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ARI NETWORK SERVICES INC /WI - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our results of operations and financial condition should be read together with our unaudited consolidated financial statements for the three and nine months ended April 30, 2011 and 2010, including the notes thereto, which appear elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the markets in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "endeavors," "strives," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, estimate, or verify, including those identified in our annual report on Form 10-K for the year ended July 31, 2010, under "Item 1A. Risk Factors,", and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason. Overview of Business ARI Network Services, Inc. ("ARI") provides technology-enabled solutions that help dealers, distributors and manufacturers worldwide increase revenue and reduce costs. We deliver our products and services to companies of all sizes across a dozen vertical markets, with a core emphasis on the outdoor power, power sports, marine, RV, and appliance verticals. We estimate that 18,000 equipment dealers, 125 manufacturers, and 150 distributors worldwide leverage our solutions to drive revenue, increase efficiencies and improve customer satisfaction. Our Solutions Our technology-enabled solutions are designed to facilitate our customers' operations, from lead generation and lead management, to sales of their whole goods, parts, garments, and accessories ("PG&A"). To achieve this, our products and services allow our customers to: (i) efficiently market to their customers and prospects in order to drive increased traffic to their location or website; (ii) manage and nurture customers and prospects; (iii) increase revenues by selling PG&A products online; (iv) increase revenues by generating leads for whole goods; and (v) increase revenues and reduce costs by enhancing the productivity of our customers' support operations, specifically with respect to the sale of manufacturers' parts. Today, we generate revenue from three primary categories of technology-enabled solutions: (i) electronic catalogs for publishing, viewing and interacting with technical reference information about equipment; (ii) lead generation and management products and services designed to help dealers grow their businesses and increase profitability through efficient marketing of their products; and (iii) websites with eCommerce capabilities designed to generate sales through the sites and provide information to consumers in the dealers' local areas. Further information regarding our service offerings can be accessed at the Company's website at www.arinet.com, or in our Annual Report on Form 10-K for the year ended July 31, 2010. Our Strategy Our mission is to be recognized in each market we serve as the leader in creating, marketing and supporting solutions that increase revenue and reduce costs for our customers. To do this, our technology-enabled products and services create connections between manufacturers, distributors, dealers and their end-customers. We expect to increase our financial and market performance by executing on the key elements of our strategy, which include: · Deepening relationships with our existing customer base through launching new technology-enabled products and services and cross-selling complementary products and services across customers and markets; this will improve the value proposition to the customer and will foster organic growth and reduce customer churn rates in our strategic, subscription-based products and services; Page 22-------------------------------------------------------------------------------- Table of Contents · Continuing to execute on our current sales strategy with a focus on growing our customer base and increasing monthly recurring revenue ("MRR"); · Refining our organization and processes to drive innovation and efficiency, which will include providing operational focus on our high gross margin, critical nature, recurring revenue products into the markets we serve; and · Pursuing strategic acquisitions that will allow us to expand our addressable market and customer base. Our 2009 acquisition of Channel Blade and our 2008 acquisition of the electronic parts catalog and eCommerce assets of Info Access expanded not only our product offerings but the number of markets we serve. As a result of those acquisitions, ARI is the market leader in the marine, RV and appliance markets. Moving forward we expect to launch additional technology-enabled products and services that fit into our strategy of deepening our relationships with our customers. Our Competitive Strengths Market Leader in Core Verticals We believe that we are one of the leaders in each of our core vertical markets and also believe we are the market leader in the outdoor power and marine markets. Our direct relationships with approximately 18,000 dealers, 125 manufacturers, and 150 distributors allow us to cost-effectively leverage our published catalog content into a large and diversified customer base and to launch new product enhancements and technology-enabled solutions to this customer