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[September 10, 2012]
MOBIFORM SOFTWARE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our results of operations should be read together with our financial statements and the related notes, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report on Form 10-Q.
Executive Summary Since 2003, our experience in Microsoft .NET graphics technology has given us a unique perspective and insight into new data visualization possibilities with emerging technologies.
We specialize in the compelling visualization of real-time data. Mobiform has produced exceptional data visualization solutions for manufacturing, power and utilities, automation, and other fields of business making use of HMI (Human Machine Interface) and SCADA (Supervisory Control and Data Acquisition) software products.
Our in-house expertise and experience has provided us the opportunity to partner with companies from various vertical markets, and assist them in developing custom solutions that meet their specific needs. Our goal is to help our clients transfer their real-time production and operational data into actionable information through graphically-compelling, functional, and intuitive user interfaces.
Products and Services Our technology team has more than 20 years of experience in software design and development and has designed, built and delivered, over the years, world-class software solutions. In addition to software development, we also derive income from consulting services and contract development.
Overall Strategic Goals Our intent since inception has been to use this model as a foundation for growing our business. Our plans include developing a 'Technology Toolbox' of software development components and design technology that can be used repeatedly as we deliver a variety of software products for consumers and industry in a wide range of verticals. If you can take a piece of technology, hardware, or any manufactured item, and reuse it over and over in different products you can achieve a very high return on investment for your research and development efforts.
This toolbox is a set of software components that can be reused in various software products. The types of software developed in our toolbox include software components for visualizing information, LED displays, gauges, charting and mapping controls. We call these our 'VantagePoint Controls™'. Mobiform has created additional technology for graphics design for its Technology Toolbox.
'Aurora' is a Graphics Design Platform that can be used to provide design capabilities inside of software applications built for Microsoft Windows.
Product Description With the Technology Toolbox in place, we can quickly assemble data visualization software products for monitoring real time data. Our target market is monitoring and control for heavy industry since this is an area in which our team already has expertise.
We have assembled our first vertical market application. 'Status Vision Designer®' ("Status Designer") was released in January 2009 as an industrial control and monitoring application for heavy industry and manufacturing.
Status Designer falls into the category of a SCADA (Supervisory Control and Data Acquisition) or HMI (Human Machine Interface) software application.
Status Vision Designer® is a powerful data visualization software package that allows the user to create highly graphical screens and connect the controls on the screens to real-time data. The screens can then be published and viewed by anyone within the company or from the web.
13 --------------------------------------------------------------------------------Status Designer is built using Aurora, a powerful graphics design package developed by Mobiform. Aurora is used as the foundation for numerous software products of major Fortune 500 companies.
Status Designer has built-in connectivity to real-time OPC (Open Process Control) data and can very easily be extended to bind to other types of data.
OPC data is primarily used in the manufacturing and process control industries.
The market appeal for Status Designer is its ability to connect to a variety of OPC servers and display real-time data from hundreds of data sources.
We have attracted a number of resellers and system integrators that are now promoting and using 'Status Designer' in commercial settings. During the year ended October 31, 2011 we have materially increased our international reseller network. We believe that this will result in greater sales and distribution of our software through retail outlets and to original equipment manufacturers ("OEM"s). We are also targeting potential customers to offer customized applications to meet their industry requirements. Status Designer is now being used to monitor the 4th largest subway system in the world in Seoul, South Korea. It is monitoring HVAC performance in pharmaceutical manufacturing facilities in China, and is used in various monitoring applications in numerous verticals in the United States.
Consulting In addition to sales of pre-designed software products, we generate revenue by consulting with organizations which utilize our expertise in customized solutions and embedding our software into theirs. We also offer training and graphic design services. Mobiform's graphic designers provide screen design expertise. We have also been tasked to create customized .NET and Silverlight controls for use in the Status Designer, and produce 3D models of equipment and machinery for use in mimics.
We assist consulting clients with their applications. From initial consulting services and custom development, to embedding our Aurora software into their solution, we have the expertise and personnel to assist.
Status Designer was designed from the ground up to be extensible. Numerous companies have written custom data sources or asked Mobiform to create custom data sources to provide their real time data into Status Designer.
Technology Licensing In addition to selling our own software products, we also license the technology we have developed to other software companies. Long-term licenses to multinational automation software companies are a major part of our business.
The lead time for our engineers to work with theirs in developing successful integration of our software with their future products is fairly long-from nine months to two years - but the result is a multiyear high revenue license which provides substantial revenue to us for years to come. We have a number of agreements in place and are currently in discussions with additional companies in the oil and gas, oil service, electric power generation and mining industries.
The products developed using Mobiform technology include industrial automation solutions, medical applications for use in hospitals, smart grid, HVAC and line of business applications. The relationships established through licensing are very strategic and may lead to acquisitions to prevent competitive companies from having the same strategic benefits.
Development Services and Support Mobiform has been recognized as a leading edge software development firm. We are often asked to provide software development services, graphics design and consulting as part of the technology licensing agreements we sign with our customers.
