UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission File Number: 0-23049
RETAIL PRO, INC.
(FORMERLY KNOWN AS ISLAND PACIFIC, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 33-0896617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3252 HOLIDAY COURT, SUITE 226, LA JOLLA, CA 92037
(Address of principal executive offices) (Zip Code)
(858) 550-3355
(Registrant's telephone number, including area code)
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 [ ]
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 [ ] Accelerated filer [ ] 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common stock, $0.0001 Par Value -
60,614,339 shares as of March 8, 2008.
TABLE OF CONTENTS
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2007 and March 31, 2007.................... 3
Consolidated Condensed Statements of Operations for the Three Months and the Six Months Ended
September 30, 2007 and 2006......................................................................... 4
Consolidated Condensed Statements of Cash Flows for the Six Months Ended September 30, 2007
and 2006............................................................................................. 5
Notes to Consolidated Condensed Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 24
Item 4. Controls and Procedures.............................................................................. 24
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 24
Item 1A. Risk Factors......................................................................................... 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................................... 32
Item 3. Defaults Upon Senior Securities...................................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 32
Item 5. Other Information.................................................................................... 32
Item 6. Exhibits and Reports on Form 8-K..................................................................... 33
SIGNATURES..................................................................................................... 35
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RETAIL PRO, INC. AND SUBSIDIARIES
(Formerly known as Island Pacific, Inc.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
SEPTEMBER 30, MARCH 31,
2007 2007
----------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 115 $ 565
Accounts receivable, net of allowance for doubtful accounts of
$454 and $386, respectively 3,127 2,913
Other receivables 171 136
Prepaid expenses and other current assets 528 261
----------------- -----------------
Total current assets 3,941 3,875
Property and equipment, net 329 307
Goodwill, net 22,984 22,984
Other intangible assets, net 11,878 12,574
Deferred royalties and related maintenance 712 -
Other assets 360 315
----------------- -----------------
Total assets $ 40,204 $ 40,055
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,774 $ 3,537
Current portion of long-term debt 10,947 7,185
Accounts payable 2,206 1,286
Accrued audit fees 132 300
Accrued interest and financing costs 1,589 1,202
Accrued employment expenses 1,066 1,029
Accrued expenses 464 801
Deferred revenue 5,671 5,599
Income taxes payable 127 127
----------------- -----------------
Total current liabilities 25,976 21,066
Debt due to stockholders, less current maturities 2,515 2,515
Convertible debentures, less current maturities - 2,520
Contract Payable 285 -
Deferred revenue 1,204 1,126
Accrued price protection 1,736 1,736
Deferred rent 210 206
----------------- -----------------
Total liabilities 31,926 29,169
----------------- -----------------
Stockholders' equity
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; - -
Common stock, $.0001 par value; 250,000,000 shares authorized;
60,043,297 and 59,842,047 shares issued and outstanding,
respectively 6 6
Additional paid-in capital 92,947 92,859
Accumulated Deficit (84,675) (81,979)
----------------- -----------------
Total stockholders' equity 8,278 10,886
----------------- -----------------
Total liabilities and stockholders' equity $ 40,204 $ 40,055
================= =================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
RETAIL PRO, INC. AND SUBSIDIARIES
(Formerly known as Island Pacific, Inc.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2007 2006 2007 2006
------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
Revenues:
Product $ 6,523 $ 5,567 $ 11,884 $ 10,623
Services 1,163 707 1,956 1,601
------------- ------------ ------------- ------------
Net sales 7,686 6,274 13,840 12,224
Cost of revenues:
Product 2,016 2,005 4,052 3,970
Services 718 448 1,182 927
------------- ------------ ------------- ------------
Cost of sales 2,734 2,453 5,234 4,897
------------- ------------ ------------- ------------
Gross Profit 4,952 3,821 8,606 7,327
Expenses:
Application development 1,291 610 2,469 1,283
Depreciation and amortization 96 121 185 254
Selling, general and administrative 2,992 2,842 6,214 5,579
------------- ------------ ------------- ------------
Total expenses 4,379 3,573 8,868 7,116
------------- ------------ ------------- ------------
Income (loss) from operations 573 248 (262) 211
Other income (expense):
Other income (2) 6 (5) 11
Interest expense (777) (398) (1,195) (779)
Finance charges (422) (1,732) (1,251) (3,082)
Loss on foreign exchange (3) (2) (7) (4)
------------- ------------ ------------- ------------
Other expenses (1,204) (2,126) (2,458) (3,854)
------------- ------------ ------------- ------------
Loss before income taxes (631) (1,878) (2,720) (3,643)
Provision for income taxes (benefits) - - - -
------------- ------------ ------------- ------------
Net loss available to common stockholders $ (631) $ (1,878) $ (2,720) $ (3,643)
============= ============ ============= ============
Basic and diluted loss per share:
Net loss available to common stockholders $ (0.01) $ (0.03) $ (0.05) $ (0.05)
============= ============ ============= ============
Basic and diluted weighted-average common
shares outstanding 59,867 68,615 59,855 68,504
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
RETAIL PRO, INC. AND SUBSIDIARIES
(Formerly known as Island Pacific, Inc.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2007 2006
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss $ (2,720) $ (3,643)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,858 1,928
Amortization of debt discount 1,243 1,730
Provision for allowance for doubtful accounts, net of recoveries 68 65
Stock-based compensation 94 113
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable and other receivables (318) 430
Income tax liabilities -
Inventories -
Prepaid expenses and other assets (1,029) 107
Accounts payable and accrued expenses 843 26
Deferred revenue 150 (152)
--------------- ---------------
Net cash provided by operating activities 189 604
--------------- ---------------
Cash flows from investing activities:
Purchases of furniture and equipment (129) (98)
Capitalized software development costs (1,056) (859)
--------------- ---------------
Net cash used for investing activities (1,185) (957)
--------------- ---------------
Cash flows from financing activities:
Proceeds from term notes and contracts 759 750
Proceeds from conversion of warrants to common stock - 4
Payments on term notes (237) (550)
--------------- ---------------
Net cash provided by financing activities 522 204
--------------- ---------------
Effect of exchange rate changes on cash 24 (55)
--------------- ---------------
Net decrease in cash and cash equivalents (450) (204)
Cash and cash equivalents, beginning of period 565 542
--------------- ---------------
Cash and cash equivalents, end of period $ 115 $ 338
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $ 808 $ 740
Income taxes paid - -
Supplemental disclosure of non-cash investing and financing activities:
Issued 200,000 shares of common stock and a warrant to purchase 200,000
shares of common stock related to the termination of a product
distribution agreement $ 20 $ -
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
RETAIL PRO, INC. AND SUBSIDIARIES
(Formerly known as Island Pacific, Inc.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion
of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2007 and for all
the periods presented have been made.
The financial information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes thereto
in our Form 10-K for the year ended March 31, 2007.
The results of operations for the three and six months ended September 30, 2007
and 2006 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - GOING CONCERN UNCERTAINTY
We incurred loss of $2.4 million for the six months ended September 30 2007,
have a recent history of losses and have not been able to achieve profitability.
The recent losses have generally been due to difficulties completing sales for
new application software licenses, a change in sales mix toward lower margin
services, and debt service expenses. We will need to generate additional revenue
and reduce expenses to achieve profitability in future periods. In that regard,
we are implementing a strategic plan to integrate our product lines and unify
our processes and operations. This plan is a continuation of the Company's drive
towards profitability.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2007 and March 31, 2007 consisted of the
following (in thousands):
September 30, March 31,
2007 2007
----------------- -----------------
Computer and office equipment and purchased software $ 3,094 $ 3,000
Furniture and fixtures 321 308
Leasehold improvements 354 332
----------------- -----------------
3,769 3,640
Less accumulated depreciation and amortization 3,440 3,333
----------------- -----------------
Total $ 329 $ 307
================= =================
Depreciation expense for the three months ended September 30, 2007 and 2006 was
$54,000 and $79,000, respectively. Depreciation expense for the six months ended
September 30, 2007 and 2006 was $102,000 and $171,000, respectively.
NOTE 4 - GOODWILL AND OTHER INTANGIBLES
At September 30, 2007 and March 31, 2007, goodwill and other intangibles consist
of the following (in thousands):
6
September 30, 2007 March 31, 2007
---------------------------------------- -----------------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Net amount amortization Net
------------ --------------- ---------- ------------ --------------- ----------
Goodwill $ 28,993 $ (6,009) $ 22,984 $ 28,993 $ (6,009) $ 22,984
------------ --------------- ---------- ------------ --------------- ----------
Other intangibles:
Amortized intangible assets
Software technology 31,873 (21,935) 9,938 30,818 (20,267) 10,551
Customer relationships 1,836 (729) 1,107 1,836 (646) 1,190
Unamortized intangible trademark 833 - 833 833 - 833
------------ --------------- ---------- ------------ --------------- ----------
34,542 (22,664) 11,878 33,487 (20,913) 12,574
------------ --------------- ---------- ------------ --------------- ----------
Total goodwill and other intangibles $ 63,535 $ (28,673) $ 34,862 $ 62,480 $ (26,922) $ 35,558
============ =============== ========== ============ =============== ==========
Software and customer relationships are amortized on a straight-line basis over
their useful lives, seven and ten years, respectively. The goodwill and the
trademark have indefinite useful lives and are not subject to amortization.
Amortization expense for the three months and for the six months ended September
30, 2007 and 2006 consists of the following (in thousands):
Six Months Ended Three Months Ended
September 30, September 30,
----------------------- ---------------------
2007 2006 2007 2006
---------- ---------- --------- ---------
Amortization of Capitalized Software Development $ 1,669 $ 1,669 $ 834 $ 834
Costs Included in Cost of Revenues
Amortization of Other Intangible Assets 83 83 42 42
---------- ---------- --------- ---------
$ 1,752 $ 1,752 $ 876 $ 876
========== ========== ========= =========
NOTE 5 - DEFERRED ROYALTIES AND RELATED MAINTENANCE
On May 22, 2007, we entered a contract for $550,000 with Oracle USA, Inc. to buy
out the royalties that would apply to the embedding of Oracle database software
in upgrades to Version 9 of our Retail Pro(R) software from earlier versions. We
also purchased a two-year support contract for $209,000.
The royalty buyout will be amortized as upgrades are delivered and the support
contract will be amortized commencing with the General Release of Version 9 in
January 2008.
NOTE 6 - CONVERTIBLE DEBENTURES AND TERM NOTES
CONVERTIBLE DEBENTURES
Convertible debentures at September 30, 2007 and March 31, 2007 consist of the
following (in thousands):
September 30, March 31,
2007 2007
--------------- ---------------
9% convertible debentures, due May 2007 $ 913 $ 913
Convertible term note, bearing interest at the prime rate
plus 2%, due July 2007, net of unamortized debt
discount of $0 and $570, respectively 6,787 6,218
Convertible term notes, bearing interest at the prime
rate plus 1%, due June 2008, net of unamortized debt
discount of $953 and $1,626, respectively 3,247 2,574
--------------- ---------------
10,947 9,705
Less: current maturities 10,947 7,185
--------------- ---------------
Long-term portion of convertible notes $ - $ 2,520
=============== ===============
7
The holders of the 9% convertible debentures due May 2007 and the convertible
term note due July 2007 have deferred collection of these notes pending the sale
of the Retail Management Solutions business unit which closed on December 20,
2007. See Note 14.
TERM NOTES
Term Notes at September 30, 2007 and March 31, 2007 consist of the following (in
thousands):
September 30, March 31,
2007 2007
--------------- ---------------
Current portion of royalty buyout contract (See Note 4) $ 474 $ -
Note payable, bearing interest at the prime rate plus 2%,
due April 30, 2007 675 675
Note payable, bearing interest at the prime rate plus 2%,
due June 30, 2007 2,625 2,625
Non-interest bearing Note payable, due June 30, 2007 - 237
--------------- ---------------
$ 3,774 $ 3,537
=============== ===============
NOTE 7 - DEFERRED REVENUE
Deferred revenue as of September 30, 2007 and March 31, 2007 consists of the
following (in thousands):
September 30, March 31,
2007 2007
--------------- ---------------
Contracts in Process $ 278 $ 236
Prepaid Support Service 5,990 5,861
Customer Deposits 607 628
--------------- ---------------
6,875 6,725
Less: Current Portions 5,671 5,599
--------------- ---------------
Long-Term Deferred Revenue $ 1,204 $ 1,126
=============== ===============
NOTE 8 - SHARE-BASED COMPENSATION
Effective April 1, 2005, we commenced accounting for stock-based compensation in
accordance with the provision of SFAS No. 123(R), "Share-Based Payment", issued
in December 2004 as a revision of SFAS No. 123 and requiring that the cost
resulting from share based payments be recognized in the financial statements
using a fair value measurement. The share-based payments arise from the grant of
stock options from one of the Company plans, and compensation is recorded using
a closed-form option-pricing model which assumes that the option exercises occur
at the end of the contractual term and that the expected volatility, expected
dividends, and risk-free interest rates are constant over the option's term. We
account for the cost of stock-based compensation on a straight-line basis over
the requisition service period for the entire award.
