February 14, 2006
Fredrikson & Byron, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, MN 55402-1425
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
Division of Corporate Finance
100 E Street, N.E.
Washington, D.C. 20549
Re: Corvu Corporation
Form 10-KSB for Fiscal Year Ended June 30, 2005
Forms 10-QSB for Fiscal Quarters Ended September 30, 2005 and
December 31, 2005
File No. 000-29299
Your Letter dated February 1, 2006
Dear Mr. Krikorian:
On behalf of CorVu Corporation ("CorVu" or the "Company"), we are
responding to the comments in your letter dated February 1, 2006 with respect to
the above-referenced filings. Each response is numbered to correspond to the
number of the relevant comment in your letter.
Form 10-KSB for the Fiscal Year Ended June 30, 2005
Capital Resources and Liquidity, page 13
1. Your filing should discuss long-term and short-term needs and sources of
capital. In this regard, clearly indicate the principal sources of
liquidity to focus on the primary drivers and other material factors
necessary to understand your cash flows and the indicative value of
historical cash flows as opposed to a recitation of amounts that are
readily computable from the face of the financial statements. Tell us how
you considered Item 303 of Regulation S-K [sic] and Section IV of the
"Commission Guidance Regarding Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Release No. 34-48960)
regarding your MD&A disclosures
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 2
Response:
We believe that our filing complied with Item 303 of Regulation SB and
Section IV of the "Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and results of Operations" (Release
No. 34-48960) because we included information on the required issues to
the extent such information was available and material. We appreciate the
SEC's comments in this regard and, in future filings on Forms 10-KSB and
10-QSB, will expand our discussions on Capital Resources and Liquidity, as
appropriate.
Notes to Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, page 21
(A) Revenue Recognition, page 21
2. We note the five integrated modules as part of your CorVu 5 software
product. Tell us more about these modules and how they impact the software
license fee you charge. Further, you indicate that the CorPlanning(TM)
module can be used as a stand-alone application or as an integrated
component of CorVu 5. Tell us whether a customer gains access to the right
to use all of the CorVu 5 modules when they enter into a license agreement
or whether access is restricted to modules negotiated within the license
agreement. If so, tell us how you account for this right and identify the
accounting literature that supports your conclusion.
Response:
The five integrated modules of CorVu 5 are separate and distinct products.
See Part 1 of Form 10-KSB for the fiscal year ended June 30, 2005 for a
detailed description of the modules within CorVu 5. Upon entering into a
license agreement, the customer acquires a right to use and have access to
only the specific modules that are the subject of the respective license
agreement. Revenue is recognized when all the criteria listed below have
been met, including delivery of the product that has been ordered. Access
to the specific modules that have been ordered is controlled through our
access keys. Our agreements/contracts do not provide for any discount
related to the future purchase(s) of additional modules.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 3
We recognize license fee revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2. Accordingly, revenue is recognized when all of the following
criteria are met:
o Persuasive evidence of an arrangement exists.
o Delivery has occurred.
o The vendor's price is fixed and determinable.
o Collectibility is probable.
3. We note your disclosure that "all pricing is based upon the number of
users licensed under the agreement with the respective customer" (your
page 3). Tell us whether you consider these arrangements to be site
licenses or multiple single licenses as defined by paragraph 21 of SOP
97-2 including the basis for your conclusion. In this regard, describe
your pricing structure for licensing software and providing PCS. Address
your consideration of AICPA TPA 5100.75, if applicable.
Response:
Generally, our pricing is based on the number of users licensed under the
agreement with the customer. When products are sold on a "per user" basis,
this represents an arrangement to use multiple single licenses of the same
software. In accordance with paragraph 21 of SOP 97-2, the licensing fee
is a function of the number of copies delivered to the user. Revenue is
recognized upon delivery of those licenses and of the underlying software,
provided all other criteria have been met.
In certain situations, we agree to provide our products under site
licenses. A site license obligates us to furnish an unspecified number of
copies of the software, but only if the copies are requested by the user.
The licensing fee is payable in full whether or not the user requests any
additional copies under the site license. Accordingly, assuming all other
criteria of revenue recognition have been met and in accordance with the
principles stated in paragraph 21 of SOP 97-2, licensing revenue is
recognizable upon delivery of the first license of the product. Our
maintenance fee for these contracts is fixed and does not change if one
copy of the software is requested or if multiple copies are requested.
We license the use of our product based on our price list. In addition to
the amounts charged for the license, we charge a product maintenance fee,
which is generally 20% of the license fee paid; the maintenance contract
is annually renewable. By paying the maintenance fee, the customer has
access to post-contract support (PCS) via our help desk. In addition, they
would receive any unspecified product upgrades of the products they have
purchased and new releases of the products they have purchased free of
charge.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 4
We have reviewed AICPA TPA 5100.75 and have determined it to be not
applicable based on our policy of separately pricing software, maintenance
and services. In limited situations where we have agreed to "bundled"
pricing, we allocated the fee to the various elements of the transaction
based on vendor-specific objective evidence (VSOE) of fair value,
regardless of any separate prices stated within the contract for each
element (SOP 97-2, paragraph 10). In the case cited in TPA 5100.75, based
on VSOE of fair value of PCS, we would allocate 20% of the fee to PCS,
regardless of the number of users deployed or the value assigned or
contracted related to any subsequent renewal periods.
