Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
| (Mark One) | ||
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended April 30, 2010 | ||
| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number: 001-11807
UNIFY CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number: 001-11807
UNIFY CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 94-2710559 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
Address of principal executive offices: 1420 Rocky Ridge Drive, Suite 380, Roseville, California 95661
Registrant’s telephone number, including area code: (916) 218-4700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO x
YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the Act.
YES o NO x
YES o NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NO x
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $16,629,703 based on the number of shares held by non-affiliates of the registrant and computed by reference to the reported last sale price of common stock on October 31, 2009, which is the last business day of the registrant’s most recently completed second fiscal quarter. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of May 31, 2010, the registrant had 10,476,633 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated by reference to the Proxy Statement for the registrant’s 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.
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EXPLANATORY NOTE
We are filing this amendment to our Annual Report on Form 10-K for the year period ended April 30, 2010, which was originally filed with the Securities and Exchange Commission on July 12, 2010 (the “Original Filing”), to include restated financial statements as described in Note 2 to the consolidated financial statements. The financial statements are being restated to correct accounting errors as follows:
- Adoption of certain provisions of Accounting Standards Codification (ASC) 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity”. The anti-dilution price protection features in the Company’s outstanding common stock warrants require these common stock warrants to be accounted for as liabilities and measured at fair value. The restated financial statements reflect the reclassification of the Company’s common stock warrants from stockholders’ equity to a common stock warrant liability, and accounts for changes in the fair value of the common stock warrant liability in the statement of operations.
- Accounting for contingent consideration in business combinations in accordance with ASC 805 “Business Combinations” (“ASC 805”), was not properly applied in accounting for the Company’s June 30, 2009 acquisition of AXS-One Inc. The Company calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as adjustments in the statement of operations.
The restatement does not result in a change in the Company’s previously reported revenues, cash flows from operations, or total cash and cash equivalents shown in its financial statements for the year ended April 30, 2010. See Note 2 to our audited consolidated financial statements for additional discussion regarding the impact of the accounting errors noted above.
The items of the Original Filing which are amended and restated by this Annual Report on Form 10-K/A as a result of the foregoing are:
- Part I — Item 1 — Business
- Part I — Item 1A — Risk factors
- Part II — Item 6 — Selected Financial Data
- Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Part II — Item 9A — Controls and Procedures
- Part IV — Item 15 — Exhibits, Financial Statement Schedules
For the convenience of the reader, this Annual Report on Form 10-K/A sets forth the Original Filing in its entirety. Other than as described above, none of the other disclosures in the Original Filing have been amended or updated. Among other things, forward looking statements made in the Original Filing have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Filing, and such forward-looking statements should be read in their historical context. Accordingly, this Annual Report on Form 10-K/A should be read in conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the Original Filing.
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PART I
A Caution about Forward-Looking Statements:
The discussion in this Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software industry and certain assumptions made by the Company’s management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth herein under “Risk Factors.” Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”), particularly the Company’s Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS
The Company
Unify (the “Company”, “we”, “us” or “our”) is a global provider of application development, data management, migration and archiving software solutions. Our software helps companies to maximize value and reduce cost in the development, deployment, management and retention of business applications, data and electronically stored information. Our archiving solutions meet an organization’s requirement to archive, discover and preserve electronically stored information for eDiscovery, regulatory compliance, global email access and storage savings.
The Company sells and markets application development and database software and services, integrated content archiving solutions and modernization solutions through three segments. The segments are the Database and Development Products (“DDP”), Integrated Content Archiving Solutions and our Modernization and Migration Solutions. Following its merger with Daegis in June 2010, the Company also delivers eDiscovery solutions for corporate legal departments and law firms.
Unify’s customers include corporate information technology (“IT”) and legal organizations, software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing, retail, education, and more. We market and sell products directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers representing more than 50 countries.
Over the past five years, we have expanded our product offering to adapt to evolving market requirements. Our integrated content archiving and eDiscovery software solution, the Central Archive, enables organizations to securely capture, index, archive, retrieve, review, share, search, supervise and manage the retention, disposition, preservation and destruction of electronic records. With Daegis, we provide eDiscovery offerings that span the litigation lifecycle. Our application modernization solutions help organizations migrate and maximize investments in their existing applications and data. Our Modernization and Migration Solutions, and Software products are built to increase productivity, eliminate risk and substantially reduce time and costs. Our application development and data management software products include Team Developer, SQLBase, SQLBase Treasury, NXJ, DataServer, VISION and ACCELL. Our Modernization and Migration Solutions include Composer™ Notes which delivers a like-for-like migration of Lotus Notes applications to the Microsoft .NET platform, Composer Sabertooth™ which speeds the conversion of Team Developer or SQLWindows applications to Microsoft .NET, Composer CipherSoft which automatically converts Oracle Forms and PL/SQL code to Java and Composer Mainframe which delivers automation migration of legacy COBOL, Ideal and Natural code to modern code and relational databases through best of breed partnerships with Ateras Inc. and Information Analysis Inc. (“IAI”).
On June 29, 2010, we acquired Strategic Office Solutions, Inc. (d/b/a “Daegis”), a provider of eDiscovery solutions for corporate legal departments and law firms. The Company believes that the eDiscovery solutions compliment the integrated content archiving segment. The financial and other information in this Report presented as of our fiscal year end does not include the effect of this acquisition.
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Unify was initially incorporated in California in 1980 and later reincorporated in Delaware on April 10, 1996. We are headquartered in Roseville, California, with offices in New Jersey, Canada, Australia, France, Germany, and the United Kingdom (“UK”). Our headquarters office is located at 1420 Rocky Ridge Drive, Suite 380, Roseville, California 95661. Our telephone number is (916) 218-4700 and our website address is http://www.unify.com.
Products
Archive and eDiscovery Solutions
The Central Archive enables corporations to preserve, manage, and utilize their electronically stored information (ESI) as an asset, while better managing storage resources, complying with industry regulations, enabling legal discovery and reducing the risks associated with electronic content. The Central Archive, a policy driven, highly scalable archive solution for all forms of electronically stored information, processes all forms of disparate data types into a single unified archive where companies can manage its long-term preservation requirements, apply records management, support regulated industry requirements and manage legal discovery.
Daegis DocHunter is a dynamic online review platform that hosts electronically stored information (ESI) and provides an array of tools for early case assessment and culling, processing, hosted review and document production for legal matters. Daegis also provides professional services that include data collection, eDiscovery analytics project management, cost burden analysis and litigation readiness.
Application Modernization and Migration Solutions
Composer™ CipherSoft is a software solution that automates the conversion of Oracle Forms and PL/SQL code to Java and we believe is the only one of its kind to be validated by Oracle for migrating Forms to Java (J2EE). Utilizing J2EE simplifies the application development process by using standardized and reusable object-oriented components and by automating multi-tier functionality. As a result, the amount of time needed for programming and training is decreased, saving time and money. Composer CipherSoft provides a like-for-like conversion by preserving the business logic/work flow in order to avoid end-user disruption. Composer CipherSoft can convert all releases of Oracle Forms, including character-based versions such as Release 2.3, 3.0 and 4.5. By automating the migration process, Composer CipherSoft removes the risk of human error and produces standardized business applications that are fully maintainable, helping companies stay competitive.
Composer™ Notes is a software solution for converting IBM Lotus Notes® applications to the Microsoft platform. Composer Notes delivers like-for-like migration of Lotus Notes applications to the Microsoft stack while preserving the business logic/workflow in order to avoid end-user disruption. With Composer, Lotus Notes applications are decomposed and re-assembled: Data from the Lotus Notes application is migrated into a normalized SQL Server database; Business logic is restructured as C# Web Services in Visual Studio; User Interface is transformed into SharePoint Lists and Web Parts; and ACL security is mapped into the Microsoft Active Directory Services. Composer Notes removes the risk of human error and produces standardized business applications that are fully maintainable, helping companies stay competitive.
Composer Mainframe delivers automation migration of legacy COBOL, Ideal and Natural code to modern code and relational databases through partnerships with Ateras Inc. and Information Analysis Inc. (“IAI”). Through the Ateras partnership, Composer Mainframe offers a complete solution for companies needing to modernize their legacy mainframe applications, including migrating mainframe code and non-relational databases from IDMS, IMS, VSAM or from Natural / Adabas to COBOL, C# or JAVA code, with either a DB2, SQL Server or Oracle database. The partnership with IAI enables Composer Mainframe to migrate Ideal / Datacom applications to COBOL code with either a DB2 or Oracle database. Composer Mainframe delivers an automated code conversion and data migration for a functionally equivalent application. Unify’s methodology is designed to eliminate risk and substantially reduce time and costs of IT departments.
Composer Sabertooth™ is designed for organizations that are standardizing on Microsoft and are forced to transition Team Developer applications to C# or VB.NET. The vast majority of Unify’s worldwide Team Developer customers continue to benefit from the ability to rapidly build and deploy business applications fast and cost-effectively. From the latest Web Services Consumption in Team Developer 5.2 to the planned .NET support in future releases, Composer Sabertooth delivers a complimentary solution for organizations requiring standardization and consolidation of their IT systems and applications to the Microsoft .NET platform, either now or in the near future.
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Rapid Application Development Products
Team Developer® is a visual object-oriented rapid application development product that shortens the development cycle by providing developers the tools needed to quickly design, develop and deploy Windows solutions. Team Developer provides a completely integrated visual development environment that includes a database explorer, integrated reporting tool, team-oriented source code management facility, and a powerful component developer facility that enables programmers to automate and customize the development environment.
NXJ Developer and NXJ Enterprise® is a visual environment for the rapid development of innovative Web 2.0 Rich Internet Applications (“RIA”). NXJ Developer is distinguished by its combination of intuitive visual design, flexible service-oriented architecture (“SOA”) programming, and ease of integration with both Java code and .NET business logic via Web services. The combination of AJAX-rich client technology and Web services make NXJ Developer a powerful and competitive solution for delivering SOA-based Rich Internet Applications. NXJ Enterprise® includes all of the powerful technology of NXJ Developer but adds workflow and reporting for delivering enterprise class RIA and web-based applications.
ACCELL® is a highly productive 4GL application development suite and database software for developing and deploying data-rich, database-driven applications. 4GL is a fourth generation programming language designed to allow users to develop applications, particularly for the purpose of querying databases and producing reports. The ACCELL products support interfaces to leading database products including Unify DataServer, IBM DB2, Informix, Microsoft SQL Server, Oracle and Sybase. The ACCELL product suite includes ACCELL/SQL and ACCELL/IDS.
- ACCELL/SQL™ — is our 4GL-based rapid application development software for developing client/server applications. ACCELL/SQL connects to Unify, Oracle, Sybase and Informix databases creating a fast application performance environment.
- ACCELL/IDS™ — is our 4GL-based rapid application development software for applications that connect to Unify’s DataServer ELS database.
VISION® is a graphical, client/server application development system that allows for rapid creation and easy modification of complex business applications based on 4GL technology. Unify VISION consists of an object-oriented, repository-based component framework designed to enable developers to rapidly create and easily modify application components. VISION also contains an application server to allow organizations to integrate custom-built and packaged applications with the Internet.
Database Management Products
SQLBase® is a fully relational, high performance, embedded database that allows organizations to manage data closer to the customer, where capturing and organizing information is becoming increasingly critical. SQLBase provides a self-recovering, maintenance-free embedded database architecture that enables IT, ISVs and VARs to focus on their solution, rather than the underlying database technology.
SQLBase® Treasury is an encrypted, secure version of the SQLBase database.
DataServer® is a high performance enterprise relational database management system with minimal maintenance and memory requirements. It can quickly accommodate the growth of user requirements over time, making it an attractive choice for mission critical applications. DataServer makes it easy for developers to create graphical applications and migrate existing database applications to enterprise network and Internet environments.
DataServer® ELS is a high performance, easily embeddable database. Its small footprint and proven reliability make it an industry favorite for embedded applications that require relational databases.
Report Builder™ provides individuals with a quick and easy way to create attractive reports and ad-hoc queries for databases. Report Builder offers full Cross Platform capabilities and is available for Windows and Linux desktop computers.
Q is an end user query and reporting tool for Personal Query Management, Personal Report Management and Information Sharing.
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Customers
Unify’s customers include corporate information technology departments (“IT”), software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing, retail, education, and more. For the year ended April 30, 2010, we had one customer that accounted for 14% of consolidated revenues and one customer that accounted for 11% of consolidated revenues. No single customer accounted for 10% or more of consolidated revenue in the year ended April 30, 2009. We had one customer in the year ended April 30, 2008 that accounted for 12% of consolidated revenues.
Sales, Marketing and Distribution
Unify’s products and professional services are marketed and distributed to customers globally using a combination of a direct corporate sales force and indirect distribution channels, including ISVs, VARs, SIs and worldwide distributors. The indirect sales channels leverage Unify’s sales, support and consulting resources to provide complete solutions to our customers.
Unify’s direct sales organization consists of sales representatives and pre-sales consultants. Our North America sales representatives are located primarily in our headquarters in Roseville, California. Unify markets its products internationally through offices in the UK, France, Germany, Canada and Australia. Unify has distributors in Asia Pacific, Europe, Japan, Latin and South America, and Russia. International revenues accounted for 50%, 68% and 78% of total revenues in fiscal 2010, 2009 and 2008, respectively.
Unify’s marketing is focused on generating demand and marketing awareness for Unify products including efforts to support the direct and indirect sales channels. Marketing activities include strategic demand generation, public relations, customer communications and events, trade shows and our Web sites.
As of April 30, 2010, we had a total of 25 employees engaged in sales and marketing activities. Of those employees, 16 were located in the United States and 9 were located in other countries.
Customer Support and Professional Services
Unify’s customer support and professional services organizations play an important role in maintaining customer satisfaction, facilitating license sales and enabling customers to successfully architect, design, develop, deploy, manage or migrate applications.
Customer Support and Maintenance
Unify provides customer support via telephone, Web, e-mail and fax from its support centers located in California, New Jersey, Australia, France, UK, Malaysia, South Africa, and Holland. Distribution partners provide telephone support to international customers with technical assistance from the U.S.-based support personnel who also respond to e-mail inquiries. Customers are offered tailored support service levels including response time, information reporting, and other features, such as 24-hour a day, seven-day a week support. During each of the past three fiscal years, over 75% of our support and maintenance customers have renewed their annual contracts.
Consulting
Unify offers a full range of consulting services ranging from application installation and implementation services including delivering a proof of concept to completed applications using our technology infrastructure. Our products allow companies to maximize return on investment, get to market quickly or be more efficient. Consulting services include: application migration, project implementations and application updates, business process-centric application development, Web-enablement, technology/knowledge transfer, application architecture audits and database tuning. The level of consulting services is tailored to customer-defined needs and includes development plans, hands-on development tasks and project management.
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Education
Unify offers education courses at our training centers located in Roseville, California and Paris, France. We also offer on-site training at customer and partner facilities.
As of April 30, 2010, we had a total of 40 employees engaged in providing customer support and professional services. Of those employees, 16 were located in the United States and 24 were located in other countries.
Product Development
In fiscal 2010, we focused our development efforts on the archive portfolio, the initial release of Q, a new version of Team Developer, the Composer products, and SQLBase products. During fiscal 2010, we developed and released a new product, Q, as well as minor versions of the Central Archive, SQLBase, Team Developer, VISION and ACCELL/SQL. Significant enhancements and improvements were made to Composer CipherSoft and Composer Lotus Notes. Unify’s product development expenses for fiscal 2010, 2009 and 2008, were $6.5 million, $2.9 million and $3.5 million, respectively. The significant increase in expenses was the result of the AXS-One acquisition in June 2009.
Most of Unify’s current software products have been developed internally; however, we have licensed certain software components from third parties and we may do so again in the future. We are committed to delivering products that meet customer and market needs today and into the future.
Intellectual Property
Unify relies on a combination of copyright, trademark and trade-secret laws, non-disclosure agreements and other methods to protect our proprietary technology. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries in which we sell products do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology.
Although there are no pending lawsuits against Unify regarding infringement of any existing patents or other intellectual property rights and we have not received any notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or obtain licenses on reasonable terms. Our involvement in any patent dispute or any other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require us to seek licenses from third parties, and prevent us from developing and selling its products. Any of these situations could have an adverse effect on our business, operating results and financial condition.
Unify is dependent on third-party suppliers for certain software which is embedded in some of our products. Although we believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources, or could be developed by us if any such third-party licenses were terminated, or not renewed, or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to developing products which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs, or reduced functionality could adversely affect our business, operating results, and financial condition.
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Competition
The market for Unify’s software is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. Our applications and software products compete in the market with dozens of other companies that provide application modernization solutions, application development products, and databases. These competitors include EMC, IBM, Microsoft, Oracle and Symantec. All of these competitors are large, well capitalized companies with significantly greater financial, technical and marketing resources as well as greater name recognition and larger customer bases. The Unify solutions are competitive from a technical capability, rich interface and ease of use, service and pricing perspectives, but our competitors have greater brand recognition and perceived financial strength.
The Company generally derives sales from new eDiscovery & archiving projects, application modernization initiatives, and additional deployment of existing applications and version upgrades. As a result, the key competitive factor is generally the decision by a customer as to whether or not to begin a new project initiative or upgrade or keep things status quo. Organizations choose Unify software for a variety of factors including the ability to deliver market leading archiving/eDiscovery applications, migrate applications, build and deploy applications quickly, the high level of customer service and support Unify provides and our price point, which gives customers a cost-effective solution to their business problem. Organizations will typically choose a competitor because of their perceived financial strength.
As new products and technologies are introduced, increased competition could result in fewer customer orders, reduced prices and reduced gross margins, any one of which could adversely affect our business, operating results, and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on favorable terms.
Employees
As of April 30, 2010, we had a total of 127 employees, including 38 in product development, 25 in sales and marketing, 40 in customer support, consulting, and training, and 24 in finance, operations and general administration. Of these employees, 94 were located in the United States and 33 were located in other countries.
Unify’s success depends, in large part, on its ability to attract and retain qualified employees, particularly senior management, engineering and direct sales. The competition for such employees is intense. There can be no assurance that we will be successful in attracting or retaining key employees. Any failure we have in attracting and retaining qualified senior management, engineering, direct sales, and support personnel could adversely affect our business, operating results, and financial condition. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.
Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of the date April 30, 2010.
| Executive | ||||||
| Officer | ||||||
| Name | Current Position with Company | Age | Since | |||
| Todd E. Wille | President and Chief Executive Officer | 47 | 2000 | |||
| Steven D. Bonham | Vice President, Finance and Administration and CFO | 53 | 2005 | |||
| Mark T. Bygraves | Vice President, Sales – Europe, Middle East and Africa | 53 | 2007 | |||
| Duane V. George | Vice President, Product Development and CTO | 52 | 2007 | |||
| Glenn D. Rhodes | Vice President, Marketing and CMO | 43 | 2010 | |||
| Frank Verardi | Vice President, Sales - Americas and Asia Pacific | 61 | 2001 |
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Unify has a board of directors consisting of seven (7) members. Set forth below is information with respect to their ages as of April 30, 2010, as well as their positions and offices held with the Company. Each director holds office until the next Annual Meeting of Stockholders and until his successor is duly elected and qualified.
| Director | ||||||
| Name | Current Position with Company | Age | Since | |||
| Steven D. Whiteman | Chairman of Board | 59 | 1997 | |||
| Timothy P. Bacci | Director | 51 | 2009 | |||
| Robert M. Bozeman | Director and Mergers and Acquisitions Committee Chair | 61 | 2008 | |||
| Richard M. Brooks | Director and Audit Committee Chair | 56 | 2005 | |||
| Tery R. Larrew | Director and Compensation Committee Chair | 56 | 2002 | |||
| Robert J. Majteles | Director | 45 | 2004 | |||
| Todd E. Wille | President and Chief Executive Officer | 47 | 2000 |
Executive Officers
Todd E. Wille has served as president and chief executive officer since November 2000. He rejoined the Company in October 2000 as the chief operating officer and acting chief financial officer. Mr. Wille originally joined Unify in August 1995 as the corporate controller. In September 1997, Mr. Wille was promoted to vice president, finance and chief financial officer. In March 1998, Mr. Wille left the Company and joined FRx Software Corporation as the vice president of finance and chief financial officer. Subsequently, Mr. Wille was promoted to senior vice president of operations. Mr. Wille received a B.A. degree in business administration with concentrations in accounting and finance and management information systems from Wartburg College.