Share based compensation included in Selling, General and Administrative
Expenses in the three months ended September 30, 2007 and 2006 was $38,200 and
$60,200, respectively. Share based compensation included in Selling, General and
Administrative Expenses in the six months ended September 30, 2007 and 2006 was
$73,000 and $113,300, respectively.
NOTE 9 - EQUITY TRANSACTIONS
In the six months ended September 30, 2007, we had the following equity
transaction:
o On September 6, 2007 we issued 200,000 restricted shares of common
stock and a warrant expiring on September 5, 2010 to purchase an
additional 200,000 shares of common stock at $0.07 per share in
settlement of a software distribution agreement. The shares and
warrant were valued at fair values of $13,981 and $6,630 using a
closed-form option pricing model.
8
NOTE 10 - LOSS PER SHARE
Basic loss per common share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the reporting period. Diluted
earnings per common shares ("diluted EPS") reflect the potential dilutive
effect, determined by the treasury method, of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Loss per share for the three and six months ended September 30, 2007 and
2006 is calculated as follows (in thousands):
Three months ended Six months ended
September 30, September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
Net loss available to common
stockholders $ (631) $ (1,878) $ (2,720) $ (3,643)
============= ============= ============= =============
Basic and diluted weighted average
shares 59,867 68,615 59,855 68,504
============= ============= ============= =============
Basic and diluted loss per share $ (0.01) $ (0.03) $ (0.05) $ (0.05)
============= ============= ============= =============
The following potential common shares have been excluded from the computation of
diluted net loss per share at September 30, 2007 and 2006, because the effect
would have been anti-dilutive:
September 30, September 30,
2007 2006
----------------- -----------------
Outstanding options under our stock option plans 12,496,592 8,902,118
Outstanding options granted outside our stock option plans 30,130,295 23,776,377
Warrants issued in conjunction with private placements - 1,600,000
Warrants issued for services rendered 1,009,565 434,000
Warrants issued in conjunction with convertible debentures 16,092,098 16,092,098
Series A Convertible Preferred Stock - 20,527,746
Convertible debt 59,501,075 59,501,075
----------------- -----------------
Total 119,229,625 130,833,414
================= =================
NOTE 11 - BUSINESS SEGMENTS AND GEOGRAPHIC DATA
We are a leading provider of software solutions and services that have been
developed specifically to meet the needs of the retail industry. We provide high
value innovative solutions that help retailers understand, create, manage and
fulfill consumer demand. Our solutions help retailers improve the efficiency and
effectiveness of their operations and build stronger, longer lasting
relationships with their customers.
We have structured our operations into three strategic business units that are
separate reporting structures. The business units are retail management
solutions, store solutions and multi-channel retail solutions. Our operations
are conducted principally in the United States and the United Kingdom. In
addition, we manage long-lived assets by geographic region. The business units
are as follows:
o RETAIL MANAGEMENT SOLUTIONS ("RETAIL MANAGEMENT") - Offers a suite
of applications, which builds on our long history in retail software
design and development. We provide our customers with extremely
reliable, widely deployed, comprehensive and fully integrated retail
management solutions. Retail Management Solutions includes
merchandise management that optimizes workflow and provides the
highest level of data integrity. This module supports all
operational areas of the supply chain including planning,
open-to-buy purchase order management, forecasting, warehouse and
store receiving distribution, transfers, price management,
performance analysis and physical inventory. In addition, Retail
9
Management Solutions includes a comprehensive set of tools for
analysis and planning, replenishment and forecasting, event and
promotion management, warehouse, ticketing, financials and sales
audit. We disposed of this business unit on December 20, 2007. See
Note 14.
o STORE SOLUTIONS - Through our acquisition of Retail Technology, Inc.
("RTI"), we focused our Store Solutions offerings on "Retail
Pro(R)," which provides a total solution for small to mid-tier
retailers worldwide. Retail Pro(R) is currently used by
approximately 10,000 businesses in over 45,000 stores in 73
countries. The product is translated into eighteen languages making
it one of the few quality choices for the global retailer. At its
core, Retail Pro(R) is a high performance, 32-bit Windows
application offering point-of-sale, inventory control and customer
relations management. Running on WindowsNT, Windows2000, Windows XP
Professional and Windows.Net platforms, Retail Pro(R) combines a
fully user-definable graphical interface with support for a variety
of input devices (from keyboard to touch screen). Its Retail
Business Analytics module includes an embedded Oracle(R) 9i
database. Retail Pro(R) is fast and easy to implement. The software
has been developed to be very flexible and adaptable to the way a
retailer runs its business.
o MULTI-CHANNEL RETAIL SOLUTIONS ("MULTI-CHANNEL RETAIL") - Our
Multi-Channel Retail application is designed to specifically address
direct commerce business processes, which primarily relate to
interactions with the end-user. This application was originally
designed by Page Digital to manage its own former direct commerce
operation, with attention to functionality, usability and
scalability. Its components include applications for customer
relations management, order management, call centers, fulfillment,
data mining and financial management. Specific activities like
partial ship orders, payments with multiple tenders, back order
notification, returns processing and continuum marketing represent
just a few of the more than 1,000 parameterized direct commerce
activities that have been built into "Synaro"(TM), our Multi-Channel
Solution and its applications. These components and the interfacing
technology are available to customers, systems integrators and
independent software developers who may modify them to meet their
specific needs.
A summary of the net sales and operating income (loss), excluding depreciation
and amortization expense, and identifiable assets attributable to each of these
business units from continuing operations are as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
-----------------------------------------------------------
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Net sales from continuing operations:
Retail Management $ 3,961 $ 2,272 $ 6,808 $ 4,985
Store Solutions 3,300 3,501 6,161 6,235
Multi-channel Retail 425 501 871 1,004
-------------- --------------------------------------------
Consolidated net sales $ 7,686 $ 6,274 $ 13,840 $ 12,224
============== ============================================
Operating income (loss):
Retail Management $ 1,630 $ 239 $ 2,270 $ 859
Store Solutions 112 1,131 (297) 1,648
Multi-channel Retail (136) (81) (253) (109)
Other (see below) (1,033) (1,041) (1,982) (2,187)
-------------- --------------------------------------------
Consolidated operating income (loss) $ 573 $ 248 $ (262) $ 211
============== ============================================
Other operating loss:
Depreciation $ (95) $ (121) $ (185) $ (254)
Administrative costs and other non-allocated expenses (938) (920) (1,797) (1,933)
-------------- --------------------------------------------
Consolidated other operating loss $ (1,033) $ (1,041) $ (1,982) $ (2,187)
============== ============================================
10
September 30, MARCH 31,
2007 2007
--------------- ---------------
Identifiable assets:
Retail Management $ 14,770 $ 16,519
Store Solutions 21,563 19,524
Multi-channel Retail 3,798 3,962
--------------- ---------------
Consolidated identifiable assets $ 40,131 $ 40,005
=============== ===============
Goodwill, Net of amortization
Retail Management $ 9,474 $ 9,474
Store Solutions 10,488 10,488
Multi-channel Retail 3,022 3,022
--------------- ---------------
Consolidated goodwill $ 22,984 $ 22,984
=============== ===============
Operating income (loss) in Retail Management, Store Solutions and Multi-channel
Retail includes direct expenses for software licenses, maintenance services,
programming and consulting services, sales and marketing expenses, product
development expenses, and direct general, administrative and depreciation
expenses. The "Other" caption includes depreciation, amortization of intangible
assets, non-allocated costs and other expenses that are not directly identified
with a particular business unit and which we do not consider in evaluating the
operating income of the business unit.
We currently operate in the United States and the United Kingdom. The following
is a summary of local operations by geographic area (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
-----------------------------------------------------------
2007 2006 2007 2006
-------------- -------------- -------------- --------------
Net Sales:
United States $ 5,501 $ 3,942 $ 9,487 $ 8,215
United Kingdom 1,081 722 2,100 1,601
All Other International 1,104 1,610 2,253 2,408
-------------- -------------- -------------- --------------
Total net sales $ 7,686 $ 6,274 $ 13,840 $ 12,224
============== ============== ============== ==============
September 30, 2007 March 31, 2007
-------------------- --------------------
Long-lived assets:
United States $ 36,263 $ 36,175
United Kingdom - 5
All Other International - -
-------------------- --------------------
Total long-lived assets $ 36,263 $ 36,180
==================== ====================
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On November 22, 2002, we and Sabica Ventures, Inc. ("Sabica") our wholly-owned
subsidiary, were sued in a matter entitled Stemley vs. Shea Homes, Inc. et. al.
in San Diego Superior Court Case No. GIC 787680, as Pacific Cabinets. The case
dealt with alleged construction defects. Pacific Cabinets was dismissed from the
litigation for a waiver of fees and costs and the entire action was dismissed
November 3, 2006 and is no longer active.
RTI was named as a cross-defendant in an action by General Electric Capital
Corporation as plaintiff ("GE Capital"), against San Francisco City Stores LLC,
dated May 10, 2004. The cross-complaint filed on behalf of San Francisco City
Stores names GE Capital, Big Hairy Dog Information Systems, and RTI as
cross-defendants, claiming breach of warranty and unfair competition (against
RTI), and makes various other claims against GE Capital and Big Hairy Dog
Information Systems. The claim is for approximately $83,000. We believe the
claims made against RTI are without merit and we intend to vigorously defend
them.
11
Certain of our standard software license agreements contain a limited
infringement indemnity clause under which we agree to indemnify and hold
harmless our customers and business partners against certain liability and
damages arising from claims of various copyright or other intellectual property
infringement by our products. These terms constitute a form of guarantee that is
subject to the disclosure requirements, but not the initial recognition or
measurement provisions of Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of Others". We
have never lost an infringement claim and our cost to defend such lawsuits has
been insignificant.
Since November 2005, certain of our Retail Pro(R) software customers have been
contacted by Acacia Technologies Group ("Acacia") regarding alleged infringement
of U.S. Patent 4,707,592 (the "`592 Patent") and have requested indemnification
for any infringement claim regarding the `592 Patent which expired in October
2005. We retained patent counsel and, based on his advice, have notified the
customers in question that it is our position that there is no merit to any
potential claim that Retail Pro(R) software infringes the `592 Patent. In direct
discussions between our counsel and Acacia, we believe no information was
provided indicating that Retail Pro(R) software infringes the`592 Patent. Acacia
had alleged infringement against a number of retailers including a small number
of Retail Pro(R) software users. We are not named in the lawsuit and, although
some customers have indicated that they may seek indemnification, no actual
lawsuits have been filed against us, and we do not believe any indemnification
or defense obligation exists at this time.
On May 25, 2005, the United States Securities and Exchange Commission ("SEC")
notified us that it had begun an informal inquiry relating to the Company. We
cooperated with the SEC's informal inquiry. On July 20, 2005, the SEC informed
us that it had issued a formal order of investigation in this matter. In
connection with the investigation, the SEC is seeking information regarding our,
and our subsidiaries', financial condition, results of operations, business,
accounting policies and procedures, internal controls, issuances of common stock
and stock options, sales of common stock and option exercises by insiders,
employees and consultants as well as our internal revenue recognition
investigation relating to the timing of revenue recognition for certain
transactions during the fiscal years ended March 31, 2003, 2004 and 2005. The
scope, focus and subject matter of the SEC investigation may change from time to
time and we may be unaware of matters under consideration by the SEC. We are
cooperating with the SEC in its investigation.
