PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAINING
DATA CORPORATION AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2007
|
|
March 31,
2007
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,054
|
|
$
|
11,654
|
|
Trade accounts receivable, less allowance
for doubtful accounts of $329 and $200, respectively
|
|
1,979
|
|
1,609
|
|
Other current assets
|
|
497
|
|
461
|
|
Total current assets
|
|
15,530
|
|
13,724
|
|
|
|
|
|
|
|
Property, furniture and equipment, net
|
|
876
|
|
949
|
|
Goodwill
|
|
26,622
|
|
26,751
|
|
Other assets
|
|
104
|
|
112
|
|
Total assets
|
|
$
|
43,132
|
|
$
|
41,536
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable
|
|
$
|
307
|
|
$
|
130
|
|
Accrued liabilities
|
|
2,241
|
|
2,536
|
|
Deferred revenue
|
|
4,966
|
|
4,801
|
|
Debt-net of discount
|
|
964
|
|
|
|
Total current liabilities
|
|
8,478
|
|
7,467
|
|
Long-term debt-net of discount
|
|
|
|
24,150
|
|
Total liabilities
|
|
8,478
|
|
31,617
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
Common stock
|
|
2,620
|
|
2,118
|
|
Additional paid-in-capital
|
|
126,151
|
|
101,385
|
|
Accumulated other comprehensive income
|
|
1,404
|
|
1,612
|
|
Accumulated deficit
|
|
(95,521
|
)
|
(95,196
|
)
|
Total stockholders equity
|
|
34,654
|
|
9,919
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
43,132
|
|
$
|
41,536
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
3
RAINING
DATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
1,992
|
|
$
|
1,793
|
|
$
|
5,953
|
|
$
|
5,133
|
|
Services
|
|
2,913
|
|
2,983
|
|
8,871
|
|
8,911
|
|
Total net revenues
|
|
4,905
|
|
4,776
|
|
14,824
|
|
14,044
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Cost of license revenues
|
|
8
|
|
28
|
|
29
|
|
68
|
|
Cost of service revenues
|
|
444
|
|
442
|
|
1,383
|
|
1,583
|
|
Selling and marketing
|
|
1,601
|
|
1,387
|
|
4,278
|
|
4,204
|
|
Research and development
|
|
1,861
|
|
2,175
|
|
5,780
|
|
7,052
|
|
General and administrative
|
|
1,115
|
|
907
|
|
3,486
|
|
2,916
|
|
Total operating expenses
|
|
5,029
|
|
4,939
|
|
14,956
|
|
15,823
|
|
Operating loss
|
|
(124
|
)
|
(163
|
)
|
(132
|
)
|
(1,779
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest income (expense)-net
|
|
124
|
|
(205
|
)
|
(282
|
)
|
(636
|
)
|
Other income (expense)-net
|
|
(108
|
)
|
6
|
|
275
|
|
13
|
|
Total other income (expense)
|
|
16
|
|
(199
|
)
|
(7
|
)
|
(623
|
)
|
Loss before income taxes
|
|
(108
|
)
|
(362
|
)
|
(139
|
)
|
(2,402
|
)
|
Provision for income taxes
|
|
109
|
|
17
|
|
186
|
|
57
|
|
Net loss
|
|
$
|
(217
|
)
|
$
|
(379
|
)
|
$
|
(325
|
)
|
$
|
(2,459
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted
net loss
per share
|
|
25,909
|
|
21,142
|
|
22,785
|
|
20,928
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
4
RAINING
DATA CORPORATION AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(325
|
)
|
$
|
(2,459
|
)
|
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation and amortization of long-lived
assets
|
|
203
|
|
232
|
|
Provision for bad debt
|
|
111
|
|
105
|
|
Note discount amortization
|
|
90
|
|
62
|
|
Stock-based compensation expense
|
|
888
|
|
695
|
|
Deferred income tax expense
|
|
186
|
|
57
|
|
Foreign currency exchange gain
|
|
(226
|
)
|
(16
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
Trade accounts receivable
|
|
(348
|
)
|
(299
|
)
|
Other current and non-current assets
|
|
(50
|
)
|
(218
|
)
|
Accounts payable
|
|
172
|
|
(182
|
)
|
Accrued liabilities
|
|
233
|
|
400
|
|
Deferred revenue
|
|
(59
|
)
|
243
|
|
Net cash provided by (used in) operating
activities
|
|
875
|
|
(1,380
|
)
|
|
|
|
|
|
|
Cash flows used in investing
activities-purchase of property, furniture and equipment
|
|
(118
|
)
|
(139
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercise of stock options and
warrants
|
|
478
|
|
1,005
|
|
Proceeds from issuance of common stock
|
|
52
|
|
112
|
|
Repayment of debt
|
|
(1
|
)
|
|
|
Net cash provided by financing activities
|
|
529
|
|
1,117
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
114
|
|
145
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
1,400
|
|
(257
|
)
|
Cash and cash equivalents at beginning of
period
|
|
11,654
|
|
10,789
|
|
Cash and cash equivalents at end of period
|
|
$
|
13,054
|
|
$
|
10,532
|
|
|
|
|
|
|
|
Other non-cash activities:
|
|
|
|
|
|
Accrued interest added to debt
|
|
$
|
576
|
|
$
|
863
|
|
Conversion of debt to common stock
|
|
$
|
23,898
|
|
$
|
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
5
RAINING DATA CORPORATION AND
SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2007
1. INTERIM
FINANCIAL STATEMENTS
The unaudited interim condensed consolidated
financial information furnished herein reflects all adjustments, consisting
only of normal recurring items, which in the opinion of management are
necessary to fairly state Raining Data Corporation and its subsidiaries
(collectively, Company or we, us or our) results of operations and cash
flows for the dates and periods presented and to make such information not
misleading. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant
to SEC rules and regulations; nevertheless, management of the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the Companys audited financial statements
for the year ended March 31, 2007, contained in the Companys Annual
Report on Form 10-KSB. The results of operations for the three and nine
months ended December 31, 2007, are not necessarily indicative of results
to be expected for any other interim period or the fiscal year ending March 31,
2008.
2. RECENTLY ADOPTED ACCOUNTING STANDARDS
SAB No. 108
In September 2006, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
(SAB No. 108). We adopted SAB No. 108 in the fourth quarter of
fiscal 2007. In accordance with SAB No. 108, we recorded a cumulative
effect adjustment to beginning retained earnings as of April 1, 2006, as
further described in the Companys audited financial statements for the year
ended March 31, 2007, contained in the Companys Annual Report on Form 10-KSB.
For comparative purposes, the statement of operations for the three and nine
months ended December 31, 2006 has been adjusted to reflect the adoption of
SAB No. 108 as described below. The adoption of SAB No. 108 did not
require revision to cash flows from investing or financing activities for the
nine months ended December 31, 2006. The net effect to the cash flows from
operating activities as a result of the adoption of SAB No.108 for the nine
months ended December 31, 2006, was an increase of $43,000 in net cash used in
operating activities.
For the three months ended December 31, 2006, the effect of
adopting SAB No. 108 was a decrease in general and administrative expenses
of $55,000, and an increase in other expense of $13,000. The effect on net loss
for the three months ended December 31, 2006 was a decrease in net loss of
$42,000 with no effect on basic or diluted net loss per share. For the nine months
ended December 31, 2006, the effect of adopting SAB No. 108 was an
increase in general and administrative expenses of $73,000, and an increase in
other expense of $42,000. The effect on net loss was an increase in net loss of
$115,000, with no effect on basic or diluted net loss per share.
FIN 48
In July 2006, the FASB issued FASB
Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting and disclosure for uncertainty in
tax positions by prescribing a minimum probability threshold a tax position
must meet to be recognized in the financial statements. FIN 48 requires an
entity to recognize all or a portion of the financial statement benefit of an
uncertain income tax position only if the position, based solely on its
technical merits and on all relevant information as of the reporting date,
would have a greater than 50% probability of being sustained were the relevant
taxing authority to audit the applicable tax returns. If a tax position meets
the threshold, then the entity will evaluate the benefits it would recognize at
increasing levels of cumulative probabilities, and will record the largest
amount of benefit that would have a greater than 50% probability of being
sustained on audit (including resolution of any related appeals or litigation).
An entity will not recognize any benefit of an uncertain income tax position
that fails to meet the greater than 50% probability threshold.
