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
quarterly period ended December 31, 2008
Or
¨ 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 000-27083
AFTERSOFT
GROUP, INC.
(Exact
name of registrant as specified
in its
charter)
DELAWARE
|
|
84-1108035
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
employer identification no.)
|
Regus
House, Herons Way, Chester Business Park
Chester,
U.K., CH4 9QR
(Address
of principal executive offices)(Zip code)
011
44 1244 893 138
(Registrant’s
telephone number, including area code)
NONE
(Former
name, former address, and former fiscal year, if changed since last
report)
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, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated filer
¨ Non-accelerated
filer ¨ Smaller reporting
company 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
The
registrant has 79,125,899 shares of common stock outstanding as of February 13,
2009.
|
|
PART
I. — Financial Information
|
|
|
|
|
ITEM
1.
|
Financial
Statements
|
1
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
2
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
9
|
ITEM
4T.
|
Controls
and Procedures
|
10
|
|
|
|
PART
II. — Other Information
|
|
|
|
|
ITEM
1
|
Legal
Proceedings
|
10
|
ITEM
1A
|
Risk
Factors
|
10
|
ITEM
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
11
|
ITEM
3
|
Defaults
Upon Senior Securities
|
11
|
|
Submission
of Matters to a Vote of Security Holders
|
11
|
ITEM
5
|
Other
Information
|
11
|
ITEM
6.
|
Exhibits
|
11
|
PART
1—FINANCIAL INFORMATION
Unless
the context indicates or requires otherwise, (i) the term “Aftersoft”
refers to Aftersoft Group, Inc. and its principal operating subsidiaries;
(ii) the term “MAM Software” refers to MAM Software Limited and its
operating subsidiaries; (iii) the term “ASNA” refers to Aftersoft Network
N.A, Inc. and its operating subsidiaries; (iv) the term “EXP” refers to EXP
Dealer Software Limited and its subsidiaries; (v) the term “DSS” refers to
Dealer Software and Services Limited; and (vi) the terms “we,” “our,”
“ours,” “us” and the “Company” refer collectively to Aftersoft Group,
Inc.
ITEM
1. FINANCIAL STATEMENTS
Index
to Financial Statements
Consolidated
Balance Sheets
|
F-1
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
|
F-2
|
Consolidated
Statements of Cash Flows (Unaudited)
|
F-3
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-7
|
AFTERSOFT
GROUP, INC
Consolidated
Balance Sheets
(In
thousands, except share data)
|
|
December
31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,315 |
|
|
$ |
1,964 |
|
Accounts
receivable, net of allowance of $44 and $202
|
|
|
2,491 |
|
|
|
3,233 |
|
Inventories
|
|
|
248 |
|
|
|
615 |
|
Prepaid
expenses and other current assets
|
|
|
454 |
|
|
|
690 |
|
Total
Current Assets
|
|
|
4,508 |
|
|
|
6,502 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
1,006 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
9,518 |
|
|
|
11,878 |
|
Amortizable
intangible assets, net
|
|
|
3,770 |
|
|
|
4,584 |
|
Software
development costs, net
|
|
|
1,557 |
|
|
|
1,718 |
|
Investments
in available-for-sale securities
|
|
|
957 |
|
|
|
4,102 |
|
Other
long-term assets
|
|
|
294 |
|
|
|
426 |
|
Total
Assets
|
|
$ |
21,610 |
|
|
$ |
29,802 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,340 |
|
|
$ |
2,372 |
|
Accrued
expenses and other
|
|
|
2,843 |
|
|
|
3,508 |
|
Payroll
and other taxes
|
|
|
779 |
|
|
|
933 |
|
Current
portion of long-term debt
|
|
|
536 |
|
|
|
598 |
|
Current
portion of deferred revenue
|
|
|
354 |
|
|
|
607 |
|
Other
current liabilities
|
|
|
485 |
|
|
|
379 |
|
Total
Current Liabilities
|
|
|
6,337 |
|
|
|
8,397 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Deferred
revenue, net of current portion
|
|
|
569 |
|
|
|
545 |
|
Deferred
income taxes
|
|
|
880 |
|
|
|
880 |
|
Long-term
debt, net of current portion and debt discount
|
|
|
5,752 |
|
|
|
4,783 |
|
Other
|
|
|
329 |
|
|
|
142 |
|
Total
Liabilities
|
|
|
13,867 |
|
|
|
14,747 |
|
|
|
|
|
|
|
|
|
|
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; 150,000,000 shares authorized, 79,093,944 and
92,733,220 shares issued and outstanding, respectively
|
|
|
8 |
|
|
|
9 |
|
Additional
paid-in capital
|
|
|
29,924 |
|
|
|
31,732 |
|
Parent
company common stock
|
|
|
- |
|
|
|
(2,850 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(1,218 |
) |
|
|
1,617 |
|
Accumulated
deficit
|
|
|
(20,971 |
) |
|
|
(15,453 |
) |
Total
Stockholders' Equity
|
|
|
7,743 |
|
|
|
15,055 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
21,610 |
|
|
$ |
29,802 |
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements
AFTERSOFT
GROUP, INC
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In
Thousands except for share and per
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
share
data)
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$ |
5,005 |
|
|
$ |
5,645 |
|
|
$ |
10,850 |
|
|
$ |
11,000 |
|
Cost
of revenues
|
|
|
2,235 |
|
|
|
2,508 |
|
|
|
4,990 |
|
|
|
5,167 |
|
Gross
profit
|
|
|
2,770 |
|
|
|
3,137 |
|
|
|
5,860 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
709 |
|
|
|
766 |
|
|
|
1,494 |
|
|
|
1,458 |
|
Sales
and marketing
|
|
|
561 |
|
|
|
661 |
|
|
|
1,160 |
|
|
|
1,189 |
|
General
and administrative
|
|
|
1,478 |
|
|
|
2,254 |
|
|
|
2,983 |
|
|
|
3,564 |
|
Depreciation
and amortization
|
|
|
260 |
|
|
|
327 |
|
|
|
528 |
|
|
|
682 |
|
Total
operating expenses
|
|
|
3,008 |
|
|
|
4,008 |
|
|
|
6,165 |
|
|
|
6,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(238 |
) |
|
|
(871 |
) |
|
|
(305 |
) |
|
|
(1,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(428 |
) |
|
|
(64 |
) |
|
|
(800 |
) |
|
|
(82 |
) |
Write
down of investment available-for-sale securities
|
|
|
(3,957 |
) |
|
|
- |
|
|
|
(3,957 |
) |
|
|
- |
|
Interest
income
|
|
|
13 |
|
|
|
- |
|
|
|
13 |
|
|
|
- |
|
Reduction
in litigation settlement
|
|
|
- |
|
|
|
76 |
|
|
|
- |
|
|
|
76 |
|
Gain
on sale of investment in non-marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,312 |
|
Other,
net
|
|
|
11 |
|
|
|
1 |
|
|
|
13 |
|
|
|
(1 |
) |
Total
other income (loss), net
|
|
|
(4,361 |
) |
|
|
13 |
|
|
|
(4,731 |
) |
|
|
1,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
(4,599 |
) |
|
|
(858 |
) |
|
|
(5,036 |
) |
