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TIGERLOGIC CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The section entitled "Management's Discussion and Analysis" set forth below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements may generally be identified by the use of such words as "expect," "anticipate," "believe," "intend," "plan," "will," or "shall," or the negative of those terms. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements involve certain risks and uncertainties and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks 8 -------------------------------------------------------------------------------- Table of Contents described under the heading "Risk Factors" in Item 1A of this Form 10-Q and elsewhere in this Form 10-Q. The forward-looking statements contained in this Form 10-Q include, but are not limited to statements about the following: (1) our future success, (2) our research and development efforts, (3) our future operating results and cash flow, (4) our ability to compete, (5) the markets in which we operate, (6) our revenue, (7) cost of license revenue and cost of service revenue, (8) our selling and marketing costs, (9) our general and administrative expenses (10) our research and development expenses, (11) the effect of critical accounting policies,(12) the possibility that we may seek to take advantage of opportunities in the equity and capital markets, (13) our belief that our existing cash balances will be sufficient to meet our operating and capital expenditure requirements through the foreseeable future, (14) our focus on the continued development and enhancement of new product lines, including search technology and social media products, and identification of new and emerging technology areas and discussions with channel partners for the sale and distribution of new product lines, (15) the effect of recent changes in tax laws on our financial statements, and (16) the possibility that we may seek to take advantage of strategic acquisition opportunities. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Overview We were incorporated in the State of Delaware in August 1987. We were originally incorporated as Blyth Holdings, Inc. and our name was changed to Omnis Technology Corporation in September 1997. Effective December 1, 2000, we completed the acquisition of PickAx, Inc., a Delaware corporation ("PickAx"). Concurrent with the acquisition, we changed our name to Raining Data Corporation. On April 17, 2008, we changed our name to TigerLogic Corporation. Reference to "we," "our," "us" or the "Company" in this Form 10-Q means TigerLogic Corporation and our subsidiaries. Products Our principal business consists of 1) the design, development, sale, and support of software infrastructure; 2) Internet search enhancement tools; and 3) a social media content aggregation platform. Our products allow customers to create and enhance flexible software applications for their own needs. Our database and rapid application development software may be categorized into the following product lines: Multidimensional Database Management Systems ("MDMS") and Rapid Application Development ("RAD") software tools. Many of our database software products are based on the proprietary Pick Universal Data Model ("Pick UDM") and are capable of handling data from many sources. Our Internet search enhancement tools include the yolink browser plug-in, yolink API for web sites, and yolink search plug-in for WordPress sites. Our Postano product is a real-time social media content aggregation platform. We primarily sell our database and rapid application development software products through established distribution channels consisting of OEMs, system integrators, specialized vertical application software developers and consulting organizations. Our Internet search enhancement tools and social media content aggregation platform are generally sold through our web sites, as well as through co-marketing arrangements with third parties. We also sell all of our products directly through our sales personnel to end user organizations. Outside the United States, we maintain direct sales offices in the United Kingdom, France and Germany. We generally license our database and rapid application development software on a per-CPU, per-server, per-port or per-user basis. We license our yolink and Postano product lines at prices based on usage measured in a variety of ways. We may make both our yolink and Postano products available to users for free under certain circumstances. We also provide continuing software maintenance and support, and other professional services relating to our products, including consulting and training services. The majority of our revenue to date has been principally derived from MDMS and RAD software products. For the three and six months ended September 30, 2012, approximately 25% and 28%, respectively, of our revenue came from sales through our offices located outside the United States, and no single customer accounted for more than 10% of our revenue. In addition, one of the elements of our business strategy involves expansion through the acquisition of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, or enhance our technological capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property. TigerLogic Postano Postano is a real-time social media content aggregation platform, integrated with our yolink search technology that allows companies and individuals to collect content from various social media sources, and to display that content either within existing web pages hosted by us, or within existing web pages hosted by others, or in interactive tabs on Facebook. Postano is designed for both personal and commercial use. Postano pricing is based on features and support levels desired. Through September 30, 2012, revenue recognized from Postano product has been immaterial. 