Versant 10-K 2012
United States Securities and Exchange Commission
Washington, D.C. 20549
For the fiscal year ended October 31, 2011, or
for the transition period from to .
Commission File Number 000-28540
(Exact name of Registrant as specified in its charter)
255 Shoreline Drive, Suite 450, Redwood City, California 94065
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports under Section 13 or 15(d) of the Exchange Act. Yes o No ý
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 preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates (assuming, for purposes of this calculation only, that the registrant's directors, executive officers and greater than 10% shareholders are affiliates of the registrant) computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of April 30, 2011 (the last business day of the registrant's most recently completed second fiscal quarter): $39,903,000.
As of January 25, 2012, there were outstanding 2,925,400 shares of the Registrant’s common stock, no par value.
ANNUAL REPORT ON FORM 10-K/A
For the Fiscal Year Ended October 31, 2011
Table of Contents
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, that was filed with the Securities and Exchange Commission (“SEC”) on January 30, 2012 (the “Original Filing”). We are filing this Amendment to include the information required by Part III and not included in the Original Filing, as we will not file a definitive proxy statement involving an election of directors within 120 days of the end of our fiscal year ended October 31, 2011. The reference on the cover of the Original Filing to the incorporation by reference of our definitive proxy statement into Part III of the Original Filing is hereby deleted.
Except as set forth in Part III below, no other changes are made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing. Unless expressly stated, this Amendment does not reflect events occurring after the filing of the Original Filing, nor does it modify or update in any way the disclosures contained in the Original Filing.
Without limitation, Versant Object Database, Versant ®, FastObjects, db4o, db4objects and other Versant product names referred to herein are trademarks of Versant in the United States and/or other countries. All other corporate or trade names or service marks referred to in this report are the names or marks of their respective owners in the United States and/or other countries.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements include, among other things, statements regarding the Company's expected future financial performance, assets, liquidity and trends anticipated for the Company's business. These statements are based on the Company's current expectations, assumptions, estimates and projections about the Company's business, the Company's industry and the market for the Company's goods and services, which are based on information that is reasonably available to the Company as of the date of this report. Forward-looking statements may include words such as "believes," "anticipates," "expects," "intends," "plans," "will," "may," "should," "estimates," "predicts," “forecasts,” "guidance," "potential," "continue" or the negative of such terms, other variants of such terms or other similar expressions.
We caution investors that forward-looking statements are only predictions, forecasts or estimates based upon our current expectations about future events. The forward-looking statements are not guarantees or assurances of our future performance and are subject to significant risks and uncertainties that are inherently difficult to assess and predict, particularly in light of the continuing recessionary environment in the United States and the global economy. Consequently, our actual future results and performance may differ materially from the results and performance anticipated by any forward-looking statements due to these risks and uncertainties. Some of the important risks and factors that could cause our results and performance to differ from results or performance anticipated by this report are discussed in Item 1A of this report, -“Risk Factors”- which you should read carefully. We undertake no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise or occur after the date of this report or for any other reason. Readers are urged to carefully review and consider the various disclosures made by Versant in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of risks and factors that may affect our business.
Item 1. Business
Overview of the Company
We are a leading provider of object-oriented data management software that forms a critical component of the infrastructure of enterprise computing. We design, develop, market and support object-oriented database management system products that companies use to solve complex data management and data integration problems. We also provide related product support, training, and consulting services to assist users of our products in developing and deploying software applications based on our products. In December 2011, we announced a new strategic product roadmap in which we have outlined our plans to create database software designed to address very large data problems. This new strategy is intended to extend Versant's proven ability to provide data solutions for large, distributed systems to emerging so-called "Big Data" and near real-time analytical application opportunities. We operate our business within a single operating segment that we refer to as “Data Management”.
Historically, our mission has been to be a preferred vendor of core data management solutions to world-class enterprises whose businesses require the successful management of large and complex bodies of data. We believe that, to fulfill this mission, we must pursue a general strategy of developing and offering powerful, scalable and highly reliable data management solutions capable of handling a wide array of challenging applications. In order to carry out this objective in a world in which it is becoming increasingly important for enterprises to source and manage voluminous amounts of unstructured, real-time and/or distributed data, we plan to augment our existing product offerings by pursuing our new strategy to focus on emerging Big Data and near real-time analytical applications. Driven by the growing ubiquity of mobile devices and smart sensors, the commoditization of computing power and storage, and the exponential growth in raw data, opportunities are emerging for enterprises to harness vast stores of information and become highly agile, data-driven organizations. We believe that it is critical for Versant to develop data management solutions designed to respond to these new computing challenges.
Consequently, Versant plans to make significant investments in new product developments in order to provide data management software that enables the development of analytical applications for this new era of the intelligent “real-time enterprise.” This strategic initiative will include efforts to develop application programming interfaces and server technologies specifically geared toward enhancing an enterprise's ability to ingest and manage vast amounts of structured and unstructured data and analyze very large data sets with near real-time capabilities, and may also involve co-development of technology with other parties and/or licensing of third party intellectual property. We will continue to market our products to companies in the telecommunications and defense industries, as well as to customers in several vertical markets including technology, financial services, transportation and health care. Our software has historically been used in strategic distributed applications such as network modeling and management, fault diagnosis, fraud prevention, service activation and assurance, and customer billing, scheduling and other applications.
Versant's strategic roadmap currently includes plans to develop the following technology components in 2012 and future years:
Our planned new products will make use of the existing Versant Database technology, an enterprise class data management solution, and build on its current capabilities to enable the development of analytical applications to address Big-Data problems. The technology extensions of the core database will independently address an enterprise class NoSQL data management market and be capable of running in modern cloud computing environments.
However, as with any new software development effort, there can be no assurance that we will succeed in developing any or all of these currently planned technology components, complete them in the chronological order in which we currently plan to develop them, or develop them on a timely basis necessary to attract adequate customer interest. Likewise, we cannot offer any assurance that any of these planned technology components will not be changed or be replaced by other, new and/or different components, that any such technology components will perform as we intend or not experience technical deficiencies, or that any of these components will achieve any meaningful market acceptance or produce meaningful revenues or profit.
We were incorporated in California in August 1988 under the name Object Sciences Corporation and completed the initial public offering of our common stock under the name of Versant Object Technology Company in July 1996. The name of the company was changed to Versant Corporation on July 15, 1998. In March 2004, we acquired Poet Holdings, Inc. (Poet) through a merger. Prior to that merger, Poet was a provider of object-oriented data management software headquartered in the United States, whose stock was publicly traded on the Frankfurt Stock Exchange. In June 2004, we acquired the JDO Genie product line and its customers from JDO Genie (PTY) Ltd., a privately held South African company, and in July 2004, we acquired FastObjects, Inc., a private company that held North American distribution rights with respect to Poet's FastObjects database management product. In August 2005, we effected a 1-for-10 reverse split of our outstanding common stock. In February 2006, we sold our WebSphere consulting business. On December 1, 2008 we acquired the assets of the database software business of privately-held Servo Software, Inc. (formerly named db4objects, Inc.), which included an open source object database software solution targeting the embedded device market. Our principal executive offices are located at 255 Shoreline Drive, Suite 450, Redwood City, California 94065 and our telephone number is (650) 232-2400.
Our website URL is www.versant.com. Except as otherwise expressly set forth in this annual report on Form 10-K, the information contained in, or referred to on, our website is not a part of this report.
We conduct most of our administrative operations from our U.S headquarters in Redwood City, California and the offices of our German subsidiary, Versant GmbH in Hamburg, Germany. Our research and development activities are primarily conducted by our German subsidiary, Versant GmbH. In September 2009, a restructuring plan was undertaken to consolidate the Company's research and development efforts into one location in Germany and to close a facility in India. This restructuring plan was substantially completed as of April 30, 2010.
Computerized data management has evolved significantly over the past few decades. As business computing became more sophisticated, network and hierarchical databases emerged in the 1970s to serve growing business data requirements. In the 1980s, these types of databases were largely superseded by relational database technology, which continues to be a widely prevalent database technology today. The mid to late 1980s saw the emergence of object-oriented software programming. In object-oriented programming, smaller software building blocks called “objects”, which can perform specific functions, are aggregated with other objects in order to create larger software systems. With the advent of object-oriented software programming, it became possible to incorporate the unique features and advantages of object-based software into database management solutions. Our principal products are object-based database management software solutions, which we believe have advantages over relational database technology. In particular, we believe that object-based database management solutions are especially well suited for successfully addressing the complex and challenging data management and analytical requirements of companies who need to rapidly source, update, analyze and use very large changing bodies of complex data for a wide variety of business applications.
Certain Industry Terms
For reference purposes we have listed below certain well-known technical terms often used in our data management industry to assist readers in better understanding the information provided in this report:
websites, internal company websites and applications requiring a higher degree of scalability than is typically deployed in support of solutions for smaller user populations.
Overview of Our Products and Services
We provide sophisticated data management solutions designed to address complex data management needs. Our Versant Object Database product is used primarily by larger enterprises which have significant large-scale data management requirements, such as technology providers, telecommunications carriers, government defense agencies, defense contractors, healthcare companies and companies in the financial services and transportation industries. Since the incorporation of Poet's FastObjects solution into our product line in March 2004, we expanded the scope of our solutions to also address the data management needs of smaller systems. With our acquisition of db4o in December 2008, we added a database solution for the embedded space, (which, for example, includes database solutions for platforms such as mobile smart phones and media tablets), which we plan to continue to develop and support. In 2012 and future years, our new product roadmap includes plans for the development of application programming interfaces and server technologies specifically geared toward enhancing the ability of enterprises to ingest, manage and analyze very large data sets at near real-time.
The data management needs of our customers usually involve many business functions, ranging from usage and management of the customer's internal data to the processing of externally originated information such as customer enrollment, billing and payment transaction data. Our solutions have also been used to solve complex data management and analysis problems such as fraud detection, risk analysis, yield management, and a host of other problems that require an application specific data management solution.
In addition to our product offerings, to assist users in their development and deployment of applications based on the Versant Object Database, FastObjects and db4o, we offer a variety of related professional services, including consulting, training, and technical support services. We also provide customers with maintenance and support services with respect to our products.
Benefits of Versant Solutions
Our products provide customers the following benefits for specialized data management:
Versant Object Database (VOD)
VOD, an eighth generation object database management system, is Versant's flagship product and is designed to support multi-user, commercial applications in distributed computing environments. VOD enables users to store, manage, and distribute information that often cannot be administered effectively through traditional database technologies, including the following types of information:
The object-oriented, balanced client-server architecture of VOD provides the basis for high-performance, scalable distributed applications. We believe that VOD's performance is superior compared to relational database management systems, particularly for complex data applications, for which VOD has the capability of processing a wide variety of abstract data types in a highly concurrent, high performance manner. We also believe that the use of VOD allows our customers to reduce the time they need to develop applications for their data management systems and improves their system performance.