Our go-to-market strategy is simple: For Stage 1, following in the footsteps of Corel, Adobe and Macromedia, our goal is to put in place a set of core technologies that we can leverage to create a variety of software applications for different vertical markets. We have made some of these components available to other software companies as either retail software development components or as toolkits that can be used to embed our technology into their solutions. We have offered free downloads of our components and toolkits to prospective customers. With thousands of downloads of our products globally, we believe we are well on our way to achieving brand-name recognition. We will continue in our efforts to generate incremental revenue by working with global industry leaders in selling consulting services and licensing our technology.
14 --------------------------------------------------------------------------------Now that we are equipped with the technology infrastructure developed during Stage 1, we find that developing highly interactive and powerful software is simplified. In Stage 2 we are moving our business focus from technology development to product development. We are in discussions with major companies engaged in offshore drilling platforms, mining, electric power generation and heavy industry automation, among others. With a powerful set of software components in our tool belt, we believe we are able to build software products more rapidly and at a lower total cost of ownership to the consumer. Products are created through two different scenarios, (i) in-house creation of our own consumer products; and (ii) integration into third party products. Both scenarios should result in additional income producing licenses to or sales of, our technologies and products.
The third part of our strategy is a feedback loop. By providing a limited amount of consulting services, Mobiform is able to identify potential software products and components that are needed by industry, and produce those products for market. These components will feed our technology base and the relationships developed from the consulting will provide potential sales channels and additional licensing and OEM agreements to us.
Revenue Strategy We are currently generating revenues through the licensing of our technology to different software companies, retailing portions of our technology as software development components, and in the near future, retailing our software solutions to specific vertical markets. We anticipate, in the future, a smaller portion of our revenue will come from consulting services and custom development.
We are currently selling our products directly over the Internet from our website and through resellers. In the future, we intend to distribute Aurora through retail outlets and OEMs. We will also target potential customers to offer customized applications to meet their industry requirements.
Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.
Certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's subjective judgments are described below to facilitate a better understanding of our business activities. We base our judgments on our experience and assumptions that we believe are reasonable and applicable under the circumstances.
Revenue Recognition - Our revenues are recognized in accordance with FASB ASC Topic 985-605 "Revenue Recognition" for the software industry. Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectability is probable. Revenue from software maintenance contracts and Application Service Provider ("ASP") services are recognized ratably over the lives of the contracts. Revenue from professional services is recognized when the service is provided.
We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately.
For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
Results of Operations The following tables set forth, for the periods indicated, certain items from the statements of operations along with a comparative analysis of ratios of costs and expenses to revenues.
15 --------------------------------------------------------------------------------Comparison of the Three Months Ended July 31, 2012 and 2011 For the three months ended July 31, 2012 2011 (Unaudited) (Unaudited) % of % of Amounts Revenues Amounts Revenues Revenues $ 179,893 100% $ 104,897 100% Operating expenses: Compensation costs $ 153,892 86% $ 142,413 136% Consulting fees $ 1,114 1% $ 12,967 12% Advertising $ 8,298 5% $ 509 0% Professional fees $ 13,750 8% $ 15,975 15% Interest and debt costs $ 4,318 2% $ 3,679 4% Net loss $ (30,910) (17)% $ (89,587) (85)% Net loss per share - basic and diluted $ -- $ -- Revenues Our revenues for the three months ended July 31, 2012 amounted to $179,893 compared to the comparative 2011 period of $104,897. Revenues for the period increased by approximately $75,000 (72%) resulting from increases in licensing and support fees and consulting and developmental services revenues. Service revenues include revenues from fees charged for the implementation of our software products and training of customers in the use of such products. We are currently selling our software over the internet and are marketing our products and services to companies which may want to license or joint venture some of our software applications.
Operating Expenses Our operating expenses consist primarily of compensation costs, advertising and professional services.
Compensation costs consist of payroll and related expenses. Payroll expenses amounted to $153,892 in the three months ended July 31, 2012 compared to $142,413 in the three months ended July 31, 2011. Payroll expenses increased $11,479 (8%), but are 86% of revenues for the period compared to 136% of revenues in the three month period of the prior year as we continue to maintain costs to implement our strategic plan.
Advertising costs have increased from $509 in the three months ended July 31, 2011 to $8,298 in the three months ended July 31, 2012, an increase of $7,789 primarily from increases in online advertising. We believe it is necessary that we market our products in order to accomplish our plan for revenue growth, although we continue to control costs while we try to secure funding for future growth.
Professional fees have decreased to $13,750 in the three months ended July 31, 2012 from $15,975 from the three months ended July 31, 2011, a decrease of $2,225 (14%). We reduced professional fees by internally performing certain functions which had previously been done by our professionals.
Consulting fees decreased from $12,967 in the three months ended July 31, 2011 to $1,114 in the three month period ended July 31, 2012 as certain consulting agreements entered into in fiscal 2011 were not renewed.
Interest and Debt Costs Interest expense increased from $3,679 in the three months ended July 31, 2011 to $4,318 in the three months ended July 31, 2012. Interest expense is incurred on the promissory notes totaling $164,000 with our CEO and $50,000 on outstanding convertible debentures.