Steven D. Bonham joined the Company in June 2005, as vice president of finance and administration and chief financial officer. Before joining Unify, Mr. Bonham was the chief financial officer for LexisNexis/Examen, a subsidiary of LexisNexis, from 1997-2005. Prior to LexisNexis/Examen, Mr. Bonham spent nine years with Foundation Health Corporation, a former Fortune 500 publicly traded managed care insurance company, most recently serving as the vice president of finance for Foundation’s, California Heath Plan. Mr. Bonham, a licensed certified public accountant, has a B.S. degree in accounting from California State University, Sacramento.
Mark T. Bygraves joined the Company in November 2006 as part of the acquisition of Gupta Technologies, where he had served since February 2002 and was appointed as an officer on May 1, 2007. Mr. Bygraves is responsible for driving the Unify channel sales programs together with day to day operational responsibilities for Northern Europe, Middle East and Africa (EMEA). Mr. Bygraves has worked in the IT industry for 20 years, holding a number of senior positions, most recently from January 1999 to January 2002 as Director of Channels at Hitachi Data Systems. Prior to Hitachi Data Systems, Mr. Bygraves was the Sales Director of Transformation Software.
Duane V. George has served as vice president of product development and CTO since July 2006. Mr. George is responsible for Unify’s Technical Services Group which includes product development, customer support, training, documentation, quality control and assurance. Mr. George provides technical vision, leads all aspects of the Company’s technology development and plays an integral role in shaping the Company’s strategic direction, development and future growth. He is responsible for refining the technology strategy for Company products and services and implementing projects aligned to that strategy and delivering all technology applications, systems and solutions that are core to the Company’s offerings. Mr. George has been in the information technology and engineering industries for over 25 years. He began his career as an engineer with the Department of Defense managing the acquisition and implementation of Computer Aided Design and Manufacturing (CAD/CAM) systems. Subsequently, Mr. George joined the US Space Command to manage strategic space defense initiatives and satellite Command Control and Communication (C3) programs. He eventually moved into software development, customer support and project management with an emphasis on customer satisfaction. Mr. George joined Unify in 1995 and has been a core member of the support, consulting and product development teams. He earned his B.S. in engineering from Brigham Young University in Provo, Utah.
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Glenn Rhodes joined Unify in February 2010, as vice president of marketing and chief marketing officer. He is responsible for leading all aspects of Unify’s marketing organization as the Company accelerates its growth and leadership in the content archiving and eDiscovery markets. Glenn has more than 20 years of experience in the IT industry, having held key management roles in marketing, sales, strategy and consulting for leading technology firms. Prior to joining Unify, Mr. Rhodes served as vice president of marketing at CA, Inc. where he was involved in the company’s storage and information management software line. Prior to CA, at Symantec, he was involved in the development of a new solution sales and marketing programs. Preceding Symantec, Mr. Rhodes served on the leadership team at Arkivio, Inc., where he spearheaded marketing for the company’s information lifecycle management (ILM) storage software solution later acquired by Rocket Software. Previously, at HP, Mr. Rhodes orchestrated the market development of HP’s Surestore network storage solutions. He began his career in sales at NCR. Mr. Rhodes holds a master’s degree in business administration and a bachelor’s degree in marketing from Northern Illinois University, College of Business.
Frank Verardi has served in an executive officer position since 2000. Mr. Verardi is currently responsible for driving the Unify channel sales programs together with day to day operational responsibilities for the Americas and Asia Pacific regions. Mr. Verardi served as vice president and general manager of Unify Business Solutions from May 2005 to April 2007, where he oversaw the sales and marketing for the Company’s technology products. From June 2003 to April 2005, he served as vice president of technical services, and from May 2001 to May 2003, he served as vice president of worldwide sales and marketing. Prior to these positions, Mr. Verardi served in various management positions, including vice president of worldwide professional services, vice president of worldwide product delivery and customer support, and director of client services. Mr. Verardi joined the Company in August 1988. Before joining Unify, Mr. Verardi held various positions with Computer Sciences Corporation, including director of commercial professional services. Mr. Verardi received a B.S. degree in computer science from California State University, Chico.
Board of Directors
Steven D. Whiteman has served as a director of the Company since May 1997. In August 2004, he was appointed chairman of the board. Mr. Whiteman previously served as the president and chief executive officer of Intesource, an Internet based procurement service specifically for the food industry. From June 2000 to May 2002, he worked as an independent consultant. From May 1993 until June 2000, Mr. Whiteman served as president of Viasoft, Inc. (“Viasoft”), a publicly traded software products and services company. From February 1994 to June 2000, Mr. Whiteman also served as chief executive officer and director of Viasoft, and from April 1997 to June 2000, he served as chairman of the board of directors. Mr. Whiteman is also a director of Intesource, Actuate Corporation, and Flypaper Inc. Mr. Whiteman holds a B.A. degree in business administration from Taylor University and a M.B.A. from the University of Cincinnati.
Timothy P. Bacci joined our board of directors on August 20, 2009 following Unify’s acquisition of AXS-One Inc. on June 30, 2009. Prior to joining Unify’s board of directors, Mr. Bacci had been a board member of AXS-One. Mr. Bacci is the co-founder of BlueLine Partners, a Calif.-based strategic opportunities fund with more than $100 million in assets invested in small, publicly-traded, and undervalued healthcare and IT companies. Prior to BlueLine, he spent 15 years in executive positions for software companies, including serving as chairman and interim CEO of Instant802 Networks and CEO of siteROCK Corp. He was a co-founder of Vicinity Corporation, which was acquired by Microsoft in 2002. Additionally, he has served as a consultant to several early stage technology companies addressing areas relating to corporate strategy and executive recruiting. Mr. Bacci holds a B.S. in engineering from the United States Naval Academy and served as an officer on active duty in the U.S. Navy as a fighter pilot.
Robert M. Bozeman was appointed director in January of 2008. Mr. Bozeman currently serves as an investor and/or advisor to companies in Silicon Valley. His experience includes business operations, venture capital investment, and mergers and acquisitions. He previously served in the capacities of CEO and Board Member for a variety of software, information services and computer supplier companies. Mr. Bozeman's last operating role was as CEO for Bricsnet from July, 2003 through November, 2004; prior to that - from November, 1997 through December, 2003, Mr. Bozemen was General Partner of Angel Investors LP for both its Fund I and Fund II. Investments by the firm included Ask Jeeves, Brightmail, Google, Opsware, and PayPal. In addition, many of Angel Investors LP investments became successful acquisitions, including AOL’s acquisition of Spinner, Microsoft’s acquisitions of eQuil, MongoMusic and Vacation Spot and Sybase’s acquisition of AvantGo!. Mr. Bozeman is currently on the Board and/or is an advisor to Become.com, Rare Light, Restoration Partners, Shakers Vodka, and Vortex Intellectual Property Management.
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Richard M. Brooks has served as a director of the company since August 2005. Since September 2006, Mr. Brooks has been a partner with Tatum, a national Executive Services consulting company, which is a wholly owned subsidiary of SFN Group. With Tatum, Mr. Brooks has acted as the project lead on a variety of consulting assignments, including acting as the interim CFO for Pixelworks, a publicly traded semi-conductor company. Mr. Brooks previously served as chief executive officer for VantageMed, a public company, from April 2002 to December 2004. In addition, Mr. Brooks served as a director of VantageMed Corporation from March 2001 to January 2005 and was appointed chairman of that board in May of 2002. Mr. Brooks received a B.S. in business administration from Oregon State University.
Tery R. Larrew has served as a director of the Company since May 2002. Mr. Larrew is the founding and managing partner of Caddis Capital LLC, a private equity firm that specializes in income oriented investments with strong equity appreciation including International Gaming and Entertainment; Energy – Oil & Gas Exploration and Production; Real Estate - Mobile Home Communities, Apartment Complexes, Self Storage Units and Unimproved Land; Natural Resources – Water and Secured Debt/Hard Asset financing. Until 2005, Mr. Larrew served as the President and CEO of Vericept Corporation, a provider of network-based early warning and misuse prevention solutions, headquartered in Denver, Colorado. Prior to joining Vericept in 2002, Mr. Larrew co-founded IQ3G, a mobile services company, in 2000. From 1999 to 2000, Mr. Larrew was the chairman and chief executive officer of a start-up e-communication company, UPDATE Systems, Inc. From 1989 to 1998, Mr. Larrew served as President of the Database Marketing Services Division of Metromail/CIC. He is a graduate of Colorado State University with a B.S. degree in business administration and serves on the Global Leadership Council for the Colorado State University School of Business.
Robert J. Majteles is the managing partner of Treehouse Capital LLC, an investment firm he founded in order to make investments of time and money in interesting people doing worthy things. Treehouse’s portfolio consists of private and public technology companies in a wide array of markets and circumstances. Mr. Majteles often serves as an active and involved board member for the companies in Treehouse's portfolio and also serves as an advisory partner to a variety of investment funds. In addition, Mr. Majteles is the Director of the Entrepreneurship Program at the Berkeley Center for Law, Business and the Economy. Prior to launching Treehouse, Mr. Majteles was the chief executive officer of three different technology companies. In addition, Mr. Majteles has also been an investment banker and a mergers and acquisitions attorney. Mr. Majteles is a frequent lecturer, speaker, and panelist on a wide range of topics including board governance and value added, investment process and methodology, and entrepreneurial strategic planning and metrics-driven business model execution. Mr. Majteles received a law degree from Stanford University in 1989 and a Bachelor of Arts degree from Columbia University in 1986.
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WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K that we may file from time to time and our proxy statements. You may obtain copies of these reports directly from us or from the SEC and the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Unify) at its website at www.sec.gov. We make available free of charge on or through our Internet website located at www.unify.com our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings as soon as reasonably practicable after electronic filing with the SEC.
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ITEM 1A. RISK FACTORS
In evaluating the Company’s business, readers should carefully consider the business risks discussed in this section in addition to the other information presented in this Annual Report on Form 10-K and in our other filings with the SEC.
Deterioration in general economic conditions has caused and could cause additional decreases or delays in spending by customers and could harm our ability to generate license and maintenance revenues and our results of operations.
The state of the global economy and availability of capital has and could further impact the spending patterns of existing and potential future customers. Any reduction in spending by, or loss of, existing or potential future customers would cause revenues to decline. Further, it may be difficult to adjust expenses and capital expenditures quickly enough to compensate for any unexpected revenue shortfall.
Software license and maintenance purchases tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since most revenues are derived from sales of software licenses, the current deterioration in economic conditions has caused and could cause additional decreases in or delays in software spending and is likely to reduce software license revenues and negatively impact our short-term ability to grow revenues. Further, any decreased collectability of accounts receivable or early termination of agreements due to the current deterioration in economic conditions could negatively impact our results of operations.
The conversion ratio of certain convertible notes and the exercise price of certain warrants may be substantially below the market price of our stock at the time of exercise which could potentially have a negative impact on our stock price.
In conjunction with the acquisition of Gupta Technologies LLC in November 2006, we obtained debt financing that included convertible notes in the principal amount of $5,350,000 and we also issued 670,000 warrants. As of April 30, 2010, the remaining principal amount of convertible notes resulting from our debt financing was approximately $377,000 which is convertible into our common stock at a fixed ratio of $5.00 per share. As of April 30, 2010, there were 435,994 warrants issued as part of our debt financing that were outstanding which are exercisable at fixed exercise prices ranging from $1.35 per share to $1.90 per share. Subject to certain exceptions, these conversion ratios and exercise prices are subject to downward adjustment in the event we issue additional shares of common stock at prices below the then-current conversion ratio or exercise price. Conversion of the notes or exercise of the warrants is only likely to occur at such time as the conversion ratio or exercise price, as the case may be, is lower than the current market price for our stock. Issuance of common stock at a price below our current market price would have a dilutive effect on current stockholders and could potentially have a negative impact on our stock price.
In conjunction with the acquisition of Daegis in June 2010, we obtained debt financing and issued 718,860 warrants which are exercisable at $3.30 per share. Subject to certain exceptions, these exercise prices are subject to downward adjustment in the event we issue additional shares of common stock at prices below the then-current exercise price. Exercise of the warrants is only likely to occur at such time as the exercise price is lower than the current market price for our stock. Issuance of common stock at a price below our current market price would have a dilutive effect on current stockholders and could potentially have a negative impact on our stock price.
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If we default on any secured loan, all or a portion of our assets could be subject to forfeiture.
To finance the cash portion of the acquisition of Gupta in 2006 and provide working capital, we entered into a Revolving Credit and Term Loan Agreement (the “ComVest Loan Agreement”) with ComVest on November 20, 2006. Under the Loan Agreement, we granted to ComVest a first priority security interest in substantially all of our assets. To finance the cash portion of the merger with Daegis and provide working capital, the Company entered into a new Revolving Credit & Term Loan Agreement with Hercules Technology on June 29, 2010 (the “Hercules Loan Agreement”). Under the Hercules Loan Agreement, we granted to Hercules a first priority security interest in substantially all of our assets. If we default on the Hercules Loan Agreement and are unable to cure the default pursuant to the terms of the agreement, our lender could take possession of any or all assets in which it holds a security interest, including intellectual property, and dispose of those assets to the extent necessary to pay off the debts, which could seriously harm our business. Furthermore, we may enter into other secured credit or loan agreements in the future. The proceeds from the loan provided under the Hercules Loan Agreement were used to pay off the loans provided under the ComVest Loan Agreement and upon such pay-off ComVest’s security interest was released.
We are subject to intense competition.
We have experienced and expect to continue to experience intense competition from current and future competitors including EMC, IBM, Microsoft, Oracle, and Symantec. Often, these competitors have significantly greater financial, technical, marketing and other resources than Unify, in addition to having greater name recognition and more extensive customer bases. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can.
In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could adversely affect our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competition, and the failure to do so would have an adverse effect upon our business, operating results and financial condition.
The markets in which we compete are subject to rapid technological change.
The markets in which we compete are characterized by rapid technological change, frequent introductions of new and enhanced products, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable.
Our future success will depend in part upon our ability to address the increasingly sophisticated needs of customers by developing new product functionality and enhancements that keep pace with technological developments, emerging industry standards and customer requirements.
There can be no assurance that our products will continue to be perceived by our customers as technologically advantageous or that we will not experience difficulties that delay or prevent the sale of enhancements to existing products that meet with a significant degree of market acceptance. If the release dates of any future product enhancements, or new products are delayed, or if when released, they fail to achieve market acceptance, our business, operating results and financial condition would be adversely affected.
We are dependent on indirect sales channels.
A significant portion of our revenues are derived from indirect sales channels, including ISVs, VARs and distributors. ISVs, VARs and distributors accounted for approximately 45%, 61% and 64% of our software license revenues for fiscal 2010, 2009 and 2008, respectively. Our success therefore depends in part upon the performance of our indirect sales channels, over which we have limited influence. Our ability to achieve significant revenue growth in the future depends in part on maintaining and expanding our indirect sales channels worldwide. The loss of any major partners, either to competitive products offered by other companies or to products developed internally by those partners, or the failure to attract effective new partners, could have an adverse effect on our business, operating results, and financial condition.
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There are numerous risks associated with our international operations and sales.
Revenues derived from our international customers accounted for 50%, 68% and 78% of our total revenues, with the remainder from North America, in fiscal 2010, 2009 and 2008, respectively. If the revenues generated by our international operations are not adequate to offset the expense of maintaining such operations, our overall business, operating results and financial condition will be adversely affected. There can be no assurance that we will continue to be able to successfully market, sell and deliver our products in these markets. Although we have had international operations for a number of years, there are certain unique business challenges and risks inherent in doing business outside of North America, and such challenges and risks can vary from region to region. These include unexpected changes in regulatory requirements; export restrictions, tariffs and other trade barriers; difficulties in staffing and managing foreign operations; longer payment cycles; problems in collecting accounts receivable; political instability; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe and other parts of the world; unfamiliar or unusual business practices; and potentially adverse tax consequences, any of which could adversely impact the success of our international operations. There can be no assurance that one or more of these factors will not have an adverse effect on our future international operations and, consequently, on our business, operating results and financial condition. In addition, the Company’s subsidiaries and distributors in Europe and Asia Pacific operate in local currencies. If the value of the U.S. dollar increases relative to foreign currencies, our business, operating results and financial condition could be adversely affected.
Our stock price may be subject to volatility.
Unify’s common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the common stock to fluctuate, perhaps substantially, including: announcements of developments related to our business; fluctuations in the operating results and order levels of Unify or its competitors; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements from us or our competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; and developments in our relationships with our customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in our senior management team. In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of our common stock.
Beginning on August 25, 2008, the Company’s stock started trading on the NASDAQ. Prior to being traded on the NASDAQ, the Company’s stock was traded over-the-counter on the “bulletin board”. Even though our stock is now traded on the NASDAQ, we do not receive any analyst coverage, our stock is thinly traded and our stock is considered to be micro-cap stock. Our stock is therefore subject to greater price volatility than larger companies whose stock trades more actively.
Our quarterly operating results may be subject to fluctuations and seasonal variability.
Unify’s quarterly operating results have varied significantly in the past and we expect that they could vary significantly in the future. Such variations could result from the following factors: the size and timing of significant orders and their fulfillment; demand for our products; the quantity, timing and significance of our product enhancements and new product announcements or those of our competitors; our ability to attract and retain key employees; seasonality; changes in our pricing or our competitors’; realignments of our organizational structure; changes in the level of our operating expenses; incurrence of extraordinary operating expenses, changes in our sales incentive plans; budgeting cycles of our customers; customer order deferrals in anticipation of enhancements or new products offered by us or our competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results may vary on a quarterly basis. Revenues and quarterly results may vary because software technology is rapidly evolving, and our sales cycle, from initial evaluation to purchase and the providing of maintenance services, can be lengthy and vary substantially from customer to customer. Because we normally deliver products within a short time of receiving an order, we typically do not have a backlog of orders. As a result, to achieve our quarterly revenue objectives, we are dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, we generally recognize a substantial portion of our software license revenues at the end of a quarter. Our expense levels largely reflect our expectations for future revenue and are therefore somewhat fixed in the short term.
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We expect that our operating results will continue to be affected by the continually challenging IT economic environment as well as by seasonal trends. In particular, we anticipate relatively weaker demand in the fiscal quarters ending July 31 and October 31 as a result of reduced business activity in Europe during the summer months.
Our products are subject to lengthy sales cycles.
Our archiving/eDiscovery solutions are used to implement governance and matter driven requirements and involve legal, IT and risk management departments. Our application modernization solutions are used to implement comprehensive solutions including complete technology platform transitions and new applications. The delivery of our application modernization solutions generally involves a four to ten week implementation time and a significant commitment of management attention and resources by prospective customers. Accordingly, our sales cycle is subject to delays associated with the long approval process that typically accompanies significant initiatives or capital expenditures. Our business, operating results, and financial condition could be adversely affected if customers reduce or delay orders. There can be no assurance that we will not continue to experience these and additional delays in the future. Such delays may contribute to significant fluctuations of quarterly operating results in the future and may adversely affect those results.
Our software products could contain defects and could be subject to potential release delays.
Software products frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. There can be no assurance that, despite testing by us and current and potential customers, defects and errors will not be found in current versions, new versions or enhancements after commencement of commercial shipments, resulting in loss of revenues, delay in market acceptance, or unexpected re-programming costs, which could have an adverse effect upon our business, operating results and financial condition. Additionally, if the release dates of any future Unify product line additions or enhancements are delayed or if, when released, they fail to achieve market acceptance, our business, operating results, financial condition and cash flows would be adversely affected.
Our license agreements may not protect us from product liability claims.
The license agreements we have with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in these license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. The sale and support of current and future products may involve the risk of such claims, any of which are likely to be substantial in light of the use of these products in the development of core business applications. A successful product liability claim brought against the Company could have an adverse effect upon our business, operating results, and financial condition.
We rely upon technology from certain third-party suppliers.
Unify is dependent on third-party suppliers for software which is embedded in some of its products. We believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources or could be developed by the Company. However, if any such third-party licenses were terminated, or not renewed, or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to developing such products, which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs or reduced functionality could adversely affect our business, operating results and financial condition.
We may be subject to violations of our intellectual property rights.
Unify relies on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect its proprietary technology. Despite our efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our technology exists, piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights will be adequate and, to the extent such rights are not adequate, other companies could independently develop similar products using similar technology.
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Although there are no pending lawsuits against us regarding infringement of any existing patents or other intellectual property rights, and we have received no notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or if necessary obtain licenses on reasonable terms. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require that we seek licenses from third parties and prevent us from developing and selling our products. Any of these situations could have an adverse effect on our business, operating results, and financial condition.