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
198 |
|
|
|
216 |
|
|
|
313 |
|
|
|
388 |
|
Loss
from continuing operations
|
|
|
(4,797 |
) |
|
|
(1,074 |
) |
|
|
(5,349 |
) |
|
|
(143 |
) |
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
(23 |
) |
|
|
- |
|
|
|
14 |
|
Loss
on sale of discontinued operations
|
|
|
- |
|
|
|
(26 |
) |
|
|
- |
|
|
|
(26 |
) |
Net
loss
|
|
|
(4,797 |
) |
|
|
(1,123 |
) |
|
|
(5,349 |
) |
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of unrealized loss on investments in available-for-sale
securities
|
|
|
1,556 |
|
|
|
- |
|
|
|
808 |
|
|
|
- |
|
Foreign
currency translation gain (loss)
|
|
|
(2,595 |
) |
|
|
238 |
|
|
|
(3,643 |
) |
|
|
618 |
|
Total
comprehensive income (loss)
|
|
$ |
(5,836 |
) |
|
$ |
(885 |
) |
|
$ |
(8,184 |
) |
|
$ |
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share attributed to common stockholders - basic and
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
$ |
- |
|
Discontinued
Operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
$ |
- |
|
Earnings
per share attributed to common stockholders - basic and
diluted
|
|
|
92,814,017 |
|
|
|
85,787,724 |
|
|
|
92,773,620 |
|
|
|
85,787,724 |
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements
AFTERSOFT
GROUP, INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In
Thousands)
|
|
For
the Six Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,349 |
) |
|
$ |
(155 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
528 |
|
|
|
869 |
|
Writedown
of investments in available-for-sale securities
|
|
|
3,957 |
|
|
|
- |
|
Debt
discount and debt issuance cost amortization
|
|
|
409 |
|
|
|
- |
|
Stock
compensation expense
|
|
|
17 |
|
|
|
- |
|
Gain
on sale of investments in nonmarketable securities
|
|
|
- |
|
|
|
(1,312 |
) |
Payment
of litigation costs
|
|
|
- |
|
|
|
(2,000 |
) |
Loss
on sale of discontinued operations
|
|
|
- |
|
|
|
26 |
|
Gain
on modification of debt settlement
|
|
|
- |
|
|
|
(123 |
) |
Warrants
issued for services
|
|
|
- |
|
|
|
27 |
|
Changes
in operating assets and liabilities (net of effect of acquisitions and
divestitures):
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
742 |
|
|
|
(895 |
) |
Inventories
|
|
|
367 |
|
|
|
(217 |
) |
Prepaid
expenses and other current assets
|
|
|
236 |
|
|
|
160 |
|
Accounts
payable
|
|
|
(1,032 |
) |
|
|
(509 |
) |
Net
advances to parent company relating to operating
Activities
|
|
|
- |
|
|
|
(2,108 |
) |
Accrued
expenses and other liabilities
|
|
|
(233 |
) |
|
|
2,758 |
|
Deferred
revenue
|
|
|
(229 |
) |
|
|
401 |
|
Taxes
payable
|
|
|
(154 |
) |
|
|
200 |
|
Net
cash used in operating activities
|
|
|
(741 |
) |
|
|
(2,878 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(95 |
) |
|
|
(113 |
) |
Proceeds
from the sale of investments in non-marketable securities
|
|
|
- |
|
|
|
2,000 |
|
Capitalized
software development costs
|
|
|
(119 |
) |
|
|
(396 |
) |
Net
cash provided by (used in) investing activities
|
|
|
(214 |
) |
|
|
1,491 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net of cash issuance Costs
|
|
|
- |
|
|
|
2,037 |
|
Proceeds
from sale of Parent company common stock, net of cash issuance
costs
|
|
|
841 |
|
|
|
- |
|
Proceeds
from long-term debt, net of cash issuance costs
|
|
|
500 |
|
|
|
4,359 |
|
Payments
on long-term debt
|
|
|
(258 |
) |
|
|
(875 |
) |
Net
cash provided by financing activities
|
|
|
1,083 |
|
|
|
5,521 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
(777 |
) |
|
|
(236 |
) |
Cash
divested in discontinued operations
|
|
|
- |
|
|
|
(157 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(649 |
) |
|
|
3,741 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,964 |
|
|
|
665 |
|
Cash
and cash equivalents, end of period
|
|
$ |
1,315 |
|
|
$ |
4,406 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
373 |
|
|
$ |
66 |
|
Income
taxes
|
|
$ |
104 |
|
|
$ |
270 |
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
Value
of distributed shares
|
|
$ |
29 |
|
|
$ |
- |
|
Value
of retired shares
|
|
$ |
2,126 |
|
|
$ |
- |
|
Shares
issued for accrued litigation costs
|
|
$ |
- |
|
|
$ |
825 |
|
Value
of shares returned in revised litigation settlement
|
|
$ |
- |
|
|
$ |
275 |
|
Value
of warrants issued in revised litigation settlement
|
|
$ |
- |
|
|
$ |
152 |
|
Value
of warrants issued for debt discount/debt issuance costs
|
|
$ |
- |
|
|
$ |
910 |
|
Value
of warrants issued for amended debt covenants
|
|
$ |
15 |
|
|
$ |
- |
|
Issuance
of debt for property, plant and equipment
|
|
$ |
403 |
|
|
$ |
- |
|
Gain
on sale of Parent company common stock
|
|
$ |
337 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Shares
of Parent company common stock remitted in exchange for Parent company
obligations
|
|
$ |
193 |
|
|
|
|
|
Parent
company obligations assumed by Company
|
|
|
(140 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Loss
on settlement of Parent company obligations
|
|
$ |
53 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Divestiture
of MMI (see Note 9):
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$ |
157 |
|
Accounts
receivable
|
|
|
|
|
|
|
439 |
|
Inventory
|
|
|
|
|
|
|
6 |
|
Other
|
|
|
|
|
|
|
27 |
|
Current
Assets
|
|
|
|
|
|
|
629 |
|
Property
and equipment
|
|
|
|
|
|
|
156 |
|
Other
long term assets
|
|
|
|
|
|
|
219 |
|
Goodwill
|
|
|
|
|
|
|
723 |
|
Intangible
assets
|
|
|
|
|
|
|
2,242 |
|
Total
Assets
|
|
|
|
|
|
|
3,969 |
|
Liabilities
Assumed
|
|
|
|
|
|
|
(1,739 |
) |
Net
assets divested
|
|
|
|
|
|
|
2,230 |
|
Proceeds
received
|
|
|
|
|
|
|
- |
|
Loss
on Disposal
|
|
|
|
|
|
$ |
(2,230 |
) |
|
|
|
|
|
|
|
|
|
Divestiture
of EXP (see Note 9):
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
|
$ |
1,050 |
|
Investments
in available-for-sale securities
|
|
|
|
|
|
|
369 |
|
Current
Assets
|
|
|
|
|
|
|
1,419 |
|
Goodwill
|
|
|
1,640
|
|
Total
Assets
|
|
|
3,059
|
|
Liabilities
assumed
|
|
|
(1,405)
|
|
Net
assets divested
|
|
|
1,654
|
|
Proceeds
- value of shares and receivable (see Note 3)
|
|
|
4,041
|
|
Gain
on disposal
|
|
$
|
2,387
|
|
The
Accompanying Notes Are an Integral Part of these Consolidated Financial
Statements
AFTERSOFT GROUP,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
(Unaudited)
NOTE
1. MANAGEMENT’S
REPRESENTATIONS
The