VOD implements a variety of enterprise database features, including two-phase commitment for distributed transaction integrity and “database triggers” to monitor changing events and data and to notify users and applications when specified events occur. In addition, on-line management utilities enable routine maintenance to be performed while the database is running. These include utilities to perform backup operations, manage log files, dynamically evolve database schema, add, delete and compress volumes on disk storage and related functions. These utilities provide multiple levels of administrative access and application security.
Version 8.0 of VOD includes our core object database management system, C++ and Java language interfaces (proprietary JVI and standards-based JDO), and XML for import and export of data into the database. By bundling these components with VOD, we believe we are enhancing the solution that we are offering, thereby making it easier for customers to deploy applications requiring these components.
As part of the VOD family of solutions, we also offer a range of add-on options that a customer can use in situations requiring advanced capabilities, including the following:
FastObjects is an object database management system designed to provide minimal administration and to work natively with the customer's product. The primary target application for our FastObjects product line is for use as an embedded data management system to be integrated in a customer's products. FastObjects is used in a vast range of applications, including medical devices, vending machines, telecom equipment, and defense systems. The majority of FastObjects installations are now running under the Microsoft Windows Operating System.
db4o is an open source object database that enables Java and .NET developers to store and retrieve any application object with only one line of code, eliminating the need to predefine or maintain a separate, rigid data model. The db4o product targets embedded applications and embedded operating system deployments.
We derived approximately 45% of our revenues from services in fiscal 2011, predominantly from maintenance services. Our services include maintenance and support programs for our data management products, consulting services and the development of customer-specific extensions to our products.
Maintenance Services. We provide maintenance and technical support services for our products that are generally available at an annual fee that varies depending on the type and level of support the customer requires. Maintenance and support contracts, which typically have twelve-month terms, are offered concurrently with the initial license of our product and entitle a customer to telephone support, product upgrades, and documentation updates. For additional fees, customers may purchase a special support package that provides dedicated support engineers and telephone support available for 24 hours per day and seven days a week. Maintenance contracts are typically renewable annually and typically are paid for in advance for all products, but in some instances maintenance and support fees are paid in arrears. For the support of older versions of our products, we offer specific obsolescence support options.
Professional Services. We also provide a variety of training and consulting services to assist customers in the design, development, training and management of applications that are built based on our core products. Training services are offered for a variety of Versant-specific and other object-related technologies and range from beginning to advanced levels. Consulting services are available for analysis and design assistance, mentoring and technical information transfer, application coding, design reviews and performance analysis. In addition, we provide custom development services to customers that request unique or proprietary product extensions.
We categorize our customers into two broad groups, End-Users and Value Added Resellers (“VARs”). End-Users are companies who use our products internally and do not redistribute our products outside their corporate organizations. VAR customers, on the other hand, include traditional Value Added Resellers, Systems Integrators, OEMs and other vendors who redistribute Versant products to third party customers, either individually or as part of an integrated product.
We license our data management products through two types of perpetual and time-based licenses - development licenses and deployment licenses. Development licenses, typically licensed on a per seat basis, authorize a customer to develop an application program that uses our software product. Under a deployment license, a customer is permitted to deploy an application that it has developed under a development license from us. End-Users generally purchase deployment licenses based on the number of central processing units (CPUs or Cores) accessing the server that will run the application using our database management system. For certain applications, we offer deployment licenses priced on a per user basis. Pricing of Versant Object Database and FastObjects varies according to several factors, including the number of CPUs/Cores per server on which the applications run, and the number of users that are able to access the server at any particular time. Pricing of db4o
also varies according to several factors, including the number of users that are able to access the server at any particular time. However, due to the open source nature of the db4o product, for db4o at this time we only offer use/deployment licenses (and not development licenses).
VARs license development software from us on a per seat basis and on terms similar to those of development licenses that we license directly to End-Users. VARs are authorized to sublicense directly to the End-User deployment copies of our data management products, which are either bundled or embedded in the VARs' applications. VARs are required to report the distribution of our software to us and are charged a royalty that is based either on the number of copies of the application software that are distributed or computed as a percentage of the selling price charged by the VAR to its end-user customers. These royalties may be prepaid in full or paid upon deployment.
Frequently, a significant portion of our total revenues has been derived from a limited number of large organizations who tend to change from year to year. In fiscal year 2011, one customer accounted for 10% of our total revenues in the first quarter; two customers accounted for 15% and 14%, respectively of our total revenues in the second quarter; two customers accounted for 11% and 11%, respectively, of our total revenues in the third quarter; and one customer accounted for 15% of our total revenues in the fourth quarter. One customer accounted for 12% of our total revenues for the fiscal year ended October 31, 2011.
In fiscal year 2010, one customer accounted for 13% of our total revenues for the first quarter; two customers accounted for 12% and 17%, respectively, of our total revenues for the second quarter; one customer accounted for 15% of our total revenues for the third quarter; and two customers accounted for 12% and 13%, respectively, of our total revenues in the fourth quarter. One customer accounted for 12% of our total revenues for the fiscal year ended October 31, 2010. In fiscal year 2009, no one customer accounted for 10% or more of our total revenues for the fiscal year or in any fiscal quarter as we experienced smaller average license transactions in fiscal 2009.
Our Vertical Markets
Versant Object Database and FastObjects are licensed for development or deployment, or both, and db4o is licensed only for deployment, in a wide range of application categories. A substantial amount of our sales is for applications in the telecommunications, technology, healthcare, defense, transportation, financial services and media sectors. Many of our customers have licensed multiple copies of our products for use in different applications.
Our future performance will depend in significant part on achieving increased usage and sales of the Versant Object Database and FastObjects in telecommunications, technology, healthcare, government and defense, transportation, financial market applications, media, and online gaming, the continued acceptance of our products within these industries and achieving use and acceptance of our products in other industries such as the energy sector. Our performance will also be affected by the success of our planned development of new product offerings and the adoption of those products to solve the Big Data problems of our current and future vertical markets.
Sales and Marketing
Sales Channels. We market and sell our products principally through our direct sales force and through value-added resellers, systems integrators, and distributors.
Direct Sales. Our direct sales organization is based in our corporate offices in Redwood City, California and Hamburg, Germany, and in other offices in the U.S. and Europe. The direct sales organization includes field sales personnel, who are responsible for account management, and systems engineers, who answer technical questions and assist customers in running benchmarks against competitive products and in developing prototype applications.
Indirect Sales. Part of our sales strategy is to further develop indirect distribution channels, such as value-added resellers and systems integrators who address new markets or industries. Systems integrators may integrate our products with their own products or those of other vendors, in order to provide a complete solution to their customers. Under their agreements with Versant, value-added resellers and systems integrators are typically not subject to any minimum purchase or resale requirements and can cease marketing our products at any time. Some of our value-added resellers and systems integrators offer products they produced by themselves or by other vendors, which may in some cases compete with our products. In addition we distribute our products in certain markets through distributors who resell our products without integrating them in other solutions.
Marketing. The primary objective of our marketing efforts is to build increased visibility for Versant and its products and to generate sales leads for our business. Our marketing programs have included our efforts at cultivating media and analyst
relations, fostering valuable investor communications, speakers' programs, online marketing, partner-marketing programs, sponsoring database technology scholarship programs at the university level, participation in conferences and tradeshows and in some cases preparation of white papers or other marketing / advertising initiatives targeting a discrete industry or market.
Sales Process. The cycle for a complete sale of our products to new and large enterprise customers can often exceed six months and may extend to a year or beyond. For existing customers with successfully deployed applications, sales cycles for new applications of our core products are generally shorter. During the sales cycle, meetings involving both Versant technical and management staff are conducted frequently at the prospective customer's site and at our offices. As part of their product selection process, our prospective customers typically perform a detailed technical evaluation or benchmark of our object-based technologies, often directly comparing them to competitive products. Upon completion of the evaluation, a customer that chooses our solution may license one or more development licenses, which entitle the customer to develop applications that use a Versant software product. The number of development licenses a customer may acquire depends upon the number of programmers who will develop and build the customer's application. Additionally, a customer may purchase technical support, training courses and consulting services. Our customers may also purchase deployment licenses from us that enable them to sell and market product applications developed under a Versant development license. In some cases our customers purchase deployment licenses at the same time they acquire development licenses. In other cases customers may instead defer their purchase of deployment licenses and related maintenance until they complete the application development under their development license (a process that typically takes at least six months and can exceed one year).
Shipping and Backlog. Our software may be either physically or electronically delivered to the customer. If physically delivered, our software product is shipped from either our Redwood City or Hamburg facilities and is delivered to the customer upon receipt of an approved order and a signed license agreement. We typically do not have a material backlog of unfilled license orders at any given time, and we do not consider backlog to be a meaningful indicator of our future performance.
International Sales and Marketing. Our international sales are primarily recorded by our subsidiary in Germany, which sells our products through distributors and value-added resellers, as well as directly to end-users. In fiscal 2009, we partnered with a distributor in China and in 2011 with a distributor in India to access potential long-term growth opportunities in those geographic regions. For fiscal 2011, our international revenues derived from customers outside North America made up approximately 60% of our total revenues, compared to 60% for fiscal 2010 and 62% for fiscal 2009. Risks particularly associated with our international sales are discussed below in Item 1A under the risk factor captioned “International Operations pose unique risks”.
Our software products compete with products of companies offering object and relational database management systems. Our competitors, especially Oracle and Progress Software, have longer operating histories, significantly greater financial, technical, marketing, service and other resources, significantly greater name recognition, broader product offerings, larger and more established distribution channels and a larger installed base of customers than does Versant. In addition, many of our competitors have well-established relationships with our current and potential customers and may offer broader suites of products with a wide array of complementary applications which may incentivize customers to purchase these competitors' data management products. We will encounter competition from new sources such as 10gen, IBM, EMC, HP and Teradata as the implementation of our new Big Data strategy brings us into new marketplaces. We may not be able to compete successfully against current or future competitors, and competitive pressures could have a material adverse effect on the business, pricing, operating results and financial condition of the company.
Research and Development
Currently our research and development activities are conducted primarily in Hamburg, Germany and consist primarily of the development of enhancements of and improvements to our existing product line, (quality assurance engineering) and development of add-on option solutions used with our principal products. Our new Big Data strategic initiative will require significant investment in research and development to develop analytics software, application programming interfaces and server technologies to manage Big Data sets. Consequently, in order to pursue this initiative, Versant expects to increase its research and development expenses from 2011 levels by approximately 40% in 2012. In fiscal 2011, fiscal 2010 and fiscal 2009, our research and development expenses were $3.9 million, $3.8 million and $4.0 million, respectively. Our research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits, expenses for facilities and payments made to outside software development contractors and, to a lesser degree, depreciation of capital equipment.
