SEC Comment Letter for PACIFICNET INC (CIK 0000815017) — Dec 19, 2005
PACIFICNET INC (CIK 0000815017)
Date: Dec. 19, 2005 · CIK: 0000815017 · Accession: 0000000000-05-062870
AI Filing Summary & Sentiment
File numbers found in text: 000-24985
Referenced dates: October 7, 2005, September 9, 2005
Letter
December 13, 2005 Mr. ShaoJian Wang Chief Financial Officer PacificNet Inc. 860 Blue Gentian Road Suite 360 Eagan, MN 55121 Form 10-QSB for Fiscal Qu arter Ended September 30, 2005 File No. 000-24985
Re: PacificNet Inc. Form 10-KSB for Fiscal Year Ended December 31, 2004 Filed April 19, 2005
Dear Mr. Wang:
We have reviewed your supplemental re sponse letter dated October 7, 2005 as well as your filings and have the following co mments. As noted in our comment letter dated September 9, 2005 we have limited our review to your financial statements and related disclosures and do not intend to e xpand our review to ot her portions of your documents.
Form 10-KSB for Fiscal Y ear Ended December 31, 2004
Item 1. Description of Business, page 1
Consolidation of Variable Interest Entities, page 5
1. Refer to your response to comment 1 and expl ain to us in more detail the nature of Dianxun-DE and Sunroom-DE and your rela tionship with them. Please tell us whether you consider these ent ities to be variable interest entities as defined by FIN 46 (R), and if so, tell us how you consid ered FIN 46 (R) in accounting for them. Otherwise, tell us why you do not believe thes e entities are variable interest entities and explain to us in detail how you do account for them under US GAAP. In addition, please clarify your statements in your response letter where you indicate
Mr. ShaoJian Wang PacificNet Inc. December 13, 2005 Page 2 both that you are en titled to share in 51% of the net income of the DE’s and that you are entitled to receive service fees equal to substantially all of the net income of the DE’s.
Report of Independent Registered Public Accounting Firm, page 28
2. Please be advised that we are still evaluating your response to comment 3.
Note 13 – Consolidated Statements of Cash Flows, page 32
3. We note your response to comment 7; however, it is unclear to us why the increase in the minority interest balance resulting from new acquisitions is included as an adjustment to net income to arrive at cash flows from operating activ ities. It is our belief that this increase in minority interest does not affect either your cash balance or net income and therefore should not be give n any treatment on the statements of cash flows. Please revise your cash flow stat ements within your 10-KSB for the year ended December 31, 2004 and 10-QSB’s for the quarters ending March 31, 2005 and June 30, 2005 to appropriately remove the minor ity interest adjustment to net income resulting from new acquisitions during the period. In addition, tell us in your response letter what other cash flow statemen t line item(s) you will adjust so that cash flow statements balance. Otherwise, please advise.
Nature of Operations and Summary of Significant Accounting Policies, page 33
Revenue Recognition, page 33
4. Please refer to your response to comment 8 and provide us with the following additional clarification of your revenue recognition policies: • In your response to comment 8.1, yo u discuss installation services, modification and customization work, and product sales. Please explain to us in detail the nature of ea ch of these components and how they relate to each other in the sales arrangement, and clarify for us your revenue recognition policy for each. If you recognize revenue separately for each, please explain to us your basis for doing so. Explain to us in detail your consideration of SOP 97-2 in accounting for these arrangements. • Refer to your response to comment 8.4 and explain to us in greater detail the nature of Linkhead’s software sales and system integration projects. Tell us whether these components are provided as part of the same arrangement, and if so, whether you recognize the revenue separately for each component. Explain to us in detail your US GAAP basis for your revenue recognition policy. In addition, clarify for us your statement in your response to comment 8.4, “delivery has occurred since custom er is satisfied after the test”.
Mr. ShaoJian Wang PacificNet Inc. December 13, 2005 Page 3 • Refer to your response to comment 8.5 a nd explain to us in more detail the nature of all of the products and se rvices provided by PacSo, and whether these products and services are sold as part of the same sale arrangements. Tell us which specific GAAP guidance you follow for each of your sales arrangements (i.e. SOP 97-2 or EITF 00- 21) and explain to us in detail how your accounting complies with that guidance. • We note your response to comment 8.6; how ever it is not clear to us why you believe it is appropriate to recognize reve nue on a net basis rather than a gross basis. For each of your prepaid pr oducts, tell us who your suppliers and customers are and explain to us in detail the arrangements that you have with those suppliers and customers. In add ition, tell us the amount of revenue that you recognized on a net basis for each of these prepaid products. To the extent possible, reconcile the total amount of revenue recognized on a net basis from your prepaid pr oducts to the total revenue recognized from your Communications Distribu tion Business segment.