consolidated financial statements included herein have been prepared by
Aftersoft Group, Inc. (“Aftersoft” or the “Company”), without audit, pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission
(“SEC”). 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, 2008 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2009. It is suggested that the consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended June 30,
2008, which was filed with the SEC on September 30, 2008.
NOTE
2. BASIS
OF PRESENTATION
On
November 24, 2008, Auto Data Network, Inc. (“ADNW”), the former parent of
Aftersoft, distributed a dividend of the 71,250,000 shares of Aftersoft common
shares that ADNW owned at such time in order to complete the previously
announced spin-off of Aftersoft’s business. The dividend shares were
distributed in the form of a pro rata dividend to the holders of record as of
November 17, 2008 (the “Record Date”) of ADNW’s common and convertible preferred
stock. Each holder of record of shares of ADNW common and preferred stock as of
the close of business on the Record Date was entitled to receive 0.6864782
shares of Aftersoft's common stock for each share of common stock of ADNW held
at such time, and/or for each share of ADNW common stock that such holder would
own, assuming the convertible preferred stock owned on the Record Date was
converted in full. Prior to the spin-off, ADNW owned approximately
77% of Aftersoft’s issued and outstanding common stock. Subsequent to and as a
result of the spin-off, Aftersoft is no longer a subsidiary of ADNW (see Notes 4
and 8).
Aftersoft
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 wholly owned subsidiaries with
operations in Europe and North America. MAM Software Limited (“MAM”) is based in
Sheffield, United Kingdom (“UK”) and Aftersoft Network, NA, Inc. (“ASNA”) has
offices in the United States (“US”) in Dana Point, California, Allentown,
Pennsylvania and Wintersville, Ohio.
EXP
Dealer Software Services Limited (“EXP”) is comprised of MMI Automotive Limited
(“MMI”), based in Wiltshire, UK, Anka Design Limited, (“Anka”) based in Chester,
UK, and Dealer Software Services Limited (“DSS”), an inactive company, which
were all sold during fiscal 2008, and are included as Discontinued Operations in
the consolidated financial statements for all periods presented (see Notes 3 and
9).
Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in the consolidated financial
statements.
Concentrations
of Credit Risk
The
Company has no significant off-balance-sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Cash
and Cash Equivalents
The
Company maintains cash balances at financial institutions that are insured by
the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December
31, 2008 and June 30, 2008, the Company did not have balances in these accounts
in excess of the FDIC insurance limits. For banks outside of the United States,
the Company maintains its cash accounts at financial institutions which it
believes to be credit worthy.
For the
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents to the extent the funds are not being held for investment
purposes.
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, 2008 and 2007.
Segment
Reporting
The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” SFAS No.
131 requires public companies to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. As a result of the divestitures that occurred during fiscal 2008, the
Company operates in only one segment.
Geographic
Concentrations
The
Company conducts business in the US, Canada and the UK. For customers
headquartered in their respective countries, the Company derived 23% of its
revenues from the US, 2% from Canada and 75% from its UK operations during the
three months ended December 31, 2008, compared to 25% from the US and 75% from
the UK for the three months ended December 31, 2007.
The
Company derived 22% of its revenues from the US, 2% from Canada and 76% from its
UK operations during the six months ended December 31, 2008 compared to 25% from
the US and 75% from the UK for the six months ended December 31, 2007. At
December 31, 2008, the Company maintained 55% of its net property and equipment
in the UK and the remaining 45% in the US.
Use
of Estimates
The
preparation of consolidated 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 fair value of investments in available-for-sale
securities, the recoverability of goodwill and other long-lived assets,
valuation of deferred tax assets, and the estimated value of warrants and shares
issued for non-cash consideration. Actual results could materially differ from
those estimates.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash and cash
equivalents, investments in marketable securities, accounts receivable, accounts
payable, accrued expenses and debt instruments. Effective July 1, 2008, the
Company adopted SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the U.S. and expands
required disclosures about fair value measurements. SFAS No. 157 establishes a
three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The three levels are defined
as follows:
|
·
|
Level
1 – Fair value based on quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level
2 – Fair value based on significant directly observable data (other than
Level 1 quoted prices) or significant indirectly observable data through
corroboration with observable market data. Inputs would normally be (i)
quoted prices in active markets for similar assets or liabilities, (ii)
quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by
observable market data.
|
|
·
|
Level
3 – Fair value based on prices or valuation techniques that require
significant unobservable data inputs. Inputs would normally be a reporting
entity’s own data and judgments about assumptions that market participants
would use in pricing the asset or
liability.
|
Pursuant
to SFAS No. 157, other than for certain investments in available for
sale securities (see Note 5), the fair value of the Company’s cash equivalents
is determined based on quoted prices in active markets for identical assets
(“Level 1 Inputs”). The Company believes that the carrying values of all other
financial instruments approximate their current fair values due to their nature
and respective durations.
