================================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
OR
|_| 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 41-1457090
(State of Incorporation) (IRS Employer ID #)
3400 West 66th Street
Edina, Minnesota 55435
(Address of Principal Executive Offices)
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 |X| No |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES | | NO |X|
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 April 14, 2006: 49,483,268
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
================================================================================
CorVu Corporation
Index to Form 10-QSB
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2006 (Unaudited) and June 30, 2005
Consolidated Statements of Cash Flows (Unaudited) Nine Month Periods Ended
March 31, 2006 and 2005
Consolidated Statements of Operations (Unaudited) Three and Nine Month
Periods Ended March 31, 2006 and 2005
Notes to Unaudited Consolidated Financial Statements For the Three and Nine
Month Periods Ended March 31, 2006 and 2005
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
EXHIBITS
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CORVU CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, June 30,
2006 2005
------------ ------------
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 2,903,611 2,162,866
Trade accounts receivable, net of allowance
for doubtful accounts of $77,000 and $65,000,
respectively 3,007,752 4,199,610
Prepaid expenses and other 386,104 490,473
------------ ------------
Total current assets 6,297,467 6,852,949
Furniture, fixtures and equipment, net 225,429 286,371
------------ ------------
Total assets $ 6,522,896 7,139,320
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,101,895 1,213,332
Accrued compensation and related costs 1,972,484 1,868,877
Deferred revenue 4,880,681 5,955,815
Accrued interest 73,140 39,698
Other accrued expenses 870,167 995,911
------------ ------------
Total current liabilities 8,898,367 10,073,633
------------ ------------
Long-term debt 1,500,000 1,500,000
------------ ------------
Total Liabilities 10,398,367 11,573,633
------------ ------------
Stockholders' deficit:
Undesignated capital stock, 23,383,000 shares
authorized at March 31, 2006 and June 30,
2005; none issued and outstanding -- --
Series C convertible preferred stock, par value
$100 per share; 17,000 shares authorized;
17,000 outstanding at March 31, 2006 and
June 30, 2005, respectively, liquidation
preference of $2,550,000 at March 31, 2006 1,724,500 1,767,500
Series B convertible preferred stock, par value
$0.01 per share; 600,000 shares authorized;
360,000 outstanding at March 31, 2006 and
June 30, 2005, respectively, liquidation
preference of $360,000 at March 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 March 31, 2006
and June 30, 2005, respectively -- --
Common stock, $0.01 par value; 75,000,000
shares authorized; 49,483,268 shares issued
and outstanding at March 31, 2006 and
June 30, 2005, respectively 494,833 494,833
Additional paid-in capital 22,234,720 22,012,720
Accumulated deficit (27,277,860) (27,738,043)
Deferred compensation (208,933) (17,900)
Accumulated other comprehensive loss (846,331) (957,023)
------------ ------------
Total stockholders' deficit (3,875,471) (4,434,313)
------------ ------------
Total liabilities and stockholders' deficit $ 6,522,896 7,139,320
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
CORVU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Month Periods Ended March 31, 2006 and 2005
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 516,825 (3,381,117)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation 121,050 121,029
Warrants and stock options vested 30,967 25,900
Changes in operating assets and liabilities:
Trade accounts receivable, net 1,191,858 655,455
Prepaid expenses and other 104,369 (19,650)
Accounts payable (111,437) (462,892)
Accrued compensation and related costs 103,607 (555,696)
Deferred revenue (962,771) 486,206
Accrued interest 33,442 (88,452)
Other accrued expenses (225,386) (62,275)
----------- -----------
Net cash provided by (used in)
operating activities 802,524 (3,281,492)
----------- -----------
Cash flows from investing activities:
Capital expenditures (60,108) (92,513)
----------- -----------
Net cash used in investing activities (60,108) (92,513)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net -- 3,007,335
Proceeds from sale of Series B convertible
preferred stock, net -- 344,583
Proceeds from sale of Series C convertible
preferred stock -- 1,700,000
Borrowings on long-term debt -- 1,500,000
Repayment of line of credit -- (300,000)
----------- -----------
Net cash provided by financing
activities -- 6,251,918
Effect of exchange rate changes on cash (1,671) 43,203
----------- -----------
Net increase in cash and cash
equivalents 740,745 2,921,116
Cash and cash equivalents at beginning of period 2,162,866 148,475
----------- -----------
Cash and cash equivalents at end of period $ 2,903,611 3,069,591
=========== ===========
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 70,316 189,356