Our success is dependent upon the retention of key personnel and we may be unable to retain key employees.
Our future performance depends on the continued service of key technical, sales and senior management personnel. With the exception of Unify’s President and Chief Executive Officer and Executive Vice President and Chief Operating Officer, there are no other Unify technical, sales, executive or senior management personnel bound by an employment agreement. The loss of the services of one or more of our officers or other key employees could seriously harm our business, operating results and financial condition. Future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may fail to retain our key technical, sales and managerial employees, or attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.
Rapid growth may significantly strain our resources.
If we are able to achieve rapid and successful market acceptance of our current and future products, we may undergo a period of rapid growth. This expansion may significantly strain management, financial resources, customer support, operational and other resources. To accommodate this anticipated growth, we are continuing to implement a variety of new and upgraded operating and financial systems, procedures and controls, including the improvement of our internal management systems. There can be no assurance that such efforts can be accomplished successfully. Any failure to expand these areas in an efficient manner could have an adverse effect on our business, operating results, and financial condition. Moreover, there can be no assurance that our systems, procedures and controls will be adequate to support our future operations.
Our disclosure controls and procedures and our internal control over financial reporting may not be effective to detect all errors or to detect and deter wrongdoing, fraud or improper activities in all instances.
While we believe we currently have adequate internal control over financial reporting, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and fraud. In designing our control systems, management recognizes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further the design of a control system must reflect the necessity of considering the cost-benefit relationship of possible controls and procedures. Because of inherent limitations in any control system, no evaluation of controls can provide absolute assurance that all control issues and instances of wrongdoing, if any, that may affect our operations, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple error or mistake and that controls may be circumvented by individual acts by some person, by collusion of two or more people or by management’s override of the control. The design of any control system also is based in part upon certain assumptions about the likelihood of a potential future event, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in cost-effective control systems, misstatements due to error or wrongdoing may occur and not be detected. Over time, it is also possible that controls may become inadequate because of changes in conditions that could not be, or were not, anticipated at inception or review of the control systems. Any breakdown in our control systems, whether or not foreseeable by management, could cause investors to lose confidence in the accuracy of our financial reporting and may have an adverse impact on our business and on the market price for Unify’s common stock. Refer to additional financial reporting risk and disclosure below.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.
As described elsewhere in this Amendment No. 1, in connection with the restatement process, we identified material weaknesses with regard to accounting for common stock warrant instruments and contingent consideration in our internal control over financial reporting, specifically with regard to our prior interpretation of ASC 815, as it related to the accounting of common stock warrants as either liabilities or equity instruments dating back to May 2009. Upon a reassessment of those financial instruments, we determined that we should have accounted for certain common stock warrant instruments as liabilities instead of equity. Additionally, in applying ASC 805 the Company had calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as an adjustment to goodwill. However, in accordance with ASC 805 such changes in the fair value should have been recorded as adjustments in the statement of operations. Given these material weaknesses with regard to the accounting for the common stock warrants and contingent consideration, management determined that we did not maintain effective internal control over financial reporting as of April 30, 2010. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.
As described elsewhere in this Amendment No. 1, in connection with the restatement process, we identified material weaknesses with regard to accounting for common stock warrant instruments and contingent consideration in our internal control over financial reporting, specifically with regard to our prior interpretation of ASC 815, as it related to the accounting of common stock warrants as either liabilities or equity instruments dating back to May 2009. Upon a reassessment of those financial instruments, we determined that we should have accounted for certain common stock warrant instruments as liabilities instead of equity. Additionally, in applying ASC 805 the Company had calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as an adjustment to goodwill. However, in accordance with ASC 805 such changes in the fair value should have been recorded as adjustments in the statement of operations. Given these material weaknesses with regard to the accounting for the common stock warrants and contingent consideration, management determined that we did not maintain effective internal control over financial reporting as of April 30, 2010. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis.
Acquisitions may have an adverse effect on our business.
We expect to continue making acquisitions as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management’s attention from our other businesses. These events could harm our operating results or financial condition.
ITEM 2. PROPERTIES
The Company’s principal administrative offices and headquarters are in Roseville, California where we lease a 17,660 square foot facility. This lease is for a period of 68 months and ends in April 2014. We also lease offices in the United Kingdom, France, Canada and New Jersey. We believe that our existing facilities are adequate for our needs and that suitable additional or alternative space will be available on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of April 30, 2010, there were no proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.
ITEM 4. Reserved
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PART II
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information for Common Stock
For all of fiscal 2008 and through August 24, 2008 of fiscal 2009, Unify’s common stock was traded on the Over-The-Counter Bulletin Board (OTC BB) under the symbol UFYC.OB. Beginning on August 25, 2008, Unify began trading on the NASDAQ under the symbol UNFY. The following table sets forth the lowest and highest sale price of our common stock, as reported on the over-the-counter market or the NASDAQ for the periods presented. For common stock traded on the OTC BB, quotations reflect prices between dealers, do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
| High | Low | ||||
| Fiscal 2010 | |||||
| Fourth Quarter | $ | 3.72 | $ | 2.95 | |
| Third Quarter | 3.38 | 2.64 | |||
| Second Quarter | 3.60 | 2.50 | |||
| First Quarter | 3.90 | 2.40 | |||
| Fiscal 2009 | |||||
| Fourth Quarter | $ | 2.93 | $ | 1.24 | |
| Third Quarter | 3.26 | 2.00 | |||
| Second Quarter | 5.50 | 2.59 | |||
| First Quarter | 6.40 | 3.70 | |||
Common Stockholders of Record
As of June 24, 2010, there were approximately 343 stockholders of record of the Company’s common stock, as shown in the records of our transfer agent, excluding stockholders whose stock was held in nominee or street name by brokers.
Dividends
We have never paid dividends on our common stock and our present policy is to retain anticipated future earnings for use in our business.
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Equity Compensation Plan Information
Unify maintains a compensation plan that provides for the issuance of its Common Stock to officers, directors, other employees or consultants. This plan is known as the 2001 Stock Option Plan (the “Option Plan”) and it was approved by the stockholders. The 1991 Stock Option Plan, which had a ten-year life, has expired and has therefore ceased to be available for new grants. In fiscal 2003, the Board adopted, without a need for shareholder approval, the 2002 Director Restricted Stock Plan (the “Director Restricted Stock Plan”) as part of a program to provide compensation we felt was necessary to attract, retain and reward members of our Board of Directors who were willing to provide the time and energy that we believe is required to meet our business goals. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of April 30, 2010:
| Number of | |||||||
| shares | |||||||
| remaining | |||||||
| available | |||||||
| for future | |||||||
| Number of | issuance | ||||||
| shares to be | Weighted- | under equity | |||||
| issued upon | average | compensation | |||||
| exercise of | exercise price of | plans | |||||
| outstanding | outstanding | [excluding | |||||
| options, | options, | shares | |||||
| warrants and | warrants and | reflected in | |||||
| rights | rights | column (a)] | |||||
| Plan Category | (a) | (b) | (c) | ||||
| Equity compensation plans approved by stockholders (1) | 1,636,848 | $ | 3.42 | 509,965 | |||
| Equity compensation plans not approved by stockholders: | |||||||
| Director Restricted Stock Plan (2) | 96,138 | $ | 2.45 | 3,862 | |||
| Non-Plan Options (3) | 330,400 | $ | 2.94 | 0 | |||
| (1) | Comprised entirely of shares reserved for future issuance under the Option Plan. | |
| (2) | There are 100,000 shares authorized under the Director Restricted Stock Plan, of which 96,138 shares were awarded and were outstanding on April 30, 2010. As of April 30, 2010 there were 3,862 shares available for future awards. | |
| (3) | In fiscal 2003, the Board authorized the issuance of non-plan stock options for individual senior level executive recruitment. | |
Material Features of Director Restricted Stock Plan
On May 1, 2002 the Board approved the Director Restricted Stock Plan as part of a compensation program designed to attract and retain independent members for our board of directors. The maximum aggregate number of shares of common stock that may be issued under the Director Restricted Stock Plan is 100,000. In fiscal 2010, there were no shares awarded under this plan. As of April 30, 2010 there is a balance of 3,862 shares reserved for future awards under this plan. The Company does not intend to issue any of the remaining shares and intends to terminate this plan.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
21
| Years Ended April 30, | |||||||||||||||||||
| 2010 (2) | 2009 | 2008 | 2007 (1) | 2006 | |||||||||||||||
| (As Restated) | |||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||
|
Software licenses
|
$ | 7,379 | $ | 6,436 | $ | 8,489 | $ | 4,432 | $ | 4,759 | |||||||||
|
Services
|
15,816 | 11,688 | 11,027 | 6,755 | 5,384 | ||||||||||||||
|
Migration Solutions
|
5,397 | 2,468 | 309 | - | - | ||||||||||||||
|
Total revenues
|
28,592 | 20,592 | 19,825 | 11,187 | 10,143 | ||||||||||||||
|
Cost of Revenues:
|
|||||||||||||||||||
|
Software licenses
|
346 | 244 | 226 | 377 | 448 | ||||||||||||||
|
Services
|
3,202 | 1,019 | 1,245 | 1,024 | 1,106 | ||||||||||||||
|
Migration Solutions
|
2,537 | 1,041 | 129 | - | - | ||||||||||||||
|
Total cost of revenues
|
6,085 | 2,304 | 1,600 | 1,401 | 1,554 | ||||||||||||||
|
Gross profit
|
22,507 | 18,288 | 18,225 | 9,786 | 8,589 | ||||||||||||||
|
Operating Expenses:
|
|||||||||||||||||||
|
Product development
|
6,470 | 2,907 | 3,498 | 2,360 | 1,643 | ||||||||||||||
|
Selling, general and administrative
|
17,664 | 12,494 | 12,002 | 8,314 | 5,801 | ||||||||||||||
| Change in fair value of contingent consideration | (2,093 | ) | - | - | - | - | |||||||||||||
|
Total operating expenses
|
22,041 | 15,401 | 15,500 | 10,674 | 7,444 | ||||||||||||||
|
Income (loss) from operations
|
466 | 2,887 | 2,725 | (888 | ) | 1,145 | |||||||||||||
| Other income (expense): | |||||||||||||||||||
| Loss from change in fair value of common stock warrant liability | (192 | ) | - | - | - | - | |||||||||||||
| Interest expense | (267 | ) | (194 | ) | (900 | ) | (527 | ) | (11 | ) | |||||||||
| Other, net | (14 | ) | (124 | ) | 130 | 136 | 61 | ||||||||||||
| Total other income (expense) | (473 | ) | (318 | ) | (770 | ) | (391 | ) | 50 | ||||||||||
|
Income (loss) before income taxes
|
(7 | ) | 2,569 | 1,955 | (1,279 | ) | 1,195 | ||||||||||||
|
Provision (Benefit) for income taxes
|
(131 | ) | 179 | 324 | 82 | - | |||||||||||||
|
Income (loss) from continuing operations
|
$ | 124 | $ | 2,390 | $ | 1,631 | $ | (1,361 | ) | $ | 1,195 | ||||||||
|
Loss from discontinued operations
|
- | - | - | (1,445 | ) | (1,823 | ) | ||||||||||||
|
Net income (loss)
|
$ | 124 | $ | 2,390 | $ | 1,631 | $ | (2,806 | ) | $ | (628 | ) | |||||||
|
Net income (loss) per share:
|
|||||||||||||||||||
|
Basic earnings per share:
|
|||||||||||||||||||
|
Continuing operations
|
$ | 0.01 | $ | 0.34 | $ | 0.25 | $ | (0.23 | ) | $ | 0.21 | ||||||||
|
Discontinued operations
|
$ | - | $ | - | $ | - | $ | (0.24 | ) | $ | (0.32 | ) | |||||||
|
Net income (loss) per share
|
$ | 0.01 | $ | 0.34 | $ | 0.25 | $ | (0.47 | ) | $ | (0.11 | ) | |||||||
|
Dilutive earnings per share:
|
|||||||||||||||||||
|
Continuing operations
|
$ | 0.01 | $ | 0.32 | $ | 0.23 | $ | (0.23 | ) | $ | 0.20 | ||||||||
|
Discontinued operations
|
$ | - | $ | - | $ | - | $ | (0.24 | ) | $ | (0.32 | ) | |||||||
|
Net income (loss) per share
|
$ | 0.01 | $ | 0.32 | $ | 0.23 | $ | (0.47 | ) | $ | (0.12 | ) | |||||||
|
Shares used in computing net income (loss) per share:
|
|||||||||||||||||||
|
Basic
|
9,691 | 6,991 | 6,423 | 5,927 | 5,803 | ||||||||||||||
|
Diluted
|
10,182 | 7,582 | 7,105 | 5,927 | 5,875 | ||||||||||||||
| Consolidated Balance Sheet Data | |||||||||||||||||||
|
Cash and cash equivalents
|
$ | 3,055 | $ | 6,147 | $ | 2,692 | $ | 2,064 | $ | 1,881 | |||||||||
|
Working capital (deficit)
|
(6,472 | ) | 1,317 | (1,157 | ) | (3,343 | ) | 1,657 | |||||||||||
|
Total assets
|
36,861 | 21,081 | 16,678 | 15,654 | 8,351 | ||||||||||||||
|
Long term debt, net
|
12 | 837 | 1,334 | 4,910 | 3 | ||||||||||||||
|
Total stockholders' equity
|
19,442 | 9,303 | 5,419 | 469 | 2,235 | ||||||||||||||
| (1) | The Company acquired Gupta Technologies LLC on November 20, 2006, so the fiscal 2007 results include only the activity through the end of the fiscal year. There was no Gupta activity for fiscal year 2006. | |
| (2) | The Company acquired AXS-One, Inc. on June 30, 2009, so the fiscal 2010 results include ten months of operations from AXS-One, Inc. The fiscal 2010 results also include restated amounts related to the change in fair value of contingent consideration. See Note 2. | |
22
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of the financial condition and results of operations of the Company contains forward-looking statements that involve risks and uncertainties and should be read in conjunction with the cautionary language applicable to such forward-looking statements described above in “A Caution About Forward-Looking Statements” found before Item 1 of this Form 10-K/A. You should not place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report on Form 10-K/A. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto in Item 8. The Company’s actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, the Risk Factors discussed in this Annual Report and in the Company’s other filings with the SEC.
RESTATEMENT OF PREVIOUSLY-ISSUED CONSOLIDATED FINANCIAL STATEMENTS
In this Amendment No. 1, we have restated our previously-issued audited consolidated financial statements and related disclosures for the year ended April 30, 2010 for the following:
In this Amendment No. 1, we have restated our previously-issued audited consolidated financial statements and related disclosures for the year ended April 30, 2010 for the following:
- To correct errors in the accounting for certain warrants. Specifically, we previously classified as equity instruments warrants that should have been classified as derivative liability instruments based on the terms of the warrants and the applicable accounting guidance.
- To correct an error in the application of ASC 805. The Company had calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as an adjustment to goodwill. However, in accordance with ASC 805 such changes in the fair value should have been recorded as adjustments in the statement of operations.
We are also making corresponding amendments to the following sections of MD&A: Results of Operations and Liquidity and Capital Resources.
Overview
Unify (the “Company”, “we”, “us” or “our”) is a global provider of archiving/eDiscovery, application development, data management, and migration software solutions. Our archiving solutions meet an organization’s requirement to archive, discover and preserve electronically stored information for eDiscovery, regulatory compliance, global email access and storage savings. Our software helps companies to maximize value and reduce cost in the development, deployment, management and retention of business applications, data and electronically stored information.
The Company sells and markets application development and database software and services, integrated content archiving solutions and modernization solutions through three segments. The segments are the Database and Development Products (“DDP”), Integrated Content Archiving Solutions and our Modernization and Migration Solutions.
On June 29, 2010, the Company purchased Strategic Office Solutions, Inc. dba Daegis for approximately $37.5 million. Payment was made in the form of $24.0 million in cash, $7.3 million in equity, and $6.2 million in convertible notes.
On June 30, 2009, the Company purchased AXS-One Inc. for approximately 3.1 million shares of common stock.
On January 30, 2009, the Company purchased CipherSoft Inc. (“CipherSoft”), headquartered in Calgary, Canada, for approximately $628,000 in cash plus the assumption of debt of $1,032,000 and future potential royalty payments to be paid over a four year period following the acquisition.
On May 22, 2007, the Company purchased privately held Active Data Corporation (“ADC”) for approximately $420,000 plus potential earn-out payments over a two year period following the acquisition.
Critical Accounting Policies
The following discussion and analysis of the Company’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.
Revenue Recognition
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. Additionally, the Company generates revenue from its migration solutions products. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
23
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is measured by labor hours.
The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting service arrangements are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed.
Goodwill and Intangible Assets
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented. Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented.
24
Deferred Tax Asset Valuation Allowance
Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries as they are considered to be permanently reinvested.
As of April 30, 2010, we had approximately $22.4 million of deferred tax assets related principally to net operating loss and capital loss carryforwards, reserves and other accruals, and various tax credits. The Company’s ability to utilize net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership. In addition, the ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Accordingly, a valuation allowance has been recorded to offset these deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Account Receivable and Allowance for Doubtful Accounts
We record trade accounts receivable at the invoiced amount and they do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make these estimates based on an analysis of accounts receivable using available information on our customers’ financial status and payment histories as well as the age of the account receivable. Historically, bad debt losses have not differed materially from our estimates.
Accounting for Stock-based Compensation
For our share-based payment awards, we make estimates and assumptions to determine the underlying value of stock options, including volatility, expected life and forfeiture rates. Additionally, for awards which are performance-based, we make estimates as to the probability of the underlying performance being achieved. Changes to these estimates and assumptions may have a significant impact on the value and timing of stock-based compensation expense recognized, which could have a material impact on our financial statements.
Fair Value of Common Stock Warrant Liability
The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity”. The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Gain (loss) from change in fair value of common stock warrant liability.”
The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity”. The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Gain (loss) from change in fair value of common stock warrant liability.”
25
Results of Operations
The following table sets forth our consolidated statement of operations expressed as a percentage of total revenues for the periods indicated:
| Years Ended April 30, | |||||||||||
| 2010 | 2009 | 2008 | |||||||||
| (As Restated) | |||||||||||
| Revenues: | |||||||||||
| Software licenses | 25.8 | % | 31.3 | % | 42.8 | % | |||||
| Services | 55.3 | 56.7 | 55.6 | ||||||||
| Migration Solutions | 18.9 | 12.0 | 1.6 | ||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | ||||||||
| Cost of revenues: | |||||||||||
| Software licenses | 1.2 | 1.2 | 1.1 | ||||||||
| Services | 11.2 | 4.9 | 6.3 | ||||||||
| Migration Solutions | 8.9 | 5.1 | 0.7 | ||||||||
| Total cost of revenues | 21.3 | 11.2 | 8.1 | ||||||||
| Gross profit | 78.7 | 88.8 | 91.9 | ||||||||
| Operating expenses: | |||||||||||
| Product development | 22.6 | 14.1 | 17.6 | ||||||||
|
Selling, general and administrative
|
61.8 | 60.7 | 60.5 | ||||||||
|
Change in fair value of contingent consideration
|
(7.3 | ) | — | — | |||||||
| Total operating expenses | 77.1 | 74.8 | 78.1 | ||||||||
| Income from operations | 1.6 | 14.0 | 13.7 | ||||||||
| Other income (expense): | |||||||||||
| Loss from change in fair value of common stock warrant liability | (0.7 | ) | 0.0 | 0.0 | |||||||
| Interest expense | (0.9 | ) | (0.9 | ) | (4.5 | ) | |||||
| Other, net | 0.0 | (0.6 | ) | 0.7 | |||||||
| Total other income (expense) | (1.6 | ) | (1.5 | ) | (3.8 | ) | |||||
| Income (loss) from operations before income taxes | (0.0 | ) | 12.5 | 9.9 | |||||||
| Provision (Benefit) for income taxes | (0.5 | ) | 0.9 | 1.6 | |||||||
| Net income | 0.5 | % | 11.6 | % | 8.2 | % | |||||
Total Revenues
The Company generates revenue from software license sales and related services, including maintenance, support and consulting services. We license our software through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide. Revenues from our distributor, ISV and VAR indirect channels accounted for approximately 45%, 61%, and 64% of our software license revenues for fiscal 2010, 2009 and 2008, respectively. International revenues include all our software license and service revenues from customers located outside North America. International revenues accounted for 50%, 68%, and 78% of total revenues in fiscal years 2010, 2009 and 2008, respectively.