9 -------------------------------------------------------------------------------- Table of Contents TigerLogic Yolink Yolink is a next-generation search enhancement technology that increases the effectiveness of search functionality across web sites and services. Yolink can search both structured markup, such as HTML, and binary code documents as well as unstructured, raw text documents by layering a common semantic model across them, and using this to organize and effect full-text searches across documents. Yolink searches behind links and through web sites to retrieve content based on keyword search terms. To facilitate the user's review of search results, each keyword is highlighted with a unique color. This capability is especially useful for reviewing and searching through the many web pages that contain hundreds, if not thousands, of embedded hyperlinks. Yolink technology can be applied to many platforms and Internet delivery methodologies. Yolink application programming interfaces (known as APIs) allow developers to integrate yolink search technologies with their web sites, services or applications. Yolink is available for download at www.yolink.com. Through September 30, 2012, revenue recognized from the yolink search technology has been immaterial. Multi-dimensional Databases (MDMS) The MDMS product line consists principally of the D3 Data Base Management System ("D3"), which runs on many operating systems, including IBM AIX, Linux and Windows. D3 allows application programmers to create new business solution software in less time than it normally takes in many other environments. Our MDMS products also include mvEnterprise, a scalable multi-dimensional database solution that allows the user to leverage the capabilities of the UNIX operating system, and mvBase, a multi-dimensional database solution that runs on all Windows platforms. Version 9.0 of D3 and version 3.0 of mvBase, released in September 2010, include bundled support for .NET, providing developers a cost effective solution for developing applications utilizing Microsoft Visual Studio; and bundled support for Java, allowing development of applications utilizing Java. The TigerLogic Dashboard, released in August 2010, is a development tool that allows Pick UDM developers to create intuitive and web-based graphical displays of multi-value data via dashboard and widget creation utilizing Pick/BASIC programming language. Rapid Application Development (RAD) Software Tools Our RAD products support the full life cycle of software application development and are designed for rapid prototyping, development and deployment of graphical user interface ("GUI") client/server and web applications. The RAD products - Omnis Studio and Omnis Classic - are object-oriented and component-based, providing the ability to deploy cross-platform applications on operating system platforms and database environments. In March 2012, we released version 5.2 of Omnis Studio featuring a new JavaScript based Client technology that enables developers to create leading-edge mobile applications. The Omnis JavaScript Client uses scripting compatible with HTML5 and CSS3 to enable support for all popular browsers and devices, including tablets, smartphones, desktops, and web-enabled TVs. Omnis-based applications are developed once and deployed to any device, on any platform, including Android, iOS, Mac OS, Linux and Windows, with no plug-in installation required. Technical Support Many of our products are used by our customers to build and deploy applications that may become a critical component of their business operations. As a result, continuing to provide customers with technical support services is an important element of our business strategy. Customers who participate in our support programs receive periodic maintenance releases on a when-and-if available basis and direct technical support when required. Research and Development We have devoted significant resources to the research and development of our products and technology. We believe that our future success will depend largely on strong development efforts with respect to both our existing and new products. These development efforts have resulted in updates and upgrades to existing MDMS and RAD products and the launch of new products including the yolink search technology and Postano social media product lines. We expect to continue our research and development efforts in all product lines for the foreseeable future. We intend for these efforts to improve our future operating results and increase cash flow. However, such efforts may not result in additional new products or revenue, and we can make no assurances that the recently announced products or future products will be successful. We spent approximately $1.3 million and $2.5 million on research and development during the three and six months ended September 30, 2012, respectively. 10 -------------------------------------------------------------------------------- Table of Contents Competition The application development tools software market is rapidly changing and intensely competitive. Our MDMS products compete with products developed by companies such as Oracle, Microsoft, and Rocket Software. Our RAD products currently encounter competition from several direct competitors, including Microsoft, and competing development environments, including JAVA. Direct competitors of our yolink search technology include Google, Yahoo, Microsoft, AOL, and Ask, as well as a number of smaller companies with products that directly and indirectly compete with our yolink search technology. Our Postano social media product competes with products developed by companies such as Facebook and Twitter, as well as a number of smaller companies in the emerging social media marketplace. Most of our competitors have significantly more financial, technical, marketing, and