Cash paid during the period for income taxes -- --
=========== ===========
Non-cash investing and financing activities:
Series B Convertible Preferred Stock issued for
cancellation of note payable-stockholder,
subsequently converted into common stock $ -- 240,000
Common stock issued for cancellation of note
payable-stockholder -- 405,600
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
CORVU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three and Nine Month Periods Ended March 31, 2006 and 2005
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues:
Software and license fees $ 1,590,839 1,213,434 4,736,898 3,515,973
Maintenance fees 1,483,796 1,492,390 4,417,015 4,075,023
Consulting and other 748,016 867,616 2,134,440 2,350,694
------------ ------------ ------------ ------------
Total revenues 3,822,651 3,573,440 11,288,353 9,941,690
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of consulting and other services 753,172 883,518 2,277,008 2,671,721
Product development 531,419 552,681 1,605,910 1,651,139
Sales and marketing 993,250 1,676,198 3,368,331 5,479,075
General and administrative 1,129,608 1,165,692 3,464,621 3,428,299
------------ ------------ ------------ ------------
Total operating costs and expenses 3,407,449 4,278,089 10,715,870 13,230,234
------------ ------------ ------------ ------------
Operating income (loss) 415,202 (704,649) 572,483 (3,288,544)
Interest expense, net (11,121) (34,836) (55,658) (92,573)
------------ ------------ ------------ ------------
Income (loss) before income taxes 404,081 (739,485) 516,825 (3,381,117)
Benefit from income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) 404,081 (739,485) 516,825 (3,381,117)
Preferred stock dividends (24,842) (103,157) (56,642) (332,402)
------------ ------------ ------------ ------------
Income (loss) attributable to common stockholders $ 379,239 (842,642) 460,183 (3,713,519)
============ ============ ============ ============
Net income (loss) per common share--basic $ 0.01 (0.02) 0.01 (0.12)
Income (loss) attributable to common
stockholders per common share- basic $ 0.01 (0.02) 0.01 (0.13)
Weighted average shares outstanding--basic 49,483,268 37,855,779 49,483,268 28,531,202
Net income (loss) per common share--diluted $ 0.01 (0.02) 0.01 (0.12)
Income (loss) attributable to common
stockholders per common share- diluted $ 0.01 (0.02) 0.01 (0.13)
Weighted average shares outstanding--diluted 57,390,234 37,855,779 56,226,114 28,531,202
See accompanying notes to unaudited consolidated financial statements.
5
CORVU CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements for the
Three and Nine Month Periods Ended March 31, 2006 and 2005
(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 nine months ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the
year ending June 30, 2006. 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, 2005.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
We recognize revenue in accordance with the provisions of the American
Institute of Certified Public Accountants (AICPA) 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
AICPA, 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.
Software license 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 received cash for prepayment of
software license fees from resellers and 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 or refund. 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.
Maintenance revenues are recognized ratably, upon collection of the funds
from the customer, over the term of the maintenance contract, typically 12
to 36 months.
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.
6
(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
nine months ended March 31, 2006 and 2005, respectively:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income (loss) attributable to common
stockholders $ 379,239 (842,642) 460,183 (3,713,519)
Weighted average shares outstanding- basic 49,483,268 37,855,779 49,483,268 28,531,202
Income (loss) attributable to common
stockholders per common share- basic $ 0.01 (0.02) 0.01 (0.13)
Income (loss) per common share- diluted:
Income (loss) attributable to common
stockholders $ 379,239 (842,642) 460,183 (3,713,519)
Weighted average shares outstanding- basic 49,483,268 37,855,779 49,483,268 28,531,202
Common stock equivalents 3,306,966 0 2,142,846 0
Convertible preferred stock 4,600,000 0 4,600,000 0
Weighted average shares outstanding- diluted 57,390,234 37,855,779 56,226,114 28,531,202
Income (loss) attributable to common
stockholders- diluted $ 0.01 (0.02) 0.01 (0.13)
The Company uses the treasury method for calculating the dilutive effect
of the stock options and warrants (using the average market price).
Options and warrants outstanding totaling 9,728,504 and 9,894,504 were
excluded from the computation of common share equivalents for the three
and nine months ended March 31, 2006, as they were anti-dilutive. Options,
warrants and convertible preferred stock outstanding at March 31, 2005
totaling 18,988,964 were excluded from the computation of common share
equivalents for the three and nine months ended March 31, 2005, as they
were anti-dilutive.