Total revenues in fiscal 2010 were $28.6 million, an increase of $8.0 million or 39% from fiscal 2009 revenues of $20.6 million. Total software license revenues in fiscal 2010 were $7.4 million, an increase of $1.0 million or 15% from fiscal 2009 software license revenues of $6.4 million. Total services revenues were $15.8 million in fiscal 2010, an increase of $4.1 million or 35% from fiscal 2009 service revenues of $11.7 million. The increase in software license revenues and services revenues was primarily due to the acquisition of AXS-One, Inc. in 2010. Total migration solutions revenue in fiscal 2010 was $5.4 million compared to $2.5 million in fiscal 2009. The increase in migration solutions revenue was primarily related to a multi-million dollar database migration project for a governmental entity. This increase offset the decline in total revenues from the tools and database business that was impacted by the deterioration in the worldwide economic conditions during fiscal 2010. Total revenues in fiscal 2009 were $20.6 million, an increase of $0.8 million or 4% from fiscal 2008 revenues of $19.8 million. Total software license revenues in fiscal 2009 were $6.4 million, a decrease of $2.1 million or 24% from fiscal 2008 software revenue of $8.5 million due to the deterioration of in the worldwide economic conditions in fiscal 2009, the decline of the Euro and an order of approximately $1 million received during fiscal 2008 from our Russian distributor that did not reoccur in fiscal 2009. Total service revenues of $11.7 million in fiscal 2009 increased by $0.7 million or 6% from fiscal 2008. Total migration solutions revenue in fiscal 2009 was $2.5 million compared to $0.3 million in fiscal 2008. The increase in migration solutions revenue was due to increases in sales from our Composer Notes, Composer Sabertooth, and Composer CipherSoft.
26
For fiscal 2010 and 2009, total revenues from the United States were 50% and 32% of total revenues, respectively. Total revenue from the United States in absolute dollars was $14.3 million for fiscal 2010 and $6.7 million for fiscal 2009. The increase is primarily due to the recognition of revenue on two large US based projects. Additionally, AXS-One has historically had a high percentage of total revenue from the United States. Total revenue from all other countries was $14.3 million for fiscal 2010 and $13.9 million for fiscal 2009. On a percentage basis, revenue from other countries was 50% for fiscal 2010 and 68% for fiscal 2009.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses consists primarily of royalty payments and the amortization of purchased technology from third parties that is amortized ratably over the technology’s expected useful life. Cost of software licenses was $0.3 million for fiscal 2010, $0.2 million for fiscal 2009 and $0.2 for fiscal 2008.
Cost of Services. Cost of services consists primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts and consulting and implementation services. Total cost of services was $3.2 million for fiscal 2010, $1.0 million for fiscal 2009 and $1.2 million for fiscal 2008. Our cost of services as a percent of services revenues was 20% in fiscal 2010, 9% in fiscal 2009 and 11% in 2008. The increase in the percentage of cost of service expenses to services revenue in fiscal 2010 versus fiscal 2009 was due primarily to the acquisition of AXS-One which has a higher proportion of costs of services than most of the Company’s other products.
Cost of Migration Solutions. Cost of migration solutions consists primarily of both expenses associated with employees involved in migration projects and also expenses related to third party assistance. Cost of migration solutions was $2.5 million in fiscal 2010, $1.0 million in fiscal 2009, and $0.1 million in fiscal 2008. The increase in cost of migration solutions in fiscal 2010 over fiscal 2009 is primarily related to a multi-million dollar database migration project for a governmental entity.
Operating Expenses
Product Development. Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems. Product development costs in fiscal 2010 were $6.5 million compared to $2.9 million in fiscal 2009 and $3.5 million in fiscal 2008. The increase in product development costs in fiscal 2010 compared to fiscal 2009 was primarily the result of expenses related to additional headcount resulting from our acquisition of CipherSoft in January 2009 and our acquisition of AXS-One in June 2009.
Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and benefits, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense. SG&A expenses were $17.7 million in fiscal 2010, $12.5 million for 2009 and $12.0 million for 2008. The increase in SG&A costs in fiscal 2010 was primarily the result of expenses related to our acquisition of CipherSoft in January 2009 and our acquisition of AXS-One in June 2009. During fiscal 2010, the Company incurred approximately $1.4 million related to the transaction costs for the AXS-One acquisition and salary continuation and severance costs for AXS-One staff that were eliminated post acquisition. As a percentage of total revenue, SG&A expenses were 62% in fiscal 2010, 61% in fiscal 2009 and 61% in fiscal 2008. The major components of SG&A for fiscal 2010 were sales expenses of $8.2 million, marketing expenses of $1.5 million and general and administrative expenses of $7.9 million. The major components of SG&A for fiscal 2009 were sales expenses of $6.5 million, marketing expenses of $0.9 million and general and administrative expenses of $5.1 million. For fiscal 2008, the major components were sales expenses of $5.8 million, marketing expenses of $1.4 million and general and administrative expenses of $4.8 million.
Change in Fair Value of Contingent Consideration. In applying ASC 805 the Company had calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as an adjustment to goodwill. However, in accordance with ASC 805 such changes in the fair value should have been recorded as adjustments in the statement of operations.
Loss from Change in Fair Value of Common Stock Warrant Liability. The change in the fair value of common stock warrant liability for the year ended April 30, 2010 resulted in a loss of $192,000, due primarily to an increase in the Company’s common stock share price during the period.
Loss from Change in Fair Value of Common Stock Warrant Liability. The change in the fair value of common stock warrant liability for the year ended April 30, 2010 resulted in a loss of $192,000, due primarily to an increase in the Company’s common stock share price during the period.
Interest Expense. Interest expense is primarily the result of interest from outstanding debt and was $267,000, $194,000 and $900,000 in fiscal 2010, 2009 and 2008, respectively. Fiscal 2010 interest expense consists primarily of interest incurred on notes payable resulting from a debt financing in conjunction with the November 2006 acquisition of Gupta Technologies LLC and the acquisition of CipherSoft Inc., plus the amortization of related debt issuance costs and the amortization of the discount on notes payable.
27
Other Income (Expense). Other income (expense), net consists primarily of the gain on the sale of the other investments in fiscal 2008, the foreign exchange gains and losses and interest earned by the Company on our cash and cash equivalents. Other income (expense), net was ($14,000), ($124,000) and $130,000 in fiscal 2010, 2009 and 2008, respectively. In September 2007, the Company sold all of its stock in Arango as part of a stock repurchase plan offered by Arango. At the time of the sale, the Company had a carrying value of $175,000 for the Arango stock. Proceeds from the sale of the Arango stock were $264,000 which generated a gain that was included in other income. Additionally, during fiscal 2008, we wrote off our investment in Unify Japan of $39,000 based on our assessment that there was a permanent decline in value for this investment. The write off of Unify Japan was recorded in other expense.
Provision (Benefit) for Income Taxes. For fiscal 2010, the Company recorded $65,000 in foreign tax benefit and $66,000 for state and federal tax benefit. For fiscal 2009, the Company recorded $27,000 in foreign tax benefit and $206,000 for state or federal tax expense. For fiscal 2008, the Company recorded $89,000 in foreign tax expense and $235,000 for state and federal taxes.
Liquidity and Capital Resources
At April 30, 2010, the Company had cash and cash equivalents of $3.1 million, compared to $6.1 million at April 30, 2009. The Company had net accounts receivable of $6.2 million as of April 30, 2010 and $4.5 million as of April 30, 2009. The increase in accounts receivable and decrease in cash from April 30, 2009 to April 30, 2010 was primarily the result of accounts receivable acquired and payments on obligations related to the June 30, 2009 acquisition of AXS-One.
As of April 30, 2010 the Company has various notes payable outstanding in the amount of $1.0 million of which $1.0 million is current. The notes payable all have an interest rate of 5%. The Company also has a $2.5 million revolving line of credit with an interest rate of prime plus 2.25% which has a maturity date of November 30, 2010. As of April 30, 2010 there is $350,000 outstanding on the revolving line of credit. All outstanding amounts under these notes and the line of credit were repaid in June 2010 from the proceeds of the loan provided under the Hercules Loan Agreement.
To finance the merger with Daegis, the Company entered into the Hercules Loan Agreement. The Hercules Loan Agreement consists of a term note and a revolving credit note agreement. The term note is for $24.0 million payable over 5 years with escalating principal payments of 5%, 10%, 15%, 20% and 50% annually. The Company incurs interest at the prevailing LIBOR rate plus 8.25% per annum with a minimum rate of 10.25% (10.25% at the date of closing) plus 2% interest to be paid in kind. Under the terms of the revolver the Company can borrow up to $6.0 million. The amount that can be borrowed under the revolver is based on the amount of eligible accounts receivable outstanding. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 7.25% per annum with a minimum rate of 9.25% (9.25% at the date of closing).
We believe that existing cash of $3.1 million as of April 30, 2010, along with forecasted operating cash flows and the credit facilities under the Hercules Loan Agreement, will provide us with sufficient working capital for us to meet our operating plan for fiscal year 2011. Our operating plan assumes normal operations for the Company and the required debt service payments.
Operating Cash Flows. In fiscal 2010, we had cash flows used in operations of $1.4 million. This compares to fiscal 2009 and 2008 where cash flows from operations were $3.8 million and $3.4 million, respectively. Cash flows used in operations for fiscal 2010 principally resulted from $0.1 million of net income, a $1.2 million increase in accounts receivable, a decrease in the valuation allowance from acquisition of $0.2 million, a decrease in accounts payable of $1.8 million, a decrease in accrued compensation of $0.2 million, a decrease in accrued acquisition costs of $0.1 million, a decrease in other accrued liabilities of $2.4 million, a decrease in other long term liabilities of $0.5 million, and a change in fair value of contingent consideration of $2.1 million. Offsetting these amounts was a $2.7 million increase in deferred revenue, a decrease of $0.6 million in prepaid expenses and other current assets, $2.4 million in amortization of intangible assets, $0.2 million in depreciation, $0.6 million in stock based expenses, and a loss from change in fair value of common stock warrant liability of $0.2 million.
In fiscal 2009, we had cash flows from operations of $3.8 million. Cash flows provided by operations for fiscal 2009 principally resulted from $2.3 million of income from operations, a $0.7 million decrease in accounts receivable, a decrease in other long term assets of $0.1 million, an increase in other accrued liabilities of $0.4 million, an increase in accounts payable of $0.1 million, $0.8 million in amortization of intangible assets, $0.2 million in depreciation and $0.5 million in stock based expenses. Offsetting these amounts was a $0.8 million decrease in deferred revenue, a decrease of $0.4 million in accrued compensation and related expenses and an increase of $0.1 million in prepaid expenses and other current assets.
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In fiscal 2008, we had cash flows from operations of $3.4 million. Cash flows provided by operations for fiscal 2008 principally resulted from $1.6 million of income from operations, a $0.9 million increase in deferred revenue, a $0.8 million increase in accrued compensation and related expenses, $0.8 million in amortization of intangible assets, $0.2 million for amortization of discount on notes payable, $0.2 million in depreciation and $0.2 million in stock based expenses. Offsetting these amounts was an increase of $0.6 million in accounts receivable, an increase of $0.1 million in other long term assets, a $0.3 million decrease in accounts payable, a decrease of $0.3 million in accrued acquisition costs, and fulfillment of support obligations of $0.3 million.
Investing Cash Flows. Cash used in investing activities was $17,000 for fiscal 2010. Cash used in investing activities was $842,000 in fiscal 2009. The use of cash consisted of $542,000 related to the acquisition of CipherSoft Inc., $190,000 related to the purchase of property and equipment and $110,000 related to payments on acquisitions. Cash used in investing activities was $576,000 in fiscal 2008.
Financing Cash Flows. Net cash used in financing activities in fiscal 2010 was $1.6 million. In fiscal 2010 uses of cash included $1.9 million of principal payments under debt obligations. This amount was offset by proceeds of $0.4 million from borrowings on revolving line of credit. Net cash provided by financing activities in fiscal 2009 was $1.1 million. In fiscal 2009 sources of cash included $1.2 million in proceeds from the exercise of warrants and $1.0 million from borrowings under debt obligations. This amount was offset by a payment of $1.1 million for principal payments under debt obligations. Net cash used in financing activities in fiscal 2008 was $2.3 million. In fiscal 2008 cash used for principal payments under debt obligations was $3.3 million. This amount was offset by $1.0 million in borrowing under debt obligations and $20,000 of proceeds from issuance of common stock.
A summary of certain contractual obligations as April 30, 2010 is as follows (in thousands):
| Payments Due by Period | |||||||||||||||
| 1 year | After | ||||||||||||||
| Contractual Obligations | Total | or less | 2-3 years | 4-5 years | 5 years | ||||||||||
| Debt financing | $ | 1,358 | $ | 1,356 | $ | 2 | $ | - | $ | - | |||||
| Estimated interest expense | 20 | 20 | - | - | - | ||||||||||
| Other liabilities | 197 | 100 | - | - | 97 | ||||||||||
| Capital lease obligations | 52 | 41 | 11 | - | - | ||||||||||
| Operating leases | 3,446 | 1,295 | 1,600 | 551 | - | ||||||||||
| Total contractual cash obligations | $ | 5,073 | $ | 2,812 | $ | 1,613 | $ | 551 | $ | 97 | |||||
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that establishes the Accounting Standards Codification (“Codification” or "ASC") as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supercedes all existing non-SEC accounting literature not included in the Codification. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. GAAP was not intended to be changed as a result of the FASB’s Codification project, but it did change the way guidance is organized and presented. As a result, these changes impacted how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the Codification in this Report by providing a plain English approach when describing any new or updated authoritative guidance.
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In October 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The new guidance will become effective for Unify beginning May 1, 2011, with earlier adoption permitted. The Company is currently assessing the impact of the adoption of this guidance.
In May 2009, the FASB issued authoritative guidance for the accounting and reporting of subsequent events that occur between the balance sheet date and issuance of financial statements. Issuers are required to recognize the effects, if material, of subsequent events in the financial statements if the subsequent event provides additional evidence about conditions that existed as of the balance sheet date. The issuer must also disclose the date through which subsequent events have been evaluated and the nature of any nonrecognized subsequent events. This guidance became effective for financial reporting periods ending after June 15, 2009. We adopted this guidance in fiscal 2010. We evaluated subsequent events through the date this Report was filed with the U.S. Securities and Exchange Commission.
In September 2006, the FASB issued authoritative guidance on fair value measurements. This guidance defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We adopted this guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued authoritative guidance on business combinations. The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We have accounted for the acquisition of AXS-One Inc. in June 2009 under this guidance. See Note 2.
In December 2007, the FASB issued authoritative guidance on noncontrolling interests in consolidated financial Statements. The guidance changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in net income. The guidance was effective for us beginning May 1, 2009. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
In March 2008, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities. This guidance requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We have adopted the guidance and it did not have a material impact on our consolidated financial statements.
In May 2008, the FASB issued authoritative guidance on accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This guidance requires issuers of convertible debt that may be settled wholly or partly in cash when converted to account for the debt and equity components separately. The guidance is effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
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In April 2008, the FASB issued authoritative guidance on the determining the useful life of intangible assets. This guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. It also requires expanded disclosure related to the determination of intangible asset useful lives. The guidance is effective for fiscal years beginning after December 15, 2008. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio, which consists of cash equivalents. Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at cost. Cash equivalents are generally maintained in money market accounts which have as their objective preservation of principal. The Company does not believe its exposure to interest rate risk is material for cash and cash equivalents, which totaled $3.1 million as of April 30, 2010. Unify had no short-term investments at April 30, 2010.
In November 2006, the Company entered into a revolving credit facility agreement with ComVest whereby ComVest would provide up to $2.5 million through a revolving credit facility. The revolver has an interest rate of prime plus 2.25% and has a maturity date of November 30, 2010. Should the prime interest rate increase during the life of the revolver, the Company would have exposure to interest rate risk if it has a large balance outstanding on the revolver. As of April 30, 2010, there was $350,000 outstanding on the revolver.
Unify does not use derivative financial instruments in its short-term investment portfolio, and places its investments with high quality issuers only and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and attempts to ensure the safety of its invested funds by limiting default, market and reinvestment risk.
Foreign Currency Exchange Rate Risk. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have an adverse impact on the Company’s business, operating results and financial position. Historically, the Company’s primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.
Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results. Although Unify takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on cash and accounts receivable balances related to activities with the Company’s operations in France, Germany, UK, Australia and Canada. At April 30, 2010 the Company had cash held in foreign currencies of $1,029,000 in Euros, $174,000 in Canadian dollars, $987,000 in pounds sterling, and $60,000 in Australian dollars. At April 30, 2010 the Company had accounts receivable in foreign currencies of $1,927,000 in Euros, $25,000 in Canadian dollars, $316,000 in pounds sterling, $369,000 in Australian dollars, $35,000 in Japanese yen, $34,000 in Polish zloty, $5,000 in Singapore dollars, and $95,000 in Malaysian ringgit. The Company engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates could have a significant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 (a) for an index to the financial statements and supplementary financial information, which are filed, as part of this report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
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ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2010. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934. Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As a result of a material weaknesses in our internal control over financial reporting relating to the accounting for warrants and contingent consideration, our management has reassessed the effectiveness of our disclosure controls and procedures and have determined that our disclosure controls and procedures were not effective as of April 30, 2010.
(b) Restatement of Consolidated Financial Statements. On February 15, 2011, the Audit Committee of the Board of Directors, concluded that the Company’s audited financial statements for the year ended April 30, 2010, did not properly account for certain common stock warrants and contingent consideration and, as a result, should not be relied upon. The Audit Committee has authorized and directed the officers of the Company to restate its audited financial statements included in this Form 10-K filing as of and for the year ended April 31, 2010.
(c) Remediation Plan. Since the determination regarding these material weaknesses, we have devoted significant effort and resources to the remediation and improvement of our internal control over financial reporting. While we had processes to identify and intelligently apply developments in accounting, we enhanced these processes to better evaluate our research and understanding of the nuances of complex accounting standards. Our enhancements included providing training to accounting staff relative to the application and interpretations of ASC 815 and ASC 805. We have also increased communication among our legal and finance personnel. Additionally, we have retained a third party professional to assist us with the interpretation and application of new and complex accounting guidance. Management will continue to review and make necessary changes to the overall design of its internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting.
As a result of a material weaknesses in our internal control over financial reporting relating to the accounting for warrants and contingent consideration, our management has reassessed the effectiveness of our disclosure controls and procedures and have determined that our disclosure controls and procedures were not effective as of April 30, 2010.
(b) Restatement of Consolidated Financial Statements. On February 15, 2011, the Audit Committee of the Board of Directors, concluded that the Company’s audited financial statements for the year ended April 30, 2010, did not properly account for certain common stock warrants and contingent consideration and, as a result, should not be relied upon. The Audit Committee has authorized and directed the officers of the Company to restate its audited financial statements included in this Form 10-K filing as of and for the year ended April 31, 2010.
(c) Remediation Plan. Since the determination regarding these material weaknesses, we have devoted significant effort and resources to the remediation and improvement of our internal control over financial reporting. While we had processes to identify and intelligently apply developments in accounting, we enhanced these processes to better evaluate our research and understanding of the nuances of complex accounting standards. Our enhancements included providing training to accounting staff relative to the application and interpretations of ASC 815 and ASC 805. We have also increased communication among our legal and finance personnel. Additionally, we have retained a third party professional to assist us with the interpretation and application of new and complex accounting guidance. Management will continue to review and make necessary changes to the overall design of its internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting.
(d) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the quarter ended April 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
(e) Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with this Amendment No. 1, management, including our Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of our internal control over financial reporting as of April 30, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. This evaluation identified material weaknesses in our internal controls regarding our process and procedures related to the initial classification and subsequent accounting of common stock warrants as liabilities or equity instruments and contingent consideration. These material weaknesses in our internal controls resulted in the restatement of our annual financial statements for the year ended April 30, 2010 and our quarterly reports for the periods ended July 31, 2009, October 31, 2009, and January 31, 2010. Accordingly we did not maintain effective internal control over financial reporting as of April 30, 2010, based on the COSO criteria.
This Annual Report on Form 10-K/A does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K/A for the year ended April 30, 2010.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the information required by this item relating to our executive officers is included under the caption “Directors and Executive Officers of the Registrant” in Part I of this report.
