form10k_fye2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
One)
x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For
the fiscal year ended September 30, 2007
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OR
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission
file number 0-15935
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ENTERPRISE
INFORMATICS INC.
(Exact
name of registrant as specified in its charter)
California
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95-3634089
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(State
or other jurisdiction of incorporation or
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(IRS
Employer Identification No.)
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organization)
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10052
Mesa Ridge Court, Suite 100
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San
Diego, CA
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92121
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(Address
of principal executive offices)
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(Zip
Code)
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(858)
625-3000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12 (b) of the Act:
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Name
of each exchange on
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Title
of each class
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which registered
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None
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None
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Securities
registered pursuant to Section 12 (g) of the Act:
Common
Stock
(Title
of
class)
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 x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity on
March 31,2007, (the last business day of the Registrant’s most recently
completed second fiscal quarter) held by non-affiliates* of the Registrant,
based upon the last price reported on the OTC Bulletin Board on such date was
$2,600,115
The
number of shares outstanding of the Registrant’s Common Stock at the close of
business on January 14, 2008 was 37,862,332.
*
Without acknowledging that any individual director of Registrant is an
affiliate, all directors have been included as affiliates with respect to shares
owned by them.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s proxy statement relating to its 2008 Annual Shareholders
Meeting are incorporated by reference into – Part III hereof.
PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results
to
differ materially from historical results or anticipated results, including
those set forth under the heading “Risk Factors” and elsewhere in, or
incorporated by reference into, this report. Other risks and uncertainties
include such factors, among others, as market acceptance and market demand
for
the Company’s (as defined below) technologies and services, pricing, the
changing regulatory environment, the effect of the Company’s accounting
policies, potential seasonality, industry trends, adequacy of the Company’s
financial resources to execute its business plan, the Company’s ability to
attract, retain and motivate key technical, marketing and management personnel,
possible disruption in commercial activities occasioned by terrorist activity
and armed conflict, and other risk factors detailed in the Company’s other SEC
filings.
In
some
cases, you can identify forward looking statements by terms such as “may,”
“intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “ believe, “ “
anticipate, “ “estimate,” “predict,” “potential,” or the negative of these
terms, and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The forward-looking statements in this report are
based upon management’s current expectations and belief, which management
believes are reasonable. These statements represent our estimates and
assumptions only as of the date of this Annual Report on Form 10-K, and we
undertake no obligation to publicly release the result of any revisions to
any
forward-looking statement, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated
events. You are cautioned not to place undue reliance on any
forward-looking statements.
In
this
report, unless the context indicates otherwise, the terms “Company,” “we,” “us,”
and “our” refer to Enterprise Informatics Inc., a California corporation, and
its subsidiaries.
ITEM
1.
BUSINESS
General
Enterprise
Informatics Inc., formerly Spescom Software Inc. and formerly Altris
Software, Inc., (the “Company”) was founded and incorporated as a
California corporation in 1981 and is headquartered in San Diego, California
with an international sales and support subsidiary in London, United
Kingdom. Our principal executive office is located at 10052 Mesa
Ridge Court, Suite 100, San Diego, California, 92121. Our telephone
number at that address is (858) 625-3000. Our website address is
www.enterpriseinformatics.com. Our annual reports on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities and Exchange Act of 1934
can be accessed, free of charge, at our website as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission.
The
Company develops, markets and supports eB™, its integrated
suite of
collaborative document, configuration and records management software solutions.
The eB suite enables
organizations in a broad range of industries to create, capture, store, manage,
share and distribute critical business information regarding their customers,
products, assets and processes in an efficient manner. The eB suite also enables
them
to maintain complete, up-to-date information about the configuration of their
products, assets and infrastructures so that they can achieve operational
excellence and compliance with regulatory requirements. eB provides the capabilities
of an Enterprise Content Management (ECM)/Electronic Document Management (EDM)
System, but extends these capabilities by also managing the “things’ that the
content/documents relate to such as products, assets, functions, processes,
requirements, projects, organizations, locations, work orders, etc. As a result,
eB can be used to manage the lifecycle of physical items (e.g., products,
equipment or assets), and the requirements (e.g., functional, safety,
performance, environmental, etc.) that govern them. It enables intelligent
relationships to be defined between these items thereby creating an
interdependency model. As a result, the effects of any change on requirements,
documents and items can be determined and change can be managed to effectively
ensure information integrity. In particular, eB enables organizations
with extensive and complex physical infrastructures to efficiently identify,
classify, structure, link, and manage documents, physical items, and
requirements throughout their lifecycles and ensure that conformance between
these is maintained by means of an automated change process.
eB’s
integration of document,
configuration and records management functionality onto a single platform is
a
major differentiator and significant competitive advantage that allows the
Company to address the information management needs of an enterprise in a more
holistic manner than solutions provided by other vendors. In addition, eB provides interoperability
and scalability across and beyond an enterprise, deployment over the web, and
quick, cost-effective “out-of-the-box” implementation. Finally, the product’s
full functionality is available via a set of application programming interfaces
(“API’s”) that enable the rapid definition and deployment of customer specific
solutions and integration with other business applications, including enterprise
resource planning (“ERP”), maintenance management, and project management
products.
History
In
the
1980’s, the Company and a handful of other pioneering companies set out to
provide a better alternative for managing documents electronically. In the
mid 1990’s the Company acquired two of those other companies, Optigraphics
Corp., and Trimco Ltd. that were recognized for their product excellence and
vision. As a combined entity, the Company became a leading developer of
enterprise document management solutions. In 2000, the Company acquired
the rights to certain configuration management technology and skills from
Spescom Ltd., which at the same time acquired a controlling interest in the
Company. Due to this unique combination of document and configuration
management technologies and skills, the Company began doing business as Spescom
Software Inc. on October 1, 2001.
As
of
September 30, 2007 Spescom Ltd. by virtue of its ownership of common stock
and Series F Preferred Stock controlled 59% of the outstanding voting shares
of
the Company.
A
timeline summary of equity transactions between the Company and Spescom Ltd.
and
between the Company and ERP2 Holdings, LLC, which purchased the interests of
Spescom Ltd. in the Company in October 2007, follows:
1999
The
Company sold 3,428,571 shares of its common stock to Spescom Ltd. for $2,300,000
in cash. In addition, the Company sold a 60% interest in ASL, its United
Kingdom subsidiary, for an additional $1,000,000. At the end of 1999,
Spescom Ltd. purchased the Company’s subordinated debt and Series E
Preferred Stock held by a third party. Under the terms of the debt and
preferred stock, Spescom Ltd. had the right to convert the debt and preferred
stock into common stock at $1.90 per share which equated to 3,226,841 shares
of
common stock.
2000
In
April 2000, the Company sold 5,284,714 shares of its common stock to
Spescom Ltd. for $3,700,000. Also, the Company agreed to convert its
subordinated debt and Series E Preferred Stock held by Spescom Ltd. into
9,528,096 shares of common stock—an effective conversion rate of $.70 per
share. The Company also transferred its remaining interest in ASL to
Spescom Ltd. for no consideration. In September 2000, the Company
changed its year end from December 31 to September 30 to coincide with
Spescom Ltd.’s year end.
2001
In
October 2000, Spescom Ltd. contributed certain assets and liabilities of
its United Kingdom subsidiary (formerly ASL) to the Company for 550,000 shares
of common stock of the Company.
2002
In
2002, Spescom Ltd. loaned working capital to the Company under promissory notes
secured by all of the assets of the Company.
2003
In
September 2003, the Company agreed to convert $5,292,000 of the $5,791,000
owed to Spescom Ltd. into shares of the Company’s Series F Preferred
Stock. As of the date of its issuance the Series F Preferred Stock
was convertible into the Company’s common stock based upon a conversion rate of
$.45 per share (subject to certain adjustments set forth in the related
Certificate of Determination for the Series F Preferred Stock), which
equated to 11,757,778 shares of common stock.
2004
In
November 2003, the Company issued a note payable to Spescom UK with a
principal balance of $600,000 which was repaid in full during fiscal
2004.
2005
In
November 2004, the Company completed a financing arrangement whereby the
Company issued 2,200 shares of Series G Convertible Preferred Stock along
with 2,750,000 common stock warrants for gross proceeds of $2,200,000.
During fiscal 2005, 750 shares of this preferred stock was converted into
2,428,000 shares of common stock.
2006
In
fiscal
2006, the Company completed two preferred stock financings, the net aggregate
result of which was the Company’s issuance of 2,450 shares of Series I
Convertible Preferred Stock along with 1,851,852 common stock warrants, its
receipt of cash consideration of $1,000,000 and its cancellation of the
remaining 1,450 shares of Series G Convertible Preferred Stock. As a
result of these financing activities and certain anti-dilution provisions under
the terms of the Company’s Series F Convertible Preferred Stock held by
Spescom Ltd. resulted in the Series F conversion rate was adjusted from $0.45
per share to $0.39 per share.
2007
On
October 10, 2007, pursuant to a Securities Purchase Agreement , dated as of
September 30, 2007, between Spescom Ltd, and its wholly owned subsidiary Spescom
Ltd. UK (collectively, “Spescom”), on the one hand, and ERP2 Holdings, LLC
(“ERP2”), on the other hand, Spescom sold to ERP2, for aggregate consideration
of $2,500,000, all shares of the capital stock of the Company held by Spescom,
two demand notes payable by the Company to Spescom, and certain contract
rights and other interests held by Spescom in connection with its ownership
of
such shares and notes (the “Transaction”). The
shares of capital stock sold to ERP2 consist of 15,650,471 shares of the
Company’s common stock and 5,291 shares of the Company’s Series F Convertible
Preferred Stock.
2008
On
January 14, 2008, the Company entered into a term sheet with ERP2 that provides,
among other things, for the concurrent consummation (the “ERP2 Closing”) of the
following transactions: (i) the extension of the maturity date of the demand
notes acquired by ERP2 from Spescom Ltd. to the date that is two years from
the
date of the ERP2 Closing, (ii) the agreement of ERP2 not to call such demand
notes following an event of default, prior to September 30, 2008;
(iii) the issuance of additional notes to ERP2 in the aggregate
principal amount of $1,500,000 with a maturity date two years from the date
of
the ERP2 Closing. Disbursement of $300,000 of such aggregate
principal amount is subject to delivery at the ERP2 Closing of definitive
transaction documents pursuant to the term sheet. Disbursement of the
remaining $1,200,000 of such amount is subject to completion of all actions
required to be completed by the Company in order to effectuate a 1000-to-1
reverse split of the Company’s common stock and the deregistration of the
Company’s common stock under the Securities Exchange Act of 1934.
Upon
execution of the term sheet, the Company’s issued to ERP2 a warrant exercisable
for 17,175,971 shares of Common Stock, which warrant has a per share exercise
price of $0.08 and a 10-year term. The term sheet provides that, upon
the above-referenced $1,200,000 disbursement, the Company will issue to ERP2
warrants for the purchase of the number of shares of common stock equal to
the
greater of (i) 26,735,508 shares of common stock and (ii) 20% of the fully
diluted outstanding common stock as of the issuance date. Such
warrants will have a per share exercise price of $0.08 and a 10-year
term.
Upon
execution of the term sheet, the Company declared a dividend payable to ERP2
in
the amount of 20,827,268 shares of Common Stock, in satisfaction of the entire
amount of accrued and unpaid dividends (together with interest) on the shares
of
the Company’s Series F Convertible Preferred Stock held by ERP2.
Industry
Background
In
today’s marketplace,
organizations are increasingly looking for better ways to help manage their
business information and processes. Most companies are overwhelmed by the amount
and variety of information generated by their suppliers, customers, employees
and partners and by the rate at which change occurs in their operations. As
a
result, organizations are seeking computer-based information management
solutions that enable them to improve productivity, reduce costs, react quickly
to changes in their marketplace, improve customer service or comply with
stringent regulatory and quality certification requirements.
Enterprise
information can be broadly divided into two categories:
i)
Structured information stored
in a database regarding, for example, customers, suppliers, products and
transactions. This data is readily manipulated by a computer application to
achieve a specified business objective, for example, general accounting,
manufacturing planning, inventory control, purchasing, asset management,
personnel management. Most enterprise software applications including for
example, Enterprise Resource Planning (“ERP”), Customer Relationship Management
(“CRM”), Supply Chain Management (“SCM”), and Product Lifecycle Management
(“PLM”), solely use this category of information.
ii)
Unstructured information
generated by software for personal computers and workstations, such as word
processing documents, spreadsheets and computer-aided design (“CAD”) drawings,
as well as other types of information which may or may not be in electronic
format, such as manufacturing procedures, maintenance records, training and
technical manuals, facility layouts, blueprints, product and parts drawings,
specifications, schematics, invoices, checks and other business records,
presentation graphics, photos, audio and video clips and facsimile documents.
The majority of corporate information is in an unstructured format and is
growing at an exponential rate straining an enterprise’s ability to efficiently
access, process and communicate that information.
Whatever
the format and wherever the location, unstructured data represents information
that is essential to a company’s business and forms a key part of its
intellectual capital. In today’s competitive marketplace, companies need the
ability to leverage their intellectual capital; however, limitations on a
company’s ability to access, process and communicate this information has
restrained the productivity of businesses at both the individual and team
levels. Without an effective means of obtaining business information, employees
are often forced to re-create information from scratch, duplicating effort
and
increasing the potential for error. In addition, professionals often spend
a
significant amount of their time locating information rather than engaging
in
higher value
activities. Additional complexity results where information must be accessed
and
revised by collaborative teams dispersed throughout and beyond an enterprise
that may operate different desktop software and computers. The lack of effective
tools for communicating and sharing information and for automating the business
logic makes this process even more time-consuming, inefficient and
error-prone.
A
further
factor that is increasingly impacting business is that of information integrity.
Due to the dynamic business environment, enterprises are being stretched to
the
limit to manage change effectively. The result of rapid change is a
reduction in enterprise information integrity and an inevitable decrease in
operational efficiency, safety, customer service, regulatory compliance and
profitability. Independent research by the Institute of Configuration
Management (ICM) based in Phoenix, Arizona has determined that a reduction
of only 8% in information integrity results in a 50% reduction in operational
effectiveness.
In
recent
years, enterprises have become keenly aware of the need to secure and protect
their corporate information as its loss could threaten the ongoing operations
of
the business. The need to not only provide secured access to information but
also implement effective disaster recovery plans is of utmost importance.
Stringent regulatory requirements as a result of the Enron and other financial
fiascos have also forced enterprise to re-examine and improve their information
and records management policies and systems.
To
address some of the above issues, Electronic Document Management Systems (EDMS)
were developed in the late 1990’s to enable enterprises to effectively and
efficiently manage, share and distribute critical business information contained
in documents. An EDMS solution is often viewed by organizations as part of
their
information systems’ re-engineering, and as a result there are several
significant issues they typically consider when evaluating an EDMS solution.
Such issues include scalability of the system, the ability to integrate with
existing structural databases and applications, deployment over the web, the
price of the system, the ability to view multiple document formats, the level
and cost of integration services required, the impact of the system on network
bandwidth, integration with existing business processes, the ability to control
document security, the ability to operate on existing computing infrastructure
and with existing applications, the system architecture and the ability to
handle large and complex data types and to customize the product to the client’s
particular needs. In addition, organizations also consider user related issues
such as the ability to search, retrieve, view, and edit data in a controlled
manner and associate unstructured and structured data to company
assets.
More
recently EDMSs have evolved to Enterprise Content Management (ECM) systems
that
not only capture, manage and deliver document content but manage all types
of
content within an enterprise including email, web content, digital assets
(video, voice, pictures) and forms.