Intellectual Property and Other Proprietary Rights
We consider our products to be proprietary. We attempt to protect our technology by relying primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. For example, we license our software pursuant to signed license agreements and, to a lesser extent, “shrink-wrap” licenses displayed in evaluation downloads and in software installation screens, which impose certain restrictions on the licensee's ability to utilize our software. In addition, we take steps to avoid disclosure of our trade secrets, such as requiring persons with access to our proprietary information to execute non-disclosure agreements, and we restrict access to our software source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We were awarded a United States patent (No. 5,822,759) for our proprietary cache system used within our product suites, which expires in 2015. We also have certain trademarks and service marks for certain of our products and services.
As of October 31, 2011, we and our subsidiaries had a total of 65 full time employees, of whom 24 were based in the United States and 41 in Europe. As of October 31, 2011, 33 employees were engaged in engineering and technical services, 18 were engaged in sales and marketing and the remaining 14 were engaged in general administration and finance. To the best of our knowledge, none of our employees is represented by a labor union. We have not experienced any organized work stoppage to date and believe that our relationship with our employees is generally good.
Our future performance depends mostly upon the continued service of our key technical, sales, and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business, operating results and financial condition.
In September 2009, a restructuring plan was undertaken to consolidate the Company's research and development efforts into one location in Germany in order to streamline operations, create management efficiencies and increase productivity. The Company committed to closing its research and development facility in Pune, India and winding down the affairs of its subsidiary, Versant India Private Limited. The restructuring was substantially completed during the second fiscal quarter ended April 30, 2010. See Note 12 of our “Notes to Consolidated Financial Statements” in Item 8 of this report for more information regarding this transaction.
We are subject to the informational requirements of the Securities Exchange Act of 1934, or the “Exchange Act” pursuant to which we file our periodic reports on Forms 10-Q, 10-K, 8-K, proxy statements and other information with the Securities and Exchange Commission, or “the SEC”. These reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Room 1580, Washington, DC 20549. Information on the operation of the SEC's Public Reference Room may be obtained by calling the SEC at 1(800) SEC-0330. In addition, the SEC maintains an Internet site (at http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Information regarding our revenues, net income, total assets and other financial information for our fiscal years ended
October 31, 2011, 2010 and 2009 can be found in Item 8 of this report on Form 10-K, which is incorporated here by reference.
Financial and other information about Versant can also be accessed at our Investor Relations website. The address of Versant's website is: (www.versant.com). We make available, free of charge, copies of our annual reports, annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after filing such materials with the SEC.
Item 1A. Risk Factors
This annual report on Form 10-K contains forward-looking statements regarding the Company that involve risks and uncertainties, including, but not limited to, those set forth below in this Item 1A, that could cause our actual results of operations and financial condition to differ materially from those contemplated in the forward-looking statements. The risks and uncertainties set forth below should be carefully considered when evaluating our business and prospects.
Current economic conditions may harm our business and results of operations. Global economic conditions and financial markets have continued to be challenging to the enterprise software market, as many economies and financial markets continue to experience a deep recession stemming from a multitude of factors, including adverse credit conditions, slower economic activity, concerns about the debt levels and financial viability of certain European countries and the instability of financial institutions and other businesses, inflation and deflation, continuing high rates of unemployment, reduced corporate capital spending, adverse business conditions and liquidity concerns and other factors. Recovery of economic growth in the U.S. and many other countries has remained very slow and the length of time these adverse economic conditions may persist are unknown. During challenging economic times and in tight credit markets, many prospective customers delay or reduce technology purchases. This has resulted, and could continue to result in, reductions in sales of our products and services, longer sales cycles, smaller sales levels, difficulties in collection of accounts receivable, slower adoption of new technologies and increased price competition. Continued softness in corporate information technology spending would have a direct adverse impact on our business and any of the events described above in this paragraph would likely materially harm our business, including by decreasing our revenues, decreasing cash provided by operating activities and negatively impacting our liquidity. We cannot predict the duration of these economic conditions or the impact they will have on our customers or business.
Efforts to expand and diversify our product line may adversely affect our operating results and may not result in the development of successful new products. In 2012 and future years we plan to develop new products in order to expand and diversify our product offerings beyond our existing core products, VOD, FastObjects and db4o. The new software that we propose to develop will require substantial research and development, marketing and sales expenditures, and in some cases product acquisition and technology licensing costs, with no assurance that we will receive incremental additional revenue from such new products. Developing successful new products will require us to incur significant marketing expenditures to determine the viability of such new products and applications and target customers, as well as substantial research and development expenditures and additional sales expense associated with selling new products. A significant portion of such expenses would likely be incurred well in advance of our recognition of any revenues from such new products, and thus are likely to adversely affect our results of operations and cash flows for certain fiscal periods. In addition, there can be no assurance that any new products will be successfully developed, accepted in the marketplace or generate meaningful amounts of revenue or net income. Failure to develop successful new products may adversely affect our reputation and our ability to successfully market other products and our future revenues. Consequently, the Company must act carefully when making product or technology development decisions. In December 2008 we acquired the db4o database assets of Servo Software, with the objective of giving us a new product, as well as access to new customers and additional revenue opportunities. However the financial costs of this acquisition and associated operational costs have adversely affected our results of operations for fiscal years 2011, 2010 and 2009 and may continue to do so.
We are dependent on a limited number of products, especially Versant Object Database or “VOD”. Most of our license revenues to date have been derived from our VOD product, its predecessors and related products that add to or extend the capabilities of VOD. Consequently, if our ability to generate revenues from VOD were negatively impacted, our business, cash flows and results of operations would be materially and adversely affected. Many factors could negatively impact our ability to generate revenues from Versant Object Database, including without limitation softness in demand in the North American or European markets for enterprise software, the current instability in the global economy and any slowness in the U.S. or European economies or in key industries we serve, such as the telecommunications and information technology industries, the success of competitive products of other vendors, reduction in the prices we can obtain for our products due to competitive or economic factors, the adoption of new technologies or standards that make our products technologically obsolete and customer reluctance to invest in object-oriented technologies. Although we have taken steps to diversify our product line through our 2004 acquisition of Poet and its FastObjects data management product and our December 2008 acquisition of db4o, we still expect that sales of VOD will continue to be very critical to our revenues for the foreseeable future. Accordingly, any significant reduction in revenue levels from our VOD product can be expected to have a material negative impact on our business and results of operation. It is possible that our efforts to develop and market our proposed new products for Big Data applications could divert attention from our continued development, sales and marketing efforts for VOD, and any failure by the Company to devote sufficient effort to VOD development, sales and marketing efforts could have an adverse impact on VOD sales and the Company's overall revenues and financial condition.
We depend on successful technology development. We believe it will be necessary for us to increase significantly our research and development expenditures in order for us to develop the new products outlined in our strategic roadmap. While we believe our research and development expenditures will result in new salable product, because of the uncertainty of software development projects and risks posed by the current economic downturn, these expenditures will not necessarily result in successful product introductions or sustained or increased revenue levels. Uncertainties affecting the success of software development project introductions include risks of technical difficulties, delays in the introductions of new products, potential product errors, market conditions, competitive products, and customer acceptance of and demand for new products and the operating systems they run on. We also face certain challenges in integrating third-party technology embedded in our products. These challenges include the technological challenges of integration, which may result in development delays, and uncertainty regarding the economic terms of our relationship with our third-party technology providers, which may result in delays of the commercial release of new products. In addition, if we are required to adopt cost-conservation measures, we may be compelled to reduce the amount of our investment in research and development activities, which could adversely affect our ability to maintain the competitiveness of our existing products, our ability to develop new products (including without limitation the new proposed products outlined in our strategic roadmap) and our future research and development capabilities. Failure to continue to timely develop technologies and products necessary for us to remain competitive is likely to have a material and adverse effect on our business.
Reduced demand for our products and services may prevent us from achieving targeted revenues and profitability. Our revenues and our ability to achieve and sustain profitability depend on continuing or increasing the level of overall demand for the software products and services we offer. Demand for our product line may be reduced due to alternative technologies offered by competitors, negative customer perception of our object-oriented technology or other causes, including economic conditions that adversely affect the industries of our most significant customers, such as the defense and telecommunications industries. In addition, we have experienced continued hesitancy on the part of our existing and potential customers to commit to additional products or services from us, particularly in our North American markets. Any significant reduction in the demand for our products or services would have a material adverse effect on our business and results of operations.
Our products face significant competition from larger competitors. Our VOD, FastObjects and db4o products compete with products of other companies that offer database management systems. We face substantial competition from substantially larger and well-established relational database management companies including Oracle, Computer Associates, Sybase, IBM, and Microsoft. We also face competition from object database companies including Progress Software Corporation and Objectivity. Additionally, some of our prospective customers might attempt to build specialized data storage capability themselves using their own internal engineering resources, sometimes starting with low level operating system functionality, and other times utilizing lower level data storage routines that are commercially available, such as Oracle Berkeley DB, a simplified database without query processing capability. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing, service and other resources, better and wider name recognition, broader suites of product offerings, stronger sales and distribution channels and a much larger installed base of customers than ours. In addition, many of our competitors have well-established relationships with our current and potential customers. Our competitors may be able to devote greater resources to the development, promotion, and sale of their products. They may also have more direct access to corporate decision-makers of key customers based on their previous relationships with these customers. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, and may have the competitive advantage of being able to sell products competitive to ours through package sales of a suite of a variety of products for different applications that we do not offer. We may not be able to compete successfully against our current or future competitors, and competitive pressures could cause us to lose revenues or lower the prices for our products to increase or maintain our sales revenues, or to take other market-responsive actions, any of which could have a material adverse effect on our business, operating results and financial condition.
Our customer concentration increases the potential volatility of our operating results. Due to the nature of our products a significant portion of our total revenues has been, and we believe will continue to be, derived from a limited number of significant orders placed by large organizations. For example, in fiscal year 2011, one customer accounted for 10% of our revenues in the first quarter; two customers accounted for 15% and 14%, respectively of our total revenues in the second quarter; two customers accounted for 11% and 11%, respectively, of our total revenues in the third quarter; one customer accounted for 15% of our total revenues in the fourth quarter; and one customer accounted for 12% of our total revenues for the fiscal year ended October 31, 2011. Similarly, in fiscal year 2010, one particular customer accounted for 13%, 12%, 15% and 9% of our total revenues in the first, second, third and fourth fiscal quarters of that fiscal year, respectively, and 12% of total revenues for that fiscal year. A different customer accounted for 17% of our total revenues in the second fiscal quarter of 2010 and two other customers accounted for 12% and 13%, respectively, of our total revenues in our fourth fiscal quarter of 2010. The timing of large orders and their fulfillment has caused, and in the future is likely to cause, material fluctuations in our operating results, particularly on a quarterly basis. In addition, our major customers tend to change from year to year. The loss of any one or more of our major customers, or our inability to replace a customer making declining purchases with a new
customer of comparable significance, could each have a material adverse effect on our business.
