SEC Company Response from LION — Aug 31, 2005
LION INC/WA (CIK 0000941179)
Date: Aug. 31, 2005 · CIK: 0000941179 · Accession: 0000930413-05-006310
AI Filing Summary & Sentiment
File numbers found in text: 000-25159
Referenced dates: JULY 8, 2005, July 8, 2005
Letter
August 31, 2005 Filed by EDGAR Mr. Patrick Gilmore Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
RE: LION, INC. FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2004 COMMENT LETTER DATED JULY 8, 2005 FILE NO. 000-25159
Dear Mr. Gilmore:
On behalf of LION, Inc., the following response is submitted to your comment letter dated July 8, 2005 relating to LION's Form 10-KSB for the fiscal year ended December 31, 2004. The numbered responses in this letter correspond to your numbered comments. We have attached as Exhibit A LION's proposed revised MD&A disclosures regarding critical accounting policies.
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS ENTERPRISE SEGMENTS, PAGE 12
1. We believe we operate as one reportable operating segment for our various product lines within our Leads, Loans and Capital Markets groups for both LION and our subsidiary, TRMS. TRMS provides and supports its risk management services to customers utilizing LION's Pipeline Tools technology. Although LION has multiple operating segments, under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, i.e. if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services, 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. As more fully explained below, we believe LION meets these criteria since we provide similar services to similar customers using similar methods of production and similar methods to distribute the services and therefore qualify to aggregate our results of operations in one reportable operating segment.
All operating segments are overseen by one chief operating decision maker. The chief operating decision maker is a group comprised of the Chief Executive Officer, President and Chief Financial Officer of LION.
Mr. Patrick Gilmore August 31, 2005 Page 2
Over the last 18 months, we have made 2 strategic acquisitions with the intent to acquire compatible products that extend our customer base and add technology and intellectual property that would have required years of development. During that time and still on going is our effort to convert all of our products onto the same technology platform that currently delivers the LPX and Pipeline Tools products.
The Staff noted that certain products in our Loans and Capital Markets segments require more time and resources to deploy. The principal reason for this is that these products were designed as an enterprise solution for very large lenders. We have nonetheless incorporated this technology into our Precision Marketing Productivity Suite which when totally complete will include a marketing, pricing and delivery solution for retail, wholesale and correspondent mortgage origination channels via the Internet from our datacenters. This product suite features corporate wholesale and retail websites, online advertising, lead generation, loan productivity tools, a product eligibility and pricing engine, mortgage pipeline hedging and risk management, software development and data communications tools. Our goal is to provide a more affordable and quicker-to-deploy solution for a broader group of participants in the mortgage industry such as mortgage brokers, lenders and other mid-size loan originators and not just the high-end enterprise solution large lenders. Our customers will be able to choose some or all of the various feature sets within the Precision Marketing Productivity Suite.
The Staff also noted that approximately 94% of TRMS operating expenses are direct expenses and that this might further suggest that the Capital Markets segment may have different economic characteristics. This statistic, taken by itself, should not create the inference that this segment should be separately reported. TRMS relies on our Pipeline Tools technology in order to provide its hedging advisory services. Without this technology, TRMS would not be able to operate. The Pipeline Tools technology is owned by and resides with LION, the parent company. The research and development and other support services related to the Pipeline Tools technology are performed in LION not TRMS. Prior to the acquisition by LION, TRMS expended very little marketing effort due to the size of its company. These efforts will increase throughout 2005 and 2006 for TRMS due to the resources of LION. Therefore, when combining the resources of LION and TRMS so that TRMS can perform its functions, the percentage of costs that are direct, research and development or other types of costs would be different than the 94% statistic would suggest. The underlying costs would more closely approximate the types of efforts in LION's other products and services. It should be noted that while we do track revenues by product group, our reporting system currently does not break out and report on expenses by these same product groups.
In conclusion, we believe the Company meets the criteria in paragraph 17 of SFAS 131 to aggregate our results of operations in one reportable operating segment as we provide similar services to customers in the mortgage industry using similar methods of production and similar methods to distribute the services.