A
further
category of software used to manage information about an enterprise’s products
and/or assets includes Product Data Management (PDM), Product Lifecycle
Management (PLM) and Enterprise Asset Management (EAM) applications. These
applications typically enable all the component parts comprising a product
or an
asset/plant and all associated information to be identified, structured and
managed throughout their lifecycles. PDM and PLM applications are mainly used
to
manage information regarding discrete products especially during the design
and
manufacturing phases. EAM applications typically are used to maintain a complex
asset/plant throughout its operational life cycle.
While
all
of the above categories of products create, organize, and track data, they
do
little to ensure the integrity or relevance of the information they
manage. A new category of products called Enterprise Information
Management (EIM) is emerging that add this level knowledge. The
Company sees itself as being an early entrant in this category.
The
Company’s Strategic Positioning
The
Company has leveraged its historic domain knowledge and developed technology
built on the modern Microsoft .NET framework that encompasses many of the
features of an ECM and PLM system. These features have been uniquely
combined and enhanced with the ability to relate all relevant and interdependent
information together providing an EIM solution ideal for maintaining the
information integrity necessary for compliance needs across many industries
and
business needs. The unique combination of features developed to
work in the pervasive Microsoft infrastructure enable the Company to deliver
superior solutions at a better value compared to the competition.
While
the
Company’s product offerings are applicable and deployed in many markets, the
Company has focused on and been successful in the regulated energy sector and
local governments.
Competition
The
market for the Company’s products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company currently encounters
competition from a number of public and private companies, including Electronic
Document Management Systems/Enterprise Content vendors such as EMC (Documentum
product), IBM (FileNet products), OpenText, and Sword; Enterprise Asset
Management vendors such as Indus, Computer Aided Design Vendors (CAD) / Product
Lifecycle Management (PLM) vendor such as PTC, Siemens (UGS product), Matrix,
Autotrol and Intergraph. Many of these direct competitors have significantly
greater financial, technical, marketing and other resources than the Company.
The Company also expects that direct competition will increase as a result
of
recent consolidation in the software industry.
The
Company also faces indirect competition from systems integrators and value
added
resellers (“VARs”). The Company relies on a number of systems consulting and
systems integration firms for implementation and other customer support
services, as well as for recommendation of its products to potential
purchasers.
The
Company believes that the principal competitive factors affecting its market
include system features such as scalability of the system, the ability to
integrate and compliment existing applications such as other EDMS, EAM and
PDM,
the ability to provide integrated document, configuration and records management
capability, the price of the system, the level and cost of integration required,
the impact of the system on network bandwidth, integration with existing
business processes, the ability to operate on existing computing infrastructure
and with existing applications, the system architecture and the ability to
handle large and complex data types and to customize products to the client’s
needs. In addition, organizations also consider features such as the ability
to
search, retrieve, view, annotate and edit data in a controlled
manner.
The
Company’s Solution
The
Company’s solutions are for regulated organizations with vast quantities of
interdependent documents that need to be managed and controlled through their
lifecycle. Customers are generally focused on meeting regulatory
compliance requirements and reducing business risk while optimizing process
efficiency to lower the cost of operations and compliance. The Company’s product
“eB” is n Enterprise Information Management solution that vastly improves the
integrity, visibility and access to all relevant information at the time it
is
needed. The eB product
is unlike document and records management solutions that collect and archive
documents for search and retrieval and lack document control capabilities such
as IBM/FileNET or EMC/Documentum. The solution ensures the integrity of the
controlled information, and uniquely connects information objects with relevant
assets, people, processes, projects and functions to create a framework for
rapid access to accurate information in context.
Technology
The
company has been an early adopter of the critically acclaimed Microsoft .NET
Framework as the development platform for all products. The core
product architecture embodies several best practice concepts such as Service
Oriented Architecture (SOA), XML data structures, and modular n-tier components
that make it scalable in terms of quantity of data, number of users, and volume
of transactions.
With
strong partnership ties with Microsoft (Gold Certified Partner, Managed
Partner), the Company has access to valuable insight and guidance in the use
of
Microsoft technology and products.
The
Company’s Products
The
Company’s flagship
product eB is a fully
integrated Enterprise Information Management suite that includes collaborative
document, configuration and records management software. The eB product enables
the efficient capture, management and distribution of all types of information
across an enterprise.
The
functionality of eB
consists of a core platform that contains functionality usually provided by
multiple applications in a single fully integrated environment. This
includes:
·
Document/content management
·
Imaging
·
Workflow
·
Item management
·
Requirements management
·
Change management
·
Records management
This
core
functionality is exposed via a comprehensive set of application program
interfaces available as a toolkit to enable rapid application development and
easy integration with other software products.
eB
provides a collaborative
environment for managing both unstructured and structured enterprise
information. In addition, it not only provides a hub to connect other
applications to each, but also identifies and controls key information with
the
goal of ensuring its integrity.
eB
enables documents/content,
as well as physical items (products, equipment or assets) and requirements
(e.g., functional, safety, environmental) to be identified, classified,
structured, linked and managed throughout their life-cycles. It is designed
to
ensure that conformance between these is maintained by means of an automated
change process.
It
provides the capabilities of a document management suite but goes beyond this by
also providing the capability to manage items and link documents to items and
requirements. It then applies industry standard configuration management
rules to control the effects of change on both documents and items in order
to achieve information integrity.
The
records management functions of eB support the enterprise
to
achieve compliance with legal, regulatory, corporate, audit and quality
requirements regarding declaration, archiving and disposition of enterprise
records.
Multiple
ways of accessing eB
are provided from standard out-of-the-box interfaces as well as integrations
with other business applications. Full access is also provided over
the Internet using standard web browsers enabling global collaboration and
access to information anytime, anywhere to authorized users. Any one or all
of
the components of eB
can be deployed, depending on a customer’s specific requirements.
In
December 2006, the Company announced the ability of eB to manage the integrity
of documents stored in a Microsoft Office 2007 Server (SharePoint), making
it
even easier to deploy eB solutions within an enterprise.
This
integrated solution provides enterprises with many benefits,
including:
1.
A single system for all document, data, records and process orientated functions
across an enterprise that simplifies maintenance for administrators and IT
staff.
2.
A single point of entry for users, which reduces the cost of training and
eliminates the need for users to know or care where documents and other
information resides.
3.
A broad range of functionality that addresses the needs of many different users
throughout an organization, thereby maximizing the investment.
4.
Rapid deployment using standard “out-of-the-box” interfaces and applications
resulting in a fast return on investment.
5.
A single point of contact and support for the technology, which results in
potentially fewer problems with software upgrades, than might otherwise be
encountered in systems that use products from multiple vendors.
6.
Reduced integration effort compared to implementing “best-of-breed” systems
using technologies from multiple vendors — an approach that requires learning
multiple programming interfaces in an attempt to integrate unrelated
products.
7.
Rapid application development and simplified integration with other critical
systems such as ERP applications using the powerful eB Software Development
Kit.
In
June
2007, the Company announced it had received Microsoft Vista Logo Certification
for its flagship product eB. It has been participating in the Early Adopter
program for certification for the new Microsoft Windows 2008 Server product.
These certifications not only validate the design and robustness of Enterprise
Informatics software products, but provide significant marketing opportunities
with Microsoft as Microsoft launches its offerings.
Strategy
Business
Model
The
Company is building its business strategies around three core
strengths:
|
·
|
Expertise
and a large customer base in the Nuclear industry
|
|
·
|
A
large customer base in applications within local governments — mainly
where some form of regulatory compliance is required.
|
|
·
|
The
inherently broad application set the eB product
can handle
when combined with the Microsoft SharePoint product.
|
To
capitalize on these strengths, the Company has instituted the strategic
initiatives listed below. We believe that these initiatives will enhance
the Company’s ability to achieve a defensible, leading market position within
its growing market niche.
Strategic
Initiatives
·
Continue
to
Develop and Position eB
as
a
Critical but Complementary Enterprise Platform. Rather than
position and
market eB as a
stand-alone, mutually exclusive enterprise suite, the Company will continue
to
promote eB as an
essential, high value, high functionality niche platform that complements,
rather than supplants, existing/legacy solutions. By positioning eB in this less threatening
manner, the Company not only minimizes repetitive and costly “head-to-head”
evaluations with competitors having significantly greater resources, but also
enables the conversion of its “competitors” into “partners”.
·
Continue
Investment in the Company’s Direct Sales Force. The Company currently
employs a dual sales model comprised of both a direct sales force and select
partners and re-sellers. Vertical markets targeted by the Company’s direct sales
force are those: (1) in which the Company has market domain expertise, and
(2)
that have a limited number of end-user customers that can be effectively
penetrated and profitably served by its relatively small sales force. The direct
sales force will focus on core market verticals where we can leverage our
vertical expertise.
·
Form product
strategic partnering agreements to
be able
to provide more enhanced solutions. The Company will continue
its efforts to develop integrations/interconnections with already established
software market leaders.
·
Enter
New
Markets Through Increased Investment in and Expansion of Strategic
Partnerships. To
expand into new markets, the Company seeks to increase its key strategic
relationships with dominant players in market verticals, system integrators
and
channel partners having significantly greater resources and immediate access
to
customers. Because of the Company’s positioning of eB as a complementary
rather
than replacement or standalone solution, the Company is well positioned to
create win-win relationships with its direct/indirect competitors. Ultimately,
the end-users benefit with higher value solutions that truly address their
critical information requirements. Properly implemented, we believe this
strategy affords the Company new, relatively immediate, incremental, high margin
revenues with substantially reduced investment. However, for this strategy
to be
successful, the Company must allocate resources for the additional demands
placed on the Company. In particular, the Company must invest in: (1) product
development to assure
eB integrates easily with those of the expanding partner network, and
(2)
sales, marketing and customer support resources to train, coordinate, and
support a growing partnership network and base of end-users.
·
Outsource
Non-Core Operations. The Company
plans to
continue its program of outsourcing non-core service functions. Services
presently outsourced include on-site implementation and integration using
partners in selected regions and markets. The Company plans to expand these
functions to include other regions and markets. Through careful partner and
supplier selection and program coordination, monitoring and implementation,
the
Company is better positioned to:
i)
Allocate its resources to its critical, core functions,
ii)
Focus on the delivery of higher margin services and products such as system
design services and solution products, and
iii)
Leverage these partners market position, thus providing increase sales
opportunity and customer penetration.
·
Increase
Company’s Market Presence. The Company
plans to
increase the awareness and credibility of the Company and the eB suite within its
vertical
markets, with its partners, and within the investment and technology analyst
communities. To heighten the profile of the Company in its customer markets,
the
Company will be modernizing its corporate image to showcase its state-of-the-art
technology and focus on regulatory compliance issues.
·
Grow
revenues by:
i)
Leveraging senior business development executives with extensive market contacts
within each of the Company’s targeted vertical markets in the US and UK/Europe.
In addition, the Company plans to allocate additional resources to support
these
key persons with adequate staffs and budgets to leverage their effect in the
market.
ii)
Leveraging existing user groups to increase the number of licensed seats and/or
number of software modules. This is intended to not only increase software
sales
but also enhance the recurring revenue stream the Company realizes from annual
software maintenance contracts. In addition, the Company will target
conversion of legacy software seats into eB.
iii)
Applying resources to expand horizontally or vertically to new user groups,
departments or subsidiaries within existing markets.
iv)
Leverage partnerships into new markets.
Customers
The
Company is primarily active in markets characterized by customers that have
extensive assets and infrastructures that need to be managed throughout their
life cycles. The target markets specifically include:
·
Utilities (power, water and gas)
·
Transportation (air, rail and sea)
·
Public Sector/Local Government
Enterprises
within these markets are highly regulated and operate extensive and complex
assets and infrastructures that form the foundation for the products and
services they provide to their customers and for generating revenues. For
example, rail transportation companies operate a complex rail network including
tracks, signaling, electrification, etc. and utilities or public sector
enterprises operate power, water or gas distribution networks.
The
following are examples of customers who are using the Company’s
products:
Utilities.
Within the utilities
industry, countless documents relating to plant management, facility maintenance
and support, transmittal processing and tracking and statutory compliance must
be current and readily available at all times. Furthermore, with pending
deregulation, utilities are under increasing pressure to minimize their costs.
The Company has installed information management solutions at utilities around
the world and today provides the core Configuration Management product of
numerous utilities and has dominated certain applications
functions.
Transportation.
In
the rail
transportation segment, countless documents relating to scheduling, structures,
track and signaling must be current and readily available at all times. For
example, one of the world’s oldest and largest public transportation systems had
more than 3,000,000 maintenance and safety documents stored on aperture cards
and microfiche, and manual handling processes were straining efficient
operation. The Company’s information management solution now enables users quick
access to all documents on-line, including the documents described above as
well
as accounts payable and invoice records, internal letters and memoranda and
other business records, with additional search, optical character recognition
(“OCR”) and e-mail functionality. Today, the system can be accessed and operated
by over 1,500 individual users who can retrieve critical business information
whenever necessary on a near-instantaneous basis, thereby enabling this public
transportation system to better ensure regulatory compliance.
Public
Sector /
Local Government. Local authorities constantly face the challenges of
complying with safety, environmental and fiscal regulations. Many of these
organizations have used
eB to control their documents and data needed to support these business
processes in a highly efficient manner. As an example, a major US metropolitan
utilities district has adopted
eB as its standard throughout the city and county, and has made extensive
use of the interfaces with its Permit Tracking and Geographical Information
Systems (GIS). Geo-spatial data is of utmost importance to the safety and
security programs currently being developed by all metropolitan authorities.
It
allows them to accurately identify buildings, powerplants and other structures
of high risk, and integrate all available data (e.g. building and evacuation
plans, fire surveys, threat assessments) into police, fire and rapid response
systems. eB’s ability
to store this information and make it available in context to geographical
location, forms a critical components of a solution for safety and security
in
local government.
A
small
number of customers has typically accounted for a large percentage of the
Company’s annual revenues. In fiscal 2007 Aveva Solutions Limited and Network
Rail accounted for 25% and 12%, respectively. In fiscal 2006
Constellation Energy Group accounted for 13% of revenues. In fiscal 2005
Network Rail accounted for 16% of revenues. The Company’s reliance on
relatively few customers could have a material adverse effect on the results
of
its operations on a quarterly basis. For
this
reason, alternatives “to market avenues” are being pursued with strategic
partners. It is a defined objective of the Company to substantially grow
our partnering relationships in markets where we are not directly
active.
Sales
and Marketing
Direct
sales
The
Company focuses its direct sales force on select vertical markets with
compelling business needs for the Company’s information management solutions.
The Company has established a strong market presence in those chosen verticals
both domestically and internationally. The Company’s strategy is to continue its
direct sales and marketing to increase its market penetration in these
verticals. Sales cycles for the Company’s products generally last from six to
twelve months.
Indirect
distribution channels
Although
the Company has historically generated the majority of its revenues from its
direct sales force, the Company has also established a network of third-party
VARs, system integrators and OEMs who build and sell systems (with
components or complete systems provided by the Company) that address specific
customer needs within various vertical markets, including those targeted
directly by the Company. Sales through indirect channels amounted to
$485,000 or 5%, $796,000 or 11%, and $507,000 or 9% of total sales for fiscal
years 2007, 2006 and 2005, respectively.
The
Company’s strategy is to further grow and develop its VAR, systems integrator
and OEM channels which are primarily targeted at the industries and geographic
regions not covered by its direct sales force in order to reach the broadest
customer base. The VARs and systems integrators are an integral part of the
Company’s distribution strategy as they are responsible for identifying
potential end-users, selling the Company’s products to end-users as part of a
complete hardware and software solution, customizing and integrating the
Company’s products at the end-user’s site and supporting the end-user following
the sale.
Customers,
VARs, systems integrators and OEMs may not continue to purchase the Company’s
products. The failure by the Company to maintain its existing relationships,
or
to establish new relationships in the future, could have a material adverse
effect on the Company’s business, results of operations and financial
condition.