other resources than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies, evolving markets and changes in customer requirements, and may devote greater resources to the development, promotion, and sale of their products. We believe that our ability to compete in the various product markets depends on factors both within and outside our control, including the timing of release, performance and price of new products developed by both us and our competitors. Although we believe that we currently compete favorably with respect to most of these factors, we may not be able to maintain our competitive position against current and potential competitors, especially those with greater resources. We continue to focus on growth in new market opportunities, such as the yolink and Postano product lines, while also continuing to meet the needs of our loyal customer base by investing in the development of new upgrades and updates for our existing MDMS and RAD product lines. While we have experienced lower license revenue for our MDMS and RAD product lines, we believe that our relatively stable services revenue and prudent management of expenditures will continue to provide sufficient working capital balances to fund new product initiatives aimed at increasing stockholder value. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and accounting for goodwill and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We have identified the accounting policies below as the policies critical to our business operations and the understanding of our results of operations and how the related judgments and estimates affect the preparation of our consolidated financial statements: † Revenue Recognition † Goodwill † Employee Stock-Based Compensation † Income Taxes These critical accounting policies are described in our Form 10-K for the fiscal year ended March 31, 2012 and there have been no changes in our application of these policies during the six months ended September 30, 2012. Results of Operations The following table sets forth certain unaudited Condensed Consolidated Statement of Operations data in total dollars, as a percentage of total net revenues and as a percentage change from the same periods in the prior year. Cost of license revenues and cost of service revenues are expressed as a percentage of the related revenues. This information should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. 11 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Three Months Ended Six Months Ended Six Months Ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 % of Net Percent % of Net % of Net Percent % of Net Results Revenues Change Results Revenues Results Revenues Change Results Revenues (In (In (In (In thousands) thousands) thousands) thousands) Net revenues Licenses $ 910 29 % -20 % $ 1,137 32 % $ 1,905 30 % -4 % $ 1,976 29 % Services 2,246 71 % -6 % 2,392 68 % 4,535 70 % -4 % 4,727 71 % Total net revenues 3,156 100 % -11 % 3,529 100 % 6,440 100 % -4 % 6,703 100 % Operating expenses Cost of revenues: Cost of license revenues (as a % of license revenues) 2 0 % -50 % 4 0 % 4 0 % -33 % 6 0 % Cost of service revenues (as a % of service revenues) 400 18 % -17 % 482 20 % 824 18 % -14 % 959 20 % Selling and marketing 1,056 33 % -12 % 1,201 34 % 2,113 33 % -17 % 2,560 38 % Research and development 1,264 40 % -9 % 1,384 39 % 2,499 39 % -13 % 2,868 43 % General and administrative 915 29 % 4 % 880 25 % 1,952 30 % -1 % 1,973 29 % Total operating expenses 3,637 115 % -8 % 3,951 112 % 7,392 115 % -12 % 8,366 125 % Operating loss (481 ) -15 % 14 % (422 ) -12 % (952 ) -15 % -43 % (1,663 ) -25 % Other expense-net (12 ) 0 % 68 % (38 ) -1 % (31 ) 0 % 15 % (27 ) 0 % Loss before income taxes (493 ) -16 % 7 % (460 ) -13 % (983 ) -15 % -42 % (1,690 ) -25 % Income tax provision 19 1 % -72 % 68 2 % 22 0 % -88 % 177 3 % Net loss $ (512 ) -16 % -3 % $ (528 ) -15 % $ (1,005 ) -16 % -46 % $ (1,867 ) -28 % Revenue NET REVENUE. Our revenue is derived principally from two sources: fees from software licensing and fees for post contract technical support. We generally license our database and rapid application development software primarily on a per-CPU, per-server, per-port or per-user basis. Therefore, the addition of CPUs, servers, ports or users to existing systems increases our revenue from our installed base of licenses. Similarly, the reduction of CPUs, servers, ports or users from existing systems decreases our revenue from our installed base of customers. The timing of orders and customer ordering patterns has resulted in fluctuations in license revenue between quarters and year-to-year. Total revenue decreased by $0.4 million or 11%, and $0.3 million or 4% for the three and six month periods ended September 30, 2012, respectively, when compared to the same periods in the prior year. License revenue for the three and six month periods ended September 30, 2012 decreased $0.2 million or 20% and $0.1 million or 4%, respectively, when compared to the same periods in the prior year due to lower sales of Omnis licenses in the current year in our European market. Service revenue for the three and six month periods ended September 30, 2012 decreased $0.1 million or 6% and $0.2 million or 4%, respectively, when compared to the same periods in the prior year mainly due to lower professional service revenue and slightly lower support revenue as some of our customers reduced users in the current year. We have been actively developing and marketing our newer product lines, including yolink and Postano. Revenue from these new products has been immaterial for the three and six months ended September 30, 2012 and 2011. While we are committed to research and development efforts that are intended to allow us to penetrate new markets and generate new sources of revenue, such efforts may not result in additional products, services or revenue. We can give no