UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
| ¨ | 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 000-25661
TenFold Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 83-0302610 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
698 West 10000 South
South Jordan, Utah 84095
(Address of principal executive offices, including zip code)
(801) 495-1010
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of March 31, 2007, there were 46,945,052 shares of the registrant’s Common Stock outstanding.
INDEX
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In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this report, the words “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” “seeks,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risks described in this Quarterly Report, and those referenced in Part II, Item 1A “Risk Factors” to our Annual Report on Form 10-K for the year ended December 31, 2006; and those risks described from time to time in our future reports filed with the Securities and Exchange Commission.
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CONDENSED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| March 31, | December 31, | |||||||
| 2007 | 2006 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,144 | $ | 3,601 | ||||
Accounts receivable, (net of allowances for doubtful accounts of $0 and $0, respectively) | 537 | 680 | ||||||
Unbilled accounts receivable, (net of allowances for doubtful accounts of $0 and $0, respectively) | 18 | 34 | ||||||
Prepaid expenses and other assets | 101 | 146 | ||||||
Total current assets | 3,800 | 4,461 | ||||||
Restricted cash | 65 | 74 | ||||||
Property and equipment, net | 94 | 141 | ||||||
Total assets | $ | 3,959 | $ | 4,676 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 232 | $ | 172 | ||||
Income taxes payable | 5 | 8 | ||||||
Accrued liabilities | 767 | 1,142 | ||||||
Deferred revenue | 1,351 | 1,446 | ||||||
Current installments of obligations under capital leases | 4 | 10 | ||||||
Total current liabilities | 2,359 | 2,778 | ||||||
Long-term liabilities | — | — | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Convertible preferred stock, $0.001 par value: | ||||||||
Authorized: 2,000,000 shares | ||||||||
Issued and outstanding shares: 1,788,009 shares at March 31, 2007 and 1,812,009 shares at December 31, 2006 | 2 | 2 | ||||||
Common stock, $0.001 par value: | ||||||||
Authorized: 120,000,000 shares | ||||||||
Issued and outstanding shares: 46,945,052 shares at March 31, 2007 and 46,557,745 shares at December 31, 2006 | 47 | 47 | ||||||
Additional paid-in capital | 87,063 | 86,429 | ||||||
Accumulated deficit | (85,512 | ) | (84,580 | ) | ||||
Total stockholders’ equity | 1,600 | 1,898 | ||||||
Total liabilities and stockholders’ equity | $ | 3,959 | $ | 4,676 | ||||
The accompanying notes are an integral part of these condensed financial statements.
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CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
Revenues: | ||||||||
License | $ | 127 | $ | 87 | ||||
Services and other | 1,696 | 512 | ||||||
Total revenues | 1,823 | 599 | ||||||
Operating expenses: | ||||||||
Cost of revenues | 925 | 586 | ||||||
Sales and marketing | 207 | 191 | ||||||
Research and development | 965 | 1,123 | ||||||
General and administrative | 690 | 612 | ||||||
Total operating expenses | 2,787 | 2,512 | ||||||
Loss from operations | (964 | ) | (1,913 | ) | ||||
Other income (expense): | ||||||||
Interest income | 37 | 8 | ||||||
Interest expense | — | (19 | ) | |||||
Total other income, net | 37 | (11 | ) | |||||
Loss before income taxes | (927 | ) | (1,924 | ) | ||||
Provision (benefit) for income taxes | 5 | — | ||||||
Net loss | $ | (932 | ) | $ | (1,924 | ) | ||
Deemed dividend related to warrants issued with preferred stock and beneficial conversion feature on preferred stock | — | (1,761 | ) | |||||
Net loss applicable to common shareholders | $ | (932 | ) | $ | (3,685 | ) | ||
Basic loss per common share | $ | (0.02 | ) | $ | (0.08 | ) | ||
Diluted loss per common share | $ | (0.02 | ) | $ | (0.08 | ) | ||
Weighted average common and common equivalent shares used to calculate loss per share: | ||||||||
Basic | 46,717 | 46,482 | ||||||
Diluted | 46,717 | 46,482 | ||||||
The accompanying notes are an integral part of these condensed financial statements.
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CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (932 | ) | $ | (1,924 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 58 | 61 | ||||||
Stock-based compensation expense | 619 | 502 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 143 | 60 | ||||||
Unbilled accounts receivable | 16 | 2 | ||||||
Prepaid expenses and other assets | 45 | 81 | ||||||
Accounts payable | 60 | (173 | ) | |||||
Income taxes payable | (3 | ) | (7 | ) | ||||
Accrued liabilities | (375 | ) | 9 | |||||
Deferred revenues | (95 | ) | (242 | ) | ||||
Net cash used in operating activities | (464 | ) | (1,631 | ) | ||||
Cash flows from investing activities: | ||||||||
Decrease in restricted cash | 9 | — | ||||||
Additions to property and equipment | (11 | ) | (5 | ) | ||||
Net cash used in investing activities | (2 | ) | (5 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from employee stock purchase plan stock issuance | 15 | 10 | ||||||
Proceeds from issuance of convertible preferred stock and warrants | — | 6,072 | ||||||
Proceeds from issuance of notes payable | — | 500 | ||||||
Principal payments on notes payable | — | (1,100 | ) | |||||
Principal payments on obligations under capital leases | (6 | ) | (8 | ) | ||||
Net cash provided by financing activities | 9 | 5,474 | ||||||
Net increase (decrease) in cash and cash equivalents | (457 | ) | 3,838 | |||||
Cash and cash equivalents at beginning of period | 3,601 | 1,344 | ||||||
Cash and cash equivalents at end of period | $ | 3,144 | $ | 5,182 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 2 | $ | 7 | ||||
Cash paid for interest | — | 19 | ||||||
The accompanying notes are an integral part of these condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Condensed Financial Statements included herein have been prepared by TenFold Corporation (“TenFold”) pursuant to the rules and regulations of the Securities and Exchange Commission. As used herein, “TenFold,” the “Company,” “we,” “our” and similar terms refer to TenFold Corporation, unless the context indicates otherwise. In management’s opinion, the interim financial data presented includes all adjustments necessary for a fair presentation. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for any future period or for the year ending December 31, 2007.