7
(c) Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and
related interpretations, the Company uses the intrinsic value-based method
for measuring stock-based compensation cost which measures 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 must pay for the
stock. The Company's general policy is to grant stock options at fair
value at the date of grant. Options and warrants issued to non-employees
are 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 has
adopted the disclosure only provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation".
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123R which requires
companies to recognize in the income statement the grant-date fair value
of stock options and other equity-based compensation issued to employees,
but expressed no preference for the valuation model. SFAS No. 123R is
effective for small business issuers as of the beginning of annual
reporting periods that begin after December 15, 2005. The Company will
adopt SFAS No. 123R in its first fiscal 2007 quarter. The Company has not
evaluated the impact, if any, of the adoption of SFAS No. 123R on its
consolidated financial statements.
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:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income (loss) attributable to common
stockholders:
As reported $ 379,239 (842,642) 460,183 (3,713,519)
Pro forma 318,711 (872,574) 299,250 (3,939,763)
Basic income (loss) attributable to common
stockholders per common share:
As reported 0.01 (0.02) 0.01 (0.13)
Pro forma 0.01 (0.02) 0.01 (0.14)
Diluted income (loss) attributable to common
stockholders per common share:
As reported 0.01 (0.02) 0.01 (0.13)
Pro forma 0.01 (0.02) 0.01 (0.14)
Stock based compensation:
As reported 0 0 0 0
Pro forma 60,528 29,932 160,933 226,244
In determining the compensation cost of options granted during the three
and nine months ended March 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 Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Risk-free interest rate 4.50% 3.375-3.50% 3.875-4.50% 3.375-3.625%
Expected life of options granted 7 years 7 years 5-7 years 5-7 years
Expected volatility 152% 122% 152% 122%
Expected dividend yield 0% 0% 0% 0%
8
(3) Comprehensive Income (Loss)
Comprehensive income (loss) and its components consist of the following:
Three Months Ended March 31, Nine Months Ended March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net income (loss) $ 404,081 $ (739,485) $ 516,825 $ (3,381,117)
Other comprehensive income (loss):
Foreign currency translation adjustment 11,445 (4,457) 110,692 (376,108)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 415,526 $ (743,942) $ 627,517 $ (3,757,225)
============ ============ ============ ============
(4) Income Taxes
Through March 31, 2006, the Company has U.S. Federal and State operating
loss carryforwards of approximately $9.1 million and $3.3 million,
respectively. In addition, the Company has foreign net operating loss
carryforwards of approximately $4.1 million. The U.S. net operating loss
carryforwards expire in the years 2010 through 2024. The Company has
recorded a valuation allowance at March 31, 2006 and June 30, 2005 due to
the uncertainties related to the ability to utilize certain Federal and
State 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) Series B Convertible Preferred Stock
During the year ended June 30, 2005, the Company authorized and sold
600,000 shares of Series B Convertible Preferred Stock at a par value of
$0.01 per share. A total of 360,000 shares were sold at a price of $1.00
per share, resulting in proceeds to the Company of $360,000. The Company
incurred $15,417 of financing costs associated with the preferred stock
offering. The remaining 240,000 shares were issued as a result of the
conversion of an existing note payable-stockholder. In February 2005,
these 240,000 shares were converted into 800,000 shares of the Company's
common stock at a price of $0.30 per share.
Under the terms of these shares, holders of the Series B Convertible
Preferred Stock (1) are entitled to a liquidation preference equal to
$1.00 per share in the event of any liquidation or dissolution of the
Company, (2) are entitled to receive a dividend of 6% per annum, payable
quarterly in either cash or common stock, at the option of the Company and
(3) received piggyback registration rights. Shares of the Series B
Convertible Preferred Stock are convertible into shares of the Company's
common stock, at the option of the holder, at a rate of $0.30 per share,
or a total of 1,200,000 shares. The conversion price is subject to
adjustment under certain conditions such as stock dividends, stock splits
and reclassifications. In addition, shares of the Series B Convertible
Preferred Stock participate on an as-if converted basis in any dividends
paid of common stock and are entitled to voting rights together with the
common stock, on an as-if converted basis. In addition, the investors also
received five-year warrants to purchase up to 1,400,001 shares of the
Company's common stock at an exercise price of $0.20 per share. The fair
value of the warrants at the date of grant was estimated to be
approximately $360,000 using the Black-Scholes pricing model. The
following assumptions were used to calculate the fair value of the
warrants: dividend yield of 0%; expected volatility of 122%; risk-free
interest rate of 3.375%; and an expected life of five years.
