U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
|_| 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 0-27083
Aftersoft Group, Inc.
---------------------
(Exact name of small business issuer as specified in its charter)
Delaware 84-1108035
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Savannah House 5th Floor 11 Charles II Street; London SW1Y 4AU UK
-----------------------------------------------------------------
(Address of principal executive offices)
+44 20 7451 2468
----------------
(Issuer's telephone number)
W3 Group, Inc.
60 East 42nd Street, Suite 1163 New York, NY 10165
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of February 10, 2006 the Company had 34,101,167 shares of its $0.0001
par value common stock issued and outstanding.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Aftersoft Group, Inc.
Consolidated Balance Sheet
(In thousands, except per share data)
As of 12/31/2005
----------------
(unaudited)
----------------
ASSETS
Current Assets
Cash $ 112
Accounts receivable, net of allowance of $195 4,125
Inventories 448
Other 130
----------------
Total Current Assets 4,815
----------------
Property and Equipment, Net 439
----------------
Other Assets
Goodwill 22,061
Amortizable intangible assets, net 6,043
Software development costs, net 1,076
Other 39
----------------
Total Other Assets 29,217
----------------
Total Assets $ 34,471
================
LIABILITIES
Current Liabilities
Accounts payable $ 1,815
Accrued expenses 1,538
Accrued legal expenses 1,986
Current portion of long-term debt 815
Deferred revenue 1,374
Taxes payable 404
Other 20
----------------
Total Current Liabilities 7,952
Long-Term Liabilities
Deferred revenue 872
Deferred income taxes 899
Long-term debt 668
Loan - ADN Inc. 494
Other 487
----------------
Total Liabilities 11,372
----------------
COMMITMENTS AND CONTINGENCIES
----------------
STOCKHOLDERS' EQUITY
Preferred Stock
Par value $0.0001 per share; 10,000,000 shares authorized,
none issued and outstanding --
Common stock
Par value $0.0001 per share; 100,000,000 shares authorized,
34,101,167 shares issued and outstanding 3
Additional paid-in-capital 20,934
Other comprehensive loss (359)
Retained earnings 2,521
----------------
Total Stockholders' Equity 23,099
----------------
Total Liabilities and Stockholders' Equity $ 34,471
================
The accompanying notes are an integral part of these
consolidated financial statements
Aftersoft Group, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
For The Three Months Ended For The Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- -------------- -------------- --------------
Revenues $ 4,845 $ 6,498 $ 9,624 $ 11,985
Cost of revenues 2,290 2,533 4,729 4,742
-------------- -------------- -------------- --------------
Gross Profit 2,555 3,965 4,895 7,243
-------------- -------------- -------------- --------------
Operating Expenses
Research and development 763 824 1,536 1,533
Sales and marketing 487 606 966 1,083
General and administrative 699 663 1,559 1,513
Depreciation and amortization 265 624 544 999
-------------- -------------- -------------- --------------
Total Operating Expenses 2,214 2,717 4,605 5,128
-------------- -------------- -------------- --------------
Operating income 341 1,248 290 2,115
-------------- -------------- -------------- --------------
Other Income (Expense)
Other, net 17 3 18 3
Interest (26) (50) (58) (68)
Gain on disposal of fixed assets 304 -- 304 --
-------------- -------------- -------------- --------------
Total other income (expense), net 295 (48) 264 (65)
-------------- -------------- -------------- --------------
Pretax income 636 1,200 555 2,050
Provision for income taxes 104 62 185 179
-------------- -------------- -------------- --------------
Net income 532 1,138 369 1,871
Foreign currency translation loss (gain) (44) 37 (57) 38
-------------- -------------- -------------- --------------
Comprehensive income $ 488 $ 1,175 $ 312 $ 1,909
============== ============== ============== ==============
Income per share attributed to common
stock holders - basic and diluted $ 0.01 $ 0.04 $ 0.01 $ 0.06
Weighted average number of shares of
common stock outstanding - basic and
diluted 32,674,040 32,500,000 32,587,020 30,663,834
The accompanying notes are an integral part of these
consolidated financial statements.