Available-for-Sale
Investments
The
Company accounts for its investments in equity securities with readily
determinable fair values that are not accounted for under the equity method of
accounting under SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities.” Management determines the appropriate classification of such
securities at the time of purchase and re-evaluates such classification as of
each balance sheet date. The specific identification method is used to determine
the cost basis of securities disposed of. Unrealized gains and losses on the
marketable securities are included as a separate component of accumulated other
comprehensive income (loss), net of tax. During the three
months ended December 31, 2008, the Company wrote down its investment in
available for sale securities and recognized a loss of $3,957,000 because of an
other-than-temporary impairment. The
recognition of this impairment loss in the statement of operations resulted in
the reversal in other comprehensive income (loss) of previously recognized
unrealized loss of $1,556,000 and $808,000 for the three and six month
periods ended December 31, 2008, respectively. At December 31, 2008, investments
consist of corporate stock with an unrealized loss of $3,957,000. At June 30,
2008, investments consist of corporate stock with an unrealized loss of
$184,000.
Inventories
Inventories
are stated at the lower of 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.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Investment
in Non-Marketable Securities
Non-marketable
securities consisted of equity securities for which there were no quoted market
prices. Such investments were initially recorded at their cost, subject to an
impairment analysis. Such investments will be reduced if the Company receives
indications that a permanent decline in value has occurred. Any decline in value
of non-marketable securities below cost that is considered to be “other than
temporary” will be recorded as a reduction on the cost basis of the security and
will be included in the consolidated statement of operations as an impairment
loss.
The
Company owned an 18.18% interest in DCS Automotive Ltd, a non-public company in
the UK, recorded at its cost of $688,000. During the three months ended
September 30, 2007, the Company sold its non-marketable investment to a third
party for $2,000,000, generating a gain of $1,312,000.
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 consolidated statement of operations. Depreciation
expense from continuing operations was $46,000 and $30,000 for the three months
ended December 31, 2008 and 2007, respectively, and $84,000 and $59,000 for the
six months ended December 31, 2008 and 2007, respectively.
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 cost 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 loss of the Company. Amortization expense from
continuing operations was $27,000 and $92,000 for the three months ended
December 31, 2008 and 2007, respectively, and $85,000 and $224,000 for the six
months ended December 31, 2008 and 2007, respectively.
Amortizable
Intangible Assets
Amortizable
intangible assets consist of completed software technology, customer
relationships and automotive data services and are recorded at cost. Completed
software technology and customer relationships are amortized using the
straight-line method over their estimated useful lives of 8 to 10 years, and
automotive data services are amortized using the straight-line method over their
estimated useful lives of 20 years. Amortization expense from continuing
operations on amortizable intangible assets was $187,000 and $205,000 for the
three months ended December 31, 2008 and 2007, respectively, and $359,000 and
$399,000 for the six months ended December 31, 2008 and 2007,
respectively.
Goodwill
SFAS No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), 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 No.
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 No. 142 expands the disclosure requirements
about goodwill and other intangible assets in the years subsequent to their
acquisition.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
SFAS No.
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 is recorded for any goodwill that is determined to
be impaired, which resulted in an $8,170,000 impairment charge in fiscal 2008
and a $3,100,000 impairment charge in fiscal 2007. The impairment relates to
ASNA as a result of continuing operating losses and less optimistic operating
forecasts. The estimated fair value of ASNA was determined using present value
techniques. 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 additional impairment of goodwill in the future. The Company
performs impairment testing on all existing goodwill at least
annually.
For the
six months ended December 31, 2008, goodwill activity was as
follows:
Balance,
July 1, 2008
|
|
$
|
11,878,000
|
|
Effect
of exchange rate changes
|
|
|
(2,360,000
|
)
|
Balance,
December 31, 2008
|
|
$
|
9,518,000
|
|
Long-Lived
Assets
The
Company’s management assesses the recoverability of long-lived assets (other
than goodwill discussed above) upon the occurrence of a triggering event 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, 2008, 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.
Issuance
of Stock to Non-Employees for Non-Cash Consideration
All
issuances of the Company’s stock to non-employees for non-cash consideration
have been assigned a per share amount equaling either the market value of the
shares issued or the value of consideration received, whichever is more readily
determinable. The majority of the non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the dates issued.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of SFAS No.
123, “Accounting for Stock-Based Compensation,” and Emerging Issues Task Force
(“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” and EITF 00-18, “Accounting Recognition for Certain Transactions
Involving Equity Instruments Granted to Other Than Employees.” The measurement
date for the fair value of the equity instruments issued is determined at the
earlier of (i) the date at which a commitment for performance by the consultant
or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement. In accordance with EITF 00-18, an asset acquired in
exchange for the issuance of fully vested, non-forfeitable equity instruments
should not be presented or classified as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted for accounting
purposes.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Stock-Based
Compensation
The
Company adopted the provisions of SFAS No. 123(R) “Share-Based Payment” (“SFAS
No. 123(R)”) requiring it to recognize expense related to the fair value of its
share-based compensation awards over the applicable vesting period, subject to
estimated forfeitures.
For
valuing stock options awards under SFAS No.123(R), the Company has elected to
use the Black-Scholes valuation model, using the guidance in Staff Accounting
Bulletin (“SAB”) No. 107 for determining its expected term and volatility
assumptions. For the expected term, the Company uses a simple average of the
vesting period and the contractual term of the option. Volatility is a measure
of the amount by which the Company’s stock price is expected to fluctuate during
the expected term of the option. For volatility the Company considers its own
volatility as applicable for valuing its options and warrants. SFAS 123(R)
requires that forfeitures be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. The risk-free interest rate is based on the relevant US Treasury
Bill Rate at the time each grant. The dividend yield represents the dividend
rate expected to be paid over the option’s expected term; the Company currently
has no plans to pay dividends.
