SEC Company Response from FREESTAR TECHNOLOGY CORP (CIK 0001102301) — Dec 20, 2005
FREESTAR TECHNOLOGY CORP (CIK 0001102301)
Date: Dec. 20, 2005 · CIK: 0001102301 · Accession: 0001185185-05-000476
AI Filing Summary & Sentiment
Referenced dates: July 19, 2005
Letter
December 20, 2005 VIA EDGAR AND FAX Ms. Tamara Tangen, CPA Division of Corporate Finance U.S. Securities & Exchange Commission Washington, D.C. 20549
Re: FreeStar Technology Corporation File No. 0-28749 Form 10-KSB for June 30, 2004 Form 10-KSB/A for June 30, 2004 Form 10-QSB for the quarters ended September 30, 2004, December 31, 2004 and March 31, 2005
Dear Ms. Tagen:
This will acknowledge receipt of your letter of comment dated July 19, 2005 with regard to the above referenced filings. Our responses, which reference your comment numbers follow.
<PAGE>
FORM 10-KSB FOR FISCAL YEAR ENDED JUNE 30, 2004
CERTAIN INDEBTEDNESS, PAGES 38 THROUGH 40
1. COMMENT: With regard to the financing transactions described in paragraph (d) of this section, please summarize how you accounted for this series of transactions and the authoritative accounting literature upon which you based your accounting.
RESPONSE: The following summarizes the Company's accounting for this series of transactions. Note that although similar entries sometimes occurred in different accounting periods, such as receipt of cash from loans and the amortization of discounts, these similar entries are combined here for simplicity of presentation.
a. Record receipt of cash for notes payable:
Debit Cash 410,000 Prepaid financing cost 227,000 Credit notes payable 637,000
b. Record issuance of 1,000,000 shares of stock issued to lenders(1) (1):
Consulting expense 98,000 Stock 1,000 Additional paid-in capital 97,000
c. Amortize financing fees over the life of the notes:
Financing expense 227,000 Prepaid financing cost 227,000
d. Record value of beneficial conversion feature of convertible notes payable (2):
Discount on notes payable 128,082 Additional paid-in capital 128,082
e. Amortize discount on notes payable (3) (4):
Interest expense 128,082 Discount on notes payable 128,082
f. Interest and accumulated penalties due Lender:
Interest expense 18,569 Accrued interest 18,569
Penalties expense 24,300 Accrued penalties 24,300
----------------------------- (1) FAS 123, paragraph 8 and EITF 96-18 (FMV of shares issued at the commitment date was used for valuing the compensation expense)
(2) Per EITF's 98-5 and 0027
(3) Per EITF 00-27, paragraph 19 (4) SEC Accounting Disclosure Rules and Practices Official Text, Appendix A: Form and Content of Financial Statements , I. Balance Sheet Format and Classifications, N (2) Debt Issuance Costs
<PAGE>
g.) Lender foreclosed on collateral (personal shares of Company stock pledged by the Company's President):
Notes payable 637,000 Accrued interest 18,569 Accrued penalties 24,300
Due to President 679,869
h. Accrue interest through March 2004 on the amount due President:
Interest expense 47,590 Accrued interest 47,590
i. Record effect of legal settlement with lender in which lender agreed to return all the foreclosed shares of stock:
Due to President 679,869 Accrued interest 47,590 Gain on legal settlement 727,459
Record return of 1,000,000 shares issued to lenders in legal settlement:
j.) Stock 1,000 Additional paid-in capital 97,000
Gain on legal settlement 98,000
The Company believes its policy of accounting for its debt transactions is reasonable and in accordance with U.S. generally accepted accounting principles.
FORM 10-KSB AMENDMENT NO. 1 FOR FISCAL YEAR ENDED JUNE 30, 2004.
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS, PAGES 5 AND 6
2. COMMENT: We note that your primary operations are located in Finland, your principal offices are located in the Dominican Republic and your auditors are located in New York. We also note that your former auditors were located in California. Please tell us the circumstances that led you to retain these particular audit firms in their respective locations.