The other information required by this Item 10 is incorporated by reference from the information contained in our Proxy Statement to be filed with the U.S. Securities and Exchange Commission in connection with the solicitation of proxies for our 2010 Annual Meeting of Stockholders (the “2010 Proxy Statement”) under the sections entitled “Directors and Executive”.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the information to be contained in our 2010 Proxy Statement under sections entitled “Executive Compensation”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from the information to be contained in our 2010 Proxy Statement under sections entitled “Security Ownership of Certain Beneficial Owners and Management”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference from the information to be contained in our 2010 Proxy Statement under sections entitled “Certain Relationships and Related Transactions, and Director Independence”.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference from the information to be contained in our 2010 Proxy Statement under sections entitled “Principal Accounting Fees and Services”.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K/A:
1. Consolidated Financial Statements
| Page | ||
| Number | ||
| Report of Grant Thornton LLP, Independent Registered Public Accounting Firm | 38 | |
| Consolidated Balance Sheets as of April 30, 2010 and 2009 | 39 | |
| Consolidated Statements of Operations for the years ended April 30, 2010, 2009, 2008 | 40 | |
| Consolidated Statements of Stockholders’ Equity for the years ended April 30, 2010, 2009, 2008 | 41 | |
| Consolidated Statements of Cash Flows for the years ended April 30, 2010, 2009, 2008 | 42 | |
| Notes to Consolidated Financial Statements | 43 |
Schedules are omitted because they are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto.
2. Exhibits—See Item 15(b) below.
(b) Exhibits
| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 2.1 | Agreement and Plan of Merger, dated April 16, 2009, by and among Unify, UCAC, Inc., a Delaware corporation and wholly owned subsidiary of Unify, and AXS-One Inc., a Delaware corporation |
8-K | 001-11807 | 2.1 | April 20, 2009 | ||||||||
| 2.2 | Agreement and Plan of Merger, dated June 29, 2010, by and among Unify Corporation, Unify Acquisition Corp., and Strategic Office Solutions, Inc. (dba Daegis) |
8-K | 001-11807 | 10.1 | July 1, 2010 | ||||||||
| 3.1 | Restated Certificate of Incorporation of the Company | S-1 | 333-03834 | 3.1 | April 19, 1996 | ||||||||
| 3.2 | Amendment to Restated Certificate of | 10-K/A | 001-11807 | 3.2 | December 18, | ||||||||
| Incorporation of the Company | 2007 | ||||||||||||
| 3.3 | Amended Bylaws of the Registrant | 10-K | X | ||||||||||
| 4.1 | Form of Stock Certificate | S-1/A | 333-03834 | 4.1 | May 22, 1996 | ||||||||
| 4.2 | Revolving Credit and Term Note Agreement by and between ComVest and Unify, dated November 20, 2006 |
8-K | 001-11807 | 10.18 | November 29, 2006 |
||||||||
| 4.3 | Convertible Term Note – Tranche 1 | 10-K/A | 001-11807 | 4.3 | December 18, 2007 |
||||||||
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| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 4.4 | Convertible Term Note – Tranche 2 | 10-K/A | 001-11807 | 4.4 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.5 | Convertible Term Note – Tranche 3 | 10-K/A | 001-11807 | 4.5 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.6 | Registration Rights Agreement dated | 8-K | 001-11807 | 10.19 | November 29, | ||||||||
| November 20, 2006 | 2006 | ||||||||||||
| 4.7 | Form of 2006 Warrants | 10-K/A | 001-11807 | 4.7 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.8 | Special Situations Stock Purchase Agreement | 10-K | 001-11807 | 10.11 | July 21, 2004 | ||||||||
| dated April 23, 2004 | |||||||||||||
| 4.9 | Special Situations Registration Rights | 10-K | 001-11807 | 10.12 | July 21, 2004 | ||||||||
| Agreement dated April 23, 2004 | |||||||||||||
| 4.10 | Form of 2004 Warrants | 10-K/A | 001-11807 | 4.12 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.11 | Form of 2009 Warrants | 10-K | 001-11807 | 4.11 | July 22, 2009 | ||||||||
| 4.12 | Loan and Security Agreement, dated June 29, | 8-K | 001-11807 | 10.2 | July 1, 2010 | ||||||||
| 2010, by and among Unify Corporation and | |||||||||||||
| Hercules Technology II, L.P. | |||||||||||||
| 4.13 | Registration Rights Agreement dated June 29, | 8-K | 001-11807 | 10.3 | July 1, 2010 | ||||||||
| 2010 | |||||||||||||
| 4.14 | Form of 2010 Warrant | 8-K | 001-11807 | 10.4 | July 1, 2010 | ||||||||
| 4.15 | Form of Subordinated Indemnity Note | 8-K | 001-11807 | 10.5 | July 1, 2010 | ||||||||
| 4.16 | Form of Subordinated Purchase Note | 8-K | 001-11807 | 10.6 | July 1, 2010 | ||||||||
| 10.1* | 1991 Stock Option Plan, as amended | S-1 | 001-11807 | 10.2 | April 19, 1996 | ||||||||
| 10.2* | 2001 Stock Option Plan | 10-Q | 001-11807 | 10.9 | March 14, 2002 | ||||||||
| 10.3* | Employment Agreement by and between Todd | 10-K | 001-11807 | 10.8 | July 30, 2001 | ||||||||
| Wille and the Registrant dated December 29, | |||||||||||||
| 2000 | |||||||||||||
| 10.4 | Note Exchange Agreement, dated April 16, | 8-K | 001-11807 | 10.1 | April 20, 2009 | ||||||||
| 2009, between and among Unify and holders of | |||||||||||||
| certain convertible notes of AXS-One Inc., a | |||||||||||||
| Delaware corporation | |||||||||||||
| 10.5* | Employment Agreement by and between Kurt | 8-K | 001-11807 | 10.7 | July 1, 2010 | ||||||||
| Jensen and the Registrant dated June 30, 2010 | |||||||||||||
35
| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 10.6 | Form of Indemnification Agreement | 10-K | 001-11807 | 10.5 | July 22, 2009 | ||||||||
| 10.7 | Office Building Lease for Roseville, California | 10-K | 001-11807 | 10.6 | July 22, 2009 | ||||||||
| facility, dated November 1, 2007, and amended | |||||||||||||
| November 21, 2007 | |||||||||||||
| 14 | Code of Ethics for Senior Officers | 10-K | 001-11807 | 14 | July 21, 2004 | ||||||||
| 21.1 | Subsidiaries of the Registrant | X | |||||||||||
| 23.1 | Consent of Grant Thornton LLP, Independent | X | |||||||||||
| Registered Public Accounting Firm | |||||||||||||
| 31.1 | Certification of Chief Executive Officer | X | |||||||||||
| pursuant to Rule 13a-14(a) or 15d-14(a) of the | |||||||||||||
| Securities Exchange Act of 1934 as adopted | |||||||||||||
| pursuant to Section 302 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
| 31.2 | Certification of Chief Financial Officer | X | |||||||||||
| pursuant to Rule 13a-14(a) or 15d-14(a) of the | |||||||||||||
| Securities Exchange Act of 1934 as adopted | |||||||||||||
| pursuant to Section 302 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
| 32.1 | Certification of Todd E. Wille, Chief Executive | X | |||||||||||
| Officer of Unify Corporation pursuant to 18 | |||||||||||||
| U.S.C. Section 1350, as adopted pursuant to | |||||||||||||
| Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32.2 | Certification of Steven D. Bonham, Chief | X | |||||||||||
| Financial Officer of Unify Corporation | |||||||||||||
| pursuant to 18 U.S.C. Section 1350, as adopted | |||||||||||||
| pursuant to Section 906 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
| * | Exhibit pertains to a management contract or compensatory plan or arrangement. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
UNIFY CORPORATION
|
|
| By: | /s/ TODD E. WILLE |
| Todd E. Wille | |
| President and Chief Executive Officer | |
Dated: March 8, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
| /s/ TODD E. WILLE | President and Chief Executive Officer | March 8, 2011 | |
| Todd E. Wille | (Principal Executive Officer) | ||
| /s/ STEVEN D. BONHAM | Vice President and Chief Financial Officer | March 8, 2011 | |
| Steven D. Bonham | (Principal Financial and Accounting Officer) | ||
| /s/ STEVEN D. WHITEMAN | Director and Chairman of the Board | March 8, 2011 | |
| Steven D. Whiteman | |||
| /s/ TIMOTHY P. BACCI | Director | March 8, 2011 | |
| Timothy P. Bacci | |||
| /S/ ROBERT M. BOZEMAN | Director | March 8, 2011 | |
| Robert M. Bozeman | |||
| /s/ RICHARD M. BROOKS | Director | March 8, 2011 | |
| Richard M. Brooks | |||
| /s/ TERY R. LARREW | Director | March 8, 2011 | |
| Tery R. Larrew | |||
| /s/ ROBERT J. MAJTELES | Director | March 8, 2011 | |
| Robert J. Majteles |
37
Report of Independent Registered Public Accountants
Board of Directors and Shareholders
Unify Corporation
Unify Corporation
We have audited the accompanying consolidated balance sheets of Unify Corporation (a Delaware corporation) and subsidiaries (collectively, the “Company”) as of April 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unify Corporation and subsidiaries as of April 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2010 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2, the 2010 financial statements have been restated.
/s/ GRANT THORNTON LLP
Reno, Nevada
July 12, 2010 (except for Note 2 and the effects thereof, as to which the date is March 8, 2011)
July 12, 2010 (except for Note 2 and the effects thereof, as to which the date is March 8, 2011)
38
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| April 30, | April 30, | |||||||
| 2010 | 2009 | |||||||
| (As Restated) See Note 2 |
||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,055 | $ | 6,147 | ||||
| Accounts receivable, net of allowances of $262 in 2010, and $183 in 2009 | 6,194 | 4,501 | ||||||
| Prepaid expenses and other current assets | 493 | 717 | ||||||
| Total current assets | 9,742 | 11,365 | ||||||
| Property and equipment, net | 350 | 472 | ||||||
| Goodwill | 17,928 | 6,425 | ||||||
| Intangibles, net | 8,613 | 2,720 | ||||||
| Other assets, net of allowances of $82 in 2010, and $80 in 2009 | 228 | 99 | ||||||
| Total assets | $ | 36,861 | $ | 21,081 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 380 | $ | 685 | ||||
| Current portion of long term debt | 1,397 | 1,663 | ||||||
| Accrued compensation and related expenses | 1,308 | 1,178 | ||||||
| Common stock warrant liability | 1,047 | — | ||||||
| Other accrued liabilities | 2,349 | 905 | ||||||
| Deferred revenue | 9,733 | 5,617 | ||||||
| Total current liabilities | 16,214 | 10,048 | ||||||
| Long term debt, net of current portion | 12 | 837 | ||||||
| Deferred tax liabilities, net | 557 | 541 | ||||||
| Other long term liabilities | 636 | 352 | ||||||
| Commitments and contingencies | — | — | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 7,931,370 shares authorized; no shares | — | — | ||||||
| issued or outstanding | ||||||||
| Common stock, $0.001 par value; 40,000,000 shares authorized, 10,476,633 | 10 | 7 | ||||||
| and 7,476,705 shares outstanding in 2010 and 2009 | ||||||||
| Additional paid-in capital | 79,919 | 69,941 | ||||||
| Accumulated other comprehensive income (loss) | 383 | (113 | ) | |||||
| Accumulated deficit | (60,870 | ) | (60,532 | ) | ||||
| Total stockholders’ equity | 19,442 | 9,303 | ||||||
| Total liabilities and stockholders’ equity | $ | 36,861 | $ | 21,081 | ||||
See accompanying notes.
39
Unify Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
Consolidated Statements of Operations
(In thousands, except per share data)
| Years Ended April 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (As Restated) See Note 2 |
||||||||||||
| Revenues: | ||||||||||||
| Software licenses | $ | 7,379 | $ | 6,436 | $ | 8,489 | ||||||
| Services | 15,816 | 11,688 | 11,027 | |||||||||
| Migration solutions | 5,397 | 2,468 | 309 | |||||||||
| Total revenues | 28,592 | 20,592 | 19,825 | |||||||||
| Cost of Revenues: | ||||||||||||
| Software licenses | 346 | 244 | 226 | |||||||||
| Services | 3,202 | 1,019 | 1,245 | |||||||||
| Migration solutions | 2,537 | 1,041 | 129 | |||||||||
| Total cost of revenues | 6,085 | 2,304 | 1,600 | |||||||||
| Gross profit | 22,507 | 18,288 | 18,225 | |||||||||
| Operating Expenses: | ||||||||||||
| Product development | 6,470 | 2,907 | 3,498 | |||||||||
| Selling, general and administrative | 17,664 | 12,494 | 12,002 | |||||||||
| Change in fair value of contingent consideration | (2,093 | ) | — | — | ||||||||
| Total operating expenses | 22,041 | 15,401 | 15,500 | |||||||||
| Income from operations | 466 | 2,887 | 2,725 | |||||||||
| Other income (expense): | ||||||||||||
| Loss from change in fair value of common stock warrant liability | (192 | ) | — | — | ||||||||
| Interest expense | (267 | ) | (194 | ) | (900 | ) | ||||||
| Other, net | (14 | ) | (124 | ) | 130 | |||||||
| Total other income (expense) | (473 | ) | (318 | ) | (770 | ) | ||||||
| Income (loss) before income taxes | (7 | ) | 2,569 | 1,955 | ||||||||
| Provision (benefit) for income taxes | (131 | ) | 179 | 324 | ||||||||
| Net income | $ | 124 | $ | 2,390 | $ | 1,631 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 0.01 | $ | 0.34 | $ | 0.25 | ||||||
| Diluted | $ | 0.01 | $ | 0.32 | $ | 0.23 | ||||||
| Shares used in computing net income per share: | ||||||||||||
| Basic | 9,691 | 6,991 | 6,423 | |||||||||
| Diluted | 10,182 | 7,582 | 7,105 | |||||||||
See accompanying notes.
40
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| Common Stock | Additional Paid-In |
Accumulated Other Comprehensive |
Accumulated | Total Stockholders’ |
|||||||||||||||||
| Shares | Amount | Capital | Income (loss) | Deficit | Equity | ||||||||||||||||
| Balances at April 30, 2007 | 6,029,201 | $ | 6 | $ | 64,973 | $ | 45 | $ | (64,555 | ) | $ | 469 | |||||||||
| Components of comprehensive income: | |||||||||||||||||||||
| Net income | — | — | — | — | 1,631 | 1,631 | |||||||||||||||
| Translation adjustments | — | — | — | 74 | 2 | 76 | |||||||||||||||
| Total comprehensive income | 1,707 | ||||||||||||||||||||
| Issuance of common stock | 41,108 | — | 183 | — | — | 183 | |||||||||||||||
| Exercise of stock options | 13,390 | — | 23 | — | — | 23 | |||||||||||||||
| Conversion of warrants and debt to stock | 897,050 | 1 | 2,826 | — | — | 2,827 | |||||||||||||||
| Stock-based compensation | — | — | 210 | — | — | 210 | |||||||||||||||
| Balances at April 30, 2008 | 6,980,749 | 7 | 68,215 | 119 | (62,922 | ) | 5,419 | ||||||||||||||
| Components of comprehensive income: | |||||||||||||||||||||
| Net income | — | — | — | — | 2,390 | 2,390 | |||||||||||||||
| Translation adjustments | — | — | — | (232 | ) | — | (232 | ) | |||||||||||||
| Total comprehensive income | 2,158 | ||||||||||||||||||||
| Issuance of common stock | 20,000 | — | 52 | — | — | 52 | |||||||||||||||
| Exercise of stock options | 500 | — | 2 | — | — | 2 | |||||||||||||||
| Conversion of warrants to stock | 475,456 | — | 1,188 | — | — | 1,188 | |||||||||||||||
| Stock-based compensation | — | — | 484 | — | — | 484 | |||||||||||||||
| Balances at April 30, 2009 | 7,476,705 | 7 | 69,941 | (113 | ) | (60,532 | ) | 9,303 | |||||||||||||
| Adoption of ASC 805 related to warrants | — | — | (609 | ) | — | (462 | ) | (1071 | ) | ||||||||||||
| Components of comprehensive loss: | |||||||||||||||||||||
| Net income | — | — | — | — | 124 | 124 | |||||||||||||||
| Translation adjustments | — | — | — | 496 | — | 496 | |||||||||||||||
| Total comprehensive loss | 620 | ||||||||||||||||||||
| Issuance of common stock | 2,836,063 | 3 | 9,439 | — | — | 9,442 | |||||||||||||||
| Exercise of stock options | 7,911 | — | 13 | — | — | 13 | |||||||||||||||
| Conversion of warrants and debt to stock | 155,954 | — | 506 | — | — | 506 | |||||||||||||||
| Stock-based compensation | — | — | 629 | — | — | 629 | |||||||||||||||
| Balances at April 30, 2010 (As Restated See Note 2) | 10,476,633 | $ | 10 | $ | 79,919 | $ | 383 | $ | (60,870 | ) | $ | 19,442 | |||||||||
See accompanying notes.
41
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended April 30, | |||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
| (As Restated) See Note 2 |
|||||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income (loss) | $ | 124 | $ | 2,390 | $ | 1,631 | |||||||||
| Reconciliation of net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||
| Depreciation | 235 | 189 | 172 | ||||||||||||
| Gain on disposal of other investments | - | - | (49 | ) | |||||||||||
| Amortization of intangible assets | 2,398 | 809 | 770 | ||||||||||||
| Fulfillment of support obligations | - | - | (313 | ) | |||||||||||
| Amortization of discount on notes payable | 28 | 47 | 199 | ||||||||||||
| Stock based compensation expense | 629 | 484 | 210 | ||||||||||||
| Change in fair value of contingent consideration | (2,093 | ) | - | - | |||||||||||
| Loss from change in fair value of common stock warrant liability | 192 | - | - | ||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||
| Accounts receivable | (1,164 | ) | 654 | (596 | ) | ||||||||||
| Prepaid expenses and other current assets | 647 | (209 | ) | 119 | |||||||||||
| Other long term assets | 52 | 74 | 142 | ||||||||||||
| Valuation allowance from acquisition | (220 | ) | - | - | |||||||||||
| Accounts payable | (1,804 | ) | 130 | (312 | ) | ||||||||||
| Accrued compensation and related expenses | (187 | ) | (425 | ) | 784 | ||||||||||
| Accrued acquisition costs | (76 | ) | 7 | (324 | ) | ||||||||||
| Other accrued liabilities | (2,420 | ) | 381 | 50 | |||||||||||
| Deferred revenue | 2,739 | (754 | ) | 899 | |||||||||||
| Other long term liabilities | (470 | ) | - | - | |||||||||||
| Net cash provided by (used in) operating activities | (1,390 | ) | 3,777 | 3,382 | |||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Acquisition, net of cash acquired | $ | 19 | $ | (542 | ) | $ | (249 | ) | |||||||
| Purchases of property and equipment | (36 | ) | (190 | ) | (284 | ) | |||||||||
| Proceeds from sale of property and equipment | - | - | 9 | ||||||||||||
| Payments on acquisitions | - | (110 | ) | (317 | ) | ||||||||||
| Proceeds from sale of other investments | - | - | 265 | ||||||||||||
| Net cash used in investing activities | (17 | ) | (842 | ) | (576 | ) | |||||||||
| Cash flows from financing activities: | |||||||||||||||
| Short term borrowings, net | - | - | 20 | ||||||||||||
| Proceeds from issuance of common stock | 13 | 2 | - | ||||||||||||
| Proceeds from exercise of warrants | - | 1,188 | - | ||||||||||||
| Borrowings on revolving line of credit | 350 | 1,000 | 1,000 | ||||||||||||
| Payments on revolving line of credit | - | (1,000 | ) | (1,000 | ) | ||||||||||
| Principal payments under debt obligations | (1,940 | ) | (133 | ) | (2,302 | ) | |||||||||
| Net cash provided by (used in) financing activities | (1,577 | ) | 1,057 | (2,282 | ) | ||||||||||
| Effect of exchange rate changes on cash | (108 | ) | (537 | ) | 104 | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (3,092 | ) | 3,455 | 628 | |||||||||||
| Cash and cash equivalents, beginning of year | 6,147 | 2,692 | 2,064 | ||||||||||||
| Cash and cash equivalents, end of year | $ | 3,055 | $ | 6,147 | $ | 2,692 | |||||||||
| Supplemental cash flow information: | |||||||||||||||
| Cash paid during the year for interest | $ | 112 | $ | 81 | $ | 610 | |||||||||
| Cash paid during the year for income taxes | $ | 79 | $ | 146 | $ | 21 | |||||||||
| Supplemental non-cash financing activities: | |||||||||||||||
| Warrants converted into common stock | $ | 236 | $ | - | $ | 162 | |||||||||
| Debt converted into common stock | $ | 270 | $ | - | $ | 3,004 | |||||||||
See accompanying notes.