Services
and Support
The
Company believes that a high level of services and support are critical to
its
performance. As a result, the Company maintains a telephone hotline service
to
provide technical assistance and software support directly to its end-users
on
an as-needed basis. The Company also provides technical support, maintenance,
training and consulting to its VARs, systems integrators and OEMs, which in
turn
provide technical support services directly to end-users. These services are
designed to increase end-user satisfaction, provide feedback to the Company
as
to end-users’ demands and requirements and generate recurring revenue. The
Company provides much of its maintenance activities through its eSupport website
which enables customers and partners to obtain support on a self-service basis.
The Company plans to continue to expand its support programs as the depth and
breadth of the products offered by the Company increase.
VARs,
Systems Integrators and OEM support
The
Company employs pre-sales, technical support personnel that work directly with
VARs, systems integrators and OEMs to provide responses to technical sales
inquiries. The Company also offers educational and training programs, as well
as
customized consulting services to its VARs, systems integrators and OEMs.
Fees for training and consulting services are generally charged on a per diem
basis. The Company also provides product information bulletins on an ongoing
basis, including bulletins posted through its Internet web site and through
periodic informational updates about the products installed. These bulletins
generally answer commonly asked questions and provide information about new
product features.
Technical
Support and Software Maintenance
The
Company, in conjunction with its VARs and systems integrators, offers end-users
a software maintenance program that includes software updates provided by the
Company to end-users and technical support provided by the VARs and systems
integrators.
Telephone
consultation is provided by the Company to VARs and systems integrators in
response to end-user questions that VARs and systems integrators are unable
to
answer. VARs and systems integrators typically charge end-users a fee for
maintenance and support of the entire EDMS and imaging system, including
software and hardware. In turn, the Company charges VARs and systems integrators
an annual fee based upon a percentage of the original purchase price of the
licensed software.
The
Company generally includes a 90-day limited warranty with software licenses.
During the warranty period, end-users are entitled to corrections for documented
program errors. The services provided during the warranty period may be extended
by the end-user entering into the Company’s software maintenance
program.
Product
Development
The
Company’s product development efforts are focused on providing customers with
the most technologically advanced solutions for their document, configuration
and records management needs. The Company believes that the marketplace is
rapidly moving towards demanding that all corporate information, structured
and
unstructured, simple and complex, be managed in a consistent and controlled
manner. Customers are requiring integrated solutions that address critical
information management issues in a holistic manner, that can be implemented
quickly and provide a rapid ROI. This trend demands that greater functionality
is provided “out-of-the-box” thereby reducing the need for multiple products
from different vendors and the associated integration and support costs.
It also demands that products work across technology platforms, across the
web,
business processes and geographic locations to provide real-time information
management with integrated document/content, records and configuration
management capabilities.
The
Company intends to continue to extend its position as a technology leader in
developing and marketing EIM solutions that include integrated document,
configuration and records management solutions. The Company intends to do this
by continuing to enhance the features and functionality of its eB product suite
using industry best practices, customer input and feedback and current
technologies, including tools to allow users to tailor the look and feel of
the
product, administrative tools to enable systems operators to easily setup and
make changes to the system and add tighter integration with other third party
enterprise products. Through this enhanced functionality and integration the
Company’s products can provide even faster deployment and greater management
control of enterprise information. The Company also plans to introduce new
products and product extensions which are complementary to its existing suite
of
products and which address both existing and emerging market needs.
During
2006, the Company developed a new feature set that enable it to bring EIM
features to an existing Microsoft SharePoint installation. This technology
will
continue to be enhanced and refined during 2007. In June 2007,
the Company announced it had received Microsoft Vista Logo Certification for
its
flagship product eB. It has been participating in the Early
Adopter program for certification for the new Microsoft Windows 2008 Server
product. These certifications not only validate the design and
robustness of Enterprise Informatics software products, but provide significant
marketing opportunities with Microsoft as Microsoft launches its
offerings. In addition, the Company is participating in the Early
Adopter program for certification on Microsoft’s new Vista operating
system.
Backlog
and Current Contracts
The
Company’s contract backlog consists of the aggregate anticipated revenues
remaining to be earned at a given time from the uncompleted portions of its
existing contracts. It does not include revenues that may be earned if customers
exercise options to make additional purchases. At September 30, 2007, the
Company’s contract backlog was $3,530,000 as compared to $4,244,000 at
September 30, 2006. The Company expects a majority of the
September 30, 2007 backlog to be substantially completed in fiscal 2008.
The amount of contract backlog is not necessarily indicative of future contract
revenues because short-term contracts, modifications to or terminations of
present contracts and production delays can provide additional revenues or
reduce anticipated revenues. The Company’s backlog is typically subject to large
variations from time to time when new contracts are awarded. Consequently,
it is
difficult to make meaningful comparisons of backlog.
The
Company’s contracts with its customers generally contain provisions permitting
termination at any time at the convenience of the customer (or the U.S.
Government if the Company is awarded a subcontract under a prime contract with
the U.S. Government), upon payment of costs incurred plus a reasonable profit
on
the goods and services provided prior to termination. To the extent the Company
deals directly or through prime contractors with the U.S. Government or other
governmental sources, it is subject to the business risk of changes in
governmental appropriations. In order to reduce the risks inherent in competing
for business with the U.S. Government, the Company has directed its government
contracts marketing efforts toward teaming with large corporations, who
typically have existing government contracts, can alleviate the cash flow
burdens often imposed by government contracts and have more extensive experience
in and resources for administering government contracts. The Company does not
have any contractual arrangements regarding such joint marketing efforts. In
the
past, such efforts have been pursued when deemed appropriate by the Company
and
such corporations in response to opportunities for jointly providing systems
or
services to potential government agency customers.
Patents
and Technology
The
Company’s success is dependent in part upon proprietary technology. The Company
owns certain U.S. and foreign patents covering certain aspects of its document
management systems technology, including two patents that enable large format
drawings to be rapidly downloaded and viewed over low speed communication links.
The Company also owns a patent on technology to allow edit users to make changes
to documents without having to specify whether they are working on raster or
vector data and a patent for a reviser capability that allows users to modify
and store drawing changes in raster and vector format for subsequent review
of
the original document and each sequential revision.
Employees
As
of
September 30, 2007, the Company had 37 full-time employees, of whom 10 were
engaged in product development, 14 in customer support, implementation and
application engineering activities, 6 in sales and marketing and 7 in
administration. The Company also utilizes consultants for specific projects.
None of the Company’s employees is represented by a labor union. The Company has
not experienced work stoppages and believes its relationship with its
employees is good. Competition for qualified personnel in the industry in which
the Company competes is intense and the Company expects that such competition
will continue for the foreseeable future. The Company has an incentive stock
option plan which is used for granting options to employees as a means of
attracting and keeping key individuals. The Company believes that its future
success will depend, in large measure, on its ability to continue to attract,
hire and retain qualified employees and consultants.
ITEM
1A. RISK FACTORS
Because
of the following factors, as well as other variables affecting our operating
results and financial condition, past performance may not be a reliable
indicator of future performance, and historical trends should not be used to
anticipate results or trends in future periods.
The
Company has a history of significant losses. If we do not sustain
profitability, our financial condition and stock price could
suffer.
Although
the Company reported net income of $998,000 for fiscal year 2007, the Company
has a history of losses and may incur losses in the foreseeable future. We
incurred net losses of $2,376,000 and $6,049,000 for fiscal years 2006 and
2005,
respectively. As of September 30, 2007, our accumulated deficit was
$91,051,000. If revenues do not reach the levels the Company anticipates,
or if operating expenses exceed the Company’s expectations, the Company may not
be able to achieve or sustain profitability in the near future or at
all. If the Company is unable to achieve and sustain profitability
at satisfactory levels, its financial condition and stock price could be
materially adversely affected.
The
Company will be controlled by ERP2 Holdings, LLC as long as they are entitled
to
a majority of the votes eligible to be cast in the election of
directors.
As
of
January 13, 2008, ERP2 Holdings, LLC ("ERP2"), by virtue of its ownership of
common stock and Series F Preferred Stock, was entitled to 32,554,099, or
59%, of the total number of votes eligible to be cast in the election of
directors. Furthermore, on January 14, 2008, the board of directors of the
Company declared a dividend payable to ERP2 in the amount of 20,827,268
shares of common stock in satisfaction of the entire amount of accrued and
unpaid dividends (together with interest) on the shares of the Company's Series
F Convertible Preferred Stock held by ERP2. Upon payment of such dividend,
ERP2 will be entitled to 50,044,406 or 69% of the total number of
votes eligible to be cast in the election of directors.
ERP2 therefore currently has the ability to elect a majority of the
Company’s board of directors and to remove the entire board of directors, with
or without cause, without calling a special meeting. Moreover, even if the
percentage of the voting power of the voting securities of the Company held
by
ERP2 were to drop below 50%, it is likely that ERP2 would have sufficient
votes to retain control of the Company. As a result, ERP2 will likely
continue to control all matters affecting the Company, including but not limited
to:
|
·
|
the
composition of the Company’s board of directors and, through it, any
determination with respect to the Company’s business direction and
policies, including the appointment and removal of officers;
|
|
·
|
the
allocation of business opportunities that may be suitable for the
Company
and ERP2 ;
|
|
·
|
any
determinations with respect to mergers or other business combinations
or
extraordinary transactions;
|
|
·
|
the
Company’s acquisition or disposition of assets; and
|
|
·
|
the
Company’s financing.
|
|
·
|
ERP2
is not prohibited from selling a controlling interest in us to a
third
party.
|
Upon
a liquidation of the Company, sale of all or substantially all of the Company’s
assets, or merger of the Company, the Company’s preferred shareholders would be
entitled to receive substantial payments prior to any distribution to the common
shareholders.
Upon
a
liquidation of the Company, the holders of Series F Convertible Preferred Stock
would be entitled to receive, prior to any distribution to the holders of common
stock, an aggregate amount equal to $5,291,000 plus accrued but unpaid dividends
per share and interest on all such dividends. Upon a liquidation of the
Company, sale of all or substantially all of the Company’s assets, or merger of
the Company, prior to any distribution or payment of merger consideration to
the
holders of common stock, the holders of Series I Convertible Preferred Stock
would be entitled to receive an aggregate amount equal to the higher of (i)
$2,450,000 and (ii) the amount such holders would be entitled to receive had
such holders’ shares of Series I Preferred Stock been converted into shares of
common stock immediately prior to the liquidation, sale of assets or merger
in
accordance with the terms of the Series I Preferred Stock.
The
Company's indebtedness to ERP2 Holdings, LLC is secured by all the
Company's assets, and the Company may become insolvent if repayment of such
debt is due prior to the Company’s ability to obtain funds to repay such debt or
if the Company fails to restructure such debt.
At
December 31, 2007, the Company owed, including accrued but unpaid interest,
an
aggregate amount of $693,000 to ERP2 Holdings, LLC ("ERP2") under two
demand notes. Interest accrues on such debt at an annual interest rate of
10%, and such debt is secured by a security interest in favor of ERP2 on all
of
the Company’s assets.
On
January 14, 2008, the Company entered into a term sheet with ERP2 that provides,
among other things, for the concurrent consummation (the “ERP2 Closing”) of the
following transactions: (i) the extension of the maturity date of the existing
demand notes to the date that is two years from the date of the ERP2 Closing;
(ii) the agreement of ERP2 not to call such demand notes, as extended, following
an event of default, prior to September 30, 2008; and (iii) the issuance
of
additional notes to ERP2 in the aggregate principal amount of $1,500,000
with a
maturity date two years from the date of the ERP2 Closing. Interest
will accrue on the Company’s debt under the notes so extended or issued at an
annual rate of 10%, and such debt will be secured by a security interest
in
favor of ERP2 on all of the Company’s assets. Disbursement of
$300,000 of such aggregate principal amount is subject to delivery at the
ERP2
Closing of definitive transaction documents pursuant to the term
sheet. Disbursement of the remaining $1,200,000 of such amount is
subject to completion of all actions required to be completed by the Company
in
order to effectuate a 1000-to-1 reverse split of the Company’s common stock and
the deregistration of the Company’s common stock under the Securities Exchange
Act of 1934. If the Company fails to complete such actions by April
30, 2008, such failure will constitute an event of default under the extended
demand notes and under the additional notes contemplated by the term
sheet.
If
the
Company is unable to generate sufficient cash flow from its operations, secure
funds from the capital markets or lenders or restructure its debt to ERP2
prior
to
the time that the debt under the demand notes, as extended, and the additional
notes contemplated by the term sheet become due, the Company will become
insolvent.
Financing
to fund the Company’s future capital requirements may not be available on
favorable terms or at all.
The
Company and ERP2 have entered into a term sheet that contemplates the extension
by ERP2 to the Company of a $1,500,000 loan, the disbursement of which, as
discussed above, is subject to certain conditions. The Company,
however, may need financing in the future in addition to any funding received
from ERP2 pursuant to such term sheet, and such financing may not be available
on favorable terms or at all from any source.
The
Company believes its capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations
in
its operating results, financing activities, and investments and third party
products and receivables management. The Company’s future liquidity will
depend on financing from ERP2 and its ability to generate new system sales
of
its eB product suite in
the near term, which cannot be assured. Failure to generate sufficient
system sales to meet the Company’s cash flow needs can be expected to have a
material adverse effect on the Company’s business, results of operations, and
financial condition. Management believes that the Company’s current cash
and receivables, as well as additional cash that may be generated from
operations and received from ERP2 pursuant to the above-referenced term sheet,
will be sufficient to meet its short-term needs for working capital.
However, the Company may not be able to obtain sufficient orders to enable
the
Company to achieve a sustained break-even level of cash flow, which would be
necessary to continue operations in the absence of further
financing. Future equity financings would be dilutive to the
existing holders of the Company’s common stock. Future debt financings
could involve restrictive covenants. Moreover, the Company may not be able
to attract equity or debt financing at all.
The
Company is party to a term sheet
with ERP2 Holdings, LLC that contemplates the consummation of a 1000-to-1
reverse split of the Company’s common stock; in the event the reverse split is
consummated, (i) certain shareholders will receive a cash payment in exchange
for some or all of their common shares; (ii) the trading liquidity of the
common
shares could be adversely effected; (iii) the total market
capitalization of the
common sharesafter the
reverse stock split may be lower than the total market capitalization before
the
reverse stock split; (iv)
the market price of the common shares may become subject to greater declines
on
a percentage basis; and (v) some shareholders may
consequently own “odd lots”
requiring higher transaction costs
to
sell.
The
Company is party to a term sheet with ERP2 Holdings, LLC (“ERP2”), which
provides, among other things, for the extension to the Company by ERP2 of
a
$1,500,000 loan, of which $1,200,000 is subject to disbursement only upon
completion of all actions required to be completed by the Company in order
to
effectuate a 1000-to-1 reverse split of the Company’s common stock (as well as
the subsequent deregistration of the Company’s common stock under the Securities
Exchange Act of 1934). In the event the Company fails to complete
such actions prior to April 30, 2008, an event of default will exist with
respect to the loan. ERP2, following payment to ERP2 of a dividend on
the shares of the Company’s Series F Convertible Preferred Stock held by ERP2
that the Company declared on January 14, 2008, will possess sufficient voting
power to ensure the requisite shareholder approval of such reverse stock
split.
In
the
event the reverse split contemplated by the term sheet is consummated, each
shareholder will be entitled to receive that number of post-split common
shares
calculated by dividing their pre-split common share holdings by 1,000 and
rounding down to the nearest whole number. If the total number of
pre-split common shares that a shareholder holds is not evenly divisible
by
1,000, the shareholder will receive cash equal to the fraction of a post-split
common share that the shareholder otherwise would have been entitled to receive,
multiplied by a value determined by the Company’s board of directors to
represent the approximate market value of 1,000 common shares prior to
consummation of the split.