<PAGE>
RESPONSE: While Company was in its development stage with limited operations , the Company's previous auditors based in California provided the Company with the necessary audit and review services. As the Company expanded to operate in Europe, the Company's Board of Directors believed the Company needed the services of a registered public accounting firm that had closer geographic proximity to its operating segments and experience in auditing foreign operations of US registrants. Certain planned audit procedures and related fieldwork was completed by personnel of our audit firm at the Company's operating segment in Helsinki under the supervision of firm personnel in its New York, New York office. The accountant's work papers and conclusions where subsequently reviewed by a firm supervisor and partner in the New York, New York office prior to the issuance of the firm's audit report.
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 9
3. COMMENT: It appears that you have classified all of your depreciation and amortization expense within selling, general and administrative expense. Tell us how your presentation complies with SAB Topic 11B and Question 17, FASB Staff Implementation Guidance on applying Statement 86.
RESPONSE: SAB Topic 11B deals with the description of the financial statement line items which include depreciation and amortization. We believe the intent of SAB Topic 11B is to clarify the line items in which depreciation and amortization are contained. The Company's financial statements as filed do not contain adequate disclosure regarding this question, and will be changed to provide additional clarification.
Question 17 of FASB Staff Implementation Guidance on applying Statement 86 states that the amortization of capitalized software costs relates to a software product that is marketed to others, and accordingly should be charged to cost of sales or a similar expense category. The Company has not classified the amortization of its software in cost of sales, and will make this accounting change in order to comply with Statement 86.
4. COMMENT: Separate income statement classifications based solely on the form of consideration is not appropriate (i.e., non-cash compensation). Tell us why you have not classified the non-cash compensation costs to the appropriate line items based on the function of the individual who received the benefit (i.e., cost of revenue, selling, general and administrative, etc.)
RESPONSE: All of the Company's equity base compensation is a selling or administrative cost. The Company agrees with the comment and has presented the costs as selling, general and administrative in its most recent annual report on Form 10KSB for the year ended June 30, 2005
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, PAGE 12
5. COMMENT: We note that during 2004 there were 4.6 million shares of common stock issued "in error." Please tell us the circumstances surrounding this transaction and how this "error" occurred. In addition, tell us whether there are any other instances of shares being issued "in error." Your response should describe how, and when, you accounted for the issuance and cancellation of any such shares, including your recording of a "shares cancellation receivable." Please identify the specific accounting literature upon which your accounting is based.
RESPONSE: The 4,600,000 shares issued in error, or 657,143 shares post reverse-split, consist of two transactions:
Transaction # 1: 514,286 shares (post reverse-split) were issued pursuant to sale of common stock, and the sale was never consummated. The accounting for this transaction was as follows:
March 2004 - issue shares: Debit share cancellation receivable 3,600 Credit common stock (3,600)
September 2005 - write off: Debit expense 3,600 Credit share cancellation receivable 3,600
These shares have not yet been recovered.
Transaction #2: 142,857 shares were issued to a service provider. This was a duplicate issuance which was unnecessary. The accounting for this transaction was as follows:
April 2003 - issue shares: Debit expense 150,000 Credit stock (143) Credit APIC (149,857)
March 2004 - set up receivable: Debit shares cancellation receivable 150,000 Credit expense (150,000)
December 2004 - cancel shares: Debit stock 143 Debit APIC 149,857 Credit shares cancellation receivable (150,000)
6. COMMENT: Tell us how your certifying officers considered the impact of the issuance of common shares "in error" on the adequacy of your disclosure controls and procedures as of the end of the period covered by your periodic report for the related period(s). Similarly address the restatement you disclose in Note 5 in your December 31, 2004 Form 10-QSB.