The proceeds of the Series B Convertible Preferred Stock of $360,000 and
the conversion of the note payable-stockholder of $240,000 were allocated
between preferred stock, the fair value of the warrants based on using
Black-Scholes pricing model and the beneficial conversion of the preferred
stock. As defined in Emerging Issues Task Force (EITF) 00-27 "Application
of Issue No. 98-5 to Certain Convertible Instruments", the resulting
beneficial conversion of the Series B Convertible Preferred Stock of
approximately $225,000 was accounted for as preferred stock dividends
during the year ended June 30, 2005. For the three and nine month periods
ended March 31, 2006 and 2005, the Company has recorded dividends of
$5,400 and $7,057, respectively, and $16,200 and $10,769, respectively.
Dividends accrued but not paid as of March 31, 2006 in the amount of
$5,400 were paid to the holders of the Series B Convertible Preferred
Stock subsequent to March 31, 2006.
For their efforts in securing this financing, the Company's placement
agent received a five-year warrant to purchase up to 100,000 shares of the
Company's common stock at an exercise price of $0.20 per share.
9
(6) Debt and Equity Financing Transaction
In February 2005, the Company and ComVest Investment Partners LLC
(ComVest) completed a debt and equity financing which included: (1) an
equity investment of $3,300,000 in exchange for 22,000,000 shares of the
Company's common stock at a price of $0.15 per share; (2) a preferred
stock and warrant investment of $1,700,000 in exchange for 17,000 shares
of a Series C Convertible Preferred Stock ("Series C Preferred Stock"),
plus five-year warrants to purchase up to 3,400,000 shares of the
Company's common stock at an exercise price of $0.50 per share, and (3) a
collateralized loan in the principal amount of $1,500,000.
Each share of Series C Convertible Preferred Stock has a par value of $100
and is convertible into 200 shares of the Company's common stock, subject
to customary anti-dilution provisions. In addition, holders of the Series
C Convertible Preferred Stock are entitled to voting rights together with
the common stock, on an as-if converted basis. 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. The Company has the right to redeem Series C Convertible
Preferred Stock at any time upon 10 business days prior written notice
upon payment of $100 per share plus accumulated but unpaid dividends;
holders of Series C Convertible Preferred Stock may elect to convert the
stock at any time. The fair value of the warrants at the date of grant was
estimated to be approximately $748,000 using the Black-Scholes pricing
model. The following assumptions were used to calculate the fair value of
the warrants: dividend yield of 0%; expected volatility of 122%; risk-free
interest rate of 3.375%; and an expected life of five years. As defined in
Emerging Issues Task Force (EITF) 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments", it was determined that there was no
resulting beneficial conversion of the Series C Convertible Preferred
Stock. Upon liquidation of the Company, each share of Series C Convertible
Preferred Stock entitles its holder to receive an amount of $150, prior
and in preference to holders of common stock and any other preferred
stock. 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. Since its
issuance, as of March 31, 2006, the Company has amortized $65,500 of the
effective dividend discussed above. In addition, for the three and nine
month periods ended March 31, 2006 and 2005, the Company has recorded
dividends of $32,442 and $13,600, respectively, and $83,442 and $13,600,
respectively. Dividends accrued but not paid as of March 31, 2006, in the
amount of $32,442, were paid to the holders of the Series C Convertible
Preferred Stock subsequent to March 31, 2006.
The loan 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 2008), (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 $12,082, respectively, and
$101,250 and $12,082, respectively, which is included in interest expense
in the accompanying statement of operations, for the three and nine month
periods ended March 31, 2006 and 2005, respectively. The collateralized
loan balance in the amount of $1,500,000 is included as long-term debt in
the accompanying balance sheets as of March 31, 2006 and June 30, 2005,
respectively.
The Company has agreed for a period equal to the shorter of (i) three
years from the closing or (ii) such time as ComVest owns less than
5,000,000 shares of the Company's common stock, not to issue any shares of
common stock, or any securities convertible into common stock for an
effective per share price of less than $0.25 per share, without the
approval of ComVest. The Company also has agreed not to incur any
indebtedness for borrowed money other than an asset-based senior line of
credit without the prior approval of ComVest. The Company is obligated to
use 50% of any proceeds it may receive in the future upon the sale of
certain equity or debt securities to redeem outstanding Series C
Convertible Preferred Stock or to retire the loan.
