|
CROSSROADS SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statement
Various statements contained in or incorporated by reference into this annual
report that express a belief, expectation, or intention, or that are not
statements of historical fact, are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These
forward-looking statements may include projections and estimates concerning
capital expenditures, our liquidity and capital resources, the timing and
success of specific projects, outcomes and effects of litigation, claims and
disputes, elements of our business strategy and other statements concerning our
operations, economic performance and financial condition. When used in
this annual report, the words "could," "believe," "anticipate," "intend,"
"estimate," "expect," "may," "continue," "predict," "potential," "project" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. In
particular, the factors discussed below and detailed in our prospectus dated
August 30, 2011 and filed with the SEC pursuant to Rule 424(b) on September 14,
2011, could affect our actual results and cause our actual results to differ
materially from expectations, estimates, or assumptions expressed in, forecasted
in, or implied in such forward-looking statements.
10
--------------------------------------------------------------------------------
Forward-looking statements may include statements about our:
· our ability to implement our business strategy, including the transition from
a hardware storage company to a software solutions and services provider;
· anticipated trends and challenges in our business and the markets in which we
operate;
· our expected future financial performance;
· our expectations regarding our operating expenses;
· our ability to anticipate market needs or develop new or enhanced products to
meet those needs;
· our ability to expand into other sectors of the storage market, beyond
protection storage;
· our expectations regarding market acceptance of our products;
· our ability to compete in our industry and innovation by our competitors;
· our ability to protect our confidential information and intellectual property
rights;
· our ability to successfully identify and manage any potential acquisitions;
· our ability to manage expansion into international markets;
· our ability to remediate any material weakness in our internal controls
identified by our independent registered public accounting firm;
· our ability to maintain or broaden our business relationships and develop new
relationships with strategic alliances, suppliers, customers, distributors or
otherwise;
· our ability to recruit and retain qualified sales, technical and other key
personnel;
· our ability to obtain additional financing; and
· our ability to manage growth.
All forward-looking statements involve risks, assumptions and uncertainties. The
occurrence of the events described, and the achievement of the expected results,
depend on many events, some or all of which are not predictable or within our
control. Actual results may differ materially from expected results. These
risks, assumptions and uncertainties are not necessarily all of the important
factors that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Other unknown or
unpredictable factors also could harm our results. In light of these risks,
uncertainties and assumptions, the forward-looking events might not occur.
Readers are cautioned not to place undue reliance on forward-looking statements,
as there can be no assurance that the plans, intentions or expectations upon
which they are based will occur. By their nature, forward-looking statements
involve numerous assumptions, known and unknown risks and uncertainties, both
general and specific, that contribute to the possibility that the predictions,
forecasts, projections and other things contemplated by the forward-looking
statements will not occur. Forward-looking statements in this annual report are
based on management's beliefs and opinions at the time the statements are made.
The forward-looking statements contained in this annual report are expressly
qualified in their entirety by this cautionary statement. The forward-looking
statements included in this annual report are made as of the date of this annual
report and we undertake no obligation to publicly update or revise any
forward-looking statements to reflect new information, future events or
otherwise, except as required by applicable securities laws.
Overview
The following discussion and analysis of the financial condition and results of
our operations should be read in conjunction with the condensed consolidated
financial statements and related notes included elsewhere in this annual report
on Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed below. Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and those discussed in
the section entitled "Risk Factors" included elsewhere in our filings with the
Securities and Exchange Commission.
We are a global provider of solutions to connect, protect and secure
business-critical data for enterprise storage and the cloud computing
marketplace. Using our storage software solutions leveraging our extensive
patent portfolio enables highly-resilient data protection, pro-active data
security and intelligent storage connectivity.