Foreign Currency Translation, page 34
5. We note your response to comment 10; however , it is unclear to us why you consider the functional currency of your subsidiaries based in mainland China to be the Hong Dollar (HKD) rather than the Renminbi (RMB). In this regard, we note your statement, “each subsidiary’s revenues a nd associated operating costs are largely local denominated.” We also note that while the exchange rates between the US dollar, the HKD and the RMB remained c onsistent during 2003 and 2004, there is no guarantee that these exchange rates will re main consistent in the future. Please confirm for us that you will use the RM B as the functional currency for your mainland China based subsidiaries in future periods. Otherwise, explain to us in greater detail while you still believe it is appropriate to use the HKD as the functional currency for your mainland China based subsid iaries, including your consideration of the factors listed in Appendix A of SFAS 52 in making this determination. In addition, please tell us what the foreign cu rrency translation adjustment would have been in the 2 nd quarter 2005 had you used the RMB as your functional currency for your mainland China based subsidiaries.
2. Business Acquisitions, page 39
6. We note your response to comment 13.3 in which you state, “The S&P agreements stipulate warrants or bonus shares for achieving profit exceeding the guaranteed profit”. However, on pages 41-42 of your filing, you indicate that you issued the warrants to the acquired company (i.e. Yueshan and Smartime) on the respective acquisition date. Given that you actually issued the warrants on the acquisition date, please explain to us why you di d not include the fair value of the warrants as part of the purchase price. Explain to us in more detail the nature of these warrants,
Mr. ShaoJian Wang PacificNet Inc. December 13, 2005 Page 4 including whether the achievement of the stip ulated profit levels affects the terms of the warrants.
Form 10-QSB for the quar ter ended June 30, 2005
Consolidated Balance Sheets, page 2
7. We note your response to comment 12; howev er, we disagree with your assessment that the increase in loans receivable shoul d be included as part of cash flows from operating activities. Please refer to para graph 21 of SFAS 95 which states, “Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income.” Please revise your statement of cash flows to present these loans as a cash outflow from investing activities, or explain to us in more detail why you still believe it is appropriate to classify them as part of operati ng activities.
Consolidated Statements of Cash Flows, page 4
8. We refer to your response to comment 19 where you state, “The amounts presented in the consolidated statements of cash flow refl ect that shares were issued to sellers to finance the acquisitions.” We do not unders tand how the issuance of shares affects your cash balance. Please revise or advise us in detail.
3. Business Acquisitions, page 7
9. In order to help us better understand your acquisition of Guangzhou 3G Information Technology Co. Ltd. (Guangzhou3G-WOFE), please answer the following additional questions for us: • Explain to us what your relationship with 3G-BVI, Asiafame International Limited, Stargain International Lim ited and Trilogic Investments Limited prior to the purchase of the Guangzhou3G-WOFE shares. In addition, tell us who currently holds the other 49% e quity interest in Guangzhou3G-WOFE. • Given that Guangzhou3G-WOFE was not fo rmed prior to the acquisition, as you indicate in your response to comment 20.6, tell us why you paid $5,365,000 for this entity. In your response letter, provide us with the condensed balance sheet of Guangzh ou3G-WOFE at the acquisition date, which you also agreed to include in your amended filing. • Further, given that Guangzhou3G-WOFE was not formed prior to the acquisition, explain to us why the pre ss release included with your 8-K filed on April 5, 2005 states that Guangzhou3G is one of the largest value added telecom and information services providers in China.
Mr. ShaoJian Wang PacificNet Inc. December 13, 2005 Page 5 • Explain to us what your relationshi p was with Sunroom-DE prior to the acquisition and what Guangzhou3G-WOFE’ s relationship is with Sunroom- DE currently. • Explain to us how you accounted for this transaction and tell us what specific accounting guidance you followed.
Form 10-QSB for the quarte r ended September 30, 2005
10. To the extent applicable, please revise your 10-QSB for the quarter ended September 30, 2005 to comply with the comments above.
Please amend your filings and respond to these comments within 10 business days or tell us when you will provide us with a response. You may contact Adam Washecka, Staff Accountant, at (202) 551-3375 or Ivette Leon, Assistant Chief Accountant, at (202) 551-3351 if you have questions regarding comm ents on the financial statements and related matters. Please contact me at (202) 551-3810 if you have any other questions.