assurances as to customer acceptance of any new products or services, or the ability of the current or any new products and services to generate revenue. Operating Expenses COST OF LICENSE REVENUE. Cost of license revenue is comprised of direct costs associated with software license sales including software packaging, documentation, physical media costs and royalties. The slight change in cost of license revenue for three and six months ended September 30, 2012 when compared to the same periods in the prior year was due to lower physical media packaging cost as most of our customers now receive new licenses via electronic downloads. COST OF SERVICE REVENUE. Cost of service revenue includes primarily personnel costs relating to consulting, technical support and training services. Cost of service revenue for the three and six month periods ended September 30, 2012 decreased $0.1 million or 17% and $0.1 million or 14%, respectively, when compared to the same periods in the prior year mainly due to lower personnel cost as a result of consolidating our offices in the United Kingdom in the prior year, and lower stock compensation expense due to certain options being fully amortized. 12 -------------------------------------------------------------------------------- Table of Contents SELLING AND MARKETING. Selling and marketing expense consists primarily of salaries, benefits, advertising, tradeshows, travel and overhead costs for our sales and marketing personnel. Selling and marketing expense for the three and six month periods ended September 30, 2012 decreased $0.1 million or 12% and $0.4 million or 17%, respectively, when compared to the same periods in the prior year mainly due to lower consulting and product marketing expenses, and lower personnel and stock compensation expenses. In the prior year, we incurred higher consulting and marketing expenses due to the launch of our Postano product. The full amortization of certain stock options and the consolidation of our offices in the United Kingdom also helped to reduce the selling and marketing expense this year. We anticipate that selling and marketing costs related to the yolink and Postano product lines may increase as we further develop the sales channels for these products and if customer acceptance of these products increases. In addition, if our continued research and development efforts are successful, including with respect to our yolink and Postano product lines, and as new products or services are created, we may incur increased sales and marketing expense to promote those new products in future periods. RESEARCH AND DEVELOPMENT. Research and development expense consists primarily of salaries and other personnel-related expenses and overhead costs for engineering personnel including employees in the United States and the United Kingdom and contractors in the United States. Research and development expense for the three and six month periods ended September 30, 2012 decreased $0.1 million or 9% and $0.4 million or 13%, respectively, when compared to the same periods in the prior year mainly related to lower personnel and consulting expenses, and lower stock compensation expense as certain options were fully amortized. We remain committed to our research and development efforts. As we investigate further applications and delivery options for the yolink technology and Postano social media products, and as we build new technology platforms for our RAD product line and continue enhancing our MDMS product line, our research and development expense may increase in the future. Such efforts may not result in additional new products, and new products may not generate sufficient revenue, if any, to offset the research and development expense. GENERAL AND ADMINISTRATIVE. General and administrative expense consists primarily of costs associated with our finance, human resources, legal and other administrative functions. These costs consist principally of salaries and other personnel-related expenses, professional fees, depreciation and overhead costs. General and administrative expense for the three and six month periods ended September 30, 2012 was generally consistent on a dollar amount basis with the same periods in the prior year. OTHER INCOME (EXPENSE). Other income (expense) consists primarily of gains and losses on foreign currency transactions. Other expense-net decreased by $26,000 for the three months ended September 30, 2012 and slightly increased by $4,000 for the six months ended September 30, 2012 mainly due to fluctuation in the Euro exchange rate relating to intercompany balances. Due to the uncertainty in exchange rates, we may experience transaction gains or losses in future periods, the effect of which cannot be predicted at this time. PROVISION FOR INCOME TAXES. Our effective tax rate was (3.9)% and (2.2)% for the three and six month periods ended September 30, 2012, respectively, and (14.8)% and (10.5)% for the three and six month periods ended September 30, 2011, respectively. The provision for income taxes for the three and six month periods ended September 30, 2012 reflected the income tax on net earnings from foreign subsidiaries. The provision for income taxes for the three and six month periods ended September 30, 2011 reflected income tax on net earnings from foreign subsidiaries, and the true up of tax expense of our German subsidiary's deferred tax assets, net of the deferred tax benefits. Due to uncertainties surrounding the timing of realizing the benefits of the net operating loss carryforwards in the future, we continue to carry a full valuation allowance against net deferred tax assets for our subsidiaries in the United States and United Kingdom. Liquidity and Capital Resources As of September 30, 2012, we had $7.6 million in cash, of which approximately $0.5 million was held by our foreign subsidiaries and, if repatriated, would