SEC Company Response from COGNIGEN NETWORKS INC (CIK 0000726293) — May 2, 2005
COGNIGEN NETWORKS INC (CIK 0000726293)
Date: May 2, 2005 · CIK: 0000726293 · Accession: 0000949303-05-000035
AI Filing Summary & Sentiment
File numbers found in text: 000-11730
Referenced dates: March 28, 2005
Letter
Re: Response to Comments on Cognigen Networks, Inc. Form 10-KSB for the fiscal year ended June 30, 2004 Filed September 23, 2004
corr_050205
April 25, 2005
United States Securities and Exchange Commission Mail Stop 0407 450 Fifth Street, N.W. Washington, D.C. 20549
Form 10-QSB for the quarter ended December 31, 2004 File No. 000-11730
Ladies and Gentlemen:
We have reviewed your comments, in your letter dated March 28, 2005, regarding our Form 10-KSB and 10-QSB filings referenced above, and offer our following responses.
Form 10-KSB for the Year Ended June 30, 2004
Consolidated Statements of Operations
1. You have said that it is not appropriate to include a subtotal prior to presenting the captions "Loss provision for sale of CST" and "Loss provision for termination of Intandem Funding Agreement." We will implement in future filings and comply with your request.
Note 1 - Description of Business and Summary of Significant Accounting Policies
Revenue Recognition
Our current business model is to sell primarily telecommunications products and services through our independent sales agents through the Internet. We recognized the marketing potential of the Internet and formed what we believe was one of the first companies to create a marketing operation based exclusively on the Internet. Our proprietary technology automatically creates a web site for each new sales agent, at the time the sales agent becomes a member of our network Through web sites of our sales agents, we sell our own proprietary telecommunications products and services or we sell, as a master agent, the products and services of outside vendors The products and services we sell include domestic and international long distance service, prepaid calling cards or pins, paging services, wireless communications, and computers, among other things We sell our own proprietary products and services and, as a master agent, have contractual agreements with a variety of outside vendors who provide us with a commission percentage of sales of their products and services.
2. You have asked for supplemental information regarding our revenue recognition policies. You have asked for a detailed description of our business specifically related to "proprietary products and services."
a) We earn revenue in two ways. First, we earn commission revenue from a number of outside vendors whom we represent as a master agent on our sales agent web sites and sell their products and services to customers by way of contractual agreements with the outside vendors. Second, we earn telecommunications revenue through sales of our own proprietary products and services to customers through our sales agent web sites.
b) When we receive commissions revenue (net commissions from outside vendors), it is when we (Cognigen's sales agents) have acted as an agent or broker and sold a product or service, such as a long distance service, on behalf of an outside vendor who owns the long distance account and services the customer monthly. Servicing the customer means the outside vendor will provide the customer's service (setting up the customer for long distance service), prepare and collect monthly billings for which they have set the price for the products and services, and address any other service issues with the customer as the outside vendor owns the customer account. The outside vendor is responsible for any bad debt or risk that may occur if the customer does not pay his bill and is also responsible for their carrier or supplier billings.
Example Accounting: Sales of Outside Vendor Products and Services
The following is an example of the revenue and expense flow for one customer for one month's billing of $100 when we are selling products and services of outside vendors and we do not own the customers. We do not record revenue received directly from the customer. We record marketing commissions revenue received from the outside vendor as they pay us a commission, and we in turn pay a commission to our sales agents, on the monthly billing of the outside vendor's customer.