S i n c e r e l y ,
L a r r y M . S p i r g e l A s s i s t a n t D i r e c t o r
Show Raw Text
Mail Stop 3561
December 13, 2005
Mr. ShaoJian Wang
Chief Financial Officer
PacificNet Inc.
860 Blue Gentian Road
Suite 360
Eagan, MN 55121
Re: PacificNet Inc.
Form 10-KSB for Fiscal Year Ended December 31, 2004
Filed April 19, 2005
Form 10-QSB for Fiscal Qu arter Ended September 30, 2005
File No. 000-24985
Dear Mr. Wang:
We have reviewed your supplemental re sponse letter dated October 7, 2005 as
well as your filings and have the following co mments. As noted in our comment letter
dated September 9, 2005 we have limited our review to your financial statements and
related disclosures and do not intend to e xpand our review to ot her portions of your
documents.
Form 10-KSB for Fiscal Y ear Ended December 31, 2004
Item 1. Description of Business, page 1
Consolidation of Variable Interest Entities, page 5
1. Refer to your response to comment 1 and expl ain to us in more detail the nature of
Dianxun-DE and Sunroom-DE and your rela tionship with them. Please tell us
whether you consider these ent ities to be variable interest entities as defined by FIN
46 (R), and if so, tell us how you consid ered FIN 46 (R) in accounting for them.
Otherwise, tell us why you do not believe thes e entities are variable interest entities
and explain to us in detail how you do account for them under US GAAP. In
addition, please clarify your statements in your response letter where you indicate
Mr. ShaoJian Wang
PacificNet Inc.
December 13, 2005 Page 2
both that you are en titled to share in 51% of the net income of the DE’s and that you
are entitled to receive service fees equal to substantially all of the net income of the
DE’s.
Report of Independent Registered Public Accounting Firm, page 28
2. Please be advised that we are still evaluating your response to comment 3.
Note 13 – Consolidated Statements of Cash Flows, page 32
3. We note your response to comment 7; however, it is unclear to us why the increase in
the minority interest balance resulting from new acquisitions is included as an adjustment to net income to arrive at cash flows from operating activ ities. It is our
belief that this increase in minority interest does not affect either your cash balance or
net income and therefore should not be give n any treatment on the statements of cash
flows. Please revise your cash flow stat ements within your 10-KSB for the year
ended December 31, 2004 and 10-QSB’s for the quarters ending March 31, 2005 and June 30, 2005 to appropriately remove the minor ity interest adjustment to net income
resulting from new acquisitions during the period. In addition, tell us in your response letter what other cash flow statemen t line item(s) you will adjust so that cash
flow statements balance. Otherwise, please advise.
Nature of Operations and Summary of Significant Accounting Policies, page 33
Revenue Recognition, page 33
4. Please refer to your response to comment 8 and provide us with the following
additional clarification of your revenue recognition policies:
• In your response to comment 8.1, yo u discuss installation services,
modification and customization work, and product sales. Please explain to us
in detail the nature of ea ch of these components and how they relate to each
other in the sales arrangement, and clarify for us your revenue recognition
policy for each. If you recognize revenue separately for each, please explain to us your basis for doing so. Explain to us in detail your consideration of SOP 97-2 in accounting for these arrangements.
• Refer to your response to comment 8.4 and explain to us in greater detail the
nature of Linkhead’s software sales and system integration projects. Tell us
whether these components are provided as part of the same arrangement, and if so, whether you recognize the revenue separately for each component. Explain to us in detail your US GAAP basis for your revenue recognition policy. In addition, clarify for us your statement in your response to comment
8.4, “delivery has occurred since custom er is satisfied after the test”.
Mr. ShaoJian Wang
PacificNet Inc.
December 13, 2005 Page 3
• Refer to your response to comment 8.5 a nd explain to us in more detail the
nature of all of the products and se rvices provided by PacSo, and whether
these products and services are sold as part of the same sale arrangements.
Tell us which specific GAAP guidance you follow for each of your sales arrangements (i.e. SOP 97-2 or EITF 00- 21) and explain to us in detail how
your accounting complies with that guidance.
• We note your response to comment 8.6; how ever it is not clear to us why you
believe it is appropriate to recognize reve nue on a net basis rather than a gross
basis. For each of your prepaid pr oducts, tell us who your suppliers and
customers are and explain to us in detail the arrangements that you have with those suppliers and customers. In add ition, tell us the amount of revenue that
you recognized on a net basis for each of these prepaid products. To the
extent possible, reconcile the total amount of revenue recognized on a net
basis from your prepaid pr oducts to the total revenue recognized from your
Communications Distribu tion Business segment.