ComVest also received warrants to purchase another 2,000,000 shares at
$0.50; however, these warrants will become exercisable only if less than
two ComVest designees are members of the Company's Board of Directors
while ComVest owns more than 5,000,000 shares of the Company's common
stock.
All warrants are subject to anti-dilution protection and contain cashless
exercise provisions.
At closing, the Company paid ComVest a cash fee of $240,000, which was
offset against the gross proceeds of the preferred and common stock.
Subject to waiver by the unanimous consent of the Company's Board of
Directors, the Company has agreed to maintain a minimum cash balance of
$750,000. This cash is available for the Company to use but, in the event
of its use, an event of default under the debt instrument would be
triggered which, if left uncured, could result in the debt being declared
immediately due and payable. As of March 31, 2006, the Company is in
compliance with all covenants contained in the debt agreement.
Upon the closing of the financing transaction with ComVest, Delia
MacIntosh, the spouse of the Company's former Chief Executive Officer,
converted the remaining outstanding debt of the Company due to her under a
note payable-stockholder in the aggregate amount of approximately $400,000
into 2,704,000 shares of Common Stock at the same terms as the equity
financing.
10
(7) Contingencies
The Company was involved in a dispute with a customer involving software,
support and services that were purchased from the Company in February
2001. In accordance with the contractual terms, the matter was brought to
arbitration in November 2003 and, in February 2006, the dispute was
settled and the Company received approximately $50,000 from the customer.
The amount, which was collected during the three month period ended March
31, 2006, was recorded as a reduction of general and administrative
expenses in the accompanying statement of operations.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
For the Three and Nine Month Periods Ended March 31, 2006
versus March 31, 2005
REVENUES:
Total revenue increased 7% and 14% for the three and nine month periods ended
March 31, 2006, respectively, compared to the same periods a year ago.
Software revenues increased $377,405 (31%) and $1,220,925 (35%) for the three
and nine month periods ended March 31, 2006, respectively, from the same periods
last year. We continue to experience improved results based on focusing the
sales efforts on specific targeted markets. For the nine month period ended
March 31, 2006, all regions reflect improved software revenues over the same
period last year.
Maintenance revenues decreased $8,594 (1%) and increased $341,992 (8%) for the
three and nine month periods ended March 31, 2006, respectively, from the same
periods last year. Results for the nine months ended March 31, 2006 are
indicative of the continued maintenance contract renewals and collections, and
maintenance contracts sold to new customers at the current rate of 20% of the
software license fee paid, which is recognized ratably over the contract period.
Consulting and other revenues decreased $119,600 (14%) and $216,254 (9%), for
the three and nine month periods ended March 31, 2006, respectively, from the
same periods last year. Staffing levels totaled 24 at the end of March 2006, a
reduction of 8% over the same period last year. Revenues in this area are
primarily the result of new software license fee sales. When new software
license sales are down, eventually this will lead to lower consulting revenues.
Conversely, when new software license sales increase, consulting and other
revenues increase. The lack of sufficient new software license revenue in FY
2004 and FY 2005, in the Americas and Asia-Pacific regions, have impacted
revenues in this area in FY 2006. For the nine month period ended March 31,
2006, revenues in the Americas region have declined by $188,468 or 32%, and
revenues in the Asia-Pacific region have declined by $265,867, or 25%. As
software revenues improve in these regions (see discussion above), we would
expect revenues in this area to improve as well. Conversely, revenues in the
UK/Europe region have increased by $238,081, or 35%, based on better results in
the area of new software revenues.
OPERATING COSTS AND EXPENSES:
Operating expenses decreased $870,640 (20%) and $2,514,364 (19%) for the three
and nine month periods ended March 31, 2006, respectively, from the same periods
last year. We continue to focus efforts on controlling expenses, reducing and
eliminating unnecessary expenses and efficiently spending our resources on our
focused sales efforts.
Cost of maintenance, consulting and other expenses decreased $130,346 (15%) and
$394,713 (15%) for the three and nine month periods ended March 31, 2006,
respectively. As stated under consulting and other revenues above, the number of
personnel in this area has declined by 8%.
Product development costs decreased $21,262 (4%) and $45,229 (3%) for the three
and nine month periods ended March 31, 2006, respectively, from the same periods
last year.