Consummation
of the reverse stock split
would reduce the number of issued and outstanding shares of the Company’s common
stock by a factor of one-thousand. Such reduction could lead to
reduced trading volume of and a smaller number of market makers for the
common
shares, thereby adversely affecting the trading liquidity of the common
shares.
In
the event the reverse stock split is
consummated, there can be no assurancesthat
the market price of the Company’s
common sharesafter
the reverse stock split will
increase in proportion to the reduction in the number of common shares
issued
and outstanding before the reverse stock split. For example, based on
the closing price on the OTC Bulletin Board of the Company’s common shares on
January 9,
2008 of $0.07per
share, if the reverse stock
splitis
consummated, there can be
no assurancesthat
the post-split market price of the
Company’s common shares would be at least $70.00per
share. Accordingly, the
total
market capitalization of the Company’s common shares after the proposed reverse
stock split may be lower than the total market capitalization before the
proposed reverse stock split. Furthermore, if the
reverse
stock split is consummated and the market price of the Company’s common shares
subsequently declines, the percentage decline may be greater than would
occur in
the absence of the reverse split.
In
the event the reverse stock split is
consummated, some
shareholders may consequently own
less than 100 shares of
the
Company’s common stock.A
purchase or sale of less than 100
shares (an “odd lot” transaction) may result in incrementally higher
tradingcosts through
certain brokers. Therefore,
those shareholders who own
less than 100 common
shares
following the
reverse stock split may be
required to pay higher
transaction costs if they
shoulddetermine
to sell their shares.
The
Company is party to a term sheet with ERP2 Holdings, LLC that contemplates
the
deregistration of the Company’s common stock under the Securities Exchange Act
of 1934; in the event the deregistration is consummated, (i) the
Company will no longer make public filings under the Securities
Exchange Act of 1934 and (ii) the Company’s common stock will no longer be
eligible for trading on the OTC Bulletin Board, and there may cease to
be any
public market for the Company’s common stock.
The
Company is party to a term sheet with ERP2 Holdings, LLC (“ERP2”), which
provides, among other things, for the extension to the Company by ERP2
of a
$1,500,000 loan, of which $1,200,000 will be subject to disbursement only
upon
completion of all actions required to be completed by the Company in order
to
effectuate the deregistration of the Company’s common stock under the Securities
Exchange Act of 1934 (the “Exchange Act”) (as well as a 1000-to-1 reverse split
of the Company’s common stock, contemplated to occur prior to such
deregistration). In the event the Company fails to complete such
actions prior to April 30, 2008, an event of default will exist with respect
to
the loan.
In
the
event the deregistration contemplated by the term sheet is consummated,
the
Company will no longer be subject to public reporting requirements under
the
Exchange Act, including any requirements to file annual reports on Form
10-K,
quarterly reports on Form 10-Q, or current reports on Form
8-K. Consequently, following any such deregistration, there will not
be made available to the public current financial or other information
concerning the Company, except such information, if any, as the Company
may
choose to voluntarily disclose or be required to disclose pursuant to applicable
legal requirements.
Although
the Company anticipates that, immediately following any such deregistration,
its
common stock will be quoted in the Pink Sheets, there can be no assurances
that
such quotation of the Company’s common stock will occur or continue for any
period of time. Rule 15c2-11 under Exchange Act requires brokers to
obtain certain information and assess its reliability before publishing
quotations for securities that are not registered under the Exchange
Act. As indicated above, following deregistration, the Company will
be under no obligation to make public filings under the Exchange Act, and
any
information that the Company makes available to the public may not include
all
of the information that a broker would need to have available in order
to
publish quotations of the Company’s common stock under Rule
15c2-11. Accordingly, quotations for the Company’s common stock in
the Pink Sheets may cease to be published if brokers determine that the
available information about the Company is no longer current. In that
case, there would be no public market for the Company’s common stock, and
stockholders may be unable to sell shares of the Company’s common
stock.
The
Company is dependent on sales to a relatively small number of new customers
each
quarter, so any failure to close a sale to any customer could have a material
adverse effect on its quarterly operating results.
A
small
number of customers has typically accounted, and will continue in the future
to
account, for a large percentage of the Company’s annual revenues. Aveva
Solutions Limited and Network Rail accounted for 25% and 12%, respectively,
of
revenue for fiscal 2007. Constellation Energy Group accounted for 13%
of revenue for fiscal 2006. Network Rail accounted 16% of the Company’s
revenues in fiscal 2005. Because of the Company’s reliance on sales to
relatively few customers, the loss of any sale could have a material adverse
effect on the results of its operations on any given quarter.
Additionally, a significant portion of the Company’s revenues has historically
been, and is expected in the future to be, derived from the sale of systems
to
new customers. The Company generally incurs significant marketing and
sales expense prior to entering into a contract with a new customer that
generates revenues. The length of time it takes to establish a new
customer relationship typically ranges from 6 to 12 months. As such, the
Company may incur significant expenses associated with its sales efforts
directed to prospective customers in any particular period before any associated
revenues stream begins. If the Company is not successful at obtaining
significant new customers or if a small number of customers cancel or delay
their orders for its products, then its business and its prospects could be
harmed which may cause the price of the Company’s common stock to
decline.
In
fiscal 2007 the Company granted a source code license in the eB product suite,
as it existed in March 2007, to Aveva Solutions Limited and could face
competition from the offering by that company or one of its sublicensees of
products with substantially the same functionality as the eB product
suite.
On
October 2, 2006, the Company entered into a $2 million licensing contract with
an engineering IT solutions and services company, Aveva Solutions Limited
(“AVEVA”), by which the Company granted to AVEVA a non-exclusive perpetual
license to use and sublicense (subject to certain restrictions described below)
the technology underlying the Company’s eB product suite, including the source
code of the eB product suite. However, prior to March 31, 2008, AVEVA
may not (1) sublicense the source code of the eB product suite or any derivative
of it (except to third party contractors under limited circumstances) or (2)
sublicense the eB product suite or any derivative of it when such technology
is
not included with other products (except to existing customers of AVEVA’s parent
company, Aveva Group plc, and certain of its
affiliates). Nevertheless, subject to the foregoing restrictions,
AVEVA or a party to whom AVEVA grants a sublicense could offer products using
the Company’s source code and providing substantially the same functionality as
the eB product suite, which could have a material adverse impact on the
Company’s business, results of operations, and financial condition. The source
code license, however, was based on the state of the eB product in March
2007 and
since that time the Company has developed new features and functions into the
product for which AVEVA has no technology rights.
Conversion
of the Company’s preferred stock would result in significant dilution to
existing shareholders.
In
a
private placement completed in March 2006, the Company issued, in addition
to certain warrants, shares of new Series I Convertible Preferred Stock,
which upon conversion into common stock would result in substantial dilution
to
common shareholders. The number of shares of the Company’s common stock into
which the shares of Series I Preferred Stock may be converted varies based
on a volume-weighted measure of the market price of the common stock. The
range
is from 11,666,667 common shares, if the market price measure were to be
at
least $0.25 at the time of all conversions, up to 33,793,104 common shares,
if
the market price measure were to be no greater than $0.08 at the time of
all
conversions.
On
September 30, 2003, the Company issued 5,291 shares of Series F
Preferred Stock with a stated value of $1,000 per share in consideration
of the
cancellation of $5,291,000 of certain debt. The Series F Preferred
Stock is convertible into the Company’s common stock at a stated conversion
price of $0.45 per share, subject to certain anti-dilution
provisions. As a result of these anti-dilution provisions and the
issuance of the Series I Convertible Preferred Stock, the conversion price
has
been adjusted to $0.39 per share. Upon conversion of the Series F Preferred
Stock at the $0.39 per share conversion price, 13,566,667 shares of the
Company’s common stock is issuable based on the stated value of the Series F
Preferred Stock. In addition, upon such conversion, shares of the
Company’s common stock are issuable based on any unpaid accrued dividends
and interest thereon related to the Series F Preferred Stock as of such date.
As
of the date of payment to ERP2 of the dividend declared by the Company on
January 14, 2008, there will be no such unpaid accrued dividends and
interest. Conversion of the Series F Preferred Stock may occur at
the option of the holder until September 30, 2008. On that date, any
outstanding Series F Preferred Stock not previously converted will be
converted automatically. Conversion of the Series F Preferred Stock
will result in substantial dilution to common shareholders.
Future
sales of common stock by the Company’s shareholders, including investors in
future offerings and ERP2 Holdings, LLC, could adversely affect the Company’s
stock price.
ERP2
Holdings, LLC (“ERP2”), as of January 15, 2008 (i) holds 48,388,207 shares of
the Company’s common stock on a fully diluted basis and (ii) is entitled to
payment of a dividend in the amount of 20,827,268 additional shares of
common
stock, in satisfaction of the entire amount of accrued and unpaid dividends
(together with interest) on the shares of the Company’s Series F Convertible
Preferred Stock held by ERP2. In addition, as detailed below, ERP2 is
anticipated to become entitled to receive warrants with a per share exercise
price of $0.08 for the purchase of the number of shares of common stock
equal to
the greater of (A) 26,735,508 shares of common stock and (B) 20% of the
fully
diluted outstanding common stock as of the date of issuance of such
warrants. If ERP2, from time to time in the future, sells the shares
of common stock that it holds or may acquire, the Company’s stock price may be
adversely affected.
In
connection with the Series I Convertible Preferred Stock private placement
completed in March 2006, the Company filed a registration statement for the
common stock of the Company issuable upon conversion of such preferred
stock. The registration statement was declared effective by the Securities
and Exchange Commission on July 10, 2006. Any sales of these shares
of common stock or shares of the Company’s common stock issued in any future
offering could cause a decline in the price of the Company’s stock.
The
exercise of outstanding options and warrants and warrants that are
anticipated to be issued to ERP2 Holding, LLC, would result in dilution of
the Company’s stock.
As
of
January 15, 2008, the Company had outstanding stock options to purchase
approximately 5,755,250 shares of common stock and warrants to purchase
approximately 19,877,823 shares of common stock including a warrant to purchase
17,175,971 shares of common stock at a per share exercise price of $0.08
issued
to ERP2 Holdings, LLC ("ERP2"). If such options and warrants
are exercised for all or a substantial number of the shares of common stock
issuable thereunder, shareholders could suffer significant
dilution.
The
Company is party to a term sheet with ERP2, which provides, among other
things,
for the extension to the Company by ERP2 of a $1,500,000 loan in two
tranches: (a) $300,000 upon delivery of definitive transaction
documents pursuant to the term sheet and (b) $1,200,000 upon completion
of all
actions required to be completed by the Company in order to effectuate
a
1000-to-1 reverse split of the Company’s common stock and the deregistration of
common stock under the Securities Exchange Act of 1934. The term
sheet provides that, upon disbursement of such $1,200,000 tranche, the
Company
will issue to ERP2 warrants with a per share exercise price of $0.08 for
the
purchase of the number of shares of common stock equal to the greater of
(i)
26,735,508 shares of common stock and (ii) 20% of the fully diluted outstanding
common stock as of the date of such issuance. In the event such
warrants are issued and subsequently exercised for all or a substantial
number
of the shares of common stock issuable thereunder, shareholders could suffer
significant dilution.
The
issuance of shares of common stock to ERP2 Holdings, LLC in payment of
the
dividend that has been declared on the Series F Convertible Preferred Stock
will
result in dilution of the Company’s stock.
On
January 14, 2008, the Company declared a dividend payable to ERP2 Holdings,
LLC
(“ERP2”) in the amount of 20,827,268 shares of common stock, in satisfaction of
the entire amount of accrued and unpaid dividends (together with interest)
on
the shares of the Company’s Series F Convertible Preferred Stock held by
ERP2. Such dividend was issued in satisfaction of a condition to the
execution by ERP2 of a term sheet for a financing transaction that the
Company
and ERP2 entered into on January 14, 2008.
The
Company’s operating results are difficult to predict and fluctuate substantially
from quarter to quarter and year to year, which may increase the difficulty
of
financial planning and forecasting and may result in declines in the Company’s
stock price.
The
Company’s future operating results may vary from the Company’s past operating
results, are difficult to predict and may vary from year to year due to a number
of factors. Many of these factors are beyond the Company’s control.
These factors include:
|
·
|
the
potential delay in recognizing revenue from license transactions
due to
revenue recognition rules which the Company must follow;
|
|
·
|
the
tendency to realize a substantial amount of revenue in the last weeks,
or
even days, of each quarter due to the tendency of some of the Company’s
customers to wait until quarter or year end in the hope of obtaining
more
favorable terms;
|
|
·
|
customer
decisions to delay implementation of the Company’s products;
|
|
·
|
the
size and complexity of the Company’s license transactions;
|
|
·
|
any
seasonality of technology purchases;
|
|
·
|
demand
for the Company’s products, which can fluctuate significantly;
|
|
·
|
the
timing of new product introductions and product enhancements by both
the
Company and its competitors;
|
|
·
|
changes
in the Company’s pricing policy;
|
|
·
|
the
publication of opinions concerning us, the Company’s products or
technology by industry analysts;
|
|
·
|
changes
in foreign currency exchange rates; and
|
|
·
|
domestic
and international economic and political conditions.
|
One
or
more of these factors may cause the Company’s operating expenses to be
disproportionately high or the Company’s gross revenues to be disproportionately
low during any given period, which could cause the Company’s net revenue and
operating results to fluctuate significantly. The Company’s operating
results have fluctuated significantly in the past. You should not rely on
the Company’s annual operating results to predict its future results because of
the significant fluctuations to which the Company’s results are
subject.
As
a
result of these and other factors, operating results for any fiscal year are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful in
terms
of their relation to future performance. You should not rely upon these
comparisons as indications of future performance. It is likely that the
Company’s
future quarterly and annual operating results from time to time will not meet
the expectations of public market analysts or investors, which could cause
a
drop in the price of its common stock.
The
Company’s market is subject to rapid technological change and if the Company
fails to continually enhance its products and services in a timely manner,
its
revenue and business would be harmed.
The
Company must continue to enhance and improve the performance, functionality
and
reliability of its products and services in a timely manner. The software
industry is characterized by rapid technological change, changes in user
requirements and preferences, frequent new product and services introductions
embodying new technologies, and the emergence of new industry standards and
practices that could render the Company’s products and services obsolete.
The Company has experienced product development delays in the past, and may
experience delays in the future. The Company’s failure to continually
enhance its products and services in a timely manner would adversely impact
its
business and prospects. In the past, the Company has also discovered that
some of its customers desire additional performance and functionality not
currently offered by its products. The Company’s success will depend, in
part, on its ability to internally develop and license leading technologies
to
enhance its existing products and services, to develop new products and services
that address the increasingly sophisticated and varied needs of its customers,
and to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. The Company’s product
development efforts with respect to its eB product suite are
expected to continue to require substantial investments by the Company, and
the
Company may not have sufficient resources to make the necessary
investments. If the Company is unable to adapt its products and services
to changing market conditions, customer requirements or emerging industry
standards, it may not be able to maintain or increase its revenue and expand
its
business.
The
Company’s lack of product diversification means that any decline in price or
demand for its products and services would seriously harm its
business.
The
eB product suite and related
services have accounted for substantially all of the Company’s revenue and this
situation is expected to continue for the foreseeable future.
Consequently, a decline in the price of, or demand for, the eB product suite
or related services, or their failure to achieve broad market acceptance, would
seriously harm the Company’s business.
Significant
unauthorized use of the Company’s products would result in material loss of
potential revenues and the Company’s pursuit of protection for its intellectual
property rights could result in substantial costs to it.
The
Company’s software is licensed to customers under license agreements containing
provisions prohibiting the unauthorized use, copying and transfer of the
licensed program. Policing unauthorized use of the Company’s products is
difficult and, while the Company is unable to determine the extent to which
piracy of its software products exists, any significant piracy of its products
could materially and adversely affect the Company’s business, results of
operations and financial condition. In addition, the laws of some foreign
countries do not protect the Company’s proprietary rights to as great an extent
as do the laws of the United States and the Company’s means of protecting its
proprietary rights may not be adequate.
