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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 September 30, 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 or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
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 October 15, 2006: 49,518,268
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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CorVu Corporation
Index to Form 10-QSB
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2006 (Unaudited)
and June 30, 2006
Consolidated Statements of Cash Flows (Unaudited) Three Month Periods
Ended September 30, 2006 and 2005
Consolidated Statements of Operations (Unaudited) Three Month Periods
Ended September 30, 2006 and 2005
Notes to Unaudited Consolidated Financial Statements For the Three
Month Periods Ended September 30, 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
September 30, June 30,
2006 2006
------------ ------------
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 3,384,665 3,104,504
Trade accounts receivable, net of allowance for doubtful accounts of $68,000 and
$69,000, respectively 1,747,816 3,807,362
Prepaid expenses and other 412,802 313,861
------------ ------------
Total current assets 5,545,283 7,225,727
Furniture, fixtures and equipment, net 221,286 221,876
------------ ------------
Total assets $ 5,766,569 7,447,603
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 642,403 814,020
Accrued compensation and related costs 1,704,545 2,241,334
Deferred revenue 4,893,618 5,330,222
Accrued interest 78,750 78,657
Other accrued expenses 707,567 899,987
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Total current liabilities 8,026,883 9,364,220
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Long-term debt 1,500,000 1,500,000
------------ ------------
Total liabilities 9,526,883 10,864,220
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Stockholders' deficit:
Undesignated capital stock, 23,383,000 shares authorized at September 30, 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 September 30, 2006 and June 30, 2006, respectively,
liquidation preference of $2,550,000 at September 30, 2006 1,709,900 1,717,200
Series B convertible preferred stock, par value $0.01 per share; 600,000 shares
authorized; 360,000 outstanding at September 30, 2006 and June 30, 2006,
respectively, liquidation preference of $360,000 at September 30, 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 September 30, 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 September 30, 2006 and June 30, 2006, respectively 495,183 494,983
Additional paid-in capital 22,123,854 22,238,620
Accumulated deficit (27,031,309) (26,634,092)
Deferred compensation -- (208,933)
Accumulated other comprehensive loss (1,061,542) (1,027,995)
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Total stockholders' deficit (3,760,314) (3,416,617)
------------ ------------
Total liabilities and stockholders' deficit $ 5,766,569 7,447,603
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
CORVU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Month Periods Ended September 30, 2006 and 2005
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $ (360,867) (235,919)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 27,038 39,202
Warrants and stock options vested 74,542 14,000
Changes in operating assets and liabilities:
Trade accounts receivable, net 2,059,546 1,340,422
Prepaid expenses and other (98,941) 16,828
Accounts payable (171,617) (253,742)
Accrued compensation and related costs (552,789) (291,125)
Deferred revenue (452,604) (609,414)
Accrued interest 93 11,497
Other accrued expenses (175,929) (245,357)
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Net cash provided by (used in) operating activities 348,472 (213,608)
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Cash flows from investing activities:
Capital expenditures (26,448) (28,505)
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Net cash used in investing activities (26,448) (28,505)
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Cash flows used in financing activities:
Payment of preferred stock dividends (43,650) (30,900)
Proceeds from exercise of stock options 2,400 --
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Net cash used in financing activities (41,250) (30,900)
Effect of exchange rate changes on cash (613) 44
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Net increase (decrease) in cash and cash equivalents 280,161 (272,969)
Cash and cash equivalents at beginning of period 3,104,504 2,162,866
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Cash and cash equivalents at end of period $ 3,384,665 1,889,897
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Supplemental cash flow disclosures:
Cash paid during the period for interest $ 33,657 22,515
Cash paid during the period for income taxes -- --
Non-cash investing and financing activities:
Preferred stock dividends included in other accrued expenses 7,300 15,000
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
CORVU CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Month Periods Ended September 30, 2006 and 2005
2006 2005
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Revenues:
Software and license fees $ 654,780 1,156,777
Maintenance fees 1,544,835 1,431,006
Consulting and other 717,963 705,097
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Total revenues 2,917,578 3,292,880
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Operating costs and expenses:
Cost of consulting and other services 703,684 736,500
Product development 524,665 507,912
Sales and marketing 1,000,683 1,117,521
General and administrative 1,048,144 1,144,384
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Total operating costs and expenses 3,277,176 3,506,317
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Operating loss (359,598) (213,437)
Interest expense, net (1,269) (22,482)
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Loss before income taxes (360,867) (235,919)
Provision for income taxes -- --
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Net loss (360,867) (235,919)
Preferred stock dividends (36,350) (15,900)
------------ ------------
Net loss attributable to common stockholders $ (397,217) (251,819)
============ ============
Net loss attributable to common stockholders per
common share-basic $ (0.01) (0.01)
Weighted average shares outstanding--basic 49,517,181 49,483,268
Net loss attributable to common stockholders per
common share-diluted $ (0.01) (0.01)
Weighted average shares outstanding--diluted 49,517,181 49,483,268
See accompanying notes to unaudited consolidated financial statements.
