<<< Are you saying they are on the COMPLETED CONTRACT method of Revenue recognition? >>>
JDN, No, 90% of the company's service revenue is billed on a time and material basis and is recognized in the period that services are rendered. The balance of service revenue is provided on a fixed price basis, which is recognized using the percentage-of-completion method.
The relationship in the timing between SGA expense and revenue recognition for the growth of complete project business involves the entire process from beginning to end.
SGA expenses up front include:
*Infrastructure expense for increase in general administration and management personnel, and facility expansion to accomodate anticipated future growth.
*Advertising, recruiting, Hiring,(including signing bonuses)and training of:
a)Sales teams, including senior and junior sales exec's,
recruiters and technology leaders.
b)Project leader's and assistants, as well as a host of IT
professional's cross trained throughout the multiple
technology's offered by Command.
*lead generation and promotional activities to identify new project opportunities. Sales team meetings with prospects to identify project needs, and the formulation of comprehensive solution proposals. Ect.
From the prospectus:
"The Company's services require a substantial financial commitment by customers and, therefore, typically involve a long sales cycle. Once a lead is generated, the Company endeavors to understand quickly the potential customer's business needs and objectives in order to develope the appropriate solution and bid accordingly. The Company's technology leaders are involved throughout the sales cycle to ensure mutual understanding of customer goals, including time to completion, and technological requirements. Sales cycles for complex business solutions projects typically range from one to six months from the time the Company initially meets with a prospective customer until the customer decides whether to authorize commencement of an engagement.
*Contract signing, and resulting sales commissions.
"Commissions based upon the gross profit generated from each
business transaction constitute a substantial portion of the total
compensation for each sales executive."
JDN, as is apparent from the foregoing, Substantial SGA expense can precede the very first penny of recognized project revenue by six months or longer. The resulting impact to the near term income statement is devastating....similar to a start up operation, no recognized income, high SGA expense. The only difference is that Command is able to offset these project "start-up" losses from profits generated from it's other income operations, as well as interest income from the IPO proceeds.
"The Company has also reorganized its sales force to focus on the delivery of complete projects and solutions to its clients. The Company believes that projects managed by the Company will carry higher margins and will better enable it to become a full service technology solutions provider to its customers."
"A high percentage of the Company's selling, general and administrative expenses, particularly salary, are relatively fixed in advance of any particular quarter. As a result, unanticipated variations in the number and timing of the Company's projects
during a particular quarter may cause significant variations in operating results in that quarter."
JDN, the initiatives associated with Command's focus toward complete project orientation began in the 1st qtr. However, as is apparent from the increase in SGA expense, the major thrust in that direction was not until Q2.
With a six month average sales cycle we should begin seeing substantial revenue increases beginning in Q4, as project revenue begins to flow to the income statement.
Best Regards, JAB
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