The
Company relies on third party software products incorporated in its
products. Any loss of use to such third party software could result in
delays in the Company’s product shipments.
The
Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company’s products to perform key functions. There can be no
assurances that the developers of such software will remain in business, that
they will continue to support their products, that their products will otherwise
continue to be available to the Company on commercially reasonable terms or
that
their products are free from bugs or defects. The loss of or inability to
maintain any of these software licenses could result in delays or reductions
in
product shipments until equivalent software can be developed, identified,
licensed and integrated, which could adversely affect the Company’s business,
operating results and financial condition.
If
third parties claim that the Company infringes on their patents, trademarks,
or
other intellectual property rights, it may result in costly litigation or
require the Company to make royalty payments.
The
Company is not aware that any of its software products infringe the proprietary
rights of third parties. There can be no assurance, however, that third
parties will not claim infringement by the Company with respect to its current
or future products. The Company expects that software product developers
will increasingly be subject to infringement claims. Any such claims, with
or without merit, could be time-consuming, result in costly litigation, cause
product shipment delays, consume significant management time or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable
to
the Company or at all, which could have a material adverse effect on the
Company’s business, results of operations and financial condition.
The
Company may face product liability claims from its customers.
The
Company’s license agreements with its customers usually contain provisions
designed to limit its exposure to potential product liability claims. It
is possible, however, that the limitation of liability provisions contained
in
the Company’s license agreements may not be effective under the laws of some
jurisdictions. A successful product liability claim brought against the
Company could result in payment by the Company of substantial damages, which
would harm its business, operating results and financial condition and cause
the
price of its common stock to fall.
If
the Company loses key personnel, or is unable to attract and retain additional
key personnel, the Company may not be able to successfully grow and manage
its
business.
The
Company believes that its future success will depend upon its ability to attract
and retain its key technical and management personnel. These employees are
not subject to employment contracts. The Company may not be successful in
retaining its key employees in the future or in attracting and assimilating
replacement or additional key personnel. Any failure in retaining and
attracting management personnel may impair its ability to rapidly grow and
manage its business.
The
Company faces intense competition from several competitors and may be unable
to
compete successfully.
The
market for the Company’s products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company currently encounters
competition from a number of public and private companies, including Electronic
Document Management System/Enterprise Content Management vendors such as EMC
(Documentum product), IBM (FileNet products) , OpenText, and Sword; Enterprise
Asset Management vendors such as Indus, Computer Aided Design Vendors (CAD)
/
Product Lifecycle Management (PLM) vendor such as PTC, Siemens (UGS product),
Matrix, Autotrol and Intergraph. Many of these direct competitors
have significantly greater financial, technical, marketing and other resources
than the Company. The Company also expects that direct competition will
increase as a result of recent consolidation in the software industry.
The
Company also faces indirect competition from systems integrators and VARs.
The
Company relies on a number of systems consulting and systems integration firms
for implementation and other customer support services, as well as for
recommendation of its products to potential purchasers. Although the
Company seeks to maintain close relationships with these service providers,
many
of these third parties have similar, and often more established, relationships
with the Company’s principal competitors. If the Company were unable to
develop and retain effective, long-term relationships with these third parties,
the Company’s competitive position would be materially and adversely
affected. Further, these third parties may market software products in
competition with the Company in the future and may otherwise reduce or
discontinue their relationship with, or support of, the Company and its
products.
In
addition, database vendors, such as Oracle, IBM and Microsoft are potential
competitors in the future if they acquire competitive technology or otherwise
expand their current product offerings. Like the Company’s current
competitors, these companies have longer operating histories, significantly
greater financial, technical, marketing and other resources and name recognition
and a larger installed base of customers than the Company. Several of
these companies, including Oracle, Microsoft, IBM and others, have
well-established relationships with the Company’s current and potential
customers and strategic partners, as well as extensive resources and knowledge
of the enterprise software industry that may enable them to offer a
single-vendor solution more easily than the Company can. In addition, the
Company’s competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company can. If the Company cannot respond to its competitors adequately
and in a timely manner, then it may be required to reduce prices for its
products and could suffer reduced gross margins and loss of market share, any
of
which could harm its business, prospects, financial condition and operating
results, causing the price of its common stock to decline. In addition,
the Company’s past financial losses and customer uncertainty regarding the
Company’s financial condition are likely to have a material adverse effect on
the Company’s ability to sell its products in the future against competitors.
The
Company’s common stock is deemed to be “penny stock,” which may make it more
difficult for investors to sell their shares due to suitability
requirements.
The
Company’s common stock is deemed to be “penny stock” as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of
1934. Consequently,
broker/dealers dealing in the Company’s common stock are subject to
certain requirements. Such requirements may reduce the potential
market for the Company’s common stock by reducing the number of potential
investors. This may make it more difficult for investors in the Company’s
common stock to sell shares
to
third parties or to otherwise dispose of them. This could cause the
Company’s stock price to decline. Penny stock is stock:
|
·
|
With
a price of less than $5.00 per share;
|
|
·
|
That
is not traded on a “recognized” national exchange;
|
|
·
|
Whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ
listed stock must still have a price of not less than $5.00 per share);
or
|
|
·
|
In
issuers with net tangible assets less than or equal to $2.0 million
(if the issuer has been in continuous operation for at least three
years)
or $5.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
|
Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stock. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor.
The
Company’s common stock trades sporadically; the market price of the Company’s
common stock may be volatile.
The
Company’s common stock currently trades sporadically on the OTC Bulletin
Board. The market for the Company’s common stock may continue to be an
inactive market, and the market price of the Company’s common stock may
experience significant volatility. The Company’s quarterly results,
failure to meet analysts’ expectations, announcements by the Company or its
competitors regarding acquisitions or dispositions, loss of existing customers,
new industry standards or technology, changes in general conditions in the
economy, and general market conditions could cause the market price of the
common stock to fluctuate substantially. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the trading prices of equity securities of many technology
companies. These price and volume fluctuations often have been unrelated
to the operating performance of the affected companies.
The
Company is subject to significant foreign currency fluctuations which may have
a
material adverse effect on the Company’s business and financial
results.
Changes
in foreign currency rates, the condition of local economies, and the general
volatility of software markets may result in a higher or lower proportion of
foreign revenues in the future. Although the Company’s operating and pricing
strategies take into account changes in exchange rates over time, future
fluctuations in the value of foreign currencies may have a material adverse
effect on the Company’s business, operating results and financial
condition.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Company’s headquarters are located in San Diego, California. The Company leased
12,192 square feet of a 40,000 square foot building in San Diego through June
14, 2007. The original lease, which commenced September 1, 2003
and was to terminate on August 31, 2009, carried a monthly rent starting at
$18,898 in year one, increasing 3% each year to $21,908 in year
six. On June 14, 2007, the Company signed a lease addendum with our
landlord to reduce the amount of office space in our principal offices from
12,192 square feet to 6,996 square feet. The amended lease commenced
on July 1, 2007 and terminates on June 30, 2012 and carries a monthly rent
starting at $13,642, increasing approximately 3.5% each year to $15,640 in
year
five.
The
Company leases 3,024 square feet of a 6,137 square foot building in Surrey,
United Kingdom. The lease, which commenced on February 10, 2006 and
terminates on February 10, 2011, includes an early termination option effective
beginning February 9, 2009, provided six months notice is given. The
monthly rent, which began on August 10, 2006, is $6,663 over the lease
term.
See
Note
9 of the Notes to the Consolidated Financial Statements for further information
regarding the Company’s lease commitments.
ITEM
3. LEGAL PROCEEDINGS
The
Company is involved from time to time in litigation arising in the normal course
of business. The Company believes that any liability with respect to such
routine litigation, individually or in the aggregate, is not likely to be
material to the Company’s consolidated financial position or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company trades on the OTC Bulletin Board under the symbol “EPRS.OB” The
following table shows, for the calendar quarters indicated, the high and low
bid
prices of the Common Stock. These high and low bid prices from
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
|
|
High
|
|
|
Low
|
|
Year
Ended September 30,
2007
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.15 |
|
|
$ |
0.05 |
|
Second
Quarter
|
|
|
0.09 |
|
|
|
0.06 |
|
Third
Quarter
|
|
|
0.25 |
|
|
|
0.05 |
|
Fourth
Quarter
|
|
|
0.19 |
|
|
|
0.06 |
|
Year
Ended September 30,
2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.25 |
|
|
$ |
0.09 |
|
Second
Quarter
|
|
|
0.25 |
|
|
|
0.11 |
|
Third
Quarter
|
|
|
0.14 |
|
|
|
0.08 |
|
Fourth
Quarter
|
|
|
0.12 |
|
|
|
0.06 |
|
On
January 11, 2008, there were approximately 800 holders of record of the
Company’s Common Stock and the last sale price of the Common Stock as reported
on the OTC Bulletin Board on September 30, 2007 was $0.11 per
share.
The
Company has never paid a dividend on its Common Stock, and the current policy
of
its Board of Directors is to retain all earnings to provide funds for the
operation and expansion of the Company’s business. Consequently, the Company
does not anticipate that it will pay cash dividends on its Common Stock in
the
foreseeable future.
Equity
Compensation Plan Information
The
following table gives information about the Company’s common stock that may be
issued upon the exercise of options under all of the Company’s equity
compensation plans as of September 30, 2007. The table includes the
1996 Stock Incentive Plan and the 2007 Stock Incentive Plan.
|
|
|
|
|
|
Number
of
securities
|
|
|
Number
of
securities to be
|
|
|
|
remaining
available for
future
|
|
|
issued
upon
exercise of
|
|
Weighted-average
exercise
|
issuance
under
equity
|
|
outstanding
options,
|
price
of outstanding
options,
|
compensation
plans
(excluding
|
|
warrants
and
rights
|
warrants
and
rights
|
|
securities
reflected in column
a)
|
Plan
category
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity
compensation plans approved
by security holders
|
5,768,000
|
|
$0.24
|
|
—
|
Equity
compensation plans not
approved by security holders
|
1,300,000
|
(1)(2)
|
$0.33
|
|
—
|
Total
|
|
7,068,000
|
|
$0.25
|
|
—
|
(1) A
warrant underlying 1,000,000 of these option shares was granted in 2004 to
a
public relations firm. The exercise price under the warrant is $0.40
per share. The warrant expired unexercised on November 3,
2007.
(2) A
warrant underlying 300,000 of these option shares was granted on March 31,
2006
to a public relations firm. The exercise price under the warrant is
$0.10 per share. The warrant expires on the third anniversary of its date
of issuance.
ITEM
6. SELECTED FINANCIAL DATA
The
following table sets forth selected consolidated financial data of the Company.
The financial data for each of the years ended September 30, 2007, 2006,
2005, 2004 and 2003 have been derived from the audited Consolidated Financial
Statements.
The
data
set forth below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”.
|
|
|
|
|
Years
ended
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In
thousands except per share
data)
|
|
Consolidated
Statement of
Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$ |
3,107 |
|
|
$ |
1,775 |
|
|
$ |
737 |
|
|
$ |
3,897 |
|
|
$ |
2,053 |
|
Services
and
other
|
|
|
5,867 |
|
|
|
5,231 |
|
|
|
5,088 |
|
|
|
5,105 |
|
|
|
5,309 |
|
Total
revenues
|
|
|
8,974 |
|
|
|
7,006 |
|
|
|
5,825 |
|
|
|
9,002 |
|
|
|
7,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
169 |
|
|
|
324 |
|
|
|
206 |
|
|
|
260 |
|
|
|
690 |
|
Services
and
other
|
|
|
2,477 |
|
|
|
2,370 |
|
|
|
2,232 |
|
|
|
2,249 |
|
|
|
2,334 |
|
Total
cost of
revenues
|
|
|
2,646 |
|
|
|
2,694 |
|
|
|
2,438 |
|
|
|
2,509 |
|
|
|
3,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,328 |
|
|
|
4,312 |
|
|
|
3,387 |
|
|
|
6,493 |
|
|
|
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and
development
|
|
|
1,152 |
|
|
|
1,058 |
|
|
|
852 |
|
|
|
1,393 |
|
|
|
1,494 |
|
Marketing
and
sales
|
|
|
1,936 |
|
|
|
2,410 |
|
|
|
3,799 |
|
|
|
2,949 |
|
|
|
2,452 |
|
General
and
administrative
|
|
|
1,719 |
|
|
|
1,622 |
|
|
|
1,994 |
|
|
|
1,965 |
|
|
|
1,410 |
|
|
|
|
4,807 |
|
|
|
5,090 |
|
|
|
6,645 |
|
|
|
6,307 |
|
|
|
5,356 |
|
Income
(loss) from
operations
|
|
|
1,521 |
|
|
|
(778 |
) |
|
|
(3,258 |
) |
|
|
186 |
|
|
|
(1,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring
loss on conversion of
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
preferred
stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,499 |
) |
Interest
and other
income
|
|
|
2 |
|
|
|
4 |
|
|
|
1 |
|
|
|
13 |
|
|
|
4 |
|
Interest
and other
expense
|
|
|
(261 |
) |
|
|
(248 |
) |
|
|
(291 |
) |
|
|
(151 |
) |
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
|
1,262 |
|
|
|
(1,022 |
) |
|
|
(3,548 |
) |
|
|
48 |
|
|
|
(3,004 |
) |
Deemed
preferred
dividend
|
|
|
— |
|
|
|
(1,000 |
) |
|
|
(2,200 |
) |
|
|
— |
|
|
|
— |
|
Cumulative
preferred
dividends
|
|
|
(264 |
) |
|
|
(354 |
) |
|
|
(301 |
) |
|
|
(271 |
) |
|
|
— |
|
Net
income (loss) available to
common shareholders
|
|
$ |
998 |
|
|
$ |
(2,376 |
) |
|
$ |
(6,049 |
) |
|
$ |
(223 |
) |
|
$ |
(3,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per
share
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
Diluted
net income (loss) per
share
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
Shares
used in computing basic and
diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,324 |
|
|
|
36,875 |
|
|
|
34,941 |
|
|
|
34,016 |
|
|
|
31,100 |
|
Diluted
|
|
|
49,841 |
|
|
|
36,876 |
|
|
|
34,941 |
|
|
|
34,016 |
|
|
|
31,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended
September 30,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
deficit
|
|
$ |
(4,852 |
) |
|
$ |
(7,782 |
) |
|
$ |
(4,659 |
) |
|
$ |
(2,693 |
) |
|
$ |
(3,880 |
) |
Total
assets
|
|
|
2,062
|
|
|
|
1,723 |
|
|
|
1,645 |
|
|
|
1,430 |
|
|
|
1,230 |
|
Long-term
obligations
|
|
|
55 |
|
|
|
680 |
|
|
|
976 |
|
|
|
601 |
|
|
|
566 |
|
Shareholders’
(deficit)
equity
|
|
|
(4,348 |
) |
|
|
(7,878 |
) |
|
|
(4,960 |
) |
|
|
(3,136 |
) |
|
|
(4,141 |
) |
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The
Company develops, markets and supports eB, its integrated
suite of
collaborative document, configuration and records management software solutions.