Aftersoft Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Six Months
Ended December 31,
----------------------------
2005 2004
------------ ------------
Operating activities:
Net income $ 369 $ 1,871
Adjustments to net income
Depreciation and amortization 544 999
Gain on sale of assets (304) --
Changes in assets and liabilities (net of the effect of acquisition):
Trade accounts receivable (588) 352
Inventories (90) 104
Prepaid expenses and other assets (16) (394)
Accounts payable (113) (662)
Taxes payable 185 179
Deferred revenue (348) (3,711)
Accrued expenses and other liabilities 578 378
------------ ------------
Net cash provided by (used in) operating activities 217 (884)
------------ ------------
Investing Activities:
Cash acquired in acquisition -- 490
Purchase of property and equipment (34) (92)
Property and equipment sale proceeds 304 --
Capitalized software development costs (164) (247)
------------ ------------
Net cash provided by investing activities 106 151
------------ ------------
Financing Activities:
Proceeds from related party 327 1,060
Payment on long-term debt (467) (142)
Payment to related party (208) --
------------ ------------
Net cash provided by (used in) financing activities (348) 918
------------ ------------
Effect of exchange rate changes (57) 38
------------ ------------
Net change in cash (82) 223
Cash, beginning of period 194 7
------------ ------------
Cash, end of period $ 112 $ 230
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 58 $ 68
Income taxes $ -- $ --
Non cash investing and financing transactions during the period for:
Settlement of note receivable $ 510 $ --
Shares issued for CarParts Technologies, Inc. acquisition:
Cash $ 490
Other current assets 1,132
Property and equipment 140
Other long-term assets 37
Other current liabilities (3,264)
Deferred income (4,872)
Long-term debt (1,151)
Other long-term liabilities (487)
Goodwill 14,549
Amortizable Intangibles 5,300
------------
$ 11,874
============
The accompanying notes are an integral part of these
consolidated financial statements.
AFTERSOFT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Periods Ended December 31, 2005 and 2004
NOTE 1. Management's Representation
The financial statements included herein have been prepared by Aftersoft Group,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. Certain information normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America has been omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating results for the three and six months ended December 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2006. It is suggested that the financial statements be read in
conjunction with the audited financial statements and notes thereto for the year
ended June 30, 2005.
NOTE 2. Nature of Business
Basis of Presentation
Aftersoft Group, Inc. is a subsidiary of Auto Data Network, Inc. ("ADN, Inc."),
which owns approximately 95% of the outstanding common stock.
Aftersoft Group is a leading provider of business and supply chain management
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through subsidiaries
with operations in Europe and North America. MAM Software Limited is the leading
supplier of software to the automotive parts market in the U.K. MAM Software
consists of MAM Autopart Ltd, MAM AutoCat Ltd. and MAM Autowork Ltd., which are
all based in Sheffield, UK. Aftersoft Network North America, Inc. is comprised
of AFS Warehouse Distribution Management, Inc. and AFS Tire Management Inc.,
which are based in San Juan Capistrano, California and AFS Autoservice, Inc.,
which is based in Allentown PA. Aftersoft Network North America was formerly
known as CarParts Technologies Acquisition Corp. and AFS Tire Management was
formerly known as CarParts Technologies, Inc. Together these subsidiaries are
the second largest supplier of software to the automotive parts market in the
U.S.
On December 21, 2005, W3 Group, Inc. ("W3") consummated an Acquisition Agreement
("Agreement") to acquire all of the outstanding shares of common stock of Old
Aftersoft Group, Inc. ("Oldco") in exchange for the issuance of 32,500,000 newly
issued shares of W3, par value $0.0001 per share (the "Common Stock"), to ADN,
Inc., the sole shareholder of Oldco.
Pursuant to the Agreement and as a result of consummation of the Agreement, the
existing shareholders of W3 owned 1,601,167 shares, or approximately 4.7% of the
34,101,167 total outstanding shares of the Common Stock and ADN owned 32,500,000
shares or approximately 95.3% of the total outstanding shares. Concurrent with
the closing of the transaction, the Board of Directors of W3 appointed three
additional directors designated by ADN to serve until the next annual election
of directors. In addition, concurrent with the close of the transaction, W3: (1)
changed its corporate name from W3 Group, Inc. to Aftersoft Group, Inc., (2)
changed its corporate address to California, and (3) replaced the corporate
officers.