On June
12, 2008, the Company’s shareholders approved the Aftersoft Group Inc. 2007
Long-Term Stock Incentive Plan. The maximum aggregate number of shares of common
stock that may be issued under the plan, including stock awards, and stock
appreciation rights is limited to 15% of the shares of common stock outstanding
on the first trading day of any fiscal year. The Company issued restricted
shares to management and board members in fiscal 2008 outside this plan and in
fiscal 2009 under this plan (see Note 8).
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 collectability 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 collected from customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance
sheet.
Revenues
for maintenance agreements, software support, on-line services and information
products are recognized ratably over the term of the service
agreement.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Advertising
Expense
The
Company expenses advertising costs as incurred. For the three months ended
December 31, 2008 and 2007, advertising expense totaled $18,000 and $20,000,
respectively, and totaled $28,000 and $42,000 for the six months ended December
31, 2008 and 2007, respectively.
Foreign
Currency
Management
has determined that the functional currency of its subsidiaries is the local
currency. Assets and liabilities of the UK subsidiaries are translated into US
dollars at the quarter-end exchange rates. Income and expenses are translated at
an average exchange rate for the period and the resulting translation (loss)
gain adjustments are accumulated as a separate component of stockholders’
equity, which totaled ($2,595,000) and $238,000 for the three months ended
December 31, 2008 and 2007, respectively, and ($3,643,000) and $618,000 for the
six months ended December 31, 2008 and 2007, 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 (loss) includes all changes in equity (net assets) during a period from
non-owner sources. For the six months ended December 31, 2008 and 2007, the
components of comprehensive income (loss) consist of changes in foreign currency
translation gains (losses) and changes in unrealized loss on investments in
available-for-sale securities.
Income
Taxes
The
Company accounts for domestic and foreign income taxes under SFAS No. 109,
“Accounting for Income Taxes” (“SFAS No. 109”).
Under the
asset and liability method of SFAS No. 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 No. 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. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109,” which defines the threshold for
recognizing the benefits of tax return positions as well as guidance regarding
the measurement of the resulting tax benefits. FIN 48 requires a company to
recognize for financial statement purposes the impact of a tax position if that
position is “more likely than not” to prevail (defined as a likelihood of more
than fifty percent of being sustained upon audit, based on the technical merits
of the tax position). The Company adopted FIN 48 in its consolidated financial
statements in fiscal 2008.
Basic
and Diluted Earnings (Loss) Per Share
Basic
earnings (loss) per common share are computed based on the weighted average
number of shares outstanding for the period. Diluted earnings (loss) per share
are computed by dividing net income (loss) by the weighted average shares
outstanding assuming all potential dilutive common shares were issued. During
periods in which the Company incurs losses, common stock equivalents, if any,
are not considered, as their effect would be anti-dilutive. The Company has no
dilutive securities for the three and six months ended December 31, 2008. For
the three and six months ended December 31, 2008, a total of 21,798,135 common
stock purchase warrants and debt convertible into 3,361,345 shares were excluded
from the computation of diluted loss per share as their effect would have been
anti-dilutive.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per share computation for the three months ended December
31:
|
|
2008
|
|
|
2007
|
|
Numerator
for basic and diluted loss per share:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,797,000 |
) |
|
$ |
(1,123,000 |
) |
Deemed
distribution to parent company
|
|
|
(29,000
|
) |
|
|
- |
|
Net
loss available to common shareholders
|
|
$ |
(4,826,000 |
) |
|
$ |
(1,123,000 |
) |
Denominator
for basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common stock outstanding
|
|
|
92,814,017 |
|
|
|
85,787,724 |
|
|
|
|
|
|
|
|
|
|
Net
loss per common share available to common stockholders - basic and
diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per share computation for the six months ended December
31:
|
|
2008
|
|
|
2007
|
|
Numerator
for basic and diluted loss per share:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,349,000 |
) |
|
$ |
(155,000 |
) |
Deemed
distribution to parent company
|
|
|
(169,000
|
) |
|
|
- |
|
Net
loss available to common shareholders
|
|
$ |
(5,518,000 |
) |
|
$ |
(155,000 |
) |
Denominator
for basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common stock outstanding
|
|
|
92,773,620 |
|
|
|
85,787,724 |
|
|
|
|
|
|
|
|
|
|
Net
loss per common share available to common stockholders - basic and
diluted
|
|
$ |
(0.06 |
) |
|
$ |
- |
|
Reclassifications
Certain
amounts in the 2007 consolidated financial statements have been reclassified to
conform to the 2008 presentation (see Note 9), with no effect on the previously
reported net loss.
Recent
Accounting Pronouncements
In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP
157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not
active, and provides an illustrative example intended to address certain key
application issues. FSP 157-3 is effective immediately, and applies to the
Company’s December 31, 2008 consolidated financial statements. The Company has
concluded that the application of FSP 157-3 did not have a material impact on
its consolidated financial position and results of operations as of and for the
periods ended December 31, 2008.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
In
February 2007, the FASB issued SFAS. No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115. SFAS No. 159 would create a fair value option of accounting for
qualifying financial assets and liabilities under which an irrevocable election
could be made at inception to measure such assets and liabilities initially and
subsequently at fair value, with all changes in fair value reported in earnings.
SFAS No. 159 is effective as of the beginning of the first fiscal year beginning
after November 15, 2007. The Company adopted SFAS No. 159 and it has had no
impact on the Company’s consolidated financial position, results of operations
and cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) requires acquiring entities in a business combination to recognize
the assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors the
information they need to evaluate and understand the nature and financial effect
of the business combination. SFAS No. 141(R) is effective in fiscal years
beginning after December 15, 2008. The Company expects to adopt SFAS No. 141(R)
on July 1, 2009. The Company is currently assessing the impact the
adoption of SFAS No. 141(R) will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 160 requires entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. SFAS No. 160 is effective in fiscal years
beginning after December 15, 2008. The Company expects to adopt SFAS No. 160 on
July 1, 2009. The Company is currently assessing the impact the adoption of SFAS
No. 160 will have on its consolidated financial statements.
In June
2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-5”).
EITF 07-5 provides guidance for determining whether an equity-linked financial
instrument, or embedded feature, is indexed to an entity’s own stock. EITF 07-5
is effective for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and will be adopted by the Company in
the first quarter of fiscal year 2010. The Company is currently assessing the
potential impact, if any, of the adoption of EITF 07-5 on its consolidated
results of operations and financial condition.