11
--------------------------------------------------------------------------------
Our strategy and operations are currently focused on the following initiatives:
Strategic Focus
Most technologies have limited life spans as systems transition to newer
environments. In 2005, we undertook a strategic initiative to develop a software
solutions and services model focusing on emerging higher growth business
opportunities for the company. We expanded our company's focus from solely
offering bridging and routing solutions. This transition of our research and
development efforts have resulted in the creation of our currently shipping
products: StrongBox, RVA, and SPHiNX.
We deliver our current offerings to the market through hardware appliances. This
strategy allows us to use off-the-shelf hardware platforms, which can easily be
customized to support specific OEM or SI specifications. We believe this
strategy provides us with low-cost, high performance options that can be quickly
deployed with minimal disruption to customers all the while minimizing inventory
and associated excess and obsolete costs.
Substantially all of our current products have been sold in combination with
support and services contracts. Our support and services contracts are typically
offered for periods of one to three years. We mainly sell these products through
a network of OEMs, SIs and VARs.
We expect growth in international markets for StrongBox, RVA and SPHiNX to be a
significant factor contributing to our revenue growth in future periods.
International revenue accounted for approximately 2.9% and 3.6% of our total
revenue in the years ended October 31, 2010 and 2011, respectively. As we expand
internationally, we may incur additional costs to conform our products to comply
with local laws or local product specifications and to ship our products to our
international customers.
IP Licensing Campaign Focus
We continue to realize revenue from existing intellectual property licensees
with go-forward royalties derived from the '972 patent family, which accounts
for 8 of our existing 96 granted patents and 32 pending patents as of October
31, 2011. We maintain an active licensing program related to the '972 family,
which has been licensed to over 40 of the leading storage industry providers. We
pursue licensing fees for past shipments and recurring licensing fees related to
ongoing shipments. In some cases we are required to litigate where we believe
other companies are infringing our claims. Generally, these cases are settled
quickly as we engage in business discussions with the opposing parties; however,
one or more of the litigants may pursue their defense to greater lengths, which
would require higher expenses to continue the lawsuit. Our IP licensing revenue
for the year ended October 31, 2011 was $5.1 million, or approximately 34.0% of
revenues.
We continue to look for different ways to extract value from our patents outside
the '972 family, which may include commercial, financial and strategic
initiatives. Intellectual property, or IP, holds value beyond pure monetary
reasons. For example, we believe that the proprietary nature of our products is
appealing to both end-users and strategic partners who view our products as not
being easily replaceable. Additionally, IP may be a significant barrier to entry
for potential competitors. Therefore, we will continue to assess the value of
our current portfolio and attempt to expand and take advantage of our IP
portfolio.
Leveraging our IP, Current Products and Capital
Our product development strategy includes the creation of code modules that can
be used across different products, enabling fast development and high quality
and reliability. For example, StrongBox used code modules from our existing
solutions, such RVA and SPHiNX. This allowed for the architecture, development
and release of StrongBox only one year after the start of the program, resulting
in what we believe to be a first-to-market and best-of-breed product.
12
--------------------------------------------------------------------------------
Growing Our Market Reach
Our initial market for StrongBox focuses on the Cloud and Media market to gain
visibility in the industry for StrongBox and to learn from customer experience
for the offering. With the expansion of on-line web access globally, we are also
focused on delivering valuable information and content which enables our website
to be a lead generation engine to grow our VAR channel for Media as well as the
security and surveillance, healthcare and government industries. While our
marketing efforts are focused on this vertical approach, we believe that
StrongBox can work for any company with a long-term archive need. Therefore, we
focus on website and search engine optimization and expansion of strategic
partners to work with cloud storage and archiving service providers directly to
offer the non-proprietary, secure and highly portable options we believe to be
missing in cloud-based solutions today. We expect that our launch strategy for
StrongBox provides visibility, customer acquisition and strategic partner
relationships that can lead to OEM partnerships and to expand the reach of
StrongBox globally.