not be subject to material tax consequences. We believe that our existing cash balances will be sufficient to meet our operating and capital expenditure requirements for the remainder of the fiscal year ending March 31, 2013 and through the foreseeable future. We are committed to research and development and marketing efforts that are intended to allow us to penetrate new markets and generate new sources of revenue and improve operating results. However, our research and development and marketing efforts have required, and will continue to require, cash outlays without the immediate or short-term receipt of related revenue. Our ability to meet our expenditure requirements is dependent upon our future financial performance, and this will be affected by, among other things, prevailing economic conditions, our ability to penetrate new markets and attract new customers, market acceptance of our new and existing products and services, the success of research and development efforts and other factors beyond our control. We had no material commitments for capital expenditures as of September 30, 2012. 13 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities was $1.3 million and $2.4 million for the six month periods ended September 30, 2012 and 2011, respectively. The decrease in net cash used in operating activities for the six month period ended September 30, 2012 as compared to the same period in the prior year was primarily due to lower selling and marketing expense and research and development expense. Net cash used in investing activities was $27,000 and $44,000 for the six month periods ended September 30, 2012 and 2011, respectively, for expenditures related to furniture and equipment purchased. Net cash provided by financing activities was $47,000 and $110,000 for the six month periods ended September 30, 2012 and 2011, respectively. Net cash provided by financing activities was due to proceeds derived from the exercise of stock options and related issuance of common stock. There was no outstanding line of credit during the three and six months ended September 30, 2012 or 2011. Off-Balance Sheet Arrangements We did not have any off-balance sheet liabilities or transactions as of September 30, 2012. Non-GAAP Financial Information EBITDA or Adjusted EBITDA (each as defined below) should not be construed as a substitute for net income (loss) or as a better measure of liquidity than cash flow from operating activities determined in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA exclude components that are significant in understanding and assessing our results of operations and cash flows. EBITDA or Adjusted EBITDA do not represent funds available for management's discretionary use and are not intended to represent cash flow from operations. In addition, EBITDA and Adjusted EBITDA are not terms defined by GAAP and as a result our measure of EBITDA and Adjusted EBITDA might not be comparable to similarly titled measures used by other companies. However, EBITDA and Adjusted EBITDA are used by management to evaluate, assess and benchmark our operational results and we believe that EBITDA and Adjusted EBITDA are relevant and useful information widely used by analysts, investors and other interested parties in our industry. Accordingly, we are disclosing this information to permit a more comprehensive analysis of our operating performance, to provide an additional measure of performance and liquidity and to provide additional information with respect to our ability to meet future debt service and capital expenditure and working capital requirements. EBITDA is defined as net income (loss) with adjustments for depreciation and amortization, interest income (expense)-net, and income tax provision (benefit). Adjusted EBITDA used by our company is defined as EBITDA plus adjustments for other income (expense)-net, and non-cash stock-based compensation expense. Our Adjusted EBITDA was negative $0.2 million or negative 6% of total net revenue for the three month period ended September 30, 2012, as compared to negative $0.1 million or negative 2% of total net revenue for same period in the prior year mainly due to lower revenue. Our Adjusted EBITDA was negative $0.4 million or negative 6% of total net revenue for the six month period ended September 30, 2012, as compared to negative $1.0 million or negative 14% of total net revenue for the same period in the prior year mainly due to lower sales and marketing expense and research and development expense in the current period. The following table reconciles Adjusted EBITDA to the GAAP reported net loss: RECONCILIATION OF ADJUSTED EBITDA TO NET LOSS (In thousands) For the Three Months Ended For the Six Months Ended September 30, September 30, 2012 2011 2012 2011 Reported net loss $ (512 ) $ (528 ) $ (1,005 ) $ (1,867 ) Depreciation and amortization 31 38 66 82 Stock-based compensation 276 296 500 629 Interest (income) expense-net 1 - 4 (2 ) Other expense-net 11 38 27 29 Income tax provision 19 68 22 177 Adjusted EBITDA $ (174 ) $ (88 ) $ (386 ) $ (952 ) 14 -------------------------------------------------------------------------------- Table of Contents Our Adjusted EBITDA financial information can also be reconciled to net cash used in operating activities as follows: RECONCILIATION OF ADJUSTED EBITDA TO NET CASH USED IN OPERATING ACTIVITIES (In thousands) For the Six Months Ended September 30, 2012 2011 Net cash used in operating activities $ (1,321 ) $ (2,449 ) Interest expense (income)-net 4 (2 ) Other expense-net 27 29 Income tax provision 22 177 Change in trade accounts receivable 98 498 Change in other current and non-current assets 15 652 Change in accounts payable 62 (31 ) Change in accrued liabilities 314 1 Change in deferred revenue 419 207 Foreign currency exchange loss (33 ) (30 ) Provision for bad debt 7 (4 ) Adjusted EBITDA $ (386 ) $ (952 ) |