5
CORVU CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements for the Three Month Periods
Ended September 30, 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 months ended September 30, 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.
6
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:
September 30, June 30,
2006 2006
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Maintenance revenue $ 4,661,279 5,040,712
Services revenue 232,339 289,510
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Total $ 4,893,618 5,330,222
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As of September 30, 2006 and June 30, 2006, the balance of accounts
receivable represented by unpaid maintenance contracts (which is included
in deferred revenues) was $988,977 and $1,732,519, respectively.
(b) Loss per Common Share
Basic loss attributable to common stockholders per common share is
computed by dividing loss attributable to common stockholders by the
weighted average number of common shares outstanding during the period.
Diluted loss attributable to common stockholders per common share is
computed by dividing 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.
Dilutive common equivalent shares have not been included in the
computation of basic or diluted loss attributable to common stockholders
per share for the periods ended September 30, 2006 and 2005 because their
inclusion would be anti-dilutive due to the loss from operations.
Following is a reconciliation of basic and diluted loss attributable to
common stockholders per common share for the three months ended September
30, 2006 and 2005, respectively:
Three Months Ended
September 30,
----------------------------
2006 2005
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Loss attributable to common stockholders $ (397,217) (251,819)
Weighted average shares outstanding 49,517,181 49,483,268
Loss attributable to common stockholders
per common share -- basic $ (0.01) (0.01)
Loss per common share -- diluted:
Loss attributable to common stockholders $ (397,217) (251,819)
Weighted average shares outstanding 49,517,181 49,483,268
Common stock equivalents 0 0
Convertible preferred stock 0 0
Weighted average shares and potential
diluted shares outstanding 49,517,181 49,483,268
Loss attributable to common stockholders
per common share -- diluted $ (0.01) (0.01)
7
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
13,021,441 and 22,753,026, respectively, were excluded from the
computation of common share equivalents for the three months ended
September 30, 2006 and 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 $45,342 ($0.00 per share) for the three
months ended September 30, 2006 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 September 30, 2006, $524,242 remains to be
amortized to operations.
During the three month period September 30, 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 $29,200 ($0.00 per
share) for the three months ended September 30, 2006 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".
8
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 loss attributable to common stockholders and basic and diluted
loss attributable to common stockholders per common share would have been
changed to the following pro forma amounts:
--------------------
Three Months Ended
September 30, 2005
--------------------
Net loss attributable to common stockholders:
As reported $ (251,819)
Pro forma (251,819)
Basic net loss attributable to common stockholders per
common share:
As reported (0.01)
Pro forma (0.01)
Diluted net loss attributable to common stockholders
per common share:
As reported (0.01)
Pro forma (0.01)
Stock based compensation:
As reported 14,000
Pro forma --
In determining the compensation cost of options granted during the three
months ended September 30, 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
September 30,
--------------------------
2006 2005
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Risk-free interest rate 4.875% 3.875%
Expected life of options granted 5-7 years 5-7 years
Expected volatility 89% 152%
Expected dividend yield 0% 0%
(3) Comprehensive Loss
Comprehensive loss and its components consist of the following:
Three Months Ended September 30,
--------------- ----------------
2006 2005
--------------- ----------------
Net loss $ (360,867) (235,919)
Other comprehensive income (loss):
Foreign currency translation
adjustment (33,547) 25,365
--------------- ----------------
Comprehensive loss $ (394,414) $ (210,554)
=============== ================
(4) Income Taxes
Through September 30, 2006, the Company has U.S. Federal and State
operating loss carryforwards of approximately $8.7 million and $3.1
million, respectively. In addition, the Company has foreign net operating
loss carryforwards of approximately $8.9 million. The U.S. net operating
loss carryforwards expire in the years 2010 through 2024. The Company has
recorded a valuation allowance at September 30, 2006 and June 30, 2006 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.
9
(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 month periods
ended September 30, 2006 and 2005, the Company has recorded additional
dividends of $5,400 in each period.