The acquisition was recorded as a reverse acquisition, whereby the assets and
liabilities and 32,500,000 outstanding shares of common stock of Oldco are
reported at their historical cost and the 1,601,167 shares of W3 are reflected
as being issued by the Company on December 21, 2005 as a corporate
reorganization. In addition, the results of Oldco for all comparative periods
prior to the reverse acquisition are reported as the results of the Company.
The Company operates on a June 30 fiscal year end.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Concentrations of Credit Risk
Cash
The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At
December 31, 2005, the Company did not have any balances in these accounts in
excess of the FDIC insurance limits.
Customers
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. Credit
risk is managed by discontinuing sales to customers who are delinquent. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
No customer accounted for more than 10% of the Company's revenues during the
three- and six-month periods ended December 31, 2005 and 2004.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report selected segment information
in their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company believes it operates in only one segment and as such has
not presented additional segment disclosures.
Geographic Concentrations
The Company conducts business in the United States, Canada, and the United
Kingdom ("UK"). From customers headquartered in their respective countries, the
Company derived 1% of its revenues from Canada, 36% of its revenues from the
United States and 63% from its UK operations during the three months ended
December 31, 2005 compared to 1% from Canada, 34% from the United States and 65%
from the UK for the three months ended December 31, 2004. For the six months
ended December 31, 2006 the Company derived 1% of its revenues from Canada, 34%
of its revenues from the United States and 65% from its UK operations compared
to 1% from Canada, 47% from the United States and 52% from the UK for the six
months ended December 31, 2004. At December 31, 2005, the Company maintains 86%
of its net property and equipment in the UK with the remaining 14% in North
America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company's
management include, but are not limited to, the collectibility of accounts
receivable, the recoverability of long-lived assets and valuation of deferred
tax assets. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The Company's consolidated financial instruments consist of cash, accounts
receivable, related party loans, long-term debt, accounts payable and accrued
expenses. The carrying values of such instruments classified as current
approximate their fair values as of December 31, 2005 due to their short-term
maturities. The difference between the fair values and recorded values of the
related party loans and long-debt are not significant due to and the lack of
significant differential between current prevailing rates of similar instruments
and the rates of the Company's non-current instruments.
Inventories
Inventories are stated at the lower of standard cost or current estimated market
value. Cost is determined using the first-in, first-out method. Inventories
consist primarily of hardware that will be sold to customers. The Company
periodically reviews its inventories and records a provision for excess and
obsolete inventories based primarily on the Company's estimated forecast of
product demand and production requirements. Once established, write-downs of
inventories are considered permanent adjustments to the cost basis of the
obsolete or excess inventories.
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the statement of income.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development costs are recorded at estimated
fair market value. When a product is ready for general release, its capitalized
costs are amortized using the straight-line method over a period of three years.
If the future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact the recorded net income/loss of the Company.
Goodwill
Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and
Other Intangible Assets," addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment, and intangible assets that have
finite useful lives be amortized over their useful lives. In addition, SFAS 142
expands the disclosure requirements about goodwill and other intangible assets
in the years subsequent to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. Based on its analysis, the Company's
management believes that no impairment of the carrying value of its goodwill
existed at December 31, 2005. There can be no assurance however, that market
conditions will not change or demand for the Company's products and services
will continue which could result in impairment of goodwill in the future.
Long-Lived Assets
The Company's management assesses the recoverability of other long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of long-lived asset impairment, if any, is
measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management. At December 31, 2005
the Company's management believes there is no impairment of its long-lived
assets. There can be no assurance, however, that market conditions will not
change or demand for the Company's products and services will continue, which
could result in impairment of long-lived assets in the future.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
Accordingly, software license revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product component has occurred, the fee
is fixed and determinable, and collectibility is probable. If any of these
criteria are not met, revenue recognition is deferred until such time as all of
the criteria are met. In accordance with SOP 98-9, the Company accounts for
delivered elements in accordance with the residual method when arrangements
include multiple product components or other elements and vendor-specific
objective evidence exists for the value of all undelivered elements. Revenues on
undelivered elements are recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which
time the costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
Advertising Expense
The Company expenses advertising costs as incurred. For the six months ended
December 31, 2005 and 2004, advertising expense totaled $16,000 and $11,000,
respectively.
