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| GOJO.OB > SEC Filings for GOJO.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Forward-Looking Statements
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including:
o our history of operating losses, and expectation that those losses will
continue;
o that a significant portion of our operating revenue has been and
continues to be earned from a very limited number of significant
customers;
o that our stock price has been volatile and you could lose your
investment; and
o other factors, including those set forth under Item 1A, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in our 2008 10-K Report and in other documents we have
filed with the Securities and Exchange Commission.
These factors could have a material adverse effect upon our business, results of operations and financial condition.
Overview
We are developers of business connectivity software, including Unix, Linux and Windows server-based software, with an immediate focus on web-enabling applications for use and/or resale by independent software vendors ("ISVs"), corporate enterprises, governmental and educational institutions, and others. We have also made significant investments in intellectual property and have pursued various means of monetizing such investments. We conduct and manage our business based on these two segments, which we refer to as our "software" and "Intellectual Property" segments, respectively.
Server-based computing, which is sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server, or host computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. Our software architecture provides application developers with the ability to relocate applications traditionally run on the desktop to a server, or host computer, where they can be run over a variety of connections from remote locations to a variety of display devices. With our server-based software, applications can be web-enabled, without any modification to the original application software required, allowing the applications to be run from browsers or portals. Our server-based technology can web-enable a variety of Unix, Linux or Windows applications.
Critical Accounting Policies
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimates, and different estimates, which also would have been reasonable, could have been used, which would have resulted in different financial results. Our critical accounting policies are identified in our 2008 10-K Report, and include: revenue recognition, long-lived assets, patents, and stock-based compensation. The following operating results should be read in conjunction with our critical accounting policies.
Results of Operations for the Three and Six-Month Periods Ended June 30, 2009 and 2008.
Revenue
Software Revenue
Our software revenue has historically been primarily derived from product licensing fees and service fees from maintenance contracts. Other sources of software revenue include private labeling fees, sales of software development kits and training. Software development kits are tools that allow end users to develop, interface and brand their own applications for use in conjunction with either our Windows or Unix/Linux products.
Software revenue for the three-month periods ended June 30, 2009 and 2008 was as follows:
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 510,200 $ 476,100 $ 34,100 7.2%
Unix 334,300 353,000 (18,700) -5.3%
--------------- ---------------- -----------------
844,500 829,100 15,400 1.9%
--------------- ---------------- -----------------
Service Fees
Windows 287,300 248,400 38,900 15.7%
Unix 289,200 274,800 14,400 5.2%
--------------- ---------------- -----------------
576,500 523,200 53,300 10.2%
--------------- ---------------- -----------------
Other - 20,800 (20,800) -100.0%
--------------- ---------------- -----------------
Total $ 1,421,000 $ 1,373,100 $ 47,900 3.5%
=============== ================ =================
|
2009 Over (Under) 2008
-------------------------------
Revenue 2009 2008 Dollars Percent
----------------------- --------------- ---------------- ----------------- ----------
Product Licenses
Windows $ 946,800 $ 905,700 $ 41,100 4.5%
Unix 660,500 701,200 (40,700) -5.8%
--------------- ---------------- -----------------
1,607,300 1,606,900 400 0.0%
--------------- ---------------- -----------------
Service Fees
Windows 571,000 492,100 78,900 16.0%
Unix 576,800 554,400 22,400 4.0%
--------------- ---------------- -----------------
1,147,800 1,046,500 101,300 9.7%
--------------- ---------------- -----------------
Other 75,000 32,000 43,000 134.4%
--------------- ---------------- -----------------
Total Revenue $ 2,830,100 $ 2,685,400 $ 144,700 5.4%
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During the three and six-month periods ended June 30, 2009 the increases in Windows-based product licenses revenue were partially offset by decreases in Unix-based product licenses revenue, as compared with the same periods of the prior year. Such revenue can vary from period to period because a significant portion of this revenue has historically been earned, and continues to be earned, from a limited number of significant customers, most of whom are resellers. Consequently, if any of these significant customers change their order level, or fail to order during the reporting period, our product licenses revenue could be materially impacted. We expect this situation to continue throughout the next several quarterly reporting periods.
The increases in service fees for the three and six-month periods ended June 30, 2009, as compared with the same periods of the prior year, were primarily a result of the continued growth of the number of licenses our end-user customers have installed. Since our customers typically purchase maintenance contracts, and, subsequently, renew them upon expiration, as end-user customers continue to deploy more and more of our products, the revenue we are able to recognize from the sale of such maintenance contracts increases. We expect aggregate service fees revenue for 2009 to exceed those of 2008.
Other revenue for the six-month period ended June 30, 2009 increased, as compared with the same period of the prior year, as a result of the sale of private labeling kits. We have entered into four such sales during 2009, as compared with only two such sales during 2008. Other revenue for the three-month period ended June 30, 2009 decreased, as compared with the same period for the prior year, as a result of the deferral of all revenue related to the sale of a private labeling kit during such period as not all criteria necessary for revenue recognition were present. We expect to be able to recognize all revenue related to this transaction by December 31, 2009.
Intellectual Property Revenue
We derived $1,850,000 from our intellectual property segment during each of the three and six-month periods ended June 30, 2009 as we entered into three separate licensing agreements during such periods. We entered into no such licensing agreements during either of the comparable periods of the prior year.
Revenues from our intellectual property segment are non-predictable and are dependent upon the outcome of our currently pending litigation efforts.
Cost of Revenue
Software Cost of Revenue
Software cost of revenue is comprised primarily of service costs, which represent the costs of customer service, and product costs. We incur no shipping or packaging costs as all of our deliveries are made via electronic means over the Internet. Under accounting principles generally accepted in the United Sates ("GAAP"), research and development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our balance sheet. Such capitalized costs are subsequently amortized as cost of revenue over the shorter of three years or the remaining estimated life of the products. No such costs were capitalized during either of the three or six-month periods ended June 30, 2009 or 2008.
Software cost of revenue was 4% and 11% of total revenue for the three months ended June 30, 2009 and 2008, respectively, and 6% and 11% of total revenue for the six months ended June 30, 2009 and 2008, respectively.
Software cost of revenue for the three-month periods ended June 30, 2009 and 2008 was as follows:
2009 Over (Under) 2008
----------------------
Description 2009 2008 Dollars Percent
------------- ---------- --------- ------------ -------
Service costs $ 126,500 $ 124,800 $ 1,700 1%
Product costs 5,500 21,900 (16,400) -75%
---------- --------- ------------
$ 132,000 $ 146,700 $ (14,700) -10%
========== ========= ============
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Software cost of revenue for the six-month periods ended June 30, 2009 and 2008 was as follows:
2009 Over (Under) 2008
----------------------
Description 2009 2008 Dollars Percent
------------- ---------- --------- ------------ -------
Service costs $ 253,900 $ 269,600 $ (15,700) -6%
Product costs 11,000 35,700 (24,700) -69%
---------- --------- ------------
$ 264,900 $ 305,300 $ (40,400) -13%
========== ========= ============
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Service costs and product costs both decreased during the six-month period ended June 30, 2009, as compared with the same period of the prior year. The decrease in service costs for the six-month period ended June 30, 2009, as compared with the same period of the prior year, was primarily as a result of a change in the mix of employees providing customer service as well as the time spent by each providing such services. The decrease in product costs for both the three and six-month period ended June 30, 2009, as compared with the same periods of the prior year, was as a result of the timing of the renewal of a service contract for certain software that we license and incorporate into our product offerings.
Service costs include non-cash stock-based compensation. Such costs aggregated approximately $2,000 and $5,500 for the three-month periods ended June 30, 2009 and 2008, respectively, and $4,400 and $10,800 for the six-month periods ended June 30, 2009 and 2008, respectively.
We expect 2009 software cost of revenue to approximate 2008 levels.
Intellectual Property Cost of Revenue
For the three and six-month periods ended June 30, 2009, we incurred $725,000 of contingent legal fees in conjunction with the intellectual property licenses entered into during such periods. No such fees were incurred during either of the comparable periods of the prior year as we did not enter into any intellectual property licenses during those periods.
Cost of revenue from intellectual property sales are non-predictable and are dependent upon the outcome of our currently pending litigation efforts.
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), outside services and travel and entertainment expense.
Selling and marketing expenses for the three-month period ended June 30, 2009 increased by $31,000, or 7%, to $458,200, from $427,200 for the same period of 2008. Selling and marketing expenses were 14% and 31% of revenue for the three-month periods ended June 30, 2009 and 2008, respectively. For the six-month period ended June 30, 2009 selling and marketing expenses increased by $111,500, or 13%, to $947,200, from $835,700 for the same period of 2008. Selling and marketing expenses were 20% and 31% of revenue for the six-month periods ended June 30, 2009 and 2008, respectively.
Employee costs and the costs of outside services increased during both the three and six-month periods ended June 30, 2009, as compared to the same periods of the prior year. Employee costs were higher ($17,000 and $38,800 for the three and six-month periods, respectively) primarily due to higher commissions and bonuses, resulting from a higher level of sales bookings, and increased health care costs. Outside services were higher ($19,400 and $56,300 for the three and six-month periods, respectively) mainly as a result of certain costs associated with implementing an integrated sales management software package. Travel expenses were $9,000 lower during the three-month period ended June 30, 2009, as compared with the same period of the prior year, however; for the six-month period ended June 30, 2009, travel expenses were $14,100 higher than the prior year. This resulted primarily as a result of the costs associated with our Asian sales representative, and others, visiting customers and prospects in Asia during the three months ended March 31, 2009. No such trips were made during the three-months ended June 30, 2009 or during the three or six-month periods ended June 30, 2008.
Included in employee costs were non-cash stock-based compensation costs aggregating approximately $4,400 and $8,400, respectively, for the three-month periods ended June 30, 2009 and 2008, and $8,800 and $19,000 for the six-month periods ended June 30, 2009 and 2008, respectively.
We currently expect our full-year 2009 sales and marketing expense to be somewhat higher than 2008 levels.