Outside Vendor Cognigen Accounting Accounting
Telecommunications revenue (gross from customer) $ 100
Direct carrier expenses 15
Direct commissions expense (paid to Cognigen acting as master agent) (15)
Marketing commissions revenue (net from outside vendor) $ 15
Marketing commissions expenses (paid to Cognigen's sales agents) (10)
Other indirect expenses included in SG&A (25) (2) ---------- ----------
Income from operations $ 5 $ 3 ========== ==========
c) When we earn telecommunications revenue, it is because our sales agents have sold a product or service for which we own the customer account and have set the retail price for the product or service. In other words, we have purchased the product or service from a supplier (i.e. long distance service from Global Crossing) and have resold this long distance service to a customer as a Cognigen branded product or service, for which Cognigen is bearing the risk of ownership. The price paid to the supplier/carrier is under a predetermined agreement. Profit margins vary depending on the retail pricing established by us and the prices we pay to our supplier/carrier. Under this structure we now wear the "outside vendor" shoes, versus being the master agent, and are responsible for provisioning, preparing and collecting the monthly billings and addressing any other customer service issues that may arise. In this case, we own the customer account and deal directly with the customers who are using the products or services for which we set the retail pricing. We are responsible for the bad debt or risk that may occur if this customer does not pay his bill and we are also responsible for the supplier/carrier billings from whom we have purchased the products and services at predetermined prices (i.e. Global Crossing).
Example Accounting: Sales of Cognigen's Branded Products and Services
The following is an example of the revenue and expense flow for one customer for one month's billing of $100 when we are selling Cognigen branded products and services which is where we own the customer account. We record revenue received directly from the customer. We do not record marketing commissions revenue received from an outside vendor as there is no outside vendor. We record marketing commission expense as we pay commissions to our sales agents on the monthly billing of our customers.
Cognigen Accounting
Telecommunications revenue (gross from customer) $ 100
Direct carrier expenses (55)
Marketing commissions expense (paid to Cognigen sales agents) (10)
Other indirect expenses included in SG&A (33) ----------
Income from operations $ 2 ==========
d) As you can see from the examples, if we own the customer account and record the revenue that is billed directly by us to our customers, the revenue is "five to seven times" the commission revenue we receive acting as a master agent for outside vendors. In other words, the $100 received directly from the customer is "five to seven times" the $15 received by Cognigen acting as a master agent for the outside vendor.
3. You have asked us to clarify whether we report revenue gross as a principal versus net as an agent and how we used the guidance in EITF 99-19 in making our determinations for this. In addition, you have asked us to explain the nature and composition of certain operating expense line items from our statement of operations and how each of these lines items relate to the sources of our revenue.
a) the criteria identified in EITF 99-19 paragraph 3 are the following:
1. acts as principal in the transaction; 2. takes title to the products; 3. has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns; 4. acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis.
b) We only record gross revenue received from customers where we are selling our own branded products and services (taking title to products) and where we bare the burden of collecting the revenue from the customer and are responsible for all related direct and indirect expenses to earn that revenue. We have the risk and reward of owning the customer account and are the principal in the transaction. This follows the criteria in EITF 99-19 #1 through #3 described in 3.a) and the example explained in 2.c). Otherwise, the revenue we record is the net marketing commissions we receive from the outside vendors in acting as agent for them in selling their products and services at which retail price the outside vendors establish and have the risk and reward of ownership. In this case, the outside vendor bears the burden of collection from the customer and all other direct and indirect expenses of that revenue. We record the net commissions revenue received from the outside vendors net as marketing commissions revenue. We do not act as the principal in the transaction and do not own these customer accounts, but act as agents for the outside vendors. This follows the criteria in EITF 99-19 #4 and the example explained in 2.b).
c) Commissions: Marketing expenses are the commissions we pay to Cognigen's sales agents from selling the products and services of outside vendors.
Commissions: Telecommunications expenses are the commissions we pay to Cognigen's selling agents from selling our own, Cognigen's, branded products and services to which we have taken title.
Telecommunications expenses are the supplier/carrier expenses we pay to suppliers/carriers (i.e. Global Crossing) to purchase or take title to the products and services at predetermined and agreed upon prices that we brand as our own, Cognigen's, and then resell to customers at retail rates that we set.
All of these expenses are direct costs of revenue.
4. You have asked for us to explain what is meant by "pin revenue". Pin revenue is revenue that we receive from selling a long distance service that is accessed by way of entering a "pin code or personal identification number" enabling a telecommunications switch to recognize the caller as having paid for a certain number of long distance minutes.
You have also asked to explain why it is appropriate to recognize calling card and pin revenue at the point of shipment rather than as the phone time is used and why this policy is different from our policy of recording long distance phone service revenue and prepaid long distance phone service revenue as the services are rendered and the minutes are used.