Key Financial Definitions
Revenue. Revenue consists of sales of hardware, software and services, as well
as royalties we earn for products and the license of certain intellectual
property. Our "product revenue" is composed of sales of our hardware products
and software products sold to value added resellers, original equipment
manufacturers and end users. Our "IP license, royalty and other revenue" is
derived from the licensing of intellectual property, royalty payments, and sales
of service contracts.
Cost of Revenue. Cost of revenue is composed of cost of product revenue and IP
license, royalty and other revenue. "Cost of product revenue" consists primarily
of the cost charged by our previous contract manufacturer to manufacture our
products, shipping charges and warranty obligations. "Cost of IP license,
royalty and other revenue" consists of professional fees and services, overhead
allocations, and obsolete inventory adjustments.
Operating Expenses. Operating expenses consist of sales and marketing, research
and development, general and administrative expenses and amortization of
intangible assets. Personnel-related costs, which include stock-based
compensation expense, are the most significant component of each of these
expense categories. We had 87 employees as of October 31, 2009, 86 employees as
of October 31, 2010 and 99 employees as of October 31, 2011. We expect our
headcount will remain fairly consistent during fiscal year 2012. In any
particular period, the timing of additional hires could materially affect our
operating expenses, both in absolute dollars and as a percentage of revenue.
Sales and Marketing. Sales and marketing expenses include personnel costs,
employee sales commissions and marketing programs. We have sales and marketing
personnel throughout the United States and in our sales office in Germany.
Research and Development. Research and development expenses primarily include
personnel costs, depreciation on lab equipment, costs of prototype equipment,
other related costs of quality assurance and overhead allocations. We expense
research and development costs as incurred. Though we incur software development
costs, the costs of software development that we incur after a product has
reached marketability are considered immaterial, and to date, we have not
capitalized any such costs.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for personnel and facilities related
to our executive, finance, human resource, information technology and legal
organizations, and fees for professional services. Professional services,
excluding those for IP (which are included in cost of revenue), consists of
outside legal, tax and audit costs.
Amortization of Intangibles. Amortization of intangibles consists of the
amortization of purchased technology.
13
--------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our discussion and analysis of the financial condition and results of operations
is based on the accompanying consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these statements requires us to make significant estimates
and judgments about future uncertainties that affect reported assets,
liabilities, revenues and expenses and related disclosures. We base our
estimates on historical experience and on various other assumptions believed to
be reasonable under the circumstances. Our critical accounting estimates require
the most difficult, subjective or complex judgments and are described below. An
accounting estimate is considered critical if it requires estimates about the
effect of matters that are inherently uncertain when the estimate is made, if
different estimates reasonably could have been used or if changes in the
estimate that are reasonably possible could materially impact the financial
statements. We have discussed the development, selection and disclosure of our
critical accounting policies with the Audit Committee of our board of directors.
We believe the assumptions and estimates used and the resulting balances are
reasonable; however, actual results may differ from these estimates under
different assumptions or conditions.
Revenue Recognition
Application of the various accounting principles related to measurement and
recognition of revenue requires us to make judgments and estimates in the
following related areas: determining fair value in arrangements with multiple
deliverables, the amount of revenue allocated to undelivered elements in
software arrangements using vendor-specific objective evidence ("VSOE"), the
interpretation of non-standard terms and conditions in sales agreements, and
assessments of future price adjustments, such as future product returns and
estimates for contractual licensee fees. Additionally, we sometimes use judgment
in determining whether any undelivered elements are essential to the
functionality of the delivered elements in order to determine the appropriate
timing of revenue recognition.
For established products and PCS, we determine fair value based on VSOE, which
consists of the prices charged when these services are sold separately.
For arrangements with multiple elements entered into prior to November 1, 2010,
the Company allocates revenue to the separate elements based on relative fair
value, provided the fair value for all elements of the arrangement are known.
If, in an arrangement, the undelivered elements have fair value, but the
delivered element does not, the fair value of the undelivered elements is
deferred and the residual revenue is allocated to the delivered elements. If
fair value does not exist for undelivered elements, then revenue for the entire
arrangement is deferred until all elements have been delivered.
