Over the last few days I have been asked over and over “Is Wake Up Now, going out of business?” The first reports started coming in last week after WakeUpNow (WORC) released an audited 2013 annual financial report. Not sure why none of the critics or competitors ever made a big deal about the initial Wake Up Now Information & Disclosure Statement, from back in 2011.
Now there is no doubt that if anyone who doesn’t fully understand the past, present and future plans of Wake Up Now were to “JUST” read the financials, they could get the wrong impression. Now I am not talking about the fact the numbers show an $8 million dollar loss over the last two years. I am talking about the real inside story of Wake Up Now. Here are two interviews I did with Jason Elrod, partner and president of WUN, and Kirby Cochran, partner and CEO of WUN. When you listen to these two interviews, then read the financials you get a far deeper understanding of where this company has been and where it’s going.
Before I get into the actual financial report, let’s look at what it was even published since it’s unaudited in the first place. The first info we see has to do with a rule most folks have never heard of from a law they have never read.
INFORMATION AND DISCLOSURE STATEMENT PURSUANT TO RULE 15c2-(11)(a)(5) AND OTC PINK® BASIC DISCLOSURE GUIDELINES All information contained in this information and Disclosure Statement has been compiled fulfill the disclosure requirements of Rule 15c2-(11)(a)(5) promulgated under the Securities Exchange Act of 1934, as amended. The enumerated captions contained herein correspond to the sequential format as set forth in the rule
Read the above Rule by clicking here! So, it’s easy to see that when someone started buying the WORC stock, the company quickly realized someone was either very uneducated about buying and selling stocks, or someone or entity was trying to manipulate the stock. In either case when stock starts to move, based on the SEA of 1934, the company must protect the investors! Next I want to draw attention to the three classes of preferred stock of Wake Up Now. Preferred stock is usually bought by accredited investors who are willing to invest through private placement large sums of cash. Many Venture Capitalists and Angel Investors will request a specific class of stock. Preferred stock is also a great way to avoid long term debt. Accourding to the WORC annual report there are three classes of preferred stock – A, B and C. This is a good indication that several accredited investors (including the CEO, President and COO) have invested heavily in the future of the company.
Troy’s Insights – Unlike a management team who uses OPM (Other People’s Money), when investors take an active role in the management and future of the company, they usually weigh every decision based on their own financial risk and reward metrics.
When you look at the amount of shares of Wake Up Now that have been issues between 2012 and 2013 you can see they are tied to either a vesting clause or the SEC 506 Rule. Companies issue stock to team members to keep them focused on doing the best job they can do. And to make sure the team member sticks around for a while. A current example is Angela Ahrendts who just received $68 million in Apple stock as a signing bonus. Ahrendts Apple stock is restricted and has a vesting clause tied to it.
Between April 2011 and December 31, 2012, we sold 3,016,089 shares of stock to 37 people pursuant to private placements wherein we raised $2,334,266. The private placements offered 1 share of common stock and 1 share of preferred stock at a total unit price of $0.76 per unit. The common stock shares were booked at 1 cent per share. Many of these shares are subject to lockup/leak-out and other restrictions. We believe the transactions to be exempt under Section 4(2) of the Securities Act of 1933, as amended, because they did not involve a public offering. We believe that this sale of securities did not involve a public offering on the basis that each investor is an accredited investor as defined in Rule 501 of Regulation D and because we provided each of our investors with a private placement memorandum disclosing items set out in Rule 501 and 506 of Regulation D. The shares sold were restricted securities as defined in Rule 144 (a) (3). Further, each common stock certificate issued in connection with this private offering bears a legend providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of the Company’s counsel that registration is not required under the Securities Act of 1933. All the unregistered securities issued pursuant to Rule 506 promulgated as part of Regulation D under section 4(2) of the Securities Act of 1933 were offered and sold to a select group of investors who at the time of investment represented themselves to us to be “accredited investors” as defined in Regulation D under the Securities Act of 1933, and knowledgeable and sophisticated investors. In addition, each investor was believed to have had such knowledge and experience in financial and business matters that such investor was capable of evaluating the merits and risks of their investment into us, and able at the time of investment to bear the economic risks of an investment in us. We believe the investors to be accredited because we received written confirmation from the investor in our subscription agreements and we have no reason to doubt the validity of the subscription documents. An appropriate legend was placed on the common stock issued to each shareholder. All stock certificates or other documents that evidence the shares contain a legend (1) stating that the shares have not been registered under the Securities Act and (2) setting forth or referring to the restrictions on transferability and sale of the shares under the Securities Act.
Troy’s Thoughts – It seems to me, after reviewing the annual statement, the investors, Cochran, Elrod and Poloch are putting their money where their mouth is. They are not asking venders, consultants, or most of all their customers and independent business owners to do what they themselves are not doing.
Now lets look at the real nitty-gritty of the annual report… The company as of December 2013 was sitting on a little over $2 million in assets – $2,093,244.00 to be exact.