On January 10, 2008, the Company received a "Wells Letter" from the staff of the
SEC. The Company has been informed that its Chief Executive Officer, Mr. Barry
Schechter, also received a Wells Letter. The Wells Letters stated the staff of
the SEC is considering recommending the SEC bring civil injunctive actions
against the Company and Mr. Schechter for alleged violations of the federal
securities laws. Under the process established by the SEC, the recipients have
an opportunity to respond before any action is brought against them. Discussions
are ongoing between the staff and the recipients' counsel with respect to the
alleged violations and possible resolution of the matter. There is no assurance
that a resolution can be reached, or that the ultimate impact will not be
material.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
NOTE 13 - RELATED-PARTY TRANSACTIONS
In connection with the Page Digital acquisition, we assumed a three-party lease
agreement for our Colorado offices between CAH Investments, LLC ("CAH"),
wholly-owned by the spouse of one of our former executive officers, Larry Page,
and Southfield Crestone, LLC, whereby Page Digital agreed to lease offices for
ten years expiring on December 31, 2011. CAH and Southfield Crestone LLC are
equal owners of the leased property. Rent expense related to this lease is
$21,300 and $59,500 for the three months ended September 30, 2007 and 2006,
respectively, and $42,600 and $44,000 for the six months ended September 30,
2007 and 2006, respectively. A security deposit of $170,000 relating to this
lease is included in other long-term assets at September 30, 2007 and March 31,
2007.
NOTE 14 - SUBSEQUENT EVENTS
Asset Sale
On December 20, 2007, Island Pacific, Inc. (the "Company") and 3Q Holdings
Limited ("3Q Holdings") consummated an Asset Purchase Agreement (the "Asset
Purchase Agreement") under which 3Q Holdings purchased from the Company the
assets of the Company used in connection with the Company's Retail Management
Solutions business unit and the "Island Pacific" name and related trademarks,
service marks, trade names and all goodwill associated with the name "Island
Pacific" (collectively, the "Purchased Assets").
12
Prior to entering the Asset Purchase Agreement, the Company conducted an
extensive auction process commencing July 2006 during which 61 potential buyers
were pursued, with 22 of them signing Non-Disclosure Agreements and conducting
further due diligence, and 5 buyers making offers based on a determined price
range of $10.0 million to $16.0 million. The Company was not reasonably certain
that any of the 5 buyers making offers would be able to secure financing
enabling them to close the transaction. In the third quarter of 2008, 3Q
Holdings was able to confirm a commitment for financing.
The purchase price for the Purchased Assets, determined based upon arms-length
negotiation between the parties, is $16.0 million, subject to certain working
capital adjustments. The Asset Purchase Agreement is subject to a number of
closing conditions including, among others, the receipt by both parties of all
required consents, waivers and amendments from respective lenders, the accuracy
at the time of closing of the parties' representations and warranties made in
the Asset Purchase Agreement, and the absence of certain changes or events
having a material adverse effect on the Purchased Assets.
The pro forma effect of the transaction on our financial position and results of
operations for the six months ended September 30, 2007 is presented in the
following table:
Pro forma Effect Pro forma Result
As Reported of Proposed Sale of Proposed Sale
------------------ ------------------ ------------------
At September 30, 2007
---------------------
Current Assets $ 3,941 $ 15,030 $ 18,971
Property and Equipment, Net 329 (83) 246
Goodwill 22,984 (9,474) 13,510
Other Intangible Assets 11,878 (4,116) 7,762
Other Assets 1,072 (80) 992
------------------- ------------------- -------------------
Total Assets $ 40,204 $ 1,277 $ 41,481
------------------- ------------------- -------------------
Current Liabilities $ 25,976 -- $ 25,976
Long Term Liabilities 5,950 -- 5,950
------------------- ------------------- -------------------
Total Liabilities 31,926 -- 31,926
------------------- ------------------- -------------------
Stockholders' Equity $ 8,278 $ 1,277 $ 9,555
------------------- ------------------- -------------------
For the Six Months Ended September 30, 2007
-------------------------------------------
Net Sales $ 13,840 $ 6,808 $ 7,032
Gross Profit 8,606 3,657 4,949
Income (Loss) from Operations (262) 2,232 (2,494)
Net Loss (2,364) 2,231 (4,595)
Basic and diluted EPS $ (0.04) $ 0.04 $ (0.08)
Securities Purchase Agreement and Secured Term Note
On March 3, 2008, effective February 29, 2008, Retail Pro, Inc. (the "Company")
entered into a Securities Purchase Agreement with Valens Offshore SPVII, Corp.
c/o Laurus Master Fund, Ltd. ("Laurus") for the sale of:
(a) a Secured Term Note (the "Note") in the principal amount of Two
Million Five Hundred Thousand Dollars ($2,500,000); and
(b) a warrant to acquire an aggregate of 15,000,000 shares of the
Company's common stock for One Cent ($0.01) per share (the
"Warrants").
The Note is due on February 29, 2009 and bears interest at the "prime rate" plus
2%, provided that in no event shall the Contract Rate (as defined in the Note)
be less than 9.5%. The Company may prepay the Note at any time, in whole or in
part, without penalty or premium. The Note provides for mandatory prepayment as
the Company's receives payment(s) pursuant to that certain Vendor Loan Agreement
dated as of December 21, 2007 by and among the Company, 3Q Holdings Limited,
Island Pacific (UK) Limited and Applied Retail Solutions, Inc. (the
"Purchasers") which, among other things, sets forth the certain agreements
relating to the Company's financing of $3,000,000 of the purchase price for
assets of the Company sold to 3Q Holdings Limited.
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The Warrants are immediately exercisable and have ten (10) year terms. The
exercise price of the Warrants adjusts proportionately in the event of any stock
split, combination, dividend or reclassification. The Note and the Warrants were
issued without registration pursuant to the exemption provided under Section
4(2) of the Securities Act of 1933, as amended, and Regulation-D promulgated
thereunder.
The Company's obligations under the Note are secured by a continuing security
interest in all of the Company's assets in favor of Laurus. The Company's
obligations are also guaranteed by its subsidiaries. Laurus' security interest
is governed by the Master Security Agreement and Stock Pledge Agreement that the
Company executed in connection with the sale of the Note and the Warrants.
Amendment of Existing Notes
In connection with the sale of the Note and the Warrants, the Company entered
into an Omnibus Amendment and Waiver with Laurus pursuant to which:
(a) the principal balance of the Amended and Restated Secured
Convertible Term Note issued to Laurus on July 12, 2004 (the "July
2004 Note") was acknowledged to be an aggregate outstanding
principal amount of $2,066,866.48;
(b) the definition of Maturity date set forth in the July 2004 Term Note
was amended and extended to January 31, 2011;
(c) the "fixed conversion price" under the July 2004 Note was reset to
$0.08 per share for the first $688,955 converted thereunder, and
$2.00 thereafter;
(d) the principal balance of the Secured Term Convertible Note issued to
Laurus on June 15, 2005 (the "June 2005 Note") was acknowledged to
be an aggregate outstanding principal amount of $3,200,000;
(e) the definition of Maturity date set forth in the June 2005 Term Note
was amended and extended to January 31, 2011.;
(f) the "fixed conversion price" under the June 2005 Note was reset to
$0.08 per share for the first $1,066,666 converted thereunder, and
$2.00 thereafter.
The Omnibus Amendment and Waiver also provided an acknowledgement that the
company had caused occurrences of default with three notes and accordingly
acknowledged default payments in the amount of $755,626 and $355,586 of the
late penalty payment was recognized as of September 30, 2007.
Sales Tax Obligation
On December 31, 2007, the State of California Board of Equalization issued a
Determination by Audit to the Company that assessed a state sales tax liability
including interest and penalty. The outstanding balance is $206,343. The Company
has determined that the liability resulted from a change in accounting estimate
and will record the obligation in the third quarter of 2008.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS REPORT 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 AND THE COMPANY INTENDS THAT CERTAIN MATTERS DISCUSSED IN THIS REPORT
ARE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBOR FROM
LIABILITY ESTABLISHED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED BY THE CONTEXT OF
THE STATEMENT WHICH MAY INCLUDE WORDS SUCH AS THE COMPANY ("IPI," "WE" OR "US")
"BELIEVES," "ANTICIPATES," "EXPECTS," "FORECASTS," "ESTIMATES" OR OTHER WORDS
WITH SIMILAR MEANING AND CONTEXT. SIMILARLY, STATEMENTS THAT DESCRIBE FUTURE
PLANS, OBJECTIVES, OUTLOOKS, TARGETS, MODELS, OR GOALS ARE ALSO DEEMED
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE FORECASTED OR ANTICIPATED AS OF THE DATE OF THIS REPORT.
CERTAIN OF SUCH RISKS AND UNCERTAINTIES ARE DESCRIBED IN CLOSE PROXIMITY TO SUCH
STATEMENTS AND ELSEWHERE IN THIS REPORT INCLUDING ITEM 2, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
STOCKHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE
FACTORS IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS OR CONSTRUE SUCH
STATEMENTS TO BE A REPRESENTATION BY US THAT OUR OBJECTIVES OR PLANS WILL BE
ACHIEVED. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE MADE ONLY
AS OF THE DATE OF THIS REPORT, AND WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE
SUCH FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS FORM 10-Q. READERS ARE ALSO URGED TO CAREFULLY
REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT TO ADVISE
INTERESTED PARTIES OF THE FACTORS WHICH AFFECT OUR BUSINESS, INCLUDING WITHOUT
LIMITATION THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN OUR ANNUAL
REPORT FILED ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2007, AND THE DISCLOSURES
UNDER THE HEADING "RISK FACTORS" IN THE FORM 10-K, AS WELL AS OTHER REPORTS AND
FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a provider of software solutions and services to the retail industry,
providing solutions that help retailers understand, create, manage and fulfill
consumer demand. Due to the scalability of our Store Solutions software, we are
able to meet the needs of the broad spectrum of retail customers from small
businesses to large enterprise applications. We derive the majority of our
revenues from three sources: the initial sale of application software licenses,
or license revenues, professional services and support, and maintenance.
Application software license fees are dependent upon the sales volume of our
customers, the number of users of the application(s), and/or the number of
locations in which the customer plans to install and utilize the application(s).
As the customer grows in sales volume, adds additional users and/or adds
additional locations, we charge additional license fees. Professional services
relate to implementation of our software, training of customer personnel and
modification or customization work. Support, maintenance and software updates
are a source of recurring revenues and are generally based on a percentage of
the software license revenues and are charged on an annual basis pursuant to
renewable maintenance contracts. We typically charge for professional services
including consulting, implementation and project management services on an
hourly basis.
As the vast majority of our revenues are derived from the retail industry, we
are heavily dependent on the financial strength of retailers and their capital
budgets. Deterioration in the health of retailers, a reduction in their capital
budget or a decision to delay the purchase of new systems have a direct impact
on our business. Our large enterprise sales cycles are long, generally three to
twelve months, and our ability to close a pipeline of potential transaction is
very unpredictable. As such, management believes that license revenue and growth
in license revenue are the best indicator of the Company's business as they
signify either new customers or an expansion of licenses of existing customers.
15
In recent periods, our revenues have stabilized and we are developing and
implementing plans for achieving profitability. Improvement in our operations
has been derived from:
o Appointment of a new management team;
o Headcount reduction, office space downsize, and reduction of other
operating expenses;
o New focus on R & D for core products and termination of unprofitable
partner ventures;
o Introduction of new products to the market;
o Opening of a Europe, Middle East and Africa division through our UK
office to better serve the business partners in these regions
marketing Retail Pro(R);
o Opening an Asia Pacific office in Sydney, Australia and Beijing
China to serve the Greater Chinese Geography, and develop a
dedicated team to better serve Latin America.
We believe that these actions will position us to achieve revenue growth and
profitability.
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2006
REVENUES
Product revenues increased by $1.0 million due principally to the sale of a
license by our Retail Management division to a new customer whose operations
were spun off from an existing customer. Professional Services revenues
increased by $0.4 million arising from increased activity in implementation of a
long-term contract by our Retail Management division.
License revenues of our Store Solutions division decreased by $0.8 million in
anticipation of the release of Version 9 of our Retail Pro(R) software. The
decrease was offset by increases in sales of professional services, payment
processing services and technical support.
These changes in Product and Services revenues resulted in a net revenue
increase of $1.4 million.
The three months ended September 30, 2007 continues the trend of the fiscal year
ended March 31, 2007. The slowdown in the U.S. and world economies caused the
retail industry to be more cautious with its investment in information systems
which resulted in a lack of growth in sales and in extended sales cycles. In
addition, our financial condition may have interfered with our ability to sell
new large enterprise application software licenses, as implementation of large
enterprise applications generally requires extensive future services and
support, and some potential customers have expressed concern about our financial
ability to provide these ongoing services. The effect of these conditions has
carried over to the current quarter.