<PAGE>
RESPONSE: Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that our disclosure controls and procedures need improvement and were not adequately effective as of December 31, 2004 to ensure timely reporting with the Securities and Exchange Commission. Our management is in the process of identifying deficiencies with respect to our disclosure controls and procedures and implementing corrective measures, which includes the establishment of new internal policies related to financial reporting.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 19
7. COMMENT: With regard to your revenue recognition policies we have the following comments:
a. Within the description of your Business you describe nine types of products and services and in MD&A you describe five core payment processing products (pages 8 through 16 and page 27 of the Form 10-KSB filed on October 27, 2004, respectively.) We also note your statement that revenue is "primarily generated" from transaction fees. Please clarify which "transaction fees" you are referring to in this statement and tell us the amounts of revenue for the year ended June 30, 2004 and for the nine months ended March 31, 2005, attributable to each of the product types and services you have described;
b. Identify the individual elements included in each type of transaction and the timing under which you provide the deliverables, incur costs and are paid by your customers, including any up-front fees you may receive. Your response should describe how your policies address all of the general criteria identified in SAB 104 and identify all authoritative literature that you have relied on in developing your revenue recognition polices, including your consideration of the applicability of SOP 97-2;
c. Your arrangements appear to contain multiple elements. Tell us how you allocate revenue to the various elements contained in your arrangements, including the relevant accounting guidance on which your allocations are based; and,
d. Tell us the payment terms you offer and what you believe your normal and customary payment terms are. Explain why your accounts receivable balance at December 31, 2004 is so significant relative to your second quarter sales.
<PAGE>
RESPONSE:
a. In a typical transaction, a consumer uses a card to pay for goods or services from a merchant. The merchant is a client of the company; the consumer is a client of the merchant. The consumer presents his card to the merchant at the point of sale ("POS") terminal ,or enter their card details on the checkout page of the merchants web site. Once the merchants system has gathered the cardholders details an authorization request is sent to the company's processing system at Rahaxi , which is then sent to the merchants acquiring bank .The authorization is then sent back to Rahaxi by the bank .Rahaxi then sends the transaction back to the merchants terminal confirming whether the transaction , the consumers card, and the merchants request is valid . Transactions are batched and stored at Rahaxi are then forwarded onto the bank for settlement. Rahaxi charges a fee for processing the authorization request, a transaction fee.
The nine product types mentioned in this section, along with the revenue derived from each for the twelve months ended June 30, 2004 and the nine months ended March 31, 2005, respectively, are as follows:
12 months ended 9 months ended June 30, 2004 March 31, 2005 ================ ===============
1. POS Transaction Processing 1,333,829 1,203,502 2. Integrate
Show Raw Text
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FREESTAR TECHNOLOGY CORPORATION
60 LOWER BAGGOT STREET
DUBLIN 2 IRELAND
350 1 602 4757
December 20, 2005
VIA EDGAR AND FAX
Ms. Tamara Tangen, CPA
Division of Corporate Finance
U.S. Securities & Exchange Commission
Washington, D.C. 20549
Re: FreeStar Technology Corporation
File No. 0-28749
Form 10-KSB for June 30, 2004
Form 10-KSB/A for June 30, 2004
Form 10-QSB for the quarters ended September 30, 2004,
December 31, 2004 and March 31, 2005
Dear Ms. Tagen:
This will acknowledge receipt of your letter of comment dated July 19,
2005 with regard to the above referenced filings. Our responses, which reference
your comment numbers follow.
<PAGE>
FORM 10-KSB FOR FISCAL YEAR ENDED JUNE 30, 2004
CERTAIN INDEBTEDNESS, PAGES 38 THROUGH 40
1. COMMENT: With regard to the financing transactions described in paragraph
(d) of this section, please summarize how you accounted for this series
of transactions and the authoritative accounting literature upon which
you based your accounting.
RESPONSE: The following summarizes the Company's accounting for this
series of transactions. Note that although similar entries sometimes
occurred in different accounting periods, such as receipt of cash from
loans and the amortization of discounts, these similar entries are
combined here for simplicity of presentation.