Troy’s Thoughts – Some assets that I saw that was missing (remember this is an unaudited financial report), from the assets was any of the Wake Up Now’s proprietary software, patents and trademarks. These assets are at times forgotten when putting together annual reports. However, when the audited financials are published in the future I would bet we will see ALL Assets listed and the published number will rise.
Now the issue that has gathered a boatload of attention is the liabilities of Wake Up Now. At close to $7 million -($6,739,484.00) to be exact, many critics and competitors are using this info to state “WUN is broke and going out of business!”
Troy’s Thoughts – Although no company wants to see more liabilities than assets, as I stated above I am not sure all the assets have been counted. And critics might point out that not all the liabilities have been counted either. However, liabilities always standout and are easier to count, than assets at times. In the case of Wake Up Now, all liabilities are relevant, but we need to make sure we fully understand what each category of liability stands for.
Accounts Payable – An accounting entry that represents an entity’s obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.
Accured Expenses – An accounting expense recognized in the books before it is paid for. It is a liability, and is usually current. These expenses are typically periodic and documented on a company’s balance sheet due to the high probability that they will be collected.
Deferred Revenue – Advance payments or unearned revenue, recorded on the recipient’s balance sheet as a liability, until the services have been rendered or products have been delivered. Deferred revenue is a liability because it refers to revenue that has not yet been earned, but represents products or services that are owed to the customer. As the product or service is delivered over time, it is recognized as revenue on the income statement.
Long Term Debt – Loans and financial obligations lasting over one year. Long-term debt for a company would include any financing or leasing obligations that are to come due in a greater than 12-month period. Such obligations would include company bond issues or long-term leases that have been capitalized on a firm’s balance sheet.
Troy’s Thoughts – I wanted to get these definitions out in front of everyone because many times we just don’t fully grasp all the financial terms used in financial reporting. In this case we can see that some of Wake Up Now’s liabilities are current and will need to be paid within a short-term period, while some are long-term due 12-months out. And others are just on paper and will be transferred to an income or asset account down the road.
Now let’s take a look at what “Shareholder’s Equity is, and how it plays into the financial report.
Shareholder Equity – A firm’s total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders’ equity represents the amount by which a company is financed through common and preferred shares. Shareholders’ equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.
Perferred Stock – A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Accured Perferred Dividends – An accounting term referring to the balance sheet item that accounts for dividends that have been declared but not yet paid to shareholders. Accrued dividends are booked as a liability from the declaration date and remain as such until the dividend payment date.
Accrued dividends should not be confused with accumulated dividends, which refer to dividends due to holders of cumulative preferred stock
Common Stock – A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debtholders have been paid in full.
Additional Paid-In Capital – A value that is often included in the contributed surplus account in the shareholders’ equity section of a company’s balance sheet. The account represents the excess paid by an investor over the par-value price of a stock issue. Additional paid-in-capital can arise from issuing either preferred or common stock.
Stock Subscriptions Issuable – Stock subscriptions are a mechanism for allowing employees and investors to consistently purchase shares of company stock over a long period of time, usually at a price that does not include a broker commission. Because there is no commission, the price at which shares are purchased represents a good deal for buyers. Stock subscriptions can reduce shareholder and employee turnover, since they have an interest in remaining with the company to continue to take advantage of the subscription deal. The arrangement also represents a modest increase in the amount of funding available to the company.
Receivables For Stock Purchases – An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company’s accountants and reported on the balance sheet, and they include all debts owed to the company, even if the debts are not currently due.
Retained Deficit – Companies report negative retained earnings as accumulated ( Retained) deficit in the balance sheet. The accumulated deficit is a note to the original retained earnings account. For any more asset and operation losses, companies continue to report them in retained earnings to increase the accumulated deficit, while maintaining the balances of other capital accounts as initially recorded. However, the accumulated deficit is compared to balances of the contributed capital accounts. A company could be in an imminent danger of bankruptcy if the accumulated deficit has exceeded the amount of contributed capital.
Troy’s Thoughts – When reviewing the definitions and studying the WUN annual report, I saw a couple of items that caught my attention.
First was the amount of Capital which has been raised to date. Close to $6,000,000.00 million to date has been invested by accredited and common investors – $5,765,943.00 to be exact. I also realized that the retained deficit was twice as high as the paid-in capital, and that was a concern. Could the critics be right and WakeUpNow could be on the verge of going out of business? NOPE!
Yes the current report for 2012 and 2013 suck, and if someone has not taken the time to interview and review where the company is today compared to where it has come from then without a doubt they could take a worldview that WUN is going down.
But, something I had to take into account is the fact, the company management team, has continued to invest in he company, take little or no pay, and continue to stay focused on their business plan. And I was once again reminded of how many tech companies, like natural resources, and pharmaceutical companies invest heavily in the early years in research and development and don’t see the profits until someone where in the future.