The Company is subject to the provisions of FIN 48
as of April 1, 2007, and has analyzed filing positions in the federal and
state jurisdictions where it is required to file income tax returns, as well as
open tax years in these jurisdictions. As a result of adoption, we have
recorded no additional tax liability. As of the date of adoption, the Companys
uncertain tax positions totaled $94,000, all of which would affect our annual
effective income tax rate if recognized.
6
The
Company files consolidated and separate income tax return in the U.S.federal
jurisdiction and in certain state jurisdictions as well as foreign
jurisdictions including France, Germany, and the United Kingdom. With limited
exceptions, the Company is no longer subject to U.S. federal income tax
examinations for fiscal years before 2004 and is no longer subject to state and
local income tax examinations by tax authorities for fiscal years before 2003.
Neither
the Company nor its subsidiaries is currently under examination by any taxing
authorities.
The
Company recognizes potential accrued interest and penalties related to
uncertain tax positions in income tax expense. During the nine months ended December 31,
2007, the Company did not recognize a significant amount in potential interest
and penalties associated with uncertain tax positions. As of December 31,
2007, the Company has accrued approximately $18,000 in interest and penalties.
To the extent interest and penalties are not assessed with respect to uncertain
tax positions, amounts accrued will be reduced and reflected as a reduction of
the overall income tax provision.
The
Company does not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits or the expiration of
statutes of limitations prior to December 31, 2008.
3.
STOCK-BASED COMPENSATION
The
Company has a stock option plan (1999 Plan) that provides for the granting of
stock options, restricted stock and restricted stock units to directors, employees
and consultants. The Company also has an Employee Stock Purchase Plan (ESPP)
which allows the employees to purchase the Companys common stock at a
discount.
Total
stock-based compensation expense included in the unaudited condensed
consolidated statements of operations for the three and nine months ended December 31,
2007 and 2006, (in thousands) were as follows:
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
2
|
|
$
|
|
|
$
|
4
|
|
5
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
140
|
|
94
|
|
$
|
373
|
|
274
|
|
Research and development
|
|
94
|
|
69
|
|
236
|
|
209
|
|
General and administrative
|
|
96
|
|
75
|
|
275
|
|
207
|
|
Total stock-based compensation expense
|
|
332
|
|
238
|
|
888
|
|
695
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
Net stock-based compensation expense
|
|
$
|
332
|
|
$
|
238
|
|
$
|
888
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2007, there was approximately $2.9 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the plans. That cost is expected to be recognized over a weighted-average
period of 2.7 years.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. It also applies under other accounting pronouncements that
require or permit fair value measurement as a relevant attribute. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15,
2007, and all interim periods within that fiscal year. Management of the
Company is evaluating the impact of this pronouncement on the Companys
consolidated results of operations and financial condition.
7
5.
DEBT
Astoria Capital Partners, L.P. (Astoria), GFAM Hedge
Partnership (GFAM) and CAM Small Cap Fund L.P. (CAM) were each holders of a
5% Convertible Subordinated Note Due in May 2008. The interest rate of the
Convertible Subordinated Notes is 5% per annum, payable quarterly, which has
been refinanced through increases to the outstanding principal of the
Convertible Subordinated Notes. The Convertible Subordinated Notes have a
maturity date of May 30, 2008. The Convertible Subordinated Notes are
convertible into common stock, at the option of the holder, at a price of $5.00
per share, at any time through May 29, 2008.
On October 4, 2007, the Company received a
conversion notice from Astoria and on October 5, 2007, the Company
received a conversion notice from GFAM, each electing to convert its
Convertible Subordinated Note in full. As a result, $22,917,000 of outstanding
principal owed to Astoria under its Convertible Subordinate Note was converted
into 4,583,400 shares of the Companys common stock, and $981,000 of outstanding
principal owed to GFAM under its Convertible Subordinated Note was converted
into 196,200 shares of the Companys common stock. Per the terms of the
Convertible Subordinated Notes, the Company made a cash payment to Astoria and
GFAM of approximately $13,181 and $1,264, respectively, for amounts outstanding
under the Convertible Subordinated Notes that were not converted into shares of
common stock. Following the conversion of such Convertible Subordinated Notes
and the cash payment to Astoria and GFAM, the Convertible Subordinated Notes
held by Astoria and GFAM were cancelled. After the conversion by Astoria and
GFAM, one Convertible Subordinated Note held by CAM remains outstanding, with a
principal balance of approximately $1 million.
As of December 31,
2007 and March 31, 2007, the outstanding amounts under such notes were as
follows (in thousands):
|
|
December 31,
2007
|
|
March 31,
2007
|
|
Subordinated convertible notes payable
|
|
$
|
953
|
|
$
|
23,946
|
|
Plus accrued interest
|
|
12
|
|
295
|
|
Less unamortized discount
|
|
(1
|
)
|
(91
|
)
|
Total notes payable
|
|
$
|
964
|
|
$
|
24,150
|
|
6.
STOCKHOLDERS EQUITY
Basic loss per share is computed using the net loss
and the weighted average number of common shares outstanding during the period.
Diluted loss per share is computed using the net loss and the weighted average
number of common shares and dilutive potential common shares outstanding during
the period when the potential common shares are not anti-dilutive. Potential
dilutive common shares include outstanding stock options and convertible debt.
There were outstanding options to purchase 4,215,946 shares of the Companys
common stock with exercise prices ranging from $0.75 to $17.00 per share as of December 31,
2007. There were outstanding options to
purchase 4,138,679 shares of the Companys common stock with exercise prices
ranging from $0.75 to $17.00 per share as of December 31, 2006.
There was convertible debt outstanding at December 31, 2007 and 2006,
which was convertible into 192,787 and 4,729,600 shares of common stock,
respectively. The effects of these items were not included in the
computation of diluted earnings per share because such effects would have been
anti-dilutive.
The
change in accumulated other comprehensive income during the three- and nine- month
periods ended December 31, 2007 and 2006, is the result of the effect of
foreign exchange rate changes. The following table reconciles net loss as
reported with total comprehensive loss (in thousands):
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net loss reported
|
|
$
|
(217
|
)
|
$
|
(379
|
)
|
$
|
(325
|
)
|
$
|
(2,459
|
)
|
Translation adjustmentsnet
|
|
99
|
|
100
|
|
(208
|
)
|
184
|
|
Total comprehensive loss
|
|
$
|
(118
|
)
|
$
|
(279
|
)
|
$
|
(533
|
)
|
$
|
(2,275
|
)
|
8
7.
BUSINESS SEGMENT
The
Company operates in one reportable segment. International operations consist
primarily of foreign sales offices selling software developed in the United
States of America combined with local maintenance revenue. The following table summarizes
consolidated financial information of the Companys operations by geographic
location (in thousands):
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,194
|
|
$
|
3,314
|
|
$
|
9,886
|
|
$
|
9,750
|
|
Europe/Africa
|
|
1,711
|
|
1,462
|
|
4,938
|
|
4,294
|
|
Total
|
|
$
|
4,905
|
|
$
|
4,776
|
|
$
|
14,824
|
|
$
|
14,044
|
|
|
|
December 31, 2007
|
|
March 31,2007
|
|
Long-lived assets
|
|
|
|
|
|
North America
|
|
$
|
26,981
|
|
$
|
27,174
|
|
Europe/Africa
|
|
621
|
|
638
|
|
Total
|
|
$
|
27,602
|
|
$
|
27,812
|
|
The Company operates in
one reportable segment and is engaged in the design, development, sale, and
support of three software product lines: 1) XML Data Management Servers (XDMS),
2) Multidimensional Database Management Systems (MDMS), and
3) Rapid Application Development (RAD) software tools. The following
table represents the net revenue from the Companys segment by product line (in
thousands):
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Databases
|
|
$
|
3,601
|
|
$
|
3,644
|
|
$
|
11,172
|
|
$
|
10,916
|
|
RAD Tools
|
|
1,304
|
|
1,132
|
|
3,652
|
|
3,128
|
|
Total
|
|
$
|
4,905
|
|
$
|
4,776
|
|
$
|
14,824
|
|
$
|
14,044
|
|
8.
COMMITMENTS AND CONTINGENCIES
The Company is subject from time to time to
litigation, claims and suits arising in the ordinary course of business. As of December 31,
2007 the Company was a party to the following legal proceedings:
Raining
Data v. Intrametrics
.