a. Record receipt of cash for notes payable:
Debit Cash 410,000
Prepaid financing cost 227,000
Credit notes payable 637,000
b. Record issuance of 1,000,000 shares of stock issued to lenders(1)
(1):
Consulting expense 98,000
Stock 1,000
Additional paid-in capital 97,000
c. Amortize financing fees over the life of the notes:
Financing expense 227,000
Prepaid financing cost 227,000
d. Record value of beneficial conversion feature of convertible notes
payable (2):
Discount on notes payable 128,082
Additional paid-in capital 128,082
e. Amortize discount on notes payable (3) (4):
Interest expense 128,082
Discount on notes payable 128,082
f. Interest and accumulated penalties due Lender:
Interest expense 18,569
Accrued interest 18,569
Penalties expense 24,300
Accrued penalties 24,300
-----------------------------
(1) FAS 123, paragraph 8 and EITF 96-18 (FMV of shares issued at the commitment
date was used for valuing the compensation expense)
(2) Per EITF's 98-5 and 0027
(3) Per EITF 00-27, paragraph 19
(4) SEC Accounting Disclosure Rules and Practices Official Text, Appendix A:
Form and Content of Financial Statements , I. Balance Sheet Format and
Classifications, N (2) Debt Issuance Costs
2
<PAGE>
g.) Lender foreclosed on collateral (personal shares of Company stock
pledged by the Company's President):
Notes payable 637,000
Accrued interest 18,569
Accrued penalties 24,300
Due to President 679,869
h. Accrue interest through March 2004 on the amount due President:
Interest expense 47,590
Accrued interest 47,590
i. Record effect of legal settlement with lender in which lender
agreed to return all the foreclosed shares of stock:
Due to President 679,869
Accrued interest 47,590
Gain on legal settlement 727,459
Record return of 1,000,000 shares issued to lenders in legal
settlement:
j.) Stock 1,000
Additional paid-in capital 97,000
Gain on legal settlement 98,000
The Company believes its policy of accounting for its debt transactions
is reasonable and in accordance with U.S. generally accepted accounting
principles.
FORM 10-KSB AMENDMENT NO. 1 FOR FISCAL YEAR ENDED JUNE 30, 2004.
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS, PAGES 5 AND 6
2. COMMENT: We note that your primary operations are located in Finland,
your principal offices are located in the Dominican Republic and your
auditors are located in New York. We also note that your former auditors
were located in California. Please tell us the circumstances that led you
to retain these particular audit firms in their respective locations.
3
<PAGE>
RESPONSE: While Company was in its development stage with limited
operations , the Company's previous auditors based in California provided
the Company with the necessary audit and review services. As the Company
expanded to operate in Europe, the Company's Board of Directors believed
the Company needed the services of a registered public accounting firm
that had closer geographic proximity to its operating segments and
experience in auditing foreign operations of US registrants. Certain
planned audit procedures and related fieldwork was completed by personnel
of our audit firm at the Company's operating segment in Helsinki under
the supervision of firm personnel in its New York, New York office. The
accountant's work papers and conclusions where subsequently reviewed by a
firm supervisor and partner in the New York, New York office prior to the
issuance of the firm's audit report.
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 9
3. COMMENT: It appears that you have classified all of your depreciation and
amortization expense within selling, general and administrative expense.
Tell us how your presentation complies with SAB Topic 11B and Question
17, FASB Staff Implementation Guidance on applying Statement 86.
RESPONSE: SAB Topic 11B deals with the description of the financial
statement line items which include depreciation and amortization. We
believe the intent of SAB Topic 11B is to clarify the line items in which
depreciation and amortization are contained. The Company's financial
statements as filed do not contain adequate disclosure regarding this
question, and will be changed to provide additional clarification.
Question 17 of FASB Staff Implementation Guidance on applying Statement
86 states that the amortization of capitalized software costs relates to
a software product that is marketed to others, and accordingly should be
charged to cost of sales or a similar expense category. The Company has
not classified the amortization of its software in cost of sales, and
will make this accounting change in order to comply with Statement 86.
4. COMMENT: Separate income statement classifications based solely on the
form of consideration is not appropriate (i.e., non-cash compensation).
Tell us why you have not classified the non-cash compensation costs to
the appropriate line items based on the function of the individual who
received the benefit (i.e., cost of revenue, selling, general and
administrative, etc.)
RESPONSE: All of the Company's equity base compensation is a selling or
administrative cost. The Company agrees with the comment and has
presented the costs as selling, general and administrative in its most
recent annual report on Form 10KSB for the year ended June 30, 2005
4
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, PAGE 12
5. COMMENT: We note that during 2004 there were 4.6 million shares of common
stock issued "in error." Please tell us the circumstances surrounding
this transaction and how this "error" occurred. In addition, tell us
whether there are any other instances of shares being issued "in error."