CRITICAL ACCOUNTING POLICIES, PAGE 21
2. Rather than merely referencing the Notes to the Financial Statements, we intend to expand our disclosures regarding our critical accounting policies in subsequent filings. We have attached as Exhibit A our proposed revised MD&A disclosures regarding our critical accounting policies.
Mr. Patrick Gilmore August 31, 2005 Page 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE 25
3. Article 2.02 of Regulation S-X requires that the accountant's report be manually signed. At the time of filing of our Form 10-KSB for the year ended December 31, 2004, we were in possession of the manually signed report and consent from Grant Thornton. (A copy of each is supplementally provided for your reference and is attached as Exhibit B). The accountant's conformed signature was inadvertently omitted from the EDGAR filing.
NOTE A - SUMMARY OF ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 20
4. We host retail, wholesale and correspondent lending websites for our customers. Our customers access and use the websites, software applications or databases that reside on our servers on an as needed basis over the Internet. The components for most of these websites are comprised of setup fees for development of the website and monthly hosting fees once the websites are live. In these cases, the customer does not have the contractual right to take possession of the software at any time during the hosting period. Per EITF 00-3, these customer contracts are outside the scope of SOP 97-2 and are considered service contracts which fall under SAB 104 which requires that revenue should be recognized as services are rendered.
Setup fee recognition occurs in two different ways depending on the type of website the customer uses. First, our retail website products have setup fees that are recognized as the sites are developed. These setup fees are billed separately from the monthly hosting. In addition, the design of the website becomes the intellectual property of the customer upon completion. The customer could, if they wanted to, host the site with another vendor. Second, other websites that we develop for our customers cannot be hosted by other vendors. If they were, certain functionality and services that are provided with these websites would not work. In these cases, the setup fees and monthly hosting fees are treated as an integrated package. The setup fees are recognized over the estimated life of the underlying customer contract.
Costs associated with the setup fees discussed above are comprised of time and materials, approximate a 4-week development time period, and are recognized as incurred.
See our response to question 5 below for customers that have different or additional components or arrangements.
5. We have product groups that include LockPoint Xtra(R) (LPX), Pipeline Tools, LION Pro, Retail Websites (discussed above in our response to question 4), Mortgage 101, the Precision Marketing Productivity Suite, which is a bundling of various products and services we provide, and risk management services through our subsidiary, TRMS.
Mr. Patrick Gilmore August 31, 2005 Page 4
LPX AND PIPELINE TOOLS.
For the standard version of LPX and Pipeline Tools, revenue recognition policies are similar. They both could have a setup fee prior to the customer's service going live and a monthly fee based on closed or locked loan volumes. The monthly fee is either a minimum monthly amount or higher if certain loan volumes are achieved. In these cases, the customer does not have the contractual right to take possession of the software at any time during the hosting period. Per EITF 00-3, these customer contracts are outside the scope of SOP 97-2 and are considered service contracts which fall under SAB 104 which requires that revenue should be recognized as services are rendered. These products cannot be hosted anywhere else other than our servers. The setup fees and monthly hosting fees in these cases are treated as an integrated package. The setup fees are recognized over the estimated life of the underlying customer contract.
At times, we may provide project management or development services for our LPX or Pipeline Tools customers that are not associated with the LPX or Pipeline Tools components provided to the customers. In these cases, we are playing an independent contractor role. These are service contracts, and revenues are recognized as the services are rendered.
One LPX customer has 2 licensing agreements for the LPX software which resides on their servers. See our response to question 8 below regarding deferred revenue associated with these agreements. The customer has taken possession of the software. One licensing agreement expired on March 31, 2004 and the other will expire on September 14, 2005. Per EITF 00-3, SOP 97-2 would apply. There is only a licensing component associated with each of these agreements. The associated revenues are recognized ratably on a monthly basis over the licensing period. Any deliverables associated with the software licensing components were satisfied by the predecessor company prior to the acquisition of the Ignition Mortgage Technology Services assets. Therefore, we believe recognition of revenues on a monthly basis during the licensing period is appropriate.