Sales and marketing expenses decreased $682,948 (41%) and $2,110,744 (39%) for
the three and nine month periods ended March 31, 2006, respectively, from the
same periods last year. Included in these decreases are increases in sales
commission expense for the three and nine month periods ended March 31, 2006 of
$27,883 (23%) and $108,133 (24%), respectively, as compared to the same periods
last year. The increase in sales commission expense is due to increased software
license fees for those periods. Taking those increases into effect, our other
sales and marketing expenses actually decreased $710,831 (46%) and $2,218,877
(44%) for the three and nine month periods ended March 31, 2006, from the same
periods last year. Expenses like communications, travel and general marketing
costs have been reduced to bring them in line with expected revenues.
General and administrative expenses decreased $36,084 (3%) and increased $36,322
(1%) for the three and nine month periods ended March 31, 2006, respectively,
from the same periods last year.
OPERATING INCOME (LOSS):
CorVu Corporation generated operating income of $415,202 and $572,483 for the
three and nine month periods ended March 31, 2006, respectively, compared to
operating losses of $704,649 and $3,288,544 for the three and nine month periods
ended March 31, 2005, respectively.
12
INTEREST EXPENSE, NET:
Interest expense, net decreased $23,715 (68%) and $36,915 (40%) for the three
and nine month periods ended March 31, 2006, respectively, from the same periods
last year. Generally, our cost of borrowing decreased this year compared to the
same periods last year. In addition, we have earned interest income
(approximately $48,000) on our excess cash balances this year due to our
stronger cash position compared to previous periods.
NET INCOME (LOSS):
CorVu Corporation reported net income of $404,081 and $516,825 for the three and
nine month periods ended March 31, 2006, respectively, compared to net losses of
$739,485 and $3,381,117 for the three and nine month periods ended March 31,
2005, respectively.
Liquidity and Capital Resources
Total cash and cash equivalents increased by $740,745 during the nine month
period ended March 31, 2006 from $2,162,866 as of June 30, 2005 to $2,903,611 as
of March 31, 2006. Net cash provided by operating activities was $802,524 for
the nine month period ended March 31, 2006. Net income of $404,081 that was
generated for the nine month period ended March 31, 2006 has driven cash to
these levels. Net cash used in investing activities was $60,108, reflecting the
acquisition of capital assets during the period. Foreign exchange rate changes
resulted in a reduction in cash of $1,671.
The accompanying consolidated financial statements are prepared assuming the
Company will continue as a going concern. During the year ended June 30, 2005,
the Company generated an operating loss of $3,872,825. For the ensuing nine
month period ended March 31, 2006, operating income of $572,483 has been
generated. As of March 31, 2006, the Company had an accumulated deficit of
$27,277,860 and total stockholders' deficit of $3,875,471.
During the year ended June 30, 2005, the Company raised approximately $6.5
million in debt and equity financing, net of expenses. As operating performance
has improved this year, the Company continues to monitor and control operating
expenses to assure they are in line with expected revenue. In addition, we
continue to focus our sales on targeted markets and to continue to improve cash
flow.
We believe that we will generate sufficient cash flow from operations to meet
our operating cash requirements for the next 12 months.
13
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,
2005. The accounting policies used in preparing our interim 2006 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 No. 104, "Revenue
Recognition." 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.
Our specific revenue recognition policies are as follows:
Software license 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 received cash for prepayment of
software license fees from resellers and 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 or refund. 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.
Maintenance revenues are recognized ratably, upon collection of the funds
from the customer, over the term of the maintenance contract, typically 12
to 36 months.
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.
Software Development Costs. Software development costs are expensed as incurred.
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.
14
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, 2005.
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.
Item 3 Controls and Procedures
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. Management is aware that there is a
lack of segregation of duties due to the small number of employees dealing with
general administrative and financial matters. However, management has decided
that considering the employees involved and the control procedures in place,
risks associated with such lack of segregation of duties are insignificant and
the potential benefits of adding employees to clearly segregate duties do not
justify the expenses associated with such increases.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company was involved in a dispute with a customer involving
software, support and services that were purchased from the Company in
February 2001. In accordance with the contractual terms, the matter was
brought to arbitration in November 2003 and, in February 2006, the
dispute was settled and the Company received approximately $50,000 from
the customer.
During the quarter ended March 31, 2006, the Company did not have any
additional legal proceedings that were outside of routine litigation
incidental to the business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibits: See Exhibit Index on page following the signature page of
this Form 10-QSB.
16
SIGNATURES
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: April 25, 2006 By /s/ David C. Carlson
--------------------
David C. Carlson
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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
18