Our quarterly revenue levels and operating results are not predictable and have resulted in volatility in our stock price. Our revenues and, in some cases, our operating results, have fluctuated (in some cases significantly) on a quarterly basis, and we expect this trend to continue. For example, in fiscal 2011, our quarterly revenues fluctuated from a high of $4.6 million in the first quarter of 2011 to a low of $3.5 million in the second quarter of 2011. These quarterly fluctuations can result in volatility in our stock price and result from a number of factors, including but not limited to the following:
We have previously experienced revenues and earnings results that were significantly below levels expected by investors, which have had an immediate and significant adverse effect on the trading price of our common stock. This may occur again in the future. Additionally, as a significant portion of our revenues are often realized late in a fiscal quarter, we may not be aware of any revenue shortfall until late in a fiscal quarter and an unanticipated announcement of such a revenue shortfall, could result in an even more immediate and adverse effect on the trading price of our common stock.
Our future revenues are substantially dependent upon our installed customers continuing to license Versant products and renew their maintenance agreements for our products. Our future professional services and maintenance revenues are dependent on future sales of our software products. We depend heavily on our installed customer base for future revenues from licenses of additional products or upgrades of existing products and from related fees for the renewal of maintenance and support agreements. If our existing customers do not purchase additional products, upgrade existing products or renew their maintenance and support agreements with us, this could materially and adversely affect our business and revenues and our future quarterly and annual operating results. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. Our maintenance agreements are generally renewable annually at the option of the customer, and there are no minimum payment obligations or obligations to license additional software. Therefore, our current customers may not necessarily generate significant maintenance revenues in future periods if
they choose not to renew our maintenance services or renew them at lower service levels that generate lower revenues. This risk may be increased in the case of long-term customers who have not upgraded our products which they license. In addition, our customers may choose not to purchase additional products, upgrades or professional services. Our professional services and maintenance revenues are also dependent upon the continued use of our products by our installed customer base. Consequently, any downturn in our software license revenues would likely have a corresponding negative impact on the growth of our professional service and maintenance revenues.
We plan to substantially increase our research and development, and sales and marketing efforts and related expenses in fiscal 2012, which is likely to adversely affect our operating results in fiscal 2012 and may continue to adversely affect our operating results thereafter if these efforts are unsuccessful. As part of our 2012 strategic new product initiative, we expect to develop database software related to very large data problems and plan to make significant investments in research and development in order to execute on this initiative. Specifically, we currently have plans to increase our research and development spending levels by approximately 40% in fiscal 2012 compared to the prior fiscal year. In addition as we did in fiscal 2011, in fiscal 2012 we again anticipate increasing our sales and marketing efforts and associated sales and marketing expense in order to enter into the Big Data market, attract new customers and to find new applications for our products with existing customers. We currently have plans to increase our sales and marketing spending levels by approximately 30%, in fiscal 2012 compared to fiscal 2011. While we anticipate receiving benefits from these additional research and development, and sales and marketing investments over the medium term, we do not expect to generate meaningful revenues from our new product initiative in fiscal 2012, and we currently expect that our total revenues in fiscal year 2012 will remain at approximately 2011 levels. Consequently as a result of these planned investments, we currently estimate that we will experience a net loss of approximately $1.7 to $1.9 million for the fiscal year ending October 31, 2012, and we expect our net cash from operating activities for fiscal year 2012 to be minimal. If our enhanced research and development and sales and marketing activities do not result in additional revenues and new customers, the related increased research and development and sales and marketing expenses associated with these efforts would likely adversely affect our results of operations over the medium to longer term. Further, even if our increased research and development and sales and marketing efforts are successful, we do not expect to recognize revenue from our new strategic product initiative until sometime in fiscal 2013, and due to the relatively long sales cycle of our products, the benefit of these efforts likely will not be meaningfully realized until future fiscal periods, so that such increased research and development and sales and marketing expenses will still be likely to adversely affect our results of operations in the fiscal periods in which they are incurred. Without limitation, the estimates, forecasts and other statements in this paragraph are forward-looking statements.
Our products have a lengthy sales cycle. The sales cycle for our VOD, FastObjects and db4o products varies substantially from customer to customer and similar long sales cycles can be expected for new products developed pursuant to our new Big Data product initiative. This sale cycle often exceeds six months and can sometimes extend to a year or more, especially for sales to defense sector customers. Due in part to the critical and strategic nature of our products and the level of expenditures associated with their purchase, our potential customers are typically very cautious in making decisions to acquire our products. In order for us to influence our customers' decision to license our products we often must provide a significant level of education to prospective customers regarding the uses and benefits of our products, and we frequently commit to provide that education without any charge or reimbursement. Generally, pre-sales support efforts, such as assistance in performing benchmarking and application prototype development, are also conducted with no charge to customers. Because of the lengthy sales cycle for our products and the relatively large average dollar size of our individual licenses, a lost or delayed sales transaction could potentially have a significant negative impact on our operating results for a particular fiscal period.
We may not be able to manage our costs effectively given the unpredictability of our revenues. We expect to continue to maintain a relatively high percentage of fixed expenses. We expect our research and development and our sales and marketing expenses to increase substantially as we invest in efforts to develop new products and expand our customer base. Consequently, if our forecasted revenue does not materialize, our business, financial condition and results of operations will be materially harmed.
We rely on revenues from the telecommunications and to a lesser degree, certain other industries; and these industries are characterized by complexity, intense competition and changes in purchasing cycles. Historically, we have been highly dependent upon the telecommunications industry and, more recently, we are also becoming increasingly dependent upon the information technology, medical, transportation and finance industries, for sales of VOD. Our success in these markets depends, to a large extent, on general economic conditions affecting these industries, our ability to successfully compete with other technology providers of solutions that directly compete with, or provide alternatives to, our products, our ability to develop products that can successfully interoperate in different computing environments and the continued belief by our existing and potential customers that we have the expertise and financial stability necessary to provide effective solutions and support in these markets on an ongoing basis. If any of these conditions, among others, are not satisfied, we may not be successful in generating additional opportunities in these markets. As previously noted, the current global economy is in a
recession and, in the past, general economic downturns have also adversely affected our ability to generate revenues from customers in the telecommunications and other industries. In addition, the types of applications and commercial products needed by the telecommunications industry and other markets we address are continuing to develop and are rapidly changing, and these markets are characterized by an increasing number of new entrants whose products may compete with ours. As a result, we cannot predict the future growth of (or whether there will be future growth in) these markets, and demand for object-oriented databases applications in these markets may not develop or be sustainable. We also may not be successful in attaining a significant share of these markets due to competition and other factors, such as our limited size and working capital. Moreover, potential customers in these markets generally develop sophisticated and complex applications that require substantial consulting expertise to implement and optimize. There can be no assurance that we can hire and retain adequate skilled personnel to provide such ongoing consulting services.
We rely on a substantial portion of our revenues being generated through our international operations and will continue to do so in the future. A large portion of our revenues is derived from customers located outside North America, and it is critical for us to maintain these international revenues. Following our 2004 acquisition of Poet, which had a strong European presence, international revenues have represented a larger percentage of our total revenues than they had prior to that time. Consequently, we maintain a significant portion of our workforce in Germany and must conduct our operations internationally and maintain a significant presence in international markets. In each of fiscal 2011 and fiscal 2010, international revenues derived from customers outside North America made up approximately 60% of our total revenues for each such fiscal year, and international revenues comprised 62% of our total revenues in fiscal 2009. Most of our non-North American revenues are derived from Europe, but we have taken initial steps to develop new distribution channels in China and India in an effort to expand our customer base and future revenues. We have substantially less experience in the sale and marketing of our products and services in Asia and India and there can be no assurance that our efforts to develop new customers there will be successful or will not result in increased sales and marketing costs that may not generate corresponding revenue, which would adversely affect our operating results. We expect international revenues to continue to be critical to our operations and cash flows.
International Operations pose unique risks. Our international operations are subject to a number of unique risks in addition to the risks faced by our domestic operations. These risks include, but are not limited to the following areas:
In addition, in light of increasing concerns about global security and terrorism, and the extended global economic downturn, there may be additional risks of disruption to our international sales activities. Any prolonged disruption in the markets in which we derive significant revenues may potentially have a material adverse impact on our revenues and results of operations.
In order to be successful, Versant must attract, retain and motivate key employees, for whom competition is intense; and failure to do so could seriously harm the Company, particularly given the smaller size of our executive management team. In order to effectively execute our business strategy, we must attract, retain and motivate our executives and other key employees, including those in managerial, sales and technical positions. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. The loss of the services of one or more of our key employees could have a material adverse effect on our business, particularly so given the relatively smaller
size of our executive management team, which currently consists of Bernhard Woebker, our President and Chief Executive Officer, and Jerry Wong, our Vice President Finance, Chief Financial Officer and Secretary. Our future success also depends on our continuing ability to attract, train and motivate highly qualified technical, sales and managerial personnel. Constraints on our ability to offer compensation at levels that may be offered by larger competitors and other circumstances may adversely affect our ability to attract and retain key management in the future. We must continue to motivate our employees and keep them focused on the achievement of our strategies and goals. We now employ a sizable German workforce subject to German employment law, which generally provides greater financial protection to terminated employees than does United States law. Consequently, failure to retain our German employees may cause us to incur significant severance costs, which could adversely affect our operating results and financial condition.
Our personnel, management team and operations are located in different countries and as a result, we may experience difficulty in coordinating our activities and successfully implementing Company goals. Following our 2004 merger with Poet, we acquired significant operations and personnel in Europe and now have approximately 41 employees based in Europe, whose activities must be well coordinated with those of our U.S. workforce and our other employees. The significant geographic dispersion of our management team and our workforce may make it more difficult for us to successfully manage our long-term objectives, coordinate activity across the Company, and integrate our operations and business plans, and causes us to incur certain additional travel and other expenses to maintain communications between our various offices.
An impairment loss could have a material adverse impact on our financial condition and results of operations. The continued global economic instability, resulting in, among other things, lower demand for our offerings and disruption of capital and credit markets could significantly affect our stock price and market capitalization. It is possible that further sustained declines in our stock price would result in a goodwill impairment loss that could have a material adverse impact on our financial condition and results of operations.
We are subject to litigation and the risk of future litigation. Litigation can be expensive to defend, can consume significant amounts of management time and can result in judgments or settlements that could have adverse effects on our results of operations, financial condition and cash reserves. We are subject to potential litigation claims and the resulting costs and distraction. For example, during fiscal 2006, we settled a litigation that commenced in the last quarter of fiscal 2004 when we were sued by Systems America, Inc., a privately held company, in an action which alleged that, prior to our acquisition of a smaller privately-held company in November 2002, persons associated with that company misappropriated trade secrets and confidential information of Systems America, unfairly competed with Systems America with respect to its customer relationships, and infringed Systems America's trademarks and trade names. Additionally, during fiscal 2008, we settled another related litigation in which a prior customer was seeking indemnification from us for costs the customer had incurred in defending a suit brought against it by Systems America Inc., which alleged that a Versant product that was discontinued in 2004 infringed Systems America's intellectual property. Such settlements can adversely affect our operating results and reduce our cash reserves.