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
tose periods. For the three month periods ended September 30, 2006 and
2005, the Company amortized $7,300 and $15,000, respectively, of the
effective dividend discussed above. In addition, the Company has recorded
additional dividends of $38,250 and $25,500 for the three month periods
ended September 30, 2006 and 2005, 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 $33,935, which is included in interest expense in the
accompanying statements of operations, for the three month periods ended
September 30, 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 September 30, 2006 and June 30, 2006.
(7) Recently Issued Accounting Pronouncements
The FASB has issued SFAS No. 157 (SFAS No. 157), Fair Value Measurements,
to eliminate the diversity in practice that exists due to the different
definitions of fair value and the limited guidance for applying those
definitions in GAAP that are dispersed among the many accounting
pronouncements that require fair value measurements. SFAS No. 157 retains
the exchange price notion in earlier definitions of fair value, but
clarifies that the exchange price is the price in an orderly transaction
between market participants to sell an asset or liability in the principal
or most advantageous market for the asset or liability. Moreover, the SFAS
states that the transaction is hypothetical at the measurement date,
considered from the perspective of the market participant who holds the
asset or liability. Consequently, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date
(an exit price), as opposed to the price that would be paid to acquire the
asset or received to assume the liability at the measurement date (an
entry price).
SFAS No. 157 also stipulates that, as a market-based measurement, fair
value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability, and
establishes a fair value hierarchy that distinguishes between (a) market
participant assumptions developed based on market data obtained from
sources independent of the reporting entity (observable inputs) and (b)
the reporting entity's own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). Finally, SFAS No. 157 expands
disclosures about the use of fair value to measure assets and liabilities
in interim and annual periods subsequent to initial recognition. Entities
are encouraged to combine the fair value information disclosed under SFAS
No. 157 with the fair value information disclosed under other accounting
pronouncements, including SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, where practicable. The guidance in this Statement
applies for derivatives and other financial instruments measured at fair
value under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" at initial recognition and in all subsequent periods.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years, although earlier application is encouraged. Additionally,
prospective application of the provisions of SFAS No. 157 is required as
of the beginning of the fiscal year in which it is initially applied,
except when certain circumstances require retrospective application.
The Company is currently evaluating the effect of adopting SFAS No. 157 on
their consolidated financial statements.
10
The FASB has issued SFAS No. 158 (SFAS No. 158), Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, to require an
employer to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare, and other
postretirement plans in their financial statements. Previous standards
required an employer to disclose the complete funded status of its plan
only in the notes to the financial statements. Moreover, because those
standards allowed an employer to delay recognition of certain changes in
plan assets and obligations that affected the costs of providing benefits,
employers reported an asset or liability that almost always differed from
the plan's funded status. Under SFAS No. 158, a defined benefit
postretirement plan sponsor that is a public or private company or a
nongovernmental not-for-profit organization must (a) recognize in its
statement of financial position an asset for a plan's overfunded status or
a liability for the plan's underfunded status, (b) measure the plan's
assets and its obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions), and (c)
recognize, as a component of other comprehensive income, the changes in
the funded status of the plan that arise during the year but are not
recognized as components of net periodic benefit cost pursuant to SFAS No.
87, Employers' Accounting for Pensions, or SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 158
also requires an employer to disclose in the notes to financial statements
additional information on how delayed recognition of certain changes in
the funded status of a defined benefit postretirement plan affects net
periodic benefit cost for the next fiscal year. The Company is evaluating
the effect of adopting SFAS No. 158 on their consolidated financial
statements.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
For the Three Month Periods Ended September 30, 2006
versus September 30, 2005
REVENUES:
Total revenues for the three month period ended September 30, 2006 decreased
11%, compared to the same period a year ago.
Software and license fee revenues decreased $501,997 (43%) for the three-month
period ended September 30, 2006 from the same period last year. Two factors had
an impact on the September quarter results. First, the first quarter is usually
our weakest quarter of the year, with new license sales traditionally slow in
our two largest markets, the U.S. and Europe. Secondly, the completion of a
larger than usual number of license sales were delayed to the second quarter. We
believe that software and license fee revenue will increase in future quarters.
Maintenance fee revenues increased $113,829 (8%) for the three-month period
ended September 30, 2006 from the same period last year. The results reflect the
continued high level of maintenance contract renewals and collections and to new
contracts sold to new customers at the current rate of 20% of the software
license fee paid. We expect maintenance fee revenues to continue to be higher
than last year.
