Writer's Direct Dial: 414.277.5409
E-Mail: chad.wiener@quarles.com
March 19, 2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Division of Corporation Finance
100 F. Street NE
Washington, DC 20549
ATTENTION: Gopal R. Dharia
RE: MODAVOX, INC.
FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 2008
FILED JUNE 13, 2008
FILE NO. 333-57818
Dear Mr. Dharia:
We write on behalf of Modavox, Inc., ("the Company") in response to
Staff's letter of February 26, 2009 by Larry Spirgel, Assistant Director of the
United States Securities and Exchange Commission (the "Commission") regarding
the above-referenced Form 10-KSB for the year ended February 28, 2008 (the
"Comment Letter").
The factual information provided herein relating to the Company has been
made available to us by the Company. Paragraph numbering used for each response
corresponds to the numbering used in the Comment Letter.
Form 10-K for the year ended February 29, 2008
Financial Statements
Note 2- Summary of Significant Accounting Policies
Goodwill, Intangible Assets and Long-Lived assets, page 42
1. PLEASE DISCLOSE YOUR ACCOUNTING POLICY FOR EVALUATING THE
RECOVERABILITY OF CAPITALIZED SOFTWARE COSTS. PLEASE REFER TO PARAGRAPH 10 OF
SFAS 86.
In response to this comment, the Company disclosed its accounting policy for
evaluating the recoverability of capitalized software costs in Note 2 of the
footnote disclosures to the financial statements for the year ended February 29,
2008 in the amended annual report on Form 10-KSB/A filed on edgar.
2. WE NOTE THAT MODAVOX HAS INCURRED SIGNIFICANT OPERATING LOSSES AND HAS
NEGATIVE CASH FLOWS FROM OPERATIONS. PLEASE TELL US HOW YOU APPLIED THE GUIDANCE
IN SFAS 142 IN PERFORMING THE ANNUAL GOODWILL IMPAIRMENT TEST AND SUMMARIZE THE
RESULTS OF YOUR ANALYSIS. DESCRIBE THE NATURE OF THE VALUATION TECHNIQUES YOU
EMPLOYED IN PERFORMING THE IMPAIRMENT TESTS. QUALITATIVELY AND QUANTITATIVELY
DESCRIBE THE SIGNIFICANT ESTIMATES AND ASSUMPTIONS USED IN YOUR DISCOUNTED CASH
FLOW MODEL TO DETERMINE THE FAIR VALUE OF YOUR REPORTING UNITS IN YOUR
IMPAIRMENT ANALYSIS. ALSO TELL US HOW YOU EVALUATED THE RECOVERABILITY OF
CAPITALIZED SOFTWARE COSTS.
In response to this comment, the Company discloses on a supplement basis that it
uses the two step method required by SFAS 142 to test impairment of its goodwill
at the end of each fiscal year by using a present value discounted cash flow
model. The goodwill is associated with the Company's acquisition of Kino. The
Company determined Kino is the reporting unit at which goodwill is tested. The
Company prepares a projected cash flow analysis of Kino beginning with
historical results of Kino and using assumptions for future periods. The
analysis at February 28, 2008 provided for an estimate of fair value of Kino to
be approximately $4 million resulting in no impairment of the $1.1 million of
goodwill related to Kino. The Company concluded from step 1 that step 2 was not
required.
The Company's model projects over a period of five years the estimated revenues
and expenses associated with the reporting unit. The projects are initially
based on historical performance of the reporting unit with assumptions for
future periods. Revenues specifically considered pricing per unit and estimated
units to be sold. The pricing per unit was projected to stay relatively flat
over the five year period using a base of the common pricing per unit sold
historically. The units sold were projected to increase by the addition of sales
representatives and an increase in the units to be sold per representative. In
addition to new units sold, the revenue projections also include an estimate of
customer renewals each year. The related costs have been projected in the same
manner by using historical data and estimates of future costs based on fixed
costs where known and future costs related to an increase in sales. The cash
flows were then discounted resulting in a net present value of future cash flows
related to Kino. The result was compared to the carrying value of Kino resulting
in a conclusion of no impairment of the Kino goodwill.
The Company's capitalized software costs were evaluated in the same manner as
described above. Capitalized software costs related to Kino were evaluated by
using software revenues and costs of Kino and capitalized software costs related
to WTR were evaluated by using software revenues and costs of WTR.
3. IN ADDITION, TELL US HOW WHETHER (SIC) YOU PERFORMED SUBSEQUENT INTERIM
IMPAIRMENT TESTS OF GOODWILL DURING THE CURRENT FISCAL YEAR AND THE RESULTS OF
YOUR ANALYSIS. IF YOU DID NOT, TELL US HOW APPLIED (SIC) THE GUIDANCE IN
PARAGRAPH 28 OF SFAS 142 CONSIDERING THE IMPACT OF THE CURRENT ECONOMIC
ENVIRONMENT.
In response to this comment, the Company discloses on a supplemental basis that
it informally considers each quarter whether or not events or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. The Company does not believe any such events or
circumstances occurred between the annual tests. The Company's primary business
functions and revenue generators do not rely on terrestrial opportunities. The
Company generally does not engage with large companies to generate revenues
rather its internet radio, broadcast, development, sponsorship, and advertising
revenues are generated through individual publishing entities. The Company has
seen no indicators from its target market that its plans both current and near
term require major modification.
4. IN LIGHT OF THE SIGNIFICANCE OF YOUR GOODWILL BALANCE, WE EXPECT ROBUST
AND COMPREHENSIVE DISCLOSURE IN YOUR CRITICAL ACCOUNTING POLICIES REGARDING YOUR
IMPAIRMENT TESTING POLICY. THIS DISCLOSURE SHOULD PROVIDE INVESTORS WITH
SUFFICIENT INFORMATION ABOUT MANAGEMENT'S INSIGHTS AND ASSUMPTIONS WITH REGARD
TO THE RECOVERABILITY OF GOODWILL. FOR FURTHER GUIDANCE, REFER TO RELEASE NO.
33-8350 "INTERPRETATION: COMMISSION GUIDANCE REGARDING MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." PLEASE REVISE
YOUR DISCLOSURES IN FUTURE FILINGS.
In response to this comment, the Company confirms that its future filings will
provide more robust and comprehensive disclosure in its critical accounting
policies regarding its impairment testing policy.
EXHIBIT 31.1
5. WE NOTE THAT YOU FILED YOUR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER CERTIFICATIONS UNDER ITEM 601(B)(31) OF REGULATION S-K. PLEASE
REVISE THESE CERTIFICATIONS TO INCLUDE THE INTRODUCTORY LANGUAGE OF PARAGRAPH 4
AND THE LANGUAGE OF PARAGRAPH 4(B) OF ITEMS 601(B)(31) OF REGULATION S-K.
In response to this comment, the Company revised and filed the Principal
Executive Officer and Principal Financial Officer certifications under Item
601(b)(31) of Regulation S-K as an exhibit to the amended annual report on Form
10-KSB/A for the year ended February 29, 2008.
6. PLEASE REVISE YOUR FORM 10-Q FOR THE PERIODS ENDED NOVEMBER 30, 2008 TO
ADDRESS THE ABOVE COMMENT.
In response to this comment, the Company revised and filed the Principal
Executive Officer and Principal Financial Officer certifications under Item
601(b)(31) of Regulation S-K as an exhibit to the amended quarterly report on
Form 10-Q/A for the periods ended November 30, 2008.
Very truly yours,
/S/ CHAD J. WIENER
Chad J. Wiener
CWIENER:dab