COST OF REVENUES/GROSS PROFIT
The rate of increase in the cost of revenues conforms to the increase in revenue
arising from high margin license sales, payment processing, and support sales.
Total gross profit increased $1.1 million, resulting from higher margin revenue
increases.
APPLICATION DEVELOPMENT EXPENSE
Application development expense increased by $0.7 million, or 112%, to $1.3
million in the three months ended September 30, 2007. This increase results from
our continued effort to upgrade our existing software line while we continue to
develop new software technologies.
DEPRECIATION AND AMORTIZATION
The decrease in depreciation and amortization of $0.03 million is primarily due
to certain assets becoming fully depreciated and not replaced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by $0.15 million, to $3.0 million in the three months
ended September 30, 2007. We do not consider this to be a significant increase.
16
OPERATING INCOME
Operating income, which included depreciation and amortization expense,
increased by $0.3 million, due primarily to the increase in Gross Profit which
was partially absorbed by the increase in Application development and SG&A
expenses.
INTEREST EXPENSE
Interest expense increased by $0.4 million in the three months ended September
30, 2007 compared to the three months ended September 30, 2006, as a result of
approximately $0.4 million of default interest on the Laurus Notes.
SIX MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO SIX MONTHS ENDED SEPTEMBER, 30,
2006
REVENUES
In comparing the six months ended September 30, 2007 to the six months ended
September 30, 2006, the increase in product revenue from the sale of the new
license by the Retail Management division is offset by a similar decrease in
sales of new licenses by the Store Solutions division in anticipation of the
release of Version 9 of the Retail Pro(R) software. Consequently, the increase
in product revenue arises principally from increases in sales of support
services ($0.6 million) and payment processing services ($0.4 million). Service
revenues increased by $0.035 million in the six months ended September 30, 2007
compared to the six months ended September 30, 2006 due primarily to the
increased activity in implementation of a long-term contract by our Retail
Management division.
Revenues from existing customers are increasing, however new customer sales have
been hindered by market factors and the delay in releasing Version 9 of the
Retail Pro(R) software. The slowdown in the U.S. and world economies combined
with the fear of future terrorist attacks and the ongoing hostilities in the
world caused the retail industry to be more cautious with their investment in
information systems and to deliberately evaluate solutions, which resulted in
decreases in sales and in extended sales cycles. In addition, our financial
condition may have interfered with our ability to sell new application software
licenses, as implementation of our applications generally requires extensive
future services and support, and some potential customers have expressed concern
about our financial ability to provide these ongoing services. The effect of
these conditions has carried over to the current quarter.
COST OF REVENUES/GROSS PROFIT
The negligible increase in cost of revenues in the six months ended September
30, 2007, compared to the six months ended September 30, 2006 ($0.3 million) is
attributable to increased sales of high-margin products during the comparative
periods. Consequently, total Gross profit increased by $1.3 million, (17%) to
$8.6 million in the six months ended September 30, 2007.
APPLICATION DEVELOPMENT EXPENSE
Application development expense decreased by $1.2 million, (92.3%) to $2.5
million in the six months ended September 30, 2007 compared to the six months
ended September 30, 2006. This increase results from our continued effort to
upgrade our existing software line while we continue to develop new software
technologies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $0.07 million, due to certain assets
becoming fully depreciated and not replaced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased $0.6 million, (11%) to $6.2 million in the six months
ended September 30, 2007, compared to the six months ended September 30, 2006
primarily due to increases in professional and marketing personnel to expedite
the beta testing of Version 9 of the Retail Pro(R) software and prepare for an
aggressive marketing effort when the product is ready for general release. We
anticipate that SG&A as a percentage of sales will continue to increase in the
future until we release Retail Pro(R) Version 9.
17
OPERATING LOSS
Due to increases in application development expenses in excess of the increase
in gross profit, we incurred an operating loss of $0.3 million in the six months
ended September 30, 2007 compared to an operating income of $0.2 million in the
six months ended September 30, 2006.
INTEREST EXPENSE
Interest expense increased $0.4 million in the six months ended September 30,
2007 compared to the six months ended September 30, 2006, as a result of
approximately $0.4 million of default interest on the Laurus Notes..
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
During the six months ended September 30, 2007, we financed our operations using
cash on hand, cash provided by operations, and proceeds from the sale of
short-term notes. At September 30, 2007 and March 31, 2007, we had cash of $0.1
million and $0.6 million, respectively.
Operating activities provided cash of $0.2 million in the six months ended
September 30, 2007 and cash of $0.6 million in the six months ended September
30, 2006. Cash provided by operating activities in the six months ended
September 30, 2007 results from $2.7 million net loss which includes non-cash
depreciation and amortization of $1.9 million, amortization of debt discount of
$1.2 million, and stock based compensation of $0.1 million, offset by increases
in accrued interest and financing costs, accounts receivable and other assets of
$0.5 million. Similarly, in the six months ended September 30, 2006, the net
loss of $3.6 million included non-cash depreciation and amortization of $1.9
million and amortization of debt discount of $1.7 million. The cash flow
provided by operations arose from decreases in accounts receivable and other
assets.
Investing activities used cash of $1.2 million in the six months ended September
30, 2007 and used cash of $1.0 million in the six months ended September 30,
2006. Cash used for investing activities in the six months ended September 30,
2007 and 2006 resulted primarily from $1.1 million and $0.9 million of
capitalized software development costs, respectively.
Financing activities provided cash of $0.5 million and $0.2 million in the six
months ended September 30, 2007 and 2006, respectively. Cash provided by
financing activities in the six months ended September 30, 2007 resulted
primarily from the proceeds of an $0.8 million software purchase contract,
offset by $0.2 million payment on term notes. Cash provided by financing
activities in the six months ended September 30, 2006 resulted primarily from
the proceeds of an $0.8 million term note, offset by $0.6 million payment on
term notes.
We believe that our cash, cash equivalents and funds generated from operations
will provide adequate liquidity to meet our normal operating requirements for at
least the next twelve months. Our future capital requirements depend on many
factors, including our application development, sales and marketing activities.
In addition, we have incurred losses for the last three fiscal years and we had
a negative working capital at September 30, 2007. In the next twelve months,
additional capital will be raised through the sale of our Retail Management
Solutions business unit (see Note 13 to the accompanying financial statements).
In the long-term, we anticipate that cash from operations will be sufficient to
provide liquidity for our normal operating requirements. However, our growth may
depend on additional financing, and we do not know whether additional financing
will be available when needed, or available on terms acceptable to us. We may
raise capital through public or private equity or debt financings. If we are
unable to raise the needed funds, we may be forced to curtail some or all of our
activities and we may not be able to grow.
INDEBTEDNESS
OMICRON/MIDSUMMER
On March 15, 2004, we sold Omicron Master Trust ("Omicron") and Midsummer
Investment, Ltd. ("Midsummer") convertible debentures (the "March 2004
Debentures") for an aggregate price of $3.0 million pursuant to a securities
purchase agreement (the "March 2004 Debenture Purchase Agreement"). With a
portion of the proceeds from the sale of the Laurus 2004 Convertible Note, we
paid Omicron $1.75 million, the full amount due under its March 2004 Debenture,
plus $0.2 million in accrued interest, liquidated damages pursuant to the
Omicron/Midsummer Registration Rights Agreement, and prepayment penalties. The
March 2004 Debentures due to Midsummer bear interest at a rate of 9% per annum,
and provide for interest only payments on a quarterly basis, payable, at our
option, in cash or shares of our common stock. The March 2004 Debentures
initially matured on May 15, 2006, but the maturity date was extended to April
30, 2007 pursuant to the Amendment and Waiver between us and Midsummer dated
April 23, 2007.
18
We entered into a registration rights agreement with Omicron and Midsummer dated
March 15, 2004 (the "Omicron/Midsummer Registration Rights Agreement"), pursuant
to which we were required to file a registration statement respecting the common
stock issuable upon the conversion of the March 2004 Debentures and exercise of
the warrants within 30 days after March 15, 2004, and to use best efforts to
have the registration statement declared effective at the earliest date but in
no event later than 90 days after March 15, 2004 (or 120 days in the event of
full review). The Omicron/Midsummer Registration Rights Agreement provided that
if we failed to file a registration statement within such 30 day period or have
it declared effective within such 90 day period (or 120 day period in the event
of a full review), we were obligated to pay liquidated damages to Omicron and
Midsummer equal to 2% per month of each of their initial subscription amounts
plus the value of any outstanding warrants. The filing deadline was extended to
October 31, 2007 pursuant to the March/April 2007 Amendments, and the initial
effectiveness date was amended to 135 days after the filing date.
The outstanding balance of Midsummer Debenture, including accrued interest, is
$0.9 million at September 30, 2007.
TOMCZAK/BOONE
In connection with the RTI acquisition in June 2004, we issued promissory notes
to RTI's two principals, Michael Tomczak and Jeffrey Boone, totaling $2.6
million ("Officers Notes"). The Officers Notes were due on June 1, 2006 and
payable in monthly installments in aggregate of $20,000 from June 1, 2004
through May 1, 2005, increasing to $0.2 million from June 1, 2005. The Officers
Notes earn interest at a rate of 6.5% per annum. The balance of the Officers
Notes is $2.5 million at September 30, 2007.
On April 18, 2005, in conjunction with the issuance of a secured term note to
Multi-Channel Holdings, Inc., pursuant to a Subordinated Seller Note
Subordination Agreement ("Subordination Agreement"), the Officers Notes were
subordinated to the debts owed by us to Multi-Channel Holdings, Inc. and Laurus
("Senior Debts"), prohibiting any payment of principal or interest on the
Officers Notes until the Senior Debts have been paid in full.
LAURUS
On July 12, 2004, we sold and issued a secured convertible term note (the
"Laurus Note") to Laurus Master Fund, Ltd. ("Laurus") for gross proceeds of $7.0
million pursuant to a Securities Purchase Agreement. In addition, we issued
Laurus a warrant to purchase up to 3,750,000 shares of our common stock at a
price of $0.71 per share (the "Laurus Warrant").
The Laurus 2004 Convertible Note initially matured on September 1, 2004,
however, the maturity date was automatically extended to July 12, 2007 (the
"Maturity Date") upon our stockholders approving an increase in our authorized
common stock from 100 to 250 million shares and our filing an amendment to our
certificate of incorporation to effect such change on August 27, 2004. The
Laurus 2004 Convertible Note accrues interest at a rate per annum equal to the
"prime rate" published in The Wall Street Journal from time to time, plus two
percent. Interest under the Laurus 2004 Convertible Note is payable monthly in
arrears commencing August 1, 2004. The Interest Rate is recalculated with each
change in the prime rate and is subject to adjustment based on the then-current
price of our common stock. The initial conversion price under the Laurus 2004
Convertible Note was $0.56 per share, subject to adjustment upon our issuance of
securities at a price below the fixed conversion price, a stock split or
combination, declaration of a dividend on our common stock or reclassification
of our common stock. We have the option to redeem the Laurus 2004 Convertible
Note by paying Laurus 125% of the principal amount due under the Laurus 2004
Convertible Note together with all accrued and unpaid interest. Our obligations
under the Laurus 2004 Convertible Note are secured by all of our assets and
guaranteed by our subsidiaries, pursuant to the Laurus Security Instruments.
The balance of the Laurus 2004 Convertible Note, including accrued interest, is
$6.8 million at September 30, 2007.
On February 29, 2008, the Company entered into an Omnibus Amendment and Waiver
of the Laurus Note extending the maturity date to January 31, 2011 and amending
the fixed conversion price applicable to the note to $0.08 for the first
$688,955 converted, $0.12 for the next $688,955 converted and $0.15 the for
balance converted. The Company acknowledged a late payment penalty based upon
the occurrence of defaults totaling $755,626 and $355,586 of the late penalty
payment was recognized as of September 30, 2007.
JUNE 2005 CONVERTIBLE NOTES
On June 15, 2005, we sold and issued secured convertible term notes to Laurus
for gross proceeds of $3.2 million (the "Laurus June 2005 Convertible Note") and
to Midsummer for gross proceeds of $1.0 million (the "Midsummer June 2005
Convertible Note") (together the "June 2005 Convertible Notes") pursuant to
Securities Purchase Agreements. We also issued Laurus and Midsummer warrants to
purchase up to 4,444,444 and 1,388,889 shares of our common stock, respectively,
19
at a price of $0.23 per share (the "June 2005 Warrants") and options to purchase
up to 17,142,857 and 5,357,143 shares of our common stock, respectively, at the
price of $0.01 per share (the "June 2005 Options").