While the majority of our sales arrangements contain standard terms and
conditions, we sometimes apply judgment when interpreting complex arrangements
with non-standard terms and conditions to determine the appropriate accounting.
An example of such a judgment is deferring revenue related to significant
post-delivery obligations and customer acceptance criteria until such
obligations are fulfilled.
We record reductions to revenue for estimated future product returns. These
allowances are based on programs in existence at the time revenue is recognized.
We have historically been able to reliably estimate the amount of allowances
required and recognize revenue, net of these projected allowances, upon shipment
to our customers. If allowances cannot be reliably estimated in any specific
reporting period, revenue would be deferred until the rights have lapsed and we
are no longer under obligation to reduce the price or accept the return of the
product.
We license our patented technology to customers under licensing agreements that
allow those customers to utilize our technology in specific products they offer.
As consideration, licensees pay us a fee based on the amount of sales of their
products that incorporate our patented technology. On a periodic and timely
basis, the licensees provide us with reports listing their sales to end users
for which they owe us license fees. Similarly, royalty revenue is estimated from
licensee reports of units sold to end users subject to royalties under master
contracts. In both cases, these reports are used to substantiate delivery and we
recognize revenue based on the information in these reports.
In October 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue
Arrangements" and ASU 2009-14, "Certain Revenue Arrangements that Include
Software Elements." We adopted the new guidance on a prospective basis for new
or materially modified revenue arrangements as of November 1, 2010.
14
--------------------------------------------------------------------------------
For arrangements entered into or materially modified beginning November 1, 2010,
when elements such as hardware, software and services are contained in a single
arrangement, or in related arrangements with the same customer, we allocate
revenue to each element in an arrangement based on relative selling price using
a selling price hierarchy. The selling price for a deliverable is based on its
VSOE if available, third party evidence ("TPE") if VSOE is not available, or our
best estimate of selling price ("ESP") if neither VSOE nor TPE is available. The
maximum revenue recognized on a delivered element is limited to the amount that
is not contingent upon the delivery of additional items.
For established products, we use VSOE. For new products, installation and
professional services for which we are unable to establish selling price using
VSOE or TPE, we use ESP. The objective of ESP is to determine the price at which
we would transact a sale if these items were sold on a standalone basis. In
determining ESP, we use the cost to provide the new product, installation or
professional service plus a margin. When using cost plus a margin, we consider
the total cost of the item to establish a VAR or OEM price. We also consider the
historical margins for established products and other factors, including any
changes to pricing methodologies, competitiveness of new products, installation
and professional services, pricing pressures due to entering a new market, and
cost drivers that could cause future margins to differ from historical margins.
Inventories
Our manufacturing and service parts inventories are stated at the lower of cost
or market, with cost computed using standard costs, which approximates the
first-in, first-out ("FIFO") basis. Adjustments to reduce the carrying value of
both manufacturing and service parts inventories to their net realizable value
are made for estimated excess, obsolete or impaired balances. Factors
influencing these adjustments include significant estimates and judgments about
the future of product life cycles, product demand, rapid technological changes,
development plans, product pricing, physical deterioration, quality issues, end
of service life plans and volume of enhanced or extended warranty service
contracts.
Impairment of Long-lived Assets
We apply judgment when reviewing amortizable intangible and other long-lived
assets ("long-lived assets") for impairment. We apply judgment when evaluating
potential impairment indicators. Indicators we consider include adverse changes
in the business climate that could affect the value of our long-lived assets,
changed long-term economic outlook including downward revisions in our revenue
projections, negative current events, decreases or slower than expected growth
in sales of products and relative weakness in customer channels.
When an impairment indicator exists, we then evaluate long-lived assets for
impairment as appropriate. Because we operate as a single reporting unit, we
consider the company as a whole when evaluating our long-lived assets for
impairment. If our business operations were to change and revenue streams
related to long-lived assets were to become identifiable at a lower level, we
would apply significant judgment to determine the appropriate grouping of these
assets for impairment testing.