Foreign Currency
Management has determined that the functional currency of its subsidiaries is
the local currency. Assets and liabilities of the UK subsidiary are translated
into U.S. dollars at the period end exchange rates. Income and expenses are
translated at an average exchange rate for the period and the resulting
translation gain (loss) adjustments are accumulated as a separate component of
stockholders' equity, which totaled $(57,000) and $38,000 for the six months
ended December 31, 2005 and 2004, respectively.
Foreign currency gains and losses from transactions denominated in other than
respective local currencies are included in income. The Company had no foreign
currency transaction gains (losses) for all periods presented.
Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during a period
from non-owner sources. For the six months ended December 31, 2005 and 2004, the
components of comprehensive loss consist of foreign currency translation losses.
Income Taxes
The Company accounts for domestic and foreign income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. Deferred taxation is provided in full in respect of taxation
deferred by timing differences between the treatment of certain items for
taxation and accounting purposes.
Basic and Diluted Earnings Per Share
Basic earnings per common share is computed based on the weighted average number
of shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted average shares outstanding assuming all
potential dilutive common shares were issued. Basic and diluted earnings per
share is the same for the periods presented as the Company has no dilutive
securities.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("Statement 123(R)") to provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the equity or liability instrument
used. Statement 123 (R) covers a wide range of share based compensation
arrangements including share options, restricted share plans, performance based
awards, share appreciation rights, and employee share purchase plans. Statement
123(R) replaces SFAS No. 123 and supersedes APB 25. The Company will be required
to apply Statement 123(R) in fiscal 2007. The Company does not believe the
adoption of Statement 123(R) will have a significant impact on the Company's
overall results of operations or financial position as it has no stock based
payments as of December 31, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets
- an amendment to ABP Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 eliminates the exception for non-monetary exchanges of similar
productive assets, which were previously required to be recorded on a carry over
basis rather then a fair value basis. Instead, this statement provides that
exchanges of non-monetary assets do not have a commercial substance be reported
at a carryover basis rather then a fair value basis. A non-monetary exchange is
considered to have commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of this statement are effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have an impact on its financial condition or results
of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its results of operations, cash flows or
financial position.
NOTE 3. Related-Party Transactions
The Company transferred its note receivable with a related party known as MAM
North America, Inc. in the amount of $510,000 to ADN, Inc. ADN, Inc. has agreed
to accept the assignment of all the issued shares of MAM North America, Inc.
from the Company and to repay the $510,000 note receivable on October 1, 2005 by
allowing the Company to reduce its balance of loans due to ADN, Inc. Furthermore
MAM North America has indemnified the Company against all past or current
liabilities.
From time to time, ADN, Inc. advances funds to the Company. Such advances are
non interest bearing and currently have no specific due date. ADN, Inc. has
indicated that it will not make any demands on this balance prior to January 1,
2007; as a result, the Company has classified this loan as a long-term
liability.
NOTE 4. Commitments and Contingencies
Legal Matters
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the financial
position or results of operations of the Company.
The Company has been informed of a verdict against it in a litigation in the
Court of Common Please of Allegheny County, Pennsylvania, in favor of Aidan
McKenna totaling $3,555,000, which it intends to vigorously appeal. The Company
filed a claim against McKenna for $1,000,000 for breach of contract alleging
that McKenna continued to conduct business in the Open Webs Corporation in
violation of the asset purchase agreement. The Company has recorded an accrual
of $1,650,000 to cover the cost of any verdict with respect to this litigation
as of December 31, 2005.
Homann Tire LTD ("Homann") filed a complaint against the Company in California
District Court on August 11, 2005 regarding the Company's obligations pursuant
to a software license agreement that it entered into with Homann on October 18,
2002 (the "Agreement"). Homann alleges breach of contract, breach of warranty
and intentional and negligent misrepresentation. The Company maintains the
complaint is without merit.
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers contracts the Company indemnifies the customer
that the software provided does not violate any US patent. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheet.
Item 2. Management's Discussion and Analysis of Financial Condition or Plan of
Operations
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the audited historical
consolidated financial statements and the notes accompanying those statements.
The results described below are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on the Company's current expectations, which are inherently
subject to risks and uncertainties. Actual results and the timing of certain
events may differ significantly from those projected in such forward-looking
statements due to a number of factors. The Company undertakes no obligation
beyond what is required under applicable securities law to publicly update or
revise any forward looking statement to reflect current or future events or
circumstances, including those set forth herein.
