Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended January 31, 2008, for Forgent Networks, Inc. (trading as Asure Software, ticker: ASUR). The company operates primarily in two segments: Software & Professional Services and Intellectual Property Licensing. In October 2007, the company acquired iSarla Inc. (doing business as iEmployee), a workforce management software provider, to expand its Software & Services segment. The company is currently a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Jan 31, 2008 | Six Months Ended Jan 31, 2008 | Three Months Ended Jan 31, 2007 | Six Months Ended Jan 31, 2007 |
|---|---|---|---|---|
| Total Revenue | $2.73 million | $4.61 million | $1.05 million | $10.14 million |
| Gross Margin | $2.11 million (77%) | $3.65 million (79%) | $0.85 million (81%) | $6.10 million (60%) |
| Net (Loss) Income | $(1.48) million | $(2.40) million | $1.30 million | $4.05 million |
| Diluted EPS | $(0.05) | $(0.08) | $0.05 | $0.16 |
| Cash & Equivalents | $13.94 million (Jan 31, 2008) $33.52 million (July 31, 2007) |
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| Short-term Investments | ||||
| Total Current Assets | $19.68 million | |||
| Total Current Liabilities | $6.61 million | |||
| Working Capital | $13.07 million | |||
| Accumulated Deficit | $(240.91) million |
Material Changes vs. Prior Period
- Revenue Composition Shift: Total revenue for the six months ended Jan 31, 2008, decreased significantly compared to the prior year ($4.61M vs. $10.14M). This is primarily due to the cessation of Intellectual Property Licensing revenues ($8.16M in the prior year period vs. $0 in the current period) following the conclusion of patent litigations. Conversely, Software & Services revenue increased 133% year-over-year ($4.61M vs. $1.98M), driven by the iEmployee acquisition and growth in SaaS subscriptions.
- Profitability: The company reported a net loss of $2.40 million for the six months ended Jan 31, 2008, compared to net income of $4.05 million in the prior year. The prior year income was heavily influenced by a $2.9 million one-time gain on the sale of assets (patents) and licensing revenues, neither of which occurred in the current period.
- Cash Flow: Operating cash flow turned negative, with a use of $10.59 million for the six months ended Jan 31, 2008, compared to a provision of $2.44 million in the prior year. This was driven by the net loss and a significant reduction in accounts payable ($8.14 million decrease), largely due to the payment of $7.4 million in legal contingency fees related to prior patent settlements.
- Acquisition Impact: The acquisition of iEmployee resulted in $7.14 million in goodwill and $4.96 million in intangible assets. Operating expenses increased due to the integration of iEmployee's workforce and increased sales/marketing efforts.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects revenues to continue increasing as the company integrates iEmployee operations and expands its sales force. Gross margins are expected to improve in total dollars but remain relatively consistent as a percentage of revenue.
- Liquidity: As of Jan 31, 2008, the company held $17.8 million in cash, cash equivalents, and short-term investments. Management believes this is sufficient to fund operations for the next 12 months, though future capital raises may be necessary for acquisitions or if cash consumption exceeds expectations.
- Legal Contingencies:
- Jenkens & Gilchrist Litigation: Former legal counsel is suing for $3.4 million in fees (company believes $1.4 million is owed). A motion for summary judgment hearing occurred in March 2008; the outcome is pending and could materially impact financial statements.
- Wild Basin Litigation: The company is suing its landlord for breach of contract and fraud regarding a lease assignment, with a trial scheduled for May 2008.
- Delisting Risk: On Feb 4, 2008, the company received a Nasdaq deficiency letter because its stock price closed below $1.00 for 30 consecutive days. The company has until August 4, 2008, to regain compliance or face delisting.
- Internal Controls: Due to the iEmployee acquisition, the company has not yet tested the operating effectiveness of internal controls for the acquired entity and will not report on them until the fiscal 2008 10-K.
Investor Verification Checklist
- Legal Exposure: Verify the outcome of the Jenkens & Gilchrist summary judgment motion, as a loss could result in a $2 million+ liability.
- Stock Listing Status: Monitor the company's ability to maintain a $1.00 share price to avoid Nasdaq delisting by August 2008.
- Revenue Sustainability: Assess whether the growth in Software & Services revenue can offset the permanent loss of Intellectual Property Licensing revenue.
- Cash Burn Rate: Review future cash flow projections given the negative operating cash flow and the $240.9 million accumulated deficit.
- Integration Risks: Evaluate the progress of integrating iEmployee's operations and the realization of anticipated synergies.