We use an undiscounted cash flow approach to evaluate our long-lived assets for
recoverability when there are impairment indicators. Estimates of future cash
flows require significant judgments about the future and include company
forecasts and our expectations of future use of our long-lived assets, both of
which may be impacted by market conditions. Other critical estimates include
determining the asset group or groups within our long-lived assets, the primary
asset of an asset group and the primary asset's useful life.
Inherent in our development of cash flow projections for the income approach
used in an impairment test are assumptions and estimates derived from a review
of our operating results, approved business plans, expected growth, cost of
capital and income tax rates. We also make certain assumptions about future
economic conditions, applicable interest rates and other market data. Many of
the factors used in assessing fair value are outside of our control. Future
period results could differ from these estimates and assumptions, which could
materially affect the determination of fair value of the company and future
amounts of potential impairment.
15
--------------------------------------------------------------------------------
Accrued Warranty
We estimate future product failure rates based upon historical product failure
trends as well as anticipated future failure rates if believed to be
significantly different from historical trends. Similarly, we estimate future
costs of repair based upon historical trends and anticipated future costs if
they are expected to significantly differ, for example due to negotiated
agreements with third parties. We use a consistent model and exercise
considerable judgment in determining the underlying estimates. Our model
requires an element of subjectivity for all of our products. For example,
historical return rates are not completely indicative of future return rates and
we must therefore exercise judgment with respect to future deviations from our
historical return rates. When actual failure rates differ significantly from our
estimates, we record the impact of these unforeseen costs or cost reductions in
subsequent periods and update our assumptions and forecasting models
accordingly. As our newer products mature, we are able to improve our estimates
with respect to these products. We warrant products for a period from 12 to 39
months following the sale while receiving a hardware warranty from our vendors
for a period of typically 36 months.
Income Taxes
Deferred tax assets and liabilities are recognized for the effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In addition,
deferred tax assets are reduced by a valuation allowance if it is more likely
than not that some or all of the deferred tax asset will not be realized. A
number of estimates and judgments are necessary to determine deferred tax
assets, deferred tax liabilities and valuation allowances.
We recognize the benefit from a tax position only if it is more-likely-than-not
that the position would be sustained upon audit based solely on the technical
merits of the tax position. The calculation of our tax liabilities requires
judgment related to uncertainties in the application of complex tax regulations.
We recognize liabilities for uncertain tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we have to determine the probability of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis. This evaluation is based on factors including, but not limited
to, changes in facts or circumstances, changes in tax law, effectively settled
issues under audit and new audit activity.
We have provided a full valuation allowance against our U.S. net deferred tax
assets due to our history of net losses, difficulty in predicting future results
and our conclusion that we cannot rely on projections of future taxable income
to realize the deferred tax assets. In addition, we have provided a full
valuation allowance against certain of our international net deferred tax
assets. Due to reorganizations in these jurisdictions, it is unclear whether we
will be able to realize a benefit from these deferred tax assets. Also, certain
changes in stock ownership could result in a limitation on the amount of net
operating loss and tax credit carryovers that can be utilized each year. Should
we undergo such a change in stock ownership, it would severely limit the usage
of these carryover tax attributes against future income, resulting in additional
tax charges.
Significant management judgment is required in determining our deferred tax
assets and liabilities and valuation allowances for purposes of assessing our
ability to realize any future benefit from our net deferred tax assets. We
intend to maintain this valuation allowance until sufficient positive evidence
exists to support the reversal of the valuation allowance. Future income tax
expense will be reduced to the extent that we have sufficient positive evidence
to support a reversal or decrease in this allowance. We also have deferred tax
assets and liabilities due to prior business acquisitions with corresponding
valuation allowances after assessing our ability to realize any future benefit
from these acquired net deferred tax assets.