Your response should describe how, and when, you accounted for the
issuance and cancellation of any such shares, including your recording of
a "shares cancellation receivable." Please identify the specific
accounting literature upon which your accounting is based.
RESPONSE: The 4,600,000 shares issued in error, or 657,143 shares post
reverse-split, consist of two transactions:
Transaction # 1: 514,286 shares (post reverse-split) were issued pursuant
to sale of common stock, and the sale was never consummated. The
accounting for this transaction was as follows:
March 2004 - issue shares:
Debit share cancellation receivable 3,600
Credit common stock (3,600)
September 2005 - write off:
Debit expense 3,600
Credit share cancellation receivable 3,600
These shares have not yet been recovered.
Transaction #2: 142,857 shares were issued to a service provider. This
was a duplicate issuance which was unnecessary. The accounting for this
transaction was as follows:
April 2003 - issue shares:
Debit expense 150,000 Credit stock (143)
Credit APIC (149,857)
March 2004 - set up receivable:
Debit shares cancellation receivable
150,000 Credit expense (150,000)
December 2004 - cancel shares:
Debit stock 143 Debit APIC 149,857 Credit
shares cancellation receivable (150,000)
6. COMMENT: Tell us how your certifying officers considered the impact of
the issuance of common shares "in error" on the adequacy of your
disclosure controls and procedures as of the end of the period covered by
your periodic report for the related period(s). Similarly address the
restatement you disclose in Note 5 in your December 31, 2004 Form 10-QSB.
5
<PAGE>
RESPONSE: Based on this evaluation, the Company's chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures need improvement and were not adequately effective as of
December 31, 2004 to ensure timely reporting with the Securities and
Exchange Commission. Our management is in the process of identifying
deficiencies with respect to our disclosure controls and procedures and
implementing corrective measures, which includes the establishment of new
internal policies related to financial reporting.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 19
7. COMMENT: With regard to your revenue recognition policies we have the
following comments:
a. Within the description of your Business you describe nine types of
products and services and in MD&A you describe five core payment
processing products (pages 8 through 16 and page 27 of the Form
10-KSB filed on October 27, 2004, respectively.) We also note your
statement that revenue is "primarily generated" from transaction
fees. Please clarify which "transaction fees" you are referring to
in this statement and tell us the amounts of revenue for the year
ended June 30, 2004 and for the nine months ended March 31, 2005,
attributable to each of the product types and services you have
described;
b. Identify the individual elements included in each type of
transaction and the timing under which you provide the
deliverables, incur costs and are paid by your customers,
including any up-front fees you may receive. Your response should
describe how your policies address all of the general criteria
identified in SAB 104 and identify all authoritative literature
that you have relied on in developing your revenue recognition
polices, including your consideration of the applicability of SOP
97-2;
c. Your arrangements appear to contain multiple elements. Tell us how
you allocate revenue to the various elements contained in your
arrangements, including the relevant accounting guidance on which
your allocations are based; and,
d. Tell us the payment terms you offer and what you believe your
normal and customary payment terms are. Explain why your accounts
receivable balance at December 31, 2004 is so significant relative
to your second quarter sales.
6
<PAGE>
RESPONSE:
a. In a typical transaction, a consumer uses a card to pay for goods
or services from a merchant. The merchant is a client of the
company; the consumer is a client of the merchant. The consumer
presents his card to the merchant at the point of sale ("POS")
terminal ,or enter their card details on the checkout page of the
merchants web site. Once the merchants system has gathered the
cardholders details an authorization request is sent to the
company's processing system at Rahaxi , which is then sent to the
merchants acquiring bank .The authorization is then sent back to
Rahaxi by the bank .Rahaxi then sends the transaction back to the
merchants terminal confirming whether the transaction , the
consumers card, and the merchants request is valid . Transactions
are batched and stored at Rahaxi are then forwarded onto the bank
for settlement. Rahaxi charges a fee for processing the
authorization request, a transaction fee.
The nine product types mentioned in this section, along with the
revenue derived from each for the twelve months ended June 30,
2004 and the nine months ended March 31, 2005, respectively, are
as follows:
12 months ended 9 months ended
June 30, 2004 March 31, 2005
================ ===============
1. POS Transaction Processing 1,333,829 1,203,502
2. Integrate