The eB suite enables
organizations in a broad range of industries to create, capture, store, manage,
share and distribute critical business information regarding their customers,
products, assets and processes in an efficient manner. The eB suite also enables
them
to maintain complete, up-to-date information about the configuration of their
products, assets and infrastructures so that they can achieve operational
excellence and compliance with regulatory requirements. eB provides the capabilities
of an Enterprise Content Management (ECM)/Electronic Document Management (EDM)
System, and extends these capabilities by also managing the “things’ that the
content/documents relate to such as products, assets , functions, processes,
requirements, projects, organizations, locations, work orders, etc. As a
result, eB can be used
to manage the lifecycle of physical items (e.g. products, equipment or assets),
and the requirements (e.g. functional, safety, performance, environmental,
etc.)
that govern them. It enables intelligent relationships to be defined between
these items thereby creating an interdependency model. As a result, the effects
of any change on requirements, documents and items can be determined and change
can be managed to effectively ensure information integrity. In particular, eB enables organizations
with extensive and complex physical infrastructures to efficiently identify,
classify, structure, link, and manage documents, physical items, and
requirements throughout their lifecycles and ensure that conformance between
these is maintained by means of an automated change process.
We
develop, market and support
eB, our integrated suite of collaborative document, configuration and
records management software solutions. Our revenues in the fiscal year ended
September 30, 2007 increased by 28% from the prior fiscal year primarily
due to the sale of a perpetual license to Aveva Solutions Limited for $2.0
million.
Our
revenues are derived from licenses of our software to our customers, services
that we provide under maintenance support contracts and our non-maintenance
services, consisting primarily of design studies, system implementation and
training. Of our total revenues in fiscal 2007, license revenues accounted
for 35%, maintenance services revenues accounted for 35% and non-maintenance
services represented 30%.
Many
of
our customers are located outside the United States, with foreign-originated
revenues accounting for 58% and 35% of fiscal 2007 and 2006 revenues,
respectively. Revenue in fiscal 2007 reflected a foreign currency gain of
$238,000 due to the declining value of the dollar during the year.
While
revenues increased, our cost of revenues decreased by 2% in fiscal 2007 compared
to fiscal 2006 primarily because of lower cost of sales for licenses.
Our gross profit increased from 62% to 71% of revenues in fiscal 2007 due
to the increase in high margin software sales. Operating expenses
decreased by 6% primarily as a result of decreased marketing and sales personnel
related costs during fiscal 2007.
At
September 30, 2007, our principal sources of liquidity consisted of $553,000
of
cash and cash equivalents, compared to $95,000 at September 30,
2006. The improvement in liquidity was primarily due to the $2.0
million perpetual license sale.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operation summarizes the significant factors affecting our consolidated
operating results, financial condition, liquidity and cash flow during the
three-year period ended September 30, 2007, each year therein being
referred to as fiscal 2007, fiscal 2006 and fiscal 2005. Unless otherwise
indicated, references to any year in this discussion refer to the applicable
fiscal year ended September 30. This discussion and analysis should
be read with the consolidated financial statements and financial statement
footnotes included in this Annual Report on Form 10-K.
This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements due to many factors,
including but not limited to those set forth under the headings “Risk Factors”
and “Special Note Regarding Forward-Looking Statements.”
Critical
Accounting
Policies
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. As such,
management is required to make judgments, estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The significant accounting policies which are most
critical to aid in fully understanding and evaluating reported financial results
include the following:
Revenue
Recognition
The
Company’s revenues are derived from sales of its document and configuration
management systems that are primarily composed of software and services,
including maintenance, training and consulting services, and third party
software and hardware. The Company recognizes revenue in accordance with
Statement of Position (“SOP”) 97-2 “Software Revenue
Recognition,” SOP 98-9, “Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions”, Staff Accounting Bulletin
(“SAB”) No. 101, updated by SAB’s 103 and 104 “Update of Codification of Staff
Accounting Bulletins,” and Emerging Issues Task Force No. 00-21 (“EITF 00-21”)
“Accounting for Revenue Arrangements with Multiple
Deliverables.” Revenue through the Company’s Value Added Resellers
(“VARS”) are net of any VAR discount in accordance with EITF 99-19 “Reporting
Revenue Gross as a Principal versus Net as an Agent.”
Software
license and third party product revenues are recognized upon shipment of the
product if no significant vendor obligations remain and collection is probable.
In cases where a significant vendor obligation exists, revenue recognition
is
delayed until such obligation has been satisfied. For new software products
where a historical record has not yet been demonstrated that acceptance is
perfunctory, the Company defers recognition of revenue until acceptance has
occurred. If an undelivered element of the arrangement exists under the license
arrangement, a portion of revenue is deferred based on vendor-specific objective
evidence (VSOE) of the fair value of the undelivered element until delivery
occurs. If VSOE does not exist for all undelivered elements, all revenue
is deferred until sufficient evidence exists or all elements have been
delivered. Annual maintenance revenues, which consist of ongoing support
and product updates, are recognized on a straight-line basis over the term
of
the contract. Payments received in advance of performance of the related service
for maintenance contracts are recorded as deferred revenue. Revenues from
training and consulting services are recognized when the services are performed
and adequate evidence of providing such services is available. Contract revenues
for long-term contracts or programs requiring specialized systems are recognized
using the percentage-of-completion method of accounting, primarily based on
contract labor hours incurred to date compared with total estimated labor hours
at completion. Provisions for anticipated contract losses are recognized at
the
time they become known.
Contracts
are billed based on the terms of the contract. There are no retentions in billed
contract receivables. Unbilled contract receivables relate to revenues earned
but not billed at the end of the period.
The
Company considers many factors when applying accounting principles generally
accepted in the United States of America related to revenue recognition.
These factors include, but are not limited to:
·
|
The
actual contractual terms, such as payment terms, delivery dates,
and
pricing of the various product and service elements of a contract
|
·
Availability of products to be delivered
·
Time period over which services are to be performed
·
Creditworthiness of the customer
·
The complexity of customizations to the Company’s software required by service
contracts
·
The sales channel through which the sale is made (direct, VAR, distributor,
etc.)
·
Discounts given for each element of a contract
·
Any commitments made as to installation or implementation of “go live”
dates.
Each
of
the relevant factors is analyzed to determine its impact, individually and
collectively with other factors, on the revenue to be recognized for any
particular contract with a customer. Management is required to make
judgments regarding the significance of each factor in applying the revenue
recognition standards, as well as whether or not each factor complies with
such
standards. Any misjudgment or error by management in its evaluation of the
factors and the application of the standards, especially with respect to complex
or new types of transactions, could have a material adverse effect on the
Company’s future operating results.
Software
Development Costs and Purchased Software
Software
development costs and purchased software are capitalized when technological
feasibility and marketability of the related product have been established.
Software development costs incurred solely in connection with a specific
contract are charged to cost of revenues. Capitalized software costs are
amortized on a product-by-product basis, beginning when the product is available
for general release to customers. In fiscal 2007 the Company capitalized
no internal software development costs, while in fiscal 2006, the Company
capitalized $35,000 of internal software developments costs. The
capitalized software costs relate primary to the eB version 14 product release
completed in November 2005 and is the core base product of the Company going
forward. Annual amortization expense is calculated using the greater of the
ratio of each product’s current gross revenues to the total of current and
expected gross revenues or the straight-line method over the estimated useful
life of three to five years.
Allowance
for Doubtful Accounts
The
Company sells its products directly to end-users, generally requiring a
significant up-front payment and remaining terms appropriate for the
creditworthiness of the customer. The Company also sells its products to VARs
and other software distributors generally under terms appropriate for the
creditworthiness of the VAR or distributor. The Company retains no continuing
obligations on sales to VARs. Management believes that no significant
concentrations of credit risk existed at September 30, 2007. Receivables
from customers are generally unsecured. The Company continuously monitors its
customer account balances and actively pursues collections on past due balances.
The Company maintains an allowance for doubtful accounts which is comprised
of a
general reserve based on historical collections performance plus a specific
reserve for certain known customer collections issues. If actual bad debts
are
greater than the reserves calculated based on historical trends and known
customer issues, the Company may be required to book additional bad debt expense
which could have a material adverse effect on our business, results of
operations and financial condition for the periods in which such additional
expense occurs.
Share-Based
Payments
In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standards No. 123 (FAS 123R), “Share-Based Payment,”
which establishes accounting for share-based awards exchanged for employee
services and requires companies to expense the estimated fair value of these
awards over the requisite employee service period. On April 14, 2005, the U.S.
Securities and Exchange Commission adopted a new rule amending the effective
dates for FAS 123R. In accordance with the new rule, the accounting provisions
of FAS 123R were effective for the Company beginning in the quarter ended
December 31, 2005.
Under
FAS
123R, share-based compensation cost is measured at the grant date, based on
the
estimated fair value of the award, and is recognized as expense over the
employee’s requisite service period. The Company has no awards with market or
performance conditions. The Company adopted the provisions of FAS 123R on
October 1, 2005, the first day of the Company’s fiscal year 2006, using a
modified prospective application, which provides for certain changes to the
method for valuing share-based compensation. Under the modified prospective
application, prior periods are not revised for comparative purposes. The
valuation provisions of FAS 123R apply to new awards and to awards that are
outstanding on the effective date and subsequently modified or cancelled.
Estimated compensation expense for awards outstanding at the effective date
will
be recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under FASB Statement No. 123,
“Accounting for Stock-Based Compensation” (FAS 123).
On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards.” The Company has elected to adopt the alternative transition
method provided in this FASB Staff Position for calculating the tax effects
of
share-based compensation pursuant to FAS 123R. The alternative transition method
includes a simplified method to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of
employee share-based compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of FAS 123R.
Results
of Operations
The
following table sets forth the percentage relationship to total revenues of
items included in the Company’s Consolidated Statements of Operations for the
years ended September 30, 2007, 2006 and 2005.
|
|
Years
ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
35
|
% |
|
|
25
|
% |
|
|
13
|
% |
Services
and
other
|
|
|
65
|
% |
|
|
75
|
% |
|
|
87
|
% |
Total
revenues
|
|
|
100
|
% |
|
|
100
|
% |
|
|
100
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
1
|
% |
|
|
4
|
% |
|
|
4
|
% |
Services
and
other
|
|
|
28
|
% |
|
|
34
|
% |
|
|
38
|
% |
|
|
|
29
|
% |
|
|
38
|
% |
|
|
42
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
71
|
% |
|
|
62
|
% |
|
|
58
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and
development
|
|
|
13
|
% |
|
|
15
|
% |
|
|
15
|
% |
Marketing
and
sales
|
|
|
22
|
% |
|
|
35
|
% |
|
|
65
|
% |
General
and
administrative
|
|
|
19
|
% |
|
|
23
|
% |
|
|
34
|
% |
|
|
|
54
|
% |
|
|
73
|
% |
|
|
114
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from
operations
|
|
|
17
|
% |
|
|
(11 |
)
% |
|
|
(56 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest
expense
|
|
|
(3 |
)
% |
|
|
(4 |
)
% |
|
|
(5 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
|
14
|
% |
|
|
(15 |
)
% |
|
|
(61 |
)
% |
Deemed
preferred
dividend
|
|
|
— |
|
|
|
(14 |
)
% |
|
|
(38 |
)
% |
Cumulative
preferred
dividends
|
|
|
(3 |
)
% |
|
|
(5 |
)
% |
|
|
(5 |
)
% |
Net
income (loss) available to
common shareholders
|
|
|
11
|
% |
|
|
(34 |
)
% |
|
|
(104 |
)
% |
Revenues
Licenses
Revenues
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
License
revenues
|
|
$ |
3,107 |
|
|
|
75
|
% |
|
$ |
1,775 |
|
|
|
141
|
% |
|
$ |
737 |
|
Percentage
of total
revenues
|
|
|
35
|
% |
|
|
|
|
|
|
25
|
% |
|
|
|
|
|
|
13
|
% |
License
revenues increased by $1.3 million, or 75%, to $3.1 million in fiscal 2007
from
$1.8 million in fiscal 2006. The increase is due primarily to new
customer Aveva Solutions Limited purchasing a perpetual license for $2,000,000,
offset by lower license sales to other new and existing customers.
License
revenues increased by $1.0 million, or 141% to $1.8 million in fiscal 2006
from
$737,000 in fiscal 2005. The increase was due to (1) new customers
ordering software systems such as Florida Power and Light for $269,000 and
Defense Threat Reduction Agency (a part of the United States Defense Department)
for $140,000 and (2) current customers expanding their systems such as
Constellation Energy Group who placed sales for $282,000 and JEA for
$275,000
The
Company was successful in capitalizing on its pipeline of sales opportunities
in
2007. While the Company’s pipeline of sales
opportunities
continues to be strong for 2008, the Company’s license revenues can fluctuate
from quarter to quarter, based on the timing of customers orders due to the
long
sales cycle and changes in customers’ internal plans for the rollout of software
licenses. The length of time it takes to establish new customer
relationships typically ranges from 6 to 12 months and as such the timing of
sales can fluctuate significantly.
A
small
number of customers has typically accounted for a large percentage of the
Company’s total annual revenues. Aveva Solutions Limited accounted for 25% and
Network Rail accounted for 12% of fiscal 2007 revenue. Constellation
Energy Group accounted for 13% of 2006 revenue, while Network Rail accounted
for
16% of fiscal 2005 revenue. The Company’s reliance on relatively few customers
could have a material adverse effect on the results of its operations on a
quarterly basis. In fiscal 2007 revenue through resellers totaled
$485,000 or 5% of total revenue, versus $796,000 or 11% in fiscal 2006 and
$507,000 or 9% in fiscal 2005.
Services
and
Other Revenues
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Services
and other
revenues
|
|
$ |
5,867 |
|
|
|
12
|
% |
|
$ |
5,231 |
|
|
|
3
|
% |
|
$ |
5,088 |
|
Percentage
of total
revenues
|
|
|
65
|
% |
|
|
|
|
|
|
75
|
% |
|
|
|
|
|
|
87
|
% |
Services
and other revenues are comprised of maintenance and non-maintenance
services. Non-maintenance services typically relate to design studies,
implementation of systems and training which vary with the level of license
revenues while maintenance revenue is primarily dependent on customers renewing
their annual maintenance support contracts.
Services
and other revenues increased $636,000 or 12% from $5.2 million in fiscal 2006
to
$5.9 million in fiscal 2007. Non-maintenance services increased
$502,000 while maintenance revenue increased $134,000 in fiscal
2007. Non-maintenance services increased as customers continued
to utilize the Company’s resources to assist in implementing their systems in
new business areas within their organization and upgrading from older legacy
systems to the current versions of eB. Maintenance
increases were due primarily to a full year of maintenance revenue for software
purchased late in fiscal 2006 including a new customer, Defense Threat Reduction
Agency, and expansions from two existing customers, JEA and Trinity
Industries.
Service
and other revenues had a slight increase of $143,000 or 3% from fiscal 2005
to
fiscal 2006. Non-maintenance services increased $134,000 while
maintenance revenue increased $9,000. Non-maintenance services
increased slightly as customers continued to utilize the Company’s resources to
assist in implementing their systems in new business areas within their company
and upgrading from older legacy systems to the current versions of eB.
We
anticipate that service and other revenue will fluctuate primarily due to
fluctuations in sales to new customers, which require more services that
typically include a business process study, integration with other business
systems and training. In addition, we expect that service and other
revenues will continue to fluctuate from quarter to quarter based on the timing
of customer orders.
Cost
of Revenues
Cost
of Licenses
Revenues
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Cost
of License
Revenues
|
|
$ |
169 |
|
|
|
(48 |
)
% |
|
$ |
324 |
|
|
|
57
|
% |
|
$ |
206 |
|
Percentage
of total
revenues
|
|
|
1
|
% |
|
|
|
|
|
|
4
|
% |
|
|
|
|
|
|
4
|
% |
Cost
of
licenses revenues consists of costs associated with reselling third-party
products and amortization of internal software development costs.
Cost
of
license revenue decreased $155,000 or 48% in fiscal 2007 compared to fiscal
2006
primarily due to fewer third party software orders. The gross profit
percentage of license revenue increased to 95% in fiscal 2007 from 82% in fiscal
2006 due primarily to the large perpetual license sale to one customer, Aveva
Solutions Limited, during fiscal 2007.