On or about January 19, 2007, the Company filed a complaint in Orange
County Superior Court that sets forth allegations that Intrametrics threatens
to and has misappropriated the Companys trade secrets. The Companys
allegations in the complaint include that Intrametrics has obtained the Companys
source code in violation of the Parties OEM (Original Equipment Manufacturer)
Distribution Agreement and in violation of Californias laws prohibiting the
misappropriation of trade secrets. The Company seeks injunctive relief
from Intrametrics, including, but not limited to, compelling Intrametrics to
fully comply with all of the termination provisions set forth in the OEM
Agreement; enjoining Intrametrics and its employees and agents from using or
disclosing the Companys trade secrets; prohibiting Intrametrics from
soliciting the Companys current or potential customers for 3 years, and from
soliciting or employing certain of the Companys former employees for 3
years. Intrametrics filed a motion to quash the Complaint, which the
Company opposed, but on the morning of the hearing, Intrametrics first notified
the Company that it filed Chapter 11 bankruptcy, effectively staying the
litigation in Orange County Superior Court. The Company is pursuing
further discovery and litigation in the bankruptcy court in Houston, TX.
Raining
Data v. Soheil Raissi (formerly the Companys Vice President, Product
Development and Professional Services), Mario Barrenechea (formerly the Companys
Senior Vice President, Worldwide Sales and Marketing, Pick and Omnis Products),
and Adevnet, LLC
.
On or about December 8, 2006, the Company filed a complaint in Orange
County Superior Court that sets forth allegations that the defendants threaten
to and have misappropriated the Companys trade secrets. The Companys
allegations in the complaint include that the individual defendants have used
and/or disclosed the Companys
9
trade secrets (in the
form of source code and licenses and other trade secret information) in
violation of their agreements with the Company to maintain the confidentiality
of such trade secret information, and in violation of California laws
prohibiting the misappropriation of trade secrets. The Company seeks injunctive
relief from the defendants, including, but not limited to, compelling the
defendants to immediately return all of the Companys trade secrets and
property; enjoining the defendants and their employees and agents from using or
disclosing the Companys trade secrets, including the Companys source code;
ordering the defendants to disclose all gains and profits they have derived
from the misappropriation of the Companys trade secrets; enjoining the
defendants from directly or indirectly supplying, selling or promoting any
product that incorporates the Companys trade secrets.
Cross-Complaint
by Soheil Raissi, Mario Barrenechea and Adevnet v. Raining Data.
On or about January 10, 2007, the
defendants filed a cross-complaint against the Company and Carlton Baab (the
Companys President and Chief Executive Officer) for the following claims: unfair business practices, violation of civil
rights, intentional interference with prospective economic advantage, negligent
interference with prospective economic advantage, malicious prosecution, abuse
of process, negligence, and civil conspiracy. Cross-complainants allege
general, compensatory, special, and punitive and exemplary damages in amounts according
to proof, and seek to enjoin the Company from engaging in improper and
unlawful conduct. The Company and Carlton Baab (the Cross-Defendants)
contend that all of the claims are baseless, and filed a special motion to
strike all of the claims in the cross-complaint. The Companys special
motion to strike is scheduled to be heard in June 2008. The
Cross-Defendants will continue to vigorously defend their rights in this
litigation. We are unable to estimate any loss or range of loss at
this time. Management believes that the ultimate disposition of this matter
will not have a material adverse effect on the Companys consolidated financial
statements, results of operations, cash flows or liquidity.
Indemnification
The
Companys standard customer license and software agreements contain
indemnification and warranty provisions which are generally consistent with
practice in the Companys industry. The duration of the Companys service
warranties generally does not exceed 30 days following completion of its
services. The Company has not incurred significant obligations under customer
indemnification or warranty provisions historically and does not expect to
incur significant obligations in the future. Accordingly, the Company does not
maintain accruals for potential customer indemnification or warranty-related
obligations. The maximum potential amount of future payments that the Company
could be required to make is generally limited under the indemnification
provisions in its customer license and service agreements.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
This Form 10-QSB
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act). These
statements may generally be identified by the use of such words as expect, anticipate,
believe, intend, plan, will, or shall, or the negative of those
terms. We have based these forward-looking statements on our current
expectations and projections about future events. Forward-looking statements
involve certain risks and uncertainties and actual results may differ
materially from those discussed in any such statement. Factors that could cause
actual results to differ materially from such forward-looking statements
include the risks described under the heading Risk Factors in Item 2 of
this Form 10-QSB and elsewhere in this Form 10-QSB. The
forward-looking statements contained in this Form 10-QSB include, but are
not limited to statements about the following: (1) our future success, (2) our
research and development efforts, (3) our future operating results and
cash flow, (4) our competitive ability and position, (5) the markets
in which we operate, (6) our revenue, (7) cost of license revenue and
cost of service revenue, (8) our selling and marketing costs, (9) our
backlog, (10) the adoption of certain critical accounting policies and the
related judgments and estimates , (11) our belief that our existing cash
balances combined with our cash flow from operating activities will be sufficient
to meet our operating and capital expenditure requirements for the remainder of
the fiscal year ending March 31, 2008, (12) our focus on the continued
development and enhancement of the TigerLogic XDMS product line, and
identification of new and emerging application areas and discussions with
channel partners for the sale and distribution of the TigerLogic product line,
(13) the sales cycle for our products being longer than anticipated and (14)
the effect of ongoing litigation on our financial condition or liquidity. All forward-looking statements in this
document are made as of the date hereof, based on information available to us
as of the date hereof, and we assume no obligation to update any forward-looking
statement.
Overview
We were incorporated in
the State of Delaware in August 1987. We were originally incorporated as
Blyth Holdings, Inc. and our name was changed to Omnis Technology
Corporation in September 1997. Effective December 1, 2000, we
completed the acquisition of PickAx, Inc., a Delaware corporation (PickAx).
Concurrent with the acquisition, we changed our name to Raining Data
Corporation.
10
Products
Our
principal business is the design, development, sale and support of software
infrastructure. Our products allow customers to create and enhance flexible
software applications for their own needs, and our software may be categorized
into three product lines: XDMS, MDMS and RAD software tools.
Many
of our products are based on the Pick Universal Data Model (Pick UDM), which
we created, and are capable of handling data from many sources. The Pick UDM is
a core component across the XDMS and MDMS product lines.
Beginning
in 2001, we began an extensive effort to leverage our time-proven Pick UDM and
core intellectual property to create an enterprise class XML database
management system for the emerging XML market, the growing need for native XML
data stores and the ability to handle structured and unstructured data. This
significant investment of time and resources resulted in the TigerLogic XDMS
product line. We are focused on the continued development and enhancement of
this product line, identification of new and emerging application areas and
discussions with channel partners for the sale and distribution of the
TigerLogic product line.
TigerLogic XDMS
TigerLogic XML Data
Management Server provides high-performance management and query of XML data by
leveraging the time-proven Pick UDM. TigerLogic also enables the ability to
query external data sources as if they were one logical database and maintains
referential integrity across data sources. TigerLogics patent-pending XML
Indexing and Profiling technology enables it to access XML data via XQuery
between 10x to 150x faster in internal tests than relational databases, XML
repositories or XML Index and Search engines. TigerLogic provides XML, Java,
.NET, WSDL and SOAP compatibility for simplified plug-in and integration with
development environments of choice.
TigerLogic provides an
extensible and flexible development and deployment environment. Unlike other
XML data management alternatives, TigerLogic XDMS does not need to know the
schema or structure of data before processing and storing it. We believe the
ability to make XML schemas optional is a vital innovation because the
structures of operational systems frequently change, and mapping schemas for
the purpose of linking to a new data source is both difficult and
time-consuming. The system also enables support for schema versioning, which is
critical when addressing evolving standards and XML schemas. The General
Availability Release of TigerLogic XDMS version 2.6, which included support for
enhanced XQuery features, including XQuery stored procedures and full-text
search and support for High Availability clustering, was released in July 2006.
Version 3.0, which is the third generation release of the product and includes
compliance with the XML Query 1.0 specification, released in January 2007,
cache management of data sources, in-memory cache, support for Geospatial data,
enhanced APIs and data replication was released for beta testing in June 2007.
Multi-dimensional Databases (MDMS)
The MDMS product line
consists principally of the D3 Data Base Management System (D3), which runs
on many operating systems, such as IBM AIX, Linux and Windows NT. D3 allows
application programmers to create new business solution software in less time
than it normally takes in many other environments. This can translate into
lower costs for the developer, lower software prices for the customer and
reduced costs of ownership for both the developer and end user. Our MDMS
products also include mvEnterprise, a scalable multi-dimensional database
solution that allows the user to leverage the capabilities of the UNIX
operating system, and mvBase, a multi-dimensional database solution that runs
on all Windows platforms.