42
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2010
(Tables in thousands of dollars, except share and per share data, unless otherwise indicated)
Restatement of Historical Financial Statements
As discussed in Note 2, the accompanying Consolidated Balance Sheet as of April 30, 2010 and the Consolidated Statement of Operations, Consolidated Statement of Stockholders Equity, and Consolidated Statement of Cash Flows for the year ended April 30, 2010, have been restated.
Note 1. The Company and Summary of Significant Accounting Policies
The Company
Unify (the “Company”, “we”, “us” or “our”) is a global provider of archiving, application development, data management, and migration software solutions. Our archiving solutions meet an organization’s requirement to archive, discover and preserve electronically stored information for eDiscovery, regulatory compliance, global email access and storage savings. Our software helps companies to maximize value and reduce cost in the development, deployment, management and retention of business applications, data and electronically stored information.
Basis of Presentation
The accompanying consolidated financial statements have been prepared by Unify Corporation pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Such financial statements include our accounts and those of our subsidiaries that we control due to ownership of a controlling interest. Intercompany transactions and balances have been eliminated.
The functional currency of the Company’s foreign subsidiaries is their local currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average rates of exchange in effect during the reporting period. Foreign currency transaction gains or losses are included in other income (expense), net. Foreign currency adjustments resulting from the translation process are excluded from net income and recorded in other comprehensive income (loss).
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include revenue recognition and the assessment of the valuation of goodwill and other intangible assets, valuation allowance for deferred taxes and the allowance for doubtful accounts receivable. Actual results could differ from these estimates.
Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of three months or less when purchased and are stated at cost. Cash equivalents consist primarily of demand deposits with banks and money market funds.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. The carrying amounts of long term accounts receivable approximate fair value based on the collection analysis performed and recording of necessary reserves. The fair values of the Company's long term borrowings are estimated based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Such values approximate the carrying value of the borrowings as of fiscal year end.
43
Concentrations of Credit Risk and Credit Evaluations
Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents primarily with five financial institutions which at times may exceed federal insured levels. The Company licenses its products principally to companies in the United States, Europe, Canada, Latin America, Russia, Japan, Singapore and Australia. For the year ended April 30, 2010, one customer accounted for 14% of consolidated revenues and another accounted for 11% of consolidated revenues. No single customer accounted for 10% or more of consolidated revenue in the year ended April 30, 2009. We had one customer in the year ended April 30, 2008 that accounted for 12% of consolidated revenues. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential credit losses. International revenues include all our software license and service revenues from customers located outside the United States. International revenues accounted for 50%, 68% and 78% of total revenues in fiscal years 2010, 2009 and 2008, respectively.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established to ensure trade receivables are not overstated due to uncollectability. Bad-debt reserves are maintained for all customers based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. Additional reserves for individual accounts are recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Following is a schedule that details activity for the allowance for doubtful accounts and the allowance for long-term accounts and notes receivable.
| Charges | |||||||||||||||||
| Balance at | Beginning | (Credits) to | Balance at | ||||||||||||||
| Beginning | Balance From | Operating | Write-offs | End of | |||||||||||||
| of Year | Acquisition | Expenses | of Accounts | Year | |||||||||||||
| (In thousands) | |||||||||||||||||
| Allowance for doubtful accounts receivable: | |||||||||||||||||
| Year ended April 30, 2008 | $ | 193 | $ | - | $ | 15 | $ | (39 | ) | $ | 169 | ||||||
| Year ended April 30, 2009 | 169 | - | 73 | (59 | ) | 183 | |||||||||||
| Year ended April 30, 2010 | 183 | 50 | 74 | (45 | ) | 262 | |||||||||||
| Allowance for long-term accounts | |||||||||||||||||
| receivable – reflected in other assets: | |||||||||||||||||
| Year ended April 30, 2008 | $ | 213 | $ | - | $ | 23 | $ | (140 | ) | $ | 96 | ||||||
| Year ended April 30, 2009 | 96 | - | (14 | ) | (2 | ) | 80 | ||||||||||
| Year ended April 30, 2010 | 80 | - | 2 | - | 82 | ||||||||||||
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets, generally three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.
Capitalized Software
Under the criteria set forth in Financial Accounting Standards Board (“FASB”) guidance on accounting for the costs of computer software to be sold, leased or otherwise marketed, capitalization of software development costs begins upon the establishment of technological feasibility of the product. With respect to the Company’s software development process, technological feasibility is established upon completion of a working model. To date, the Company’s products have been released shortly after reaching technological feasibility. Therefore, development costs incurred after completion of a working model and prior to general release have not been significant. Accordingly, no software development costs have been capitalized by the Company to date.
44
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may be in excess of fair value or not recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment has been identified during any of the periods presented.
The Company periodically reevaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful lives of the long-lived assets. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate income from operations and positive cash flows in future periods.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented (Note 5).
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented (Note 5).
Revenue Recognition
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. Additionally, the Company generates revenue from its migration solutions products. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is measured by labor hours.
The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
45
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting service arrangements are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed.
Warranties and Indemnification
The Company offers a limited warranty for product and service sales that generally provide the customer a sixty-day warranty period against defects. To date, the Company has not incurred any material costs as a result of such warranties and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
The Company’s license agreements generally include certain provisions for indemnifying customers against liabilities if its product or services infringe upon a third-party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
Stock-Based Compensation
Compensation expense includes the estimated fair value of equity awards vested during the reported period. Expense for equity awards vested is determined based on the grant date fair value previously calculated for pro forma disclosures. For the fiscal years ended April 30, 2010, 2009, and 2008 equity-based compensation expense was comprised of the following (in thousands):
| April 30, 2010 | April 30, 2009 | April 30, 2008 | |||||||
| Cost of Sales | $ | 17 | $ | 14 | $ | 4 | |||
| Product Development | 122 | 75 | 30 | ||||||
| Selling, General and Administrative | 490 | 395 | 176 | ||||||
| Total Equity-Based Compensation | $ | 629 | $ | 484 | $ | 210 | |||
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The following table shows remaining unrecognized compensation expense on a pre-tax basis related to all types of nonvested equity awards outstanding as of April 30, 2010. This table does not include an estimate for future grants that may be issued (in thousands).
| Fiscal Year Ending April 30, | Amount | ||
| 2011 | $ | 621 | |
| 2012 | 519 | ||
| 2013 | 218 | ||
| 2014 | 24 | ||
| Total | $ | 1,382 | |
The cost above is expected to be recognized over a weighted-average period of 1.25 years.
The Company uses the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. The Company’s calculations are made using the following weighted average assumptions: expected option life, 12 months following vesting; stock volatility, 92% in fiscal 2010, 90% in fiscal 2009, 104% in fiscal 2008; risk-free interest rates, 1.9% in fiscal 2010, 2.9% in fiscal 2009, 4.2% in fiscal 2008; and no dividends during the expected term. Not all stock options that have been granted will be exercised. Accordingly, the Company’s calculation of equity-based compensation expense includes an adjustment for the estimated number of options that will be forfeited. The Company uses a forfeiture rate of 20%, which is based on historical trends.
Under the 2001 Stock Option Plan (the “2001 Option Plan”), the Company may grant options to purchase up to 2,000,000 shares of common stock to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Stock Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant. Under the 1991 Stock Option Plan (the “1991 Option Plan”) which expired as of March 2001, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.
A summary of the Company’s stock option activity for the fiscal year ended April 30, 2010 is as follows:
| Weighted | Weighted | ||||||||||
| Average | average remaining | Aggregate | |||||||||
| Exercise | contractual | intrinsic | |||||||||
| Shares | Price | term (in years) | value (1) | ||||||||
| Outstanding at April 30, 2009 | 1,075,804 | $ | 3.93 | 7.22 | $ | 496,992 | |||||
| Granted | 705,300 | $ | 2.84 | ||||||||
| Exercised | (7,911 | ) | $ | 1.59 | |||||||
| Cancelled/expired | (109,696 | ) | $ | 6.07 | |||||||
| Outstanding at April 30, 2010 | 1,663,497 | $ | 3.34 | 7.12 | $ | 1,271,375 | |||||
| (1) | Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated. |
The total intrinsic value of awards exercised during the year ended April 30, 2010 and 2009 was $11,996 and $1,975, respectively. The total fair value of awards vested during the year ended April 30, 2010 and 2009 was $722,896 and $561,190, respectively.
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A summary of the Company’s nonvested stock option activity for the fiscal year ended April 30, 2010 is as follows:
| Weighted | ||||||
| Average | ||||||
| Fair | ||||||
| Shares | Value | |||||
| Nonvested at April 30, 2009 | 460,464 | $ | 3.50 | |||
| Granted | 705,300 | $ | 1.54 | |||
| Vested | (282,561 | ) | $ | 2.56 | ||
| Cancelled/expired | (68,860 | ) | $ | 2.44 | ||
| Nonvested at April 30, 2010 | 814,343 | $ | 2.18 | |||
Fair Value of Common Stock Warrant Liability
The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity”. The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Gain (loss) from change in fair value of common stock warrant liability.”
Income Taxes
Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries as they are considered to be permanently reinvested.
Income (loss) Per Share
Earnings per share guidance requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and gains and losses on foreign currency translation.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have evaluated our approach for making operating decisions and assessing the performance of our business and, beginning in the first quarter of fiscal year 2010 as a result of our acquisition on AXS-One, we determined that we have three reportable segments: Database and Development Products (“DDP”), Integrated Content Archiving Solutions and Modernization and Migration Solutions.
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that establishes the Accounting Standards Codification (“Codification” or "ASC") as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supercedes all existing non-SEC accounting literature not included in the Codification. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. GAAP was not intended to be changed as a result of the FASB’s Codification project, but it did change the way guidance is organized and presented. As a result, these changes impacted how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the Codification in this Report by providing a plain English approach when describing any new or updated authoritative guidance.
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In October 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The new guidance will become effective for Unify beginning May 1, 2011, with earlier adoption permitted. The Company is currently assessing the impact of the adoption of this guidance.
In May 2009, the FASB issued authoritative guidance for the accounting and reporting of subsequent events that occur between the balance sheet date and issuance of financial statements. Issuers are required to recognize the effects, if material, of subsequent events in the financial statements if the subsequent event provides additional evidence about conditions that existed as of the balance sheet date. The issuer must also disclose the date through which subsequent events have been evaluated and the nature of any nonrecognized subsequent events. This guidance became effective for financial reporting periods ending after June 15, 2009. We adopted this guidance in fiscal 2010. We evaluated subsequent events through the date this Report was filed with the U.S. Securities and Exchange Commission.
In September 2006, the FASB issued authoritative guidance on fair value measurements. This guidance defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We adopted this guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued authoritative guidance on business combinations. The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We have accounted for the acquisition of AXS-One Inc. in June 2009 under this guidance. See Note 2.
In December 2007, the FASB issued authoritative guidance on noncontrolling interests in consolidated financial Statements. The guidance changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in net income. The guidance was effective for us beginning May 1, 2009. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
In March 2008, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities. This guidance requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We have adopted the guidance and it did not have a material impact on our consolidated financial statements.
In May 2008, the FASB issued authoritative guidance on accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This guidance requires issuers of convertible debt that may be settled wholly or partly in cash when converted to account for the debt and equity components separately. The guidance is effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
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In April 2008, the FASB issued authoritative guidance on the determining the useful life of intangible assets. This guidance amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset. It also requires expanded disclosure related to the determination of intangible asset useful lives. The guidance is effective for fiscal years beginning after December 15, 2008. We adopted the guidance in the first quarter of fiscal 2010 and it did not have a material effect on our consolidated financial statements.
2. Restatement of Financial Statements
We have restated our previously issued consolidated financial statements as of and for the year ended April 30, 2010, to correct errors in the accounting for certain common stock warrants and contingent consideration. Specifically, we previously classified as equity instruments common stock warrants that should have been classified as derivative liability instruments based on the terms of the common stock warrants and the applicable accounting guidance. We have historically accounted for common stock warrants as equity instruments. Certain provisions of ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity” became effective for us on May 1, 2009. The anti-dilution price protection features in the Company’s outstanding common stock warrants require these common stock warrants to be accounted for as liabilities and measured at fair value. The restated financial statements reflect the reclassification of the Company’s common stock warrants from stockholders’ equity to a common stock warrant liability, and accounts for changes in the fair value of the common stock warrant liability in the statement of operations. Accordingly, on May 1, 2009, the Company reduced additional paid-in capital and increased accumulated deficit by $608,850 and $461,897, respectively, and recorded $1,070,747 as a common stock warrant liability.
We have restated our previously issued consolidated financial statements as of and for the year ended April 30, 2010, to correct errors in the accounting for certain common stock warrants and contingent consideration. Specifically, we previously classified as equity instruments common stock warrants that should have been classified as derivative liability instruments based on the terms of the common stock warrants and the applicable accounting guidance. We have historically accounted for common stock warrants as equity instruments. Certain provisions of ASC 815 - “Derivatives and Hedging — Contracts in Entity’s Own Equity” became effective for us on May 1, 2009. The anti-dilution price protection features in the Company’s outstanding common stock warrants require these common stock warrants to be accounted for as liabilities and measured at fair value. The restated financial statements reflect the reclassification of the Company’s common stock warrants from stockholders’ equity to a common stock warrant liability, and accounts for changes in the fair value of the common stock warrant liability in the statement of operations. Accordingly, on May 1, 2009, the Company reduced additional paid-in capital and increased accumulated deficit by $608,850 and $461,897, respectively, and recorded $1,070,747 as a common stock warrant liability.
Additionally, in applying ASC 805 the Company had calculated the fair value of contingent consideration related to net license revenue on a quarterly basis and recorded any change in the calculated amount as an adjustment to goodwill. However, in accordance with ASC 805 such changes in the fair value should have been recorded as adjustments in the statement of operations.
The accompanying financial statements have been restated to report the warrants issued in November 2006 and April 2009 as derivative liabilities measured at estimated fair value, calculated using an open form option pricing model:
The accompanying financial statements have been restated to report the warrants issued in November 2006 and April 2009 as derivative liabilities measured at estimated fair value, calculated using an open form option pricing model:
| Number of Warrants | ||||||||||
| Outstanding at | Expiration of | Fair Value of Warrants | ||||||||
| Issuance Date | April 30, 2010 | Exercise Price | Warrants | at April 30, 2010 | ||||||
| (in thousands) | ||||||||||
| November 20, 2006 | 80,000 | $1.35 | October 31, 2012 | $169 | ||||||
| November 20, 2006 | 166,425 | $1.60 | October 31, 2012 | $317 | ||||||
| November 20, 2006 | 189,519 | $1.90 | October 31, 2012 | $318 | ||||||
| April 24, 2009 | 190,182 | $2.75 | April 24, 2014 | $243 | ||||||
The following tables summarize the effect of the restatement on the specific items presented in our historical consolidated financial statements included in our Annual Report on Form 10-K for the year ended April 30, 2010:
| Consolidated Balance Sheet | April 30, 2010 | |||||||
| (in thousands) | (As previously | April 30, 2010 | ||||||
| reported) | (As restated) | |||||||
| Goodwill | $ | 15,835 | $ | 17,928 | ||||
| Total assets | 34,768 | 36,861 | ||||||
| Current liabilities: | ||||||||
| Common stock warrant liability | $ | - | $ | 1,047 | ||||
| Total current liabilities | 15,167 | 16,214 | ||||||
| Stockholders' equity: | ||||||||
| Additional paid-in-capital | 80,312 | 79,919 | ||||||
| Accumulated deficit | (62,309 | ) | (60,870 | ) | ||||
| Total stockholders' equity | 18,396 | 19,442 | ||||||
| Consolidated Statement of Operations | Year Ended | |||||||
| (in thousands) | April 30, 2010 | |||||||
| (As previously | ||||||||
| reported) | (As restated) | |||||||
| Change in fair value of contingent consideration | $ | - | $ | (2,093 | ) | |||
| Total operating expenses | 24,134 | 22,041 | ||||||
| Income (loss) from operations | (1,627 | ) | 466 | |||||
| Loss from change in fair value of common stock warrant liability | - | (192 | ) | |||||
| Net income (loss) | (1,777 | ) | 124 | |||||
| Net income (loss) per share, basic | (0.18 | ) | 0.01 | |||||
| Net income (loss) per share, dilutive | (0.18 | ) | 0.01 | |||||
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| Consolidated Statement of Cash Flows | Year Ended | |||||||
| (in thousands) | April 30, 2010 | |||||||
| (As previously | ||||||||
| reported) | (As restated) | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (1,777 | ) | $ | 124 | |||
| Change in fair value of contingent consideration | - | (2,093 | ) | |||||
| Loss from change in fair value of common stock warrant liability | - | 192 | ||||||
| Net cash used in operating activities | (1,390 | ) | (1,390 | ) | ||||
Note 3. Acquisitions
Active Data Corporation
On May 22, 2007, the Company purchased privately held Active Data Corporation (“ADC”) for approximately $420,000 plus earn-out payments of $97,000. ADC provided application migration software that added Microsoft’s .NET functionality to Unify’s Team Developer product and provided an additional application migration solution for the Company. Pursuant to the terms of the purchase agreement, Unify acquired all the outstanding stock of ADC. ADC did not represent the addition of a significant subsidiary. The acquisition of ADC did not have a material impact on the financials of Unify and the results of operations for ADC are included in the Company’s results from the date of acquisition. The ADC purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions.
CipherSoft Inc.
On January 30, 2009, the Company purchased privately held CipherSoft Inc. (“CipherSoft”), headquartered in Calgary, Canada, for approximately $628,000 plus the assumption of debt of $1,032,000 and future potential royalty payments to be paid over a four year period following the acquisition. The royalty payments are based on a percentage of revenue and will increase goodwill upon being earned. As of April 30, 2010, royalty payments earned totaled $135,000. CipherSoft is a leading Oracle partner for modernization and migration of Oracle applications and provides an additional application migration solution for the Company. Pursuant to the terms of the purchase agreement, Unify acquired all the outstanding stock of CipherSoft. CipherSoft did not represent the addition of a significant subsidiary.
The CipherSoft purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values at the acquisition date, January 30, 2009. Intangible assets include technologies of $1,060,000, non-competition agreements of $85,000, consulting agreements of $110,000 and trade names of $80,000. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. The following table summarizes the fair values of net assets acquired and represents the opening balance sheet for CipherSoft as of the acquisition date, January 30, 2009 (in thousands):
| Current assets | $ | 236 | |
| Long term assets | 22 | ||
| Goodwill | 780 | ||
| Intangibles | 1,335 | ||
| Total assets | $ | 2,373 | |
| Current Liabilities | $ | 1,099 | |
| Long term liabilities | 646 | ||
| Total liabilities assumed | $ | 1,745 | |
| Total consideration | $ | 628 | |
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AXS-One Inc.
On June 30, 2009, the Company acquired all of the issued and outstanding shares of common stock and warrants of AXS-One. The common stock and warrants were converted into, in the aggregate, 1,000,000 shares of Unify common stock. The outstanding convertible notes of AXS-One with an aggregate outstanding principal and interest balance of approximately $13 million were exchanged for 1,642,600 shares of Unify common stock. The note holders may also be issued additional shares of Unify common stock based on revenue generated from AXS-One’s products over 13 months after the effective date of the merger.
AXS-One is a leading provider of integrated content archiving software solutions which enables organizations to implement secure, scalable and enforceable policies that address records management for corporate governance, legal discovery and industry regulations. The acquisition of AXS-One advances the Company’s growth strategy to acquire superior technology companies that can leverage its technology strengths, extensive customer base and worldwide distribution channel while enabling the combined company to meet a broader set of customers’ needs, accelerate direct and channel sales, and achieve cost synergies.