Pipeline Tools has one customer contract that began in early 2004 that has multiple components or elements. See discussion below in our response to question 6 regarding vendor specific objective evidence (VSOE). The components or deliverables in this contract include a licensing fee related to a non-exclusive license that includes taking possession of the software that resides on their servers (covered by SOP 97-2 since customer has taken possession), on-going maintenance (post-contract customer services), and development services not tied to the licensing agreement. The licensing fee is recognized as revenue upon delivery which is tied with user acceptance and expiration of the right of return. The on-going maintenance ("PCS"), which begins after delivery and acceptance of the licensing component, is recognized ratably over the contractual maintenance period. The development services supported by an independent contractor agreement relate to add-on features to be used internally and owned by the customer. The software licensed to the customer does not need these add-on features in order to function properly. All fees related to this component are non-refundable and the independent contractor agreement can be terminated at any time. Revenue is recognized over the development period as the services are performed.
LION PRO.
Most products in the LION Pro group include services that are accessed by our customers on our business portal, www.lioninc.com, via the Internet and pay monthly fees for these services. The services reside on our servers, and the customers do not take possession of the software. Per EITF 00-3, these customer contracts are outside the scope of SOP 97-2 and are considered service
Mr. Patrick Gilmore August 31, 2005 Page 5
contracts which fall under SAB 104 which requires that revenue should be recognized as services are rendered. As such, revenues are recognized monthly as the services are provided.
Included in the LION Pro group are LION Pro Corporate and various lender websites both of which have access via the Internet to the LION Pro functionality and databases. These websites cannot be hosted by other vendors otherwise the functionality and services provided would not work. Therefore, setup fee and monthly hosting fee components are treated as an integrated package. In addition, the customers cannot take possession of the software. Per EITF 00-3, these customer contracts are outside the scope of SOP 97-2 and are considered service contracts which fall under SAB
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TOLLEFSEN BUSINESS LAW P.C.
EVERETT MUTUAL TOWER
2707 COLBY AVENUE, SUITE 1116
EVERETT, WASHINGTON 98201
TELEPHONE (425) 353-8883
FAX (425) 353-9415
August 31, 2005
Filed by EDGAR
Mr. Patrick Gilmore
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: LION, INC.
FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2004
COMMENT LETTER DATED JULY 8, 2005
FILE NO. 000-25159
Dear Mr. Gilmore:
On behalf of LION, Inc., the following response is submitted to
your comment letter dated July 8, 2005 relating to LION's Form 10-KSB
for the fiscal year ended December 31, 2004. The numbered responses in
this letter correspond to your numbered comments. We have attached as
Exhibit A LION's proposed revised MD&A disclosures regarding critical
accounting policies.
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS ENTERPRISE SEGMENTS, PAGE 12
1. We believe we operate as one reportable operating segment for
our various product lines within our Leads, Loans and Capital Markets
groups for both LION and our subsidiary, TRMS. TRMS provides and
supports its risk management services to customers utilizing LION's
Pipeline Tools technology. Although LION has multiple operating
segments, under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial reporting
purposes if aggregation is consistent with the objective and basic
principles of SFAS 131, i.e. if the segments have similar economic
characteristics, and if the segments are similar in each of the
following areas: 1) the nature of products and services, 2) the nature
of the production processes; 3) the type or class of customer for
their products and services; and 4) the methods used to distribute
their products or provide their services. As more fully explained
below, we believe LION meets these criteria since we provide similar
services to similar customers using similar methods of production and
similar methods to distribute the services and therefore qualify to
aggregate our results of operations in one reportable operating
segment.
All operating segments are overseen by one chief operating
decision maker. The chief operating decision maker is a group
comprised of the Chief Executive Officer, President and Chief
Financial Officer of LION.
Mr. Patrick Gilmore
August 31, 2005
Page 2
Over the last 18 months, we have made 2 strategic acquisitions
with the intent to acquire compatible products that extend our
customer base and add technology and intellectual property that would
have required years of development. During that time and still on
going is our effort to convert all of our products onto the same
technology platform that currently delivers the LPX and Pipeline Tools
products.