16
--------------------------------------------------------------------------------
Stock-Based Compensation
On January 1, 2006, we adopted the provisions of the applicable guidance under
ASC Topic 718 for share-based payment transactions. Under the provision of this
guidance, stock-based compensation costs for employees is measured on the grant
date, based on the estimated fair value of the award on that date, and is
recognized as expense over the employee's requisite service period, which is
generally over the vesting period, on a straight-line basis. We adopted this
guidance using the prospective transition method. Under this transition method,
non-vested option awards outstanding at January 1, 2006, continue to be
accounted for under the minimum value method, and all awards granted, modified
or settled after the date of adoption are accounted for using the measurement,
recognition and attribution provisions of this guidance.
Under the provisions of this guidance, we make a number of estimates and
assumptions. The estimation of stock awards that will ultimately vest requires
judgment, and to the extent actual results differ from our estimates, such
amounts will be recorded as an adjustment in the period estimates are revised.
Actual results may differ substantially from these estimates. In valuing
share-based awards under this guidance, significant judgment is required in
determining the expected volatility of our common stock and the expected term
individuals will hold their share-based awards prior to exercising. The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. Expected volatility is based on historical
volatility of Crossroads stock. The expected term represents an estimate of the
time options are expected to remain outstanding. Prior to our filing
our registration statement on Form S-8 on September 23, 2011, shares of our
common stock issuable upon exercise of our options were restricted for one year
from the date of exercise, therefore we do not believe the actual history
of options exercised is an accurate method of calculating expected term and use
the simplified method to derive an expected term. The risk-free rate for periods
within the contractual life of the option is based on the U.S. treasury yield
curve in effect at the time of grant. The variables used in the Black-Sholes
calculation are listed below for the respective periods:
October 31,
2010 2011
Expected dividend yield 0 % 0 %
Expected volatility 63 - 68 % 69 - 70 %
Risk-free interest rate 1.2 - 2.6 % 0.9 - 2.3 %
Expected term (years) 6.1 6.1
Results of Operations
Year Ended October 31, 2011 Compared to the Year Ended October 31, 2010
Revenue. Total revenue decreased $1.4 million, or 8.5%, to $15.0 million for
the year ended October 31, 2011 from $16.4 million for the year ended October
31, 2010.
Product revenues for the year ended October 31, 2011 increased $0.2 million, or
4.8%, to $4.4 million compared with $4.2 million for the year ended October 31,
2010 due to an increase in RVA revenue of $0.5 million and an increase in SPHiNX
revenue of $0.1 million for the year ended October 31, 2011, partially offset by
a decrease in router product revenue of $0.4 million.
IP license, royalty and other revenue consists of the following for the year
ended October 31, 2010 and 2011:
17
--------------------------------------------------------------------------------
Year Ended October 31,
2010 2011
(in thousands)IP license revenue:
IP license fee allocated to past shipments 5,322 4,308
Ongoing IP license revenue
1,105 833
Total IP license revenue 6,427 5,141
HP royalty and PCS service revenue 5,406 4,699
PCS service revenue (non-HP) 292 706
IP license, royalty and other revenue 12,125 10,546
IP license, royalty and other revenues for the year ended October 31, 2011
decreased $1.6 million, or 13.2%, to $10.5 million compared with $12.1 million
for the year ended October 31, 2010.
IP license revenue decreased $1.3 million as a result of three IP agreements
being entered into during the year ended October 31, 2010, while two agreements
were entered into during the year ended October 31, 2011. HP royalty and PCS
service revenue decreased approximately $0.7 million due to decreased shipments
by HP of our legacy router products by approximately $0.8 million, offset by an
increase in SPHiNX revenue of approximately $0.1 million. PCS service revenue
(non-HP) increased $0.4 million due to an increase in the number of customers
covered by PCS contracts and an increase in PCS contract rates due to our newer
product offerings.
