
(other than PCS- related services). The services may include training,
installation, or consulting. Consulting services often include
implementation support, software design or development, or the
customization or modification of the licensed software.
If an arrangement includes such services, a determination must be made as to
whether the service element can be accounted for separately as the services are
performed. Paragraph 65 discusses the criteria that must be considered in making
such a determination. If the nature of the services is such that the service
element does not qualify for separate accounting as a service, contract
accounting must be applied to both the software and service elements included in
the arrangement. Paragraphs 74 through 91 of this SOP address the application of
contract accounting to software arrangements. Paragraph 74 states "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 of software, the service element does not meet the criteria for
separate accounting set forth in paragraph 65. The entire arrangement should be
accounted for in conformity with RB No. 45, using the relevant guidance in SOP
81-1"
In order to account separately for the service element of an arrangement that
includes both software and services, sufficient vendor-specific objective
evidence of fair value must exist to permit allocation of the revenue to the
various elements of the arrangement (as discussed in paragraphs 10 and 12).
Additionally, the services (a) must not be essential to the functionality of any
other element of the transaction and (b) must be described in the contract such
that the total price of the arrangement would be expected to vary as the result
of the inclusion or exclusion of the services."
Paragraph 69 goes on further to state "Software should be considered
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May 5, 2006
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off-the-shelf software if it can be added to an arrangement with insignificant
changes in the underlying code and it could be used by the customer for the
customer's purposes upon installation. Actual use by the customer and
performance of other elements of the arrangement is not required to demonstrate
that the customer could use the software off-the-shelf. If significant
modifications or additions to the off-the-shelf software are necessary to meet
the customer's purpose (for example, changing or making additions to the
software, or because it would not be usable in its off-the-shelf form in he
customer's environment), the software should be considered core software for
purposes of that arrangement. If the software that is included in the
arrangement is not considered to be off-the-shelf software, or if significant
modifications or additions to the off-the-shelf software are necessary to meet
the customer's functionality, no element of the arrangement would qualify for
accounting as a service, and contract accounting should be applied to both the
software and service elements of the arrangement."
The Company's custom engineering engagements are single contractual arrangements
involving significant modification or customization of the Company's own
propriety software that is not purchased by the customer but rather used in an
ASP arrangement. The customization work must be completed in order to use the
Company's IOL in an ASP environment. Again, the ASP and Customization Services
are services entered into under separate contract whose amounts are determined
using vendor-specific evidence and as such are accounted for separately. As such
the Company believes that it is appropriate to account for its Custom
Engineering Services (and Custom Engineering only) using contract accounting
following the guidance issued under SOP 81-1.
Form 10-QSB For The Fiscal Quarter Ended September 30, 2005
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3. The Company has revised the disclosure to comply with the guidance set forth
in item 308(c) of Regulation S-B as now set forth in its recently filed Form
10KSB for the year ended December 31, 2005. The revised disclosure states the
following:
"Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have
been no changes in such controls or in other factors that could have
materially affected, or is reasonably likely to materially affect, those
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses."
Securities and Exchange Commission
May 5, 2006
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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: Michael J. Beecher
Chief Financial Officer
and Secretary