SAB 104 in reference to Topic 13 indicates that revenue should not be recognized until it is realized or realizable and earned. The Staff indicated that revenue generally is realized or realizable and earned when all of the following criteria are met:
1. Persuasive evidence of an arrangement exists. 2. Delivery has occurred or services have been rendered. 3. The seller's price to the buyer is fixed or determinable. 4. Collectibility is reasonably assured.
The criteria identified above does not exist for our long distance phone service revenue (referred to in our statement of operations as telecommunications revenue) until the long distance service is provided or used by a customer. When that long distance service is used by a customer an arrangement exists, delivery has occurred at a seller's price for which a bill is then generated and sent to the customer. The customer has previously been reviewed for credit worthiness after the customer has petitioned and applied for the long distance service through one of our sales agent web sites. There may be months where no long distance phone service is used by a customer and there is no monthly billing or revenue recognized.
With regard to calling card or pin revenue. The calling cards and pins we sell are purchased by us at predetermined prices from outside vendors. We take title to the cards or pins and included them at cost in inventory at any given time until sold. Minutes usage is loaded on the cards or pins by the suppler/carrier with a predetermined number of long distance minutes allowed to be used by the owner of the card or pin, which is us until we sell the cards or pins to a retail customer. We consider the revenue realized or realizable and earned upon point of shipment as the criteria identified above is met and Cognigen has no further obligation to the retail customer at that point. The card or pin has been ordered by a retail customer through one of our sales agent web sites so there is an arrangement. Delivery takes place as the cards are mailed or pin numbers sent by email to the retail customer. The sales price to the retail customer was set before the customer ordered the cards or pins and the selling price is usually why the retail customer buys from us instead of elsewhere. Collectibility is usually good as the cards and pins are purchased by credit card which is debited prior to shipment of cards or the pin numbers are emailed. If there is a customer service issue, the supplier/carrier's customer service number is provided to the retail customer to address any issues. The supplier/carrier is obl
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CORRESP
1
filename1.htm
corr_050205
April 25, 2005
United States Securities and Exchange Commission
Mail Stop 0407
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Response to Comments on Cognigen Networks, Inc.
Form 10-KSB for the fiscal year ended June 30, 2004
Filed September 23, 2004
Form 10-QSB for the quarter ended December 31, 2004
File No. 000-11730
Ladies and Gentlemen:
We have reviewed your comments, in your letter dated March 28, 2005, regarding
our Form 10-KSB and 10-QSB filings referenced above, and offer our following
responses.
Form 10-KSB for the Year Ended June 30, 2004
Consolidated Statements of Operations
1. You have said that it is not appropriate to include a subtotal prior to
presenting the captions "Loss provision for sale of CST" and "Loss
provision for termination of Intandem Funding Agreement." We will implement
in future filings and comply with your request.
Note 1 - Description of Business and Summary of Significant Accounting Policies
Revenue Recognition
Our current business model is to sell primarily telecommunications products and
services through our independent sales agents through the Internet. We
recognized the marketing potential of the Internet and formed what we believe
was one of the first companies to create a marketing operation based exclusively
on the Internet. Our proprietary technology automatically creates a web site for
each new sales agent, at the time the sales agent becomes a member of our
network Through web sites of our sales agents, we sell our own proprietary
telecommunications products and services or we sell, as a master agent, the
products and services of outside vendors The products and services we sell
include domestic and international long distance service, prepaid calling cards
or pins, paging services, wireless communications, and computers, among other
things We sell our own proprietary products and services and, as a master agent,
have contractual agreements with a variety of outside vendors who provide us
with a commission percentage of sales of their products and services.
2. You have asked for supplemental information regarding our revenue
recognition policies. You have asked for a detailed description of our
business specifically related to "proprietary products and services."
a) We earn revenue in two ways. First, we earn commission revenue from a
number of outside vendors whom we represent as a master agent on our
sales agent web sites and sell their products and services to
customers by way of contractual agreements with the outside vendors.