Cost
of
license revenues increased $118,000 or 57% in fiscal 2006 compared to fiscal
2005 primarily due to amortization of software development costs, which totaled
$87,000, associated with the Version 14 eB upgrade project
completed
in November 2005 and an increase in third party software costs of $31,000 for
one customer. However, the gross profit percentage of license
revenue
increased to 82% in fiscal 2006 from 72% in fiscal 2005 primarily due to the
substantial increase in the sales of the Company’s proprietary software during
fiscal 2006 while the related costs were limited to the amortization of the
Company’s capitalized software development costs.
We
expect
the cost of license revenues to fluctuate based on customer requirements for
third-party software products since these costs have the largest impact on
cost
of license revenues. We expect the gross profit percentage from license
revenues to improve as sales of the Company’s proprietary software become a
greater portion of total license revenues in future years.
Cost
of Services and Other
Revenues
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Cost
of services and other
revenues
|
|
$ |
2,477 |
|
|
|
5
|
% |
|
$ |
2,370 |
|
|
|
6
|
% |
|
$ |
2,232 |
|
Percentage
of total
revenues
|
|
|
28
|
% |
|
|
|
|
|
|
34
|
% |
|
|
|
|
|
|
38
|
% |
Cost
of
services and other revenues consists primarily of personnel-related costs in
providing consulting services, training to customers and support. It also
includes costs associated with reselling third-party hardware and maintenance,
which includes telephone support costs.
Cost
of
services and other revenues increased by $107,000 or 5% in fiscal 2007 compared
to fiscal year 2006 due to higher personnel related costs primarily related
to
bonuses. The gross profit percentage on services and other revenues
increased to 58% in fiscal 2007 from 55% in fiscal 2006 primarily due to the
increased services and other revenues to both new and existing customers
resulting in a higher utilization of service engineers applied to service
contracts.
Cost
of
services and other revenues increased by $138,000 or 6% primarily due to third
party scanning services provided to one customer during fiscal
2006. The gross profit percentage on services and other revenue
decreased slightly to 55% in fiscal 2006 from 56% in fiscal 2005.
We
expect
the cost of services and other revenues to fluctuate in absolute dollar amounts
and as a percentage of total revenues as the related service revenue
fluctuates.
Operating
Expenses
Research
and
Development
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Research
and
development expenses
|
|
$ |
1,152 |
|
|
|
9
|
% |
|
$ |
1,058 |
|
|
|
24
|
% |
|
$ |
852 |
|
Percentage
of total
revenue
|
|
|
13
|
% |
|
|
|
|
|
|
15
|
% |
|
|
|
|
|
|
15
|
% |
Research
and development expenses consist of salaries and benefits for software
developers as well as an allocation of corporate expenses, calculated on the
basis of headcount, such as corporate insurance, facilities, telephone and
other.
In
fiscal
2007, research and development expenses increased $94,000, or 9% compared to
fiscal 2006 primarily due to higher consulting fees of $53,000 in connection
with services to integrate our eB product with the Microsoft Office SharePoint
server environment. In addition, in fiscal 2006 there was a total of
$35,000 of labor cost capitalized related to an updated version of our eB
version 14 software product, while there was no labor costs capitalized in
fiscal 2007.
In
fiscal
2006, research and development expenses increased $206,000, or 24% compared
to
fiscal 2005. In fiscal 2005 capitalization costs relating to the
Version 14 eB software
upgrade totaled $514,000, while only $35,000 was capitalized in fiscal 2006
since the project was completed in November 2005, resulting in research and
development costs of $479,000 being expensed. Excluding the effect
from the capitalized software, research and development costs decreased $273,000
from fiscal 2005 to fiscal 2006 as a result of lower personnel related costs
due
to a reduction in personnel in September 2005.
We
believe that continued investment in research and development is a critical
factor in maintaining our competitive position and we expect research and
development costs to increase in absolute dollar amounts but remain relatively
unchanged as a percentage of total revenue.
Marketing
and
Sales
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Marketing
and sales
expenses
|
|
$ |
1,936 |
|
|
|
(20 |
)
% |
|
$ |
2,410 |
|
|
|
(37 |
)
% |
|
$ |
3,799 |
|
Percentage
of total
revenue
|
|
|
22
|
% |
|
|
|
|
|
|
35
|
% |
|
|
|
|
|
|
65
|
% |
Marketing
and sales expenses consist of salaries, cost of benefits, sales commissions
and
other expenses related to the direct sales force, as well as allocation of
overall corporate expenses, calculated on the basis of headcount, related to
items such as corporate insurance, facilities, telephone and other.
In
fiscal
2007, marketing and sales expenses decreased $474,000, or 20% compared to fiscal
2006 due to lower personnel related costs of $591,000 with the consolidation
of
certain functions within the department. These lower costs were
offset by higher professional fees of $100,000 related to the closing of the
Aveva Solutions Limited license sale and tradeshow costs of $17,000 for
marketing support associated with the Company’s name change and goal to improve
our communications and positioning in the marketplace.
In
fiscal
2006, marketing and sales expenses decreased $1,389,000 or 37% when compared
to
fiscal 2005. This decrease is primarily due to a reduction in
personnel in September 2005 resulting in $756,000 lower personnel related costs
and reduced costs of $589,000 for advertising, consulting, and
tradeshows.
We
expect
marketing and sales expense to increase in absolute dollar.
General
and
Administrative
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
General
and administrative
expenses
|
|
$ |
1,719 |
|
|
|
6
|
% |
|
$ |
1,622 |
|
|
|
(19 |
)
% |
|
$ |
1,994 |
|
Percentage
of total
revenue
|
|
|
19
|
% |
|
|
|
|
|
|
23
|
% |
|
|
|
|
|
|
34
|
% |
General
and administrative expenses consist primarily of personnel cost for finance,
information technology, human resources and general management, as well as
outside professional services and an allocation of overall corporate expenses,
calculated on the basis of headcount, such as corporate insurance, facilities,
telephone and other.
In
fiscal
2007, general and administrative expenses increased by $97,000, or 6% when
compared to fiscal 2006. This increase was due to higher legal and
professional fees of $180,000 related to the Company’s public filings and the
license sale to Aveva Solutions Limited, offset by lower personnel related
expenses primarily related to FAS 123R expenses.
In
fiscal
2006, general and administrative expenses decreased by $372,000 or 19% when
compared to fiscal 2005. A significant portion of the decrease was
attributable to restructuring costs of $239,000 incurred in 2005 that was
partially offset by a $77,000 reduction in the Company’s allowance for
uncollectible accounts. The balance of the decrease was due to a
reduction in legal and professional fees of $333,000 that was offset by the
increase of compensation expense of $123,000 related to the adoption of FAS
123R.
We
expect
that general and administrative expenses will increase slightly in absolute
dollars in comparison to the prior year but decrease as a percentage of total
revenue in fiscal 2008.
Interest
& Other Income
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Interest
&
other
income
|
|
$ |
2 |
|
|
|
(50 |
)
% |
|
$ |
4 |
|
|
|
300
|
% |
|
$ |
1 |
|
Percentage
of total
revenue
|
|
|
-
|
% |
|
|
|
|
|
|
-
|
% |
|
|
|
|
|
|
-
|
% |
Interest
and other income consists primarily of interest earned on our cash and cash
equivalents, gains on revaluation of derivatives or foreign translation
adjustments, and gains on the sale of assets. In fiscal 2007,
interest and other income decreased to $2,000 from $4,000 primarily due to
a
decrease in the foreign translation exchange and offset by an increase in
interest earnings.
In
fiscal
2006, interest and other income increased to $4,000 from $1,000, a net increase
of $3,000, primarily from a foreign translation exchange
difference.
Interest
& Other Expense
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Interest
&
other
expense
|
|
$ |
261 |
|
|
|
5
|
% |
|
$ |
248 |
|
|
|
(15 |
)
% |
|
$ |
291 |
|
Percentage
of total
revenue
|
|
|
(3 |
)
% |
|
|
|
|
|
|
(4 |
)
% |
|
|
|
|
|
|
(5 |
)
% |
Interest
and other expense increased $13,000 from fiscal 2006 to 2007. This increase
was
primarily due to loss on sales of assets of $5,000, interest expense of $4,000,
and loss on foreign translation of $4,000.
Interest
and other expense decreased $43,000 from fiscal 2005 to 2006. Other
expense in fiscal 2005 included an expense of $146,000 relating to extending
the
expiration date of certain warrants. The expense was determined based on the
value calculated using the Black-Scholes method. Excluding the
expense associated with extending the life of the warrants, interest expense
increased $103,000 from fiscal 2005 to 2006 primarily due to interest on the
higher balance of dividends and notes payable to Spescom Ltd. and Spescom Ltd.
UK.
Deemed
Preferred Dividends
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Deemed
preferred
dividends
|
|
$ |
- |
|
|
|
(100 |
)
% |
|
$ |
1,000 |
|
|
|
(55 |
)
% |
|
$ |
2,200 |
|
Percentage
of total
revenue
|
|
|
-
|
% |
|
|
|
|
|
|
(14 |
)
% |
|
|
|
|
|
|
(38 |
)
% |
In
October 2005 the Company completed a financing arrangement whereby the Company
issued 1,950 shares of our Series H Preferred Stock along with 925,926
common stock warrants for gross proceeds of $500,000 and the exchange and
cancellation of 1,450 shares of Series G Convertible Preferred Stock. In
accordance with EITF 00-27 “Application of issue No 98-5 to Certain Convertible
Instruments,” the Company calculated using the Black–Scholes method the
intrinsic value of the convertible instruments issued and determined that there
was a deemed preferred dividend equal to the gross proceeds received of
$500,000.
In
March
2006 the Company completed a further round of financing whereby the Company
issued 2,450 shares of Series I Preferred Stock along with 925,926 common
stock warrants for gross proceeds of $500,000 and the exchange and cancellation
of 1,950 shares of Series H Convertible Preferred Stock. In accordance with
EITF 00-27 “Application of issue No 98-5 to Certain Convertible Instruments,”
the Company calculated using the Black–Scholes method the intrinsic value of the
convertible instruments issued and determined that there was a deemed preferred
dividend equal to the gross proceeds received of $500,000.
In
fiscal
2005 the Company also had a deemed dividend in connection with a financing
arrangement whereby the Company issued 2,200 shares of Series G Convertible
Preferred Stock along with 2,750,000 common stock warrants for gross proceeds
of
$2,200,000. The Company calculated using the Black–Scholes method the intrinsic
value of the convertible instruments issued and determined that there was a
deemed preferred dividend equal to the gross proceeds received of
$2,200,000.
Cumulative Preferred
Dividends
(in
thousands)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
Cumulative
preferred
dividends
|
|
$ |
264 |
|
|
|
(25 |
)
% |
|
$ |
354 |
|
|
|
18
|
% |
|
$ |
301 |
|
Percentage
of total
revenue
|
|
|
(3 |
)
% |
|
|
|
|
|
|
(5 |
)
% |
|
|
|
|
|
|
(5 |
)
% |
The
outstanding Series F Convertible Preferred Stock was entitled to receive
dividends of 5% of the stated value of $1,000 per share per annum, payable
on a
quarterly basis in cash or common stock (valued on the basis of the average
per
share market value on the 30 trading days immediately prior to the date on
which
such dividend is declared by the Board of Directors). Cumulative preferred
dividends earned in fiscal 2007 and fiscal 2006 were $264,000 and $265,000,
respectively. Unpaid dividends accrue interest at the rate of 8% per
annum. As of September 30, 2007, unpaid dividends and accrued interest
amounted to $1,058,000 and$175,000,
respectively. As of September 30, 2006, unpaid dividends and accrued interest
amounted to $794,000 and $93,000, respectively.
The
outstanding Series I Convertible Preferred Stock was entitled to receive
dividends of 6.75% of the stated value of $1,000 per share per annum, payable
on
a monthly basis in cash or common stock accrued through the July 10, 2006
effective date of the registration statement filed by the Company that included
the common stock issuable under the Series I Convertible Preferred Stock
(“Series I Preferred Stock”). Cumulative preferred dividends earned
for fiscal 2006 were $55,000 and no cumulative preferred dividends were earned
for fiscal 2007. Unpaid dividends did not accrue interest. As of September
30,
2007, unpaid dividends amounted to $55,000. On October 22, 2007 a total of
358,809 shares of the Company’s common stock were issued based on a $0.15 fair
market price in payment of the Series I Convertible Preferred Stock dividends
owed.
Prior
to
the exchange on March 10, 2006 of all the outstanding Series H Convertible
Preferred Stock (“Series H Preferred Stock”) for Series I Preferred Stock, the
Series H Preferred Stock was entitled to receive dividends of 6.75% of the
stated value of $1,000 per share per annum, payable monthly in arrears on the
last day of each month based on the number of shares of Series H Preferred
Stock
outstanding as of the first day of each such month. For fiscal year
2006 dividends on the Series H Preferred Stock totaled $44,000 and there was
no
Series H Preferred Stock outstanding for the same periods in the prior
year. A total of 325,966 shares of common stock were issued on March
31, 2006 based on a $0.13 per share fair market price in payment of Series
H
Preferred Stock dividends due as of March 10, 2006, when the Series H Preferred
Stock was exchanged for Series I Preferred Stock.
The
outstanding Series G Convertible Preferred Stock (the “Series G Preferred
Stock”) was entitled to receive dividends of 5% of the stated value of $1,000
per share per annum, payable monthly in arrears on the last day of each month
based on the number of shares of Series G Preferred Stock outstanding as of
the
first day of each such month until the common shares under the Series G
Preferred Stock was registered. Prior to the registration statement being
declared effective in March 2005 by the Securities & Exchange Commission,
the Company issued 82,050 shares of common stock with a value of $37,000 as
a
dividend on the Series G Preferred Stock. In connection with the Series G
Preferred Stock financing in November 2004, the Company recorded a beneficial
conversion of $2,200,000 as a preferred deemed dividend, as discussed
above.
Liquidity
and Capital Resources
At
September 30, 2007, our principal sources of liquidity consisted of $553,000
of
cash and cash equivalents compared to $95,000 at September 30, 2006. During
fiscal 2007, we received payment of $2,000,000 relating to a large license
and
development fee sale in October 2006. Our liquidity could be negatively impacted
by a decrease in demand for our products, which are subject to rapid
technological changes, reductions in capital expenditures by our customers
and
intense competition, among other factors.
In
past
years, the Company has received loans from Spescom Ltd. to meet its
obligations. The outstanding balance of its demand notes owed to Spescom
Ltd. as of September 30, 2007 was $676,000 as compared to $680,000 at September
30, 2006. On October 10, 2007 the notes along with all of the
Company’s common stock and Series F Preferred Stock held by Spescom Ltd. were
sold to ERP2 Holdings, LLC (“ERP2”).
On
January 14, 2008, the Company entered into a term sheet with ERP2 that provides,
among other things, for the concurrent consummation (the “ERP2 Closing”) of the
following transactions: (i) the extension of the maturity date of the existing
demand notes to the date that is two years from the date of the ERP2 Closing;
(ii) the agreement of ERP2 not to call such demand notes following an event
of
default, prior to September 30, 2008; and (iii) the issuance of additional
notes
to ERP2 in the aggregate principal amount of $1,500,000 with a maturity date
two
years from the date of the ERP2 Closing Date. Disbursement of
$300,000 of such aggregate principal amount is subject to delivery at the
ERP2
Closing of definitive transaction documents pursuant to the term
sheet. Disbursement of the remaining $1,200,000 of such amount is
subject to completion of all actions required to be completed by the Company
in
order to effectuate a 1000-to-1 reverse split of the Company’s common stock and
the deregistration of the Company’s common stock under the Securities Exchange
Act of 1934. Any failure of the Company to consummate such actions by
April 30, 2008 will constitute an event of default under the extended demand
notes and under the additional notes contemplated by the term
sheet. Additional information regarding the term sheet entered into
between the Company and ERP2 is provided under Note 13 (“Subsequent Events”) to
the Company’s consolidated financial statements.