Overview
The Company is a leading provider of business management solutions primarily to
retailers, tire and service chains, independent installers and wholesale
distributors in the Automotive Aftermarket. The Company's business management
solutions include systems, professional services, customer support and data
services that its customers use to manage their critical day-to-day business
operations through automated point-of-sale, inventory management, general
accounting and e-commerce connectivity. The Company's revenues are derived from
the following:
Business management systems comprised of proprietary software applications,
implementation and training; and
Subscription-based services, including software support and maintenance,
information (content) products and online services.
The Company acquired CarParts Technologies on August 6, 2004 to increase its
presence in the North American market as well as to provide an operational
foundation to penetrate its parts store software from its subsidiary MAM Limited
into the North American market.
At the end of the fiscal year 2004 the Company decided to temporarily
discontinue the sales efforts of its software application focused on the tire
distribution market. The Company decided to reengineer two of its other products
with the necessary tire distributor functionality, over time, while it targeted
select areas of the tire distribution market. This change in focus was expected
to create a decrease in revenues during this reengineering period as well as
increase the overall profitability of the Company through a reduction of cost of
revenue and operational expenses. The Company did expect an initial increase in
revenues associated with this product due to the large balance it maintained in
deferred revenues as these revenues were recognized over the first six months of
fiscal year 2005.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. 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. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of 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.
The Company believes the following critical accounting policies, among others,
affect the Company's more significant judgments and estimates used in the
preparation of the Company's financial statements:
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of the Company's receivables at least quarterly. The allowance
for doubtful accounts is subject to estimates based on the historical actual
costs of bad debt experienced, total accounts receivable amounts, age of
accounts receivable and any knowledge of the customers' ability or inability to
pay outstanding balances. If the financial condition of the Company's customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required. The differences could be material and
could significantly impact cash flows from operating activities.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development is recorded at its estimated
fair market value. When a product is ready for general release, its capitalized
costs are amortized using the straight-line method over a period of three years.
If the future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact the recorded net income/loss of the Company.
Goodwill
SFAS 142, Goodwill and Other Intangible Assets, addresses how intangible assets
that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. If the actual fair value of the
reporting unit is less than estimated, impairment of the related goodwill could
occur, which could significantly impact the recorded net income/loss of the
Company.
Long-Lived Assets
The Company's management assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. If the actual fair value of the
long-lived assets are less than estimated, impairment of the related asset could
occur, which could significantly impact the recorded net income/loss of the
Company
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. Accordingly, software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectibility is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met. In accordance with SOP 98-9, the Company accounts for delivered elements in
accordance with the residual method when arrangements include multiple product
components or other elements and vendor-specific objective evidence exists for
the value of all undelivered elements. Revenues on undelivered elements are
recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which
time the costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion
of the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as customer advances and deferred revenue in the accompanying
consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period the enactment occurs. Deferred
taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes.
For the three months ended December 31, 2005 and 2004
Key Components of Results of Operations
Total Revenues. Total revenues for three months ended December 31, 2005,
decreased by approximately $1.653 million, or 25.4%, compared to the three
months ended December 31, 2004. The decrease in revenues was due to the
temporary discontinuation of the sales efforts of its software application
focused on the tire distribution market. Management decided to target this
market with its other software products which the tire functionality has been
added.
Total Cost of Revenues. Total cost of revenues for the three months ended
December 31, 2005, decreased by approximately $243,000 or 9.6%, compared to the
three months ended December 31, 2004. This decrease was a result of lower
revenues for the period. For the three months ended December 31, 2005 as
compared to the three months ended December 31, 2004 the Company experienced a
decline in the gross margin percentage by 8%. The reason for this decline is
that sales during the three months ended December 31, 2005 includes more sales
which included hardware as a component of the sale (a lower margin item) than
during the three months ended December 31, 2004.
For the reasons noted above, total gross profit decreased by $1.4 million, or
35.6% for the three months ended December 31, 2005 as compared to the three
months ended December 31, 2004.
Operating Expenses. The following table sets forth, for the periods indicated,
the Company's operating expenses and the variance thereof.
