The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. We license our software through our direct sales force in the United States, Asia Pacific, Europe and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide.
Total revenues in the second quarter of fiscal 2010 were $7.1 million, an increase of $1.3 million from the second quarter of fiscal 2009. This represents an increase of 22% from the second quarter of fiscal 2009 revenues of $5.8 million. While the Company continued to feel the impact of the world-wide slowdown in the economic environment in the second quarter of 2010 there was a noticeable increase in sales activity in most parts of the world compared to the first quarter of 2010. While total revenue in the second quarter was up compared to the first quarter, the Company is not experiencing as large a number of high dollar value orders being placed as it has in prior years. Late in the second quarter of 2010 the Company released a new version of its Team Developer product. We expect sales of this product to increase during the remainder of the fiscal year. Total software license revenues in the second quarter of fiscal 2010 were $1.4 million, a decrease of $0.6 million from the second quarter of fiscal 2009. This represents a decrease of 29% over the second quarter of fiscal 2009 revenues of $2.0 million. Total services revenues in the second quarter of fiscal 2010 and 2009 were $4.0 million and $3.2 million, respectively. The increase in services revenue primarily related to the services revenue generated by AXS-One. Total migration solutions revenue in the second quarter of fiscal 2010 was $1.7 million compared to $0.6 million for the second quarter of fiscal 2009. The increase in migration solutions revenue was primarily related to a multi-million dollar database migration project for a governmental entity.
For the second quarter of fiscal 2010 and 2009, total revenues from the United States were 43% and 28% of total revenues, respectively. Total revenue from the United States in absolute dollars was $3.0 million for the second quarter of fiscal 2010 and $1.6 million for the second quarter of fiscal 2009. Total revenue from all other countries was $4.1 million in the second quarter of fiscal 2010 and $4.2 million for the second quarter of fiscal 2009. On a percentage basis, revenue from other countries was 57% for the second quarter of fiscal 2010 and 72% 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 $51,000 and $89,000 for the second quarter of fiscal 2010 and fiscal 2009, respectively. The decrease in cost of software licenses represents a decrease in software royalty payments. For the first six months ended October 31, 2009 and 2008, cost of software licenses was $145,000 and $139,000, respectively.
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 services. Cost of services was $773,000 and $298,000 for the second quarter of fiscal 2010 and fiscal 2009, respectively. For the first six months ended October 31, 2009 and 2008, cost of services was $1,210,000 and $548,000, respectively. The increase in cost of services for both the three months and six months ended October 31, 2009 was due primarily to the addition of AXS-One employees.
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 $653,000 and $358,000 for the second quarter of fiscal 2010 and fiscal 2009, respectively. For the six months ended October 31, 2009 and 2008, cost of migration solutions was $716,000 and $518,000, respectively. The increase in cost of migration solutions for both the three and six months ended October 31, 2009 was primarily due to a large migration project in the current year.
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 the second quarter of fiscal 2010 were $1.7 million compared to $0.7 million in the same period of fiscal 2009. For the six months ended October 31, 2009 and 2008, product development expenses were $3.2 million and $1.4 million, respectively. The increase in product development expenses 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.
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 $5.1 million in the second quarter of fiscal 2010 and $3.3 million for the second quarter of fiscal 2009. The major components of SG&A for the second quarter of fiscal 2010 were sales expenses of $2.6 million, marketing expenses of $0.4 million and general and administrative expenses of $2.1 million. For the second quarter of fiscal 2009, the major components of SG&A were sales expenses of $1.6 million, marketing expenses of $0.3 million and general and administrative expenses of $1.4 million. In the six months ended October 31, 2009 and 2008, our SG&A expenses were $9.9 million and $6.7 million, respectively. The major components of SG&A for the six month period ended October 31, 2009 were sales expenses of $4.8 million, marketing expenses of $0.7 million and general and administrative expenses of $4.4 million. The major components of SG&A for the six month period ended October 31, 2008 were sales expenses of $3.3 million, marketing expenses of $0.5 million and general and administrative expenses of $2.9 million. The increase in SG&A expenses in fiscal 2010 was primarily the result of expenses incurred related to our acquisition of CipherSoft in January 2009 and our acquisition of AXS-One in June 2009.