Second, we earn telecommunications revenue through sales of our own
proprietary products and services to customers through our sales agent
web sites.
b) When we receive commissions revenue (net commissions from outside
vendors), it is when we (Cognigen's sales agents) have acted as an
agent or broker and sold a product or service, such as a long distance
service, on behalf of an outside vendor who owns the long distance
account and services the customer monthly. Servicing the customer
means the outside vendor will provide the customer's service (setting
up the customer for long distance service), prepare and collect
monthly billings for which they have set the price for the products
and services, and address any other service issues with the customer
as the outside vendor owns the customer account. The outside vendor is
responsible for any bad debt or risk that may occur if the customer
does not pay his bill and is also responsible for their carrier or
supplier billings.
Example Accounting: Sales of Outside Vendor Products and Services
The following is an example of the revenue and expense flow for one customer for
one month's billing of $100 when we are selling products and services of outside
vendors and we do not own the customers. We do not record revenue received
directly from the customer. We record marketing commissions revenue received
from the outside vendor as they pay us a commission, and we in turn pay a
commission to our sales agents, on the monthly billing of the outside vendor's
customer.
Outside
Vendor Cognigen
Accounting Accounting
Telecommunications revenue (gross from customer) $ 100
Direct carrier expenses 15
Direct commissions expense (paid to Cognigen acting as
master agent) (15)
Marketing commissions revenue (net from outside vendor) $ 15
Marketing commissions expenses (paid to Cognigen's
sales agents) (10)
Other indirect expenses included in SG&A (25) (2)
---------- ----------
Income from operations $ 5 $ 3
========== ==========
c) When we earn telecommunications revenue, it is because our sales
agents have sold a product or service for which we own the customer
account and have set the retail price for the product or service. In
other words, we have purchased the product or service from a supplier
(i.e. long distance service from Global Crossing) and have resold this
long distance service to a customer as a Cognigen branded product or
service, for which Cognigen is bearing the risk of ownership. The
price paid to the supplier/carrier is under a predetermined agreement.
Profit margins vary depending on the retail pricing established by us
and the prices we pay to our supplier/carrier. Under this structure we
now wear the "outside vendor" shoes, versus being the master agent,
and are responsible for provisioning, preparing and collecting the
monthly billings and addressing any other customer service issues that
may arise. In this case, we own the customer account and deal directly
with the customers who are using the products or services for which we
set the retail pricing. We are responsible for the bad debt or risk
that may occur if this customer does not pay his bill and we are also
responsible for the supplier/carrier billings from whom we have
purchased the products and services at predetermined prices (i.e.
Global Crossing).
Example Accounting: Sales of Cognigen's Branded Products and Services
The following is an example of the revenue and expense flow for one customer for
one month's billing of $100 when we are selling Cognigen branded products and
services which is where we own the customer account. We record revenue received
directly from the customer. We do not record marketing commissions revenue
received from an outside vendor as there is no outside vendor. We record
marketing commission expense as we pay commissions to our sales agents on the
monthly billing of our customers.
Cognigen
Accounting
Telecommunications revenue (gross from customer) $ 100
Direct carrier expenses (55)
Marketing commissions expense (paid to Cognigen sales
agents) (10)
Other indirect expenses included in SG&A (33)
----------
Income from operations $ 2
==========
d) As you can see from the examples, if we own the customer account and
record the revenue that is billed directly by us to our customers, the
revenue is "five to seven times" the commission revenue we receive
acting as a master agent for outside vendors. In other words, the $100
received directly from the customer is "five to seven times" the $15
received by Cognigen acting as a master agent for the outside vendor.