4. We note that your maintenance and support renewal agreements include a
right to upgrades, when and if available. Tell us more about these
upgrades and how they fall in line with the guidance in paragraph 36 of
SOP 97-2. In this regard, tell us whether the upgrades are considered
specified or unspecified and your basis for this determination.
Response:
Customers covered under current maintenance agreements receive the right
to receive unspecified upgrades/enhancements of the products they have
purchased on a when-and-if-available basis. Accordingly, as defined in SOP
97-2, this right is considered to be part of PCS. Our contracts do not
provide our customers with upgrade rights for a specified
upgrade/enhancement.
5. Tell us whether any payment concessions are provided to your customers who
enter into maintenance contracts, which would result in revenue deferrals
for services already provided. In this regard, explain why revenue is
recognized upon collection of the funds from customers. Indicate how you
determine the amount of revenue to recognize when the collection is
received. That is, does the amount of collection equal the amount that
would be recognized based on ratable revenue recognition? In your
response, provide management's explanation for the significant change in
deferred revenue between June 30, 2004 and June 30, 2005.
Response:
We do not have a history of providing concessions to customers under
maintenance agreements. We do not recognize maintenance revenue for
renewal periods until all four elements of revenue recognition are met.
This generally does not occur until we have received payment for the
maintenance renewal period. Once payment is received, maintenance revenue
is recognized ratably over the contract period, beginning with the first
month of the maintenance period.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 5
The components of deferred revenue as reported on our balance sheet as of
June 30, 2005 and 2004 are as follows:
2005 2004
---------- ----------
Maintenance revenue $4,730,117 $4,533,532
Services revenue 426,448 414,586
License revenue 799,249 --
Office rent obligation 234,676 --
---------- ----------
$6,190,490 $4,948,118
========== ==========
Amounts deferred for maintenance, services and licenses represent amounts
billed and, in some cases, collected prior to the time revenue is
recognizable in accordance with our revenue recognition policy. Office
rent obligation represents accrual for escalating rental payments entered
into during FY 2005 for our office facility in Australia in which we are
recognizing the aggregate lease obligation on a straight-line basis over
the life of the lease. In future filings we will classify office rent
obligation as other accrued expenses.
6. We note your use of Value Added Resellers (VARs) to generate license
revenues. We also note your disclosure that "software license fee revenues
from end-users and resellers are generally recognized when ... software
has been delivered to the customer ..." (your page 8). Tell us whether
your use of the term "customer" refers to the reseller or end-user. If so,
explain why you believe that revenue recognition upon delivery to the
reseller is proper. In your response, tell us how you considered paragraph
30 of SOP 97-2 when evaluating whether the fee is fixed or determinable in
arrangements with resellers.
Response:
As we have disclosed in our Form 10-KSB, software license fee revenues
from end-users and resellers are generally recognized when software has
been delivered to the customer. In most cases, we consider the end-user to
be the customer. When license fee revenues are generated by our resellers
based on a sale to an end-user customer, as evidenced by a purchase order,
we deliver our product directly to the end-user customer and recognize
revenue at that time in accordance with our revenue recognition policy.
Receipt of payment from the VAR is not dependent on when the VAR is paid
by the end-user.
In few cases, we deliver the product directly to a reseller because we
have a specific contract with such reseller that includes a nonrefundable
payment for the purchase of our software. In this case, the reseller is
considered the customer. We have considered the factors listed in
paragraph 30 of SOP 97-2 in evaluating whether the fixed or determinable
fee and collectibility criteria for revenue recognition have been met. Our
agreements with resellers, in the case of a nonrefundable payment for the
purchase of our software meets that criteria because the reseller has made
the payment (there is no question regarding collectibility), has no right
of return or refund and no right to refunds or rebates if we subsequently
reduce our prices. To date we have not refunded our VARs for any payment
they have made for our software.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 6
7. You disclose that resellers or distributors do not have the right of
return. We note that your 2nd Quarter Form 10-QSB excludes this reference
in both the revenue recognition policy footnote and the critical
accounting policies disclosures. Indicate whether you have modified the
contractual terms with resellers or distributors to provide them with the
right of return. If so, tell us how you comply with paragraph 6 and 8 of
SFAS 48.
Response:
We have not modified our contractual terms with our resellers or
distributors. In our agreements with resellers and distributors, there is
no right to return of any product sold and no right of refund of any
amounts paid. Accordingly, in future filings on Forms 10-KSB and 10-QSB,
we will include this fact in our revenue recognition and critical
accounting policy disclosures as follows:
"Software license fee revenues from end-users and resellers are generally
recognized when there is an executed license agreement, software has been
delivered to the customer, the license fee is fixed and payable within
twelve months, collection is deemed probable and product returns are
reasonably estimable. When the Company receives cash for prepayment of
software license fees from resellers or distributors, revenue is
recognized upon the delivery and acceptance of the product, when title to
the product has passed to the reseller or distributor and there is no
right of return. Revenues related to multiple element arrangements are
allocated to each element of the arrangement based on the fair values of
elements such as license fees, maintenance, and professional services.
