U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
ý QUARTERLY REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2006
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
For the transition period from to .
Commission File No. 000-29299
CorVu Corporation |
| (Exact name of registrant as specified in its charter) |
| | | |
| | | |
Minnesota (State of Incorporation) | | 41-1457090 (IRS Employer ID #) |
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3400 West 66th Street Edina, Minnesota 55435 (Address of Principal Executive Offices) |
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952-944-7777 (Issuer’s Telephone Number, Including Area Code) |
Check whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes �� No o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding shares as of January 31, 2007: 49,518,268
Transitional Small Business Disclosure Format (check one): Yes o No ý
CorVu Corporation
Index to Form 10-QSB
FINANCIAL INFORMATION
CORVU CORPORATION AND SUBSIDIARIES
| | | December 31, 2006 | | June 30, 2006 | |
| | | (Unaudited) | | (Audited) | |
Assets | | | | | |
| | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 2,659,636 | | | 3,104,504 | |
| Trade accounts receivable, net of allowance for doubtful accounts of $62,000 and $69,000, respectively | | | 3,453,455 | | | 3,807,362 | |
| Prepaid expenses and other | | | 373,774 | | | 313,861 | |
| Total current assets | | | 6,486,865 | | | 7,225,727 | |
| Furniture, fixtures and equipment, net | | | 205,849 | | | 221,876 | |
| Total assets | | $ | 6,692,714 | | | 7,447,603 | |
| | | | | | | | |
Liabilities and Stockholders’ Deficit | | | | | | | |
| | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 740,338 | | | 814,020 | |
| Accrued compensation and related costs | | | 2,072,837 | | | 2,241,334 | |
| Deferred revenue | | | 5,088,518 | | | 5,330,222 | |
| Accrued interest | | | 78,472 | | | 78,657 | |
| Other accrued expenses | | | 904,962 | | | 899,987 | |
| Total current liabilities | | | 8,885,127 | | | 9,364,220 | |
| | | | | | | | |
| Long-term debt | | | 1,500,000 | | | 1,500,000 | |
| Total Liabilities | | | 10,385,127 | | | 10,864,220 | |
| | | | | | | | |
| Stockholders’ deficit: | | | | | | | |
| Undesignated capital stock, 23,383,000 shares authorized at December 31, 2006 and June 30, 2006; none issued and outstanding | | | — | | | — | |
| Series C convertible preferred stock, par value $100 per share; 17,000 shares authorized; 17,000 outstanding at December 31, 2006 and June 30, 2006, respectively, liquidation preference of $2,550,000 at December 31, 2006 | | | 1,702,600 | | | 1,717,200 | |
| Series B convertible preferred stock, par value $0.01 per share; 600,000 shares authorized; 360,000 outstanding at December 31, 2006 and June 30, 2006, respectively, liquidation preference of $360,000 at December 31, 2006 | | | 3,600 | | | 3,600 | |
| Series A convertible preferred stock, par value $10 per share; 1,000,000 shares authorized; none issued and outstanding at December 31, 2006 and June 30, 2006, respectively | | | — | | | — | |
| Common stock, $0.01 par value; 75,000,000 shares authorized; 49,518,268 and 49,498,268 shares issued and outstanding at December 31, 2006 and June 30, 2006, respectively | | | 495,183 | | | 494,983 | |
| Additional paid-in capital | | | 22,197,766 | | | 22,238,620 | |
| Accumulated deficit | | | (26,830,119 | ) | | (26,634,092 | ) |
| Deferred compensation | | | — | | | (208,933 | ) |
| Accumulated other comprehensive loss | | | (1,261,443 | ) | | (1,027,995 | ) |
| Total stockholders’ deficit | | | (3,756,413 | ) | | (3,416,617 | ) |
| Total liabilities and stockholders’ deficit | | $ | 6,692,714 | | | 7,447,603 | |
See accompanying notes to unaudited consolidated financial statements.