Cost of Revenue. Cost of revenue increased $0.2 million, or 8.0%, to $2.7
million, for the year ended October 31, 2011 from $2.5 million for the year
ended October 31, 2010. Product costs for the year ended October 31, 2011
decreased $65,000, or 15.4%, to $357,000 compared with $422,000 for the year
ended October 31, 2010. IP license, royalty and other costs for the year ended
October 31, 2011 increased $0.2 million, or 9.5%, to $2.3 million compared with
$2.1 million for the year ended October 31, 2010 due to the increase in
professional fees related to negotiating our IP licensing activities. The
extended negotiations of one IP agreement reached in the fourth quarter of 2011
resulted in higher professional fees and lower margins for this IP agreement.
Sales and Marketing. Sales and marketing expenses decreased $0.1 million, or
0.2%, to $5.2 million for the year ended October 31, 2011 from $5.3 million for
the year ended October 31, 2010. This decrease was due to reduced consulting and
outside services by $0.2 million and travel and travel related expenses by $0.1
million, offset by increases in stock based compensation expense by $0.1 million
and evaluation units to prospective customers by $0.1. We anticipate that sales
and marketing expenses will increase in absolute dollars, as we intend to market
our new Strongbox product.
Research and Development. Research and development expenses increased $1.8
million, or 20.2%, to $10.7 million for the year ended October 31, 2011 from
$8.9 million for the year ended October 31, 2010. This increase was due to
increases in payroll and benefits by $1.5 million, professional expenses by $0.2
million, and consulting and outside services by $0.1 million. We anticipate that
research and development expenses will be more consistent going forward, and the
increase in absolute dollars in the current year were a result of expanding our
engineering department in connection with the development of new products.
General and Administrative. General and administrative expenses increased $0.6
million, or 23.1%, to $3.2 million for the year ended October 31, 2011 from $2.6
million for the year ended October 31, 2010. The increase was due to increases
in professional fees of $0.4 million, consulting and outside services of $0.2
million, accounts receivable reserve of $0.1 million and payroll and benefits of
$0.1 million, offset by a decrease in stock-based compensation of $0.3 million.
We expect the absolute amount of general and administrative expenses to increase
in the future as we incur a full year of public company expenses.
Amortization of intangible assets. Amortization of intangible assets expenses
decreased $0.6 million, or 50.0%, to $0.6 million for the year ended October 31,
2011 from $1.2 million for the year ended October 31, 2010. The decrease was due
to 2010 containing a full year of amortization of purchased technology that was
fully amortized in the second quarter of 2011.
18
--------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flows
Our principal liquidity requirements are to meet our lease obligations and our
working capital and capital expenditure needs. Subject to our operating
performance, which, if significantly adversely affected, would adversely affect
the availability of funds, we expect to finance our operations through cash
provided by operations and existing borrowings available under our credit
facility. We cannot be sure, however, that this will be the case, and we may
seek additional financing in the future. The following table summarizes our
primary sources and uses of cash in the periods presented:
Year Ended October 31,
2010 2011
(in thousands)
Net cash used in operating activities $ (179 ) $ (1,881 )
Net cash used in investing activities (320 ) (4,675 )
Net cash provided by financing activities 9,178 144
Net increase (decrease) in cash and cash equivalents 8,514 (6,475 )
Cash and cash equivalents, end of period
13,811 7,336
Net cash used in operating activities increased from approximately $0.2 million
in the year ended October 31, 2010 to a use of cash of approximately $1.9
million in the year ended October 31, 2011 due to increased losses for the year,
primarily from the increase in expenses related to research and development,
adjusted for the impact of non-cash charges, particularly relating to
amortization of intangibles, depreciation of fixed assets, and stock-based
compensation, and net changes in operating assets and liabilities, primarily
changes in our accounts receivable, accounts payable, and deferred revenue.