The June 2005 Convertible Notes mature on June 15, 2008 and accrue interest at a
rate per annum equal to the "prime rate" published in The Wall Street Journal
from time to time, plus one percent, calculated each day that the prime rate
changes, payable monthly in arrears commencing on July 1, 2005. In addition to
accrued interest, commencing on October 3, 2005, the June 2005 Convertible Notes
require monthly principal payments to Laurus and Midsummer of $106,667 and
$40,000, respectively. The principal payments have been deferred pursuant to
November 2005, March 2006, October/November 2006, and March/April 2007
Amendments below. The June 2005 Convertible Notes are convertible to common
stock at $0.20 per share, subject to adjustment upon our issuance of securities
at a price below the fixed conversion price, a stock split or combination,
declaration of a dividend on our common stock or reclassification of our common
stock. Our obligations under the June 2005 Convertible Notes are secured by all
of our assets and guaranteed by our subsidiaries pursuant, with respect to
Laurus, to the Master Security Agreement and Subsidiary Guaranty in favor of
Laurus dated July 12, 2004 (the "Laurus Security Instruments") and, with respect
to Midsummer, to the Master Security Agreement and the Subsidiary Guaranty in
favor of Midsummer dated June 15, 2005 (the "Midsummer Security Instruments").
The balance of the June 2005 Convertible Notes, including accrued interest, is
$4.2 million at September 30, 2007.
On February 29, 2008, the Company entered into an Omnibus Amendment and Waiver
of the Laurus Note extending the maturity date to January 31, 2011 and amending
the fixed conversion price applicable to the note to $0.08 for the first
$688,955 converted, $0.12 for the next $688,955 converted and $0.15 the for
balance converted. The Company acknowledged a late payment penalty based upon
the occurrence of defaults totaling $755,626 and $355,586 of the late penalty
payment was recognized as of September 30, 2007.
NOVEMBER 2005 TERM NOTES
On November 16, 2005, we sold and issued secured term notes to Laurus for gross
proceeds of $637,500 (the "Laurus November 2005 Term Note") and to Midsummer for
gross proceeds of $212,500 (the "Midsummer November 2005 Term Note") (together
the "November 2005 Term Notes") pursuant to securities purchase agreements. In
addition, we issued Laurus and Midsummer options to purchase up to 1,125,000 and
375,000 shares of our common stock, respectively at the price of $0.01 per share
(the "November 2005 Options).
The November 2005 Term Notes initially matured on February 1, 2006 but the
maturity dates were extended to June 30, 2007 pursuant to the March/April 2007
Amendments. The November 2005 Term Notes accrue interest at a rate per annum
equal to the "prime rate" published in The Wall Street Journal from time to
time, plus two percent, calculated each day that the prime rate changes, payable
monthly in arrears commencing on December 1, 2005. Our obligations under the
November 2005 Term Notes are secured by all of our assets and guaranteed by our
subsidiaries pursuant to the Laurus Security Instruments and the Midsummer
Security Instruments.
The balance of the November 2005 Term Notes, including accrued interest, is $3.3
million at September 30, 2007.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations, including purchase
commitments at September 30, 2007, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
Payment due by period
----------------------------
Less than 1
Contractual Cash Obligations Total year 1-3 years 3-5 years Thereafter
----------------------------------- ------------- ------------- ------------- ------------- ------------
(in thousands)
Long-term debt obligations $ 10,947 $ 10,947 $ - $ - $ -
Operating leases 6,571 1,655 3,297 1,619 -
Purchase obligations 5,101 5,101 - - -
------------- ------------- ------------- ------------- ------------
Total contractual cash
obligations $ 22,619 $ 17,703 $ 3,297 $ 1,619 $ -
============= ============= ============= ============= ============
20
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
There are several accounting policies that are critical to understanding our
historical performance. These policies affect the reported amounts of revenue
and other significant areas in our reported financial statements and involve
management's judgments and estimates. These critical accounting policies include
the following:
o ACCOUNTS RECEIVABLE. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support and
consulting services performed on a time and material basis are due
upon receipt. From time to time software and consulting services are
provided under fixed price contracts where the revenue and the
payment of related receivable balances are due upon the achievement
of certain milestones. Management estimates the probability of
collection of the receivable balances and provides an allowance for
doubtful accounts based upon an evaluation of our customers' ability
to pay and general economic conditions.
o VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We test
goodwill for impairment on an annual basis or more frequently if
certain events occur. Goodwill is to be measured for impairment by
reporting units, which currently consist of our operating segments.
At each impairment test for a business unit, we are required to
compare the carrying value of the business unit to the fair value of
the business unit. If the fair value exceeds the carrying value,
goodwill will not be considered impaired. If the fair value is less
than the carrying value, we will perform a second test comparing the
implied fair value of the business unit goodwill with the carrying
amount of that goodwill. The difference, if any, between the
carrying amount of that goodwill and the implied fair value will be
recognized as an impairment loss, and the carrying amount of the
associated goodwill will be reduced to its implied fair value. These
tests require us to make estimates and assumptions concerning prices
for similar assets and liabilities, if available, or estimates and
assumptions for other appropriate valuation techniques.
For our intangible assets with finite lives, including our
capitalized software and non-compete agreements, we assess
impairment at least annually or whenever events and circumstances
suggest the carrying value of an asset may not be recoverable based
on the net future cash flows expected to be generated from the asset
on an undiscounted basis in accordance with SFAS No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". When we determine that the carrying
value of intangibles with finite lives may not be recoverable, we
measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model.
o APPLICATION DEVELOPMENT. The costs to develop new software products
and enhancements to existing software products are expensed as
incurred until Technological Feasibility has been established.
Technological Feasibility has occurred when all planning, designing,
coding and testing have been completed according to design
specifications. Once Technological Feasibility is established, any
additional costs would be capitalized, in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed".
o REVENUE RECOGNITION. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations.
In addition, our revenue recognition determines the timing of
certain expenses such as commissions and royalties. We follow
specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy.
21
We license software under non-cancelable agreements and provide
related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended and
interpreted by Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain
Transactions" as well as Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition", updated by SABs 103 and 104, "Update of
Codification of Staff Accounting Bulletins", and Technical Practice
Aids issued from time to time by the American Institute of Certified
Public Accountants. When a software sales arrangement requires
professional services related to significant production,
modification or customization of software, or when a customer
considers our professional services essential to the functionality
of the software product, we follow the guidance in Statement of
Position 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.".
We recognize software license revenue, including third party license
revenues or partner products, from sales to end users or resellers
upon the occurrence of all of the following events:
a) execution of agreements, contracts, purchase orders, or
other arrangements, generally signed by both parties
(except in customer specific or procedural instances in
which we have a customary business practice of accepting
orders without signed agreements);
b) delivery of the software;
c) establishment of a fixed or determinable license fee;
d) reasonable assurance of the collectibility of the
proceeds; and
e) determination that vendor specific objective evidence
("VSOE") of fair value exists for any undelivered
elements of the arrangement.
If a software license arrangement with an end user contains customer
acceptance criteria, revenue is recognized when we can objectively
demonstrate that the software can meet the acceptance criteria or
the acceptance period lapses, whichever occurs earlier. If a
software license arrangement with an end user contains a
cancellation right, the software revenue is recognized upon the
expiration of the cancellation right. Typically, payments for our
software licenses are due in installments within twelve months from
the date of delivery. Where software license agreements call for
payment terms of twelve months or more from the date of delivery,
revenue is recognized as payments become due and all other
conditions for revenue recognition have been satisfied.
Software license revenue derived from sales to resellers who
purchase our product for resale to end users is recognized upon
delivery of the software to the reseller based on our Business
Partner contracts and our Business Partner Return Policy which
limits our exposure to costs and losses that may occur in connection
with the return of software licenses. Our selection of resellers to
act as business partners and the terms of the related contracts meet
the qualifications for revenue recognition under SFAS No. 48,
"Revenue Recognition When Right of Return Exists". Based on our
experience with out return policy, our exposure to losses from
returns by resellers at the end of any reporting period is
immaterial.
We have established VSOE for all elements included in our sales
contracts - license fees and upgrades, professional services, and
maintenance services. License fees and upgrades are based on an
established matrix of prices applicable to each customer's system
requirements. Professional services related to modification,
implementation, and installation of systems and training of customer
personnel are based on standardized hourly rates for the skill level
of service performed. Maintenance revenues are based on a schedule
of fees applicable to the customers' varying maintenance
requirements, and are generated by contracts that are separate from
arrangements to provide licenses and/or services to our customers.
The revenue from undelivered elements in an arrangement at the end
of any reporting period is deferred based on the VSOE of that
element. Deferred revenue consists primarily of deferred license
fees, unearned maintenance contract revenue, and unearned contract
revenue accounted for using the completed contract method.
Some of our software license arrangements require professional
services for significant production, customization or modification
of the software, or to meet the customer's requirements for services
that are essential to the functionality of the software product. In
these arrangements, both the software licenses revenue and the
professional services revenue are recognized using the percentage of
completion method, based on labor hours incurred versus the estimate
of total hours required to complete the project under the guidance
of SOP 81-1. Any expected losses on contracts in progress are
recorded in the period in which the losses become probable and
reasonably estimable. Contracts whose scope does not allow a
reasonable estimation of the percentage of completion, that contain
clauses that present a significant potential impediment to
completion, or that contain a cancellation right are accounted for
using the completed contract method.
22
In addition to professional services performed in conjunction with
the sales of new licenses or license upgrades, we perform consulting
services that are separately priced, are generally available from a
number of suppliers, and include project management, system
planning, design and implementation, customer configurations, and
training. These consulting services are billed on both an hourly
basis (Time and Material) and under fixed price contracts.
Consulting services revenue billed on an hourly basis is recognized
as the work is performed. On fixed price contracts, consulting
services revenue is recognized using the percentage of completion
method of accounting by relating hours incurred to date to total
estimated hours at completion. We have, from time to time, provided
software and consulting services under fixed price contracts having
a payment schedule based on the achievement of certain milestones.
Provided that we are able to determine that the services being
performed will meet the milestone criteria, we recognize revenue on
these contracts on the percentage of completion method without
reference to the milestones. Otherwise, we defer the earned revenue
determined under the percentage of completion method until the
milestone(s) has been achieved.
Customer support services include post-contract support and the
rights to unspecified upgrades and enhancements. Maintenance
revenues from ongoing customer support services are billed on a
monthly basis and recorded as revenue in the applicable month, or on
an annual basis with the revenue being deferred and recognized
ratably over the maintenance period.
o REGISTRATION RIGHTS AGREEMENTS. We classify the liquidated damages
clause contained in the Registration Rights Agreements entered
concurrently with the various long-term debt instruments pursuant to
Emerging Issues Task Force Issue No. 05-4, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to Issue No. 00-19" ("EITF 05-4") as a separate financial
instrument. Following the guidance of FASB Staff Position No. EITF
00-19-2, we recognize the contingent obligation to make future
payments under the Registration Rights Agreements in accordance with
SFAS No. 5, "Accounting for Contingencies".
o STOCK-BASED COMPENSATION. Effective April 1, 2005, we commenced
accounting for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "Share-Based Payment", issued in
December 2004 as a revision of SFAS No. 123 and requiring that the
cost resulting from share based payments be recognized n the
financial statements using a fair value measurement. The share-based
payments arise from the grant of stock options from one of the plans
described in Note 12 and compensation is recorded using a
closed-form option-pricing model which assumes that the option
exercises occur at the end of the contractual term and that the
expected volatility, expected dividends, and risk-free interest
rates are constant over the option's term.
We account for the cost of stock-based compensation on a
straight-line basis over the requisite service period for the entire
award. In adopting the provisions of SFAS 123(R), we used the
Modified Prospective Application to account for the compensation
cost of the portion of previously-issued stock options for which the
requisite service period had not been rendered at March 31, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". SFAS
No. 141(R) revises SFAS No. 141, "Business Combinations" to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects by recognizing and measuring the identifiable assets
acquired, liabilities assumed, and any non-controlling interest in the acquiree;
recognizing and measuring the goodwill acquired in the business combination or a
gain from a bargain purchase; and determining the information to be disclosed.
The provisions of this Statement are effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
23
In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in
Consolidated Financial Statements". SFAS No. 160 amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. The provisions of this Statement are effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in foreign currency exchange rate as
measured against the U.S. dollar.