Our ability to use our net operating loss carry forwards and certain other tax attributes may be limited. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation's ability to use its pre-change net operating loss carry forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership which are beyond our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry forwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased tax liability to us in the future. In addition the State of California has in certain cases suspended the ability to utilize net operating loss carry forwards in the current (and certain past) tax years and could do so again in the future.
Although we believe our internal control over financial reporting is effective, there remain risks that our controls may become inadequate. Since we are required to assess our internal control over financial reporting on an annual basis, any future adverse results from such an assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), and the rules and regulations promulgated by the SEC to implement SOX 404, we are required to furnish an annual report in our Form 10-K regarding the effectiveness of our internal control over financial reporting. The report's assessment of our internal control over financial reporting as of the end of our fiscal year must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Management's assessment of internal control over financial reporting requires management to make subjective judgments and therefore, we may have difficulties in accurately assessing the effectiveness of our internal controls. In addition, if we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.
Adoption and application of accounting regulations and related interpretations and policies regarding revenue recognition could cause us to defer recognition of revenue or recognize lower revenues and profits. Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly with new customers and in multi-element or multi-year transactions. Negotiation of mutually acceptable terms and conditions with our customers can extend the sales cycle for our products and, in certain situations, may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with ASC 985-605, Software, Revenue Recognition; however, these future, more complex, multi-element, multi-year license transactions, which may require additional accounting analysis to account for them accurately, could lead to unanticipated changes in our current revenue accounting practices and may contain terms affecting the timing of our revenue recognition.
Failure to adequately protect our intellectual property could impair our ability to successfully compete. Despite our efforts to protect our proprietary rights, third parties may attempt to misappropriate or copy aspects of our products or our technologies, obtain or wrongfully use information we regard as proprietary or use or make unauthorized copies of our products or technologies in violation of license agreements. Policing unauthorized use of our products is difficult and enforcing our proprietary rights is potentially expensive. In addition, we conduct a substantial portion of our business outside the United States and the laws of many jurisdictions do not protect our proprietary rights to as great an extent as do the laws of the United States. Shrink-wrap licenses may be wholly or partially unenforceable under the laws of certain jurisdictions and copyright and trade secret protection for software may be unavailable or very difficult to effectively enforce in certain foreign countries. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technologies, which they could then market and sell to our customers, which could have an adverse impact on our revenues.
We may be subject to claims of intellectual property infringement. Developers of software such as the Company are frequently subject to intellectual property infringement claims as the number of products, competitors and patents in our industry sector grows. Intellectual property infringement litigation can also arise when we acquire businesses or assets. For example, in 2004 we were the subject of a suit alleging that a company we purchased misappropriated intellectual property and the plaintiff in that litigation also brought an action against one of our customers on related facts, which resulted in that customer making a claim for indemnification against us. Although these suits were settled, any claim of this type, whether meritorious or not, could be time-consuming, could result in significant litigation expenses, could cause product shipment delays and require us to enter into royalty or licensing agreements or pay amounts in settlement of the claims or pursuant to judgments, which could adversely affect our results of operations. If any of our products or technologies were found to infringe third-party rights, royalty or licensing agreements to use such third-party rights might not be available on terms acceptable to us, or at all, and we might be enjoined from marketing an infringing product or technology, each of which circumstances could have a material adverse effect on our business, operating results and financial condition.
Our use of open source software could negatively impact our ability to sell our products. The products, services or technologies we acquire, license, provide or develop may incorporate or use open source software. We monitor our use of open source software in an effort to avoid unintended consequences, such as reciprocal license grants, patent retaliation clauses, and the requirement to license our products at no cost. There is relatively little or no legal precedent for interpreting the terms of these open source licenses, whose terms may be difficult to interpret or apply, therefore we may be subject to unanticipated obligations regarding our products that incorporate open source software. In addition, disclosing the content of our source code could limit the intellectual property protection we can obtain or maintain for that source code or the products containing that source code and could facilitate intellectual property infringement claims against us.
We may engage in future acquisitions of businesses or assets that could dilute our shareholders and cause us to incur debt or assume contingent liabilities. As part of our strategy, we may from time to time review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer us growth opportunities. In the event of any future acquisitions, we potentially might take any or all of the following actions:
Such acquisitions also involve numerous risks, including the following:
For example, in December 2008 we acquired for cash from privately-held Servo Software Inc., assets associated with Servo Software's db4o open source database solution for the embedded device market. We acquired these assets with the objective of expanding our product line and obtaining access to new customers and additional revenue opportunities. However this acquisition continues to be subject to many of the risks of acquisitions outlined above, including the fact that this product may generate losses for future fiscal periods and adversely affect our results of operations.
There can be no assurance that we will be able to successfully integrate the db4o business or any other businesses, products or technologies that we might purchase in the future.
Charges to earnings resulting from our acquisition of businesses or assets may adversely affect the market value of our common stock. In accordance with U.S. generally accepted accounting principles, we account for our merger with Poet, our acquisition of FastObjects, Inc. and our fiscal 2009 acquisition of the db4o assets of Servo Software using the purchase method of accounting, which result in charges to earnings that could have a material adverse effect on the market value of our common stock. Under the purchase method of accounting, we have allocated the total estimated purchase price of Poet, FastObjects and db4o to net tangible assets and amortizable intangible assets based on their fair values as of the respective dates of the closing of these acquisitions, and recorded the excess of the purchase price over those fair values as goodwill. We will incur additional amortization expense over the useful lives of certain intangible assets acquired in connection with db4o, which will extend into future fiscal years. In addition, to the extent the value of goodwill or intangible assets is impaired we may be required to incur material charges relating to the impairment of those assets. Such amortization and potential impairment charges could have a material impact on our results of operations.
Our common stock is listed on the NASDAQ Capital Market. The listing of our common stock on The NASDAQ Capital Market may be perceived as a negative by investors and may adversely affect the liquidity and trading price of our common stock. We may be unable to list our common stock on The NASDAQ Global Market System, or NGMS.
The nature of the trading market for our stock makes our stock price volatile. We have a relatively smaller number of holders of our stock and the market for our common stock is characterized by relatively small sales volumes, which contributes to the volatility of our stock price and its sensitivity to larger trades of stock. During fiscal years 2009, 2010 and 2011, our Board of Directors approved annual stock repurchase programs under which the Company repurchased an aggregate total of approximately $10.5 million worth of our outstanding common shares, and in November 2011, our Board of Directors approved a new stock repurchase program pursuant to which the Company is authorized to potentially repurchase up to $5.0 million of its common stock in fiscal 2012. Repurchases of our shares will reduce the number of our outstanding common shares and might incrementally increase the potential for volatility in our stock by reducing the potential volumes at which our common shares may trade in the public markets.
The Company may face risks associated with the trend of increased shareholder activism. Publicly traded companies have increasingly become subject to campaigns by investors seeking to increase short-term shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases or even sales of assets or the entire company. Given the Company's market capitalization and other factors, it is possible that shareholders may in the future attempt to effect such changes or acquire control over the Company. Responding to proxy contests and other actions by activist shareholders would be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business strategies, which could adversely affect the Company's results of operations and financial condition.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses. Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters in Redwood City, California, is located near major earthquake faults. The ultimate impact on us and our general infrastructure of being located near major earthquake faults is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other natural disaster. Losses in and interruptions of our business (as well as of our customers' businesses) could also be caused by earthquakes, power shortages, telecommunications failures, water shortages, floods, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal administrative, sales and marketing operations are headquartered at an approximately 6,800 square foot office facility we lease that is located at 255 Shoreline Drive, Suite 450, Redwood City, California 94065. Our current lease of this facility expires in May 2013. In November 2011, we leased an additional 2,500 square feet in the same facility through May 2014 and in January 2012, we leased approximately 1,600 square feet in an office building in Cupertino, California for the twelve months ending January 2013.
Our international subsidiary in Hamburg, Germany entered into a lease which commenced in December 2009 for a term of 60 months ending in November 2014. Our prior Hamburg office lease expired by its terms on December 31, 2009. In January 2011, we entered into a thirty-six month lease for approximately 300 square feet of office space in Munich, Germany.
We believe that all of our current facilities are in reasonably good operating condition and will be adequate for our requirements for the next several years. Based on current commercial real estate market conditions, we believe that we will be able to lease alternative comparable facilities in Germany or in the U.S. if required to do so.
Item 3. Legal Proceedings
We may from time to time be subject to legal proceedings in the ordinary course of business. Currently, we are not subject to any material legal proceedings required to be disclosed under this Item 3.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Price Range of Common Stock
Our common stock is listed on the Nasdaq Capital Market (formerly the Nasdaq SmallCap Market) under the symbol “VSNT.” Our common stock commenced trading on the Nasdaq National Market on July 18, 1996. From July 19, 1999 until March 7, 2000, our common stock was traded on the Nasdaq SmallCap Market. From March 8, 2000 until September 30, 2002, our common stock was traded on the Nasdaq National Market. Our common stock has been traded on the Nasdaq Capital Market since October 1, 2002. We requested that listing of our common stock be transferred to the Nasdaq Capital Market as of October 1, 2002 since at that time it seemed unlikely that, in the near term, we would continue to be able to satisfy the then-applicable listing criteria of the Nasdaq National Market System.
The following table lists the high and low selling price of our common stock, based on the last daily sale reported on the Nasdaq Capital Market for the periods indicated during the last two fiscal years:
There were approximately 63 holders of record of our common stock as of January 25, 2012. We believe that a significant number of beneficial owners of our common stock hold their shares in street name.
We have neither declared nor paid any cash dividends on our common stock in the past. We currently intend to retain future earnings, if any, to fund development and growth of our business and, therefore, do not at this time anticipate that we will declare or pay cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
Versant made no issuances of unregistered securities in fiscal 2011.
Issuer Purchases of Equity Securities
On December 1, 2008, Versant's Board of Directors approved a stock repurchase program authorizing Versant to repurchase up to $5.0 million worth of its outstanding common shares from time to time on the open market, in block trades or otherwise. That stock repurchase program expired by its terms on October 31, 2009. Versant acquired 222,688 common shares on the open market for approximately $3.2 million at an average purchase price of $14.52 per share under this stock repurchase program.
On November 30, 2009, our Board of Directors approved a new stock repurchase program authorizing Versant to repurchase up to $5.0 million worth of its outstanding common shares from time to time on the open market, in block trades or otherwise (the “fiscal 2010 stock repurchase program”), which expired by its terms on October 31, 2010. Pursuant to the fiscal 2010 stock repurchase program, Versant acquired 356,104 common shares on the open market and in block trades for approximately $4.3 million at an average purchase price of $12.06 per share.