NOTE 3. ACQUISITIONS AND
DIVESTITURES
EXP
Dealer Software Limited
On
October 30, 2007, the Company divested MMI. Pursuant to the terms of the
agreement, EXP agreed to sell shares of Distal Enterprises (“Distal”), which
owned the shares of MMI, to the original sellers of MMI, in full and final
satisfaction of any and all amounts owed to the original sellers of MMI. Under
the terms of the agreement, the Company, EXP, and ADNW were released from any
and all of its liabilities under the original purchase agreement and any other
agreements between the parties executed prior thereto, upon the completion and
transfer of the entire issued share capital of Distal to the original sellers.
The Company received no further consideration on the sale, and incurred a loss
of $2,230,000 which is included in sale of discontinued operations (see Note
9).
On
November 12, 2007, the Company divested EXP. Pursuant to the terms of the Share
Sale Agreement (the “Agreement”), EU Web Services Limited (“EU Web Services”)
agreed to acquire, and the Company agreed to sell, the entire issued share
capital of EXP it then owned. In consideration of the sale, EU Web Services
agreed to issue to the Company, within twenty-eight days from the Agreement’s
execution, Ordinary 0.01 GBP shares in its parent company, First London
Securities, PLC (“First London Securities”) having a fair market value of
$3,000,000 at the date of issuance of such shares. The Company received
1,980,198 shares and recorded the investment at $2,334,000, which represented
the bid price of the restricted securities received, and discounted the carrying
value by 11% as the shares cannot be liquidated for at least twelve months. The
shares are included as investment in available for sale securities in the
accompanying consolidated balance sheet (see Note 5). Further, the Agreement
provided that the Company receive on May 12, 2008, additional consideration in
the form of: (i) Ordinary shares in EU Web Services having a fair market value
of $2,000,000 as of the date issuance of, provided that EU Web Services is
listed and becomes quoted on a recognized trading market within six (6) months
from the date of the Agreement; or (ii) If EU Web services does not become
listed within the time period specified, Ordinary shares in EU Web Services’
parent company having a fair market value of $2,000,000 on May 12, 2008. The
Company originally recorded the receivable at $1,707,000. The Company recorded a
gain of $2,387,000 on the sale of EXP which is included in sale of discontinued
operations (see Note 9). As EU Web Services did not become listed within the
six-month timeframe, the Company received on August 14, 2008, 1,874,414 shares
of First London Securities as payment for the $2,000,000
receivable.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The
operations of EXP (including MMI, Anka and DSS) for the three months ended
September 30, 2007 have been reclassified and presented separately in the
accompanying consolidated statement of operations (see Note 9).
Dealer
Software and Services Limited
DSS had a
wholly owned subsidiary, Consolidated Software Capital Limited (“CSC”). On
June 17, 2007, DSS sold all of its CSC shares for a note receivable of $865,000.
On November 12, 2007 as part of the sale of EXP, the $865,000 note receivable
was exchanged for 578,672 shares of First London Securities common stock having
a fair value of $682,000. The transaction resulted in a loss of $183,000 and is
included in sale of discontinued operations (see Note 9).
NOTE 4. TRANSACTIONS WITH PARENT
COMPANY
From time
to time payments were made by the Company to settle certain obligations of ADNW
and recorded as advances to Parent Company. The advances were non-interest
bearing and due on demand. ADNW had minimal operations, and as of December 31,
2007, agreed to exchange the balance due for 16,000,000 common shares of ADNW.
The Company recorded the net receivable at $2,372,000, which represented the bid
price of the restricted securities to be received as of December 31, 2007, and
discounted the carrying value by 11% or $188,000 because the shares could not be
liquidated until the spinoff of the Company from ADNW was completed pursuant to
the distribution by ADNW of all of the Company’s shares it owned to its
stockholders under a registration statement declared effective by the SEC which,
as of December 31, 2007, was expected to take approximately six months. The
spin-off registration statement was declared effective by the SEC on November 5,
2008. On November 24, 2008 (the “Dividend Distribution Date”), ADNW
distributed the dividend of the 71,250,000 shares of the Company’s common stock
that ADNW owned at such time in order to complete the spin-off of Aftersoft’s
businesses. The dividend shares were distributed in the form of a pro rata
dividend to the holders of record as of November 17, 2008 (the “Record Date”) of
ADNW’s common and convertible preferred stock. Each holder of record of shares
of ADNW common and preferred stock as of the close of business on the Record
Date was entitled to receive 0.6864782 shares of the Company’s common stock for
each share of common stock of ADNW held at such time, and/or for each share of
ADNW common stock that such holder would own, assuming the convertible preferred
stock owned on the Record Date was converted in full. Prior to the
spin-off, ADNW owned approximately 77% of the Company’s issued and outstanding
common stock. Subsequent to and as a result of the spin-off, the Company is no
longer a subsidiary of ADNW (see Note 8).
For the
quarter ended March 31, 2008, the Company reduced the carrying value of amount
due from parent company by $800,000, which represents the reduction of the bid
price of the restricted shares from December 31, 2007 and was recorded in
general and administrative expenses in the consolidated statement of operations
during such period.
ADNW
attempted to settle an old outstanding obligation of ADNW of $775,000 with Mr.
Blumenthal (see Note 7) for 4,400,000 shares of ADNW common stock. The value of
the shares declined and Mr. Blumenthal elected not to accept the ADNW shares as
full compensation, and has now demanded that the Company settle ADNW’s liability
with additional or different consideration. In April 2008, the Company accepted
the 4,400,000 shares from ADNW valued at $484,000 in exchange for attempting to
settle ADNW’s liability. The difference between the value of the ADNW shares and
the amount of ADNW’s initial obligation of $291,000 was recorded as general and
administrative expense in the consolidated statement of operations during such
period. Upon further diligence and review of the matter during the quarter ended
December 31, 2008, the Company determined that no contractual or transactional
basis exists which would have resulted in the assumption of any liability in
this regard. Thus, the Company does not believe it has an enforceable
legal obligation to further compensate Mr. Blumenthal. The Company is in the
process of negotiating a settlement of this matter, and during this time has
elected to continue to treat this item as a liability on its financial
statements while it attempts to negotiate a resolution.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
On June
29, 2007, the Company granted to a holder of 2,124,098 shares of ADNW preferred
stock, which is convertible into 7,231,622 shares of common stock of ADNW,
certain exchange rights. The preferred shareholder agreed to waive anti-dilution
rights it held in ADNW for the right to exchange the preferred shares for
6,402,999 units of the Company, which units were issued as part of the private
placement that closed in July 2007, and contained the same terms as the
securities issued in that offering (see Note 8) - one share of the Company’s
common stock, and a five-year warrant to purchase one share of Company’s common
stock exercisable at $1.00. On April 24, 2008, the Company completed the
exchange transaction and issued the shares and warrants. The difference of
$1,018,000 between the value of the Company units issued ($1,812,000) and the
ADNW shares received ($794,000) was recorded as a distribution in the form of an
increase to accumulated deficit.