CORVU CORPORATION AND SUBSIDIARIES
Three and Six Month Periods Ended December 31, 2006 and 2005
| | | Three Months Ended December 31, | | Six Months Ended December 31, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Software and license fees | | $ | 1,434,440 | | | 1,989,282 | | | 2,089,220 | | | 3,146,059 | |
| Maintenance fees | | | 1,537,746 | | | 1,502,213 | | | 3,082,581 | | | 2,933,219 | |
| Consulting and other | | | 616,895 | | | 681,327 | | | 1,334,858 | | | 1,386,424 | |
| | | | | | | | | | | | | | |
| Total revenues | | | 3,589,081 | | | 4,172,822 | | | 6,506,659 | | | 7,465,702 | |
| Operating costs and expenses: | | | | | | | | | | | | | |
| Cost of consulting and other services | | | 680,235 | | | 787,336 | | | 1,383,919 | | | 1,523,836 | |
| Product development | | | 530,128 | | | 566,579 | | | 1,054,793 | | | 1,074,491 | |
| Sales and marketing | | | 1,011,366 | | | 1,257,560 | | | 2,012,049 | | | 2,375,081 | |
| General and administrative | | | 1,128,540 | | | 1,190,629 | | | 2,176,684 | | | 2,335,013 | |
| Total operating costs and expenses | | | 3,350,269 | | | 3,802,104 | | | 6,627,445 | | | 7,308,421 | |
| | | | | | | | | | | | | | |
| Operating income (loss) | | | 238,812 | | | 370,718 | | | (120,786 | ) | | 157,281 | |
| | | | | | | | | | | | | | |
| Interest expense, net | | | (1,272 | ) | | (22,055 | ) | | (2,541 | ) | | (44,537 | ) |
| | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 237,540 | | | 348,663 | | | (123,327 | ) | | 112,744 | |
| | | | | | | | | | | | | | |
| Benefit from income taxes | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
| Net income (loss) | | | 237,540 | | | 348,663 | | | (123,327 | ) | | 112,744 | |
| | | | | | | | | | | | | | |
| Preferred stock dividends | | | (36,350 | ) | | (15,900 | ) | | (72,700 | ) | | (31,800 | ) |
| | | | | | | | | | | | | | |
| Income (loss) attributable to common stockholders | | $ | 201,190 | | | 332,763 | | | (196,027 | ) | | 80,944 | |
| | | | | | | | | | | | | | |
| Income (loss) attributable to common stockholders per common share- basic | | $ | 0.00 | | | 0.01 | | | (0.00 | ) | | 0.00 | |
| Weighted average shares outstanding—basic | | | 49,518,268 | | | 49,483,268 | | | 49,517,725 | | | 49,483,268 | |
| Income (loss) attributable to common stockholders per common share- diluted | | $ | 0.00 | | | 0.01 | | | (0.00 | ) | | 0.00 | |
| Weighted average shares outstanding—diluted | | | 57,927,667 | | | 55,081,531 | | | 49,517,725 | | | 55,648,373 | |
See accompanying notes to unaudited consolidated financial statements.
CORVU CORPORATION AND SUBSIDIARIES
Six Month Periods Ended December 31, 2006 and 2005
| | | 2006 | | 2005 | |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | (123,327 | ) | | 112,744 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
| Depreciation | | | 53,488 | | | 85,152 | |
| Warrants and stock options vested | | | 148,454 | | | 26,967 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Trade accounts receivable, net | | | 305,733 | | | 700,334 | |
| Prepaid expenses and other | | | (59,913 | ) | | 136,264 | |
| Accounts payable | | | (73,682 | ) | | (105,330 | ) |
| Accrued compensation and related costs | | | (201,072 | ) | | 120,672 | |
| Deferred revenue | | | (345,838 | ) | | (718,536 | ) |
| Accrued interest | | | (185 | ) | | 22,562 | |
| Other accrued expenses | | | 4,975 | | | (171,932 | ) |
| Net cash provided by (used in) operating activities | | | (291,367 | ) | | 208,897 | |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Capital expenditures | | | (37,461 | ) | | (38,145 | ) |
| Net cash used in investing activities | | | (37,461 | ) | | (38,145 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Payment of preferred stock dividends | | | (87,300 | ) | | (61,800 | ) |
| Proceeds from exercise of stock options | | | 2,400 | | | -- | |
| Net cash provided by (used in) financing activities | | | (84,900 | ) | | (61,800 | ) |
| Effect of exchange rate changes on cash | | | (31,140 | ) | | 2,563 | |
| Net increase (decrease) in cash and cash equivalents | | | (444,868 | ) | | 111,515 | |
| Cash and cash equivalents at beginning of period | | | 3,104,504 | | | 2,162,866 | |
| Cash and cash equivalents at end of period | | $ | 2,659,636 | | | 2,274,381 | |
| | | | | | | | |
| Supplemental cash flow disclosures: | | | | | | | |
| Cash paid during the period for interest | | $ | 67,685 | | | 46,521 | |
| Cash paid during the period for income taxes | | | -- | | | -- | |
| Non-cash investing and financing activities: | | | | | | | |
| Accrued compensation and related costs paid in stock options | | $ | 17,425 | | | -- | |
See accompanying notes to unaudited consolidated financial statements.