At
September 30, 2006, the Company had a payable to Spescom Ltd. of $534,000.
This
amount including interest was paid in full as of January 2007 with funds
received from the large license and development fee sale in October
2006.
Cash
provided from operating activities was $567,000 for fiscal 2007 due to the
income the Company generated in the fiscal year. Net income was
adjusted for non-cash activities of $575,000 comprised primarily of $179,000
in
depreciation and amortization, $114,000 for FAS 123R period charge for employee
stock options, $227,000 in unpaid interest on notes payable to Spescom Ltd.,
and
$55,000 in common stock options issued to a consultant for
services. On an operating basis the Company also had a $231,000
decrease in deferred revenue due primarily to one customer’s prepayment in 2005
of maintenance for three years.
Cash
used
in operating activities was $773,000 for fiscal 2006. The $773,000
use of cash in operating activities was due to the loss the Company incurred
in
fiscal 2006. The operating loss was adjusted for non-cash activities
of $656,000 comprised primarily of $167,000 in depreciation and amortization,
$196,000 for FAS 123R period charge for employee stock options, and $253,000
in
unpaid interest on notes payable to Spescom Ltd., and on an operating basis
the
Company also had a $346,000 decrease in deferred revenue due to one customer’s
prepayment in 2005 of maintenance for three years.
Cash
used
in investing activities was $83,000 for fiscal 2007. In fiscal 2007
the Company purchased $152,000 of property and equipment, of which $69,000
was
financed through a new capital lease, in connection with the renovation of
it
corporate headquarters in San Diego, California.
Cash
used
in investing activities was $78,000 for fiscal 2006. In fiscal 2006
the Company capitalized $35,000 in software development costs associated with
its release of its eB
product with a new architecture. In fiscal 2006 the Company purchased $43,000
of
property and equipment in connection with the move into a new office facility
in
the United Kingdom.
In
fiscal
2007 cash used by financing activities was $33,000 primarily relating to
payments of capital lease obligations. In fiscal 2006 cash provided
by financing totaled $676,000 the result of $716,000 through two private
placements less $40,000 in payments of capital lease obligations. The
private placements were in connection with the issuance of the Series H and
I Convertible Preferred Stock.
The
Company believes its capital requirements will continue to vary greatly from
quarter to quarter, depending on, among other things, capital expenditures,
fluctuations in its operating results, financing activities, and investments
and
third party products and receivables management. The Company’s future
liquidity will depend on financing from ERP2 and its ability to generate new
system sales of its eB
product suite in the near term, which cannot be assured. Management
believes that the Company’s current cash and receivables and cash that may be
generated from operations and received from ERP2 pursuant to the
above-referenced term sheet, will be sufficient to meet its short-term needs
for
working capital for at least the next year. However, the Company may not
be able to obtain sufficient orders to enable the Company to continue on a
cash
flow break-even level, which would be necessary to continue operations in the
absence of further financing. Future equity financings, if available to
the Company, would be dilutive to the existing holders of the Company’s common
stock. Future debt financings, if available to the Company, would likely
involve restrictive covenants.
Net
Operating Loss Tax Carryforwards
As
of
September 30, 2007, the Company had a net operating loss carryforward
(“NOL”) for federal income tax purposes of $31,442,000, which expires over the
years 2008 through 2025. The Company also had a NOL carryforward for state
income tax purposes of $4,833,000, which expires over the years 2008 through
2013. In addition, the Company generated but has not used research and
investment tax credits for federal income tax purposes of approximately
$274,000, which will substantially expire in the years 2008 through 2012. Under
the Internal Revenue Code of 1986, as amended (the “Code”), the Company
generally would be entitled to reduce its future Federal income tax liabilities
by carrying unused NOL forward for a period of 20 years to offset future
taxable income earned, and by carrying unused tax credits forward for a period
of 20 years to offset future income taxes. As a result of the Spescom Ltd’s
sales of its equity interests in the Company to ERP2 Holdings, LLC on October
10, 2007 an ownership change occurred. The Company’s ability to utilize the
consolidated NOL in future years will be limited pursuant to Code
Section 382. The annual limitation is estimated to be approximately
$550,000.
Off-Balance
Sheet
Arrangements
At
September 30, 2007 and 2006, the Company did not have any relationships
with unconsolidated entities or financial partnerships, including entities
often
referred to as structured finance or special purpose entities that would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. Therefore, we are not
materially exposed to any financing, liquidity, market or credit risk that
could
arise if the Company were engaged in such relationships.
Foreign
Currency
The
Company’s geographic markets are primarily in the United States and Europe, with
some sales in other parts of the world. In fiscal 2007, revenues recorded in
the
United States were 42% of total revenue and revenues from Europe and other
locations were 58% of total revenue. In fiscal 2006, revenues
recorded in the United States were 65% of total revenue and revenues from Europe
and other locations were 35% of total revenue. For fiscal 2005,
revenues recorded in the United States were 54% of total revenues, and revenues
from Europe and other locations were 46% of total revenues.
Revenues
from our United Kingdom subsidiary can fluctuate from quarter to quarter based
on the timing of customer orders. Revenue in fiscal 2007 and
fiscal 2006 were improved by foreign currency gains of $238,000 and $10,000,
respectively, in each case due to a weakened dollar value compared to the pound
sterling. Changes in foreign currency rates, the condition of local
economies, and the general volatility of software markets may result in a higher
or lower proportion of foreign revenues in the future. Although the Company’s
operating and pricing strategies take into account changes in exchange rates
over time, future fluctuations in the value of foreign currencies may have
a
material adverse effect on the Company’s business, operating results and
financial condition.
Inflation
The
Company believes that inflation has not had a material effect on its operations
to date. Although the Company enters into fixed-price contracts, management
does
not believe that inflation will have an adverse material impact on its
operations for the foreseeable future, as the Company takes into account
expected inflation in its contract proposals and is generally able to project
its costs based on forecasted contract requirements.
Contractual
Obligations and
Commercial Commitments
The
following summarizes our contractual obligations and other commitments at
September 30, 2007, and the effect such obligations could have on our
liquidity and cash flow in future periods:
|
|
Amount
of Commitment Expiring by
Period
|
|
|
|
Total
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than
|
|
|
|
1-3 |
|
|
|
3-5 |
|
|
Over
5
|
|
|
|
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
and Accounts Payable
to Spescom Ltd.
|
|
$ |
676,000 |
|
|
$ |
676,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Lease
commitments – Operating
Leases
|
|
|
1,132,000 |
|
|
|
253,000 |
|
|
$ |
521,000 |
|
|
$ |
358,000 |
|
|
|
— |
|
Lease
commitments – Capital
Leases
|
|
|
110,000 |
|
|
|
40,000 |
|
|
|
37,000 |
|
|
|
33,000 |
|
|
|
— |
|
Total
|
|
$ |
1,918,000 |
|
|
$ |
969,000 |
|
|
$ |
558,000 |
|
|
$ |
391,000 |
|
|
|
— |
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
The
Company’s exposure to market rate risk for changes in interest rates relates
primarily to the Company’s investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company places
its investment with high quality issuers and follows internally developed
guidelines to limit the amount of credit exposure to any one issuer.
Additionally, in an attempt to limit interest rate risk, the Company follows
guidelines to limit the average and longest single maturity dates. The Company
is adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default, market and reinvestment risk. As of
September 30, 2007, 2006 and 2005 the Company did not have any investments
in money market accounts.
Foreign
Exchange Risk
Our
revenue originating outside the United States was 58%, 35% and 46% for fiscal
2007, 2006 and 2005, respectively. International sales are made mostly from
our
foreign sales subsidiary in the United Kingdom. The functional currency of
the Company’s United Kingdom subsidiary is the pound sterling. Our subsidiary
incurs and settles most of its expenses in its local currency.
The
assets and liabilities of our subsidiary are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Income and expense items
are
translated at the daily current exchange rates. Gains and losses from
translation are included in stockholders’ equity.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports
of Independent Registered Public Accounting Firm
|
|
24
|
Consolidated
Balance Sheets as of September 30, 2007 and 2006
|
|
25
|
Consolidated
Statements of Operations for the years ended September 30, 2007, 2006
and 2005
|
|
26
|
Consolidated
Statements of Changes in Shareholders’ Deficit for the years ended
September 30, 2007, 2006 and 2005
|
|
27
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2007, 2006
and 2005
|
|
28
|
Notes
to the Consolidated Financial Statements
|
|
29
|
Valuation
and Qualifying Accounts
|
|
46
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Enterprise
Informatics Inc.
San
Diego, California
We
have
audited the consolidated balance sheets of Enterprise Informatics Inc. (the
"Company") as of September 30, 2007 and 2006, and the related consolidated
statements of operations, comprehensive income, shareholders’ deficit, and
cash flows for each of the three years in the period ended September 30,
2007. Our audits also included the financial statement schedule of Enterprise
Informatics Inc. listed in Item 15(a). These financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We
believe that our audits provided a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Enterprise Informatics
Inc.
as of September 30, 2007 and 2006, and the results of their operations and
their cash flows for each of the three years in the period ended
September 30, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
SINGER
LEWAK GREENBAUM & GOLDSTEIN LLP
Los
Angeles, California
January
15, 2008
ENTERPRISE
INFORMATICS
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
553,000 |
|
|
$ |
95,000 |
|
Receivables,
net
|
|
|
746,000 |
|
|
|
854,000 |
|
Other
current assets
|
|
|
204,000 |
|
|
|
190,000 |
|
Total
current assets
|
|
|
1,503,000 |
|
|
|
1,139,000 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
211,000 |
|
|
|
131,000 |
|
Computer
software,
net
|
|
|
321,000 |
|
|
|
425,000 |
|
Other
assets
|
|
|
27,000 |
|
|
|
28,000 |
|
Total
assets
|
|
$ |
2,062,000 |
|
|
$ |
1,723,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
338,000 |
|
|
$ |
792,000 |
|
Note
and accrued interest payable to Spescom Ltd.
|
|
|
— |
|
|
|
550,000 |
|
Preferred
stock dividend payable to Spescom Ltd.
|
|
|
1,233,000 |
|
|
|
887,000 |
|
Accrued
liabilities
|
|
|
1,465,000 |
|
|
|
1,446,000 |
|
Lease
obligations– current portion
|
|
|
32,000 |
|
|
|
44,000 |
|
Deferred
revenue
|
|
|
2,611,000 |
|
|
|
2,752,000 |
|
Series
I redeemable preferred stock, par value $0.01 per share, 2,450
shares
authorized; 2,450
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2006
|
|
|
— |
|
|
|
2,450,000 |
|
Total
current liabilities
|
|
|
5,679,000 |
|
|
|
8,921,000 |
|
|
|
|
|
|
|
|
|
|
Notes
and accrued interest payable
to Spescom Ltd.
|
|
|
676,000 |
|
|
|
664,000 |
|
Lease
obligations
|
|
|
55,000 |
|
|
|
16,000 |
|
Total
liabilities
|
|
|
6,410,000 |
|
|
|
9,601,000 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
deficit:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, 243,239 remaining shares
authorized
|
|
|
|
|
|
|
|
|
Series
F - par value $1.00 per share; 5,291 shares authorized, issued
and
|
|
|
|
|
|
|
|
|
outstanding
in 2007 and 2006
|
|
|
6,790,000 |
|
|
|
6,790,000 |
|
Series
I - par value $0.01 per share; 2,450 shares
authorized;
|
|
|
|
|
|
|
|
|
2,450
shares issued and outstanding in 2007
|
|
|
2,450,000 |
|
|
|
— |
|
Common
stock, no par value, 100,000,000 shares authorized; 37,503,523
and
37,144,494
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2007 and 2006
|
|
|
76,495,000 |
|
|
|
76,581,000 |
|
Common
stock warrants
|
|
|
1,505,000 |
|
|
|
1,505,000 |
|
Accumulated
other comprehensive loss
|
|
|
(537,000 |
) |
|
|
(441,000 |
) |
Accumulated
deficit
|
|
|
(91,051,000 |
) |
|
|
(92,313,000 |
) |
Total
shareholders’ deficit
|
|
|
(4,348,000 |
) |
|
|
(7,878,000 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
2,062,000 |
|
|
$ |
1,723,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ENTERPRISE
INFORMATICS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$ |
3,107,000 |
|
|
$ |
1,775,000 |
|
|
$ |
737,000 |
|
Services
and other
|
|
|
5,867,000 |
|
|
|
5,231,000 |
|
|
|
5,088,000 |
|
Total
revenues
|
|
|
8,974,000 |
|
|
|
7,006,000 |
|
|
|
5,825,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
169,000 |
|
|
|
324,000 |
|
|
|
206,000 |
|
Services
and other
|
|
|
2,477,000 |
|
|
|
2,370,000 |
|
|
|
2,232,000 |
|
Total
cost of
revenues
|
|
|
2,646,000 |
|
|
|
2,694,000 |
|
|
|
2,438,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,328,000 |
|
|
|
4,312,000 |
|
|
|
3,387,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,152,000 |
|
|
|
1,058,000 |
|
|
|
852,000 |
|
Marketing
and sales
|
|
|
1,936,000 |
|
|
|
2,410,000 |
|
|
|
3,799,000 |
|
General
and administrative
|
|
|
1,719,000 |
|
|
|
1,622,000 |
|
|
|
1,994,000 |
|
|
|
|
4,807,000 |
|
|
|
5,090,000 |
|
|
|
6,645,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from
operations
|
|
|
1,521,000 |
|
|
|
(778,000 |
) |
|
|
(3,258,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other
income
|
|
|
2,000 |
|
|
|
4,000 |
|
|
|
1,000 |
|
Interest
and other
expense
|
|
|
(261,000 |
) |
|
|
(248,000 |
) |
|
|
(291,000 |
) |
Net
income (loss)
|
|
|
1,262,000 |
|
|
|
(1,022,000 |
) |
|
|
(3,548,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
preferred
dividend
|
|
|
— |
|
|
|
(1,000,000 |
) |
|
|
(2,200,000 |
) |
Net
income (loss) available after deemed preferred
dividend
|
|
|
1,262,000 |
|
|
|
(2,022,000 |
) |
|
|
(5,748,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
preferred
dividends
|
|
|
(264,000 |
) |
|
|
(354,000 |
) |
|
|
(301,000 |
) |
Net
income
(loss) available to common shareholders
|
|
$ |
998,000 |
|
|
$ |
(2,376,000 |
) |
|
$ |
(6,049,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.17 |
) |
Diluted
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.17 |
) |
Weighted
average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,324,000 |
|
|
|
36,876,000 |
|
|
|
34,941,000 |
|
Diluted
|
|
|
49,841,000 |
|
|
|
36,876,000 |
|
|
|
34,941,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Comprehensive
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$ |
1,262,000 |
|
|
$ |
(1,022,000 |
) |
|
$ |
(3,548,000 |
) |
Other
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(96,000 |
) |
|
|
(88,000 |
) |
|
|
34,000 |
|
Comprehensive
income (loss)
|
|
$ |
1,166,000 |
|
|
$ |
(1,110,000 |
) |
|
$ |
(3,514,000 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
ENTERPRISE
INFORMATICS INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
Years
Ended September 30, 2007, 2006 and 2005
(In
thousands except preferred share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
Share
|
|
|
Amount
|
|
|
Share
|
|
|
Amount
|
|
|
Warrants
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
Income
(Loss)
|
|
Balance
at September 30,
2004
|
|
|
5,291 |
|
|
|
6,790 |
|
|
|
34,143 |
|
|
|
74,726 |
|
|
|
278 |
|
|
|
(387 |
) |
|
|
(84,543 |
) |
|
|
|