MDMS components include
the Pick Data Provider for .Net (PDP) and our Pick Reporting Services
Connector. The PDP component for the Microsoft .NET Framework is tightly
integrated with Microsoft Visual Studio .NET. It allows software developers
using IBMs Universe and Unidata databases and our D3 database platform to
build client/server applications, Web applications or Web services using any of
the languages and technologies that run on the Microsoft .NET Framework, such
as Microsoft ASP.NET, Visual Basic .NET, Visual C# .NET and Visual J# .NET. Our
Pick Reporting Services Connector enables a data connection that allows Pick
database users to unlock the benefits of Microsoft Reporting Services to take
advantage of a comprehensive, server-based reporting solution that can author,
manage, and deliver both paper-oriented and interactive, Web-based reports.
This solution also allows access to IBM UniVerse, IBM UniData and Pick D3 data.
11
Rapid Application Development (RAD) Tools
Our RAD products support
the full life cycle of software application development and are designed for
rapid prototyping, development and deployment of graphical user interface (GUI)
client/server and Web applications. The RAD products include Omnis Studio,
Omnis Studio for SAP and Omnis Classic, and are object-oriented and
component-based, providing the ability to deploy applications on operating
system platforms such as Windows, Unix and Linux, as well as database
environments such as MySQL, Oracle, DB2, Sybase, Microsoft SQL Server and other
Open Data Base Connectivity (ODBC) compatible database management systems.
Technical Support
Our products are used by
our customers to build and deploy applications that may become a critical
component of their business operations. As a result, continuing to provide
customer technical support services is an important element of our business
strategy. Customers who participate in our support programs receive periodic
maintenance releases on a when-and-if available basis and direct technical
support when required.
Sales and Distribution
In
the United States, we sell our products through established distribution
channels consisting of OEMs, system integrators, specialized vertical
application software developers and consulting organizations. We also sell our
products directly through our sales personnel to end user organizations. Outside
the United States, we maintain direct sales offices in the United Kingdom,
France and Germany. Approximately 35% and 33% of our revenue came from sales
through our offices located outside the United States for the three and nine
months ended December 31, 2007, respectively, compared to 31% for the same
periods in 2006.
We sell our products in
U.S. Dollars in North America, British Pounds Sterling in the United Kingdom
and Euros in France and Germany. Because we recognize revenue and expense in
these various currencies but report our financial results in U.S. Dollars,
changes in exchange rates may cause variances in our period-to-period revenue
and results of operations in future periods.
We license our software
on a per-CPU, per-server, per-port or per-user basis. Therefore, the addition
of CPUs, servers, ports or users to existing systems increases our revenue
from our installed base of licenses. In addition to software products, we
provide continuing maintenance and other services to our customers, including
professional services, technical support and training to help plan, analyze,
implement and maintain application software based on our products.
Customers
Our customers may be
classified into two general categories:
·
Independent Software Vendors and
Software Developers. The majority of our revenue is derived from independent
software vendors, which typically write their own vertical application software
that they sell as a complete package to end user customers. This category
includes value added resellers (VARs) and software-consulting companies that
provide contract programming services to their customers.
·
Corporate Information Technology (IT)
Departments.
For
each of the three and nine months ended December 31, 2007 and 2006, no
single customer accounted for more than 10% of our revenue.
Research and Development
We have devoted significant resources to the
research and development of our products and technology. We believe that our
future success will depend largely on a strong development effort with respect
to both our existing and new products. These development efforts have resulted
in updates and upgrades to existing MDMS and RAD products and the launch of new
products including the XDMS product line. New product releases in all of our
product lines are currently in progress. We expect to continue our research and
development efforts in all product lines for the foreseeable future. We intend
for these efforts to improve our future operating results and increase cash
flow. However, such efforts may not result in additional new products or
revenue, and we can make no assurances that the recently announced products or
future products will be successful. We recognized $1.9 million and $5.8 million
of research and development expense for the three and nine months ended December 31,
2007, respectively, compared to $2.2 million and $7.1 million for the same
periods in 2006.
12
Competition
The application development
tools software market is rapidly changing and intensely competitive. Our MDMS
products compete with products developed by companies such as Oracle, Microsoft
and IBM. Our RAD products currently encounter competition from several direct
competitors, including Microsoft, and competing development environments,
including JAVA. Competition is developing and evolving in the XML market for
which our XDMS products are intended. Companies that do or are expected to
compete in this market include Oracle, IBM, Microsoft and Sybase, as well as a
number of smaller companies with products that directly and indirectly compete
with our XDMS products. Most of our competitors have significantly more
financial, technical, marketing and other resources than we do. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies, evolving markets and changes in customer requirements, and may
devote greater resources to the development, promotion and sale of their
products.
We believe that our
ability to compete in the various MDMS, RAD, and XDMS markets depends on
factors both within and outside our control, including the timing of release,
performance and price of new products developed by both us and our competitors.
Although we believe that we currently compete favorably with respect to most of
these factors, we may not be able to maintain our competitive position against
current and potential competitors, especially those with greater resources.
Intellectual Property and Other Proprietary Rights
We rely primarily on a
combination of trade secret, copyright and trademark laws and contractual
provisions to protect our intellectual property and proprietary rights. Our
trademarks include Raining Data, Pick, TigerLogic, D3, Omnis, Omnis Studio,
mvEnterprise, mvBase, and mvDesigner, among others. We also have one pending
U.S. patent application as of December 31, 2007.
We license our products
to end users on a right to use basis pursuant to a perpetual license
agreement that restricts use of products to a specified number of users. We
generally rely on click-wrap licenses that become effective when a customer
downloads and installs the software on its system. In order to retain exclusive
ownership rights to our software and technology, we generally provide our
software in object code only, with contractual restrictions on copying,
disclosure, and transferability. There can be no assurance that these
protections will be adequate, or that our competitors will not independently
develop technologies that are substantially equivalent or superior to our
technology.
Backlog
We generally ship
software products as orders are received and have historically operated with
little backlog. As a result, our license revenue in any given quarter is
dependent upon orders received and product shipped during the quarter.
Historically, there has been a short cycle between receipt of an order and
shipment. Consequently, we do not believe that our backlog as of any particular
date is meaningful.
Employees
At December 31,
2007, we had 106 employees worldwide of which 77 were in the United States and
29 were in our international offices. Of the 106 employees, 100 are full-time
and approximately 45% are in research and development, 20% in technical
support, 16% in sales and marketing and 19% in general and administrative
functions.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
The discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and disclosure of
contingent liabilities.
On an on-going basis, we
evaluate our estimates, including those related to revenue recognition and
accounting for goodwill. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified the
accounting policies below as the policies critical to our business operations
and the understanding of our results of operations. We believe the following
critical accounting policies and the related judgments and estimates affect the
preparation of our consolidated financial statements:
13
REVENUE RECOGNITION.
We recognize revenue
using the residual method pursuant to the requirements of Statement of Position
No. 97-2, Software Revenue Recognition (SOP 97-2), as amended. Under
the residual method, revenue is recognized
in a multiple element arrangement when company-specific objective evidence of
fair value exists for all of the undelivered elements in the arrangement, but
does not exist for one or more of the delivered elements in the arrangement. At
the outset of the arrangement with the customer, we defer revenue for the fair
value of our undelivered elements (e.g., maintenance) based on company-specific
objective evidence of the amount such items are sold individually to our
customers and recognize revenue for the remainder of the arrangement fee
attributable to the elements initially delivered in the arrangement (e.g.,
software license) when the basic criteria in SOP 97-2 have been met.
Under SOP 97-2, revenue
attributable to an element in a customer arrangement is recognized when
persuasive evidence of an arrangement exists and delivery has occurred,
provided the fee is fixed or determinable, collectibility is probable and the
arrangement does not require significant customization of the software. If, at
the outset of the customer arrangement, we determine that the arrangement fee
is not fixed or determinable, we defer the revenue and recognize the revenue
when the arrangement fee becomes due and payable.
Service revenue relates
primarily to consulting services, maintenance and training. Maintenance revenue
is initially deferred and then recognized ratably over the term of the
maintenance contract, typically 12 months. Consulting and training revenue
is recognized as the services are performed and is usually calculated on a time
and materials basis. Such services primarily consist of implementation services
related to the installation of our products and do not include significant
customization to or development of the underlying software code. We do not have
price protection programs, conditional acceptance agreements, and sales of our
products are made without right of return.