General and Administrative Expenses
General and administrative expenses primarily consist of employee costs (inclusive of non-cash stock-based compensation expense), amortization and depreciation, legal, professional and other outside services (including those related to realizing benefits from our patent-related assets), travel and entertainment, insurance, certain costs associated with being a publicly held corporation, and bad debts expense.
General and administrative expenses decreased by $172,300 or 18%, to $772,800, for the three-month period ended June 30, 2009, from $945,100 for the same period of 2008. General and administrative expenses were approximately 23% and 69% of revenue for the three-month periods ended June 30, 2009 and 2008, respectively. For the six-month period ended June 30, 2009, general and administrative expenses decreased by $377,700, or 20%, to $1,532,800 from $1,910,500 for the same period of 2008. General and administrative expenses were approximately 32% and 71% of revenue for the six-month periods ended June 30, 2009 and 2008, respectively.
The main factors that contributed to the decrease in general and administrative expense for the three and six-month periods ended June 30, 2009, as compared with the same periods of 2008, were aggregate decreases in depreciation and amortization ($105,700 and $210,800 for the three and six-month periods, respectively), primarily as a result of the reduction in the net book value of our patent portfolio after the recording of an impairment charge against the portfolio during the fourth quarter of the year ended December 31, 2008, and aggregate decreases in employee costs ($59,800 and $145,600 for the three and six-month periods, respectively), primarily as a result of termination of one employee in our patent group during the three-month period ended March 31, 2009 and a decrease in non-cash stock-based compensation expense, which resulted from certain stock options becoming fully vested and the low fair value associated with new grants .
Partially offsetting these decreases during the three-month period ended June 30, 2009 was an $18,200 increase in certain non-contingent legal fees associated with our Juniper lawsuits, as compared with the same period of the prior year.
Partially offsetting these decreases during the six-month period ended June 30, 2009, as compared with the same period of the prior year, was a $27,500 increase in costs associated with our Sarbanes-Oxley implementation and a $23,700 increase in travel, primarily resulting from increased time being spent by our Chief Executive Officer in our New Hampshire engineering facility.
Costs associated with other individual components of general and administrative expense, notably; insurance, rent, costs associated with being a public entity and bad debts expense did not change significantly during either the three or six-month periods ended June 30, 2009, as compared with the same periods of the prior year.
Included in general and administrative employee costs was non-cash stock-based compensation expense aggregating $22,000 and $46,300, respectively, for the three-month periods ended June 30, 2009 and 2008, respectively, and $47,300 and $121,200 for the six-month periods ended June 30, 2009 and 2008, respectively.
As noted above, general and administrative expenses have significantly decreased during both the three and six-month periods ended June 30, 2009 as compared with the same periods of the prior year. We do not expect this trend to continue throughout the remainder of 2009. We expect that certain non-contingent legal fees associated with our Juniper lawsuits will continue to increase throughout the remainder of 2009 and such increases will exceed the aggregate decreases noted above. We expect that aggregate general and administrative expenses for 2009 will slightly exceed 2008 levels.
Research and Development Expenses
Research and development expenses consist primarily of employee costs (inclusive of stock-based compensation expense), payments to contract programmers, rent, and depreciation
Research and development expenses increased by $124,500, or 21%, to $723,900, for the three-month period ended June 30, 2009, from $599,400 for the same period of 2008. Research and development expenses were approximately 22% and 44% of revenue for the three-month periods ended June 30, 2009 and 2008, respectively. For the six-month period ended June 30, 2009, research and development expenses increased by $426,200, or 39%, to $1,512,000 from $1,085,800 for the same period of the prior year. Research and development expenses were approximately 32% and 40% of revenue for the six-month periods ended June 30, 2009 and 2008, respectively.
Under GAAP, all costs of product development incurred once technological feasibility has been established, but prior to general release of the product, are typically capitalized and amortized to expense over the estimated life of the underlying product, rather than being charged to expense in the period incurred. No such product development costs were capitalized during either of the three or six-month periods ended June 30, 2009 or 2008.
Factors contributing to the increase in research and developments costs during both the three and six-month periods ended June 30, 2009, as compared with the same periods of the prior year, included: increased employee costs ($68,500 and $217,600, for the three and six-month periods, respectively), which resulted from having four more employees; and increased outside services ($93,000 and $242,800, for the three and six-month periods, respectively) as we increased our use of contract engineers to assist in research and development activities surrounding GO-Global for Windows. Partially offsetting these increases were decreases in rent ($9,500 and $17,900, for the three and six-month periods, respectively), related to the closure of our office in Israel during 2008.
Included in research and development employee costs was non-cash stock-based compensation expense aggregating $26,200 and $29,400, respectively, for the three-month periods ended June 30, 2009 and 2008, respectively, and $45,700 and $63,700 for the six-month periods ended June 30, 2009 and 2008, respectively.
We currently expect 2009 research and development expenses to be somewhat higher as compared with 2008 levels as a result of the increases to our engineering staff, and a continued increase in the use of outside consultants and our overall investments in this area.
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