base. Breadth and Depth of Published Content The breadth and depth of our catalog content, as well as our ability to efficiently publish manufacturers' PG&A data as it becomes available, provides ARI with a critical competitive advantage. Our electronic catalog content enables multi-line dealers to easily access catalog content for multiple manufacturers using a single software platform. This advantage provides "stickiness" to our catalog customer base that allows us to efficiently and cost effectively nurture our existing customers while devoting resources to develop new products and services, enabling us to grow our overall customer base. Recurring Revenue Model A substantial portion of our revenue is subscription-based and recurring revenue. The majority of our customers are on contracts of twelve months or longer, and these contracts typically auto-renew for additional twelve month terms. This provides us with advanced visibility into our future revenues and, when coupled with a low rate of customer churn, significantly reduces the cost to maintain and nurture our customer base. This frees up resources to enhance our existing products and work toward new product innovations. Suite of Products Covers Entire Sales Cycle Our suite of dealer products and services and eCommerce capabilities enhance our customers' front office operations by covering the entire sales cycle, from lead generation and lead management to sales of PG&A to the consumer, both in-store and online. Page 23-------------------------------------------------------------------------------- Table of Contents Our Markets and the Challenges We Face Competition for our products and services varies by product and by vertical market. We believe that no single competitor today competes with us on every product and service in each of our industry verticals. In electronic catalogs, we compete primarily with Snap-on Business Solutions, which designs and delivers electronic parts catalogs, accessory sales tools, and manufacturer network development services, primarily to the automotive, power sports, outdoor power, construction, agriculture and mining markets. In addition, there is a variety of smaller companies focused on one or two specific industries. In lead management, websites and eCommerce, our primary competitors are PowerSports Network, owned by Dominion Enterprises, and 50 Below. Competition for our website development services also comes from in-house information technology groups that may prefer to build their own web-based proprietary systems, rather than use our proven industry solutions. There are also large, general market eCommerce companies, such as IBM, which offer products and services that could address some of our customers' needs. These general eCommerce companies do not typically compete with us directly, but they could decide to do so in the future. Two of the markets we serve, marine and RV, have been hard hit by the economy the past several years, given the "luxury" nature of the products in those verticals. As a result, in fiscal 2010 we experienced an increase in customer churn due to manufacturer bankruptcies, dealer closures, and extreme cost reduction measures by our dealers. We have begun to see improvements in customer churn during the first nine months of fiscal 2011. To the positive, the impacts of a difficult economic environment have been somewhat softened by the consumers' willingness in a down economy to repair existing equipment rather than purchase new equipment, which serves to amplify the importance of our published parts content provided to customers via our catalog parts lookup products and our website products. Results of Operations Summary The fiscal 2011 third quarter represented another quarter of strong operating results. These results are a reflection of the continued execution of our fiscal 2011 strategy and include: · We continued to generate significant operating cash flows, which we deployed on product development, technology infrastructure upgrades and paying down our line of credit. Cash flows from operations were $862,000 and $2,158,000 for the three and nine month periods ended April 30, 2011, versus $950,000 and $1,145,000 during the same periods last year. This represents a 97% increase on a year to date basis. In addition to investments in product development and our technology infrastructure, we paid down $525,000 on our line of credit during the first nine months of fiscal 2011, whereas last year we borrowed $525,000 over the same period to fund our operations. · Revenues for the quarter ended April 30, 2011 were comparable to last year at $5,354,000 and declined 1.3% on a year to date basis from $16,123,000 for the nine months ended April 30, 2010 to $15,916,000 for the nine months ended April 30, 2011. The year to date decline in revenues was primarily attributed to the loss of revenues associated with the non-cash amortization of deferred revenue established at the time of the Channel Blade acquisition. We recognized revenues of $13,000 and $49,000 from the amortization of this liability for the three and nine months ended April 30, 2011, versus $122,000 and $762,000 for the same periods last year. This represents