Fair value is determined based on vendor specific objective evidence."
8. We note the termination clauses that are included within your VAR
agreements (your page 8). Tell us how these termination clauses impact
your ability to evaluate whether the arrangement fee is fixed or
determinable. In this regard, explain whether any refund provisions exist
within your VAR agreements.
Response:
Our agreements with Value Added Resellers (VARs) include contract
termination language. Upon the termination of a contract, any amounts due
us as a result of actual sales to end users which occurred up to the date
of termination are contractually due us. These amounts are clearly fixed
and determinable as the amounts due are supported by a sales order
form/purchase order, we have shipped the product ordered and the payment
is due within the payment terms as detailed in the agreement, normally
within 30 days of the invoice date. In contract terminations we have
experienced to date, we are not aware of any situations where we were
unable to collect amounts due us. Those agreements also contain provisions
that no refunds are provided for amounts previously paid.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 7
9. Describe how you measure and recognize revenue from consulting and other
revenues. In this regard, you state that these revenues are recognized
when services are performed. This statement does not clearly disclose how
service revenue is earned, measured, and recognized. Describe your pricing
structure for these services and address how your policies comply with
paragraph 66 of SOP 97-2.
Response:
Revenue from consulting and other (primarily training) services are
recognized as the services are performed. Charges for these services are
specifically quoted per hour (or per day) in our contracts and are based
on our price list. Revenue is recognized based on work actually performed
for the customer as evidenced by timesheets provided by our staff. Vendor
specific evidence of the fair value of services rendered is based on
representative prices charged for similar work to other customers.
Accordingly, in future filings on Forms 10-KSB and 10-QSB, we will include
this fact in our revenue recognition and critical accounting policy
disclosures as follows:
"Many of our software arrangements include consulting implementation
services sold separately under consulting engagement contracts. Consulting
revenues from these arrangements are generally accounted for separately
from new software license revenues because the arrangements qualify as
service transactions as defined in SOP 97-2. The more significant factors
considered in determining whether the revenue should be accounted for
separately include the nature of services (i.e., consideration of whether
the services are essential to the functionality of the licensed product),
degree of risk, availability of services from other vendors, timing of
payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. Revenues for consulting
services are generally recognized as the services are performed. If there
is a significant uncertainty about the project completion or receipt of
payment for the consulting services, revenue is deferred until the
uncertainty is sufficiently resolved. Contracts with fixed or "not to
exceed" fees are recognized on a proportional performance basis".
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 8
Item 8A, Controls and Procedures, page 38
10. We note your disclosure that "[a]s of the end of the period covered by
this report, the Company conducted an evaluation, under the supervision
and with the participation of the Chief Executive Officer and Chief
Financial Officer, of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")). Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms." Revise to clarify, if true, that your
officers concluded that your disclosure controls and procedures are also
effective to ensure that information required to be disclosed in the
reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer
and chief financial officer, to allow timely decisions regarding required
disclosure. Refer to Exchange Act Rule 13a-15(e).
Response:
The Company's disclosure controls and procedures are also effective to
ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including the Company's chief
executive officer and chief financial officer, to allow timely decisions
regarding required disclosure. In future filings, we will amend the
Company's disclosure on its controls and procedures accordingly.
Exhibits 31.1 and 31.2
11. Note that the language of the certifications required by Item 601(b)(31)
of Regulation S-B must be provided exactly as stated therein. See Release
No. 34-46427 (Aug. 28, 2002) and the Division of Corporation Finance Staff
Alert (Mar. 5, 2005) available on our website at www.sec.gov. Please
confirm that Messrs. Caffarelli and Carlson signed these certifications in
their individual capacity. Further, we note that paragraph one of these
exhibits does not specify the report reviewed (i.e., annual report or
quarterly report) by the certifying individual. In preparing future 302
certifications, please note that the language of the certification may not
be altered in any manner. In this regard, you should not include the title
of the office held by the signatory in the first line of the
certifications. Additionally, you should identify the report reviewed in
paragraph one of the certifications. This comment also applies to exhibits
31.1 and 31.2 to your Forms 10-QSB for the quarters ended September 30 and
December 31, 2005.
Stephen Krikorian
Accounting Branch Chief
Securities and Exchange Commission
February 14, 2006
Page 9
Response:
We confirm that Messrs. Caffarelli and Carlson signed the Section 302
certifications in their individual capacity. In future 302 certifications,
we will not include the title of the signing officer in the first line of
the certification. Moreover, we will refer to the report reviewed as
"annual report on Form 10-KSB for the period ended June 30, ___" or
"quarterly report on Form 10-QSB for the period ended ", respectively.
The Company acknowledges that
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in responses to staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Please direct further comments or questions to the undersigned.
Sincerely,
/s/ Barbara Muller
- --------------------------------------
Barbara Muller
Direct Dial: 612.492.7050
Email: bmuller@fredlaw.com