Other Income (Expense), Net. Other income (expense), net consists primarily of interest expense, foreign exchange gains and losses and other income. Interest expense for the second quarter of fiscal 2010 and 2009 was $66,000 and $41,000, respectively. For the six months ended October 31, 2009 and 2008, interest expense was $124,000 and $87,000, respectively. 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. Foreign exchange rate losses for the second quarter of fiscal 2010 were $13,000. Foreign exchange rate losses in the second quarter of fiscal 2009 were $119,000. Foreign exchange rate gains for the six months ended October 31, 2009 were $64,000. Foreign exchange rate losses for the six months ended October 31, 2008 were $110,000. Other income for the second quarter of fiscal 2010 and 2009 was $1,000 and $0, respectively. Other income for the six months ended October 31, 2009 was $61,000. Other income for the six months ended October 31, 2008 was $19,000.
Provision for Income Taxes.For the second quarter of fiscal 2010, the Company recorded $58,000 in foreign withholding tax expense. For the second quarter of fiscal 2009, the Company recorded $156,000 in federal and state income tax expenses. For the six months ended October 31, 2009 the Company recorded $66,000 in foreign withholding tax expense. For the six months ended October 31, 2008, the Company recorded $188,000 in federal and state income tax expenses.
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Liquidity and Capital Resources
At October 31, 2009, the Company had cash and cash equivalents of $2.2 million, compared to $6.1 million at April 30, 2009. The decrease in cash from April 30, 2009 to October 31, 2009 was primarily the result of payments on obligations related to the June 30, 2009 acquisition of AXS-One. The Company had net accounts receivable of $9.3 million as of October 31, 2009, and $4.5 million as of April 30, 2009.
As of October 31, 2009 the Company has various notes payable outstanding in the amount of $2.1 million of which $1.7 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 October 31, 2009 there is $350,000 outstanding on the revolving line of credit.
We believe the existing cash balance of $2.2 million as of October 31, 2009, along with forecasted operating cash flows and the revolver credit facility, will provide us with sufficient working capital for us to meet our operating needs for the next 12 months. Our operating plan assumes normal operations for the Company and the required debt service payments.
In fiscal 2010, we plan to increase the marketing of our Composer product lines and we also anticipate releasing new versions of some of our Rapid Application Development Products as well as our Database Management Products. Additionally, as a result of our purchase of AXS-One we expect to offer our integrated content archiving solutions through our distribution channels andaccelerate direct and channel sales in fiscal 2010. The fiscal 2010 plan requires few additional strategic investments in sales, marketing or implementation services.
Operating Cash Flow. For the first six months of fiscal year 2010 cash used by operations was $3.9 million. This compares to cash flows provided by operations of $0.8 million for the first six months of fiscal 2009. Cash flows used by operations for the first six months of fiscal 2010 principally resulted from a net loss of $3.6 million, an increase in accounts receivable of $4.0 million, a decrease in accounts payable of $1.4 million, a decrease in accrued compensation and related expenses of $0.3 million, a decrease in other accrued liabilities of $1.2 million, and a decrease in other long term liabilities of $0.2 million. Offsetting these amounts was an increase in deferred revenue of $4.8 million, a decrease in prepaid expenses and other current assets of $0.5 million, amortization of intangible assets of $1.2 million, depreciation of $0.1 million and stock based compensation expense of $0.3 million.
Cash flows provided by operations for the first six months of fiscal 2009 principally resulted from $1.1 million in net income, amortization of intangible assets of $0.4 million, stock based compensation expense of $0.3 million, a decrease of $0.3 million in accounts receivable, an increase of $0.1 million in accounts payable and an increase of $0.3 million in other accrued liabilities. Offsetting these amounts was an increase of $0.1 million of prepaid expenses and other current assets, a decrease of $0.4 million of accrued compensation and related expenses and a decrease of $1.3 million in deferred revenue.