The goodwill of $11.2 million arising from the acquisition consists of increased market presence and opportunities, enhanced product mix and operating efficiencies expected from combining the operations of Unify and AXS-One. All of the goodwill was assigned to Unify’s Integrated Content Archiving Solutions segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid for AXS-One and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, June 30, 2009 (in thousands) (as restated):
| Consideration | ||||
| Equity instruments (2,642,600 common shares of Unify) | $ | 8,853 | ||
| Contingent consideration arrangement | 1,499 | |||
| Fair value of total consideration | $ | 10,352 | ||
| Recognized amounts of identifiable assets acquired and liabilies assumed | ||||
| Financial assets | $ | 117 | ||
| Accounts receivable | 561 | |||
| Other assets | 640 | |||
| Property, plant and equipment | 132 | |||
| Identifiable intangible assets | 8,065 | |||
| Financial liablities | (5,772 | ) | ||
| Deferred revenue | (2,493 | ) | ||
| Total identifiable net assets | $ | 1,250 | ||
| Goodwill | 11,195 | |||
| Change in fair market value of contingent consideration | (2,093 | ) | ||
| $ | 10,352 | |||
| Acquisition related costs (included in selling, general and administrative expense in Unify's | ||||
| statement of operations for the year ended April 30, 2010) | $ | 611 | ||
The fair value of the 2,642,600 common shares issued as part of the consideration paid for AXS-One ($8,853,000) was determined on the basis of the closing market price of Unify’s common shares on the acquisition date.
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The contingent consideration arrangement requires Unify to issue to the former holders of AXS-One convertible notes 0.35 shares of Unify common stock for every $1 of AXS-One net license revenue over the first $2,000,000 for the 13 month period following the acquisition date. After the holders of AXS-One convertible notes have received in the aggregate 2,580,000 Unify shares (as adjusted to reflect stock splits, stock dividends and reverse stock splits of Unify) under the earn-out, the shares issued as the earn-out shall be distributed one-half to the holders of AXS-One convertible notes and one-half to the former management members until the management members have received 171,250 Unify shares under the earn-out. Thereafter, any additional Unify shares issued as earn-out shall be distributed solely to the holders of AXS-One convertible notes. There is no limit to the total number of shares that can be earned. The estimated number of shares that Unify will issue under the contingent consideration arrangement is 451,000. The fair value of the contingent consideration of $1.5 million is based on management’s estimate of both expected net license revenue and share price.
Based on the receipt of a final valuation, acquisition date provisional values were adjusted to decrease contingent consideration by $3.3 million, decrease identifiable intangible assets by $2.0 million, increase deferred revenue by $0.4 million, increase financial liabilities $0.2 million, and increase goodwill by $1.4 million. The decrease in contingent consideration resulted in $2.1 million in income for the year ended April 30, 2010. Intangible assets include technologies of $4.2 million, trademarks of $1.2 million, backlog of $0.1 million, and customer relationships of $2.6 million.
The amounts of AXS-One’s revenue and earnings included in the Company’s consolidated statement of operations for the year ended April 30, 2010, and the supplemental pro forma revenue and earnings of the combined entity had the acquisition date been May 1, 2009, or May 1, 2008, are:
| (in thousands, except per share amounts) | Revenue | Net loss | Net loss per share | ||||||||
| Actual from July 1, 2009 to April 30, 2010 | $ | 8,555 | $ | (393 | ) | $ | (0.04 | ) | |||
| Supplemental pro forma from May 1, 2009 to April 30, 2010 | $ | 30,101 | $ | (2,693 | ) | $ | (0.28 | ) | |||
| Supplemental pro forma from May 1, 2008 to April 30, 2009 | $ | 32,827 | $ | (5,920 | ) | $ | (0.85 | ) | |||
Note 4. Property and Equipment
Property and equipment at April 30, 2010 and 2009 consisted of the following (in thousands):
| 2010 | 2009 | |||||||
| Equipment | $ | 1,700 | $ | 1,661 | ||||
| Furniture and leasehold improvements | 602 | 626 | ||||||
| $ | 2,302 | $ | 2,287 | |||||
| Less accumulated depreciation and amortization | (1,952 | ) | (1,815 | ) | ||||
| Property and equipment, net | $ | 350 | $ | 472 | ||||
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Note 5. Goodwill and Intangible Assets
The following tables present details of the Company’s goodwill and intangible assets as of April 30, 2010 and April 30, 2009 (in thousands).
| Gross | Net | |||||||||||
| carrying | Accumulated | carrying | Estimated | |||||||||
| April 30, 2010 (as Restated) | amount | amortization | amount | useful life | ||||||||
| Infinite Lives: | ||||||||||||
| Goodwill | $ | 17,928 | $ | - | $ | 17,928 | - | |||||
| Finite Lives: | ||||||||||||
| Customer - related | 4,136 | (1,268 | ) | 2,868 | 5 to 10 years | |||||||
| Technology-based | 6,787 | (2,220 | ) | 4,567 | 0.5 to 6 years | |||||||
| Trademarks | 1,500 | (456 | ) | 1,044 | 0.5 to 5 years | |||||||
| Trade name | 197 | (140 | ) | 57 | 2 years | |||||||
| Backlog | 100 | (100 | ) | - | 0.5 years | |||||||
| Non-compete | 103 | (32 | ) | 71 | 3 to 3.3 years | |||||||
| Consulting Agreements | 133 | (127 | ) | 6 | 1 year | |||||||
| Total | $ | 30,884 | $ | (4,343 | ) | $ | 26,541 | |||||
| Gross | Net | |||||||||||
| carrying | Accumulated | carrying | Estimated | |||||||||
| April 30, 2009 | amount | amortization | amount | useful life | ||||||||
| Infinite Lives: | ||||||||||||
| Goodwill | $ | 6,425 | $ | - | $ | 6,425 | - | |||||
| Finite Lives: | ||||||||||||
| Customer - related | 1,536 | (742 | ) | 794 | 4 to 5 years | |||||||
| Technology-based | 2,395 | (827 | ) | 1,568 | 3 to 5 years | |||||||
| Trademarks | 300 | (181 | ) | 119 | 4 years | |||||||
| Trade name | 180 | (107 | ) | 73 | 1 to 3 years | |||||||
| Non-compete | 85 | (7 | ) | 78 | 3 to 3.3 years | |||||||
| Consulting Agreements | 110 | (22 | ) | 88 | 1 to 1.3 years | |||||||
| Total | $ | 11,031 | $ | (1,886 | ) | $ | 9,145 | |||||
Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. The useful life of finite-lived intangibles is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the Company. Intangible assets amortization expense for fiscal 2010 was $2,398,000. Amortization expense for the fiscal year ended April 30, 2009, was $809,000. The estimated future amortization expense related to intangible assets as of April 30, 2010, is as follows (in thousands):
| Fiscal Year Ending April 30 | Amount | ||
| 2011 | $ | 2,265 | |
| 2012 | 1,747 | ||
| 2013 | 1,206 | ||
| 2014 | 1,202 | ||
| 2015 | 994 | ||
| Thereafter | 1,199 | ||
| Total | $ | 8,613 | |
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Goodwill at April 30, 2010, represents the excess of purchase prices of acquired companies over the sum of the amounts assigned to assets acquired less liabilities assumed. The Company believes these acquisitions will produce the following results:
- Increased Market Presence and Opportunities: The addition of the acquired companies should increase the combined company’s market presence and opportunities for growth in sales and earnings.
- Enhanced Product Mix: The complementary nature of the Company’s products with those of the acquired companies should benefit current customers and provide the combined company with the ability to access new customers.
- Operating Efficiencies: The combination of the Company and the acquired companies provides the opportunity for potential economies of scale and cost savings.
The Company believes these primary factors support the amount of goodwill recognized as a result of the purchase price for companies it has acquired. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. Based on our testing as of April 30, 2010, we do not believe goodwill is impaired and accordingly have made no adjustments to its carrying value.
Note 6. Credit Facility
On November 20, 2006, the Company entered into a revolving credit note agreement with ComVest Capital LLC. Under the terms of the agreement the Company can borrow up to $2.5 million. As of April 30, 2010, there was $350,000 outstanding on the revolver. The amount that can be borrowed under the revolver is based on the amount of eligible foreign and domestic accounts receivable outstanding. The revolver has an expiration date of November 30, 2010, and the Company incurs interest expense on funds borrowed at the prevailing prime rate plus 2.25% per annum (5.5% as of April 30, 2010). The credit facility was repaid on June 29, 2010. See Note 21.
7. Fair Value of Financial Instruments
We adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements.
Under ASC Topic 820, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
We adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements.
Under ASC Topic 820, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company values its warrants based on open form option pricing models which, based on the relevant inputs, render the fair value estimate Level 3. The Company bases its estimates of fair value for liabilities on the amount it would pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
- Level 1 – Quoted prices in active markets for identical assets and liabilities. Level 1 is generally considered the most reliable measurement of fair value under ASC 820.
- Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
- Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair Value on a Recurring Basis
The table below categorizes assets and liabilities measured at fair value on a recurring basis as of April 30, 2010:
The table below categorizes assets and liabilities measured at fair value on a recurring basis as of April 30, 2010:
| Fair Value | Fair value measurement using | |||||||||||
| April 30, 2010 | Level 1 | Level 2 | Level 3 | |||||||||
| Common stock warrant liability | $ | 1,047 | $ | - | $ | - | $ | 1,047 | ||||
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The following table summarizes the activity of Level 3 inputs measured on a recurring basis for the year ended April 30, 2010:
| (in thousands) | Common Stock Warrants | ||||
| Balance at May 1, 2009, date of adoption | $ | 1,071 | |||
| Exercise of common stock warrants | (216 | ) | |||
| Change in fair value of common stock warrant liability | 192 | ||||
| Balance at April 30, 2010 | $ | 1,047 | |||
Note 8. Long-Term Debt
The Company’s long-term debt consists of the following at April 30, 2010 and April 30, 2009 (in thousands):
| April 30, | April 30, | |||||||
| 2010 | 2009 | |||||||
| Convertible notes payable to ComVest Capital LLC, interest rate of 5%, payable in | ||||||||
| installments through September 30, 2010. These notes include certain negative | ||||||||
| covenants and the Company is in compliance with such covenants at April 30, | ||||||||
| 2010. The Comvest notes were repaid on June 29, 2010. See Note 21. | $ | 377 | $ | 1,400 | ||||
| Note Payable, interest rate of 5%, payable in installments through April 2011 | 627 | 1,032 | ||||||
| ComVest Capital LLC credit facility, repaid on June 29, 2010. See Notes 6 and 21. | 350 | - | ||||||
| Other note payable | 4 | - | ||||||
| Capital leases, payable in monthly installments through September 2011 | 52 | 97 | ||||||
| 1,410 | 2,529 | |||||||
| Less discount on notes payable, net | (1 | ) | (29 | ) | ||||
| Less current portion | (1,397 | ) | (1,663 | ) | ||||
| Long term debt, net | $ | 12 | $ | 837 | ||||
A summary of future payments on long-term debt obligations as of April 30, 2010 is as follows (in thousands):
| Fiscal Year Ending April 30, | Amount | |||
| 2011 | $ | 1,397 | ||
| 2012 | 13 | |||
| 1,410 | ||||
| Unamortized discount on notes payable | (1 | ) | ||
| Current portion of long term debt | (1,397 | ) | ||
| Long term debt, net | $ | 12 | ||
Note 9. Other Long Term Liabilities
In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement. As of April 30, 2010 and April 30, 2009 the amount of severance is $97,000 and $81,000, respectively. Also included in other long term liabilities as of April 30, 2010 and April 30, 2009 is $219,000 and $271,000 respectively, of deferred rent related to the Roseville, California office. Additionally, included in other long term liabilities as of April 30, 2010, is $320,000 related to the unfavorable lease terms associated with the Rutherford, New Jersey office lease assumed in the acquisition of AXS-One, Inc. (see Note 3).
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Note 10. Maintenance Contracts
The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts, at the customers’ option, annually thereafter. These maintenance contracts are priced as a percentage of the value of the related license agreement. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which the Company does business. Generally, maintenance contracts provide the customer with unspecified product maintenance updates and customer support services. Revenue from maintenance contracts is initially deferred and then recognized ratably over the term of the agreements.
Changes in the Company’s deferred maintenance revenue during the periods are as follows (in thousands):
| Year Ended | Year Ended | Year Ended | ||||||||||
| April 30, | April 30, | April 30, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Deferred maintenance revenue beginning balance | $ | 5,473 | $ | 6,130 | $ | 5,500 | ||||||
| Deferred maintenance revenue recognized during period | (14,217 | ) | (11,239 | ) | (10,551 | ) | ||||||
| Deferred maintenance revenue of new maintenance contracts | 18,386 | 10,582 | 11,181 | |||||||||
| Deferred maintenance revenue ending balance | $ | 9,642 | $ | 5,473 | $ | 6,130 | ||||||
Note 11. Stockholders’ Equity
Preferred Stock
The Company may issue up to 7,931,370 shares of preferred stock in one or more series upon authorization by its board of directors. The board of directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock.
Stock Option Plan
Under the 2001 Stock Option Plan (the “2001 Option Plan”), the Company may grant options to purchase up to 2,000,000 shares of common stock to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Stock Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant. Under the 1991 Stock Option Plan (the “1991 Option Plan”) which expired as of March 2001, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.
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A summary of stock option activity is as follows:
| Weighted | ||||||
| Average | ||||||
| Number of | Exercise | |||||
| Shares | Price | |||||
| Outstanding at April 30, 2007 | 453,242 | $ | 2.90 | |||
| Granted (weighted average fair value of $3.58) | 393,300 | $ | 3.58 | |||
| Exercised | (13,390 | ) | $ | 1.67 | ||
| Cancelled/expired | (73,135 | ) | $ | 3.41 | ||
| Outstanding at April 30, 2008 | 760,017 | $ | 3.23 | |||
| Granted (weighted average fair value of $5.85) | 455,900 | $ | 5.85 | |||
| Exercised | (500 | ) | $ | 2.55 | ||
| Cancelled/expired | (139,613 | ) | $ | 6.39 | ||
| Outstanding at April 30, 2009 | 1,075,804 | $ | 3.93 | |||
| Granted (weighted average fair value of $2.84) | 705,300 | $ | 2.84 | |||
| Exercised | (7,911 | ) | $ | 1.59 | ||
| Cancelled/expired | (109,696 | ) | $ | 6.07 | ||
| Outstanding at April 30, 2010 | 1,663,497 | $ | 3.34 | |||
Additional information regarding options outstanding at April 30, 2010 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||
| Average | Weighted | Weighted | ||||||||||
| Remaining | Average | Average | ||||||||||
| Number | Contractual | Exercise | Number | Exercise | ||||||||
| Range of Exercise Prices | Outstanding | Life (Years) | Price | Outstanding | Price | |||||||
| $ 1.10 - 1.44 | 173,994 | 3.59 | $ | 1.30 | 161,836 | $ | 1.30 | |||||
| 1.65 - 2.50 | 118,603 | 5.99 | $ | 2.12 | 98,830 | $ | 2.06 | |||||
| 2.55 - 2.55 | 179,000 | 7.01 | $ | 2.55 | 158,576 | $ | 2.55 | |||||
| 2.60 - 2.60 | 519,000 | 8.09 | $ | 2.60 | 100,828 | $ | 2.60 | |||||
| 2.65 - 3.80 | 238,100 | 6.87 | $ | 3.24 | 89,697 | $ | 2.88 | |||||
| 3.90 - 5.20 | 184,500 | 7.67 | $ | 4.87 | 105,151 | $ | 4.93 | |||||
| 6.15 - 6.25 | 9,000 | 7.94 | $ | 6.19 | 5,291 | $ | 6.21 | |||||
| 6.40 - 6.40 | 235,900 | 8.01 | $ | 6.40 | 126,037 | $ | 6.40 | |||||
| 6.48 - 6.48 | 400 | 7.99 | $ | 6.48 | 200 | $ | 6.48 | |||||
| 6.70 - 6.70 | 5,000 | 7.79 | $ | 6.70 | 2,708 | $ | 6.70 | |||||
Options to purchase 849,154 and 616,091 shares at weighted average prices of $3.20 and $3.33 were exercisable at April 30, 2010 and 2009. At April 30, 2010, there were 509,965 shares reserved for future grants under the Stock Option Plan.
Restricted Stock
On May 1, 2002, the Company established the 2002 Director Restricted Stock Plan (“Director Restricted Stock Plan”) as part of a compensation program designed to attract and retain independent members for our board of directors. The maximum aggregate number of shares of common stock that may be issued under the Director Restricted Stock Plan is 100,000. There were no shares awarded under the plan in fiscal 2010 or fiscal 2009 leaving a balance of 3,862 shares reserved for future awards at April 30, 2010.
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Private Placement
On April 23, 2004, the Company issued through a private placement 1,126,780 shares of common stock to a group of institutional investors at a price of $3.55 per share and 5-year warrants to purchase an aggregate of 450,712 shares of common stock at an exercise price of $4.50 per share. Net proceeds from the private placement were $3,696,000, net of estimated accrued costs of $304,000. The Company’s actual costs for the private placement were $397,000 which resulted in a further reduction of additional paid-in-capital of $93,000 during fiscal 2005. The warrants were subject to an anti-dilution provision such that future stock issuances would cause an adjustment to the number of warrants.
As a result of issuances of additional common stock the number of warrant shares purchasable as of April 30, 2009 was increased to 491,792. On April 24, 2009, the warrant agreement was amended and the exercise price was reduced to $2.50 per share as an inducement to have the warrant holder exercise the warrants. On April 24, 2009, 475,456 of the warrants were exercised at $2.50 per share and the remaining 16,336 warrants expired. Further, in consideration of the exercise of the warrants, the Company granted an additional 190,182 warrants at an exercise price of $2.75 per share. Under certain circumstances, where the closing bid price of a share of common stock equals or exceeds $5.50, appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of common stock, for 20 consecutive trading days commencing after the registration statement covering the warrants shares has been declared effective, the Company, upon 20 days’ prior written notice to the warrant holders within one business day immediately following the end of such 20 day trading period, may call the warrants for 25% of the shares of the common stock initially purchasable pursuant to the warrants at a redemption price equal to $0.01 per share of common stock then purchasable pursuant to the warrants. If the call conditions are met again during the 30 day period immediately after consummation of a previous call, the Company may once again call the warrants for an additional increment of 25% of the shares of common stock initially purchasable pursuant to the warrants or such less amount as shall then remain purchasable and in the same manner and subject to the same notice requirements as the initial call, until all of the shares have been called.
Note 12. Income Taxes
Income (loss) before income taxes and provision (benefit) for income taxes for the years ended April 30 were as follows (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| (restated) | ||||||||||||
| Domestic | $ | 173 | $ | 3,004 | $ | 1,997 | ||||||
| Foreign | (180 | ) | (435 | ) | (42 | ) | ||||||
| Total income (loss) before income taxes | $ | (7 | ) | $ | 2,569 | $ | 1,955 | |||||
| Current | ||||||||||||
| Foreign taxes | $ | 55 | $ | - | $ | 89 | ||||||
| Federal and state income taxes | 18 | 95 | 16 | |||||||||
| Total Current | 73 | 95 | 105 | |||||||||
| Deferred | ||||||||||||
| Foreign taxes | (120 | ) | (27 | ) | - | |||||||
| Federal and state income taxes | (84 | ) | 111 | 219 | ||||||||
| Total Deferred | (204 | ) | 84 | 219 | ||||||||
| Provision (benefit) for income taxes | $ | (131 | ) | $ | 179 | $ | 324 | |||||
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The provision (benefit) for income taxes for the years ended April 30, 2010, 2009 and 2008 differs from the amounts computed by applying the statutory U.S. federal income tax rate to pretax income (loss) as a result of the following (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Computed tax expense (benefit) at statutory rate | $ | (837 | ) | $ | 1,144 | $ | 665 | |||||
| Increases (reductions) in tax expense resulting from: | ||||||||||||
|
Change in valuation allowance for deferred tax assets
|
339 | (1,226 | ) | (298 | ) | |||||||
|
Stock-based compensation
|
180 | 117 | - | |||||||||
|
Acquisition cost
|
224 | - | - | |||||||||
|
Change in tax contingency reserve
|
7 | 67 | - | |||||||||
|
Other
|
(44 | ) | 77 | (43 | ) | |||||||
| Provision (benefit) for income taxes | $ | (131 | ) | $ | 179 | $ | 324 | |||||
The Company provides deferred income taxes which reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at April 30 were as follows (in thousands):
| 2010 | 2009 | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Non-current assets | ||||||||
|
Net operating loss carryforwards
|
$ | 18,694 | $ | 14,501 | ||||
|
Capital loss carryforward
|
2,288 | 1,702 | ||||||
|
Foreign tax credits
|
163 | 108 | ||||||
|
Domestic fixed assets and other intangibles
|
- | 296 | ||||||
|
Others
|
462 | 206 | ||||||
| Current assets | ||||||||
|
Deferred revenue
|
109 | 64 | ||||||
|
Allowance for losses on accounts receivable
|
107 | 83 | ||||||
|
Reserves and other accruals
|
578 | 151 | ||||||
| Total deferred tax assets | 22,401 | 17,111 | ||||||
| Valuation allowance | (20,120 | ) | (17,111 | ) | ||||
| Non-current liabilities | ||||||||
|
Domestic fixed assets and other intangibles
|
(2,095 | ) | - | |||||
|
Foreign fixed assets and other intangibles
|
(278 | ) | (211 | ) | ||||
|
Goodwill
|
(465 | ) | (330 | ) | ||||
| Net deferred tax assets (liabilities) | $ | (557 | ) | $ | (541 | ) | ||
Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the Company has maintained a full valuation allowance against its net deferred tax assets in all the tax jurisdictions except Canada. The valuation allowance increased by $3.0 million in fiscal 2010, decreased by $1.2 million in fiscal 2009 and increased by $298,000 in fiscal 2008.