For contracts that
require significant modification or customization to the software in accordance
with customers specifications, we recognize revenue using the
completed-contract method pursuant to the requirements of Statement of Position
No. 81-1,
Accounting for Performance
of Construction-Type and Certain Production-Type Contracts.
Under this method, revenue and expenses are deferred until customer acceptance
of the finished product occurs.
GOODWILL.
We assess the
impairment of goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. We also assess the value of
goodwill at least annually. Factors we consider to be important which could
trigger an impairment review include the following:
·
Significant
underperformance relative to expected historical or projected future operating
results;
·
Timing of our
revenue, significant changes in the manner of use of the acquired assets or the
strategy for the overall business;
·
Significant
negative industry or economic trends;
·
Significant
decline in our stock price for a sustained period; and
·
Our market
capitalization relative to net book value.
In accordance with
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS
No. 142), we do not amortize goodwill, but test for goodwill impairment
following a two-step process. The first step is used to identify potential
impairment by comparing the fair value of a reporting unit with its net book
value (or carrying amount), including goodwill. If the fair value exceeds the
carrying amount, goodwill of the reporting unit is considered not impaired and
the second step of the impairment test is unnecessary. If the carrying amount
of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting units goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. That is,
the fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the
reporting unit. Currently, we have one reporting unit for goodwill impairment
testing.
Determining the fair
value of a reporting unit under the first step of the goodwill impairment test
and determining the fair value of individual assets and liabilities of a
reporting unit (including unrecognized intangible assets) under the second step
of the goodwill impairment test is judgmental in nature and often involves the
use of significant estimates and assumptions. These estimates and assumptions
could have a significant impact on whether or not an impairment charge is
recognized and the magnitude of any such charge. Estimates of fair value are
currently based on our stock price as reported by Nasdaq.
14
EMPLOYEE
STOCK-BASED COMPENSATION. We account for stock-based compensation in accordance
with SFAS No. 123(R). Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the requisite service
period. We estimate the fair value of stock-based awards using a Black-Scholes
valuation model. Determining the fair value of share-based awards at the grant
date requires judgment, including estimating volatility, expected terms, and
forfeitures. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
materially impacted. See footnote 3 in the accompanying unaudited condensed
consolidated financial statements.
Results
of Operations
The
following table sets forth certain Condensed Consolidated Statement of
Operations data in total dollars, as a percentage of total net revenues and as
a percentage change from the same period in the prior year. Cost of license
revenues and cost of service revenues are expressed as a percentage of the
related revenues. This information should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere in this Form 10-QSB.
|
|
Three Months Ended
December 31, 2007
|
|
Three Months Ended
December 31, 2006
|
|
Nine Months Ended
December 31, 2007
|
|
Nine Months Ended
December 31, 2006
|
|
|
|
Results
|
|
% of Net
Revenues
|
|
Percent
Change
|
|
Results
|
|
% of Net
Revenues
|
|
Results
|
|
% of Net
Revenues
|
|
Percent
Change
|
|
Results
|
|
% of Net
Revenues
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
1,992
|
|
41%
|
|
11%
|
|
$
|
1,793
|
|
38%
|
|
$
|
5,953
|
|
40%
|
|
16%
|
|
$
|
5,133
|
|
37%
|
|
Services
|
|
2,913
|
|
59%
|
|
(2)%
|
|
2,983
|
|
62%
|
|
8,871
|
|
60%
|
|
0%
|
|
8,911
|
|
63%
|
|
Total net
revenues
|
|
4,905
|
|
100%
|
|
3%
|
|
4,776
|
|
100%
|
|
14,824
|
|
100%
|
|
6%
|
|
14,044
|
|
100%
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license
revenues (as a % of license revenues)
|
|
8
|
|
0%
|
|
(71)%
|
|
28
|
|
2%
|
|
29
|
|
0%
|
|
(57)%
|
|
68
|
|
1%
|
|
Cost of service
revenues (as a % of service revenues)
|
|
444
|
|
15%
|
|
0%
|
|
442
|
|
15%
|
|
1,383
|
|
16%
|
|
(13)%
|
|
1,583
|
|
18%
|
|
Selling and
marketing
|
|
1,601
|
|
33%
|
|
15%
|
|
1,387
|
|
29%
|
|
4,278
|
|
29%
|
|
2%
|
|
4,204
|
|
30%
|
|
Research and
development
|
|
1,861
|
|
38%
|
|
(14)%
|
|
2,175
|
|
46%
|
|
5,780
|
|
39%
|
|
(18)%
|
|
7,052
|
|
50%
|
|
General and
administrative
|
|
1,115
|
|
23%
|
|
23%
|
|
907
|
|
19%
|
|
3,486
|
|
24%
|
|
20%
|
|
2,916
|
|
21%
|
|
Total operating
expenses
|
|
5,029
|
|
103%
|
|
2%
|
|
4,939
|
|
103%
|
|
14,956
|
|
101%
|
|
(5)%
|
|
15,823
|
|
113%
|
|
Operating loss
|
|
(124)
|
|
(3)%
|
|
(24)%
|
|
(163)
|
|
(3)%
|
|
(132)
|
|
(1)%
|
|
(93)%
|
|
(1,779)
|
|
(13)%
|
|
Other income
(expense)-net
|
|
16
|
|
0%
|
|
108%
|
|
(199)
|
|
(4)%
|
|
(7)
|
|
0%
|
|
99%
|
|
(623)
|
|
(4)%
|
|
Loss before
income taxes
|
|
(108)
|
|
(2)%
|
|
(70)%
|
|
(362)
|
|
(8)%
|
|
(139)
|
|
(1)%
|
|
(94)%
|
|
(2,402)
|
|
(17)%
|
|
Provision for
income taxes
|
|
109
|
|
2%
|
|
541%
|
|
17
|
|
0%
|
|
186
|
|
1%
|
|
226%
|
|
57
|
|
0%
|
|
Net loss
|
|
$
|
(217)
|
|
(4)%
|
|
(43)%
|
|
$
|
(379)
|
|
(8)%
|
|
$
|
(325)
|
|
(2)%
|
|
(87)%
|
|
$
|
(2,459)
|
|
(18)%
|
|
REVENUE
NET
REVENUE. Our revenue is derived principally from two sources: fees from
software licensing and fees for post contract technical support. We license our
software on a per-CPU, per-server, per-port or per-user basis. Therefore, the
addition of CPUs, servers, ports or users to existing systems increases our
revenue from our installed base of licenses. The increase in revenue for the
three and nine month periods ended December 31, 2007, as compared to the
same periods in the prior year is due to an increase in license revenue from
additional users on certain existing accounts. In the longer term, we expect
that the MDMS and RAD markets will eventually contract as customers adopt newer
technologies, and, therefore, the revenue generated from sales of our MDMS and
RAD products is expected to decrease.
We have been actively
developing and marketing our XDMS product line. Should our development efforts
and the adoption of these product lines be successful, we anticipate additional
revenues in future periods related to the sale of these products. However, we
can give no assurances as to customer acceptance of any new products or
services, or the ability of the current or any new products and services to
generate revenue. While we are committed to research and development efforts
that are intended to allow us to penetrate new markets and generate new sources
of revenue, such efforts may not result in additional products, services or
revenue.
15
OPERATING
EXPENSES
COST
OF LICENSE REVENUE. Cost of license revenue is comprised of direct costs
associated with software license sales including software packaging and related
personnel cost, documentation, physical media costs and royalties. Cost of
license revenue decreased in the three and nine month periods ended December 31,
2007, as compared to the same periods in the prior year due to reduced
headcount. We anticipate that the cost of license revenue, as a percentage of
license revenue and in absolute dollars, will be relatively stable in future
periods.
COST OF SERVICE REVENUE.
Cost of service revenue includes primarily personnel costs relating to
providing consulting, technical support and training services. Cost of service
revenue remains consistent for the three month period ended December 31,
2007, when compared to the same period in prior year. Cost of service revenue decreased for the
nine month period ended December 31, 2007, as compared to the same period
in the prior year due to reduced headcount. We anticipate that the cost of
service revenue, as a percentage of service revenue and in absolute dollars,
will be relatively stable in future periods.
SELLING
AND MARKETING. Selling and marketing expense consists primarily of salaries,
benefits, advertising, tradeshows, travel and overhead costs for our sales and
marketing personnel. The increase in selling and marketing expense in the three
month period ended December 31, 2007, as compared to the same period in
the prior year was due to increased marketing expense relating to XDMS and
TigerLogic products. We anticipate that selling and marketing costs related to
XDMS products may increase as we further develop the sales channel for these
products and if customer acceptance of these products increases. In addition,
if our continued research and development efforts are successful, including
with respect to our XDMS products, and new products or services are created, we
may incur increased sales and marketing expense to promote those new products
in future periods.