For The Three Months Ended December 31,
-----------------------------------------------------------------
2005 2004 Variance $ Variance %
----------- ----------- ----------- -----------
In thousands $
Research and development $ 763 $ 824 $ (61) -7.4%
Sales and marketing 487 606 (119) -19.8%
General and administrative 699 663 36 5.4%
Depreciation and amortization 265 624 (359) -57.4%
----------- ----------- -----------
Total Operating Expenses $ 2,214 $ 2,717 $ (503) -18.5%
Operating Expenses decreased by $503,000 for the three months ended December 31,
2005 compared to the three months ended December 31, 2004. This is due to the
following:
Research and Development Expenses. This decrease was a result of the temporary
discontinuation of the sales efforts of its software application focused on the
tire distribution market. This decision allowed for a decrease in labor costs
associated with the product.
Sales and Marketing Expenses. This decrease was a result of the reduction of the
sales force focused on selling into the tire segment. Additionally, the Company
realigned its sales force to more efficiently target the North American market.
General and Administrative Expenses. The balance was relatively unchanged
between the periods.
Depreciation and Amortization. Depreciation and amortization expenses declined
due to a complete amortization of the backlog portion of Aftersoft Network North
America intangible asset in fiscal year 2005.
Interest Expense. Interest expense decreased by $24,000, or 47.8%, compared to
the three months ended December 31, 2004. This decrease was a result of the
reduction of long-term debt between fiscal year 2005 and fiscal year 2006.
Gain on Disposal of Fixed Assets. Gain on fixed assets increased by $304,000 for
the three months ended December 31, 2005, compared to the three months ended
December 31, 2004. This was due to the disposal of some of its fixed assets.
This disposal was related to the consolidation and closure of one of its local
offices in the UK and the disposal of assets at that location.
Provision for Income Taxes. Provision for income taxes for the three months
ended December 31, 2005, increased by approximately $42,000 or 68%, compared to
the three months ended December 31, 2004. This increase was primarily a result
of an increase in taxable net income entirely attributable to the UK operations.
Net Income. As a result of the above factors, the Company realized a net income
of $532,000 for the three months ended December 31, 2005, compared to a net
income of $1.14 million for the three months ended December 31, 2004, a decrease
of $606,000, or 53.2%.
For the six months ended December 31, 2005 and 2004
Key Components of Results of Operations
Total Revenues. Total revenues for the six months ended December 31, 2005
decreased by approximately $2.36 million, or 19.7%, compared to the six months
ended December 31, 2004. The decrease in revenues was due to the temporary
discontinuation of the sales efforts of its software application focused on the
tire distribution market. Management decided to target this market with its
other software products to which the tire functionality has been added to.
Total Cost of Revenues. Total cost of revenues for the six months ended December
31, 2005, was relatively unchanged, compared to the six months ended December
31, 2004. For the six months ended December 31, 2005 as compared to the six
months ended December 31, 2004 the Company experienced a decline in the gross
margin percentage by 9%. The reason for this decline is that sales during the
six months ended December 31, 2005 included more sales which included hardware
as a component of the sale (a lower margin item) than during the six months
ended December 31, 2004.
For the reasons noted above, total gross profit decreased by $2.35 million, or
32.4% for the six months ended December 31, 2005 as compared to the six months
ended December 31, 2004.
Operating Expenses. The following table sets forth, for the periods indicated,
the Company's operating expenses and the variance thereof.
For The Six Months Ended December 31,
-----------------------------------------------------------------
2005 2004 Variance $ Variance %
----------- ----------- ----------- -----------
In thousands $
Research and development $ 1,536 $ 1,533 $ 3 0.2%
Sales and marketing 966 1,083 (117) (10.8%)
General and administrative 1,559 1,513 46 3.0%
Depreciation and amortization 544 999 (455) -45.5%
----------- ----------- ----------- -----------
Total Operating Expenses $ 4,605 $ 5,128 $ (523) -10.2%
Operating income decreased by $1.83 million for the six months ended December
31, 2005 compared to the six months ended December 31, 2004. This is due to the
following:
Research and Development Expenses. The balance was relatively unchanged between
the periods.
Sales and Marketing Expenses. This decrease was a result of the reduction of the
sales force focused on selling into the tire segment. Additionally, the Company
realigned its sales force to more efficiently target the North American market.
General and Administrative Expenses. The balance was relatively unchanged
between the periods.
Depreciation and Amortization. Depreciation and amortization expenses declined
due to a complete amortization of the backlog portion of Aftersoft Network North
America intangible asset in fiscal year 2005.
Interest Expense. Interest expense decreased by $10,000, or 15.6%, compared to
the six months ended December 31, 2004. This decrease was a result of the
reduction of long-term debt between fiscal year 2005 and fiscal year 2006.
Gain on Disposal of Fixed Assets. Gain on fixed assets increased by $304,000 for
the six months ended December 31, 2005, compared to the six months ended
December 31, 2004. This was due to the disposal of some of its fixed assets.
This disposal was related to the consolidation and closure of one of its local
offices in the UK and the disposal of assets at that location.
Provision for Income Taxes. Provision for income taxes for the six months ended
December 31, 2005, increased by approximately $6,000 or 3%, compared to the six
months ended December 31, 2004. This increase was primarily a result of an
increase in taxable net income entirely attributable to the UK operations.
Net Income. As a result of the above factors, the Company realized a net income
of $369,000 for the six months ended December 31, 2005, compared to a net income
of $1.87 million for the six months ended December 31, 2004, a decrease of $1.5
million, or 80.3%.
Liquidity and Capital Resources
The Company does not have outside sources of finance and will need to raise
funds from existing shareholders or the capital markets to maintain its
development plans. If it should encounter any unforeseen problems, the Company
will review its budget and adjust the scheduling and costs of the development
programs accordingly to allow the Company to operate until sufficient long term
funding is achieved. However, a key element of our business strategy is to
continue to acquire, obtain licenses for, and develop, new technologies and
products that we believe offer unique market opportunities and/or complement our
existing product lines.
The Company realized positive cash flows from operations of $217,000 for the six
months ended December 31, 2005. The positive cash flow was generated by the
Company's net income. As compared to the six months ended December 31, 2004, the
cash flow from operations for the six months ended December 31, 2005 increased
$1.1 million. This increase was mainly associated with the large decrease in the
deferred revenue associated with its tire distributor product. The Company
recognized the revenue associated with final acceptances on many of the projects
associated with this product line. The Company used cash flows in activities of
$106,000 for the six months ended December 31, 2005 compared to cash flows of
$151,000 in 2004, a change of $45,000. This change is mainly due to the $490,000
of cash obtained in the acquisition of CarParts Technologies in 2004, offset by
proceeds from sale of property and equipment of $304,000 in 2005. The Company
incurred negative cash flows from financing activities of $348,000 for the six
months ended December 31, 2005 compared to positive $918,000 in 2004. This
decrease is mainly due to reduction of principal on both its long-term debt and
its borrowings from its related party AutoData Networks.
Forward Looking Statements
This Form 10-QSB contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements made by the Company involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
the forward looking statements include, but are not limited to, risks associated
with lack of significant operating history, demand for the Company's products,
international business operations, dependence on licensees, governmental
regulations, technological changes, intense competition and dependence on
management. Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The Company's management disclaims
any obligation to forward-looking statements contained herein to reflect any
change in the Company's expectation with regard thereto or any change in events,
conditions, circumstances or assumptions underlying such statements.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer carried out an
evaluation of the effectiveness and operation of the Company's disclosure
controls and procedures. They have concluded after evaluating the effectiveness
of the Company's disclosure controls and procedures as of December 31, 2005,
that as of such date, the Company's disclosure controls and procedures were
effective and designed to ensure that material information relating to the
Company would be made known to them by others.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls during the three
months ended December 31, 2005.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable
Item 2. Unregistered Sales of Equity Securities
Pursuant to the terms of the Agreement completed on December 21, 2005, the
Company issued 32,500,000 shares of Common Stock, par value $0.0001, to ADN in a
non-public issuance exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(1), Section 4(6) and/or
Regulation D. The shares so issued are "restricted shares" and may not be
disposed of except in compliance with an applicable exemption from registration
under U.S. securities laws or pursuant to an effective registration statement
under U.S. securities laws.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits
Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. ss.1350 of Chief Executive Officer and
Chief Financial Officer
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Aftersoft Group, Inc.
By: /s/ Ian Warwick
--------------------------------------
Ian Warwick
Chief Executive and President
Date: February 21, 2006
EXHIBIT INDEX
Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. ss.1350 of Chief Executive Officer and
Chief Financial Officer