On November 29, 2010, our Board of Directors approved a new stock repurchase program authorizing Versant to repurchase up to $5.0 million worth of its outstanding common shares from time to time on the open market, in block trades or otherwise (the “fiscal 2011 stock repurchase program”), which expired by its terms on October 31, 2011. Pursuant to this fiscal 2011 stock repurchase program, Versant acquired 240,629 common shares on the open market and in block trades for approximately $3.0 million at an average purchase price of $12.23 per share.
The stock repurchase activity under our stock repurchase program during the three months and fiscal year ended October 31, 2011 is summarized in the following table:
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of October 31, 2011 with respect to compensation plans under which our equity securities are authorized for issuance:
Stock Price Performance Graph and Cumulative Total Return
The graph below compares the cumulative total shareholder return on Versant common stock with the cumulative total return on the Nasdaq Composite Index and the Nasdaq Computer and Data Processing Index for each of the last five fiscal years ended October 31, 2011, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
** $100 invested on 10/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending October 31.
Item 6. Selected Financial Data
The following selected consolidated financial data are qualified by reference to, and should be read in conjunction with, “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this report and the Consolidated Financial Statements and related Notes of Versant included in Item 8 of this report. The selected consolidated balance sheet data as of October 31, 2011 and 2010 and selected consolidated statements of income data for the years ended October 31, 2011, 2010 and 2009, are derived from our audited consolidated financial statements included elsewhere in this report. The selected consolidated balance sheet data as of October 31, 2009, 2008 and 2007 and the selected consolidated statements of income data for the years ended October 31, 2008 and 2007 were derived from audited consolidated financial statements not included in this report. Our historical results are not necessarily indicative of our future results.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As indicated in the paragraph above Item 1 of this report, this report on Form 10-K (including this Item 7) contains certain forward-looking statements within the meaning of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements include, among other things, statements regarding the Company's expected future financial performance, assets, liquidity and trends anticipated for the Company's business. These statements are based on the Company's current expectations, assumptions, estimates and projections about the Company's business, the Company's industry and the market for the Company's goods and services, which are based on information that is reasonably available to the Company as of the date of this report. Forward-looking statements may include words such as "believes," "anticipates," "expects," "intends," "plans," "will," "may," "should," "estimates," "predicts," “forecasts,” "guidance," "potential," "continue" or the negative of such terms, other variants of such terms or other similar expressions.
We caution readers that these forward-looking statements are not assurances of our future performance or financial condition and are subject to and involve significant known and unknown risks, uncertainties and other factors that may cause the Company's actual operating results, financial condition, levels of activity, performance or achievement to be materially different from any future operating results, financial condition, levels of activity, performance or achievements that are expressed, estimated, forecasted, projected, implied in, anticipated or contemplated by the forward-looking statements. These known and unknown risks, uncertainties and other factors include, but are not limited to, those risks, uncertainties and factors discussed in Item 1A of this report under the heading “Risk Factors.” Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, financial performance or financial condition. Versant undertakes no obligation to revise or update any forward-looking statement in order to reflect events or circumstances that may arise or occur after the date of this report.
Background and Overview
We design, develop, market and support high performance, object-oriented database management software solutions and provide related maintenance and professional services. Our products and services address the complex data management needs of enterprises and providers of products requiring data management functions. In December 2011, we announced a strategic product roadmap in which we have outlined our plans to create database software related to very large data problems. The goal of this new product development strategy is to extend Versant's proven ability to provide data solutions for large, distributed systems to emerging so called Big Data and near real-time analytical application opportunities. Our products and services collectively comprise our single operating segment, which we call “Data Management.”
Our end-user customers typically use our products to manage data for business systems and to enable these systems to access and integrate data necessary for the customers' data management applications. Our data management products and services offer customers the ability to manage real-time, XML and other types of hierarchical and navigational data. We believe that by using our data management solutions, customers cut their hardware costs, accelerate and simplify their development efforts, significantly reduce administration costs and deliver products and services with a significant competitive edge.
Our Data Management business is currently comprised of the following key products:
Our Versant Object Database product offerings are used primarily by larger organizations, such as technology providers, telecommunications carriers, government defense agencies, defense contractors, healthcare companies and companies in the financial services and transportation industries, each of which have significant large-scale data management requirements. With the incorporation of the FastObjects solution into our product line following our March 2004 merger with Poet Holdings, Inc., we expanded the scope of our solutions to also address the data management needs of smaller business systems. By our acquisition of db4o in December 2008, we further expanded the scope of our solutions to include the embedded device market.
In December 2011, we announced a new strategic product roadmap under which we plan to develop database software products to address very large data problems. Versant plans to develop these new products in order to provide data management software that enables the development of analytical application for the intelligent "real-time enterprise."
Our customers' data management needs can involve many business functions, ranging from management of the use and sharing of a company's internal enterprise data to the processing of externally originated information such as customer enrollment, billing and payment transaction data. Our solutions have also been used to solve complex data management issues such as fraud detection, risk analysis and yield management and can be adapted for use with many different applications.
In addition to our product offerings, we provide maintenance and technical support services to assist users in using our products. We also offer a variety of consulting and training services to assist users in developing and deploying applications based on Versant Object Database, FastObjects and db4o.
We license our products and sell associated maintenance, training and consulting services to end-users through our direct sales force and through value-added resellers, systems integrators and distributors.
In addition to these products and services, we resell related software developed by third parties. To date, substantially all of our revenues have been derived from the following data management products and related services:
Negative and Uncertain Global Economic Conditions Are Continuing to Impact Our Business
Global economic developments like the recent recessions and debt crises in the U.S. and Europe have continued to adversely effect the enterprise software market. Economic growth in the U.S. and many other countries has remained very slow and the length of time these adverse economic conditions may persist is unknown. Our business has been negatively affected by these ongoing worldwide economic conditions. It is unclear when or to what extent the macroeconomic environment may improve. During fiscal year 2011 our selling environment remained very challenging. We are seeing continuing pressures on our customers’ budgets, and as they are facing uncertainty and cost pressures in their own businesses, some of our customers are deferring purchases of our products or electing less expensive levels of our maintenance services. The current difficult and uncertain economic conditions are causing some of our customers to face financial challenges and they may continue to face such challenges for the foreseeable future. The current economic uncertainty could continue to harm our business, operating results and financial condition in the foreseeable future.
Financial Highlights for Fiscal Year 2011
Fiscal Year 2012 and Beyond
During fiscal year 2012, we expect to focus our sales and marketing efforts on our data management products, (Versant Object Database, FastObjects and db4o), on related maintenance, consulting and training services and the launch of new products currently being developed to address Big Data problems. Versant Object Database was the key focus of our marketing efforts and the major source of our license and service revenues in fiscal year 2011.
We again expect to derive most of our revenues in fiscal year 2012 from Versant Object Database, FastObjects and db4o licenses and related services. Like many other software companies, we do not operate with a significant backlog of orders. Our license revenues, in particular, are difficult to forecast. The outlook into the Company's anticipated performance in fiscal year 2012 is uncertain, due principally to the prolonged worldwide economic instability. As part of our 2012 strategic initiative, we expect to develop database software related to very large data problems. Versant plans to make significant investments in research and development in order to execute on our new strategic initiative and additional marketing resources are also necessary to make the initiative a success. Versant anticipates revenues from this initiative beginning in fiscal year 2013.
Versant plans to increase its research and development as well as its sales and marketing spending levels by approximately 40% and 30%, respectively, in fiscal year 2012 compared to the prior fiscal year. The Company expects to recognize benefits from these additional investments over the medium term, and currently expects its total revenues in fiscal year 2012 to remain at approximately 2011 levels. As a result of these investments, we currently estimate a net loss of approximately $1.7 to $1.9 million for the fiscal year ending October 31, 2012. Versant expects net cash from operating activities for fiscal year 2012 to be minimal. Without limitation, the estimates, forecasts and other statements in this paragraph are forward-looking statements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amount of our assets and liabilities at the date of our financial statements and of our revenues and expenses during the reporting period covered by our financial statements. We base these estimates and judgments on information reasonably available to us, such as our historical experience and trends, industry, economic and seasonal fluctuations and on our own internal projections that we derive from that information. Although we believe our estimates to be reasonable under the circumstances, there can be no assurances that such estimates will be accurate given that the application of these accounting policies necessarily involves the exercise of subjective judgment and the making of assumptions regarding many future variables and uncertainties. We consider “critical” those accounting policies that require our most difficult, subjective or complex judgments, and that are most important to the portrayal of our financial condition and results of operations. These critical accounting policies relate to revenue recognition, goodwill and acquired intangible assets, and income taxes.
We recognize revenues in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as set forth in:
Our revenues consist mainly of revenues earned under software license agreements, maintenance support agreements (otherwise known as post-contract customer support or “PCS”) and, to a lesser degree, agreements for consulting and training activities.
We use the residual method to recognize revenues when a license agreement includes one or more elements to be delivered by us at a future date. If there is an undelivered element under the license arrangement, we defer revenues based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element, as determined by the price charged when the element is sold separately. If VSOE of fair value does not exist for all undelivered elements of a transaction, we defer all revenues from that transaction until sufficient evidence of the fair value exists or until all elements have been delivered. Under the residual method, discounts are allocated only to the delivered elements in a multiple element arrangement, with any undelivered elements being deferred based on the vendor-specific objective evidence of the fair value of such undelivered elements. We typically do not offer discounts on future undeveloped products.
We have established VSOE of fair value of our PCS as evidenced by stand-alone renewal transactions using the “bell shaped curve approach.” PCS of our Versant Object Database is priced as a percentage of the original software license fees. We perform quarterly analysis on a transaction by transaction basis to document the range of pricing in PCS renewals. We conclude that we have established VSOE of fair value for our PCS, if substantial majorities (greater than 80%) of our stand-alone renewal transactions are priced within a reasonably narrow range (plus or minus 15% from the midpoint of the range). For the year ended October 31, 2011, the pricing of over 95% of our stand-alone PCS renewal transactions fell within the predefined pricing range.
Revenues from software license arrangements, including prepaid license fees, are recognized when all of the following criteria are met:
If an acceptance period or other contingency exists, revenues are not recognized until customer acceptance or expiration of the acceptance period, or until satisfaction of the contingency, as applicable. Our license fees are generally non-cancelable and non-refundable. Also, our customer agreements for prepaid deployment licenses typically do not make payment of our license fees contingent upon the actual deployment of the software. Therefore, a customer's delay or acceleration in its deployment schedule generally does not impact our revenue recognition in the case of a prepaid deployment license.