Investing Cash Flows. Cash flow from investing activities was $30,000 for the first six months of fiscal 2010 and was primarily the result of cash gained in the acquisition of AXS-One. Net cash used in investing activities for the first six months of fiscal 2009 was $261,000 and was the result of the purchase of property and equipment of $151,000 and payments on acquisition obligations of $110,000.
Financing Cash Flows. Net cash used in financing activities for the first six months of fiscal 2010 was $366,000. Cash from financing activities was the result of proceeds from debt obligations of $350,000. Offsetting this amount was $716,000 of principal payments on debt obligations. Net cash used in financing activities for the first six months of fiscal 2009 was $11,000.
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A summary of certain contractual obligations as October 31, 2009 is as follows (in thousands):
| | | Payments Due by Period |
| | | | | | 1 year | | 2-3 | | 4-5 | | After 5 |
| Contractual Obligations | | Total | | or less | | years | | years | | years |
| Long-term debt | | $ | 2,476 | | $ | 1,688 | | $ | 788 | | | — | | | — |
| Estimated interest expense | | | 50 | | | 46 | | | 4 | | | — | | | — |
| Other liabilities | | | 1,086 | | | 994 | | | — | | | 92 | | | — |
| Capital leases | | | 77 | | | 45 | | | 32 | | | — | | | — |
| Operating leases | | | 5,115 | | | 1,457 | | | 2,671 | | | 697 | | | 290 |
| Total contractual cash obligations | | $ | 8,804 | | $ | 4,230 | | $ | 3,495 | | $ | 789 | | $ | 290 |
Other liabilities primarily include contractual severance payments related to the AXS-One acquisition.
Stock Repurchase Plan.On December 1, 2009, the Company announced that its Board of Directors had approved a stock repurchase program authorizing the repurchase of up to 300,000 shares of its common stock. Under the program, shares may be repurchased from time to time in open market transactions at prevailing market prices or in privately negotiated purchases. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, alternative investment opportunities, and other market and economic conditions. Repurchases under the program will be funded from available working capital. The program may be commenced, suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice. No shares have been repurchased as of the date of this report.
Volatility of Stock Price and General Risk Factors Affecting Quarterly Results
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; developments in our relationships with our customers, distributors and suppliers; legal proceedings brought against the Company or its officers; significant changes in our senior management team; and our proposed stock repurchase program. 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.
Unify’s stock began trading on the NASDAQ under the symbol UNFY on August 25, 2008. Previously the Company’s shares traded over-the-counter on the “bulletin board.” Even though the Company has moved to a larger exchange with the NASDAQ, we do not receive any analyst coverage, the Company’s shares are still thinly traded and our stock is considered to be a micro-cap stock. Our stock is therefore subject to greater price volatility than larger companies whose stock trades more actively.
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 integrate acquisitions; our ability to attract, integrate 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 varies 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. We expect that our operating results will continue to be affected by the continually challenging IT economic environment as well as by seasonal trends.
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Item 3. 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 $2.2 million as of October 31, 2009. Unify had no short-term investments at October 31, 2009.
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 October 31, 2009, 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 intercompany accounts receivable and intercompany accounts payable related to activities with the Company’s operations in France, Germany, UK, Australia, Singapore and Canada. At October 31, 2009, the Company had $2.2 million in such payables denominated in Euros and U.S. dollars, and a total $5.0 million in receivables denominated in Euros, Canadian dollars, U.S. dollars and pounds sterling. 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 on intercompany balances 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 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report.
(b)Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the first six months of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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UNIFY CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
The Company is subject to legal proceedings and claims arising in the ordinary 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 October 31, 2009, 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.
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Item 6. Exhibits
| | Exhibits |
| 31.1 | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2 | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 | | Certification of Chief Executive Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 | | Certification of Chief Financial Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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UNIFY CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: December 11, 2009 | Unify Corporation |
| | (Registrant) |
| |
| | By: |
| |
| | /s/ STEVEN D. BONHAM |
| | Steven D. Bonham |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
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