The Staff noted that certain products in our Loans and Capital
Markets segments require more time and resources to deploy. The
principal reason for this is that these products were designed as an
enterprise solution for very large lenders. We have nonetheless
incorporated this technology into our Precision Marketing Productivity
Suite which when totally complete will include a marketing, pricing
and delivery solution for retail, wholesale and correspondent mortgage
origination channels via the Internet from our datacenters. This
product suite features corporate wholesale and retail websites, online
advertising, lead generation, loan productivity tools, a product
eligibility and pricing engine, mortgage pipeline hedging and risk
management, software development and data communications tools. Our
goal is to provide a more affordable and quicker-to-deploy solution
for a broader group of participants in the mortgage industry such as
mortgage brokers, lenders and other mid-size loan originators and not
just the high-end enterprise solution large lenders. Our customers
will be able to choose some or all of the various feature sets within
the Precision Marketing Productivity Suite.
The Staff also noted that approximately 94% of TRMS operating
expenses are direct expenses and that this might further suggest that
the Capital Markets segment may have different economic
characteristics. This statistic, taken by itself, should not create
the inference that this segment should be separately reported. TRMS
relies on our Pipeline Tools technology in order to provide its
hedging advisory services. Without this technology, TRMS would not be
able to operate. The Pipeline Tools technology is owned by and resides
with LION, the parent company. The research and development and other
support services related to the Pipeline Tools technology are
performed in LION not TRMS. Prior to the acquisition by LION, TRMS
expended very little marketing effort due to the size of its company.
These efforts will increase throughout 2005 and 2006 for TRMS due to
the resources of LION. Therefore, when combining the resources of LION
and TRMS so that TRMS can perform its functions, the percentage of
costs that are direct, research and development or other types of
costs would be different than the 94% statistic would suggest. The
underlying costs would more closely approximate the types of efforts
in LION's other products and services. It should be noted that while
we do track revenues by product group, our reporting system currently
does not break out and report on expenses by these same product
groups.
In conclusion, we believe the Company meets the criteria in
paragraph 17 of SFAS 131 to aggregate our results of operations in one
reportable operating segment as we provide similar services to
customers in the mortgage industry using similar methods of production
and similar methods to distribute the services.
CRITICAL ACCOUNTING POLICIES, PAGE 21
2. Rather than merely referencing the Notes to the Financial
Statements, we intend to expand our disclosures regarding our critical
accounting policies in subsequent filings. We have attached as Exhibit
A our proposed revised MD&A disclosures regarding our critical
accounting policies.
Mr. Patrick Gilmore
August 31, 2005
Page 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE 25
3. Article 2.02 of Regulation S-X requires that the accountant's
report be manually signed. At the time of filing of our Form 10-KSB
for the year ended December 31, 2004, we were in possession of the
manually signed report and consent from Grant Thornton. (A copy of
each is supplementally provided for your reference and is attached as
Exhibit B). The accountant's conformed signature was inadvertently
omitted from the EDGAR filing.
NOTE A - SUMMARY OF ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 20
4. We host retail, wholesale and correspondent lending websites
for our customers. Our customers access and use the websites, software
applications or databases that reside on our servers on an as needed
basis over the Internet. The components for most of these websites are
comprised of setup fees for development of the website and monthly
hosting fees once the websites are live. In these cases, the customer
does not have the contractual right to take possession of the software
at any time during the hosting period. Per EITF 00-3, these customer
contracts are outside the scope of SOP 97-2 and are considered service
contracts which fall under SAB 104 which requires that revenue should
be recognized as services are rendered.
Setup fee recognition occurs in two different ways depending on
the type of website the customer uses. First, our retail website
products have setup fees that are recognized as the sites are
developed. These setup fees are billed separately from the monthly
hosting. In addition, the design of the website becomes the
intellectual property of the customer upon completion. The customer
could, if they wanted to, host the site with another vendor. Second,
other websites that we develop for our customers cannot be hosted by
other vendors. If they were, certain functionality and services that
are provided with these websites would not work. In these cases, the
setup fees and monthly hosting fees are treated as an integrated
package. The setup fees are recognized over the estimated life of the
underlying customer contract.
Costs associated with the setup fees discussed above are
comprised of time and materials, approximate a 4-week development time
period, and are recognized as incurred.