RESEARCH
AND DEVELOPMENT. Research and development expense consists primarily of
salaries and other personnel-related expenses and overhead costs for
engineering personnel including employees in the US and the UK and contractors
in the US and India. The decrease in research and development expense in the
three and nine month periods ended December 31, 2007, as compared to the
same periods in the prior year was mainly due to reduced headcount and
termination of contracted professional technical services in India. We are
committed to our research and development efforts and expect research and
development expense will remain at the current level in future periods or
increase if we believe that additional spending is warranted. Such efforts may
not result in additional new products and any new products, including the XDMS
products, may not generate sufficient revenue, if any, to offset the research
and development expense.
GENERAL
AND ADMINISTRATIVE. General and administrative expense consists primarily of
costs associated with our finance, human resources, legal and other administrative
functions. These costs consist principally of salaries and other
personnel-related expenses, professional fees, depreciation and overhead costs.
The increase in general and administrative expense in the three and nine month
periods ended December 31, 2007, as compared to the same periods in prior
year was mainly due to costs incurred in legal services related to pending
litigation matters and professional service expenses.
OTHER
INCOME (EXPENSE). Other income (expense) consists primarily of net interest
expense and gains and losses on foreign currency transactions. The change in
other income (expense) during the three and nine month periods ended December 31,
2007, as compared to the same periods in the prior year was mainly due to less
interest expense as a result of the conversion of certain long term debt into
equity in October 2007, and foreign currency exchange gains. Due to the
uncertainty in exchange rates, we may experience transaction gains or losses in
future periods, the effect of which cannot be determined at this time.
PROVISION FOR INCOME
TAXES. The provision for income taxes reflects the tax on earnings and
dividends from foreign subsidiaries. We are able to reduce the current tax
liability of foreign subsidiaries with net operating loss carryforwards.
However, certain carryforwards were acquired in our acquisition in December 2000.
Therefore, the benefit realized from utilizing those net operating loss
carryforwards reduced goodwill instead of income tax expense. Due to
uncertainties surrounding the timing of realizing the benefits of the net
operating loss carryforwards in the future, we have established a full
valuation allowance against the related net deferred tax assets. Additionally,
for the quarter ended December 31, 2007, we received a dividend of
approximately $0.8 million from one of our foreign subsidiaries and paid
approximately $40,000 in withholding tax associated with the dividend amount.
16
LIQUIDITY AND CAPITAL RESOURCES
In connection with the
acquisition of PickAx, we assumed a Secured Promissory Note issued to Astoria
dated November 30, 2000, in the amount of $18.5 million. In January 2003,
we entered into a Note Exchange Agreement (the Exchange Agreement) with
Astoria to replace the existing Secured Promissory Note, as amended, with a
Convertible Subordinated Note. Under the terms of the Exchange Agreement, the
Secured Promissory Note was exchanged and replaced with a Convertible Subordinated
Note having a principal amount of $22.1 million, which principal amount was
equal to the outstanding principal and accrued interest payable on the Secured
Promissory Note as of the date of the Exchange Agreement. In October 2005,
Astoria assigned a portion of its common stock holdings totaling 870,536 shares
and a portion of the Subordinated Convertible Note, totaling $1,751,832, to two
of its limited partners, including GFAM. As such, we issued an Amended and
Restated Note to Astoria for $20,749,581 and corresponding notes directly to
the limited partners for $862,979 and $888,853, respectively. The Convertible
Subordinated Notes are convertible into common stock at any time, at the option
of the holder, at a price of $5.00 per share. The Convertible Subordinated
Notes mature on May 30, 2008. The interest rate of the Convertible
Subordinated Notes is 5% per annum as compared to an interest rate of 10% per
annum under the Secured Promissory Note. The interest is payable quarterly at
our option in cash or through increases to the outstanding principal of the
Convertible Subordinated Notes.
On December 14,
2004, we entered into an Agreement Regarding Amended and Restated Common Stock
Purchase Warrant and 5% Convertible Subordinated Note Due 2008 with Astoria
whereby we could redeem, in part, the Convertible Subordinated Note in advance
of January 30, 2005. On December 14, 2004, Astoria exercised its
warrant in the amount of $2,670,904. In lieu of a cash payment, we used the
proceeds of the exercise to pay down a portion of the indebtedness to Astoria.
The pay down consisted of $247,129 for accrued and unpaid interest, and
$2,423,775 as a reduction of principal of the Convertible Subordinated Note.
On October 4, 2007, the Company received a
conversion notice from Astoria and on October 5, 2007, the Company
received a conversion notice from GFAM, each electing to convert its
Convertible Subordinated Note in full. As a result, $22,917,000 of outstanding
principal owed to Astoria under its Convertible Subordinate Note was converted
into 4,583,400 shares of the Companys common stock, and $981,000 of
outstanding principal owed to GFAM under its Convertible Subordinated Note was
converted into 196,200 shares of the Companys common stock. Per the terms of
the Convertible Subordinated Notes, the Company made a cash payment to Astoria
and GFAM of approximately $13,181 and $1,264, respectively, for amounts
outstanding under the Convertible Subordinated Notes that were not converted
into shares of common stock. Following the conversion of such Convertible
Subordinated Notes and the cash payment to Astoria and GFAM, the Convertible
Subordinated Notes held by Astoria and GFAM were cancelled. After the
conversion by Astoria and GFAM, one Convertible Subordinated Note remains
outstanding, with a principal balance of approximately $1 million.
Astoria is a major
stockholder of ours, holding a majority of our outstanding common stock.
Richard W. Koe, Chairman of the Board of Directors, serves as the Managing
General Partner for Astoria. Carlton H. Baab, our President and Chief
Executive Officer and a member of the Board of Directors, served as a Managing
Principal of ACM, which is a general partner of Astoria, until taking a formal
leave of absence to join us in August 2001. Gerald F. Chew, a member of
our Board of Directors, is the cousin of Mr. Koe.
As of December 31,
2007, we had $13.1 million in cash. We believe that our existing cash
balances combined with our cash flow from operating activities will be
sufficient to meet our operating and capital expenditure requirements for the
next twelve months. We are committed to research and development efforts that
are intended to allow us to penetrate new markets and generate new sources of
revenue and improve operating results. However, our research and development
efforts have required, and will continue to require, cash outlays without the
immediate or short-term receipt of related revenue. Our ability to meet our
expenditure requirements is dependent upon our future financial performance,
which will be affected by, among other things, prevailing economic conditions,
our ability to penetrate new markets and attract new customers, market
acceptance of our new and existing products and services, the success of
research and development efforts and other factors beyond our control. On February 11,
2004, we entered into a two year credit facility with Silicon Valley Bank which
provided us with the ability to borrow up to $1.5 million at an annual interest
rate of Prime plus 1.0%, provided that the annual interest rate shall never be
less than
5%. We
renewed this credit facility on February 11, 2006. The credit facility is
collateralized by our assets and expires on February 11, 2008. The
credit facility contains financial and reporting covenants that require us to
maintain certain financial ratios only when we have outstanding borrowings on
the line. There were no outstanding borrowings as of December 31, 2007. We
are currently in the process of finalizing the renewal of our credit facility
with Silicon Valley Bank and anticipate a high likelihood of success.
17
On November 9,
2004, we entered into a lease agreement with The Irvine Company whereby we
leased one building in Irvine, California, comprising
approximately 29,000 square feet, to replace our then headquarters
facility. The lease commenced in November 2005 and has a five-year
term. If certain conditions are met, we have the option to extend the term of
the lease for an additional thirty-six months. The total basic rent
over the five-year term is approximately $2.6 million. The annual basic rent
during the five-year term ranges from approximately $475,000
during the first year to approximately $545,000 during the fifth year. The rent
expense is being recognized on a straight line basis over the lease term.
We had no material
commitments for capital expenditures as of December 31, 2007.
Net cash provided by
(used in) operating activities was $0.9 million and ($1.4) million for the
nine-month periods ended December 31, 2007 and 2006, respectively.
Our
earnings before interest, taxes, depreciation and amortization (EBITDA) was
$0.3 million, or 6% of total net revenue for the three months ended December 31,
2007, and $1.0 million, or 6% of total net revenue for the nine months
ended December 31, 2007. Our EBITDA was $0.2 million, or 3% of total net
revenue for the three months ended December 31, 2006, and ($0.9) million,
or (6%) of total net revenue for the nine months ended December 31, 2006.
