October 27, 2010
Lyn Shenk
Branch Chief
Securities and Exchange Commission
Washington, DC
Dear Mr. Shenk,
RE:
Play LA Inc.
Form 20-F for Fiscal Year ended December 31, 2009
Filed April 20, 2010
File No. 00-52311
In response to your comment letter dated October 13th, 2010 regarding our treatment of goodwill impairment, and further to our response letter dated September 15th, 2010, we offer the following guidance.
1.
Goodwill Impairment Analysis as at December 31, 2009
Please find our Goodwill Impairment Analysis for financial year-end 2009 attached as Schedule 1. This analysis was prepared in March, 2010, and was based on our audited financial statements for the year ending December 31, 2009, which were filed as part of our Form 20-F on April 20th, 2010, and included certain developments in business which occurred between 1/1/2010 to the date of preparation of impairment analysis in March, 2010.
Please refer to our letter dated September 15th, 2010, for disclosure on the methodology used to determine the carrying value of the reporting unit, and assumptions used to determine fair value of the reporting unit.
Revenues- We estimated our annual revenues for 2010 to increase to $686,000 due in part to a new effort in selling previously unsold ad space on our website. Subsequently, on May 25th, 2010, we announced an advertising agreement with one of our large clients, for £128,500 (almost $200,000 USD). We expect a rebound in 2010 revenues after a globally dismal economic downturn in 2009. We believe that these two factors support our 2010 revenue estimate. We had knowledge of this anticipated development in business at the time of preparation of original impairment analysis in March, 2010. Therefore, we believed that an estimation of revenues for 2010 was reasonable considering historic experience up until 2009 and developments of 2010.
Cost of Sales- On March 9th, 2010, we announced an acquisition of a new asset,www.Arsenal-Mania.co.uk. We are using our existing resources to address the web development, marketing, business development and management of the website. Accordingly, in 2010, we will be allocating between 25 – 30% of our cost of sales to this new reporting unit. This effectively lowers the cost of sales on the existing reporting unit by the same percentage. Improved internal processes have helped reduce overall cost of sales by 10% as of August, 2010, over the same period last year. We believe these developments support our 2010 cost of sales estimates.
General, Administrative and Management Expenses – Consistent with our allocation of costs of sales, we will allocate 70 – 75% of our General, Administrative and Management Expenses to this reporting unit, and 25 – 30% of these expenses to our new reporting unit. Our management fees will drop by almost 50% in 2010, while the rest of our general and administrative expenses should remain consistent. General, Administrative and Management Expenses were factored into our determination of unit fair value. General, Administrative and Management expenses were included with all other related costs in the single line item of ‘Direct Labor’ under Costs of sales in the impairment analysis submitted on September 15, 2010. In order to simplify this, we have segregated general and administrative expenses from cost of sales for better understanding of operating expenses.
Basis for Multiple Assumed – The multiple in our attached Goodwill Impairment Analysis of 3.5 was used in the March, 2010 calculation for deriving discounted cash flows and terminal value calculation. A Discount factor of 20% was used due to high risk associated with the Company. Stabilized EBITDA growth rate of 15% was used on yearly basis to be conservative. Reported acquisitions in the gaming industry over the past few years range from 3 – 6 times earnings. A July 1st, 2009 news release issued by Gaming VC Holdings S.A., an AIM-listed European gaming company, announced an acquisition of another online gaming entity capped at 5 times profits. Accordingly, we believed our 3.5 multiple used was appropriate, and our impairment test showed no goodwill impairment. In responding to the August 16th, 2010 SEC comment letter, we reviewed our impairment test again, and after consideration of all financial, current economic and operational factors, revised the multiple down to 2.5 times in order to use the principle of conservatism.
2)
The attached Goodwill Impairment Analysis as at December 31, 2009, prepared in March 2010, shows the fair value exceeds carrying value of the reporting unit, resulting in no goodwill impairment. We also note that as at December 31, 2009, the Company has the following assets and liabilities (excluding goodwill) which also represents fair value as of the date of preparation of original impairment analysis.
Cash
$
68,591
A/R
$
44,328
(Subsequently collected fully in 2010)
Prepaid
$ 8
Intangibles
$
60,591
(this includes URL’s, content, email lists for which the Company can realize substantial additional cash if disposed off as of the date of preparation of this analysis However, the Company is being conservative in considering the carrying value as fair value).
TOTAL ASSETS
$ 173,518
Less liabilities
(56,511)
$
117,007 Fair value of assets and liabilities as of 3/31/2010 excluding goodwill
3.
Summary of Results of Goodwill Impairment Analysis as at December 31, 2009
As originally prepared
As revised on
Date of Analysis
onMarch 31st, 2010
September 10th, 2010
Multiple Used
3.5X
2.5X
Fair Value
$ 275,585
$ 240,110
Carrying Value
$ 274,041
$ 274,041
Net
$ 1,544
($ 33,931)
Impairment indicated:
NO
YES
Conclusion
Our Goodwill Impairment testing performed in March, 2010, and used as a basis in our financial statements in our Form 20-F showed no goodwill impairment. Subsequently, due to the comment letter we received in August, 2010, we performed another test, and modified our multiple used in the analysis. We conclude that based on the re-assessed impairment testing in the 3rd quarter of 2010, we show goodwill impaired by $33,931. We will use the 2.5X multiple in our 2010 year-end goodwill impairment test. If the test shows goodwill impairment, we will adjust our stated goodwill for that reporting unit in the financial year ending December 31, 2010.
Sincerely,
Play LA Inc.
/s/ Brian Cole
H. Brian Cole, Director
Chief Financial Officer
PLAY LA INC.
c/o Mossack Fronseca & Co., Akara Building
PO Box 3136, 24 De Castro Street, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands
Schedule 1
Goodwill Analysis prepared March 2010 for Year End December 2009:
Initial Analysis of 3.5x, prepared March 31, 2010