Although there are no guarantees that Wake Up Now will turn a profit in 2014, I definitely feel at the very least they will cut the length between their losses and profits considerably.
Wake Up Now in their annual report listed revenues of $12,180,866.00, with costs of sales of $11,167,523.00. Now critics and competitors have been eating these numbers up, making it clear there is no way Wake Up Now can continue to run with such tight margins. And you know what… The critics and competitors are totally correct!
But there is something about the cost of sales, that I want everyone to think about – the net costs per unit go down as sales go up! So as I gave thought to the inside information I had about the growth of the company, I started to realize that as the company has grown, and sales have risen, the percentage of the cost of goods has gone down.
Think about it, how many times have you read a sales flyer, and it said buy one for $3.00 or two for $5.00? Well just like you and I when companies increase the volume of their sales for the services and product they are selling or manufacturing the cost per item or in software, the cost per seat also goes down, raising the profit margin.
If we take an item, that was not listed in the 2012 or 2013 report, like the new energy drink called “Thunder” we can see exactly how this formula works. When WUN placed their first order, it was a smaller order than the most current. And within the first few weeks, they had sold out of the product. Based on the new metrics they had to work with, they placed a much larger order, dropping the cost per units drastically, and raising their profit margins.
Since the sales commissions are static and don’t change, then the gross profit of the Thunder per unit just went up! So what does this mean to the bottom line? MORE PROFITS! The same thing rings true with their SaaS suite of services. When dealing with software venders, the company is given a sliding scale on what their wholesale cost is for each seat (software service activated). As the amount of activations rise, the cost per seat goes down.
So once again we see that as the overall sales of Wake Up Now products and subscriptions rise, the underlying costs per unit/seat goes down and the gross profits rise! There is one line item that may not make sense, so I want to add the definition here.
SG&A – Selling, General & Adminitrative Expenses – Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company.
Direct selling expenses are expenses that can be directly linked to the sale of a specific unit such as credit, warranty and advertising expenses. Indirect selling expenses are expenses which cannot be directly linked to the sale of a specific unit, but which are proportionally allocated to all units sold during a certain period, such as telephone, interest and postal charges. General and administrative expenses include salaries of non-sales personnel, rent, heat and lights.
When we look at Wake Up Now we know that the “seeling expense” is pretty static. The max payout from the direct selling distribution channel is static, and the in-house selling incentive plan for customer service reps is static. The overall general expenses should also be pretty static as they are with most companies, both inside and outside the direct selling industry. The one fluctuating expense could be the administrative expenses, but even these expenses should only rise in direct proportion to the sales growth the company is experiences.
Troy’s Thoughts – I have seen it written and spoken that Wake Up Now IBOs and customers are not really using the products and services. Well, although I can’t speak for all vender, I can speak about one vender because I have spent hours with them asking about activations of their software suite through the WUNHub. When I first started tracking this success of this one vender the numbers were not as high as their pro forma had anticipated.
Yet six months later the activations were above the pro forma. What made the numbers flip? the vender feels it has to do with the growth of the Wake Up Now customer service team. As the team grew, and a director of customer service was hired, the CS team learned the true value of each service.
Once they had a personal experience and realized how each service in the WUNHub could save customers money, lower their taxes and help protect their families from cyber crime, they were able to increase the amount of activations. Now everyone seems to be winning.
The company has lowered their net cost per product and service. The IBOs have an internal teams helping their to support and service their customers. And most of all the Wake Up Now customers are realizing the true value of their monthly subscriptions.
One question I have seen raised over the last few days is – “Can Wake Up Now continue to rack up millions in losses?” Well the logical answer is NO! But a more productive answer might be the following “Has the Wake Up Now management team learned from past mistakes, and have they put into place metrics to better manage the processes which will lead them to profitability?”
Troy’s Thoughts – From my personal experiences at the world headquarters of Wake Up Now, I can say the management team os 100% focused on the metrics and processes used to create success. I personally believe they are are following the Seven Pillers of Inflection which Kirby Cochran has built his whole career around. This short video will give you an inside look at some of the processes and how Wake Up Now is setup.
I personally believe, and my professional opinion is, that as long as the company management continues to implement and stay totally focused on their long-term goals for the company, they will not only continue to turn the company into a profitable concern, I truly believe that Cochran, Elrod and Polich will create what will become an Iconic Brand, through the partnership they have created with the WUN Independent Business Owners.
Safe Harbor Statement This video and editorial may include forward-looking statements on our current expectations and projections about future events. In some cases forward-looking statements can be identified by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based upon current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict. The information in this video is provided only as of the date of this video.
Wake Up Now Inc., has not reviewed, or approved this editorial before it was published.
Deep South Strategic Solutions is a consultant to the Board of Directors and executive team of Wake Up Now.
Neither Deep South Strategic Solutions, nor the writer of this editorial owns stock in WORC as of the publication of this editorial.