revenue declines of $109,000 and $713,000 for the relative year over year periods. In addition to this, we sold our Agchem EDI business on March 1, 2011, which resulted in a revenue decline of approximately $80,000 for the relative year over year periods. Without the effects of the Channel Blade deferred revenue and the disposition of the Agchem EDI Business, we had organic revenue growth of approximately 4% for the three and nine month periods ended April 30, 2011, compared to the same periods last year. Page 24-------------------------------------------------------------------------------- Table of Contents · Operating income for the third quarter of fiscal 2011 was $675,000, compared to $297,000 for the same period last year, an increase of 127%. On a year to date basis, operating income was $1,374,000, compared to $1,258,000 for the same period last year, an increase of 9%. Excluding the aforementioned loss of deferred revenue, operating income for the three and nine month periods ended April 30, 2011 would have increased $487,000 and $828,000 over the same periods last year, increases of 278% and 167%, respectively. This improvement can be attributed to the identification and execution of operational efficiencies and cost reduction strategies throughout the organization, including: (i) the fiscal 2010 restructuring and discontinuation of the F&I business; (ii) the data center consolidation project; (iii) completing the Channel Blade integration; and (iv) continuous focus on achieving additional operational efficiencies. · Net income for the third quarter was $541,000, or $.07 per share, compared to $26,000, or $.00 per share last year. For the nine months ended April 30, 2011, net income was $763,000, or $.10 per share, versus $364,000, or $.05 per share for the same period last year. In addition to the improvements in operating income, the year over year growth in net income is due to the gain recorded on the sale of the Agchem EDI business and the discontinuation of the F&I business, which generated losses up until its disposition. These income enhancements were partially offset by increases in interest and income tax expenses. We expect continued improvements in revenue, operating income and cash generation for the remainder of fiscal 2011, relative to fiscal 2010, due to continued focus on providing innovative products and services, outstanding customer support and by driving operational efficiencies throughout the organization. Net Revenues and Gross Margins The following table summarizes our net revenues, gross profit and gross margin percentage by major product category (in thousands): Page 25-------------------------------------------------------------------------------- Table of Contents (Unaudited) (Unaudited) Three months ended April 30 Nine months ended April 30 Percent Percent 2011 2010 Change 2011 2010 Change Catalog Revenue $ 3,151 $ 3,166 -0.5 % $ 9,390 $ 9,350 0.4 % Cost of revenue 347 409 -15.2 % 1,148 1,159 -0.9 % Gross profit 2,804 2,757 1.7 % 8,242 8,191 0.6 % Gross margin percentage 89.0 % 87.1 % 87.8 % 87.6 % Website Revenue 1,308 1,230 6.3 % 3,665 4,065 -9.8 % Cost of revenue 336 287 17.1 % 818 742 10.2 % Gross profit 972 943 3.1 % 2,847 3,323 -14.3 % Gross margin percentage 74.3 % 76.7 % 77.7 % 81.7 % Lead management Revenue 247 256 -3.6 % 656 735 -10.8 % Cost of revenue 87 29 200.0 % 211 80 163.8 % Gross profit 160 227 -29.6 % 445 655 -32.1 % Gross margin percentage 64.8 % 88.7 % 67.8 % 89.1 % Other Revenue 648 700 -7.4 % 2,205 1,973 11.7 % Cost of revenue 325 395 -17.7 % 1,171 1,063 10.2 % Gross profit 323 305 5.9 % 1,034 910 13.6 % Gross margin percentage 49.8 % 43.6 % 46.9 % 46.1 % Total Revenue 5,354 5,352 0.0 % 15,916 16,123 -1.3 % Cost of revenue 1,095 1,120 -2.2 % 3,348 3,044 10.0 % Gross profit $ 4,259 $ 4,232 0.6 % $ 12,568 $ 13,079 -3.9 % Gross margin percentage 79.5 % 79.1 % 79.0 % 81.1 % Total revenues for the three and nine months ended April 30, 2011 were $5,354,000 and $15,916,000, respectively, versus $5,352,000 and $16,123,000 for the same periods last year. As previously discussed, our fiscal 2011 revenues were negatively affected by the loss of non-cash deferred revenues and the sale of our Agchem EDI Business. Excluding the impact of these items, we would have experienced organic revenue growth of approximately 4% for both the three and nine months ended April 30, 2011, which is attributed to continued strong new sales and improvement in our rate of customer churn, which have collectively led to continued growth in our MRR. Given that a substantial portion of our revenues are subscription-based, MRR is one of the performance indicators we closely monitor, as it is the key driver of future revenue growth. Catalog, which continues to be our largest source of revenue, was relatively flat for the three and nine months ended April 30, 2011, compared to the same periods last year. We experienced an increase in new recurring subscription sales from our international and US operations, which was offset by a decline in revenue from non-recurring professional services as we focused on growing MRR, rather than non-recurring revenue. We expect to see continued year over year growth in our catalog