Revenues from related PCS for all product lines are usually billed in advance of the service being provided and are deferred and recognized on a straight-line basis over the term in which the PCS is to be performed, which is generally twelve months. In some cases PCS revenues are paid in arrears of the service being provided and are recognized as revenues at the time the customer provides a report to us for deployments made during a given time period. Training and consulting revenues are recognized when a purchase order is received, the services have been performed and collection is deemed probable. Consulting services are billed on an hourly, daily or monthly rate. Training classes are billed based on group or individual attendance.
We categorize our customers into two broad groups, End-Users and Value Added Resellers (VARs). End-User customers are companies who use our products internally and do not redistribute our product outside of their corporate organizations. VAR
customers include traditional Value Added Resellers, Systems Integrators, Original Equipment Manufacturers (“OEMs”) and other vendors who redistribute our products to their external third party customers, either separately or as part of an integrated product.
We license our data management products through two types of perpetual licenses - development licenses and deployment licenses. Development software is typically licensed on a per seat basis and authorizes a customer to develop and test an application program that uses our software product. Before an End-User customer may deploy an application that it has developed under our development license, it must purchase deployment licenses in which the license fees are based on the number of computers connected to the server that will run the application using our product, or for certain applications, are based on the number of users. Pricing of Versant Object Database and FastObjects licenses varies according to several factors, including the number of computer servers on which the application runs and the number of users that are able to access the server at any one time. Customers may elect to simultaneously purchase development and deployment licenses for an entire project. These development and deployment licenses may also provide for prepayment to us of a nonrefundable amount for future deployment.
VARs and distributors license development software from us on a per seat basis on terms similar to those of development licenses that we sell directly to End-Users. VARs are authorized to sublicense deployment copies of our data management products that are either bundled or embedded in the VAR's applications and sold directly to End-Users. VARs are required to report their distribution of our software and are charged a royalty that is either based on the number of copies of the application software that are distributed or computed as a percentage of the selling price charged by the VARs to their end-user customers. These royalties from VARs may be prepaid in full or paid upon deployment. Our VAR agreements for prepaid royalty arrangements are non-cancelable, non-refundable and do not make payment of our license fees contingent upon the actual deployment of our software, and therefore, the future deployment schedules of our VARs have no impact on revenue recognition of such prepaid royalties. Provided that all other conditions for revenue recognition have been met, revenues from arrangements with VARs are recognized, (i) as to prepaid license arrangements, when the prepaid licenses are sold to the VAR, and (ii) as to other license arrangements, at the time the VAR provides a royalty report to us for sales made by the VAR during a given period.
Revenues from our resale of third-party products or services are recorded at total contract value with the corresponding cost included in the cost of sales when we act as a principal in these transactions by assuming the risks and rewards of ownership (including the risk of loss for collection, delivery or returns). When we do not assume the risks and rewards of ownership, revenues from the resale of third-party products or services are recorded at contract value net of the cost of sales.
On occasion, at a customer's request, we perform engineering work to port our products to an unsupported platform, to customize our software for specific functionality, or to perform other non-routine technical assignments for a customer. In these instances, we recognize revenues in accordance with ASC 605-35, Revenue Recognition, Construction-Type and Production-Type Contracts, and use either the time and material percentage of completion method or the completed contract method for recognizing revenues. We use the percentage of completion method if we can make reasonable and dependable estimates of labor costs and hours required to complete the work in question. We periodically review these estimates in connection with the work performed and rates actually charged and recognize any losses when identified. Progress to completion is determined using the cost-to-cost method, whereby cost incurred to date as a percentage of total estimated cost determines the percentage completed and revenue recognized. When using the percentage of completion method, the following conditions must exist:
The completed contract method is used when reasonable or dependable estimates of labor costs and time to complete the work cannot be made. As a result, in such situations, we defer all revenues until such time as the work is fully completed.
Management makes significant judgments and estimates in connection with the determination of the revenue we recognize in each accounting period. If we had made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized would have resulted.
Goodwill and Acquired Intangible Assets
We account for purchases of acquired companies in accordance with ASC 805, Business Combinations, and allocate the cost of the acquired companies to the identifiable tangible and intangible assets acquired according to their respective fair values as of the date of completion of the acquisition, with the remaining amount being classified as goodwill.
In accordance with ASC 350, Intangibles - Goodwill and Other, we test for any goodwill impairment within our single Data Management operating segment and reporting unit. All our goodwill reflected in the financial statements included in this report has been aggregated from, and acquired in connection with, the following acquisitions:
Financial Accounting Standards Board (“FASB”) guidance requires that goodwill be tested for impairment at the reporting unit level, at least annually and more frequently upon the occurrence of certain events. We use the market approach to assess the fair value of our assets and this value is compared with the carrying value of those assets to test for impairment. The total fair value of our assets is estimated by summing the fair value of our equity (as indicated by Versant's publicly traded share price and shares outstanding plus an estimated control premium) less our liabilities. Under this approach, if the estimated fair value of our assets is greater than their carrying value, then there is no goodwill impairment. If the estimated fair value of our assets is less than their carrying value, then we allocate the reporting unit's estimated fair value to its assets and liabilities as though the reporting unit had just been acquired in a business combination. The impairment loss is the amount, if any, by which the implied fair value of goodwill allocable to the reporting unit is less than that reporting unit's goodwill carrying amount and would be recorded in operating results during the period of such impairment.
Identifiable intangibles are currently amortized using the straight-line method over five years in relation to the JDO Genie (PTY) Ltd acquisition, six years in relation to the FastObjects, Inc. acquisition, seven years in relation to our acquisition of Poet, nine years in relation to the acquisition of the db4o customer relationships, and five years for other db4o related acquired intangible assets.
We performed our annual valuation and analysis of goodwill in October 2011, October 2010 and October 2009. We did not perform impairment tests related to our intangible assets during fiscal years 2011, 2010 and 2009, as there were no triggering events which might indicate impairment. As a result, we determined that the value of our goodwill and intangible assets had been fairly recorded in our financial statements, and therefore no impairment charges were recorded against our goodwill and intangible assets in fiscal years 2011, 2010 and 2009.
We account for income taxes using the asset and liability method provided by ASC 740, Income taxes. We estimate our income taxes in each of the jurisdictions in which we operate and account for income taxes payable as part of the preparation of our consolidated financial statements. This process involves estimating our actual current tax expense as well as assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for financial and tax reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet to the extent deemed realizable. We assess the likelihood that, and the extent to which, our deferred tax assets will be realized and establish a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. If we establish or release a valuation allowance then we must increase or decrease the tax provision in our statements of income.
Significant management judgment is required in determining any valuation allowance recorded against our net deferred tax assets. Based upon our operating results in recent years and through October 31, 2011 as well as an assessment of our expected future results of operations, we determined that it is more likely than not that we will realize the benefit of a portion of our net deferred tax assets in Germany to the extent of our expected taxable income for fiscal year 2012. Due to uncertainties related to
our ability to utilize the balance of our deferred tax assets, we have maintained a valuation allowance at October 31, 2011 of $31.6 million. As of October 31, 2010, we had a valuation allowance of $33.9 million for our deferred tax assets.
As required by ASC 740, Income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
We are subject to U.S. federal income taxes and to income taxes in various states in the U.S. as well as in foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign tax examinations by tax authorities for tax years before 2006. With respect to prior tax years no longer subject to examination due to expiration of the statute of limitations, income may nevertheless be recomputed for the purpose of determining the amount of NOL that may be carried over to “open” years.
We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes for all periods presented, which were not significant.
Results of Operations
The following table sets forth the historical results of operations for Versant for our three fiscal years ended October 31, 2011, 2010 and 2009, expressed as a percentage of our total revenues for the fiscal year in question:
The following table summarizes our total revenues (in thousands, except percentages) for fiscal 2011, 2010 and 2009:
Total revenues are comprised of license fees and fees for maintenance, training, consulting, technical and other support services. Fluctuations in our total revenues can be attributed to changes in economic and industry conditions, product and customer mix, general trends in information technology spending, changes in geographic mix, the market response to our product and service offerings and the impact of fluctuations in foreign currency exchange rates. Further, product life cycles impact revenues periodically as old contracts expire and new products are released.
Our total revenues increased by $506,000 (or 3%) in fiscal year 2011 compared to fiscal year 2010. This resulted primarily from an increase of $554,000 (or 7%) in license revenues. The increase in license revenues resulted primarily from a modest global increase in the average license volume per customer.
Our total revenues decreased by $2.4 million (or 13%) in fiscal year 2010 compared to fiscal year 2009. This decrease resulted primarily from a decrease of $1.5 million (or 17%) in maintenance revenues and from a decrease of $703,000 (or 8%) in license revenues in fiscal year 2010 compared to fiscal year 2009. The decrease in maintenance revenues in fiscal year 2010 was principally due to fewer back maintenance transactions and customers choosing less expensive support options. The decrease in license revenues in fiscal year 2010 was due to smaller and fewer license transactions than in fiscal year 2009. At a more general level, we believe that an overriding principal factor that caused our license revenues to decrease in fiscal year 2010 was generally prevailing adverse global economic conditions.
One telecommunications customer accounted for approximately 14%, 11% and 15% of total revenues in the second, third and fourth quarters of fiscal year 2011, respectively, as well as approximately 12% of total revenues for the year ended October 31, 2011. One healthcare customer accounted for 10% of total revenues in the first quarter, a second telecommunications customer accounted for 15% of total revenues in the second quarter and a second healthcare customer accounted for approximately 11% of total revenues in the third quarter of fiscal year 2011.
In fiscal year 2010, one customer accounted for 12% of our total revenues for the fiscal year. Two different customers accounted for 12% and 13% of our total revenues in our fourth fiscal quarter of 2010. No one customer accounted for 10% or more of our total revenues in fiscal year 2009.
The inherently unpredictable business cycle of an enterprise software company makes discernment of continued and meaningful business trends difficult. In terms of license revenues, we are still experiencing lengthy sales cycles and customers' preference for licensing our software on an “as needed” basis where payment is tied to actual usage or deployment of our software, versus the older historical practice of prepaying license fees in advance of usage, a factor which can adversely affect the amount of our license revenues. License revenues also are a critical factor in driving the amount of our services revenues, as new license customers typically enter into support and maintenance agreements with us, from which our maintenance revenues are derived over future fiscal periods. The outlook into the Company's anticipated performance in fiscal year 2012 is uncertain, due principally to the significant worldwide economic slowdown.
We are currently expecting our total revenues for the fiscal year 2012 to remain stable at approximately fiscal 2011's level.
Fiscal Year 2011 Compared to Fiscal Year 2010
License revenues: License revenues represent perpetual and time-based license fees received and recognized from our End-Users and Value Added Resellers.
License revenues were $8.9 million (or 55% of total revenues) for fiscal year 2011, an increase of approximately $554,000 (or 7%) from $8.3 million (or 53% of total revenues) reported for fiscal year 2010. The increased license revenues were mainly attributable to a modest global increase in the average license volume per customer and a greater number of larger license transactions. The increase in license revenues in fiscal year 2011 compared to fiscal year 2010 included favorable foreign currency fluctuations of approximately $162,000. The majority of our license revenues in fiscal year 2011 continued to be transactions with existing VAR customers in the telecommunications, information technology and healthcare industries, which were our largest vertical markets in fiscal year 2011.