This report should be read in conjunction with our audited Financial Statements for the year ended December 31, 2006 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, including for example, estimated project costs and profitability and accounts receivable allowances. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Our financial statements have been prepared under the assumption that we will continue as a going concern. The independent auditors’ opinion on our December 31, 2006 financial statements, however, includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
As of March 31, 2007, our principal source of liquidity was our cash and cash equivalents of $3.1 million. Although we have made progress closing new sales to both existing and new customers in 2006 and 2007, and generally improved our cash flow, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations, or profitability. As a result, significant challenges and risks remain:
| • | We have not been able to generate positive cash flow from operations for the four years ended December 31, 2006, or the three months ended March 31, 2007. Our net cash used in operating activities was $464,000 for the three months ended March 31, 2007, and $4.4 million for the year ended December 31, 2006. |
| • | We have experienced difficulty closing substantial new sales, and it is unclear when or if we can expect to predictably close material sales to new or existing customers, and to achieve and sustain positive cash flow from operations. Under the leadership of our new Chief Executive Officer, Robert W. Felton, we changed our business model to focus on selling larger consulting projects, instead of the smaller prototype application projects that we primarily sold in 2005. Although we expect to be more successful with this new model, our experience with the new model is limited. We made progress closing new sales to both existing and new customers, began new consulting projects in 2006 and 2007, and generally improved our cash flow. However, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations, or profitability. There can be no assurance that we will be successful closing sufficient new sales. If we do not close significant future sales, our existing cash resources will not be sufficient to fund our operations beyond the third quarter of 2007. |
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2. Revenue Recognition
We derive revenues from license fees, applications development and implementation consulting services, support, and training services. License revenues consist of fees for licensing EnterpriseTenFold (formerly known as Universal Application) as an applications development tool. Service revenues consist of fees for applications development and implementation consulting, support and training. Other revenues include fees for reimbursement of out of pocket expenses incurred for customer projects.
We follow the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9,Modification of SOP 97-2 with Respect to Certain Transactions, and SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts, in recognizing revenue under each of our contracts.
We enter into contracts that generally involve multiple elements, such as software products, post-contract customer support (“PCS”), training, and time-and-material services. For accounting purposes, we allocate a portion of the contract fee to each undelivered element based on the relative fair values of the elements and allocate the fee for delivered software products using the residual method. The fair values of an element must be based on vendor specific objective evidence (“VSOE”). We establish VSOE based on the price charged when the same element is sold separately. For consulting services, we base VSOE on the rates charged when the services are sold separately under time-and-materials contracts. We base VSOE for training on the rates charged when training is sold separately for supplemental training courses. For PCS, VSOE is determined by reference to the renewal rate we charge the customer in future periods.
As a result, the amounts allocated to individual contract elements (such as license, consulting, training and support) for accounting purposes may differ from the amounts stated in the contract for those individual elements, but not in total.
For time-and-materials contracts, we generally estimate a profit range and recognize the related revenue using the lowest probable level of profit estimated in the range. Billings in excess of revenue recognized under time-and-material contracts are deferred and recognized upon completion of the time-and-materials contract or when the results can be estimated more precisely.
For fixed-price contracts, we recognize revenue using the percentage-of-completion method of accounting and following the guidance in Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We make adjustments, if necessary, to the estimates used in the percentage-of-completion method of accounting as work progresses under the contract and as we gain experience.
We recognize support revenue from contracts for ongoing technical support and unspecified product updates ratably over the support period.
We recognize training revenue as we perform the services.
We recognize license revenues from EnterpriseTenFold licenses that do not include services or where the related services are not considered essential to the functionality of the software, when the following criteria are met: we have signed a noncancellable license agreement with nonrefundable fees; we have delivered the software product; there are no uncertainties surrounding product acceptance; the fees are fixed and determinable; and collection is considered probable. This policy applies either when the licenses are sold separately or when an EnterpriseTenFold license is sold with an applications development project. Services relating to the licenses typically include post contract customer support services, general time-and-materials consulting, and training; and do not add significant functionality, features, or significantly alter the software. In addition, similar services are available from other vendors; there are no milestones or customer specific acceptance criteria which affect the realizability of the software license fee; and the software license fee is non-cancelable and non-refundable.
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For software arrangements that include a service element that is considered essential to the functionality of the software, we recognize license fees related to the application, and the applications development service fees, over time as we perform the services, using the percentage-of-completion method of accounting and following the guidance in Statement of Position (“SOP”) 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We make adjustments, if necessary, to the estimates used in the percentage-of-completion method of accounting as work progresses under the contract and as we gain experience. Fixed-price project revenues are split between license and service based upon the relative fair value of the components.
For certain projects, we limit revenue recognition in the period to the amount of project costs incurred in the same period, resulting in zero profit during the period, and postpone recognition of profits until results can be estimated more precisely.
For certain contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates doubtful, we recognize revenue under the completed-contract method of contract accounting.
For license agreements that contain a discount that cannot be determined at the inception of the agreement, we recognize the related license revenue at the end of the estimated economic life of the release of the software version provided to the customer. We use the end of the estimated economic life to recognize the revenue when we do not have VSOE for the related post-contract customer support, due to the discount, and therefore we cannot allocate the revenue until the discount is known at the end of the estimated economic life.
We record billings and cash received in excess of revenue earned as deferred revenue. Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed. We bill customers as payments become due under the terms of the customer’s contract. We consider current information and events regarding our customers and their contracts and establish allowances for doubtful accounts when it is probable that we will be unable to collect amounts due under the terms of existing contracts.
In our statements of operations, we present revenue net of sales taxes and any similar assessments.
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3. Loss Per Share
The following table sets forth the computation of basic and diluted loss per common share (in thousands except per share data):
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
Numerator: | ||||||||
Numerator for basic loss per share – net loss applicable to common shareholders | $ | (932 | ) | $ | (3,685 | ) | ||
Numerator for diluted loss per share – net loss applicable to common shareholders | $ | (932 | ) | $ | (3,685 | ) | ||
Denominator: | ||||||||
Denominator for basic loss per share – weighted average shares | 46,717 | 46,482 | ||||||
Stock options and other dilutive securities | — | — | ||||||
Denominator for diluted loss per share | 46,717 | 46,482 | ||||||
Loss per common share: | ||||||||
Basic loss per common share | $(0.02) | $(0.08) | ||||||
Diluted loss per common share | $(0.02) | $(0.08) | ||||||
Employee stock options that could potentially dilute basic earnings (loss) per share in the future, of which there were 21,997,246 and 23,369,871 outstanding on March 31, 2007 and 2006, respectively, that have a weighted average exercise price of $1.26 and $1.78 per share, respectively, were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the periods.
The computation of diluted loss per common share for the three months ended March 31, 2007 and 2006 excludes the assumed conversion of 1,788,009 and 1,500,000 shares, respectively, of convertible preferred stock outstanding at March 31, 2007, and 2006, respectively, from our 2006 capital raising transactions, which are convertible into 24,216,556 and 20,315,802 shares, respectively, of common stock, because the impact of the conversion would be anti-dilutive.
Warrants to purchase 12,270,803 and 10,157,899 shares of common stock outstanding at March 31, 2007 and 2006, respectively, from our 2006 capital raising transactions, were also excluded from the computation of diluted loss per common share because to do so would have been anti-dilutive for the period. The warrants have an exercise price of $0.62 per share.
4. Restricted Cash
Restricted cash of $65,000 at March 31, 2007, and $74,000 at December 31, 2006, is maintained to support various accounts payable activities.
5. Stock-Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. In accordance to this standard, we recognize the compensation cost of all share based awards on a straight-line basis over the vesting period of the award. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123,Accounting for Stock-Based Compensation (“Statement 123”).
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We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Our Condensed Financial Statements as of and for the three months ended March 31, 2007, and 2006, reflect the impact of SFAS 123(R). Under that transition method, compensation cost recognized in the first three months of 2007 and 2006 includes: (a) amortization related to the compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) amortization related to compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
We have three stock-based employee option plans and an ESPP which are described more fully in Note 12 and Note 13, respectively, in our 2006 Annual Report on Form 10-K. As of March 31, 2007, we had approximately 12.8 million shares of common stock reserved for future issuance under the stock option plans and the ESPP.
The adoption of SFAS 123(R) had a significant impact on our results of operations. Our statements of operations for the three months ended March 31, 2007 and 2006 include the following stock-based compensation expense from stock options and ESPP:
(in thousands) | Three Months Ended March 31, 2007 | Three Months Ended March 31, 2006 | ||||
Cost of revenues | $ | 54 | $ | 59 | ||
Sales and marketing | 6 | 5 | ||||
Research and development | 266 | 262 | ||||
General and administrative | 293 | 176 | ||||
Stock-based compensation expense included in operating expenses | 619 | 502 | ||||
Tax benefit | — | — | ||||
Stock-based compensation expense included in net loss | $ | 619 | $ | 502 | ||
TenFold Director Richard H. Bennett resigned from the Board of Directors effective January 2, 2007. On March 12, 2007, the Board of Directors approved extending the exercise period for certain options previously granted to Mr. Bennett, and canceling certain other options. As a result of this option modification, we recognized an option modification charge of $71,000 during the quarter ended March 31, 2007.
Unrecognized stock-based compensation expense expected to be recognized over an estimated weighted-average amortization period of 0.7 year, was $1.7 million, at March 31, 2007.
Share Option Plans
We currently have three stock option plans that allow us to grant nonqualified stock options, stock purchase rights, stock bonus awards, stock appreciation rights, and other equity based awards to employees, including officers and directors, consultants, and non-employee directors. Historically, we have generally only granted nonqualified stock options. The options generally vest over a four- or five-year period and expire ten years from the date of grant.
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Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the three months ended March 31, 2007, and 2006 are shown below:
| Three Months Ended March 31, 2007 | Three Months Ended March 31, 2006 | |||||
Expected volatility | 159 | % | 163 | % | ||
Expected dividends | 0 | % | 0 | % | ||
Expected term | 6.11 Years | 6.11 Years | ||||
Risk-free interest rate | 4.64 | % | 4.41 | % |
The expected volatility rate was estimated based on the historical volatility of our common stock. The expected term was calculated using the SEC “simplified” method as provided for in Staff Accounting Bulletin No. 107. The risk-free interest rates are the rates provided by the U.S Treasury for Daily Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury” rates in effect at the time of grant with a remaining term equal to the expected option term.
The pre-vesting forfeiture rates used for the three months ended March 31, 2007, and March 31, 2006, were based on historical rates and forward-looking factors. As required under SFAS 123(R), we will adjust the estimated forfeiture rates to our actual experience. Prior to adoption of SFAS 123(R), we accounted for forfeitures as they occurred.
A summary of the time-based stock option awards as of March 31, 2007, and changes during the three months then ended, is as follows:
Stock Option Awards | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (years) | Aggregate (000s) | |||||||
Outstanding at January 1, 2007 | 22,168,871 | $ | 1.28 | ||||||||
Granted | 45,000 | 0.34 | |||||||||
Exercised | — | — | |||||||||
Forfeited or expired | (216,625 | ) | 2.71 | ||||||||
Outstanding at March 31, 2007 | 21,997,246 | $ | 1.26 | 6.77 | $ | 3,259 | |||||
Exercisable at March 31, 2007 | 18,748,673 | $ | 1.37 | 6.41 | $ | 2,641 | |||||
The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2007, and March 31, 2006, were $0.33 and $0.28, respectively. Stock-based compensation expense related to stock options recognized under SFAS 123(R) for the three months ended March 31, 2007 and March 31, 2006 were $611,000 and $498,000, respectively. At March 31, 2007, there was $1.7 million of unrecognized stock-based compensation expense related to non-vested options, which is expected to be recognized over a weighted-average period of 0.7 year.
Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan (“ESPP”) was adopted by our Board of Directors and approved by our stockholders in March 1999. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, has two six-month offering periods each year, with new offering periods commencing on February 1 and August 1 of each year. Eligible full-time employees, through payroll deductions, are allowed to purchase a limited number of shares of our common stock during each offering period at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. We account for the ESPP as a compensatory plan and recorded compensation expense for the three months ended March 31, 2007 and March 31, 2006 of $7,600 and $3,600, respectively, in accordance with SFAS 123(R).
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The fair value of issuances under the purchase plan is estimated on the issuance date by applying the principles of FASB Technical Bulletin 97-1,Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option, and using the Black-Scholes valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for our ESPP grants during the three months ended March 31, 2007 and 2006 are shown below:
| Three Months Ended March 31, 2007 | Three Months Ended March 31, 2006 | |||||
Expected volatility | 145 | % | 106 | % | ||
Expected dividends | 0 | % | 0 | % | ||
Expected term | 0.5 Years | 0.5 Years | ||||
Risk-free interest rate | 5.16 | % | 4.6 | % |
The expected volatility rate was estimated based on the historical volatility of our common stock over a six-month period. The expected term is the same as the requisite service period. The risk-free interest rates are the rates provided by the U.S Treasury for Daily Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury” rates in effect at the time of grant with a remaining term equal to the expected term.
During the quarters ended March 31, 2007, and 2006, 62,255 and 56,264 shares of common stock were purchased under the ESPP at an average price of $0.23 and $0.19 per share, respectively. As of March 31, 2007, there was $9,500 of total unrecognized compensation costs related to employee stock plan purchases. These costs are expected to be recognized over a weighted average period of 2.5 months.
6. Income Taxes
We had a provision for income taxes of $5,000 for three months ended March 31, 2007 related to foreign withholding taxes. No provision for income taxes was required for the three months ended March 31, 2006.
At March 31, 2007, management has recognized a valuation allowance for the net deferred tax assets related to temporary differences, foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance was recorded in accordance with the provisions of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more likely than not that the net deferred tax assets will not be realized.
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7. Commitments
We lease office space and equipment under non-cancelable lease agreements, which expire at various dates through 2007. Future minimum lease payments under non-cancelable operating and capital lease obligations, in excess of one year, at March 31, 2007, are as follows (in thousands):
| Total | Operating | Capital | |||||||
2007 | $ | 197 | $ | 193 | $ | 4 | |||
Thereafter | — | — | — | ||||||
Total minimum lease payments | $ | 197 | $ | 193 | 4 | ||||
Less: Amount representing interest | 0 | ||||||||
Present value of net minimum capital lease payments | 4 | ||||||||
Less: Current installments of obligations under capital leases | 4 | ||||||||
Obligations under capital leases, excluding current installments | $ | 0 | |||||||
8. Legal Proceedings and Contingencies
Unresolved Stockholder Matter
On November 6, 2001, a class action complaint alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TenFold, certain of our officers and directors, and certain underwriters of our initial public offering. An amended complaint was filed on April 24, 2002. TenFold and certain of our officers and directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act 1934 on the basis of an alleged failure to disclose the underwriters’ alleged compensation and manipulative practices. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998. The individual officer and director defendants entered into tolling agreements and, pursuant to a Court Order dated October 9, 2002, were dismissed from the litigation without prejudice. On February 19, 2003, the Court granted a Motion to Dismiss the Rule 10b-5 claims against 116 defendants, including TenFold. On June 27, 2003, our Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided, among other things, a release of TenFold and of the individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from TenFold’s insurers regarding recovery from the underwriter defendants and other consideration from TenFold regarding its underwriters. The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. Our case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing. In light of the Second Circuit opinion regarding class certification, we do not believe the proposed settlement can be approved by the district court. We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuit’s mandate. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter.
Assessing litigation
We review litigation claims each quarter to determine the likelihood that the claim will result in a loss. Due to the inherent uncertainties of litigation, predicting the ultimate outcome of litigation is very difficult. Significant management judgment is required
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to conclude on the likely outcome of outstanding litigation. As part of that review, we consider our available insurance coverage. Such coverage is subject to the particular policy’s total limit, and typically subject to the insurer’s standard reservation of rights regarding conditions or findings that might exclude coverage for a particular matter.
If a loss is considered probable on a litigation claim, management estimates the loss and we accrue the estimated loss. If a loss is considered probable but cannot be reasonably estimated, we disclose the contingency in these notes to our financial statements. Losses may however result on litigation claims that are not considered probable or are not estimable at the current time, potentially having a material adverse impact on our future business, results of operations, financial position, or liquidity.
Indemnifications, Warranties, Complaints and Insurance
As permitted under Delaware law, and as provided in agreements with our officers and Directors, we have indemnified officers and Directors for certain claims asserted against them in connection with their service as an officer or Director of TenFold. The maximum potential amount of future payments that we could be required to make under these indemnification provisions is unlimited. However, we have purchased Directors’ and Officers’ insurance policies that reduce our monetary exposure and enable us to recover a portion of any future amounts paid. As a result of this insurance coverage, we believe the estimated fair value of these indemnification agreements is not material.
Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third party patent, copyright, or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including a right to replace an infringing product or cancel the software license and return the fees paid by the customer. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements, and no such claims were outstanding at March 31, 2007. As a result, we have not recorded a liability for infringement costs as of March 31, 2007.
Our agreements with customers also generally provide a warranty that for so long as the customer is paying for support services, our software will materially conform to the related documentation, and that our software has been developed in a workmanlike manner. To date, we have not incurred significant warranty costs. As a result, we have not recorded a liability for warranty costs as of March 31, 2007.
We are subject to various customer complaints or disputes that arise in the ordinary course of business from time-to-time. We do not believe that the ultimate liability, if any, to resolve currently outstanding complaints or disputes will have a material impact on our future business, results of operations, financial position, or liquidity.
We have an industry-standard, errors and omissions insurance policy. This policy excludes contractual related disputes such as cost and time guarantees, and only covers software errors or omissions that occur after the delivery of software. We believe this policy provides adequate coverage for potential damages related to errors and omissions in our delivered software.
9. Operating Segments
Our CEO reviews financial information on a consolidated basis, similar in format to the accompanying Statements of Operations. We consolidate revenue and expense information for all business groups for internal and external reporting and for decision-making purposes. We operate in a single operating segment, which is applications products and services.
Revenues from customers outside of North America were approximately 6 percent of total revenues for the three months ended March 31, 2007 as compared to 17 percent of total revenues for the same period in 2006. The decrease in the percentage results primarily from growth in revenues from customers located in North America. Our long-lived assets are deployed in the United States.
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Five customers accounted for a total of 60 percent of our revenues for the three months ended March 31, 2007 (individually 15 percent, 15 percent, 10 percent, 10 percent, and 10 percent of our total revenues) compared to two customers accounting for a total of 39 percent of our total revenues for the same period in 2006 (individually 20 percent and 19 percent of our total revenues). No other single customer accounted for more than 10 percent of our total revenues for the three months ended March 31, 2007 or the same period in 2006.
10. Recent Accounting Pronouncements
On January 1, 2007, we adopted SFAS No. 155,Accounting for Certain Hybrid Instruments, which amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted SFAS No. 156,Accounting for Servicing of Financial Assets to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Additionally, SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, although early adoption is permitted. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted Emerging Issues Task Force Issue, or EITF, No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-3 requires that, for interim and annual reporting periods beginning after December 15, 2006, we disclose our policy related to the presentation of sales taxes and similar assessments related to our revenue transactions. Early adoption is permitted. EITF No. 06-3 has had no effect on our financial position and results of operations.
On January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, de-recognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Our adoption of this new standard has had no impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted SFAS No. 157Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
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On January 1, 2007, we adopted SFAS No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R). SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions), and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. As we do not have any defined benefit postretirement plans, our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted FASB Staff Position (FSP) Emerging Issues Task Force (“EITF”) 00-19-2, “Accounting for Registration Payment Arrangements,” which requires an issuer to account for a contingent obligation to transfer consideration under a registration payment arrangement in accordance with FASB Statement No. 5,Accounting for Contingencies and FASB Interpretation 14,Reasonable Estimation of the Amount of Loss. Registration payment arrangements are frequently entered into in connection with issuance of unregistered financial instruments, such as equity shares or warrants. A registration payment arrangement contingently obligates the issuer to make future payments or otherwise transfer consideration to another party if the issuer fails to file a registration statement with the SEC for the resale of specified financial instruments or fails to have the registration statement declared effective within a specific period. The FSP requires issuers to make certain disclosures for each registration payment arrangement or group of similar arrangements. The FSP is effective immediately for registration payment arrangements and financial instruments entered into or modified after the FSP’s issuance date. For previously issued registration payment arrangements and financial instruments subject to those arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting the provisions of SFAS No. 159.
11. Related Person Transactions
During 2005, we entered into agreements with a new customer, DevonWay, to provide licenses, consulting services, technical support services, and training. Our Chairman, CEO and President, Robert W. Felton, is the founder and majority shareholder of DevonWay. All disinterested members of our Board of Directors approved of the related party transactions and general ongoing business relationship with DevonWay.
Our revenues from DevonWay for the three months ended March 31, 2007, and 2006 were $8,300 and $23,300, respectively. For the three months ended March 31, 2007, and 2006, we received cash inflows from DevonWay of $0 and $31,800, respectively. As of March 31, 2007 and 2006, we had no accounts receivable due from DevonWay. For the three months ended March 31, 2007 and 2006, we paid fees to DevonWay of $0 and $9,400, respectively, for marketing-related services. During late 2006 and continuing into 2007, DevonWay provided a consulting staff to us for use on one of our projects. For the three months ended March 31, 2007, we paid fees to DevonWay of $31,200, for such consulting services. (No such fees were paid during the three months ended March 31, 2006 because we did not engage the DevonWay consulting staff until the fourth quarter of 2006.) As of March 31, 2007, and 2006, we had accounts payable due to DevonWay of $20,200 and $2,800, respectively.
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12. Capital Stock
During the three months ended March 31, 2007, the number of shares of common stock outstanding increased by 387,307, from the conversion of 24,000 shares of convertible preferred stock into 325,052 shares of common stock, and from 62,255 shares issued under our Employee Stock Purchase Plan.
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Business Overview
TenFold provides services and technology for building complex, Service Oriented Architecture (“SOA”)-compliant, enterprise-scale applications in significantly less time and cost than it would otherwise take using traditional development technologies. We believe that with our technology, EnterpriseTenFold SOA, customers will also experience significantly reduced ongoing applications maintenance and enhancement costs compared to what they generally experience with legacy applications.
Our business model focuses on providing applications development services and our EnterpriseTenFold SOA product, along with product support and training, to customers who can use a TenFold team or their own business teams to build and maintain applications.
At the end of 2005, we replaced our former Chief Executive Officer, with long-time TenFold director and shareholder, Robert W. Felton. Under his leadership, we have changed our business model to focus on selling larger consulting projects, instead of the smaller prototype application projects that we primarily sold in 2005. We believe that providing larger consulting projects (that include the full breadth of applications consulting from applications design through production implementation) will be a more successful model for both our customers and us. We believe that some of our earlier customers would have been more successful with their projects with more consulting assistance than they chose to purchase under our prior business model. During 2006 and the first three months of 2007, we made progress closing new sales to both existing and new customers, began new consulting projects, and generally improved our cash flow. However, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations, or profitability. As a result, increasing sales further remains a key goal, and until we do so, we are likely to continue to experience negative cash flow from operations and losses. If we do not close significant future sales, our existing cash resources will not be sufficient to fund our operations beyond the third quarter of 2007.
Results of Operations
For the first three months of 2007, we had revenues of $1.8 million, an operating loss of $964,000, and a net loss of $932,000. This compares to revenues of $599,000, an operating loss of $1.9 million, a net loss of $1.9 million, and a net loss applicable to common shareholders of $3.7 million for the same period in 2006.
The following table sets forth, for the periods indicated, the percentage relationship of selected items from our statements of operations to total revenues.
| Three Months Ended March 31, | ||||||
| 2007 | 2006 | |||||
Revenues: | ||||||
License | 7 | % | 15 | % | ||
Services and other | 93 | % | 85 | % | ||
Total revenues | 100 | % | 100 | % | ||
Operating expenses: | ||||||
Cost of revenues | 51 | % | 98 | % | ||
Sales and marketing | 11 | % | 32 | % | ||
Research and development | 53 | % | 187 | % | ||
General and administrative | 38 | % | 102 | % | ||
Total operating expenses | 153 | % | 419 | % | ||
Loss from operations | (53 | %) | (319 | %) | ||
Total other income, net | 2 | % | (2 | %) | ||
Loss before income taxes | (51 | %) | (321 | %) | ||
Provision (benefit) for income taxes | — | — | ||||
Net loss | (51 | %) | (321 | %) | ||
Deemed dividend related to warrants issued with | ||||||
Preferred stock and beneficial conversion feature on preferred stock | — | (294 | %) | |||
Net loss applicable to common shareholders | (51 | %) | (615 | %) | ||
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Revenues
Total revenues increased $1.2 million, or 204 percent, to $1.8 million for the three months ended March 31, 2007, as compared to $599,000 for the same period in 2006.
Services and other revenues increased $1.2 million, or 231 percent, to $1.7 million for the three months ended March 31, 2007 as compared to $512,000 for the same period in 2006. The increase in services and other revenues is primarily due to our providing more time-and-materials consulting services during the three months ended March 31,2007, than in the same period in 2006, resulting from our sales of new consulting projects during the latter part of 2006 and into 2007.
License revenues increased $40,000, or 46 percent, to $127,000 for the three months ended March 31, 2007, as compared to $87,000 for the same period in 2006. The increase in license revenue is due primarily to larger sized license sales in 2007 than in the same period in 2006.
Revenues from customers outside of North America were approximately 6 percent of total revenues for the three months ended March 31, 2007 as compared to 17 percent of total revenues for the same period in 2006. The decrease in the percentage results primarily from growth in revenues from customers located in North America. Our long-lived assets are deployed in the United States.
Five customers accounted for a total of 60 percent of our revenues for the three months ended March 31, 2007 (individually 15 percent, 15 percent, 10 percent, 10 percent, and 10 percent of our total revenues) compared to two customers accounting for a total of 39 percent of our total revenues for the same period in 2006 (individually 20 percent and 19 percent of our total revenues). No other single customer accounted for more than 10 percent of our total revenues for the three months ended March 31, 2007 or the same period in 2006.
We continue to market actively to new and existing customers. We made progress closing new sales to both existing and new customers and began new consulting projects in 2006 and 2007. However, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations or profitability. We continue to face a challenging sales environment. As a result, it is unclear if or when we can expect to close significant sales to new or existing customers, and until we repeatedly do so we are likely to continue to experience negative cash flow from operations and losses.
Operating Expenses
Cost of Revenues.Cost of revenues consists primarily of compensation and other related costs of personnel and contractors to provide applications development and implementation consulting, support, and training services. Cost of revenues increased $339,000, or 58 percent, to $925,000 for the three months ended March 31, 2007 compared to $586,000 for the same period in 2006. The increase in cost of revenues is due primarily to having more staff working on more customer projects in 2007. The significant improvement in gross margin percentage reflects benefit from our increased revenues and greater utilization of our existing staff.
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Sales and Marketing.Sales and marketing expenses consist primarily of compensation, travel, and other related expenses for sales and marketing personnel and contractors; and the cost of website development, collateral production and other marketing activities. Sales and marketing expenses increased $16,000, or 8 percent, to $207,000 for the three months ended March 31, 2007 as compared to $191,000 for the same period in 2006.
Research and Development.Research and development expenses consist primarily of compensation and other related costs of personnel dedicated to research and development activities. Research and development expenses decreased $158,000, or 14 percent, to $965,000 for the three months ended March 31, 2007, as compared to $1.1 million for the same period in 2006. The decrease in research and development expenses is due primarily to more costs being allocated out of research and development to cost of revenues as more research and development staff worked on billable projects during the three months ended March 31, 2007, than in the same period in 2006.
General and Administrative.General and administrative expenses consist primarily of the costs of executive management, finance and administrative staff, business insurance, and professional fees. General and administrative expenses increased $78,000, or 13 percent, to $690,000 for the three months ended March 31, 2007 as compared to $612,000 for the same period in 2006. The increase is due primarily to an option modification charge related to stock-based compensation for a director that resigned on January 2, 2007. See Note 5 of Notes to Condensed Financial Statements for more information on stock-based compensation expenses.
Total Other Income, net
Net total other income was income of $37,000 for the three months ended March 31, 2007, as compared to a loss of $11,000 for the same period in 2006.
Provision for Income Taxes
We had a provision for income taxes of $5,000 for three months ended March 31, 2007 related to foreign withholding taxes. No provision for income taxes was required for the three months ended March 31, 2006.
At March 31, 2007, management has recognized a valuation allowance for the full amount of the net deferred tax assets related to temporary differences, foreign tax credit carryforwards and net operating loss carryforwards. The valuation allowance was recorded in accordance with the provisions of SFAS No. 109,Accounting for Income Taxes, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. Based on a number of factors, the currently available, objective evidence indicates that it is more likely than not that the net deferred tax assets will not be realized.
Deemed dividend related to convertible preferred stock
As a result of the warrants sold with the convertible preferred stock and the beneficial conversion feature inherent in the conversion rights and preferences of the convertible preferred stock issued in March 2006, we recognized a non-cash deemed dividend of $1,761,000 during the three months ended March 31, 2006. This deemed dividend was calculated based on the conversion price compared to the market price on the date of issuance of the convertible preferred shares.
Balance Sheet Items
Accrued liabilities. Accrued liabilities decreased $375K, or 33 percent, to $767,000 at March 31, 2007, from $1.1 million at December 31, 2006. The decrease is primarily due to the final cash severance payment made to our prior CEO, required under the Separation Agreement and Release dated May 19, 2006.
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Additional paid-in capital. Additional paid in capital increased by $634K, or 1 percent, to $87.1 million at March 31, 2007, from $86.4 million at December 31, 2006. The increase is primarily due to stock-based compensation expense of $619,000. See Note 5 of Notes to Condensed Financial Statements for more information.
Critical Accounting Policies
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, management has identified the “critical accounting policies” below. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
Revenue Recognition and Project Profitability
We believe risks relating to revenue recognition include the judgment required to determine project profit or loss projections on time-and-material contracts. We recognize time-and-materials revenue at the lowest point in the range of estimated profit margin, which represents our best estimate of the profit to be achieved. Variances may occur if we are unable to collect time-and-materials billings or if we grant concessions to time-and-materials customers in order to sell additional business or collect cash under the contract. As we occasionally provide services on a fixed price basis, risks relating to revenue recognition also include the judgment and estimation required to determine fixed-price project completion percentages, and fixed-price project profit or loss projections. Variances between management’s estimates and actual results may result in significant adjustments to our results of operations and financial position.
Stock-Based Compensation
In accordance with SFAS 123(R), we measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee roles, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates. See Note 5 of Notes to Condensed Financial Statements for more information.
Litigation Reserves
We review asserted litigation claims each quarter to determine the likelihood that the claim will result in a loss. Significant management judgment is required to conclude on the likely outcome of outstanding litigation. If a loss is probable on a litigation claim, management estimates the loss and we accrue the estimated loss. If a loss is considered probable but cannot be reasonably estimated, we disclose the contingency in the notes to our financial statements. Losses may result on litigation claims that are not considered probable or are not estimable at the current time, potentially having a significant impact on future financial results.
Liquidity and Capital Resources
Net cash used in operating activities was $464,000 for the three months ended March 31, 2007 as compared to $1.6 million for the same period in 2006.
Net cash used in investing activities was $2,000 for the three months ended March 31, 2007 as compared to $5,000 for the same period in 2006.
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Net cash provided by financing activities was $9,000 for the three months ended March 31, 2007 as compared to $5.5 million for the same period in 2006. Net cash provided by financing activities for the three months ended March 31, 2006 included $6.1 million of net proceeds from the sale of convertible preferred stock and warrants, $500,000 from issuance of notes payable, less $1.1 million in principal payments on notes payable which were repaid in full upon closing our capital raising transaction in March 2006.
Our deferred revenue balance generally results from contractual commitments made by customers to pay amounts to us in advance of revenues earned. We had deferred revenue balances of $1.4 million at March 31, 2007 and $1.4 million at December 31, 2006. When, over time, we recognize these deferred revenue balances as revenues in the statement of operations, we will not have corresponding increases in cash, as the related cash amounts have previously been received by us. Our unbilled accounts receivable represents revenue that we have earned but which we have not yet billed.
As of March 31, 2007, our principal source of liquidity was our cash and cash equivalents of $3.1 million. Although we have made progress closing new sales to both existing and new customers in 2006 and 2007, and generally improved our cash flow, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations, or profitability. As a result, significant challenges and risks remain:
| • | We have not been able to generate positive cash flow from operations for the four years ended December 31, 2006, or the three months ended March 31, 2007. Our net cash used in operating activities was $464,000 for the three months ended March 31, 2007, and $4.4 million for the year ended December 31, 2006. |
| • | We have experienced difficulty closing substantial new sales, and it is unclear when or if we can expect to predictably close material sales to new or existing customers, and to achieve and sustain positive cash flow from operations. Under the leadership of our new Chief Executive Officer, Robert W. Felton, we changed our business model to focus on selling larger consulting projects, instead of the smaller prototype application projects that we primarily sold in 2005. Although we expect to be more successful with this new model, our experience with the new model is limited. We made progress closing new sales to both existing and new customers, began new consulting projects in 2006 and 2007, and generally improved our cash flow. However, such sales have not been sufficient or consistent enough to generate sustained positive cash flow from operations, or profitability. There can be no assurance that we will be successful closing sufficient new sales. If we do not close significant future sales, our existing cash resources will not be sufficient to fund our operations beyond the third quarter of 2007. |
Disclosure about Contractual Obligations
The following table sets forth certain contractual obligations recorded in the condensed financial statements as of March 31, 2007 and summary information is presented in the following table (in thousands):
Contractual Obligations | Total | Less year | 1-3 years | 4-5 years | More than 5 years | |||||
Long-term debt | $— | $— | $— | $— | $— | |||||
Capital lease obligations | 4 | 4 | — | — | — | |||||
Operating lease obligations | 193 | 193 | — | — | — | |||||
Purchase obligations | 102 | 102 | — | — | — | |||||
Other long term liabilities reflected on the registrant’s Balance Sheet under GAAP | — | — | — | — | — | |||||
Total | $299 | $299 | $— | $— | $— | |||||
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Related Person Transactions
During 2005, we entered into agreements with a new customer, DevonWay, to provide licenses, consulting services, technical support services, and training. Our Chairman, CEO and President, Robert W. Felton, is the founder and majority shareholder of DevonWay. All disinterested members of our Board of Directors approved of these related person transactions and our general ongoing business relationship with DevonWay.
Our revenues from DevonWay for the three months ended March 31, 2007, and 2006 were $8,300 and $23,300, respectively. For the three months ended March 31, 2007, and 2006, we received cash inflows from DevonWay of $0 and $31,800, respectively. As of March 31, 2007 and 2006, we had no accounts receivable due from DevonWay. For the three months ended March 31, 2007 and 2006, we paid fees to DevonWay of $0 and $9,400, respectively, for marketing-related services. During late 2006 and continuing into 2007, DevonWay provided a consulting staff to us for use on one of our projects. For the three months ended March 31, 2007, we paid fees to DevonWay of $31,200, for such consulting services. (No such fees were paid during the three months ended March 31, 2006 because we did not engage the DevonWay consulting staff until the fourth quarter of 2006.) As of March 31, 2007, and 2006, we had accounts payable due to DevonWay of $20,200 and $2,800, respectively.
Recent Accounting Pronouncements
On January 1, 2007, we adopted SFAS No. 155,Accounting for Certain Hybrid Instruments, which amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted SFAS No. 156,Accounting for Servicing of Financial Assets to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Additionally, SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, although early adoption is permitted. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted Emerging Issues Task Force Issue, or EITF, No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-3 requires that, for interim and annual reporting periods beginning after December 15, 2006, we disclose our policy related to the presentation of sales taxes and similar assessments related to our revenue transactions. Early adoption is permitted. EITF No. 06-3 has had no effect on our financial position and results of operations.
On January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, de-recognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income tax assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Our adoption of this new standard has had no impact on our financial position, results of operations or cash flows.
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On January 1, 2007, we adopted SFAS No. 157Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted SFAS No. 158,Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R). SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s over funded status or a liability for a plan’s under funded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions), and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. As we do not have any defined benefit postretirement plans, our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
On January 1, 2007, we adopted FASB Staff Position (FSP) Emerging Issues Task Force (“EITF”) 00-19-2, “Accounting for Registration Payment Arrangements,” which requires an issuer to account for a contingent obligation to transfer consideration under a registration payment arrangement in accordance with FASB Statement No. 5,Accounting for Contingencies and FASB Interpretation 14,Reasonable Estimation of the Amount of Loss. Registration payment arrangements are frequently entered into in connection with issuance of unregistered financial instruments, such as equity shares or warrants. A registration payment arrangement contingently obligates the issuer to make future payments or otherwise transfer consideration to another party if the issuer fails to file a registration statement with the SEC for the resale of specified financial instruments or fails to have the registration statement declared effective within a specific period. The FSP requires issuers to make certain disclosures for each registration payment arrangement or group of similar arrangements. The FSP is effective immediately for registration payment arrangements and financial instruments entered into or modified after the FSP’s issuance date. For previously issued registration payment arrangements and financial instruments subject to those arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006. Our adoption of this new standard has not had a material impact on our financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting the provisions of SFAS No. 159.
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Reference is made to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” appearing on page 40 of our 2006 Annual Report on Form 10-K for information relating to our interest rate and currency rate risks. There have been no material changes in such risks through March 31, 2007.
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Except as listed below, other items in Part II are omitted because the items are inapplicable or require no response.
See Part I, Item 1, Note 8 of Notes to Condensed Financial Statements for a description of legal proceedings.
Reference is made to Part I, Item 1A “Risk Factors,” beginning on page 18 of TenFold’s 2006 Annual Report on Form 10-K for information relating to TenFold’s risk factors. There have been no material changes in such risks through March 31, 2007.
The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, results of operations or cash flows.
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| (a) | Exhibits |
Number | Description | |
11* | Computation of Shares used in Computing Basic and Diluted Net Loss Per Share. | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Incorporated by reference to “Notes to Financial Statements” herein |
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Pursuant to the requirements 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.
TenFold Corporation |
/s/ Robert W. Felton |
| Robert W. Felton |
| Chairman of the Board of Directors, President, and Chief Executive Officer (Principal Executive Officer) |
| May 3, 2007 |
/s/ Robert P. Hughes |
| Robert P. Hughes |
| Chief Financial Officer and Chief of Staff (Principal Financial and Accounting Officer) |
| May 3, 2007 |
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