3. You have asked us to clarify whether we report revenue gross as a principal
versus net as an agent and how we used the guidance in EITF 99-19 in making
our determinations for this. In addition, you have asked us to explain the
nature and composition of certain operating expense line items from our
statement of operations and how each of these lines items relate to the
sources of our revenue.
a) the criteria identified in EITF 99-19 paragraph 3 are the following:
1. acts as principal in the transaction;
2. takes title to the products;
3. has risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns;
4. acts as an agent or broker (including performing services, in
substance, as an agent or broker) with compensation on a
commission or fee basis.
b) We only record gross revenue received from customers where we are
selling our own branded products and services (taking title to
products) and where we bare the burden of collecting the revenue from
the customer and are responsible for all related direct and indirect
expenses to earn that revenue. We have the risk and reward of owning
the customer account and are the principal in the transaction. This
follows the criteria in EITF 99-19 #1 through #3 described in 3.a) and
the example explained in 2.c). Otherwise, the revenue we record is the
net marketing commissions we receive from the outside vendors in
acting as agent for them in selling their products and services at
which retail price the outside vendors establish and have the risk and
reward of ownership. In this case, the outside vendor bears the burden
of collection from the customer and all other direct and indirect
expenses of that revenue. We record the net commissions revenue
received from the outside vendors net as marketing commissions
revenue. We do not act as the principal in the transaction and do not
own these customer accounts, but act as agents for the outside
vendors. This follows the criteria in EITF 99-19 #4 and the example
explained in 2.b).
c) Commissions: Marketing expenses are the commissions we pay to
Cognigen's sales agents from selling the products and services of
outside vendors.
Commissions: Telecommunications expenses are the commissions we pay to
Cognigen's selling agents from selling our own, Cognigen's, branded
products and services to which we have taken title.
Telecommunications expenses are the supplier/carrier expenses we pay
to suppliers/carriers (i.e. Global Crossing) to purchase or take title
to the products and services at predetermined and agreed upon prices
that we brand as our own, Cognigen's, and then resell to customers at
retail rates that we set.
All of these expenses are direct costs of revenue.
4. You have asked for us to explain what is meant by "pin revenue". Pin
revenue is revenue that we receive from selling a long distance service
that is accessed by way of entering a "pin code or personal identification
number" enabling a telecommunications switch to recognize the caller as
having paid for a certain number of long distance minutes.
You have also asked to explain why it is appropriate to recognize calling
card and pin revenue at the point of shipment rather than as the phone time
is used and why this policy is different from our policy of recording long
distance phone service revenue and prepaid long distance phone service
revenue as the services are rendered and the minutes are used.
SAB 104 in reference to Topic 13 indicates that revenue should not be
recognized until it is realized or realizable and earned. The Staff
indicated that revenue generally is realized or realizable and earned when
all of the following criteria are met:
1. Persuasive evidence of an arrangement exists.
2. Delivery has occurred or services have been rendered.
3. The seller's price to the buyer is fixed or determinable.
4. Collectibility is reasonably assured.
The criteria identified above does not exist for our long distance phone
service revenue (referred to in our statement of operations as
telecommunications revenue) until the long distance service is provided or
used by a customer. When that long distance service is used by a customer
an arrangement exists, delivery has occurred at a seller's price for which
a bill is then generated and sent to the customer. The customer has
previously been reviewed for credit worthiness after the customer has
petitioned and applied for the long distance service through one of our
sales agent web sites. There may be months where no long distance phone
service is used by a customer and there is no monthly billing or revenue
recognized.
With regard to calling card or pin revenue. The calling cards and pins we
sell are purchased by us at predetermined prices from outside vendors. We
take title to the cards or pins and included them at cost in inventory at
any given time until sold. Minutes usage is loaded on the cards or pins by
the suppler/carrier with a predetermined number of long distance minutes
allowed to be used by the owner of the card or pin, which is us until we
sell the cards or pins to a retail customer. We consider the revenue
realized or realizable and earned upon point of shipment as the criteria
identified above is met and Cognigen has no further obligation to the
retail customer at that point. The card or pin has been ordered by a retail
customer through one of our sales agent web sites so there is an
arrangement. Delivery takes place as the cards are mailed or pin numbers
sent by email to the retail customer. The sales price to the retail
customer was set before the customer ordered the cards or pins and the
selling price is usually why the retail customer buys from us instead of
elsewhere. Collectibility is usually good as the cards and pins are
purchased by credit card which is debited prior to shipment of cards or the
pin numbers are emailed. If there is a customer service issue, the
supplier/carrier's customer service number is provided to the retail
customer to address any issues. The supplier/carrier is obl