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At April 30, 2010, the Company had approximately $37.4 million in federal net operating loss (“NOL”) carryforwards that begin to expire in fiscal year 2011 through 2029, approximately $5.2 million in state net operating loss carryforwards that expire in fiscal years 2014 to 2031, and approximately $1.2 million in foreign net operating loss carryforwards that do not expire. The Company’s ability to utilize these net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership. In addition, the Company had approximately $9.2 million acquired federal NOLs through a business combination during fiscal year 2010 that begin to expire in fiscal year 2027 though 2029, approximately $13.7 million acquired state NOL that expire in fiscal years 2015 to 2031 and approximately $5.2 million acquired foreign NOL that do not expire. At April 30, 2010, the Company also had approximately $5.1 million federal capital loss carryforward and $9.1 million California capital loss carryforward, respectively, which expires beginning in fiscal year 2013 for federal tax purpose and will not expire for State of California.
Tax Positions
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Year ended | Year ended | ||||
| April 30, 2010 | April 30, 2009 | ||||
| Beginning balance | $ | 67 | $ | - | |
| Gross increases - tax positions in current period | - | 67 | |||
| Gross decreases - tax positions in prior period | - | - | |||
| Gross increases - tax positions in prior period | 7 | - | |||
| Decreases relating to settlements | - | - | |||
| Reductions as a result of a lapse of statute of limitations | - | - | |||
| Ending balance | $ | 74 | $ | 67 | |
If recognized, $74,000 of the total unrecognized tax benefits would be recorded as a reduction in income tax expense. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of April 30, 2010, the Company did not have material interest or penalties associated with any unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In general, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the fiscal years before 2005.
Note 13. Other Income (Expenses)
Other income (expenses), net for the years ended April 30, consisted of the following (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Interest income | $ | 5 | $ | 20 | $ | 12 | ||||||
| Foreign currency exchange gain (loss) | (78 | ) | (205 | ) | 146 | |||||||
| Other | 59 | 61 | (28 | ) | ||||||||
| Other income (expenses), net | $ | (14 | ) | $ | (124 | ) | $ | 130 | ||||
Note 14. Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and net foreign currency translation adjustments. A comprehensive gain (loss) on foreign currency translations for years ended April 30, 2010, 2009, and 2008 was $496,000 and ($232,000), and $76,000 respectively.
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Note 15. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
| (in thousands, except per share amounts) | Year Ended April 30, | ||||||||
| 2010 | 2009 | 2008 | |||||||
| (As Restated) | |||||||||
| Net income | $ | 124 | $ | 2,390 | $ | 1,631 | |||
| Weighted average shares of common stock outstanding, basic | 9,691 | 6,991 | 6,423 | ||||||
| Effect of dilutive securities (stock options) | 491 | 591 | 682 | ||||||
| Weighted average shares of common stock outstanding, diluted | $ | 10,182 | $ | 7,582 | $ | 7,105 | |||
| Earnings per share of common stock: | |||||||||
| Basic | $ | 0.01 | $ | 0.34 | $ | 0.25 | |||
| Diluted | $ | 0.01 | $ | 0.32 | $ | 0.23 | |||
The dilutive securities above represent only those stock options, warrants and convertible debt whose exercise prices were less than the average market price of the stock during the respective periods and therefore were dilutive. The number of shares of stock options excluded from the above amounts because their exercise prices exceeded the average market price of the stock during the respective periods was 548,006 in fiscal 2010, 584,688 in fiscal 2009, and 85,319 in fiscal 2008. The number of shares of common stock warrants excluded from the above amounts because their exercise prices exceeded the average market price of the stock during the respective periods was none in fiscal 2010, fiscal 2009, and fiscal 2008.
Note 16. Related Party Transactions
The Company had an ownership interest in Unify Japan KK which was less than 15%. In April 2008, we wrote off our investment in Unify Japan of $39,000 based on our assessment that there was a permanent decline in value for this investment. Unify Japan KK is a Japanese corporation that is a master distributor for the Company in Japan. Sales to Unify Japan KK in fiscal 2010, 2009, and 2008 were $0.3 million, $0.2 million, and $0.2 million, respectively. Accounts receivable from Unify Japan KK as of April 30, 2010 and 2009 were $35,000 and $13,000, respectively. The Company records an investment impairment charge if and when the Company believes an investment has experienced a decline in market value that is other than temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance.
Note 17. Employee Retirement Plan
The Company maintains a 401(k) profit sharing plan (the “401(k) Plan”). Eligible employees may contribute up to 100% of their pre-tax annual compensation to the 401(k) Plan, subject to certain statutory limitations. The Company can, at its discretion, voluntarily match the participating employees’ contributions not to exceed 6% of each employee’s annual compensation. In fiscal years 2010, 2009 and 2008, the Company contributed $196,000, $140,000 and $114,000, respectively, to the 401(k) Plan.
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Note 18. Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under non-cancelable operating lease arrangements expiring at various dates through fiscal 2014. Future minimum rental payments under these leases as of April 30, 2010 are as follows (in thousands):
| Years Ending April 30, | |||
| 2011 | $ | 1,295 | |
| 2012 | 1,054 | ||
| 2013 | 546 | ||
| 2014 | 551 | ||
| Thereafter | - | ||
| $ | 3,446 | ||
Rent expense under operating leases was $927,800, $667,200 and $1,095,500 for the years ended April 30, 2010, 2009 and 2008, respectively.
Litigation
The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of April 30, 2010, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.
Note 19. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have evaluated our approach for making operating decisions and assessing the performance of our business and, beginning in the first quarter of fiscal year 2010, we have determined that we have three reportable segments: Database and Development Products (“DDP”), Integrated Content Archiving Solutions and Modernization and Migration Solutions. Prior to the first quarter of fiscal year 2010, the Company maintained two reportable segments, Database and Development Products and Modernization and Migration Solutions. The accounting policies of the segments are the same as those described in Note 1. We evaluate performance based on gross margins (total revenues less costs of licenses, services and migration solutions) before operating costs. We do not manage our operating costs on a segment basis as many of our sales, marketing and support personnel regularly work with products from all segments. Additionally, we do not track assets by segment and therefore asset disclosures by segment are not relevant and are not presented.
For the fourth quarter of fiscal 2010 and 2009, total revenue from the United States was $5.0 million and $1.6 million, respectively. Total revenue from all other countries was $3.4 million in the fourth quarter of fiscal 2010 and $3.1 million for the fourth quarter of fiscal 2009. Total long-lived assets as of April 30, 2010 and 2009, for the United States, were $26.4 million and $9.6 million, respectively. Total long-lived assets in all other countries were $2.0 million as of April 30, 2010 and $68,000 as of April 30, 2009.
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Financial information for the Company’s reportable segments is summarized below (in thousands).
| For the Years Ended April 30, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| Total revenues: | |||||||||
|
Database and Development Products
|
$ | 14,640 | $ | 18,124 | $ | 19,516 | |||
|
Integrated Content Archiving Solutions
|
8,555 | - | - | ||||||
|
Modernization and Migration Solutions
|
5,397 | 2,468 | 309 | ||||||
| Total revenues | $ | 28,592 | $ | 20,592 | $ | 19,825 | |||
| Cost of revenue: | |||||||||
|
Database and Development Products
|
$ | 1,357 | $ | 1,263 | $ | 1,471 | |||
|
Integrated Content Archiving Solutions
|
2,191 | - | - | ||||||
|
Modernization and Migration Solutions
|
2,537 | 1,041 | 129 | ||||||
| Total Cost of Revenues | $ | 6,085 | $ | 2,304 | $ | 1,600 | |||
| Gross profit: | |||||||||
|
Database and Development Products
|
$ | 13,283 | $ | 16,861 | $ | 18,045 | |||
|
Integrated Content Archiving Solutions
|
6,364 | - | - | ||||||
|
Modernization and Migration Solutions
|
2,860 | 1,427 | 180 | ||||||
| Total Gross Profit | $ | 22,507 | $ | 18,288 | $ | 18,225 | |||
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Note 20. Quarterly Results of Operations (Unaudited)
The following interim financial information presents the fiscal 2010 and 2009 results on a quarterly basis:
| Quarter Ended | ||||||||||||||
| July 31, | October 31, | January 31, | April 30, | |||||||||||
| (As Restated) | (As Restated) | (As Restated) | (As Restated) | |||||||||||
| (In thousands, except per share data) | ||||||||||||||
| Year ended 2010: | ||||||||||||||
| Total revenues | $ | 4,511 | $ | 7,087 | $ | 8,622 | $ | 8,372 | ||||||
| Gross profit | $ | 3,917 | $ | 5,610 | $ | 6,837 | $ | 6,143 | ||||||
| Net income (loss) | $ | (2,433 | ) | $ | (1,136 | ) | $ | 1,963 | $ | 1,730 | ||||
| Net income (loss) per share: | ||||||||||||||
| Basic earnings per share: | ||||||||||||||
| Net income (loss) per share | $ | (0.29 | ) | $ | (0.11 | ) | $ | 0.19 | $ | 0.17 | ||||
| Dilutive earnings per share: | ||||||||||||||
| Net income (loss) per share | $ | (0.29 | ) | $ | (0.11 | ) | $ | 0.19 | $ | 0.16 | ||||
| Shares used in computing net income per share: | ||||||||||||||
| Basic | 8,367 | 10,119 | 10,123 | 10,169 | ||||||||||
| Diluted | 8,367 | 10,119 | 10,601 | 10,743 | ||||||||||
| Year ended 2009: | ||||||||||||||
| Total revenues | $ | 5,027 | $ | 5,801 | $ | 5,208 | $ | 4,556 | ||||||
| Gross profit | $ | 4,566 | $ | 5,056 | $ | 4,621 | $ | 4,045 | ||||||
| Net income | $ | 391 | $ | 725 | $ | 1,085 | $ | 189 | ||||||
| Net income per share: | ||||||||||||||
| Basic earnings per share: | ||||||||||||||
| Net income per share | $ | 0.06 | $ | 0.10 | $ | 0.16 | $ | 0.03 | ||||||
| Dilutive earnings per share: | ||||||||||||||
| Net income per share | $ | 0.05 | $ | 0.10 | $ | 0.15 | $ | 0.03 | ||||||
| Shares used in computing net income per share: | ||||||||||||||
| Basic | 6,981 | 6,981 | 6,981 | 7,022 | ||||||||||
| Diluted | 7,821 | 7,605 | 7,334 | 7,210 | ||||||||||
Note 21. Subsequent Event
On June 29, 2010, the Company purchased Strategic Office Solutions, Inc., dba Daegis, for approximately $37.5 million. Payment was made in the form of $24.0 million in cash, $7.3 million in equity, and $6.2 million in convertible notes. The Company issued 2,085,714 shares of Unify common stock to the former owners of Daegis at $3.50 per share for a total of $7.3 million. The notes consisted of a $5.0 million convertible note and a $1.2 million escrow note. Under the terms of the convertible note the Company will incur interest at 8% per annum. Upon shareholder approval to issue additional shares in conjunction with this acquisition, the note will automatically convert to 1,428,571 shares of Unify common stock. Under the terms of the escrow note the Company will incur interest at 3% per annum for the first eighteen months and 8% per annum thereafter. Upon shareholder approval the escrow note will convert into 342,857 shares of Unify common stock 18 months after the date of closing.
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To finance the cash portion of the acquisition of Daegis and provide working capital, the Company entered into a new Revolving Credit and Term Loan Agreement with Hercules Technology (the “Hercules Loan Agreement”) on June 29, 2010. The Hercules Loan Agreement consists of a term note and a revolving credit note agreement. The term note is for $24.0 million payable over five years with escalating principal payments of 5%, 10%, 15%, 20% and 50% annually. The Company incurs interest at the prevailing LIBOR rate plus 8.25% per annum with a minimum rate of 10.25% (10.25% at the date of closing) plus 2% interest to be paid in kind. Under the terms of the revolver the Company can borrow up to $6.0 million. The amount that can be borrowed under the revolver is based on the amount of eligible accounts receivable outstanding. The Company incurs interest expense on funds borrowed at the prevailing LIBOR rate plus 7.25% per annum with a minimum rate of 9.25% (9.25% at the date of closing). The additional proceeds from the Hercules Loan Agreement were used to pay the remaining balance of the ComVest Term Loan and Revolver in full (see Note 6). In conjunction with the Hercules Loan Agreement, we issued 718,860 warrants which are exercisable at $3.30 per share.
Disclosure of the acquisition-date fair value of the consideration given, fair-value of assets acquired and liabilities assumed, intangible asset classifications, and pro-forma information is not included in this note. Due to the timing of the acquisition, the initial accounting for the business combination was incomplete at the time the financial statements were issued and the above mentioned information was unavailable.
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INDEX OF EXHIBITS
| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 2.1 | Agreement and Plan of Merger, dated April 16, | 8-K | 001-11807 | 2.1 | April 20, 2009 | ||||||||
| 2009, by and among Unify, UCAC, Inc., a | |||||||||||||
| Delaware corporation and wholly owned | |||||||||||||
| subsidiary of Unify, and AXS-One Inc., a | |||||||||||||
| Delaware corporation | |||||||||||||
| 2.2 | Agreement and Plan of Merger, dated June 29, | 8-K | 001-11807 | 10.1 | July 1, 2010 | ||||||||
| 2010, by and among Unify Corporation, Unify | |||||||||||||
| Acquisition Corp., and Strategic Office | |||||||||||||
| Solutions, Inc. (dba Daegis) | |||||||||||||
| 3.1 | Restated Certificate of Incorporation of the | S-1 | 333-03834 | 3.1 | April 19, 1996 | ||||||||
| Company | |||||||||||||
| 3.2 | Amendment to Restated Certificate of | 10-K/A | 001-11807 | 3.2 | December 18, | ||||||||
| Incorporation of the Company | 2007 | ||||||||||||
| 3.3 | Amended Bylaws of the Registrant | 10-K | X | ||||||||||
| 4.1 | Form of Stock Certificate | S-1/A | 333-03834 | 4.1 | May 22, 1996 | ||||||||
| 4.2 | Revolving Credit and Term Note Agreement by | 8-K | 001-11807 | 10.18 | November 29, | ||||||||
| and between ComVest and Unify, dated | 2006 | ||||||||||||
| November 20, 2006 | |||||||||||||
| 4.3 | Convertible Term Note – Tranche 1 | 10-K/A | 001-11807 | 4.3 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.4 | Convertible Term Note – Tranche 2 | 10-K/A | 001-11807 | 4.4 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.5 | Convertible Term Note – Tranche 3 | 10-K/A | 001-11807 | 4.5 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.6 | Registration Rights Agreement dated | 8-K | 001-11807 | 10.19 | November 29, | ||||||||
| November 20, 2006 | 2006 | ||||||||||||
| 4.7 | Form of 2006 Warrants | 10-K/A | 001-11807 | 4.7 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.8 | Special Situations Stock Purchase Agreement | 10-K | 001-11807 | 10.11 | July 21, 2004 | ||||||||
| dated April 23, 2004 | |||||||||||||
| 4.9 | Special Situations Registration Rights | 10-K | 001-11807 | 10.12 | July 21, 2004 | ||||||||
| Agreement dated April 23, 2004 | |||||||||||||
| 4.10 | Form of 2004 Warrants | 10-K/A | 001-11807 | 4.12 | December 18, | ||||||||
| 2007 | |||||||||||||
| 4.11 | Form of 2009 Warrants | 10-K | 001-11807 | 4.11 | July 22, 2009 | ||||||||
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| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 4.12 | Loan and Security Agreement, dated June 29, | 8-K | 001-11807 | 10.2 | July 1, 2010 | ||||||||
| 2010, by and among Unify Corporation and | |||||||||||||
| Hercules Technology II, L.P. | |||||||||||||
| 4.13 | Registration Rights Agreement dated June 29, | 8-K | 001-11807 | 10.3 | July 1, 2010 | ||||||||
| 2010 | |||||||||||||
| 4.14 | Form of 2010 Warrant | 8-K | 001-11807 | 10.4 | July 1, 2010 | ||||||||
| 4.15 | Form of Subordinated Indemnity Note | 8-K | 001-11807 | 10.5 | July 1, 2010 | ||||||||
| 4.16 | Form of Subordinated Purchase Note | 8-K | 001-11807 | 10.6 | July 1, 2010 | ||||||||
| 10.1* | 1991 Stock Option Plan, as amended | S-1 | 001-11807 | 10.2 | April 19, 1996 | ||||||||
| 10.2* | 2001 Stock Option Plan | 10-Q | 001-11807 | 10.9 | March 14, 2002 | ||||||||
| 10.3* | Employment Agreement by and between Todd | 10-K | 001-11807 | 10.8 | July 30, 2001 | ||||||||
| Wille and the Registrant dated December 29, | |||||||||||||
| 2000 | |||||||||||||
| 10.4 | Note Exchange Agreement, dated April 16, | 8-K | 001-11807 | 10.1 | April 20, 2009 | ||||||||
| 2009, between and among Unify and holders of | |||||||||||||
| certain convertible notes of AXS-One Inc., a | |||||||||||||
| Delaware corporation | |||||||||||||
| 10.5* | Employment Agreement by and between Kurt | 8-K | 001-11807 | 10.7 | July 1, 2010 | ||||||||
| Jensen and the Registrant dated June 30, 2010 | |||||||||||||
| 10.6 | Form of Indemnification Agreement | 10-K | 001-11807 | 10.5 | July 22, 2009 | ||||||||
| 10.7 | Office Building Lease for Roseville, California | 10-K | 001-11807 | 10.6 | July 22, 2009 | ||||||||
| facility, dated November 1, 2007, and amended | |||||||||||||
| November 21, 2007 | |||||||||||||
| 14 | Code of Ethics for Senior Officers | 10-K | 001-11807 | 14 | July 21, 2004 | ||||||||
| 21.1 | Subsidiaries of the Registrant | X | |||||||||||
| 23.1 | Consent of Grant Thornton LLP, Independent | X | |||||||||||
| Registered Public Accounting Firm | |||||||||||||
| 31.1 | Certification of Chief Executive Officer | X | |||||||||||
| pursuant to Rule 13a-14(a) or 15d-14(a) of the | |||||||||||||
| Securities Exchange Act of 1934 as adopted | |||||||||||||
| pursuant to Section 302 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
| 31.2 | Certification of Chief Financial Officer | X | |||||||||||
| pursuant to Rule 13a-14(a) or 15d-14(a) of the | |||||||||||||
| Securities Exchange Act of 1934 as adopted | |||||||||||||
| pursuant to Section 302 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
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| Incorporated by Reference | |||||||||||||
| Exhibit | Filed | ||||||||||||
| Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | |||||||
| 32.1 | Certification of Todd E. Wille, Chief Executive | X | |||||||||||
| Officer of Unify Corporation pursuant to 18 | |||||||||||||
| U.S.C. Section 1350, as adopted pursuant to | |||||||||||||
| Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32.2 | Certification of Steven D. Bonham, Chief | X | |||||||||||
| Financial Officer of Unify Corporation | |||||||||||||
| pursuant to 18 U.S.C. Section 1350, as adopted | |||||||||||||
| pursuant to Section 906 of the Sarbanes-Oxley | |||||||||||||
| Act of 2002 | |||||||||||||
| * | Exhibit pertains to a management contract or compensatory plan or arrangement. |
69