revenues for the remainder of fiscal 2011, as we focus on growing our MRR. Website revenues increased 6.3% for the three month period ended April 30, 2011, but declined 9.8% for the nine months ended April 30, 2011, compared to the same periods last year. The year to date decrease in revenue is due to the decline in non-cash deferred revenues previously discussed. Without this item, year to date revenues would have increased 9.5%. Recurring revenues increased 14.3% and 5.1% for the three and nine month periods ended April 30, 2011, compared to the same periods last year due to strong new sales and an improvement in customer churn. Furthermore, the non-cash, non-recurring revenues were replaced with cash-generating MRR. We expect total website revenue to increase for the remainder of fiscal 2011, over the previous year, due to the anticipated continued improvement in both recurring revenue and churn. Page 26-------------------------------------------------------------------------------- Table of Contents Revenues from our Lead Management product decreased 3.6% and 10.8% for the three and nine month periods ended April 30, 2011, compared to the same periods last year. Much of Lead Management sales are from the marine industry, which has been adversely affected by the economic conditions of the past several years. We experienced increased churn in this product during the latter half of fiscal 2010, which had a negative impact on revenues during fiscal 2011. We expect revenues from our Lead Management product to remain at their current levels for the remainder of fiscal 2011. Although we do not anticipate year over year growth in fiscal 2011, we have plans to launch a new platform of our Lead Management product, which is expected to drive growth beginning in fiscal 2012. Other revenues decreased 7.4% for the three month period ended April 30, 2011, compared to the same period last year, due to the sale of the Agchem EDI business. Other revenues included Agchem EDI revenues of $118,000 and $360,000 or $0.02 and $0.05 of revenue per share for the three and nine month periods ended April 30, 2010 compared to $38,000 and $276,000 or $0.00 and $0.03 of revenue per share for same periods this year. Other revenues increased for the nine month period ended April 30, 2011, compared to the same periods last year due to an increase in revenues from our search engine product and a website customization project for a large manufacturer. We expect to see revenues in this category increase for the remainder of fiscal 2011 due to the recognition of revenues from a recently-signed professional services contract. Page 27-------------------------------------------------------------------------------- Table of Contents The table below breaks out cost of revenues for the three and nine months ended April 30, 2011 and 2010 (in thousands): (Unaudited) (Unaudited) Three months ended April 30 Nine months ended April 30 Percent of Percent of Percent of Percent of 2011 Revenue 2010 Revenue 2011 Revenue 2010 Revenue Net revenue $ 5,354 $ 5,352 $ 15,916 $ 16,123 Cost of revenues: Amortization of capitalized software costs 291 5.4 % 265 5.0 % 815 5.1 % 784 4.9 % Direct labor 378 7.1 % 401 7.5 % 966 6.1 % 1,041 6.5 % Other direct costs 426 8.0 % 454 8.5 % 1,567 9.8 % 1,219 7.6 % Total cost of revenues 1,095 20.5 % 1,120 20.9 % 3,348 21.0 % 3,044 18.9 % Gross profit $ 4,259 79.5 % $ 4,232 79.1 % $ 12,568 79.0 % $ 13,079 81.1 % Gross profit was $4,259,000 or 79.5% of revenue for the three months ended April 30, 2011, compared to $4,232,000 or 79.1% of revenue for the same period last year. Gross profit was $12,568,000 or 79.0% of revenue for the nine months ended April 30, 2011, compared to $13,079,000 or 81.1% of revenue for the same period last year. The year to date decline in gross profit, as well as the decline in gross profit margin, was primarily attributed to two factors: (i) the loss of the non-cash deferred revenues, for which there were no costs associated; and (ii) a change in product mix in which we saw an increase in revenues from some of our lower-margin products. We expect fluctuations in gross margin from quarter to quarter and year over year based on the mix of products sold, but expect our gross margins to improve over time as we focus our sales efforts on our higher margin, recurring revenue products. Operating Expenses The following table summarizes our unaudited operating expenses by expense category (in thousands): (Unaudited) (Unaudited) Three months ended April 30 Nine months ended April 30 Percent of Percent of Percent Percent of Percent of Percent 2011 Revenue 2010 Revenue Change 2011 Revenue 2010 Revenue Change Sales and marketing $ 946 17.7 % $ 1,261 23.6 % -25.0 % $ 3,172 19.9 % $ 3,595 22.3 % -11.8 % Customer operations and support (1) 834 15.6 % 812 15.2 % 2.7 % 2,545 16.0 % 2,468 15.3 % 3.1 % Software development and technical support (2) 351 6.6 % 245 4.6 % 43.3 % 1,127 7.1 % 1,076 6.7 % 4.8 % General and administrative 1,011 18.9 % 1,206 22.5 % -16.2 % 3,091 19.4 % 3,374 20.9 % -8.4 % Restructuring (3) - n/a - n/a n/a - n/a 76 0.5 % n/a Depreciation and amortization (4) 442 8.3 % 411 7.7 % 7.5 % 1,259 7.9 % 1,232 7.6 % 2.2 % Net operating expenses $ 3,584 66.9 % $ 3,935 73.5 % -8.9 % $ 11,194 70.3 % $ 11,821 73.3 % -5.3 % (1) Net of capitalized software development costs of $41, $10, $143 and $61 for the three and nine months ended April 30, 2011 and 2010, respectively. (2) Net of capitalized software development costs of $372, $380, $1,085 and $954 for the three and nine months ended April 30, 2011 and 2010, respectively. (3) Represents an adjustment to accrued rent related to the 2008 restructuring. (4) Exclusive of amortization of software products of $291, $265, $815 and $784 for the three and nine months ended April 30, 2011 and 2010, respectively, which are included in cost of revenue. Net operating expenses decreased from $3,935,000 or 73.5% of revenue for the three month period ended April 30, 2010 to $3,584,000 or 66.9% of revenue for the same period this year and from $11,821,000 or 73.3% of revenue for the nine month period ended April 30, 2010 to $11,194, 000 or 70.3% of revenue for the same period this year. The decrease in net operating expenses is due to a decrease in sales and marketing and general and administrative expenses, both of which are discussed below. Page 28-------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses declined $315,000 or 25.0%, for the three months ended April 30, 2011 and $423,000 or 11.8% for the nine months ended April 30, 2011, compared to the same periods last year. We measure the returns realized through our sales teams with the customer acquisition cost ("CAC") ratio. This is defined as the new annualized net gross margin added during a quarter divided by the sales and marketing costs of the previous quarter, excluding any account management costs associated with your base revenue. We have experienced an improvement in our CAC ratios for the quarter ended April 30, 2011, compared to the same period last year, which means that we are generating more sales for each sales and marketing dollar spent. These improvements in CAC were achieved by refining our sales incentive programs, achieving operating efficiencies and close management of discretional sales and marketing spending. Our software development and technical support staff have three essential responsibilities for which the accounting treatment varies depending upon the work performed: (i) costs associated with internal software development efforts are typically capitalized as software product costs and amortized over the estimated useful life of the product; (ii) professional services performed for customers related to software customization projects are classified as cost of revenues; and (iii) all other activities are considered operating expenses and included within the software development and technical support operating expense category. The table below summarizes our gross software development and technical support spending (in thousands): (Unaudited) (Unaudited) Three months ended April 30 Nine months ended April 30 Percent Percent 2011 2010 Change 2011 2010 Change Total software development and technical support costs $ 1,130 $ 1,009 12.0 % $ 3,328 $ 3,080 8.1 % Less: amount capitalized as software development (425 ) (390 ) 9.0 % (1,278 ) (1,015 ) 25.9 % Less: direct labor classified as cost of revenues (354 ) (374 ) -5.3 % (923 ) (989 ) -6.7 % Net software development and technical support costs classified as operating expenses $ 351 $ 245 43.3 % $ 1,127 $ 1,076 4.8 % We increased our total software development and technical support costs for the three and nine months ended April 2011, compared to the same periods last year, in accordance with our product development and innovation strategies. We expect fluctuations in the amount of software development and technical support costs classified as operating expenses from period to period, as the mix of development and customization activities will change based on customer requirements, even if total software development and technical support departmental costs remain relatively constant. During the three and nine months ended April 30, 2011, we capitalized $375,000 and $1,228,000 of software development labor and overhead, versus $390,000 and $1,015,000 for the same periods last year. As discussed earlier, we completed several significant product upgrades and enhancements during fiscal 2011 and are working on several new enhancements expected to be released in the upcoming quarter, which we anticipate will increase future revenues for the Company. Management expects total spending for software development and technical support to continue at the same pace for the remainder of fiscal 2011 as we focus on our core strategy of product enhancement and innovation. General and administrative expenses declined $195,000 or 16.2% for the three months ended April 30, 2011 and $283,000 or 8.4% for the nine months ended April 30, 2011, compared to the same periods last year. This improvement can be attributed to management's cost reduction strategies and operational efficiencies in the general and administrative area, primarily as a result of the restructurings and the integration of the Channel Blade acquisition. Page 29-------------------------------------------------------------------------------- Table of Contents We expect operating expenses to continue to decrease over the prior year for the remainder of fiscal 2011 as a result of operational efficiencies, including our data center consolidation, our focus on eliminating non-value added costs and operational process improvements made throughout the organization. Other Income (Expense) Other income included an estimated gain before tax of approximately $433,000 or $0.05 per share on the sale of the AgChem EDI business during the quarter ended April 30, 2011, as more fully discussed in Note 10 to our Unaudited Consolidated Financial Statements. Income Taxes Current income tax expense is the statutory tax rate applied to current U.S. income before taxes, plus or minus any adjustments to the deferred tax assets and to the estimated valuation allowance against deferred tax assets. This does not represent a current cost obligation, as we have net operating loss carryforwards to offset taxable income. We recorded income tax expense from continuing operations of $402,000 during the quarter ended April 30, 2011 and $481,000 for the nine months ended April 30, 2011, compared to expense of $0 and $5,000 for the same periods last year. Liquidity and Capital Resources The following table sets forth, for the periods indicated, certain unaudited cash flow information derived from our financial statements (in thousands): (Unaudited) (Unaudited) Three months ended April 30 Nine months ended April 30 Percent Percent 2011 2010 Change 2011 2010 Change Net cash provided by operating activities $ 862 $ 950 -9.3 % $ 2,158 $ 1,145 88.5 % Net cash used in investing activities (567 ) (582 ) 2.6 % (1,612 ) (1,499 ) -7.5 % Net cash provided by (used in) financing activities (720 ) (38 ) -1794.7 % (676 ) 611 -210.6 % Effect of foreign currency exchange rate changes on cash 2 (3 ) 166.7 % (4 ) (3 ) n/a Net change in cash $ (423 ) $ 327 -229.4 % $ (134 ) $ 254 -152.8 % Cash at end of period $ 804 $ 904 -11.1 % $ 804 $ 904 -11.1 % Total cash flow for the three months ended April 30, 2011 was a net use of $423,000, compared to a net generation of $327,000 for the same period last year. For the nine months ended April 30, 2011, total cash flow was a net use of $134,000, versus a net generation of $254,000 last year. The primary driver of the year over year decrease in cash flow is the $525,000 repayment on the line of credit made during fiscal 2011 versus borrowings of $525,000 on the line of credit during fiscal 2010. Cash generated from operations was $862,000 for the three month period ended April 30, 2011, which was relatively the same as last year. Cash generated from operations increased 97% from $1,145,000 for the nine months ended April 30, 2010 to $2,158,000 for the same period this year. The substantial improvement in operating cash flows was driven by the following factors: Page 30-------------------------------------------------------------------------------- Table of Contents (i) A greater portion of our revenues in fiscal 2011 resulted in cash collected. This was due to the fact that a substantial portion of the non-cash deferred revenues we recognized in fiscal 2010 were replaced with cash-generating MRR. (ii) We sold AFIS in July 2010. In fiscal 2010, this business generated pre-tax operating losses of $653,000, of which $455,000 were incurred in the first nine months. (iii) Our operating expenses continue to decline as we focus on efficiencies throughout the organization. (iv) The Channel Blade acquisition has been fully integrated into the organization. (v) Our accounts receivable collections have improved as we expanded our efforts in this area. This improvement is reflected by the 37% decline in accounts receivable, net of bad debt allowance. We continue to invest cash in the business, primarily for the development of new products and upgrades of existing products; however, we have also invested additional funds during fiscal 2011 in upgrading our technology infrastructure as part of our efforts to consolidate our data centers. These efforts will result in our primary data center being located in a Tier III (as defined by the Uptime Institute's tier classification system) hosted facility in Madison, Wisconsin with one internally-hosted backup data center. Although we will continue to invest in the business, management expects cash used in investing activities to fluctuate from period to period based on the level of software development activities as well as the timing of acquisitions. Cash used in financing activities was $720,000 for the three month period ended April 30, 2011 versus $38,000 for the same period last year and $676,000 for the nine month period ended April 30, 2011 versus cash generated from financing activities of $611,000 for the same period last year. Cash generated in fiscal 2010 was a result of borrowings on the line of $525,000, whereas cash was used in financing in fiscal 2011 to pay back $525,000 on our line of credit. Management believes that current cash balances, as well as the existing availability under our line of credit with JPMorgan Chase, are sufficient to fund our needs over the next twelve months. Off-Balance Sheet Arrangements The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. |