As a
result of the above transactions, at June 30, 2008, the Company owned
approximately 27.6 million shares of ADNW’s common stock on a fully converted
basis in the aggregate, representing 26.6% of ADNW’s common stock on a fully
diluted basis as of that date.
During
the six months ended December 31, 2008, the Company liquidated 5,231,622 common
shares of ADNW for net proceeds of $889,000, and issued 2,000,000 common shares
of ADNW in settlement of ADNW obligations (see Note 8). As a result of the
Company’s ownership of certain ADNW securities, the Company received
approximately 13,965,295 shares of its own common stock in connection with the
spin-off dividend distribution. On December 31, 2008, the Company
retired 13,730,413 of the shares. The remaining 234,882 shares were used by the
Company for rounding of fractional shares issued in respect of the spin-off
dividend, to make adjustments for the benefit of the holders of ADNW’s Series B
Convertible Preferred Stock which received fewer shares in connection with the
spin-off than the number to which they were entitled as a result of a
calculation error relating to the Series B conversion rate, and for other minor
adjustments.
NOTE 5. INVESTMENT IN AVAILABLE -FOR-SALE
SECURITIES
The
Company received a total of 4,433,284 shares of First London Securities from the
sale of EXP (see Note 3). The shares are listed for trading on the London Plus
Exchange but currently they are thinly traded.
The
Company values the investment at the bid price and any unrealized gains or
losses are recorded in accumulated other comprehensive income (loss) in
stockholders’ equity in the accompanying consolidated balance sheets. The
Company owns approximately 3% of First London Securities and carries the
investment at $957,000, net of an other-than-temporary loss of $3,957,000 as of
December 31, 2008, and at $4,102,000, net of unrealized loss of $184,000 as of
June 30, 2008.
In
accordance with SFAS No. 157, the following table details the fair value
measurements within the fair value hierarchy of the Company’s investments in
available-for-sale securities (in thousands):
|
|
|
Fair Value Measurements at December 31, 2008 Using
|
|
|
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
|
Fair Value at
|
|
Active Markets for
|
|
Observable
|
|
Unobservable
|
|
|
December 31,
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Investments
in available-for-sale securities
|
$
|
|
957 |
|
$
|
|
— |
|
$
|
|
957 |
|
$
|
|
— |
|
Fair
value measurements using Level 2 inputs in the table above relate to the
Company’s investments in available for sale securities, which are based on the
current bid price of the Company’s stock in a thinly traded market.
The
following table provides a reconciliation of the beginning and ending balances
for the Company’s assets measured at fair value using Level 2 inputs (in
thousands):
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
|
|
Six Months
Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
Beginning
balance
|
|
$
|
—
|
|
Transfers
into Level 2
|
|
4,106
|
|
Reversal
of unrealized loss previously recorded included in accumulated other
comprehensive loss
|
|
808
|
|
Other-than-temporary
loss included in operations
|
|
(3,957)
|
|
Ending
balance
|
|
$
|
957
|
|
The
Company has determined that $3,957,000 of unrealized losses on these investments
as of December 31, 2008 are other-than-temporary in nature. Factors considered
in determining whether impairments are other than temporary include (i) the
length of time and extent to which fair value has been less than the amortized
cost basis, (ii) the financial condition and near-term prospects of the
investee and (iii) the Company’s intent and ability to hold an investment
for a period of time sufficient to allow for any anticipated recovery in market
value. The fair value of the Company’s investments in available for sale
securities could change significantly in the future and the Company may be
required to record other-than-temporary impairment charges or additional
unrealized losses in future periods. The recording of the
other-than-temporary impairment of $3,957,000 for the three and six month
periods ended December 31, 2008 resulted in the reversal of previously
recognized unrealized loss in other comprehensive loss of $1,556,000 and
$808,000 for the three and six month periods ended December 31, 2008,
respectively.
NOTE 6. LONG -TERM DEBT
Long-term
debt consists of the following as of December 31, 2008 and June 30,
2008:
|
|
December
31,
2008
|
|
|
June 30,
2008
|
|
ComVest
term loan, net of debt discount of $543,000 and $756,000
|
|
$ |
4,457,000 |
|
|
$ |
4,244,000 |
|
ComVest
revolver
|
|
|
1,000,000 |
|
|
|
500,000 |
|
McKenna
note
|
|
|
290,000 |
|
|
|
497,000 |
|
Homann
note
|
|
|
125,000 |
|
|
|
125,000 |
|
Secured
notes
|
|
|
403,000 |
|
|
|
- |
|
Other
notes
|
|
|
13,000 |
|
|
|
15,000 |
|
|
|
|
6,288,000 |
|
|
|
5,381,000 |
|
Less
current portion
|
|
|
(536,000
|
) |
|
|
(598,000
|
) |
Long
term portion
|
|
$ |
5,752,000 |
|
|
$ |
4,783,000 |
|
ComVest
Loan Agreement
On
December 21, 2007, the Company entered into a Revolving Credit and
Term Loan Agreement (the “Loan Agreement”) with ComVest Capital LLC (“ComVest”),
as lender, pursuant to which ComVest agreed to extend a $1,000,000 secured
revolving Credit Facility and a $5,000,000 Term Loan. The Loan Agreement
contains customary affirmative and negative covenants, including maximum limits
for capital expenditures per fiscal year, and ratios for liquidity. In
connection with obtaining a waiver for a violation of loan covenants at March
31, 2008, the Company reduced the exercise price from $0.3125 per share to $0.11
per share for one million warrants held by ComVest (see below), recognizing the
incremental fair value of the modified warrants of $24,000 as additional
interest expense.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
As of
June 30, 2008, in connection with obtaining a waiver for a violation of loan
covenants, the Company and ComVest amended the Loan Agreement and modified
certain covenants. The cash flow ratio coverage was reduced and the lender
agreed to extend from January 1, 2009 until January 1, 2010 the start of the
loan amortization. As part of the amendment, ComVest required the Company to
reduce the exercise price from $0.39 to $0.11 for 2,000,000 warrants held by
ComVest (see below). The incremental fair value of the modified warrants is
$15,000, which was recorded as an additional debt discount and is being
amortized over the remaining life of the term loan pursuant to EITF 96-19,
“Debtor's Accounting for a Modification or Exchange of Debt
Instruments.”