CORVU CORPORATION AND SUBSIDIARIES
(1) Unaudited Financial Statements
The accompanying unaudited consolidated financial statements of CorVu Corporation and Subsidiaries (the Company) have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of operating results.
Operating results for the three and six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2007. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2006.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. (SAB) 101, "Revenue Recognition in Financial Statements", as amended by SAB 104.
Software license revenues 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. 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. The Company sells its products directly to end users and indirectly using resellers and distributors.
The Company sells perpetual licenses to use their software in exchange for a one-time licensing fee. The software is generally priced on a per user basis, which represents an arrangement to use multiple single licenses of the same software. The licensing fee recognized is a function of the number of copies delivered to the customer. In accordance with SOP 97-2, revenue is recognized as those licenses are delivered, provided all other revenue recognition criteria have been met. In certain situations, the Company licenses their software under site, or unlimited user, licenses. Under these arrangements, the Company is obligated to furnish an unlimited and unspecified number of licenses of the software, but only if the licenses are requested by the customer. The licensing fee is payable in full, whether or not the customer requests any additional licenses under the agreement. Accordingly, assuming all other criteria of revenue recognition are met, the Company recognizes license revenue upon delivery of the first copy of the software.
When software revenues are generated by our resellers and distributors, as evidenced by a purchase order, the Company generally delivers the product directly to the end user customer and recognizes revenue in accordance with SOP 97-2. In certain cases, the Company receives cash for prepayment of software license fees from resellers and distributors. Accordingly, 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 or refund. To date, the Company has not refunded any prepayments made by resellers or distributors.
Agreements with resellers and distributors contain contract termination language. Upon termination of a contract, any amounts due as a result of sales to end users which occurred up to the date of termination remain due and payable. To date, the Company has successfully collected all amounts due under these contractual provisions.
Maintenance revenues are recognized in accordance with SOP 97-2. Upon collection of the funds from the customer, revenue is recognized ratably over the term of the maintenance contract, typically 12 months, beginning with the first month of the maintenance contract period. Maintenance contracts are renewable at the same rates as originally contracted. Customers covered under current maintenance contracts receive the right to receive unspecified upgrades/enhancements of the products they have purchased on a when-and-if-available basis.
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.
Deferred revenue represents payment received or amounts billed in advance of services to be performed. The amounts included in deferred revenue are recognized as revenue in accordance with the policies discussed above. Deferred revenue consists of the following for the periods ended:
| | | | | | |
| | | December 31, 2006 | | June 30, 2006 | |
| | | | | | |
| Maintenance revenue | | $ | 4,885,002 | | | 5,040,712 | |
| Services revenue | | | 203,516 | | | 289,510 | |
| Total | | $ | 5,088,518 | | | 5,330,222 | |
As of December 31, 2006 and June 30, 2006, the balance of accounts receivable represented by unpaid maintenance contracts (which is included in deferred revenues) was $1,528,370 and $1,732,519, respectively.
(b) Net Income (Loss) per Common Share
Basic net income (loss) attributable to common stockholders per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) attributable to common stockholders per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding plus all additional common stock that would have been outstanding if potentially dilutive common stock related to stock options and warrants had been issued.
Following is a reconciliation of basic and diluted net income (loss) attributable to common stockholders per common share for the three and six months ended December 31, 2006 and 2005, respectively:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Income (loss) attributable to common stockholders | | $ | 201,190 | | | 332,763 | | | (196,027 | ) | | 80,944 | |
| | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 49,518,268 | | | 49,483,268 | | | 49,517,725 | | | 49,483,268 | |
| | | | | | | | | | | | | | |
| Income (loss) attributable to common stockholders per common share— basic | | $ | 0.00 | | | 0.01 | | | (0.00 | ) | | 0.00 | |
| | | | | | | | | | | | | | |
| Income (loss) per common share — diluted: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) attributable to common stockholders | | $ | 201,190 | | | 332,763 | | | (196,027 | ) | | 80,944 | |
| | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 49,518,268 | | | 49,483,268 | | | 49,517,725 | | | 49,483,268 | |
| | | | | | | | | | | | | | |
| Common stock equivalents | | | 3,809,399 | | | 998,263 | | | -- | | | 1,565,105 | |
| | | | | | | | | | | | | | |
| Convertible preferred stock | | | 4,600,000 | | | 4,600,000 | | | -- | | | 4,600,000 | |
| | | | | | | | | | | | | | |
| Weighted average shares and potential diluted shares outstanding | | | 57,927,667 | | | 55,081,531 | | | 49,517,725 | | | 55,648,373 | |
| | | | | | | | | | | | | | |
| Income (loss) attributable to common stockholders — Diluted | | $ | 0.00 | | | 0.01 | | | (0.00 | ) | | 0.00 | |
The Company uses the treasury method for calculating the dilutive effect of the stock options and warrants (using the average market price).
Options, warrants and convertible preferred stock outstanding totaling 7,058,541 and 21,190,440, respectively were excluded from the computation of common share equivalents for the three and six months ended December 31, 2006, as they were anti-dilutive. Options and warrants outstanding totaling 14,681,692 and 13,321,692, respectively were excluded from the computation of common share equivalents for the three and six months ended December 31, 2005, as they were anti-dilutive.
(c) Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) No. 123 (R), “Share-Based Payment”, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123(R) is effective for all share-based awards granted on or after July 1, 2006. In addition, companies must recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We implemented SFAS No. 123 (R) on July 1, 2006 using the modified prospective method.
As more fully described in our Annual Report on Form 10-KSB for the year ended June 30, 2006, the Company has granted stock options over the years to employees and directors under various stockholder approved stock option plans. At July 1, 2006, options to purchase up to 8,250,126 shares of common stock were outstanding under these plans. The fair value of each option grant was determined as of the grant date, utilizing the Black-Scholes option pricing model. Based on these valuations, we recognized compensation expense of $46,305 ($0.00 per share) and $91,647 ($0.00 per share) for the three and six months ended December 31, 2006, respectively related to the amortization of the unvested portion of these options as of July 1, 2006. The amortization of each option grant will continue over the remainder of the vesting period of each option grant. As of December 31, 2006, $493,537 remains to be amortized to operations.
During the six month period December 31, 2006, the Company granted five and seven year, fully vested stock options to directors, in exchange for services, to purchase up to 95,000 shares of common stock, at exercise prices ranging from $0.30-0.40 per share. In accordance with SFAS 123 (R), these options were valued at fair value on the date of grant. Based on these valuations, we recognized compensation expense of $0 ($0.00 per share) and $29,200 ($0.00 per share) for the three and six months ended December 31, 2006, respectively in the accompanying statement of operations.
In prior years, in accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations, the Company used the intrinsic value-based method for measuring stock-based compensation cost which measured compensation cost as the excess, if any, of quoted market price of the Company’s common stock at the grant date over the amount the employee had to pay for the stock. The Company’s general policy was to grant stock options at fair value at the date of grant. Options and warrants issued to non-employees were recorded at fair value, as required by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, using the Black Scholes pricing method. The Company had adopted the disclosure-only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation”.
The expected life of the options is determined using a simplified method, computed as the average of the option vesting periods and the contractual term of the option. For performance based options that vest upon the occurrence of an event, the Company uses an estimate of when the event will occur as the vesting period used in the Black-Scholes calculation for each option grant. Because of the lack of history to calculate a forfeiture rate, the Company has not adjusted the calculated value of the options for the three and six month periods ended December 31, 2006.
Had compensation cost been recognized based on the fair value of options at the grant dates consistent with the provisions of SFAS No. 123, the Company’s income (loss) attributable to common stockholders and basic and diluted net income (loss) attributable to common stockholders per common share would have been changed to the following pro forma amounts:
| | | Periods Ended December 31, 2005 | |
| | | Three Month Period | | Six Month Period | |
| Income (loss) attributable to common stockholders: | | | | | |
| As reported | | $ | 332,763 | | | 80,944 | |
| Pro forma | | | 292,648 | | | (19,461 | ) |
| Basic income (loss) attributable to common stockholders per common share: | | | | | | | |
| As reported | | | 0.01 | | | 0.00 | |
| Pro forma | | | 0.01 | | | (0.00 | ) |
| Diluted income (loss) attributable to common stockholders per common share: | | | | | | | |
| As reported | | | 0.01 | | | 0.00 | |
| Pro forma | | | 0.01 | | | (0.00 | ) |
| Stock based compensation: | | | | | | | |
| As reported | | | 0 | | | 0 | |
| Pro forma | | | 40,115 | | | 100,405 | |
In determining the compensation cost of options granted during the three and six months ended December 31, 2006 and 2005, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized as follows:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Risk-free interest rate | | | 4.50 | % | | 4.50 | % | | 4.50-4.875 | % | | 3.875-4.50 | % |
| Expected life of options granted | | | 7 years | | | 7 years | | | 5-7 years | | | 5-7 years | |
| Expected volatility | | | 94 | % | | 152 | % | | 94 | % | | 152 | % |
| Expected dividend yield | | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
(3) Comprehensive Income (Loss)
Comprehensive loss and its components consist of the following:
| | | Three Months Ended | | Six Months Ended | |
| | | December 31, 2006 | | December 31, 2005 | | December 31, 2006 | | December 31, 2005 | |
| Net income (loss) | | $ | 237,540 | | | 348,663 | | | (123,327 | ) | | 112,744 | |
| Other comprehensive loss: | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | (199,901 | ) | | 26,118 | | | (233,448 | ) | | 99,247 | |
| Comprehensive income (loss) | | $ | 37,639 | | | 374,781 | | | (356,775 | ) | | 211,991 | |
(4) Income Taxes
Through December 31, 2006, the Company has U.S. Federal and State operating loss carryforwards of approximately $8.5 million and $3.0 million, respectively. In addition, the Company has foreign net operating loss carryforwards of approximately $8.8 million. The U.S. net operating loss carryforwards expire in the years 2010 through 2024. The Company has recorded a valuation allowance at December 31, 2006 and June 30, 2006 due to the uncertainties related to the ability to utilize certain Federal, State and international net operating loss carryforwards as determined in accordance with accounting principles generally accepted in the United States of America.
Federal tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of a change in ownership of the Company which constitutes an “ownership change,” as defined by the Internal Revenue Code, Section 382. The Company’s net operating loss carryforward may be subject to the above limitations.
(5) Preferred Stock
Holders of the Series B Convertible Preferred Stock are entitled to receive a dividend of 6% per annum, payable quarterly in either cash or common stock, at the option of the Company. For the three and six month periods ended December 31, 2006 and 2005, the Company has recorded dividends of $5,400 and $10,800 in each period, respectively.
The Series C Convertible Preferred Stock accrues cumulative quarterly dividends of $1.50 per share during the first year after issuance, $2.25 per share during the second year after issuance, and $3.00 per share during the third year after issuance. In accordance with Staff Accounting Bulletin Topic 5, “Increasing Rate Preferred Stock”, the Company has increased the carrying value of the Series C Convertible Preferred stock by $90,000, represented as the net present value of the difference between the actual stated value of dividends payable in the first two years after issuance and the effective dividends based on a 12% market rate during those periods. For the three and six month periods ended December 31, 2006, the Company amortized $7,300 and $14,600, respectively, of the effective dividend discussed above. For the three and six month periods ended December 31, 2005, the Company amortized $15,000 and $30,000, respectively, of the effective dividend discussed above. In addition, the Company has recorded additional dividends of $38,250 and $76,500 for the three and six month periods ended December 31, 2006, respectively. For the three and six month periods ended December 31, 2005, the Company has recorded additional dividends of $25,500 and $51,000, respectively.
(6) Long-term Debt
The Company has a $1.5 million loan which is collateralized by substantially all of the assets of the Company and ranks senior to any existing or future indebtedness of the Company. The interest rate for the loan is 6% during the first year of the loan, 9% during the second year and 12% for the third year. The loan becomes immediately due and payable upon the earlier of (i) 36 months from the date of issuance (February 2005), (ii) a merger or combination of the Company or a sale of all or substantially all of the assets of the Company, or (iii) the acquisition of more than 50% of the voting power or interest in the Company by a single entity or person. The Company has recorded interest in the amount of $33,750 and $67,500 in each period, which is included in interest expense in the accompanying statements of operations, for the three and six month periods ended December 31, 2006 and 2005, respectively. The collateralized loan balance in the amount of $1.5 million is included as long-term debt in the accompanying balance sheets as of December 31, 2006 and June 30, 2006.
For the Three and Six Month Periods Ended December 31, 2006
versus December 31, 2005
REVENUES:
Total revenue decreased 14% and 13% for the three and six month periods ended December 31, 2006, respectively, compared to the same periods a year ago, largely a result of no counterpart to last year’s sale for approximately $680,000 to a non-U.S. defense agency.
Software revenues decreased $554,842 (28%) and $1,056,839 (34%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year, largely as a result of no counterpart to the aforementioned sale to a defense agency which occurred last year. The Americas region generated increases of $93,909 (30%) and $95,543 (14%) for the three and six month periods ended December 31, 2006, in software revenues over the comparable periods last year. Software revenues in the Asia-Pacific region declined $608,804 (54%) and $800,527 (56%) for the three and six month periods ended December 31, 2006, over the comparable periods last year. In the December quarter last year, we closed two transactions valued at approximately $800,000 (including the aforementioned sale to a non-U.S. defense agency) in software revenues which accounts for most of the decline. Software revenues have also declined in the UK/Europe region since last year, $39,947 (7%) and $351,855 (34%) for the three and six month periods ended December 31, 2006, respectively, over the comparable periods last year.
Maintenance revenues increased $35,533 (2%) and $149,362 (5%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year. Results are indicative of the continued maintenance contract renewals and collections, and contracts sold to new customers at the current rate of 20% of the software license fee paid.
Consulting and other revenues decreased $64,432 (9%) and $51,566 (4%), for the three and six month periods ended December 31, 2006, respectively, from the same periods last year. Revenues in this area are usually indicative of the results in software revenues and were impacted negatively by lower first quarter sales. As software revenues increase, we would expect revenues in this area to increase as well.
OPERATING COSTS AND EXPENSES:
Operating expenses decreased $451,835 (12%) and $680,976 (9%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year.
Cost of consulting and other services expenses decreased $107,101 (14%) and $139,917 (9%) for the three and six month periods ended December 31, 2006, respectively. The number of personnel in this area has declined by approximately 14% this year compared to the same period last year due to a decrease in the number of implementation projects (see decline in software revenues discussed above).
Product development costs decreased $36,451 (6%) and $19,698 (2%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year. A slight decline in the number of personnel (10%) has been partially offset by an increase in the foreign currency exchange rate (all product development costs are incurred in Australia and are paid in Australian dollars).
Sales and marketing expenses decreased $246,194 (20%) and $363,032 (15%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year. Sales commissions have decreased $109,838 (12%) and $196,848 (10%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year mainly from lower revenues. Other costs have also declined including salaries, travel expenses and marketing. In addition, the closing of a sales office in Atlanta in the first quarter of last year contributed to the savings (reduction in office rent).
General and administrative expenses decreased $62,089 (5%) and $158,329 (7%) for the three and six month periods ended December 31, 2006, respectively, from the same periods last year. Included in this category last year (the three month period ended December 31, 2005) was a $65,000 discount that was given to a customer in exchange for an expedited payment on a large order. A slight reduction in the number of personnel has also contributed to the decreases experienced.
OPERATING INCOME (LOSS):
CorVu Corporation generated operating income of $238,812 and an operating loss of $120,786 for the three and six month periods ended December 31, 2006, respectively, compared to operating income of $370,718 and $157,281 for the three and six month periods ended December 31, 2005, respectively.
INTEREST EXPENSE, NET:
Interest expense, net decreased $20,783 (94%) and $41,996 (94%) for the three and six month period ended December 31, 2006, respectively, from the same periods last year. This line item includes interest expense incurred on long-term debt, net of interest income earned on excess cash balances. Interest expense remained flat during the periods while interest income increased from the same periods last year, due to our stronger cash position compared to previous periods.
NET INCOME (LOSS):
CorVu Corporation reported net income of $237,540 and a net loss of $123,327 for the three and six month periods ended December 31, 2006, respectively, compared to net income of $348,663 and $112,744 for the three and six month periods ended December 31, 2005, respectively.
PREFERRED STOCK DIVIDENDS:
The Company recorded preferred stock dividends of $36,350 and $72,700 for the three and six month periods ended December 31, 2006, respectively, compared to dividends of $15,900 and $31,800 for the three and six month periods ended December 31, 2005, respectively.
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS:
CorVu Corporation reported income attributable to common stockholders of $201,190 and a loss attributable to common stockholders of $196,027 for the three and six month periods ended December 31, 2006, respectively, compared to income attributable to common stockholders of $332,763 and $80,944 for the three and six month periods ended December 31, 2005, respectively.
Liquidity and Capital Resources
Total cash and cash equivalents decreased by $444,868 during the six month period ended December 31, 2006 from $3,104,504 as of June 30, 2006 to $2,659,636 as of December 31, 2006. Net cash used by operating activities was $291,367 for the six month period ended December 31, 2006. Net cash used in investing activities was $37,461, reflecting the acquisition of capital assets during the period. Net cash used by financing activities was $84,900 for the six month period ended December 31, 2006 as a result of the payment of preferred stock dividends in the amount of $87,300 which was partially offset by proceeds from the exercise of stock options ($2,400). Foreign exchange rate changes reduced the value of cash by $31,140.
Our plan is to continue to manage our operating expenses to keep them in line with revenues we generate. Management expects revenues to improve as sales and marketing initiatives take effect. We believe that we will generate sufficient cash flow from operations to meet our operating cash requirements for the next 12 months.
Critical Accounting Policies and Estimates-
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our annual report for the year ended June 30, 2006. The accounting policies used in preparing our interim 2007 consolidated financial statements are the same as those described in our annual report, and are as follows:
We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", as amended by SAB 104. We license software under non-cancelable license agreements and provide related professional services, including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation services are not essential to the functionality of our software products, are sold separately and also are available from a number of third-party service providers. Accordingly, revenues from these services are generally recorded separately from license fees. Our specific revenue recognition policies are as follows:
Software License Fees. Software license fee revenues from end-users, resellers and distributors 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. 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. In certain cases, the Company receives cash for prepayment of software license fees from resellers and distributors. Accordingly, 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 or refund. To date, the Company has not refunded any prepayments made by resellers or distributors.
Maintenance, Consulting and other. Revenues from training and consulting services are recognized as services are provided to customers. Revenues from maintenance contracts are deferred until collection has occurred and recognized ratably over the term of the maintenance agreements, beginning with the first month of the maintenance contract period.
Software Development Costs. Software development costs are expensed as incurred until technological feasibility is established. Software development costs incurred subsequent to establishing technological feasibility are capitalized and amortized over the estimated useful lives of the software. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required or revenue could be deferred until collectibility becomes probable.
Contingencies. We are subject to the possibility of various loss contingencies in the normal course of business. We accrue for loss contingencies when a loss is estimable and probable. There are no pending contingencies as of December 31, 2006.
Stock Based Compensation. The Company uses guidance prescribed by SFAS No. 123(R), “Share-Based Payment,” and related interpretations in accounting for employee stock options and stock based compensation. Management's estimates of the fair value of each option and warrant granted is calculated using the Black-Scholes pricing model with weighted-average assumptions including risk free interest rate, expected life of options granted, expected volatility range, and expected dividend yield.
Cautionary Factors That May Affect Future Results
This Quarterly Report on Form 10-QSB, including the information incorporated by reference herein and the exhibits hereto, and other written and oral statements made from time to time by us may include “forward-looking” statements. Forward-looking statements broadly involve our current expectations for future results. Any statement that is not a historical fact, including estimates, projections, future trends and the outcome of events that have not yet occurred, are forward-looking statements. Our forward-looking statements generally relate to our financing plans, trends affecting our financial condition or results of operations, our growth and operating strategy, product development, competitive strengths, the scope of our intellectual property rights, sales efforts, and the declaration and payment of dividends. Words such as “anticipates,” “believes,” “could” “estimates,” “expects,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will” and similar expressions generally identify our forward-looking statements. You must carefully consider forward-looking statements and understand that such statements involve a variety of assumptions, risks and uncertainties, known and unknown, and may be affected by a number of factors, including, among others, the factors discussed in our Annual Report on Form 10-KSB for the year ended June 30, 2006.
We also caution you that forward-looking statements speak only as of the date made. We undertake no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by us on this subject in our filings with the Securities and Exchange Commission, especially on Forms 10-KSB, 10-QSB, and 8-K (if any), in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. We intend to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our forward-looking statements, and are including this sentence for the express purpose of enabling us to use the protections of the safe harbor with respect to all forward-looking statements.
Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness 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, as amended (the "Exchange Act")) as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-QSB. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company's disclosure controls and procedures as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-QSB are effective to (1) provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (2) ensure that information required to be disclosed in the reports that we file or submit under te Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company has a limited number of employees and has determined that is not able to have proper segregation of duties based on an analysis of the cost versus the benefit of hiring additional employees solely to address that issue. We have determined that the risks associated with the lack of segregation of duties are insignificant based on the close involvement of management in day-to-day activities (i.e. tone at the top, corporate governance, officer oversight and involvement with daily activities, and other company controls). The Company has limited resources available and the limited amount of transactions and activities allow for sufficient compensating controls.
OTHER INFORMATION
During the quarter ended December 31, 2006, the Company did not have any additional legal proceedings that were outside of routine litigation incidental to the business.
None
None
| (a) | The Annual Meeting of the Company’s shareholders was held on December 7, 2006. |
| | (b) | At the Annual Meeting a proposal to set the number of directors at seven was adopted by a vote of 48,081,089 shares in favor, with 4,917 shares against, 7,900 shares abstaining, and no shares represented by broker nonvotes. |
| | (c) | Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to management’s nominees, and the following persons were elected directors of the Company to serve until the next annual meeting of shareholders and until their successors shall have been duly elected and qualified: |
| Nominee | Number of Votes For | Number of Votes Against | Number of Votes Abstained |
| Joseph J. Caffarelli | 49,073,800 | 20,106 | 0 |
| Robert L. Doretti | 49,073,800 | 20,106 | 0 |
| Daniel Fishback | 49,073,800 | 20,106 | 0 |
| Ismail Kurdi | 49,073,800 | 20,106 | 0 |
| Justin M. MacIntosh | 48,018,800 | 75,106 | 0 |
| James L. Mandel | 49,073,800 | 20,106 | 0 |
| Robert L. Priddy | 49,073,800 | 20,106 | 0 |
None
(a) Exhibits: See Exhibit Index on page following the signature page of this Form 10-QSB.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | CORVU CORPORATION |
| | | |
| | | |
| Date: February 12, 2007 | By | /s/ David C. Carlson | |
| | | David C. Carlson |
| | | Chief Financial Officer |
| 31.1 | Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