The increase in EBITDA for the three and nine months ended December 31,
2007, compared to the same periods in the prior year was a result of increased
license revenue and reduced personnel costs.
EBITDA is defined as net
income (loss) with an add-back for depreciation and amortization, non-cash
stock-based compensation expense, interest income (expense)- net, other income
(expense)- net, and income taxes. The following table reconciles EBITDA to the
reported net loss:
RECONCILIATION
OF EBITDA TO NET LOSS
(in thousands)
|
|
For the Three Months Ended
December 31,
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(217
|
)
|
$
|
(379
|
)
|
$
|
(325
|
)
|
$
|
(2,459
|
)
|
Depreciation and amortization
|
|
71
|
|
78
|
|
203
|
|
232
|
|
Stock-based compensation
|
|
332
|
|
238
|
|
888
|
|
695
|
|
Interest (income) expense-net
|
|
(124
|
)
|
205
|
|
282
|
|
636
|
|
Other (income) expense-net
|
|
108
|
|
(6
|
)
|
(275
|
)
|
(13
|
)
|
Provision for income taxes
|
|
109
|
|
17
|
|
186
|
|
57
|
|
EBITDA
|
|
$
|
279
|
|
$
|
153
|
|
$
|
959
|
|
$
|
(852
|
)
|
EBITDA does not represent
funds available for managements discretionary use and is not intended to
represent cash flow from operations. EBITDA should not be construed as a
substitute for net loss or as a better measure of liquidity than cash flow from
operating activities, which are determined in accordance with United States
generally accepted accounting principles (GAAP). EBITDA excludes components
that are significant in understanding and assessing our results of operations
and cash flows. In addition, EBITDA is not a term defined by GAAP and as a
result our measure of EBITDA might not be comparable to similarly titled
measures used by other companies.
However, EBITDA is used
by management to evaluate, assess and benchmark our operational results and we
believe that EBITDA is relevant and useful information, which is often reported
and widely used by analysts, investors and other interested parties in our
industry. Accordingly, we are disclosing this information to permit a more
comprehensive analysis of our operating performance, to provide an additional
measure of performance and liquidity and to provide additional information with
respect to our ability to meet future debt service, capital expenditure and
working capital requirements.
18
Our EBITDA financial
information is also comparable to net cash provided by (used in) operating
activities. The table below reconciles EBITDA to the GAAP disclosure of net
cash provided by (used in) operating activities:
RECONCILIATION OF EBITDA TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
(in thousands)
|
|
For the Nine Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
875
|
|
$
|
(1,380
|
)
|
Interest expense-net
|
|
282
|
|
636
|
|
Other income-net
|
|
(275
|
)
|
(13
|
)
|
Change in trade accounts receivable
|
|
348
|
|
299
|
|
Change in other current and non-current assets
|
|
50
|
|
218
|
|
Change in accounts payable
|
|
(172
|
)
|
182
|
|
Change in accrued liabilities
|
|
(233
|
)
|
(400
|
)
|
Change in deferred revenue
|
|
59
|
|
(243
|
)
|
Foreign currency exchange gain
|
|
226
|
|
16
|
|
Note payable discount amortization
|
|
(90
|
)
|
(62
|
)
|
Provision for bad debt
|
|
(111
|
)
|
(105
|
)
|
EBITDA
|
|
$
|
959
|
|
$
|
(852
|
)
|
RISK FACTORS
We operate in a rapidly
changing environment that involves numerous risks and uncertainties. The
following section lists some, but not all, of these risks and
uncertainties that may have a material adverse effect on our business,
financial condition or results of operation.
IF WE DO NOT DEVELOP NEW PRODUCTS
AND ENHANCE EXISTING PRODUCTS TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND
INDUSTRY STANDARDS, OUR REVENUE MAY DECLINE.
We have devoted
significant resources to the research and development of products and
technologies. We believe that our future success will depend in large part on a
strong research and development effort with respect to both our existing and
new products. Beginning in 2001, we began an extensive effort to leverage our
time-proven Pick UDM and core intellectual property to create an enterprise
class XML database management server for the emerging XML market. This
significant investment of time and resources resulted in the TigerLogic XDMS
product line. While we intend for these efforts to improve our future operating
results and increase cash flow, such efforts may not result in new products or
revenue, and any new products that do result may not be successful. The
development of new or enhanced software products is a complex and uncertain
process requiring high levels of innovation, as well as accurate anticipation
of customer and technical trends. In developing new products and services, we
may fail to develop and market products that respond to technological changes
or evolving industry standards in a timely or cost-effective manner, or
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these new products. The development and
introduction of new or enhanced products also requires us to manage the
transition from older products in order to minimize disruptions in customer
ordering patterns and to ensure that adequate supplies of new products can be
delivered to meet customer demand. Failure to develop and introduce new
products, or enhancements to existing products, in a timely manner in response
to changing market conditions or customer requirements, or lack of customer
acceptance of our products, will materially and adversely affect our business,
results of operations and financial condition.
OUR FAILURE TO
COMPETE EFFECTIVELY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS.
The market for our
products is highly competitive, diverse and subject to rapid change. Our
products and services compete on the basis of the following key
characteristics: performance; inter-operability; scalability; functionality;
reliability; pricing; post sale customer support; quality; compliance with
industry standards; and overall total cost of ownership.
The application
development tools software market is rapidly changing and intensely
competitive. Our MDMS products compete with products developed by companies
such as Oracle, Microsoft and IBM. Our RAD products currently encounter
competition from several direct competitors, including Microsoft, and competing
development environments, including
19
JAVA. Competition is
developing and evolving in the XML market for which our XDMS products are
intended. Companies that do or are expected to compete in this market include
Oracle, IBM, Microsoft and Sybase, as well as a number of smaller companies
with products that directly and indirectly compete with our XDMS products.
Additionally, as we expand our business, we expect to compete with a different
group of companies, including smaller, highly focused companies offering single
products.
Most of our competitors
have significantly more financial, technical, marketing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies, evolving markets and changes in customer
requirements and may devote greater resources to the development, promotion and
sale of their products. While we currently believe that our products and
services compete favorably in the marketplace, our products and services could
fall behind marketplace demands at any time. If we fail to address the
competitive challenges, our business would suffer materially.
BECAUSE THE MARKET
FOR OUR MDMS AND RAD TOOLS PRODUCTS MAY BE DECLINING, OUR REVENUE MAY DECLINE
IF WE CANNOT MAINTAIN OUR SALES TO EXISTING CUSTOMERS OR GENERATE SALES TO NEW
CUSTOMERS.
We believe that the
markets for our MDMS and RAD products may be declining as customers adopt other
technologies. As a result, to maintain or grow our revenue in these markets, we
will need to maintain our sales to existing customers and to generate sales to
new customers, including corporate development teams, commercial application
developers, system integrators, independent software vendors and independent
consultants. If we fail to attract new customers, if we lose our customers to
competitors, or if the MDMS or RAD markets further decline, our revenue may be
adversely affected. In the longer term, it is expected that the MDMS and RAD
markets will eventually decline as customers adopt newer technologies.
OUR PRODUCTS HAVE
A LONG SALES CYCLE WHICH COULD RESULT IN DELAYS IN THE RECEIPT OF REVENUE.
The sales cycle for our
MDMS and RAD products typically ranges from three to nine months or longer and
the sales cycle for our XDMS products is anticipated to be significantly longer
since these markets are emerging and the products are still in the process of
being adopted by the marketplace. Our products are typically used by
application developers, system integrators and value added resellers to develop
applications that are critical to their corporate end users business. Because
our products are often part of an end users larger business process,
re-engineering initiative, or implementation of client/server or web-based
computing, the end users frequently view the purchase of our products as part
of a long-term strategic decision regarding the management of their
workforce-related operations and expenditures. Thus, this sometimes results in
end users taking a significant period of time to assess alternative solutions
by competitors or to defer a purchase decision as a result of an unrelated
strategic issue beyond our control. As a result, a significant period of time
may elapse between our research and development efforts and recognition of
revenue, if any.
THE CONCENTRATION OF OUR STOCK OWNERSHIP GIVES ONE STOCKHOLDER
SIGNIFICANT CONTROL OVER OUR BUSINESS.