See our response to question 5 below for customers that have
different or additional components or arrangements.
5. We have product groups that include LockPoint Xtra(R) (LPX),
Pipeline Tools, LION Pro, Retail Websites (discussed above in our
response to question 4), Mortgage 101, the Precision Marketing
Productivity Suite, which is a bundling of various products and
services we provide, and risk management services through our
subsidiary, TRMS.
Mr. Patrick Gilmore
August 31, 2005
Page 4
LPX AND PIPELINE TOOLS.
For the standard version of LPX and Pipeline Tools, revenue
recognition policies are similar. They both could have a setup fee
prior to the customer's service going live and a monthly fee based on
closed or locked loan volumes. The monthly fee is either a minimum
monthly amount or higher if certain loan volumes are achieved. In
these cases, the customer does not have the contractual right to take
possession of the software at any time during the hosting period. Per
EITF 00-3, these customer contracts are outside the scope of SOP 97-2
and are considered service contracts which fall under SAB 104 which
requires that revenue should be recognized as services are rendered.
These products cannot be hosted anywhere else other than our servers.
The setup fees and monthly hosting fees in these cases are treated as
an integrated package. The setup fees are recognized over the
estimated life of the underlying customer contract.
At times, we may provide project management or development
services for our LPX or Pipeline Tools customers that are not
associated with the LPX or Pipeline Tools components provided to the
customers. In these cases, we are playing an independent contractor
role. These are service contracts, and revenues are recognized as the
services are rendered.
One LPX customer has 2 licensing agreements for the LPX software
which resides on their servers. See our response to question 8 below
regarding deferred revenue associated with these agreements. The
customer has taken possession of the software. One licensing agreement
expired on March 31, 2004 and the other will expire on September 14,
2005. Per EITF 00-3, SOP 97-2 would apply. There is only a licensing
component associated with each of these agreements. The associated
revenues are recognized ratably on a monthly basis over the licensing
period. Any deliverables associated with the software licensing
components were satisfied by the predecessor company prior to the
acquisition of the Ignition Mortgage Technology Services assets.
Therefore, we believe recognition of revenues on a monthly basis
during the licensing period is appropriate.
Pipeline Tools has one customer contract that began in early 2004
that has multiple components or elements. See discussion below in our
response to question 6 regarding vendor specific objective evidence
(VSOE). The components or deliverables in this contract include a
licensing fee related to a non-exclusive license that includes taking
possession of the software that resides on their servers (covered by
SOP 97-2 since customer has taken possession), on-going maintenance
(post-contract customer services), and development services not tied
to the licensing agreement. The licensing fee is recognized as revenue
upon delivery which is tied with user acceptance and expiration of the
right of return. The on-going maintenance ("PCS"), which begins after
delivery and acceptance of the licensing component, is recognized
ratably over the contractual maintenance period. The development
services supported by an independent contractor agreement relate to
add-on features to be used internally and owned by the customer. The
software licensed to the customer does not need these add-on features
in order to function properly. All fees related to this component are
non-refundable and the independent contractor agreement can be
terminated at any time. Revenue is recognized over the development
period as the services are performed.
LION PRO.
Most products in the LION Pro group include services that are
accessed by our customers on our business portal, www.lioninc.com, via
the Internet and pay monthly fees for these services. The services
reside on our servers, and the customers do not take possession of the
software. Per EITF 00-3, these customer contracts are outside the
scope of SOP 97-2 and are considered service
Mr. Patrick Gilmore
August 31, 2005
Page 5
contracts which fall under SAB 104 which requires that revenue should
be recognized as services are rendered. As such, revenues are
recognized monthly as the services are provided.
Included in the LION Pro group are LION Pro Corporate and various
lender websites both of which have access via the Internet to the LION
Pro functionality and databases. These websites cannot be hosted by
other vendors otherwise the functionality and services provided would
not work. Therefore, setup fee and monthly hosting fee components are
treated as an integrated package. In addition, the customers cannot
take possession of the software. Per EITF 00-3, these customer
contracts are outside the scope of SOP 97-2 and are considered service
contracts which fall under SAB