16 -------------------------------------------------------------------------------- Income Taxes The potential future tax benefits resulting from pre-tax losses have been fully reserved as we are not able to determine if it is more likely than not that we will be able to realize the tax benefits in the future.
Net Loss Net loss in the three months ended July 31, 2012 totaled $30,910 compared to $89,587 in the three months ended July 31, 2011, a decrease in net loss of $58,677 (66%). The decrease in net loss was due to factors as described above.
Comparison of the Nine Months Ended July 31, 2012 and 2011 For the nine months ended July 31, 2012 2011 (Unaudited) (Unaudited) % of % of Amounts Revenues Amounts Revenues Revenues $ 659,022 100% $ 616,818 100% Operating expenses: Compensation costs $ 484,525 74% $ 475,608 77% Consulting fees $ 2,834 0% $ 38,604 6% Advertising $ 16,917 3% $ 30,170 5% Professional fees $ 40,648 6% $ 65,637 11% Interest and debt costs $ 13,880 2% $ 9,728 2% Net income (loss) $ 16,034 2% $ (86,180) (14)% Net income (loss) per share - basic and diluted $ -- $ -- Revenues Our revenues for the nine months ended July 31, 2012 amounted to $659,022 compared to the comparative 2011 period of $616,818. Revenues for the period increased by approximately $42,000 (7%) resulting from increases in consulting and developmental services revenue. Service revenues include revenues from fees charged for the implementation of our software products and training of customers in the use of such products. We are currently selling our software over the internet and are marketing our products and services to companies which may want to license or joint venture some of our software applications.
Operating Expenses Our operating expenses consist primarily of compensation costs, advertising and professional services.
Compensation costs consist of payroll and related expenses. Payroll expenses amounted to $484,525 in the nine months ended July 31, 2012 compared to $475,608 in the nine months ended July 31, 2011. Payroll expenses increased $8,917 (2%) as we continued to implement our strategic plan while we tried to maintain our payroll costs.
Advertising costs have decreased from $30,170 in the nine months ended July 31, 2011 to $16,917 in the nine months ended July 31, 2012, a decrease of $13,253 (44%) primarily from decreases in trade show expense net of increases in online advertising. Although we believe it is necessary that we market our products in order to accomplish our plan for revenue growth, we continue to control costs while we try to secure funding for future growth.
Professional fees have decreased from $65,637 in the nine months ended July 31, 2011 to $40,648 in the nine months ended July 31, 2012, a decrease of $24,989 (38%). We reduced professional fees by internally performing certain functions which had previously been done by our professionals.
17 --------------------------------------------------------------------------------Consulting fees decreased from $37,145 in the nine months ended July 31, 2011 to $2,834 in the nine months ended July 31, 2012 and share based consulting fees decreased from $1,459 in the nine months ended July 31, 2011 to $0 in the nine months ended July 31, 2012 as certain consulting agreements entered into in fiscal 2011 were not renewed.
Interest and Debt Costs Interest expense increased from $9,728 in the nine months ended July 31, 2011 to $13,880 in the nine months ended July 31, 2012. Interest expense is incurred on the promissory notes totaling $164,000 with our CEO and $50,000 on outstanding convertible debentures.
Income Taxes The potential future tax benefits resulting from pre-tax losses have been fully reserved as we are not able to determine if it is more likely than not that we will be able to realize the tax benefits in the future.
Net Income (Loss) Net income in the nine months ended July 31, 2012 totaled $16,034 compared to a net loss of $86,180 in the nine months ended July 31, 2011, an increase in net income of $102,214. The increase in net income was due to factors described above.
Liquidity and Capital Resources We fund our operations through sales of our products and services and debt and equity financings.
At July 31, 2012 we had cash and cash equivalents of $172,000 compared to $14,000 at October 31, 2011. The increase of $158,000 is primarily attributable to the cash received from payments on our licensing agreements.
Cash Flows Net cash provided by (used for) operating activities amounted to $208,000 and ($141,000) in the nine months ended July 31, 2012 and 2011, respectively. Net cash from operations increased as a result of the additional cash generated in the second quarter of fiscal 2012 from our licensing agreements and services revenues while we managed to maintain operating costs for compensation, advertising and professional fees as discussed above.
In fiscal 2012, cash was used for investing activities for the acquisition of property and equipment in the amount of $4,421.
In fiscal 2012, cash was used for financing activities for loan repayments to our CEO in the amount of $45,827.
We believe that our cash on hand at July 31, 2012 will be sufficient to fund our operations for at least the next 12 months. We have signed significant licensing agreements and continue to market our products and services in accordance with our strategic business plan. We are also looking to raise additional capital through debt and/or equity financings. There is no assurance that the income generated from these and future agreements will meet our working capital requirements, or that we will be able to sign significant agreements in the future. There is also no assurance that we will be able to obtain additional capital in the amount or on terms acceptable to us.
Contractual Obligations N/A Off-Balance Sheet Arrangements As of July 31, 2012, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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