As of December 31,
2007, Astoria beneficially owned approximately 56% of our outstanding common
stock. Richard W. Koe, Chairman of the Board of Directors, serves as the
Managing General Partner for Astoria Capital Management, which is a general
partner of Astoria. Carlton H. Baab, our President, Chief Executive
Officer, and Director, served as a Managing Principal of Astoria Capital
Management until taking a formal leave of absence to join us in August 2001.
This concentration of stock ownership allows Astoria, acting alone, to block
any actions that require approval of our stockholders, including the election
of members to the Board of Directors and the approval of significant corporate
transactions. Moreover, this concentration of ownership may delay or prevent a
change in control.
WE MAY EXPERIENCE
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY
OF OUR STOCK PRICE.
We expect to continue to
spend substantial amounts of money in the area of research and development,
sales and marketing and operations in order to promote new product development
and introduction. Because the expenses associated with these activities are
relatively fixed in the short-term, we may be unable to timely adjust spending
to offset any unexpected shortfall in revenue growth or any decrease in revenue
levels. Operating results may also fluctuate due to factors such as:
20
·
the
size and timing of customer orders;
·
changes
in pricing policies by us or our competitors;
·
our
ability to develop, introduce, and market new and enhanced versions of our
products;
·
the
number, timing, and significance of product enhancements and new product
announcements by our competitors;
·
the
demand for our products;
·
non-renewal
of customer support agreements;
·
software
defects and other product quality problems; and
·
personnel
changes.
We operate without a
significant backlog of orders. As a result, the quarterly sales and operating
results in any given quarter are dependent, in large part, upon the volume and
timing of orders booked and products shipped during that quarter. Accordingly,
we may be unable to adjust spending in a timely manner to compensate for any
unanticipated decrease in orders, sales or shipments. Therefore, any decline in
demand for our products and services, in relation to the forecast for any given
quarter, could materially and negatively impact the results of our operations.
As a result, our quarterly operating results may fluctuate, which may cause our
stock price to be volatile. In addition, we believe that period-to-period
comparisons of our operating results should not be relied upon as indications
of future performance.
THE SUCCESS OF OUR
BUSINESS DEPENDS IN PART UPON OUR ABILITY TO RECRUIT AND RETAIN KEY
PERSONNEL AND MANAGEMENT.
The majority of our
executive officers joined us subsequent to the acquisition of PickAx, including
our President, Chief Executive Officer, and Director, Carlton H. Baab, who
joined us in August 2001. The loss of one or more of these or other
executives could adversely affect our business. In addition, we believe that
our future success will depend to a significant extent on our ability to
recruit, hire and retain highly skilled management and employees with
experience in engineering, product management, business development, sales,
marketing and customer service. Competition for such personnel in the software
industry can be intense, and there can be no assurance that we will be
successful in attracting and retaining such personnel. If we are unable to do
so, we may experience inadequate levels of staffing to develop and license our
products and perform services for our customers, which could adversely affect
our business.
THE INABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR ABILITY TO COMPETE.
Our ability to compete
successfully will depend, in part, on our ability to protect our proprietary
technology and operations without infringing upon the rights of others. We may
fail to do so. In addition, the laws of certain countries in which our products
are, or may be, licensed may not protect our proprietary rights to the same
extent as the laws of the United States. We rely primarily on a combination of
trade secret, copyright and trademark laws and contractual provisions to
protect our intellectual property and proprietary rights. Our trademarks
include Raining Data, Pick, D3, Omnis, Omnis Studio, mvEnterprise, mvBase,
mvDesigner and TigerLogic, among others. We also have one pending U.S. patent
application as of December 31, 2007. In addition to trademark and
copyright protections, we license our products to end users on a right to use
basis pursuant to a perpetual license agreement that restricts use of products
to a specified number of users.
We generally rely on click-wrap
licenses that become effective when a customer downloads and installs software
on its system. In order to retain exclusive ownership rights to our software
and technology, we generally provide our software in object code only, with
contractual restrictions on copying, disclosure and transferability. There can
be no assurance that these protections will be adequate, or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
As further described in Part II,
Item 1 hereof, the Company has filed complaints in Orange County Superior Court
that sets forth allegations that certain parties threaten to and have
misappropriated the Companys trade secrets, including the possible release of
certain source code.
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OUR PRODUCTS MAY CONTAIN
SOFTWARE DEFECTS WHICH COULD HARM OUR BUSINESS.
Our enterprise applications software may contain undetected errors or
failures. This includes our XDMS products, which are at higher risk given these
products are in the earliest stages of the product life cycle. This may result
in loss of, or delay in, customer acceptance of our products and could harm our
reputation and our business. Undetected errors or failures in computer software
programs are not uncommon. While we make every effort to thoroughly test our
software, in the event that we experience significant software errors, we could
experience delays in release, customer dissatisfaction and lost revenue. Any of
these errors or defects could harm our business.
IF THE REGISTRATION RIGHTS HELD BY ASTORIA AND OTHER SECURITIES HOLDERS
ARE EXERCISED, OR THESE SECURITIES HOLDERS SELL A SUBSTANTIAL AMOUNT OF
RESTRICTED SECURITIES IN THE OPEN MARKET, OUR STOCK PRICE MAY DECLINE.
As
of December 31, 2007, we had 26,204,149 outstanding shares of common stock,
of which approximately 15 million shares were restricted securities held by
Astoria and other holders. Restricted securities may be sold in the public
market only if they are registered or if they qualify for an exemption from
registration promulgated under the Securities Act. At present, all of our
outstanding restricted securities are either entitled to registration rights or
eligible for public sale under Rule 144, subject to volume limitations and
other requirements of Rule 144. If Astoria or other holders decide to
exercise their demand registration rights, we would incur costs and expenses
associated with the registration of securities.
Furthermore,
sales of a substantial number of shares by Astoria or other securities holders
in the public market, or the perception that those sales may occur, could cause
the market price of our common stock to decline. In addition, if we register
shares of our common stock in connection with a public offering of securities,
we may be required to include shares of restricted securities in the
registration, which may have an adverse effect on our ability to raise capital.
OUR GLOBAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS AND CHALLENGES
ASSOCIATED WITH CONDUCTING BUSINESS INTERNATIONALLY.
We
operate on a global basis with offices or distributors in Europe, Africa, Asia,
Latin America, South America, Australia and North America and development
efforts in North America and Europe. Approximately 35% and 33% of our revenue
for the three and nine months ended December 31, 2007, respectively, was
generated from our international offices. We face several risks inherent in
conducting business internationally, including but not limited to the
following:
·
fluctuations in interest rates or currency
exchange rates;
·
language and cultural differences;
·
local and governmental requirements;
·
difficulties and costs of staffing and
managing international operations;
·
differences in intellectual property protections;
·
difficulties in collecting accounts receivable
and longer collection periods;
·
seasonal business activities in certain parts
of the world; and
·
trade policies.
Any of these factors
could harm our international operations and, consequently, affect the
international growth or maintenance of our business. These factors or any
combination of these factors may adversely affect our revenue or our overall
financial performance.
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THE FAILURE OF OUR
PRODUCTS TO CONTINUE TO CONFORM TO INDUSTRY STANDARDS MAY HARM OUR
OPERATING RESULTS.
A key factor in our future success will continue to be the ability of
our products to operate and perform well with existing and future leading,
industry-standard enterprise software applications intended to be used in
connection with our MDMS, RAD, and XDMS products. Inter-operability may require
third party licenses, which may not be available to us on favorable terms or at
all. Failure to meet existing or future inter-operability and performance
requirements of industry standard applications in a timely manner could
adversely affect our business. Uncertainties relating to the timing and nature
of new product announcements or introductions or modifications of third party
software applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase, and
deployment of our products.
THIRD PARTIES
COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE ON THEIR
INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN COSTLY LITIGATION, CAUSE
PRODUCT SHIPMENT DELAYS, PROHIBIT PRODUCT LICENSING OR REQUIRE US TO ENTER INTO
ROYALTY OR LICENSING AGREEMENTS.
There has been a
substantial amount of litigation in the software industry regarding
intellectual property rights. Third parties may claim that our current or
potential future products and services infringe upon their intellectual
property. We expect that software product developers and providers of software
applications will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grow and the functionality
of products in different industry segments overlap. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays, prohibit product licensing or require us to enter into royalty
or licensing agreements. Royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm
our business.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our
principal executive officer and principal financial officer evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on such evaluation, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are effective, as of the end of the
period covered by this report, to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and accumulated and
communicated to the Companys management, including its principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Management necessarily applied its judgment in assessing the benefits of
controls relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There was no change in
our internal control over financial reporting that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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