Maintenance revenues: Maintenance and technical support revenues include revenues derived from maintenance agreements, under which we provide customers with internet and telephone access to support personnel and software upgrades, dedicated technical assistance and emergency response support options.
Maintenance revenues were $7.2 million (or 44% of total revenues) for fiscal year 2011, a decrease of $130,000 (or 2%) from $7.3 million (or 46% of total revenues) reported for fiscal year 2010. The decrease in maintenance revenues for fiscal year 2011 was primarily due to an approximate decrease of $429,000 resulting from certain customers electing less expensive support and maintenance options in fiscal year 2011, and was partially offset by an approximate increase of $165,000 related to back maintenance revenues derived from one North American customer and an approximate $154,000 increase from favorable foreign currency fluctuations.
Professional services revenues: Professional services revenues consist of revenues from consulting, training and technical support, as well as billable travel expenses incurred by our professional services organization.
Professional services revenues were $175,000 (or 1% of total revenues) in fiscal year 2011, an increase of $82,000 (or 88%) from $93,000 (or 1% of total revenues) reported in fiscal year 2010. This increase in the absolute dollar amount of professional services revenues was largely attributable to one consulting engagement with a European customer for approximately $53,000 in addition to a modest increase in consulting services performed in North America.
Fiscal Year 2010 Compared to Fiscal Year 2009
License revenues: License revenues were $8.3 million (or 53% of total revenues) for fiscal year 2010, a decrease of approximately $703,000 (or 8%) from $9.0 million (or 50% of total revenues) reported for fiscal year 2009. The reduced license revenues in absolute dollars for fiscal year 2010 were mainly attributable to fewer and smaller license transactions. The decrease in license revenues from fiscal year 2010 compared to fiscal year 2009 included unfavorable foreign currency fluctuations of approximately $14,000.
Maintenance revenues: Maintenance revenues were $7.3 million (or 46% of total revenues) for fiscal year 2010, a decrease of $1.5 million (or 17%) from $8.8 million (or 49% of total revenues) reported for fiscal year 2009. The decrease in maintenance revenues for fiscal year 2010 was principally due to an approximate decrease of $671,000 in recognized back maintenance compared to fiscal year 2009 and an approximate decrease of $441,000 resulting from certain customers electing less expensive support and maintenance options in fiscal year 2010. The decrease in maintenance revenues from fiscal year 2010 compared to fiscal year 2009 also included unfavorable foreign currency fluctuations of approximately $27,000.
Professional services revenues: Professional services revenues were $93,000 (or 1% of total revenues) in fiscal year 2010, a decrease of $179,000 (or 66%) from $272,000 (or 1% of total revenues) reported in fiscal year 2009. This decrease in the absolute dollar amount of professional services revenues for fiscal year 2010 compared to fiscal year 2009 was attributable to decreases in consulting and training revenues in both the US and the European operations including the absence in fiscal year 2010 of $62,000 of consulting revenue derived from one customer that was recognized in fiscal year 2009.
International Revenues. The following table summarizes our total revenues by geographic area (in thousands, except percentages) in fiscal years 2011, 2010 and 2009:
Fiscal Year 2011 Compared to Fiscal Year 2010
Total revenues increased $506,000 (or 3%) in fiscal year 2011 compared to fiscal year 2010. The increase in total revenues occurred across geographic regions. As a percentage of total revenues, international (non-North American) revenues remained stable, representing approximately 60% of our total revenues in both fiscal years 2011 and 2010.
Revenues from North America: The $225,000 (or 4%) increase in revenues from North America in fiscal year 2011 compared to fiscal year 2010 was primarily due to a $448,000 increase in license revenues that was partially offset by a $223,000 decrease in services revenues. North American maintenance revenues declined from fiscal year 2010 to fiscal year 2011 as customers chose less expensive support options or maintained fewer licenses. In fiscal year 2010, North American license revenues included the recognition of an approximate $170,000 decrease that resulted from one customer's previous misreporting and overpayment of royalties. The absence of a comparable transaction in fiscal year 2011 resulted in a relative increase in North American license revenues which were also increased in fiscal year 2011 by a larger average license volume per customer.
Revenues from Europe: The $256,000 (or 3%) increase in revenues from Europe in fiscal year 2011 compared to fiscal year 2010 was primarily due to an increase of approximately $316,000 resulting from favorable foreign currency exchange rate fluctuations.
Since the Company's acquisition of Poet Holdings, Inc. in early 2004, we have generally derived a higher percentage of international revenues due to stronger demand for our products in Europe. We expect in the future to continue to experience a somewhat stronger demand for our products in Europe as compared to our other geographic markets.
Revenues from Asia: We experienced an increase of $25,000 (or 3%) in revenues from our Asia Pacific region during fiscal year 2011 compared to fiscal year 2010, primarily due to increased revenues from a customer in Singapore.
A variety of factors may impact Versant’s future revenues, including the potential strengthening of the U.S. dollar (which would have the effect of reducing portions of our revenue resulting from favorable currency exchange fluctuations), the generally more difficult economic environment currently being experienced in the global economy, which may negatively impact demand for our products and services, and competitive market conditions.
Fiscal Year 2010 Compared to Fiscal Year 2009
Total revenues decreased $2.4 million (or 13%) in fiscal year 2010 compared to fiscal year 2009. The decrease in total revenues occurred across geographic regions as the global economy remained weak. The decrease in total revenues in absolute dollars from fiscal year 2010 compared to fiscal year 2009 was primarily due to a revenue decrease of $1.9 million in Europe, and to a lesser extent a revenue decrease of $732,000 in North America, partially offset by a revenue increase of $240,000 in Asia. As a percentage of total revenues, international (non-North American) revenues decreased slightly representing approximately 60% and 62% of our total revenues in fiscal year 2010 and fiscal year 2009, respectively.
Revenues from North America: The $732,000 (or 11%) decrease in revenues from North America in fiscal year 2010 compared to fiscal year 2009 was primarily due to a decrease of $432,000 in maintenance revenues and a decrease of $300,000 in license revenues. North American maintenance revenues declined from fiscal year 2009 to fiscal year 2010 as customers chose less expensive support options or maintained fewer licenses. North American license revenues decreased due to fewer license transactions and an approximate $170,000 decrease to license revenues resulting from one customer's previous misreporting and overpayment of royalties to Versant.
Revenues from Europe: The $1.9 million (or 18%) decrease in revenues from Europe in fiscal year 2010 compared to fiscal year 2009 was primarily due to a decrease of $1.3 million in European maintenance revenues and to a lesser extent, a $594,000 decrease in European license revenues. The decrease in European maintenance revenues in fiscal year 2010 compared to fiscal year 2009 included an approximate $663,000 decrease in back maintenance transactions and an approximate $394,000 decrease as a result of customers choosing less expensive support options. The decrease in European license revenues in fiscal year 2010 compared to fiscal year 2009 reflected fewer license transactions in Europe and the relative absence of larger license transactions. The decrease in total revenues from Europe also included approximately $42,000 resulting from unfavorable foreign currency exchange rate fluctuations.
Revenues from Asia: We experienced an increase of $240,000 (or 45%) in revenues from our Asia Pacific region during fiscal year 2010 compared to fiscal year 2009, primarily due to increased revenues from our distributor in Japan.
Cost of Revenues
The following table summarizes the revenues, cost of revenues and gross profit (in thousands, except percentages) in fiscal 2011, 2010 and 2009:
Cost of revenues was $2.0 million (or 12% of total revenues) in fiscal year 2011, a decrease of $111,000 (or 5%) from the cost of revenues of $2.1 million (or 13% of total revenues) reported in fiscal year 2010. The decrease resulted primarily from a $113,000 reduction in amortization of intangible assets.
Cost of revenues was $2.1 million (or 13% of total revenues) in fiscal year 2010, a decrease of $118,000 (or 5%) from the cost of revenues of $2.2 million (or 12% of total revenues) reported in fiscal year 2009. The decrease resulted from a $70,000 reduction in amortization of intangible assets and a $72,000 reduction in the cost of professional services revenue in fiscal year 2010 compared to fiscal year 2009 and was partially offset by slight increases in the cost of license and maintenance revenues.
Gross margin percentages (gross margin as a percentage of total revenues) remained relatively stable at 88% in fiscal year 2011, 87% in fiscal year 2010 and 88% in fiscal year 2009.
Cost of license revenues: Cost of license revenues consists primarily of royalties and costs of third party products, which we resell to our customers, as well as product media, shipping and packaging costs.
The following table summarizes the revenue, cost and gross profit for licensing (in thousands, except percentages) in fiscal 2011, 2010 and 2009:
Fiscal Year 2011 Compared to Fiscal Year 2010
Cost of license revenues was $252,000 (or 3% of license revenues) in fiscal year 2011, remaining stable as a percentage of license revenues and decreasing slightly in absolute dollars compared to $279,000 (or 3% of license revenues) in fiscal year 2010.
Fiscal Year 2010 Compared to Fiscal Year 2009
Cost of license revenues was $279,000 (or 3% of license revenues) in fiscal year 2010, remaining stable in both absolute dollars and as a percentage of license revenues compared to $273,000 (or 3% of license revenues) in fiscal year 2009.
Cost of maintenance revenues: Cost of maintenance revenues consists primarily of salaries, bonuses and consulting fees for customer support personnel and related expenses, including employee benefits and allocated overhead.
The following table summarizes the revenue, cost and gross profit for maintenance (in thousands, except percentages) in fiscal years 2011, 2010 and 2009:
Fiscal Year 2011 Compared to Fiscal Year 2010
Cost of maintenance revenues was $1.5 million (or 20% of maintenance revenues) in fiscal year 2011, remaining consistent in absolute dollars and as a percentage of maintenance revenues compared to $1.5 million (or 20% of maintenance revenues) in fiscal year 2010.
Fiscal Year 2010 Compared to Fiscal Year 2009
Cost of maintenance revenues was $1.5 million (or 20% of maintenance revenues) in fiscal year 2010, remaining consistent in absolute dollars compared to $1.5 million (or 16% of maintenance revenues) in fiscal year 2009. The Company has elected to maintain our core technical support team and its associated costs, which resulted in the slight increase in the cost of maintenance revenues as a percentage of maintenance revenues in fiscal year 2010, when our maintenance revenues were lower than in fiscal year 2009.
Cost of professional services revenues: Cost of professional services consists of salaries, bonuses, third party consulting fees and other costs associated with supporting our professional services organization.
The following table summarizes the revenue, cost and gross profit for professional services (in thousands, except percentages) in fiscal 2011, 2010 and 2009: