Business Context and Reporting Period
Company: Forgent Networks, Inc. (trading as Asure Software, ticker: ASUR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2008
Business Overview: The company operates in two segments: Software & Services and Intellectual Property Licensing. In October 2007, the company acquired iSarla Inc. (doing business as iEmployee), a workforce management SaaS provider, to expand its software offerings. The company has ceased generating revenue from its intellectual property licensing segment following the conclusion of patent litigations in fiscal year 2007.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Apr 30, 2008 |
3 Months Ended Apr 30, 2007 |
9 Months Ended Apr 30, 2008 |
9 Months Ended Apr 30, 2007 |
|---|---|---|---|---|
| Total Revenue | $2,707 | $20,978 | $7,316 | $31,119 |
| Gross Margin | $2,068 (76%) | $10,190 (49%) | $5,718 (78%) | $16,286 (52%) |
| Net (Loss) Income | $(1,573) | $6,046 | $(3,975) | $10,094 |
| EPS (Diluted) | $(0.05) | $0.23 | $(0.13) | $0.39 |
| Cash & Equivalents |
Balance Sheet (Apr 30, 2008) Cash: $12,812 Short-term Investments: $3,310 Total Current Assets: $17,886 Total Current Liabilities: $6,437 Working Capital: $11,449 Accumulated Deficit: $(242,481) |
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| Operating Cash Flow (9 Mo) |
Liquidity: As of April 30, 2008, the company held $16.1 million in cash, cash equivalents, and short-term investments. A $1.0 million credit line with Silicon Valley Bank expired on May 1, 2008, and the company is seeking renewal.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 87% ($18.3 million) for the quarter and 76% ($23.8 million) for the nine months compared to the prior year. This is primarily due to the cessation of Intellectual Property Licensing revenue, which contributed $20.0 million in the prior year's quarter and $28.2 million in the prior year's nine-month period.
- Software Growth: Despite the overall decline, the Software & Services segment grew 177% ($1.7 million) for the quarter and 147% ($4.3 million) for the nine months, driven by the iEmployee acquisition and increased sales of scheduling software (NetSimplicity).
- Profitability Shift: The company reported a net loss of $1.6 million for the quarter and $4.0 million for the nine months, reversing the net income of $6.0 million and $10.1 million reported in the same periods of 2007. The loss is attributed to the loss of high-margin licensing revenue.
- Expense Changes: Selling, General, and Administrative (SG&A) expenses decreased due to reduced legal fees associated with patent litigation, partially offset by increased costs from the iEmployee integration. R&D expenses increased significantly (242% for the quarter) due to the inclusion of iEmployee's R&D workforce.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management expects revenues to increase as the company integrates iEmployee operations, expands its sales force, and releases new software updates. The company plans to utilize its cash balances for business development, potential acquisitions, and share repurchases. Management believes current capital is sufficient to fund operations for the next 12 months but may need to raise additional capital in the future.
Material Risks and Contingencies
- NASDAQ Delisting Risk: The company received a deficiency letter on February 4, 2008, for failing to maintain a minimum bid price of $1.00 per share for 30 consecutive days. The company has until August 4, 2008, to regain compliance or face delisting.
- Legal Proceedings (Jenkens & Gilchrist): On May 20, 2008, a court ordered Forgent to pay its former counsel $2.8 million regarding contingency fees for patent settlements. Forgent is appealing this ruling. The final resolution could materially impact financial statements.
- Legal Proceedings (Wild Basin): Ongoing litigation regarding a lease agreement breach and fraud claims. A trial is scheduled for July 21, 2008.
- Integration Risk: Challenges in integrating iEmployee's operations could disrupt business and increase expenses.
Investor Verification Checklist
- Stock Price Compliance: Verify if the company has regained the $1.00 minimum bid price required to avoid NASDAQ delisting by August 4, 2008.
- Jenkens Litigation Status: Monitor the appeal process regarding the $2.8 million court order to former legal counsel, as this represents a significant contingent liability.
- Software Revenue Sustainability: Assess whether the growth in the Software & Services segment (driven by iEmployee) is sufficient to offset the permanent loss of patent licensing revenue.
- Cash Burn Rate: Review the operating cash flow usage ($11.9 million used in the first nine months) against the current cash balance ($16.1 million) to evaluate runway without additional financing.
- Debt Renewal: Confirm the status of the renewal of the $1.0 million credit line with Silicon Valley Bank which expired in May 2008.