INTEREST RATE RISK
At September 30, 2007, we have $6.8 million of outstanding debt under the Laurus
2004 Convertible Note issued July 12, 2004 bearing interest at the prime rate
plus 2%. At September 30, 2007, the applicable interest rate, based on the prime
rate, is 9.75%.
At September 30, 2007, we have $4.2 million outstanding under the June 2005
Convertible Notes issued June 15, 2005 bearing interest at the prime rate plus
1%. At September 30, 2007, the applicable interest rate, based on the prime
rate, is 8.75%.
At September 30, 2007, we have $3.3 million outstanding under term notes to
Laurus and Midsummer bearing interest at the prime rate plus 2% (effective rate
at September 30, 2007 - 9.75%).
FOREIGN CURRENCY EXCHANGE RATE RISK
We conduct business in various foreign currencies, primarily in Europe. Sales
are typically denominated in the local foreign currency, which creates exposures
to changes in exchange rate. These changes in the foreign currency exchange
rates as measured against the U.S. dollar may positively or negatively affect
our sales, gross margins and retained earnings. We attempt to minimize currency
exposure risk through decentralized sales, development, marketing and support
operations, in which substantially all costs are local-currency based. There can
be no assurance that such an approach will be successful, especially in the
event of a significant and sudden decline in the value of the foreign currency.
Approximately 13% of our total revenues were denominated in currencies other
than the U.S. dollar for each of the six months ended September 30, 2007 and
2006, respectively.
EQUITY PRICE RISK
We have no direct equity investments.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial and accounting officer, have conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that were in effect at the end of the period
covered by this report. Based on their evaluation, our principal executive
officer and principal financial and accounting officer have concluded that our
disclosure controls and procedures were effective to ensure that all material
information relating to us that is required to be included in the reports that
we file with the SEC is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no new reportable events and no material developments in the status of
any legal proceedings. See Note 12 to the accompanying financial statements.
ITEM 1A. RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN OUR FORM 10-K FOR THE YEAR ENDED MARCH 31, 2007 AND
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007. INVESTING IN OUR COMMON
STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THOSE DESCRIBED BELOW,
RISKS AND UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY
BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS OCCUR, OUR BUSINESS COULD BE HARMED. THE PRICE OF OUR COMMON
STOCK COULD DECLINE AND OUR INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
SEE THE NOTE REGARDING FORWARD-LOOKING STATEMENTS INCLUDED AT THE BEGINNING OF
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS IN THIS FORM 10-Q.
24
WE INCURRED LOSSES FOR FISCAL YEARS 2007, 2006 AND 2005.
We incurred losses of $7.2 million, $10.4 million and $20.9 million in the
fiscal years ended March 31, 2007, 2006, and 2005 respectively. The losses in
the past three years have generally been due to difficulties completing sales
for new application software licenses, the resulting change in sales mix toward
lower margin services, and debt service expenses. We will need to generate
additional revenue to achieve profitability in future periods. If we are unable
to achieve profitability, or maintain profitability if achieved, our business
and stock price may be adversely affected and we may be unable to continue
operations at current levels, if at all.
WE HAD NEGATIVE WORKING CAPITAL AT SEPTEMBER 30, 2007 AND IN THE PRIOR FISCAL
YEAR, AND WE HAVE EXTENDED PAYMENT TERMS WITH A NUMBER OF OUR SUPPLIERS.
At September 30, 2007 and March 31, 2007, we had negative working capital of
$21.7 million and $17.1 million, respectively. We have had difficulty meeting
operating expenses, including interest payments on debt, lease payments and
supplier obligations. We have at times deferred payroll for our executive
officers, and borrowed from related parties to meet payroll obligations. We have
extended payment terms with our trade creditors wherever possible.
As a result of extended payment arrangements with suppliers, we may be unable to
secure products and services necessary to continue operations at current levels
from these suppliers. In that event, we will have to obtain these products and
services from other parties, which could result in adverse consequences to our
business, operations and financial condition, and we may be unable to obtain
these products from other parties on terms acceptable to us, if at all.
OUR FINANCIAL CONDITION MAY INTERFERE WITH OUR ABILITY TO SELL NEW APPLICATION
SOFTWARE LICENSES.
Future sales growth may depend on our ability to improve our financial
condition. Our past financial condition has made it difficult for us to complete
sales of new large enterprise application software licenses. Because our large
enterprise applications typically require lengthy implementation and extended
servicing arrangements, potential customers require assurance that these
services will be available for the expected life of the application. These
potential customers may defer buying decisions until our financial condition
improves, or may choose the products of our competitors whose financial
conditions are, or are perceived to be, stronger. Customer deferrals or lost
sales will adversely affect our business, financial conditions and results of
operations.
OUR LARGE ENTERPRISE SALES CYCLES ARE LONG AND PROSPECTS ARE UNCERTAIN. THIS
MAKES IT DIFFICULT FOR US TO PREDICT REVENUES AND BUDGET EXPENSES.
The length of large enterprise sales cycles in our business makes it difficult
to evaluate the effectiveness of our sales strategies. Our large enterprise
sales cycles historically have ranged from three to twelve months, which has
caused significant fluctuations in revenues from period to period. Due to our
difficulties in completing new application software sales in recent periods and
our refocused sales strategy, it is difficult to predict revenues and properly
budget expenses.
Our software applications are complex and perform or directly affect
mission-critical functions across many different functional and geographic areas
of the retail enterprise. In many cases, our customers must change established
business practices when they install our software. Our sales staff must dedicate
significant time consulting with a potential customer concerning the substantial
technical and business concerns associated with implementing our products. The
purchase of our products is often discretionary, so lengthy sales efforts may
not result in a sale. Moreover, it is difficult to predict when a license sale
will occur. All of these factors can adversely affect our business, financial
condition and results of operations.
OUR OPERATING RESULTS AND REVENUE HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND
THEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK
PRICE.
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, which are outside of
our control, including the size and timing of orders, the general health of the
retail industry, the length of our sales cycles and technological changes. If
revenue declines in a quarter, our operating results will be adversely affected
because many of our expenses are relatively fixed. In particular, sales and
marketing, application development and general and administrative expenses do
not change significantly with variations in revenue in a quarter. It is likely
that in some future quarter our revenues or operating results will be below the
expectations of public market analysts or investors. If that happens, our stock
price will likely decline.
25
Further, due to these fluctuations, we do not believe period to period
comparisons of our financial performance are necessarily meaningful nor should
they be relied on as an indication of our future performance.
WE MAY EXPERIENCE SEASONAL DECLINES IN SALES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FALL SHORT OF EXPECTATIONS IN SOME QUARTERS.
We may experience slower sales of our applications and services from October
through December of each year as a result of retailers' focus on the holiday
retail-shopping season. This can negatively affect revenues in our third fiscal
quarter and in other quarters, depending on our sales cycles.
WE MAY NEED TO RAISE CAPITAL TO GROW OUR BUSINESS. OBTAINING THIS CAPITAL COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
We may need to raise further capital to:
o support unanticipated capital requirements;
o take advantage of acquisition or expansion opportunities;
o continue our current development efforts;
o develop new applications or services; or
o address working capital needs.
Our future capital requirements depend on many factors including our application
development and sales and marketing activities. We do not know whether
additional financing will be available when needed, or available on terms
acceptable to us. If we cannot raise needed funds for the above purposes on
acceptable terms, we may be forced to curtail some or all of the above
activities and we may not be able to grow our business or respond to competitive
pressures or unanticipated developments.
We may raise capital through public or private equity offerings or debt
financings. To the extent we raise additional capital by issuing equity
securities or convertible debt securities, our stockholders may experience
substantial dilution and the new securities may have greater rights, preferences
or privileges than our existing common stock.
INTANGIBLE ASSETS MAY BE IMPAIRED MAKING IT MORE DIFFICULT TO OBTAIN FINANCING.
Goodwill, capitalized software, and other intangible assets represent
approximately 90% of our total assets as of September 30, 2007. We may have to
impair or write-off these assets, which will cause a charge to earnings and
could cause our stock price to decline. Any such impairment will also reduce our
assets, as well as the ratio of our assets to our liabilities. These balance
sheet effects could make it more difficult for us to obtain capital, and could
make the terms of capital we do obtain more unfavorable to our existing
stockholders.
FOREIGN CURRENCY FLUCTUATIONS MAY IMPAIR OUR COMPETITIVE POSITION AND AFFECT OUR
OPERATING RESULTS.
Fluctuations in currency exchange rates affect the prices of our applications
and services and our expenses, and foreign currency losses will negatively
affect profitability or increase losses. Approximately 72%, 24% and 4% of our
revenues were in the Americas, Europe and Asia, respectively, in the three
months ended September 30, 2007. Many of our expenses related to foreign sales,
such as corporate level administrative overhead and development, are denominated
in U.S. dollars. When accounts receivable and accounts payable arising from
international sales and services are converted to U.S. dollars, the resulting
gain or loss contributes to fluctuations in our operating results. We do not
hedge against foreign currency exchange rate risks.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
AND SALES PERSONNEL, OR IF WE ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL
TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE
IMPAIRED.
We are heavily dependent on our CEO, Barry Schechter. We believe our future
success will depend largely upon our ability to attract and retain
highly-skilled software programmers, managers and sales and marketing personnel.
Competition for personnel is intense, particularly in international markets. The
software industry is characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. We compete against numerous
companies, including larger, more established companies, for our personnel. We
may not be successful in attracting or retaining skilled sales, technical and
managerial personnel, which could negatively affect our financial performance
and cause our stock price to decline.
26
On January 10, 2008, the Company received a "Wells Letter" from the staff of the
SEC. The Company has been informed that its Chief Executive Officer, Mr. Barry
Schechter, also received a Wells Letter. The Wells Letters stated the staff of
the SEC is considering recommending the SEC bring civil injunctive actions
against the Company and Mr. Schechter for alleged violations of the federal
securities laws. Under the process established by the SEC, the recipients have
an opportunity to respond before any action is brought against them. Discussions
are ongoing between the staff and the recipients' counsel with respect to the
alleged violations and possible resolution of the matter. There is no assurance
that a resolution can be reached, or that the ultimate impact will not be
material.
WE ARE DEPENDENT ON THE RETAIL INDUSTRY, AND IF ECONOMIC CONDITIONS IN THE
RETAIL INDUSTRY FURTHER DECLINE, OUR REVENUES MAY ALSO DECLINE. RETAIL SALES
HAVE BEEN AND MAY CONTINUE TO BE SLOW.
Our future growth is critically dependent on increased sales to the retail
industry. We derive the substantial majority of our revenues from the licensing
of software applications and the performance of related professional and
consulting services to the retail industry. The retail industry as a whole is
currently experiencing increased competition and weakening economic conditions
that could negatively impact the industry and our customers' ability to pay for
our products and services. In addition, the retail industry may be
consolidating, and it is uncertain how consolidation will affect the industry.
Such consolidation and weakening economic conditions have in the past, and may
in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition. Specifically, uncertain economic conditions and the specter of
terrorist activities have adversely impacted sales of our software applications,
and we believe mid-tier specialty retailers may be reluctant during the current
economic climate to make the substantial infrastructure investment that
generally accompanies the implementation of our software applications, which may
adversely impact our business.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
THE INTENSE COMPETITION IN THE RETAIL SOFTWARE INDUSTRY.
We conduct business in an industry characterized by intense competition. Most of
our competitors are very large companies with an international presence. We must
also compete with smaller companies which have been able to develop strong local
or regional customer bases. Many of our competitors and potential competitors
are more established, benefit from greater name recognition and have
significantly greater resources than us. Our competitors may also have lower
cost structures and better access to the capital markets than us. As a result,
our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our competitors may:
o introduce new technologies that render our existing or future
products obsolete, unmarketable or less competitive;
o make strategic acquisitions or establish cooperative relationships
among themselves or with other solution providers, which would
increase the ability of their products to address the needs of our
customers; and
o establish or strengthen cooperative relationships with our current
or future strategic partners, which would limit our ability to
compete through these channels.
We could be forced to reduce prices and suffer reduced margins and market share
due to increased competition from providers of offerings similar to, or
competitive with, our applications, or from service providers that provide
services similar to our services. Competition could also render our technology
obsolete.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO OUR SUCCESS DEPENDS
HEAVILY ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED
SERVICES.
The retail software industry is characterized by rapid technological change,
evolving standards and wide fluctuations in supply and demand. We must
cost-effectively develop and introduce new applications and related services
that keep pace with technological developments to compete. If we do not gain
market acceptance for our existing or new offerings or if we fail to introduce
progressive new offerings in a timely or cost-effective manner, our financial
performance will suffer.