A significant component of cash provided by operating activities is payments
received from our IP license agreements. The economic nature of these agreements
is such that they are not consistent in terms of cash receipts. The agreements
include an initial receipt of cash upon reaching agreement, as consideration for
royalties on past shipments. The amounts for past shipments reflected in
historical financial statements have fluctuated from period to period and, to
the extent that the number of new customers resulting from our licensing
campaign decreases, historical results may not be indicative of future receipts.
We may not be able to generate positive cash flows from operating activities in
the near term as we continue to invest in and market StrongBox, increase
inventory purchases and invest in functions associated with being a public
company.
Cash flows from investing activities primarily relate to capital expenditures to
support our employees, our capital needs in our research and development
efforts, and the purchase of investments with available cash. Net cash used in
investing activities was approximately $0.3 million during the year ended
October 31, 2010 compared to $4.7 million in the year ended October 31, 2011.
Included in the year ended October 31, 2011 are capital expenditures primarily
for research and development equipment in the amount of $1.3 million and the
purchases of investments of $3.4 million net of maturities.
Cash flows provided by financing activities in the year ended October 31, 2010
was $9.2 million. The amount included in the year ended October 31, 2010 was the
result of a private placement of stock, net of expenses. Cash provided by
financing activities in the year ended October 31, 2011 was approximately $0.1
million from the exercise of stock options by employees.
We have a line of credit with a bank pursuant to a loan and security agreement.
The committed revolving line provides for advances of up to $4.0 million with a
borrowing base of 80% of eligible accounts receivable. The loan agreement also
provides for a term loan in the amount of $3 million, available to us in no more
than six advances, each in an a minimum amount of $500,000 or a lesser amount
which remains unadvanced if such advance is the third and final term loan
advance. The term loan is subject to a borrowing base is $2 million if we
maintain at least $5 million in unrestricted cash with or through the bank plus
80% of eligible accounts, as determined by the bank. Interest under the loan
agreement accrues at a floating per annum rate equal to rate of the prime rate
determined under the agreement plus 0.25%. We are required to satisfy certain
financial and reporting covenants under the loan agreement. The line of credit
will mature on December 28, 2012. The maturity for each advance under the term
loan is 36 months after the advance but no later than April 1, 2015. As of
October 31, 2010 and 2011, there was $1.97 million drawn and outstanding on the
line of credit. We are in compliance with all covenants. The loan agreement is
secured by the company's assets.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 updated accounting guidance
related to fair value measurements and disclosures that result in common fair
value measurements and disclosures between GAAP and International Financial
Reporting Standards. This guidance includes amendments that clarify the intent
about the application of existing fair value measurements and disclosures or
change a particular principle or requirement for fair value measurements or
disclosures. This guidance is effective for interim and annual periods beginning
after December 15, 2011. We do not believe that the adoption of this guidance
will have a material impact on its financial position or results of operations.
19
--------------------------------------------------------------------------------
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income
(Topic 220) ("ASU 2011-05"). ASU 2011-05 modifies how comprehensive income is
presented in an entity's financial statements. The guidance issued requires an
entity to present the components of net income and total net income, the
components of other comprehensive income and total other comprehensive income,
and the total comprehensive income either in a single continuous statement of
comprehensive income, or in two separate but consecutive statements and
eliminates the option to present the components of other comprehensive income as
part of the statement of changes in stockholder's equity. The revised financial
statement presentation for comprehensive income will be effective for us for
fiscal years, and interim periods within those years, beginning after
December 15, 2011. We anticipate adopting ASU 2011-05 beginning November 1,
2012. We do not anticipate that these changes will have a significant impact
on our consolidated financial statements and disclosures.
[ Back To Contact Center Solutions Homepage's Homepage ]
|
ProtoCall One Unveils Demonstration Facility for Contact Center Managers 
Otay Water District Uses Interactive Intelligence Unified IP Communications Solution to Improve Customer Service
NEW Consolidating Infrastructures: IT's New Call to Business [white paper]
