XNAS:DITC Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to               

 

Commission file number 000-26209

 

GRAPHIC

 

Ditech Networks, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-2935531

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification Number)

 

3099 North First Street

San Jose, California 95134

(Address of principal executive offices) (Zip Code)

 

(408) 883-3636

(Registrant’s telephone number, including area code)

 

825 E. Middlefield Road

Mountain View, Ca. 94043

(Former address)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  x

(Do not check if a smaller reporting Company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES o  NO x

 

As of February 29, 2012, 26,759,143 shares of the Registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

Ditech Networks, Inc.

FORM 10-Q for the Quarter Ended January 31, 2012

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I.

 

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2012 and 2011

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at January 31, 2012 and April 30, 2011

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2012 and 2011

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

Item 1A.

Risk Factors

53

 

 

 

 

 

Item 6.

Exhibits

54

 

 

 

 

 

 

Signature

55

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM I. Financial Statements

 

Ditech Networks, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

(unaudited)

 

 

 

Three months
ended January 31,

 

Nine months ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

1,790

 

$

3,829

 

$

4,166

 

$

7,928

 

Service revenue

 

2,417

 

1,758

 

6,934

 

5,350

 

Total revenue

 

4,207

 

5,587

 

11,100

 

13,278

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

Product revenue

 

1,014

 

1,200

 

2,547

 

3,211

 

Service revenue

 

1,682

 

1,229

 

4,515

 

3,719

 

Total cost of revenue (1) 

 

2,696

 

2,429

 

7,062

 

6,930

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

1,511

 

3,158

 

4,038

 

6,348

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing (1) 

 

1,643

 

1,732

 

4,389

 

5,666

 

Research and development (1) 

 

1,780

 

1,672

 

5,390

 

5,777

 

General and administrative (1

 

750

 

1,182

 

2,753

 

3,745

 

Amortization of purchased intangible assets

 

20

 

20

 

60

 

60

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

4,193

 

4,606

 

12,592

 

15,248

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(2,682

)

(1,448

)

(8,554

)

(8,900

)

Other income (expense), net

 

10

 

(34

)

(1

)

(58

)

 

 

 

 

 

 

 

 

 

 

Loss before provision for (benefit from) income taxes

 

(2,672

)

(1,482

)

(8,555

)

(8,958

)

Provision for (benefit from) income taxes

 

6

 

5

 

18

 

(12

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,678

)

$

(1,487

)

$

(8,573

)

$

(8,946

)

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(0.10

)

$

(0.06

)

$

(0.32

)

$

(0.34

)

 

 

 

 

 

 

 

 

 

 

Weighted shares used in per share calculation:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

26,566

 

26,388

 

26,466

 

26,359

 

 


(1) Stock-based compensation expense was allocated by function as follows:

Cost of revenue

 

$

11

 

$

14

 

$

37

 

$

58

 

Sales and marketing

 

69

 

77

 

153

 

308

 

Research and development

 

41

 

30

 

138

 

170

 

General and administrative

 

80

 

122

 

47

 

450

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

Ditech Networks, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

(unaudited)

 

 

 

January 31,
2012

 

April 30,
2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

21,287

 

$

24,062

 

Short-term investments

 

2,400

 

3,360

 

Accounts receivable, net of allowance for doubtful accounts of $66 at January 31, 2012 and $249 at April 30, 2011

 

1,363

 

1,851

 

Inventories

 

3,851

 

4,689

 

Other current assets

 

391

 

327

 

 

 

 

 

 

 

Total current assets

 

29,292

 

34,289

 

 

 

 

 

 

 

Long-term investments

 

100

 

100

 

Property and equipment, net

 

709

 

1,164

 

Purchased intangibles, net

 

81

 

441

 

Other assets

 

3,447

 

4,724

 

 

 

 

 

 

 

Total assets

 

$

33,629

 

$

40,718

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Accounts payable

 

$

1,233

 

$

858

 

Accrued expenses

 

1,338

 

1,632

 

Deferred revenue

 

1,388

 

530

 

Income taxes payable

 

61

 

50

 

Total current liabilities

 

4,020

 

3,070

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value: 55,000 shares authorized and 26,758 shares issued and outstanding at January 31, 2012, and 200,000 shares authorized and 26,545 shares issued and outstanding at April 30, 2011

 

26

 

26

 

Additional paid-in capital

 

268,882

 

268,348

 

Accumulated deficit

 

(239,299

)

(230,726

)

 

 

 

 

 

 

Total stockholders’ equity

 

29,609

 

37,648

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

33,629

 

$

40,718

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

Ditech Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

(unaudited)

 

 

 

Nine months ended January 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(8,573

)

$

(8,946

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization, net

 

1,842

 

2,070

 

Accretion of interest on convertible note payable

 

 

125

 

Net loss on disposal of purchased intangibles and property and equipment

 

14

 

 

Stock-based compensation expense

 

374

 

986

 

Amortization of purchased intangibles

 

60

 

60

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

488

 

(1,885

)

Inventories

 

839

 

562

 

Other current assets

 

(96

)

292

 

Income taxes payable

 

11

 

18

 

Accounts payable

 

375

 

706

 

Accrued expenses and other accrued liabilities

 

(294

)

(1,172

)

Deferred revenue

 

858

 

(389

)

 

 

 

 

 

 

Net cash used in operating activities

 

(4,102

)

(7,573

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(78

)

(39

)

Proceeds from sale of purchased intangibles and property and equipment

 

286

 

 

Purchases of available for sale investments

 

(4,560

)

(6,720

)

Sales and maturities of available for sale investments

 

5,520

 

7,920

 

 

 

 

 

 

 

Net cash provided by investing activities

 

1,168

 

1,161

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from employee stock plan issuances

 

159

 

100

 

 

 

 

 

 

 

Net cash provided by financing activities

 

159

 

100

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,775

)

(6,312

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

24,062

 

29,634

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

21,287

 

$

23,322

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

DITECH NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(unaudited)

 

1.             DESCRIPTION OF BUSINESS

 

Ditech Networks, Inc. (the “Company”) designs, develops and markets telecommunications equipment and services for use in wireline, wireless, satellite and Internet Protocol (“IP”) telecommunications networks. The Company’s products enhance and monitor voice quality and provide security in the delivery of voice services. In addition, the Company has entered the voice services market of telecommunications by developing and marketing voice products that can be used by phone customers to have voice messages transcribed into textual messages, and which also allows for interaction with web-based applications. The Company has established a direct sales force that sells its products in the U.S. and internationally. In addition, the Company is expanding its use of value added resellers and distributors in an effort to broaden its sales channels. This expanded use of value added resellers and distributors has occurred primarily in the Company’s international markets.

 

2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated financial statements as of January 31, 2012, and for the three and nine month periods ended January 31, 2012 and 2011, together with the related notes, are unaudited but include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for the fair presentation, in all material respects, of the financial position and the operating results and cash flows for the interim date and periods presented. The April 30, 2011 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results for the interim periods ended January 31, 2012 are not necessarily indicative of results for the entire fiscal year or future periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended April 30, 2011, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on July 28, 2011, file number 000-26209.

 

Revenue Recognition

 

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. Also in October 2009, the FASB amended the accounting standards for multiple-deliverable arrangements to (i) provide updated guidance on how the elements in a multiple-deliverable arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue amongst the elements in an arrangement using estimated selling prices (“ESP”) if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of the selling price; and (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

 

VSOE for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for an element falls within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of

 

6



Table of Contents

 

the median rates. In addition, the Company considers major service groups, geographies, customer classifications, and other variables in determining VSOE.

 

TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is typically not able to determine TPE for the Company’s products or services. Generally, the Company’s go-to-market strategy differs from that of the Company’s peers and the Company’s offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

 

When the Company is unable to establish the selling price of its elements using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to, pricing policies, internal costs, gross margin objectives, competitive landscapes, geographies, customer classes and distribution channels.

 

The Company adopted this accounting guidance at the beginning of its first quarter of the fiscal year ending April 30, 2012 for applicable arrangements originating or materially modified after April 30, 2011. The Company currently only enters into multiple element arrangements within the Voice Quality Enhancement segment as mentioned in Note 10 of these Notes to the Condensed Consolidated Financial Statements. The adoption of these accounting standards has not had a material impact on revenue recognized since adoption.

 

The Company’s revenue in multiple element arrangements in the Voice Quality Enhancement segment are derived primarily from two sources: (i) product revenue which consists of hardware and software, and (ii) related support and service revenue. The Company’s products are telecommunications hardware with embedded software components such that the software functions together with the hardware to provide the essential functionality of the product. Therefore, the Company’s hardware deliverables are considered to be non-software elements and are excluded from the scope of industry-specific software revenue recognition guidance.

 

Although the Company cannot reasonably estimate the effect of the adoption on future financial periods as the impact may vary depending on the nature and volume of future sale contracts, this guidance does not generally change the units of accounting for the Company’s revenue transactions. The Company’s hardware (including essential software) products and services qualify as separate units of accounting because they have value to the customer on a stand-alone basis and the Company’s revenue arrangements generally do not include a general right of return relative to delivered products. The Company’s hardware (including essential software) is valued using ESP as mentioned above based on internal pricing policies. The Company’s services (which include annual service maintenance and installation services) are valued using VSOE as mentioned above based upon the contractually stated annual renewal rate. The rest of the Company’s revenue recognition policy is consistent with the policy in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2011.

 

7



Table of Contents

 

Computation of Loss per Share

 

Basic loss per share is calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per share for the three and nine month periods ended January 31, 2012 and 2011 is calculated excluding the effects of all common stock equivalents, as their effect would be anti-dilutive.  For the three and nine month periods ended January 31, 2012, weighted average common stock equivalents, primarily options and restricted stock units, totaling 5,005,000 shares and 4,613,167 shares, respectively, were excluded from the calculation of diluted loss per share, as their impact would be anti-dilutive. The diluted loss per share for the three and nine months ended January 31, 2012 also excludes the impact of 100,000 shares potentially issuable under the warrant issued as part of the Grid acquisition. See Note 4 of these Notes to the Condensed Consolidated Financial Statements for a further discussion of the Grid transaction. For the three and nine month periods ended January 31, 2011, weighted average common stock equivalents, primarily options, totaling approximately 5,022,000 shares and 5,448,000 shares, respectively, were excluded from the calculation of diluted loss per share, as their impact would be anti-dilutive. The diluted loss per share for the for the three and nine months ended January 31, 2011 also excludes the impact of 1,000,000 shares that had been potentially issuable upon conversion of Simulscribe’s convertible note payable and 100,000 shares potentially issuable under the warrant issued as part of the Grid acquisition.  See Notes 4 and 5 of these Notes to the Condensed Consolidated Financial Statements for a further discussion of the Grid and Simulscribe transactions, respectively.

 

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted net loss per share follows (in thousands, except per share amounts):

 

 

 

Three months ended

 

Nine months ended

 

 

 

January 31,

 

January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,678

)

$

(1,487

)

$

(8,573

)

$

(8,946

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

26,566

 

26,391

 

26,466

 

26,368

 

Less restricted stock included in weighted shares outstanding subject to vesting

 

 

(3

)

 

(9

)

Shares used in calculation of basic and diluted loss per share amounts

 

26,566

 

26,388

 

26,466

 

26,359

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.10

)

$

(0.06

)

$

(0.32

)

$

(0.34

)

 

8



Table of Contents

 

Comprehensive Loss

 

For the three and nine month periods ended January 31, 2012 and 2011, there was no difference between reported net loss and comprehensive loss.

 

Accounting for Stock-Based Compensation

 

Stock-based compensation expense recognized during the period is based on the fair value of the actual awards vested or expected to vest. Compensation expense for all stock-based payment awards expected to vest is recognized on a straight-line basis. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

The fair value of stock option awards is estimated on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock option awards. The value of the portion of the option that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Condensed Consolidated Statement of Operations.

 

The fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is the product of the number of shares granted and the grant date fair value of the Company’s stock. RSAs and RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSAs and RSUs is subject to the employee’s continuing service to the Company. RSAs and RSUs generally vest over a period of four years and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures.

 

In the periods presented, the Company has issued non-vested stock options and RSUs with performance goals to certain senior members of management. The number of non-vested stock options or non-vested RSUs underlying each award may be determined based on a range of attainment within defined performance goals. The Company is required to estimate the attainment that will be achieved related to the defined performance goals and the number of non-vested stock options or non-vested RSUs that will ultimately be awarded in order to recognize compensation expense over the vesting period. If the Company’s initial estimates of performance goal attainment change, the related expense may fluctuate from quarter to quarter based on those estimates and if the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed. In the nine months ended January 31, 2012, the Company reversed approximately $0.1 million of previously recognized expense on unvested stock options and RSUs related to certain performance grants, due to the previous chief executive officer’s departure from the Company’s board of directors.

 

There was no tax benefit from the exercise of stock options related to deductions in excess of compensation cost recognized in the three and nine months ended January 31, 2012 and 2011. The Company reflects the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow.

 

9



Table of Contents

 

Investments

 

Investment securities that have maturities of more than three months at the date of purchase but current maturities of less than one year are considered short-term investments. Long-term investment securities include any investments with remaining maturities of one year or more and auction rate securities that failed to settle beginning in fiscal 2008, for which conditions leading to their failure at auction create uncertainty as to whether they will settle in the near-term.

 

Short term investments consist primarily of certificates of deposit and long-term investments consist of asset backed preferred equity securities. The Company’s investment securities are maintained at a major financial institution, are classified as available-for-sale, and are recorded on the Condensed Consolidated Balance Sheets at fair value, with unrealized gains and losses, if any, included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. If the Company sells its investments prior to their maturity, it may record a realized gain or loss in the period the sale took place. In the three and nine months ended January 31, 2012 and 2011, the Company realized no gains or losses on its investments.

 

The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and the extent to which the fair value has been below cost-basis, the financial condition of the issuer and the Company’s ability to hold the investment for a period of time, which may be sufficient for anticipated recovery of the market value. To the extent that the historical cost of the available for sale security exceeds the estimated fair market value, and the decline in value is deemed to be other-than-temporary, an impairment charge is recorded in the Condensed Consolidated Statements of Operations.

 

10



Table of Contents

 

Impairment of Long-lived Assets

 

The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances arise, the Company assesses the recoverability of its long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of the assets in question, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

The Company evaluates the recoverability of its amortizable purchased intangible assets based on an estimate of undiscounted future cash flows resulting from the use of the related asset group and its eventual disposition. The asset group represents the lowest level for which cash flows are largely independent of cash flows of other assets and liabilities. Measurement of an impairment loss for long-lived assets that the Company expects to hold and use is based on the difference between the fair value and carrying value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

 

3.             BALANCE SHEET ACCOUNTS

 

Inventories

 

Inventories comprised (in thousands):

 

 

 

January 31,
2012

 

April 30,
2011

 

 

 

 

 

 

 

Raw materials

 

$

45

 

$

37

 

Work In Progress

 

7

 

 

Finished goods

 

3,799

 

4,652

 

 

 

 

 

 

 

Total

 

$

3,851

 

$

4,689

 

 

Stock-based compensation capitalized in inventories was not material at January 31, 2012 and April 30, 2011, respectively.

 

Investments

 

The following table summarizes the Company’s investments as of January 31, 2012 (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Certificates of deposit

 

$

2,400

 

$

 

$

 

$

2,400

 

Asset backed preferred equity securities

 

9,975

 

 

(9,875

)

100

 

Total

 

$

12,375

 

$

 

$

(9,875

)

$

2,500

 

 

11



Table of Contents

 

The following table summarizes the Company’s investments as of April 30, 2011 (in thousands):

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Certificates of deposit

 

$

3,360

 

$

 

$

 

$

3,360

 

Asset backed preferred equity securities

 

9,975

 

 

(9,875

)

100

 

Total

 

$

13,335

 

$

 

$

(9,875

)

$

3,460

 

 

As of April 30, 2011 and January 31, 2012, all of the Company’s short-term investments were held in certificates of deposit and long-term investments were held in asset backed preferred equity securities. The long-term investments are tied to auction rate securities that failed to settle at auction beginning in fiscal 2008, for which there appears to be no near-term market. As of January 31, 2012 and April 30, 2011, the Company continued to hold asset backed preferred equity securities with a par value of $10.0 million and a fair value of $0.1 million.

 

For the three and nine months ended January 31, 2012 and 2011, no gains or losses were realized on the sale of short-term and long-term investments. There were no unrealized gains or losses included in accumulated other comprehensive loss in the accompanying Condensed Consolidated Balance Sheets as of January 31, 2012 and April 30, 2011.

 

The accounting guidance on fair value accounting clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance on fair value accounting establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets at fair value, including its short-term and long-term investments.

 

When available, the Company uses quoted market prices to determine fair value of certain of its cash and cash equivalents including money market funds and certain certificates of deposit, which are reported under investments, such items are classified in Level 1 of the fair value hierarchy. At January 31, 2012 and April 30, 2011, there were no active markets for the Company’s asset backed preferred equity securities resulting from converted auction rate securities, or comparable securities due to current market conditions. Therefore, until such a market becomes active, the Company is determining their fair value based on expected discounted cash flows. Such items are classified in Level 3 of the fair value hierarchy.

 

12



The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2012 (in thousands):

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds-recurring

 

$

19,609

 

$

19,609

 

$

 

$

 

Certificates of deposit-recurring

 

2,400

 

2,400

 

 

 

Asset backed preferred equity securities-recurring

 

100

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22,109

 

$

22,009

 

$

 

 

$

100

 

 

The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2011 (in thousands):

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds-recurring

 

$

19,040

 

$

19,040

 

$

 

$

 

Certificates of deposit-recurring

 

3,360

 

3,360

 

 

 

Asset backed preferred equity securities-recurring

 

100

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

22,500

 

$

22,400

 

$

 

$

100

 

 

The following table presents the changes in the Level 3 fair value category for the nine months ended January 31, 2012 (in thousands):

 

 

 

 

 

Net Realized/Unrealized

 

 

 

 

 

 

 

 

 

 

 

Gains (Losses) included in

 

 

 

 

 

 

 

 

 

 

 

Impairment
Loss
Recognized

 

Unrealized Gain
Recognized in
Other

 

Purchases, (Sales),
Accretion of
Interest,

 

Transfers in

 

January

 

 

 

April 30,

 

in

 

Comprehensive

 

Issuances and

 

and/or (out)

 

31,

 

 

 

2011

 

Earnings

 

Income (Loss)

 

(Settlements)

 

of Level 3

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset backed preferred equity securities

 

$

100

 

$

 

$

 

$

 

$

 

$

100

 

 

13



The following table presents the changes in the Level 3 fair value category for the nine months ended January 31, 2011 (in thousands):

 

 

 

 

 

Net Realized/Unrealized

 

 

 

 

 

 

 

 

 

 

 

Gains (Losses) included in

 

Purchases,

 

 

 

 

 

 

 

May 1,

 

Impairment
Loss
Recognized in

 

Unrealized
Gain
Recognized in
Other
Comprehensive

 

(Sales),
Accretion of
Interest,
Issuances
and

 

Transfers
in
and/or
(out)

 

January 31,

 

 

 

2010

 

Earnings

 

Income (Loss)

 

(Settlements)

 

of Level 3

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset backed preferred equity securities

 

$

100

 

$

 

$

 

$

 

$

 

$

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term convertible note payable

 

$

3,277

 

$

 

$

 

$

125

(1)

$

 

$

3,402

 

 


(1)                                  Reflects the accretion of interest on the convertible note payable to Simulscribe in conjunction with the Company’s exclusive distribution agreement.  The carrying value of the note payable as of January 31, 2011 of $3.4 million approximates its fair value, based on current market rates.

Other Assets

 

Other assets comprised (in thousands):

 

 

 

January 31,
2012

 

April 30,
2011

 

 

 

 

 

 

 

Exclusive distribution intangibles, net

 

3,415

 

4,724

 

Other

 

32

 

 

 

 

 

 

 

 

Total

 

$

3,447

 

$

4,724

 

 

See note 5 of Notes to the Condensed Consolidated Financial Statements for details related to the exclusive distribution intangibles, net.

 

Accrued expenses

 

Accrued expenses comprised (in thousands):

 

 

 

January 31,
2012

 

April 30,
2011

 

Accrued employee compensation

 

$

975

 

$

1,109

 

Accrued warranty

 

109

 

139

 

Accrued restructuring costs

 

7

 

42

 

Other accrued expenses

 

247

 

342

 

Total

 

$

1,338

 

$

1,632

 

 

Warranty Accrual.

 

The Company provides for future warranty costs upon shipment of its products. The specific terms and conditions of those warranties may vary depending on the product sold, the customer and the country in which it does business. However, the Company’s hardware warranties generally start from the shipment date and continue for a period of two to five years while the software warranty is generally ninety days to one year.

 

Because the Company’s products are manufactured to a standardized specification and products are internally tested to these specifications prior to shipment, the Company historically has experienced minimal warranty costs. Factors that affect the Company’s warranty liability include the number of installed units, historical experience and management’s judgment regarding anticipated rates of warranty

 

14



Table of Contents

 

claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities every quarter and makes adjustments to the liability, if necessary.

 

Changes in the warranty accrual, which is included as a component of “Accrued expenses” on the Condensed Consolidated Balance Sheet, were as follows (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

January 31,

 

January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Balance as of the beginning of the fiscal period

 

$

113

 

$

196

 

$

139

 

$

301

 

Provision for warranties issued during fiscal period

 

(15

)

7

 

(15

)

39

 

Warranty costs incurred during fiscal period

 

11

 

(14

)

(15

)

(48

)

Other adjustments to the liability (including changes in estimates for pre-existing warranties) during fiscal period

 

 

(27

)

 

 

(130

)

 

 

 

 

 

 

 

 

 

 

Balance as of January 31

 

$

109

 

$

162

 

$

109

 

$

162

 

 

Reduction in Force.

 

In July 2011, the Company initiated a reduction in force that was completed by October 31, 2011, in an ongoing attempt to reduce operating expenses. The affected employees were notified in July 2011. As a result, the Company reduced its headcount by approximately 8%, and recorded charges of approximately $130,000 for severance and related charges, $7,000 of which has not been paid as of January 31, 2012, and is included in accrued expenses at January 31, 2012. This amount represents costs for outplacement services available to the affected employees through September 2012. The adjustment in the three and nine months ended January 31, 2011 reflects the reversal of estimated outplacement services originally recorded as a part of the restructuring in the third quarter of fiscal 2010, which expired unused in the third quarter of fiscal 2011.

 

At April 30, 2011, accrued expense included a balance of $42,000 pertaining to a facility abandonment charge resulting from the reduction in force in November 2009.  The related sublease expired fully on July 31, 2011.

 

Reduction in force costs for the three and nine month periods ended January 31, 2012 and 2011 were as follows (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

January 31,

 

January 31,

 

$s in thousands

 

2012

 

2011

 

2012

 

2011

 

Cost of revenue

 

$

 

$

 

$

45

 

$

 

Sales and marketing

 

 

(8

)

36

 

(8

)

Research and development

 

 

(7

)

28

 

(7

)

General and administrative

 

 

 

21

 

 

Total

 

$

 

$

(15

)

$

130

 

$

(15

)

 

The Company’s Voice Quality Enhancement segment incurred $120,000 of reduction in force costs during the nine months ended January 31, 2012, and $10,000 was incurred by the Voice Applications segment during that period.

 

15



Table of Contents

 

4.          PURCHASED INTANGIBLES

 

The carrying value of purchased intangible assets acquired in business combinations is as follows (in thousands):

 

January 31, 2012

 

 

 

Gross
Value

 

Accumulated
Amortization

 

Net Value

 

Purchased Intangible Assets 

 

 

 

 

 

 

 

Core technology

 

$

242

 

$

(161

)

$

81

 

Total

 

$

242

 

$

(161

)

$

81

 

 

April 30, 2011

 

 

 

Gross
Value

 

Accumulated
Amortization

 

Net Value

 

Purchased Intangible Assets

 

 

 

 

 

 

 

Core technology

 

$

242

 

$

(101

)

$

141

 

URL

 

300

 

 

300

 

Total

 

$

542

 

$

(101

)

$

441

 

 

In February 2010, the Company completed an acquisition of 100% of the outstanding shares of Grid.com, a Company with infrastructure to deliver services with simple credit card billing through the web. The purchase price, net of $0.1 million of cash received from Grid.com, totaled $0.5 million.  This purchase price, which included $35,000 of value attributable to a warrant issued for 100,000 shares of the Company’s common stock at an exercise price of $3.50 per share, based on a Black-Scholes option pricing model, was allocated to identified intangibles through established valuation techniques in the high-technology communications equipment industry.  The warrant expires in February 2013. As a result, the Company recorded an incremental $0.2 million in core technology intangible assets and $0.3 million related to the URL, the latter of which the Company sold in July of 2011 for approximately $0.2 million, net of expenses.

 

The Company recorded $20,000 and $60,000 during the three and nine months ended January 31, 2012 and 2011, respectively, of amortization of purchased intangible assets.

 

Estimated future amortization expense for the core technology purchased intangible asset as of January 31, 2012 is as follows (in thousands):

 

 

 

Years ended April
30,

 

2012 (three months)

 

$

20

 

2013

 

61

 

 

 

$

81

 

 

16



Table of Contents

 

5.          EXCLUSIVE DISTRIBUTION AGREEMENT

 

On September 10, 2009, the Company and Simulscribe, entered into a Reseller Agreement pursuant to which Simulscribe will provide, and the Company became the exclusive reseller of, Simulscribe’s voice to text (“VTT”) services to wholesale customers.  Pursuant to the agreement, the Company also assumed all of Simulscribe’s wholesale customers.  The Company paid $3.5 million and issued a two-year promissory note for an additional $3.5 million for the assumption of the wholesale customer relationships and the exclusivity rights.  This promissory note was paid in full in April 2011.  Additionally, the Company will pay a fee for the services provided by Simulscribe, and will pay up to an additional $10 million if the revenues generated from the Simulscribe services meet certain performance milestones within the first three years of the agreement (the “Additional Payments”), subject to acceleration in certain events, such as the Company’s failure to use commercially reasonable efforts to market the services or a change of control of the Company at a time that revenues from these services are on track to result in the payment ultimately being made. For the three and nine months ended January 31, 2011, the Company recognized $42,000 and $125,000, respectively, of interest expense associated with amortizing the $0.3 million discount on the note as a component of other income (expense), net in the Condensed Consolidated Statements of Operations.

 

The Additional Payments are convertible into the Company’s common stock at Simulscribe’s option, and may be converted into the Company’s common stock at a conversion price of $5.00 per share; provided that if a specified revenue target is met then up to $5.0 million of the Additional Payments can be converted at $4.00 per share. The value of the additional payments has not been recorded as of the date of the transaction pursuant to the accounting guidance related to the issuance of equity-based instruments to non-employees for the purchase of goods or services, as it is not probable of incurrence. In the event that payouts under the Additional Payments provisions of the agreement become probable of occurrence based on an assessment of customer revenue streams and the remaining duration of agreement and/or the conditions of the payout are met, the Company will record the fair value of the Additional Payments at that time.

 

As a result of this agreement, the Company recorded the total consideration at a fair value of $6.7 million and recorded assets associated with the exclusive distribution rights and transfer of customers.  The value assigned to the intangible assets, which are recorded in other assets on the face of the Condensed Consolidated Balance Sheets, was determined by valuing the discounted potential cash flows associated with each asset over the four year term of the agreement.  The asset associated with the transferred customer relationships will be amortized, on a tax deductible basis, to sales and marketing expense ratably over the four year term of the agreement and the asset associated with the distribution rights will be amortized, on a tax deductible basis, to cost of revenue on a unit of revenue basis, similar to a royalty payment, at the rate of 25% of revenue recognized based on the base level of revenue anticipated in the agreement attributable to the $7.0 million of consideration issued to date.  Subsequent to executing the agreement, the Company hired one of the principle officers of Simulscribe to assume the position of Chief Strategy Officer at the Company.  His primary focus was on expansion of the wholesale market for voice transcription service.  This individual continues to hold a large ownership interest in Simulscribe.  As such, although he may have input into key decisions related to interaction between the Company and Simulscribe, the final decisions rest with the executive management team, of which he is not a member, and/or the Board of Directors.  This individual was also a major shareholder in Grid.com, which the Company acquired in February 2010. In the third quarter of fiscal 2011, the Chief Strategy Officer resigned; however, he continues to provide certain services to the Company as a consultant.

 

17



Table of Contents

 

In the fourth quarter of fiscal 2010, the Company and Simulscribe, entered into an Amendment No. 1 to Reseller Agreement (the “Amendment”), amending the Reseller Agreement previously entered into between the Company and Simulscribe on September 10, 2009. Primarily, the Amendment permits the Company to provide services to all VTT customers, both retail and wholesale. Among other things, the Amendment also contains additional changes to the Reseller Agreement to conform to the new structure, and provides that both the retail and wholesale services will count as “Additional Payments” for purposes of determining what amount, if any, of the $10.0 million contingent consideration will be paid to Simulscribe.  In consideration for the Amendment, the Company agreed to pay an additional $0.3 million in seven equal quarterly installments.  The Company recognized this consideration as an addition to the customer relationship intangible asset, which amount is being amortized over the remainder of the 4 year life assigned to the original customer relationship intangible asset in September 2009. Four of the seven quarterly installments totaling $0.2 million were paid in cash. In April 2011, the promissory note for $3.5 million was paid in full five months early. In exchange for early payment of the promissory note, Simulscribe waived the final three installment payments totaling $0.1 million, due under the Amendment. As of April 30, 2011, this obligation had been paid in full.

 

The carrying value of the related intangible assets acquired, which are included in other assets, was as follows (in thousands):

 

 

 

January 31, 2012

 

 

 

Gross

 

Accumulated

 

 

 

 

 

 

 

Value

 

Amortization

 

Impairment

 

Net Value

 

Distribution Agreement Intangible Assets:

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,514

 

$

(1,578

)

$

 

$

936

 

Distribution rights

 

4,440

 

(1,961

)

 

2,479

 

Total

 

$

6,954

 

$

(3,539

)

$

 

$

3,415

 

 

 

 

April 30, 2011

 

 

 

Gross

 

Accumulated

 

 

 

 

 

 

 

Value

 

Amortization

 

Impairment

 

Net Value

 

Distribution Agreement Intangible Assets:

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,514

 

$

(1,105

)

$

 

$

1,409

 

Distribution rights

 

4,440

 

(1,125

)

 

3,315

 

Total

 

$

6,954

 

$

(2,230

)

$

 

$

4,724

 

 

The Company recorded amortization expense associated with the distribution rights of approximately $0.8 and $0.7 million for each of the nine months ended January 31, 2012 and 2011, respectively; and amortization expense associated with the transfer of customers of approximately $0.5 million for each of the nine month periods ended January 31, 2012, and 2011. The Company recorded amortization expense associated with the distribution rights of approximately $0.3 million and $0.2 million for the three months ended January 31, 2012 and 2011, respectively, and amortization expense associated with the transfer of customers of approximately $0.2 million for the three months ended January 31, 2012 and 2011.

 

18



Table of Contents

 

Estimated future amortization expense for the customer relationship related intangible asset as of January 31, 2012 is as follows (in thousands):

 

 

 

Years ended April
30,

 

 

 

 

 

2012 (three months)

 

$

157

 

2013

 

581

 

2014

 

198

 

 

 

 

 

 

 

$

936

 

 

Since the distribution rights are being amortized based on the level of revenue recognized, the amortization expense cannot be estimated for future periods.

 

6.          STOCKHOLDERS’ EQUITY

 

Common Stock

 

At the Company’s annual shareholder meeting on September 16, 2011, shareholders approved a reduction in the number of authorized common shares from 200 million to 55 million shares.  Accordingly, as of January 31, 2012, the number of authorized shares is 55 million and the number issued and outstanding was 26,758,414.

 

Preferred Stock

 

On September 16, 2011, there being no shares of the Series A Junior Participating Preferred Stock outstanding, the Series A Junior Participating Preferred Stock was eliminated from the Company’s Certificate of Incorporation.

 

Employee Equity Plans

 

The Company utilizes a combination of Employee Stock Purchase, Stock Option and Restricted Stock plans as a means to provide equity ownership in the Company for its employees. In the nine months ended January 31, 2012, 57,794 shares of common stock were issued under the Employee Stock Purchase Plan (“ESPP”) and 176,280 shares remained available for issuance under that plan as of January 31, 2012. Effective November 30, 2011, the Board of Directors suspended activity under the ESPP.

 

Activity under the stock option and restricted stock plans was as follows (in thousands, except exercise price amounts):

 

 

 

 

 

Outstanding Options

 

 

 

 

 

Shares Available
For Grant(1)

 

Number
of Shares

 

Weighted Average
Exercise Price

 

Aggregate Intrinsic
Value

 

 

 

 

 

 

 

 

 

 

 

Balances, April 30, 2011

 

1,465

 

4,642

 

$

3.77

 

$

320

 

Restricted stock and restricted stock units issued

 

(1,554

)

 

 

 

 

 

 

Restricted stock and restricted stock units forfeited

 

157

 

 

 

 

 

 

 

Options granted

 

(614

)

614

 

1.03

 

 

 

Options exercised

 

 

(151

)

0.70

 

 

 

Options forfeited

 

465

 

(465

)

1.61

 

 

 

Options expired

 

935

 

(935

)

4.84

 

 

 

Plan shares expired

 

(167

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 31, 2012

 

687

 

3,705

 

$

3.45

 

$

4

 

 

For the nine months ended January 31, 2012 the total intrinsic value of option exercises was approximately $32,000.

 


(1)  Shares available for grant include shares from the 1999 Non-Officer Equity Incentive Plan, the 2005 New Recruit Stock Option Plan, the 2005 New Recruit Stock Plan, and the 2006 Equity Incentive Plan that may be issued as either stock options, restricted stock or restricted stock units. Shares issued under the 2006 Equity Incentive Plan as stock bonus awards, stock purchase awards, stock unit awards, or other stock awards in which the issue price is less than the fair market value on the date of grant of the award count as the issuance of 1.3 shares for each share of common stock issued pursuant to these awards for purposes of the share reserve.

 

19



Table of Contents

 

The weighted average remaining contractual term for outstanding options as of January 31, 2012, is 5.97 years.

 

The summary of options vested and exercisable at January 31, 2012 comprised (in thousands, except term and exercise price):

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

Aggregate
Intrinsic
Value

 

Weighted
Average
Remaining
Contractual
Term

 

Fully vested and expected to vest options

 

3,563

 

$

3.54

 

$

4

 

5.86

 

Options exercisable

 

2,502

 

$

4.53

 

$

4

 

4.75

 

 

The summary of unvested restricted stock awards for the nine months ended January 31, 2012, comprised (in thousands, except per share data):

 

 

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Nonvested restricted stock, April 30, 2011

 

3

 

$

3.55

 

Restricted stock issued

 

 

 

Restricted stock vested

 

(2

)

4.12

 

Restricted Stock Forfeited

 

(1

)

2.43

 

Nonvested restricted stock, January 31, 2012

 

 

$

2.69

 

 

For the nine months ended January 31, 2012 and 2011, the total fair value of restricted stock awards that vested was $16,000 and $0.1 million, respectively.

 

RSAs and RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting is subject to the employee’s continuing service to the Company. Both RSAs and RSUs generally vest over a period of 4 years and are expensed ratably on a straight-line basis over their respective vesting period net of estimated forfeitures.

 

A summary of activity of RSUs for the nine months ended January 31, 2012 is presented below:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value

 

 

 

(in thousands)

 

 

 

(years)

 

(in thousands)

 

Nonvested restricted stock units, April 30, 2011

 

230

 

$

1.07

 

1.1

 

$

313

 

Restricted stock units issued

 

1,195

 

0.85

 

 

 

 

 

Restricted stock units forfeited

 

(120

)

1.02

 

 

 

 

 

Restricted stock units released 

 

(5

)

1.32

 

 

 

 

 

Nonvested restricted stock units, January 31, 2012

 

1,300

 

$

0.88

 

1.41

 

$

1,063

 

Restricted stock units expected to vest after January 31, 2012

 

1,215

 

$

0.86

 

1.38

 

$

994

 

 

For the nine months ended January 31, 2012 and 2011, the total fair value of restricted stock units that vested was $7,000 and $0.1 million, respectively.

 

As of January 31, 2012, there was approximately $1.3 million of total unrecognized compensation cost related to stock options and RSAs and RSUs that is expected to be recognized over a weighted-average period of 2.4 years for options and 2.5 years for restricted stock and restricted stock units.

 

20



Table of Contents

 

The key assumptions used in the fair value model and the resulting estimates of weighted-average fair value per share used to record stock-based compensation during the three and nine month periods ended January 31, 2012 and 2011, for options granted and for employee stock purchases under the ESPP, are as follows:

 

 

 

Three months ended
January 31,

 

Nine months ended
January 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Stock options:

 

 

 

 

 

 

 

 

 

Dividend yield(1) 

 

 

 

 

 

Volatility factor(2) 

 

0.72

 

0.68

 

0.70

 

0.68

 

Risk-free interest rate(3) 

 

1.29

%

1.90

%

1.48

%

1.90

%

Expected life (years)(4) 

 

4.7

 

4.7

 

4.7

 

4.7

 

Weighted average fair value of options granted during the period

 

$

0.50

 

$

0.74

 

$

0.58

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan:(5) 

 

 

 

 

 

 

 

 

 

Dividend yield(1) 

 

 

 

 

 

Volatility factor(2) 

 

 

0.64

 

0.72

 

0.63

 

Risk-free interest rate(3) 

 

%

0.3

%

0.19

%

0.3

%

Expected life (years)(4) 

 

 

1.0

 

0.50

 

1.0

 

Weighted average fair value of employee stock purchases during the period

 

$

 

$

0.56

 

$

0.43

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

Restricted stock and restricted stock units:

 

 

 

 

 

 

 

 

 

Weighted average fair value of restricted stock and RSUs granted during the period

 

$

0.85

 

$

1.32

 

$

0.85

 

$

1.32

 

 


(1)  The Company has no history or expectation of paying dividends on its common stock.

 

(2)  The Company estimates the volatility of its common stock at the date of grant based on the historic volatility of its common stock for a term consistent with the expected life of the awards affected at the time of grant.

 

(3)  The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in affect at the time of grant.

 

(4)  The expected life of stock options granted under the stock option plans is based on historical exercise patterns, which the Company believes are representative of future behavior. The expected life of grants under the ESPP represents the amount of time remaining in the 12-month offering window.

 

(5)  Assumptions for the ESPP relate to the most recent enrollment period, which began on June 1, 2011.

Effective November 30, 2011, the Board of Directors suspended activity under the ESPP.

 

21



Table of Contents

 

7.          BORROWING AGREEMENT

 

In August 2011, the Company renewed its $2.0 million line of credit with its bank.  The renewed line of credit has substantially the same terms as the prior line of credit and expires on July 31, 2012. There were no borrowings outstanding under the line of credit as of January 31, 2012 and the Company was in compliance with its financial covenants.

 

8.          INCOME TAXES

 

The guidance on Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The liability for uncertain tax positions, if recognized, will decrease the Company’s tax expense. The Company does not anticipate that the amount of liability for uncertain tax positions existing at January 31, 2012 will change significantly within the next 12 months.  Interest and penalties related to the liability for uncertain tax positions are included in provision for income taxes.

 

The Company files income tax returns in the U.S. and various state and foreign jurisdictions. Most U.S. and foreign jurisdictions have 3 to 10 years of open tax years. However, all the Company’s tax years since fiscal 1998 will be open to examination by the U.S. federal and certain state tax authorities due to the Company’s overall net operating loss and/or tax credit carryforward position.

 

22



Table of Contents

 

The Company recorded a tax provision of $6,000 and $18,000, respectively, for the three and nine months ended January 31, 2012, resulting in an effective tax rate of less than 1%.  The Company recorded a tax provision (benefit) of $5,000 and ($12,000), respectively, for the three and nine months ended January 31, 2011 resulting in an effective tax rate of less than 1%. The effective tax rate for the three and nine months ended January 31, 2012 and 2011 reflected the effects of a full valuation allowance against the federal and state net operating loss and tax credit carryforwards due to uncertainty as to the recoverability of those items due to the Company’s continuing operating losses. The tax provision (benefit) for the three and nine months ended January 31, 2012 and 2011 is each attributable to certain state and foreign jurisdictions in which the Company operates.

 

9.                                      COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company is not a party to any material legal proceedings.  From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business.  These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management’s attention.

 

Lease Commitments

 

The Company’s lease commitments are comprised of a facility lease and office equipment leases.  The Company leases its principal office facilities of approximately 20,100 square feet, in San Jose, California under a non-cancelable operating lease expiring on April 30, 2017.  The lease contains a one time early expiration option after 31 months of occupancy.  To exercise this option, the Company must comply with various provisions, and pay an expiration fee which is comprised of the unamortized portion of any commissions, legal fees, free rent and leasehold improvements.  The Company is responsible for taxes, insurance and maintenance expenses related to the leased facilities.

 

At January 31, 2012, future minimum payments under the Company’s current operating leases are as follows (in thousands):

 

Years ending April 30, 

 

Minimum Lease
Payments

 

2012 (three months)

 

$

9

 

2013

 

$

292

 

2014

 

$

301

 

2015

 

$

278

 

2016

 

$

290

 

2017

 

$

302

 

Total

 

$

1,472

 

 

Guarantees and Indemnifications

 

As is customary in the Company’s industry and as required by law in the U.S. and certain other jurisdictions, certain of the Company’s contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company’s products. From time to time, the Company indemnifies customers against combinations of losses, expenses, or liabilities arising from various trigger events related to the sale and the use of the Company’s products and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product liability or environmental obligations. In the Company’s experience, claims made under such indemnifications are rare.

 

As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving at the Company’s request, in such

 

23



Table of Contents

 

capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner that a person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.

 

10.                               REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

 

The Company is a global telecommunications equipment supplier for voice networks. The Company develops, produces and sells voice quality enhancement solutions as well as voice applications solutions to telecommunication service providers worldwide. The Company’s voice quality enhancement solutions enable service providers to deliver consistently clear, end-to-end communications to their subscribers. The Company’s revenues are organized along two main product categories: products and services, which are comprised of the Company’s new voice applications offerings as well as services in support of its voice quality enhancement solutions.  The Company currently operates in two business segments: the voice quality enhancement segment, which includes service revenues related to delivery of these solutions; and the voice applications segment.  The segments are determined in accordance with how management views and evaluates the Company’s business and based on the criteria as outlined in the authoritative guidance. A description of the types of products and services provided by each reportable segment is as follows:

 

24



Table of Contents

 

Voice Quality Enhancement Segment

 

The Company designs, develops, and markets stand-alone and system-based voice quality products for circuit-switched and Voice over Internet Protocol (“VoIP”) mobile networks throughout the world. The Company’s products feature high-capacity, high-availability hardware systems coupled with a sophisticated array of voice optimization and measurement software to enhance the quality of voice communications.  In addition to the hardware systems that comprise this segment, the Company also includes services such as maintenance, training and installation which support the hardware system sales.

 

Voice Applications Segment

 

The Company designs, develops, and markets value-added voice services that today are focused on messaging applications.  The Company’s goal is to expand the range of applications and services with the common goal of utilizing the human voice to interface with various aspects of day to day life which have been historically limited to keyboard interface.  The product portfolio may include voice based interface with the web and web-based applications, including social networking and calendar applications.

 

Segment Revenue and Contribution Margin

 

Segment contribution margin includes all product line segment revenues less the related cost of revenue, marketing and engineering expenses directly identifiable to each segment. Management allocates corporate manufacturing costs and some infrastructure costs such as facilities and information technology costs in determining segment contribution margin. Contribution margin is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include sales costs, marketing costs other than direct marketing, general and administrative costs, such as legal and accounting, stock-based compensation expenses, acquisition-related integration costs, amortization and impairment of purchased intangible assets, restructuring costs, interest and other income (expense), net.

 

Segment Data

 

The results of the reportable segments are derived directly from the Company’s management reporting system. The results are based on the Company’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. The Company measures the performance of each segment based on several metrics, including contribution margin.

 

Asset data, with the exception of inventory, is not reviewed by management at the segment level. All of the products and services within the respective segments are generally considered similar in nature, and therefore a separate disclosure of similar classes of products and services below the segment level is not presented.

 

25



Table of Contents

 

Financial information for each reportable segment is as follows as of January 31, 2012 and April 30, 2011 and for the three and nine months ended January 31, 2012 and 2011 (in thousands):

 

 

 

Voice Quality
Enhancement

 

Voice
Applications

 

Total

 

For the three months ended January 31, 2012:

 

 

 

 

 

 

 

Revenue

 

$

2,905

 

$

1,302

 

$

4,207

 

Contribution margin

 

1,026

 

(1,847

)

(821

)

As of January 31, 2012: Inventories

 

3,851

 

 

3,851

 

For the three months ended January 31, 2011:

 

 

 

 

 

 

 

Revenue

 

$

4,714

 

$

873

 

$

5,587

 

Contribution margin

 

2,553

 

(1,164

)

1,389

 

As of April 30, 2011: Inventories

 

4,689

 

 

4,689

 

For the nine months ended January 31, 2012:

 

 

 

 

 

 

 

Revenue

 

$

7,714

 

$

3,386

 

$

11,100

 

Contribution margin

 

2,374

 

(4,820

)

(2,446

)

 

 

 

 

 

 

 

 

For the nine months ended January 31, 2011:

 

 

 

 

 

 

 

Revenue

 

$

10,625

 

$

2,653

 

$

13,278

 

Contribution margin

 

4,360

 

(4,024

)

336

 

 

The reconciliation of segment information to the Company’s condensed consolidated totals is as follows (in thousands):

 

 

 

Three Months Ended

 

Nine months Ended

 

 

 

January31,
2012

 

January 31,
2011

 

January31,
2012

 

January 31,
2011

 

Segment contribution margin

 

$

(821

)

$

1,389

 

$

(2,446

)

$

336

 

Corporate and unallocated costs

 

(1,640

)

(2,574

)

(5,673

)

(8,190

)

Stock-based compensation expense

 

(201

)

(243

)

(375

)

(986

)

Amortization of purchased intangible assets

 

(20

)

(20

)

(60

)

(60

)

Other income (expense), net

 

10

 

(34

)

(1

)

(58

)

 

 

 

 

 

 

 

 

 

 

Loss before provision for (benefit from) income taxes

 

$

(2,672

)

$

(1,482

)

$

(8,555

)

$

(8,958

)

 

26



Table of Contents

 

Geographic Data

 

Geographic revenue information comprises (in thousands):

 

 

 

Three months ended January
31,

 

Nine months ended January
31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

USA

 

$

4,016

 

$

5,516

 

$

10,112

 

$

11,128

 

Middle East/Africa

 

 

 

265

 

110

 

Europe

 

38

 

2

 

106

 

89

 

Latin America

 

 

40

 

 

40

 

Canada

 

7

 

7

 

40

 

30

 

Far East

 

146

 

22

 

577

 

1,881

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,207

 

$

5,587

 

$

11,100

 

$

13,278

 

 

Sales for the three months ended January 31, 2012 included sales to three customers that represented greater than 10% of total revenue (25%, 17% and 13%).  Sales for the nine months ended January 31, 2012 included sales to three customers that represented greater than 10% of total revenue (31%, 15% and 10%).  Sales for the three months ended January 31, 2011 included sales to one customer that represented greater than 10% of total revenue (65%).  Sales for the nine months ended January 31, 2011 included sales to two customers that represented greater than 10% of total revenue (36% and 13%).

 

As of January 31, 2012, the Company had three customers that represented greater than 10% of accounts receivable (29%, 14% and 11%).  At April 30, 2011, two customers represented greater than 10% of accounts receivable (21% and 37%).

 

The Company maintained substantially all of its property and equipment in the United States at January 31, 2012 and April 30, 2011.

 

11.                               SUBSEQUENT EVENT

 

The Company has performed an evaluation of subsequent events through the date on which these financial statements in this Form 10-Q Report were filed with the Securities and Exchange Commission.

 

27



Table of Contents

 

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and Notes thereto for the year ended April 30, 2011 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on July 28, 2011. The discussion in this Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements of our expected future financial operating results, plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. See “Future Growth and Operating Results Subject to Risk” at the end of this Item 2 for factors that could cause future results to differ materially.

 

Overview

 

We provide voice technologies for the telecommunications market.  We design, develop and market telecommunications equipment for use in enhancing voice quality and canceling echo in voice calls over wireline, wireless and internet protocol (“IP”) telecommunications networks. Our products monitor and enhance voice quality and provide transcoding in the delivery of voice services. Since entering the voice processing market, we have continued to refine our echo cancellation products to meet the needs of the ever-changing telecommunications marketplace. Our TDM (“Time-Division Multiplexing”)-based product introductions have leveraged the processing capacity of our newer hardware platforms to offer not only echo cancellation but also enhanced Voice Quality Assurance (“VQA”) features including noise reduction, acoustic echo cancellation, voice level control and noise compensation through enhanced voice intelligibility.  We have also introduced products to support carriers that are deploying voice over internet protocol, or (“VoIP”) technologies which offer all the voice capabilities of our TDM-based products along with codec transcoding to meet the new challenges faced by carriers deploying VoIP technologies.

 

We also design, develop and market telecommunications software and services. We have built a software-centric extension to our voice quality offerings which provides VQA as well as other voice technologies such as mixing and keyword spotting, enabling the next generation of voice application.  We also market and develop voice-to-text applications, based on our exclusive reseller agreement with Simulscribe.  Voice-to-text utilizes much of the same core expertise in voice processing that underlies VQA.  The current primary market for voice-to-text is voicemail-to-text.  In the voicemail-to-text area we offer a broad spectrum of services, under the brand “PhoneTag”, including fully automated transcription services as well as transcription services that include human touch-up.  Using the same infrastructure we also offer transcription services for conference calls and other audio sources.

 

We sell our products primarily to wireline and wireless carriers.  We have experienced ebbs and flows in the level of demand from these carriers due to their level of network expansion, adoption of new technologies in their networks and the impacts of merger and other consolidation in the industry.  During the last three years, the downturn in business volume we have experienced seems to have been driven by three main factors: technology transitions; budgetary constraints; and the global economic crisis.

 

The technology transition has impacted us on two fronts.  First and foremost, carriers have been extremely cautious to invest in legacy second generation (“2G”) technology, historically our primary source of revenue, for fear of stranding some or all of their investments by moving to newer third/fourth generation technology (“3G/4G”).  The hesitancy to invest in 2G equipment has resulted in protracted purchase cycles and smaller deployments to mitigate perceived risks, while still addressing needed improvements in voice quality in 2G networks.  The second impact has been felt on the 3G/4G investment, which has been far slower to develop than was first predicted by industry experts.  Instead of wholesale deployment of VoIP technologies, we have experienced a much more cautious entrance into this technology by many of the carriers with which we have historically done business, with the key by-product being that they are buying much smaller systems than would have been expected from their historical buying pattern and in some

 

28



Table of Contents

 

cases even deciding to limit investment in 3G technology in lieu of even newer fourth generation technologies that are currently in development.

 

On the budgetary side, even before the world-wide financial crisis became clear, we began to see tighter budgetary spending on capital equipment in many regions of the world, but most importantly with our large domestic customers.  Spending on capital equipment appears to have been primarily targeted at equipment that could show a direct correlation with revenue generation as opposed to our historical product offerings, which although not a direct source of revenue for carriers is critical to the overall call experience and therefore to customer satisfaction, which in our opinion can ultimately translate into call revenue. Lastly, we believe that the current market conditions around the world have altered the pattern of purchasing decisions as carriers tighten their capital investment activity due to internal budget constraints and as tighter credit hampers their ability to borrow to facilitate network expansion and/or upgrades.

 

Despite the previously mentioned budget constraints and uncertainty around network architecture, we continue to believe that in the United States our continued focus on voice quality in the competitive wireless services landscape and the continued expansion of wireless networks, primarily using 3G/4G technologies and to a lesser degree 2G technologies, will be key factors in our ability to add new customers and drive opportunities for revenue growth. Although we continue to believe that 2G technology will continue to play a major role in technology utilized in the international regions of the world where we have focused our sales efforts, we do believe that there is a growing interest in certain of these regions in shifting to 3G technologies. However, we are poised to support the deployment of our Packet Voice Processor (“PVP”) product in 3G/4G networks internationally, should demand for the 3G/4G technology grow internationally. The development of our VQA feature set, which was originally targeted at the international Global System for Mobile Communications (“GSM”) market, has seen growing importance in the domestic market as well. We continue to focus sales and marketing efforts on international and domestic mobile carriers that might best apply our VQA solution. We have continued to invest in customer trials domestically and internationally, where the size of the opportunities justify the costs we must invest in the trial, in an attempt to better avail ourselves of these opportunities as they arise.

 

Between fiscal 2005 and early fiscal 2009 we directed a significant amount of our research and development spending towards the development of our PVP, a platform targeting VoIP-based network deployments. The PVP introduces cost-effective voice format transcoding capabilities combined with our VQA technology to improve call quality and clarity by eliminating acoustic echo and voice level imbalances and reducing packet loss and jitter. Despite these efforts, we have experienced mixed results as we remain dependant on the buying patterns of a small, yet diverse, group of carriers.

 

29



Table of Contents

 

Beginning in fiscal 2009, we began shifting our development efforts to other product offerings that leverage off our expertise in voice technology.  One focus of these efforts has been to develop versions of our software that can be used on other vendor platforms that currently do not compete with our products. More recently we have shifted more of our development efforts to our voice services products, which have been actively deployed for some time at the consumer and small business level, and more recently have begun deployment for evaluation purposes at the carrier level.

 

In fiscal 2010, we entered into an exclusive worldwide distribution agreement with Simulscribe.  In conjunction with this agreement we obtained the exclusive right to market Simulscribe’s voice-to-text transcription services to customers around the world.  We believe that this voice-to-text transcription service provides a meaningful complement to our voice technology product offering, and also our existing customer base.  We believe that these products could help generate a more predictable revenue base, which we believe is less susceptible to our customer’s decisions on the timing and nature of the network expansions than our legacy product offerings have experienced on a stand alone basis.

 

Due to softened demand for our products over the last few years, we have undertaken a number of cost cutting measures in an attempt to better align our spending with our revenue levels while still investing in the future of the company by means of development projects, like our voice services products which leverage our core strengths in the voice technology and will hopefully provide for more stable revenue streams in the future.  The focus of our cost cutting efforts has not only been on reducing headcount, which has declined by well over 50% since the end of fiscal 2007, but also on targeted spending reductions on discretionary spending areas such as travel, marketing campaigns and trade shows.  We intend to continue to monitor our spending and intend to take further steps if needed to balance our spending with the revenue opportunities we see ahead of us.

 

Reseller Agreement.  In September 2009, we entered into a Reseller Agreement with Simulscribe pursuant to which we became the exclusive reseller of Simulscribe’s voice-to-text services to wholesale customers.  Pursuant to the agreement, we also assumed all of Simulscribe’s wholesale customers.  We paid $3.5 million and issued a two-year promissory note for an additional $3.5 million for the assumption of the wholesale customer contracts and the exclusivity right.  In April 2011, the promissory note was paid in full. Additionally, we agreed to pay a fee for the services provided by Simulscribe, and will pay up to an additional $10.0 million if the revenues generated from the Simulscribe services meet certain performance milestones within the first three years of the agreement (the “Additional Payments”), subject to acceleration in certain events, such as our failure to use commercially reasonable efforts to market the services or a change of control of our company at a time that revenues from these services are on track to result in the payment ultimately being made.  The Additional Payments, should any be paid, are convertible into our common stock at Simulscribe’s option.  The Additional Payments may be converted into our common stock at a conversion price of $5.00 per share, provided that if a specified revenue target is met then up to $5.0 million of the Additional Payments can be converted at $4.00 per share. In the fourth quarter of fiscal 2010, we amended our agreement with Simulscribe that extended our exclusive distribution rights to all customers, not just wholesale customers.  The agreement, and the related amendment, were accounted for as an asset acquisition and the value of the consideration given was allocated to the assets received as part of the transaction.

 

30



Table of Contents

 

Our Customer Base.  Historically, the majority of our sales have been to customers in the United States. Domestic customers accounted for approximately 91% and 80% of our revenue during the nine months ended January 31, 2012, and 2011, respectively.  The geographic mix of revenue reflects domestic demand for our legacy TDM business and our VoIP business, as well as the vast majority of our voice service product revenue being generated from domestic customers.  Our international business for the nine months ended January 31, 2012 was primarily concentrated in South East Asia and North Africa. However, sales to some of our U.S. customers may result in our products purchased by these customers eventually being deployed internationally, especially in the case of any original equipment manufacturer that distributes overseas. To date, the vast majority of our international sales have been export sales and denominated in U.S. dollars. Our international revenue has been largely driven by demand from customers in South East Asia, Northern Africa, and the Middle East. We expect our international demand for voice quality products to continue to be heavily influenced by these markets as they are experiencing the highest level of growth and commonly have the most need for cost effective solutions to address voice quality in their growing networks. However, we expect that international demand for our voice service products may be more heavily influenced by demand from Europe and Latin America which tend to be earlier adopters of new phone services than other international regions into which we have historically sold product.

 

Our revenue historically has come from a small number of customers. Our largest customer in the nine months ended January 31, 2012, a domestic VoIP-based conference call provider, accounted for approximately 31% of our revenue.  In fiscal 2011 and 2010, our largest customer was a domestic wireline and wireless carrier, which accounted for approximately 28% and 30% of revenue, respectively.  Our five largest customers accounted for approximately 63% of our revenue in the nine months ended January 31, 2012 and approximately 67% and 75% of our revenue in fiscal 2011 and 2010, respectively.  Consequently, the loss of, or significant decline in purchases by, any one of our largest customers, without an offsetting increase in revenue from existing or new customers, would have a negative and substantial effect on our business. This customer concentration risk was evidenced over the last few fiscal years as sudden delays and/or declines in purchases by our large customers resulted in significant declines in our overall revenues and ultimately resulted in net losses for those periods.

 

Critical Accounting Policies and Estimates.  The preparation of our financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures. We evaluate these estimates on an ongoing basis, including those related to our revenue recognition, investments, inventory valuation allowances, cost of warranty, impairment of long-lived assets, accounting for stock-based compensation and accounting for income taxes. Estimates are based on our historical experience and other assumptions that we consider reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual future results may differ from these estimates in the event that facts and circumstances vary from our expectations. If and when adjustments are required to reflect material differences arising between our ongoing estimates and the ultimate actual results, our future results of operations will be affected.

 

Our significant accounting policies are more fully described in Item 7 of our Annual Report on Form 10-K for the year ended April 30, 2011.  With the exception of the adoption of two new accounting standards which are discussed more fully in “Recent Accounting Guidance” below, we have not materially changed these policies from those reported in our Annual Report on Form 10-K for the year ended April 30, 2011.

 

31



Table of Contents

 

Recent Accounting Guidance

 

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. Also in October 2009, the FASB amended the accounting standards for multiple-deliverable arrangements to (i) provide updated guidance on how the elements in a multiple-deliverable arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue amongst the elements in an arrangement using estimated selling prices (“ESP”) if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of the selling price; and (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

 

VSOE for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for an element falls within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major service groups, geographies, customer classifications, and other variables in determining VSOE.

 

TPE is determined based on competitor prices for similar deliverables when sold separately. We are typically not able to determine TPE for our products or services. Generally, our go-to-market strategy differs from our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

 

When we are unable to establish the selling price of its elements using VSOE or TPE, we use ESP in an allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to, pricing policies, internal costs, gross margin objectives, competitive landscapes, geographies, customer classes and distribution channels.

 

We adopted this accounting guidance at the beginning of our first quarter of the fiscal year ending April 30, 2012 for applicable arrangements originating or materially modified after April 30, 2011. We currently only enter into multiple element arrangements within the Voice Quality Enhancement segment as mentioned in Note 10 of the Notes to our Condensed Consolidated Financial Statements. The adoption of these accounting standards did not have a material impact on revenue recognized during the three and nine months ended January 31, 2012.

 

Our revenue in multiple element arrangements in the Voice Quality Enhancement segment are derived primarily from two sources: (i) product revenue which consist of hardware and software, and (ii) related support and service revenue. Our products are telecommunications hardware with embedded software components such that the software functions together with the hardware to provide the essential functionality of the product. Therefore, our hardware deliverables are considered to be non-software elements and are excluded from the scope of industry-specific software revenue recognition guidance.

 

Although we cannot reasonably estimate the effect of the adoption on future financial periods as the impact may vary depending on the nature and volume of future sale contracts, this guidance does not generally change the units of accounting for our revenue transactions. Our hardware (including essential software) products and services qualify as separate units of accounting because they have value to the customer on a stand-alone basis and our revenue arrangements generally do not include a general right of return relative to delivered products. Our hardware (including essential software) is valued using ESP as mentioned above based on internal pricing policies. Our services (which include annual service maintenance and installation services) are valued using VSOE as mentioned above based upon the contractually stated annual renewal rate. The rest of our revenue recognition policy is consistent with the policy in our Annual Report on Form 10-K for the year ended April 30, 2011.

 

32



Table of Contents

 

RESULTS OF OPERATIONS

 

The following table sets forth, for the periods indicated, the components of the results of operations, as reflected in our statement of operations, as a percentage of revenue.

 

 

 

Three months ended January
31,

 

Nine months ended January
31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

100

%

100.0

%

100

%

100.0

%

Cost of revenue

 

64.1

 

43.5

 

63.6

 

52.2

 

Gross profit

 

35.9

 

56.5

 

36.4

 

47.8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

39.1

 

31.0

 

39.5

 

42.7

 

Research and development

 

42.3

 

29.9

 

48.6

 

43.5

 

General and administrative

 

17.8

 

21.2

 

24.8

 

28.2

 

Amortization of purchased intangible assets

 

0.5

 

0.3

 

0.5

 

0.5

 

Total operating expenses

 

99.1

 

82.4

 

113.4

 

114.9

 

Loss from operations

 

(63.8

)

(25.9

)

(77.0

)

(67.1

)

Other income (expense), net

 

0.2

 

(0.6