27
The success of application enhancements and new applications depends on a
variety of factors, including technology selection and specification, timely and
efficient completion of design, and effective sales and marketing efforts. In
developing new applications and services, we may:
o Fail to respond to technological changes in a timely or
cost-effective manner;
o Encounter applications, capabilities or technologies developed by
others that render our applications and services obsolete or
non-competitive or that shorten the life cycles of our existing
applications and services;
o Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new applications
and services; or
o Fail to achieve market acceptance of our applications and services.
The life cycles of our applications are difficult to estimate, particularly in
the emerging electronic commerce market. As a result, new applications and
enhancements, even if successful, may become obsolete before we recoup our
investment.
OUR PROPRIETARY RIGHTS OFFER ONLY LIMITED PROTECTION AND OUR COMPETITORS MAY
DEVELOP APPLICATIONS SUBSTANTIALLY SIMILAR TO OUR APPLICATIONS AND USE SIMILAR
TECHNOLOGIES WHICH MAY RESULT IN THE LOSS OF CUSTOMERS. WE MAY HAVE TO BRING
COSTLY LITIGATION TO PROTECT OUR PROPRIETARY RIGHTS.
Our success and competitive position is dependent in part upon our ability to
develop and maintain the proprietary aspects of our intellectual property. Our
intellectual property includes our trademarks, trade secrets, copyrights and
other proprietary information. Our efforts to protect our intellectual property
may not be successful. Effective copyright and trade secret protection may be
unavailable or limited in some foreign countries. We hold no patents.
Consequently, others may develop, market and sell applications substantially
equivalent to ours or utilize technologies similar to those used by us, so long
as they do not directly copy our applications or otherwise infringe our
intellectual property rights.
We may find it necessary to bring claims or initiate litigation against third
parties for infringement of our proprietary rights or to protect our trade
secrets. These actions would likely be costly and divert management resources.
These actions could also result in counterclaims challenging the validity of our
proprietary rights or alleging infringement on our part. The ultimate outcome of
any litigation will be difficult to predict.
OUR APPLICATIONS MAY BE SUBJECT TO CLAIMS THEY INFRINGE ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION.
We may become subject to litigation involving patents or proprietary rights of
third parties. Patent and proprietary rights litigation entails substantial
legal and other costs, and we do not know if we will have the necessary
financial resources to defend or prosecute our rights in connection with any
such litigation. Responding to and defending claims related to our intellectual
property rights, even ones without merit, can be time consuming and expensive
and can divert management's attention from other business matters. In addition,
these actions could cause application delivery delays or require us to enter
into royalty or license agreements. Royalty or license agreements, if required,
may not be available on terms acceptable to us, if they are available at all.
Any or all of these outcomes could have a material adverse effect on our
business, operating results and financial condition.
DEVELOPMENT AND MARKETING OF OUR OFFERINGS DEPENDS ON STRATEGIC RELATIONSHIPS
WITH OTHER COMPANIES. OUR EXISTING STRATEGIC RELATIONSHIPS MAY NOT ENDURE AND
MAY NOT DELIVER THE INTENDED BENEFITS, AND WE MAY NOT BE ABLE TO ENTER INTO
FUTURE STRATEGIC RELATIONSHIPS.
Since we do not possess all of the technical and marketing resources necessary
to develop and market our offerings to target markets, our business strategy
substantially depends on our strategic relationships. While some of these
relationships are governed by contracts, most are non-exclusive and all may be
terminated on short notice by either party. If these relationships terminate or
fail to deliver the intended benefits, our development and marketing efforts
will be impaired and our revenues may decline. We may not be able to enter into
new strategic relationships, which could put us at a disadvantage to those of
our competitors, who do successfully exploit strategic relationships.
OUR PRIMARY COMPUTER AND TELECOMMUNICATIONS SYSTEMS ARE IN A LIMITED NUMBER OF
GEOGRAPHIC LOCATIONS, WHICH MAKES THEM MORE VULNERABLE TO DAMAGE OR
INTERRUPTION. THIS DAMAGE OR INTERRUPTION COULD HARM OUR BUSINESS.
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Substantially all of our primary computer and telecommunications systems are
located in four geographic areas. These systems are vulnerable to damage or
interruption from fire, earthquake, water damage, sabotage, flood, power loss,
technical or telecommunications failure or break-ins. Our business interruption
insurance may not adequately compensate us for our lost business and will not
compensate us for any liability we incur due to our inability to provide
services to our customers. Although we have implemented network security
measures, our systems are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. These disruptions could lead to
interruptions, delays, loss of data or the inability to service our customers.
Any of these occurrences could impair our ability to serve our customers and
harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
APPLICATIONS.
Our business exposes us to product liability risks. Any product liability or
other claims brought against us, if successful and of sufficient magnitude,
could negatively affect our financial performance and cause our stock price to
decline.
Our applications are highly complex and sophisticated and they may occasionally
contain design defects or software errors that could be difficult to detect and
correct. In addition, implementation of our applications may involve
customer-specific customization by us or third parties, and may involve
integration with systems developed by third parties. These aspects of our
business create additional opportunities for errors and defects in our
applications and services. Problems in the initial release may be discovered
only after the application has been implemented and used over time with
different computer systems and in a variety of other applications and
environments. Our applications have in the past contained errors that were
discovered after they were sold. Our customers have also occasionally
experienced difficulties integrating our applications with other hardware or
software in their enterprise.
We are not currently aware of any defects in our applications that might give
rise to future lawsuits. However, errors or integration problems may be
discovered in the future. Such defects, errors or difficulties could result in
loss of sales, delays in or elimination of market acceptance, damage to our
brand or to our reputation, returns, increased costs and diversion of
development resources, redesigns and increased warranty and servicing costs. In
addition, third-party products, upon which our applications are dependent, may
contain defects which could reduce or undermine entirely the performance of our
applications.
Our customers typically use our applications to perform mission-critical
functions. As a result, the defects and problems discussed above could result in
significant financial or other damage to our customers. Although our sales
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims, we do not know if these
limitations of liability are enforceable or would otherwise protect us from
liability for damages to a customer resulting from a defect in one of our
applications or the performance of our services. Our product liability insurance
may not cover all claims brought against us.
LAURUS MASTER FUND, LTD. (LAURUS) HAS THE RIGHT TO ACQUIRE A SIGNIFICANT
PERCENTAGE OF OUR COMMON STOCK, WHICH IF ACQUIRED BY LAURUS, MAY ENABLE LAURUS
TO EXERCISE EFFECTIVE CONTROL OF US.
On July 12, 2004 and June 15, 2005, Laurus purchased convertible notes from us
in the amounts of $7 million and $3.2 million, respectively which are secured by
all of our assets. In addition, Laurus purchased our term note dated November
16, 2005 in the amount of $637,500, which was amended to $1,275,000, $2,025,000
and $2,625,000 on March 23, 2006, November 27, 2006 and March 30, 2007,
respectively. The convertible notes may be converted into 50,000,000 shares of
our common stock. In addition, warrants and options issued in connection with
the sale of the convertible and term notes are exercisable for approximately
28,700,000 shares of our common stock. Consequently, Laurus beneficially owns
approximately 48.3% of our outstanding common stock. If Laurus converts the
convertible notes to common stock and exercises the warrants and options, it may
have effective control over all matters affecting us, including:
o The election of all of our directors;
o The undertaking of business opportunities that may be suitable for
us;
o Any determinations with respect to mergers or other business
combinations involving us;
o The acquisition or disposition of assets or businesses by us;
o Debt and equity financing, including future issuance of our common
stock or other securities;
29
o Amendments to our charter documents;
o The payment of dividends on our common stock; and
o Determinations with respect to our tax returns.
LAURUS MASTER FUND, LTD'S POTENTIAL INFLUENCE ON US COULD MAKE IT DIFFICULT FOR
ANOTHER COMPANY TO ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Laurus' potential effective voting control could discourage others from
initiating any potential merger, takeover or other change of control transaction
that may otherwise be beneficial to our business or our stockholders. As a
result, Laurus' potential effective control could reduce the price that
investors may be willing to pay in the future for shares of our stock, or could
prevent any party from attempting to acquire us at any price.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new customer orders or services,
change pricing policies, experience quarterly fluctuations in operating results,
announce strategic relationships or acquisitions, change earnings estimates,
experience government regulatory actions or suffer from generally adverse
economic conditions, our stock price could be affected. Some of the volatility
in our stock price may be unrelated to our performance. Recently, companies
similar to ours have experienced extreme price fluctuations, often for reasons
unrelated to their performance.
WE HAVE NEVER PAID A DIVIDEND ON OUR COMMON STOCK NOR DO WE INTEND TO PAY
DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not previously paid any cash or other dividend on our common stock. We
anticipate that we will use our earnings and cash flow for repayment of
indebtedness, to support our operations, and for future growth, and we do not
have any plans to pay dividends in the foreseeable future. Future equity
financing(s) may further restrict our ability to pay dividends.
THE TERMS OF OUR PREFERRED STOCK MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series. Our board of directors may determine the terms of subsequent series
of preferred stock without further action by our stockholders. If we issue
preferred stock, it could affect your rights or reduce the value of your common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. We are actively seeking capital, and some of the arrangements we are
considering may involve the issuance of preferred stock.
SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS, WARRANTS, DEBENTURES AND
CONVERTIBLE NOTES OR UNDER ANTI-DILUTION PROVISIONS IN CERTAIN AGREEMENTS COULD
DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
We have issued options and warrants to acquire common stock to our employees and
certain other persons at various prices, some of which are or may in the future
have exercise prices at below the market price of our stock. We have outstanding
options and warrants for 59,728,550 shares at September 30, 2007. Of these
options and warrants, 24,080,737 shares have exercise prices above the September
30, 2007 market price of $0.09 per share, and 35,647,813 shares have exercise
prices at or below that market price. If exercised, these options and warrants
will cause immediate and possibly substantial dilution to our stockholders.
Our existing stock option plans have approximately 3,391,782 shares available
for issuance as of September 30, 2007. Future options issued under the plan may
have further dilutive effects.
The issuance of additional shares pursuant to exercisable options, warrants,
convertible notes or anti-dilution provisions will cause immediate and possibly
substantial dilution to our stockholders. Further, subsequent sales of the
shares in the public market could depress the market price of our stock by
creating an excess in supply of shares for sale. Issuance of these shares and
sale of these shares in the public market could also impair our ability to raise
capital by selling equity securities.
BUSINESS RISKS FACED BY PAGE DIGITAL COULD DISADVANTAGE OUR BUSINESS.