Consulting and other revenues increased $12,866 (2%) for the three-month period
ended September 30, 2006 from the same period last year. As software and license
fee revenues improve, we expect to see improvement in this area as well, as the
number of new software implementations increases.
OPERATING COSTS AND EXPENSES:
Operating expenses decreased $229,142 (7%) for the three-month period ended
September 30, 2006 from the same period last year. Operating expenses for the
three month period ended September 30, 2006 includes a non-cash charge of
$45,342, resulting from the adoption of SAFS 123 (R), "Share-Based Payment" (see
Note 2(c)).
Cost of maintenance, consulting and other expenses decreased $32,816 (4%) for
the three-month period ended September 30, 2006 from the same period last year.
Until demand for implementation services increases, we expect expenses in this
area to be stable and to continue to be at levels similar to last year.
Product development costs increased $16,753 (3%) for the three-month period
ended September 30, 2006 from the same period last year. We expect expenses in
this area to continue to be similar to amounts incurred last year.
Sales and marketing expenses decreased $116,838 (10%) for the three-month period
ended September 30, 2006 from the same period last year. Lower revenues have
resulted in lower sales commissions and bonuses. In addition, due to the
shortfall in revenue we experienced during the quarter, we have slowed marketing
and certain selling expenses, especially travel, until revenues improve.
General and administrative expenses decreased $96,240 (8%) for the three-month
period ended September 30, 2006 from the same period last year. The decrease was
caused primarily by a decrease in staffing levels in the administration and help
desk functions. We expect the level of expenditure in this area to be consistent
throughout the fiscal year and comparable to last year's level of expenditure.
OPERATING LOSS:
Operating loss totaled $359,598 for the three month period ended September 30,
2006 compared to $213,438 for the three month period ended September 30, 2005.
INTEREST EXPENSE, NET:
Interest expense, net decreased $21,213 (94%) for the three-month period ended
September 30, 2006 compared to the same period last year because of interest
income earned on excess cash balances.
NET LOSS:
CorVu Corporation reported net losses of $360,867 and $235,919 for the
three-month periods ended September 30, 2006 and 2005, respectively.
PREFERRED STOCK DIVIDENDS:
The Company recorded preferred stock dividends of $36,350 and $15,900 for the
three-month periods ended September 30, 2006 and 2005, respectively.
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS:
CorVu Corporation incurred losses attributable to common stockholders of
$397,217 and $251,919 for the three-month periods ended September 30, 2006 and
2005, respectively.
12
Liquidity and Capital Resources
Total cash and cash equivalents increased by $280,161 during the three month
period ended September 30, 2006 from $3,104,504 as of June 30, 2006 to
$3,384,665 as of September 30, 2006. Net cash provided by operating activities
was $348,472 for the three month period ended September 30, 2006 fueled by the
collection of receivables during the three month period. Net cash used in
investing activities was $26,448, reflecting the acquisition of capital assets
during the period. Net cash used in financing activities was $41,250, reflecting
the payment of preferred stock dividends of $43,650, partially offset by
proceeds from the exercise of stock options ($2,400).
Our plan is to continue to manage our operating expenses to keep them in line
with revenues we generate. Management expects revenues to continue to improve as
initiatives implemented take effect. 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,
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 September
30, 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.
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, 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.
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.
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.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended September 30, 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.
In reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, the Company issued to
two of its directors non-qualified options to purchase an aggregate of
45,000 shares of the Company's common stock at $0.30 per share. The
options were granted at a price below fair market value and outside of
the Company's stock option plans. In consideration of the option grant,
the directors waived their right to receive an aggregate of $13,500 of
cash compensation for their services on the Company's board.
In reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, the Company issued to
its CEO non-qualified options to purchase an aggregate of 52,500 shares
of the Company's common stock at $0.30 per share. The options were
granted at a price below fair market value and outside of the Company's
stock option plans. This option grant was in consideration of an amount
due (valued at $21,000 at the date of grant) for bonus compensation.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
In September 2006, the Company entered into bonus compensation plans
with its CFO and the managing director of its Asia Pacific subsidiary.
The description of these plans is set forth on Exhibit 10.2 attached
hereto and incorporated herein by reference.
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: October 31, 2006 By /s/ David C. Carlson
----------------------------------
David C. Carlson
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Amendment No. 1 to Employment Agreement for Joseph C. Caffarelli
dated July 20, 2006
10.2 Description of Bonus Compensation Plans for Chief Financial Officer
of CorVu Corporation and Managing Director of CorVu Australasia Pty.
Ltd.
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