Foreign Currency Translation, page 34
5. We note your response to comment 10; however , it is unclear to us why you consider
the functional currency of your subsidiaries based in mainland China to be the Hong Dollar (HKD) rather than the Renminbi (RMB). In this regard, we note your
statement, “each subsidiary’s revenues a nd associated operating costs are largely
local denominated.” We also note that while the exchange rates between the US
dollar, the HKD and the RMB remained c onsistent during 2003 and 2004, there is no
guarantee that these exchange rates will re main consistent in the future. Please
confirm for us that you will use the RM B as the functional currency for your
mainland China based subsidiaries in future periods. Otherwise, explain to us in greater detail while you still believe it is appropriate to use the HKD as the functional
currency for your mainland China based subsid iaries, including your consideration of
the factors listed in Appendix A of SFAS 52 in making this determination. In
addition, please tell us what the foreign cu rrency translation adjustment would have
been in the 2
nd quarter 2005 had you used the RMB as your functional currency for
your mainland China based subsidiaries.
2. Business Acquisitions, page 39
6. We note your response to comment 13.3 in which you state, “The S&P agreements stipulate warrants or bonus shares for achieving profit exceeding the guaranteed
profit”. However, on pages 41-42 of your filing, you indicate that you issued the
warrants to the acquired company (i.e. Yueshan and Smartime) on the respective
acquisition date. Given that you actually issued the warrants on the acquisition date,
please explain to us why you di d not include the fair value of the warrants as part of
the purchase price. Explain to us in more detail the nature of these warrants,
Mr. ShaoJian Wang
PacificNet Inc.
December 13, 2005 Page 4
including whether the achievement of the stip ulated profit levels affects the terms of
the warrants.
Form 10-QSB for the quar ter ended June 30, 2005
Consolidated Balance Sheets, page 2
7. We note your response to comment 12; howev er, we disagree with your assessment
that the increase in loans receivable shoul d be included as part of cash flows from
operating activities. Please refer to para graph 21 of SFAS 95 which states, “Cash
flows from operating activities are generally the cash effects of transactions and other
events that enter into the determination of net income.” Please revise your statement
of cash flows to present these loans as a cash outflow from investing activities, or
explain to us in more detail why you still believe it is appropriate to classify them as
part of operati ng activities.
Consolidated Statements of Cash Flows, page 4
8. We refer to your response to comment 19 where you state, “The amounts presented in
the consolidated statements of cash flow refl ect that shares were issued to sellers to
finance the acquisitions.” We do not unders tand how the issuance of shares affects
your cash balance. Please revise or advise us in detail.
3. Business Acquisitions, page 7
9. In order to help us better understand your acquisition of Guangzhou 3G Information
Technology Co. Ltd. (Guangzhou3G-WOFE), please answer the following additional questions for us:
• Explain to us what your relationship with 3G-BVI, Asiafame International
Limited, Stargain International Lim ited and Trilogic Investments Limited
prior to the purchase of the Guangzhou3G-WOFE shares. In addition, tell us who currently holds the other 49% e quity interest in Guangzhou3G-WOFE.
• Given that Guangzhou3G-WOFE was not fo rmed prior to the acquisition, as
you indicate in your response to comment 20.6, tell us why you paid
$5,365,000 for this entity. In your response letter, provide us with the condensed balance sheet of Guangzh ou3G-WOFE at the acquisition date,
which you also agreed to include in your amended filing.
• Further, given that Guangzhou3G-WOFE was not formed prior to the
acquisition, explain to us why the pre ss release included with your 8-K filed
on April 5, 2005 states that Guangzhou3G is one of the largest value added
telecom and information services providers in China.
Mr. ShaoJian Wang
PacificNet Inc.
December 13, 2005 Page 5
• Explain to us what your relationshi p was with Sunroom-DE prior to the
acquisition and what Guangzhou3G-WOFE’ s relationship is with Sunroom-
DE currently.
• Explain to us how you accounted for this transaction and tell us what specific accounting guidance you followed.
Form 10-QSB for the quarte r ended September 30, 2005
10. To the extent applicable, please revise your 10-QSB for the quarter ended September
30, 2005 to comply with the comments above.
Please amend your filings and respond to these comments within 10 business days
or tell us when you will provide us with a response. You may contact Adam Washecka,
Staff Accountant, at (202) 551-3375 or Ivette Leon, Assistant Chief Accountant, at (202)
551-3351 if you have questions regarding comm ents on the financial statements and
related matters. Please contact me at (202) 551-3810 if you have any other questions.
S i n c e r e l y ,
L a r r y M . S p i r g e l
A s s i s t a n t D i r e c t o r