Page Digital is a developer of multi-channel commerce software and faces several
business risks that could disadvantage our business. These risks include many of
the risks that we face, described above, as well as:
30
o DEFECTS IN PRODUCTS COULD DIMINISH DEMAND FOR PRODUCTS AND RESULT IN
LOSS OF REVENUES - From time to time errors or defects may be found
in Page Digital's existing, new or enhanced products, resulting in
delays in shipping, loss of revenues or injury to Page Digital's
reputation. Page Digital's customers use its products for business
critical applications. Any defects, errors or other performance
problems could result in damage to Page Digital's customers'
businesses. These customers could seek significant compensation from
Page Digital for any losses. Further, errors or defects in Page
Digital's products may be caused by defects in third-party software
incorporated into Page Digital products. If so, Page Digital may not
be able to fix these defects without the assistance of the software
providers.
o FAILURE TO FORMALIZE AND MAINTAIN RELATIONSHIPS WITH SYSTEMS
INTEGRATORS COULD REDUCE REVENUES AND HARM PAGE DIGITAL'S ABILITY TO
IMPLEMENT PRODUCTS - A significant portion of Page Digital's sales
are influenced by the recommendations of systems integrators,
consulting firms and other third parties who assist with the
implementation and maintenance of Page Digital's products. These
third parties are under no obligation to recommend or support Page
Digital's products. Failing to maintain strong relationships with
these third parties could result in a shift by these third parties
toward favoring competing products, which could negatively affect
Page Digital's software license and service revenues.
o PAGE DIGITAL'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, SO PAGE DIGITAL'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO
DEVELOP AND INTRODUCE NEW APPLICATIONS AND RELATED SERVICES - The
retail software industry is characterized by rapid technological
change, evolving standards and wide fluctuations in supply and
demand. Page Digital must cost-effectively develop and introduce new
applications and related services that keep pace with technological
developments to compete. If Page Digital fails to gain market
acceptance for its existing or new offerings or if Page Digital
fails to introduce progressive new offerings in a timely or
cost-effective manner, our financial performance may suffer.
o FAILURE TO PROTECT PROPRIETARY RIGHTS OR INTELLECTUAL PROPERTY, OR
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST PAGE DIGITAL COULD
RESULT IN PAGE DIGITAL LOSING VALUABLE ASSETS OR BECOMING SUBJECT TO
COSTLY AND TIME-CONSUMING LITIGATION - Page Digital's success and
ability to compete depend on its proprietary rights and intellectual
property. Page Digital relies on trademark, trade secret and
copyright laws to protect its proprietary rights and intellectual
property. Despite Page Digital's efforts to protect intellectual
property, a third party could obtain access to Page Digital's
software source code or other proprietary information without
authorization, or could independently duplicate Page Digital's
software. Page Digital may need to litigate to enforce intellectual
property rights. If Page Digital is unable to protect its
intellectual property it may lose a valuable asset. Further, third
parties could claim Page Digital has infringed their intellectual
property rights. Any claims, regardless of merit, could be costly
and time-consuming to defend.
o COMPETITION IN THE SOFTWARE MARKET IS INTENSE AND COULD REDUCE PAGE
DIGITAL'S SALES OR PREVENT THEM FROM ACHIEVING PROFITABILITY - The
market for Page Digital's products is intensely competitive and
subject to rapid technological change. Competition is likely to
result in price reductions, reduced gross margins and loss of Page
Digital's market share, any one of which could reduce future
revenues or earnings. Further, most of Page Digital's competitors
are large companies with greater resources, broader customer
relationships, greater name recognition and an international
presence. As a result, Page Digital's competitors may be able to
better respond to new and emerging technologies and customer
demands.
o BUSINESS RISKS FACED BY RTI COULD DISADVANTAGE OUR BUSINESS.
RTI is a provider of retail management store solutions to small
through mid-tier retailers via an international network of retailers
and faces several business risks that could disadvantage our
business. These risks include many of the risks that we face,
described above, as well as:
o RTI FACES INTENSE COMPETITION IN THE RETAIL POINT OF SALE INDUSTRY -
RTI operates in an extremely competitive industry, which is subject
to rapid technological and market changes. We anticipate that the
competition will increase as more companies focus on providing
technology solutions to small and mid-tier retailers. Many of our
current and potential competitors, such as Microsoft, have more
resources to devote to product development, marketing and
distribution. While RTI believes that it has competitive strengths
in its market, there can be no assurance that RTI will continue to
compete successfully against larger more established competitors.
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o RTI IS DEPENDENT ON THEIR VALUE-ADDED RESELLERS (VARS) - RTI does
not have a direct sales force and relies on VARs to distribute and
sell its products. RTI currently has approximately 67 VARs - 27 in
North America, 7 in South America, 11 in Asia, 19 in Europe and the
Middle East, 1 in Africa, and 1 each in Australia and New Zealand.
Combined, RTI's four largest VARs account for approximately 14% of
its revenues, although no one is over 4%. RTI's VARs are
independently owned businesses and there can be no assurance that
one or more will not go out of business or cease to sell RTI
products. Until a replacement VAR could be recruited, and trained,
or until an existing VAR could expand into the vacated territory,
such a loss could result in a disruption in RTI's revenue and
profitability. Furthermore, there can be no assurance that an
adequate replacement could be located.
o A PROLONGED SLOWDOWN IN THE GLOBAL ECONOMY COULD ADVERSELY IMPACT
RTI'S REVENUES - A slowdown in the global economy might lead to
decreased capital spending, fewer new retail business start ups, and
slower new store expansion at existing retail businesses. Such
conditions, even on a regional basis could severely impact one or
more of RTI's VARs and result to a disruption in RTI's revenues, and
profitability.
o RTI'S PRODUCT MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, SO
RTI'S SUCCESS DEPENDS HEAVILY ON ITS ABILITY TO DEVELOP AND
INTRODUCE NEW APPLICATIONS AND RELATED SERVICES - We believe RTI's
ability to succeed in its market is partially dependent on its
ability to identify new product opportunities and rapidly,
cost-effectively bring them to market. However, there is no
guarantee that they will be able to gain market acceptance for any
new products. In addition, there is no guarantee that one of RTI
competitors will not be able to bring competing applications to
market faster or market them more effectively. Failure to
successfully develop new products, bring them to market and gain
market acceptance could result in decreased market share and
ultimately have a material adverse affect on RTI.
o RTI DOES NOT HOLD ANY PATENTS OR COPYRIGHTS, ANY TERMINATION OF OR
ADVERSE CHANGE TO RTI'S LICENSE RIGHTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON ITS BUSINESS - RTI has a license to develop, modify,
market, sell, and support its core technology from a third party.
Any termination of, or disruption in this license could have a
material adverse affect on RTI's business. Further, we believe that
most of the technology used in the design and development of RTI's
core products is widely available to others. Consequently, there can
be no assurance that others will not develop, and market
applications that are similar to RTI's, or utilize technologies that
are equivalent to RTI's. Likewise, while RTI believes that its
products do not infringe on any third party's intellectual property,
there can be no assurance that they will not become involved in
litigation involving intellectual property rights. If such
litigation did occur, it could have a material adverse affect on
RTI's business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2007, we issued the following
unregistered securities.
o September 6, 2007 - 200,000 restricted shares of our common stock
and a warrant to purchase an additional 200,000 shares of our common
stock related to the termination of a product distribution
agreement.
The foregoing securities were offered and sold without registration under the
Securities Act to sophisticated investors who had access to all information,
which would have been in a registration statement, in reliance upon the
exemption provided by Section 4(2) under the Securities Act and Regulation D
thereunder, and an appropriate legend was placed on the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three months ended September 30, 2007, there were no defaults upon
senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended September 30, 2007, no matters were submitted to a
vote of security holders.
ITEM 5. OTHER INFORMATION
There is no information required to be disclosed on Form 8-K during the three
months ended September 30, 2007.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
------- -----------
31.1 Certification of CEO required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 5, 2007, we filed a Form 8-K dated April 5, 2007 disclosing
as Item 1.01 a material definitive agreement to amend the secured
term notes dated November 16, 2005 to Laurus Master Fund, Ltd.
(Laurus), extend the maturity dates to June 30, 2007, extend the
deadline to file registration statements pursuant to certain
registration rights agreements to October 31, 2007, increase the
aggregate principal balances by $600,000, issue additional options
to purchase 1,000,000 shares of our common stock, and postpone
certain principal payments related to existing debt due to Laurus.
On April 24, 2007, we filed a Form 8-K dated April 24, 2007
disclosing as Item 1.01 a material definitive agreement to amend the
secured term notes dated November 16, 2005 to Midsummer Investments,
Ltd. (Midsummer), extend the maturity dates to April 30, 2007,
extend the deadline to file registration statements pursuant to
certain registration rights agreements to October 31, 2007, postpone
certain principal payments related to existing debt due to
Midsummer, and extend the maturity date of the 9% Convertible
Debenture dated March 15, 2004 to April 30, 2007.
On October 17, 2007, we filed a Form 8-K dated October 15, 2007,
disclosing as Item 2.02 the Company's preliminary financial results
for the fiscal years ended March 31, 2005, 2006, and 2007, and
disclosing as Item 7.01the final negotiations to sell our Island
Pacific Merchandising Solutions Division for $16.0 million
On November 5, 2007, we filed a Form 8-K dated November 1, 2007,
disclosing as Item 1.01 the entry into a material definitive
agreement to sell the Island Pacific Merchandising Solutions
Division and the "Island Pacific" name, related trademarks, service
marks, trade names, and all goodwill for $16.0 million to 3Q
Holdings Limited and its affiliates, subject to certain working
capital adjustments at the time the transaction closed.
On December 4, 2007, we filed a Form 8-K dated December 3, 2007,
disclosing as Items 1.01 and 5.02(b) the resignation of the
Company's Chief Operating Officer and Vice President of Business
Development and entry into a material definitive agreement of
severance to continue the departing officer's current compensation
for a period of six months, and payment of $3,000 per month for
six-months thereafter, inclusive of benefits.
On December 28, 2007, we filed a Form 8-K dated December 28, 2007,
disclosing as Items 1.01 and 2.01 the entry into a material
definitive agreement on December 20, 2007, by which the Company
entered into an Amending Deed relating to the sale of the Island
Pacific Merchandising Solutions Division to (a) revise certain
provisions for adjustment to the purchase price; (b) modify the
closing deliveries of the parties; and (c) modify certain other
rights and obligations of the parties in connection with the
transaction. The Company further disclosed, as part of the
transaction, entry into a Bill of Sale, Transition Services
Agreement, Assignment and Assumption Agreement, and Trademark
Assignment Deed.
33
On January 4, 2008, we filed a Form 8-K dated January 4, 2008,
disclosing as Item 5.03 the December 28, 2007, amendment of the
Company's Amended and Restated Certificate of Incorporation (the
"Certificate") to change its name to Retail Pro, Inc. through a
merger transaction with the Company's wholly owned subsidiary,
Retail Pro, Inc. The subsidiary was merged with and into the
Company, with the Company surviving the merger and changing its name
to Retail Pro, Inc. In connection with changing its name, the
Company announced it had also requested a new trading symbol.
On January 30, 2008, we filed a Form 8-K dated January 24, 2008,
disclosing as Item 5.02 (b) and (c) the resignation of Philip Bolles
as the Company's interim Chief Financial Officer effective January
24, 2008, and the appointment of Kevin Ralphs as the Company's
interim Chief Financial Officer effective January 24, 2008. The
Company also announced as Item 8.01 the receipt by the Company and
its Chief Executive Officer of a Wells letter from the staff of the
Securities and Exchange Commission and the change of the Company's
trading symbol to RTPR effective as of the open of the market on
January 29, 2008.
On March 10, 2008, we filed a Form 8-K dated March 3, 2008, as Items
1.01, 2.03, 3.02 and 9.01, the entry into a material definitive
agreement with Valens Offshore SPVII, Corp. c/o Laurus Master Fund,
Ltd. ("Laurus") for the sale of: (a) a Secured Term Note (the
"Note") in the principal amount of Two Million Five Hundred Thousand
Dollars ($2,500,000) due February 29, 2009, with certain prepayment
rights and bearing interest at the "prime rate" plus 2%, provided
that in no event shall the Contract Rate (as defined in the Note) be
less than 9.5%; and (b) a warrant to acquire an aggregate of
15,000,000 shares of the Company's common stock for One Cent ($0.01)
per share (the "Warrants"), which Warrants are immediately
exercisable and have ten (10) year terms. The Note and theWarrants
were issued without registration pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended, and
Regulation-D promulgated thereunder. In connection with the sale of
the Note and the Warrants, the Company entered into an Omnibus
Amendment and Waiver with Laurus pursuant to which: (a) the
principal balance of the Amended and Restated Secured Convertible
Term Note issued to Laurus on July 12, 2004 (the "July 2004 Note")
was acknowledged to be an aggregate outstanding principal amount of
$2,066,866.48; (b) the definition of Maturity date set forth in the
July 2004 Term Note was amended and extended to January 31, 2011;
(c) the "fixed conversion price" under the July 2004 Note was reset
to $0.08 per share for the first $688,955 converted thereunder, and
$2.00 thereafter; (d) the principal balance of the Secured Term
Convertible Note issued to Laurus on June 15, 2005 (the "June 2005
Note") was acknowledged to be an aggregate outstanding principal
amount of $3,200,000; (e) the definition of Maturity date set forth
in the June 2005 Term Note was amended and extended to January 31,
2011; and (f) the "fixed conversion price" under the June 2005 Note
was reset to $0.08 per share for the first $1,066,666 converted
thereunder, and $2.00 thereafter.
On March 11, 2008, we filed a Form 8-K dated March 6, 2008,
disclosing as Item 5.02(b) and (c) the resignation of Kevin Ralphs
as the Company's interim Chief Financial Officer effective March 6,
2008, and the appointment of Alfred F. Riedler as the Company's Vice
President Finance and Principal Financial Officer. The Company also
announced as Item 8.01 the relocation of its finance department.
34
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Retail Pro, Inc.
Registrant
/s/ Alfred F. Riedler
-----------------------------------------
Date: March 25, 2008 Principal Financial and Accounting Officer
Signing on behalf of the registrant
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