As of
December 31, 2008, in connection with obtaining a waiver for violation of
certain loan covenant, the Company and ComVest agreed to increase the interest
on the $1,000,000 Credit Facility (described below) from 9.5% to
11%.
After
obtaining the above waivers, the Company is not in violation of any loan
covenants at June 30, 2008 and December 31, 2008.
Credit Facility and Revolving Credit
Note. Pursuant to the terms of the Loan Agreement, the Credit Facility is
available from December 21, 2007 (the “Closing Date”), through November 30,
2009, unless the maturity date is extended, or the Company prepays the Term Loan
(described below) in full, in each case in accordance with the terms of the Loan
Agreement. The Credit Facility provides for borrowing capacity of an amount up
to (at any time outstanding) the lesser of the borrowing base at the time of
each advance under the Credit Facility, or $1,000,000. The borrowing base at any
time will be an amount determined in accordance with a borrowing base report the
Company is required to provide to ComVest, based upon the Company’s Eligible
Accounts and Eligible Inventory, as such terms are defined in the Loan
Agreement.
In
connection with the Credit Facility, the Company issued a Revolving Credit Note
(the “Credit Note”) payable to ComVest in the principal amount of $1,000,000,
bearing interest at a rate per annum equal to the greater of (a) the prime rate,
as announced by Citibank, N.A. from time to time, plus two percent (2%), or (b)
nine and one-half percent (9.5%) (which was subsequently changed to 11%; see
above). The applicable interest rate will be increased by four hundred (400)
basis points during the continuance of any event of default under the Loan
Agreement. Interest will be computed on the daily unpaid principal balance and
is payable monthly in arrears on the first day of each calendar month commencing
January 1, 2008. Interest is also payable upon maturity or acceleration of the
Credit Note.
The
Company has the right to prepay all or a portion of the principal balance on the
Credit Note at any time, upon written notice, with no penalty. The Credit Note
is secured pursuant to the provisions of certain Security
Documents.
The
Company may, at its option, and provided that the maturity date of the Credit
Facility has not been accelerated due to prepayment in full of the Term Loan,
elect to extend the Credit Facility for one additional year, through November
30, 2010, upon written notice to ComVest, provided that no default or event of
default have occurred and are continuing at that time. The Company also has the
option to terminate the Credit Facility at any time upon five business days’
prior written notice, and upon payment to ComVest of all outstanding principal
and accrued interest of the advances on the Credit Facility, and prorated
accrued commitment fees. The Credit Facility commitment also terminates, and all
obligations become immediately due and payable, upon the consummation of a Sale,
which is defined in the Loan Agreement as certain changes of control or sale or
transfers of a material portion of the Company’s assets.
At
December 31, 2008, the Company had drawn down the $1,000,000 Credit Facility in
full. The interest rate as of December 31, 2008 was increased from
9.5% to 11.0% in connection with obtaining a waiver from ComVest for violation
of certain loan covenants (described above).
Term Loan and Convertible Term
Note. Pursuant to the terms of the Loan Agreement, ComVest extended to
the Company a Term Loan in the principal amount of $5,000,000, on the Closing
Date. The Term Loan is a one-time loan, and unlike the Credit Facility, the
principal amount is not available for re-borrowing.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The Term
Loan is evidenced by a Convertible Term Note (the “Term Note”) issued by the
Company on the Closing Date, and payable to ComVest in the principal amount of
$5,000,000. The Term Note bears interest at a rate of eleven percent (11%) per
annum, except that during the continuance of any event of default, the interest
rate will be increased to sixteen percent (16%).
As
amended (see ”ComVest Loan Agreement” above), the Term Note is repayable in 11
equal monthly installments of approximately $208,333, payable on first day of
each calendar month commencing January 1, 2010 through November 1, 2010, with
the balance of $2,708,333 due on November 30, 2010.
The
Company has the option to prepay the principal balance of the Term Note in whole
or in part, at any time, upon 15 days’ prior written notice. The Company will be
required to prepay the Term Loan in whole or part under certain circumstances.
In the event that the Company prepays all or a portion of the Term Loan, the
Company will ordinarily pay a prepayment premium in an amount equal to (i) three
percent (3%) of the principal amount being prepaid if such prepayment is made or
is required to be made on or prior to the second anniversary of the Closing
Date, and (ii) one percent (1%) of the principal amount being prepaid if such
prepayment is made or is required to be made subsequent to the second
anniversary of the Closing Date.
The
principal and interest payable on the Term Note is convertible into shares of
the Company’s common stock at the option of ComVest. In addition, the
Company may require conversion of the principal and interest under certain
circumstances. The initial conversion price was $1.50 per
share. The number of shares issuable upon conversion of the
Term Note (the “Conversion Shares”), and/or the conversion price, may be
proportionately adjusted in the event of any stock dividend, distribution, stock
split, stock combination, stock consolidation, recapitalization or
reclassification or similar transaction. In addition, the number of Conversion
Shares, and/or the conversion price may be adjusted in the event of certain
sales or issuances of shares of the Company’s common stock, or securities
entitling any person to acquire shares of common stock, at any time while the
Term Note is outstanding, at an effective price per share which is less than the
then-effective conversion price of the Term Note.
On July
3, 2008, the conversion price for the Term Note was reduced from $1.50 to $1.49
as a result of certain anti-dilution protection contained therein following the
issuance by the Company of additional shares of common stock and warrants to
purchase common stock. Consequently, the number of shares issuable upon
conversion of the principal amount of the Tern Note was increased to 3,361,345
shares from 3,333,333 shares.
The
Company incurred a closing fee of $100,000 in connection with the Term Loan. In
connection with the Credit Facility, the Company has agreed to pay an annual
commitment fee of $15,000, on December 1 of each year, commencing December 1,
2008, and on any termination date (pro-rated, if applicable), that the Credit
Facility is in effect, as well as a collateral monitoring and administrative fee
of $1,500 per month.
The
expenses of this financing were approximately $641,000, which included a
finder’s fee of $300,000, lender fees of $190,000 and professional and due
diligence fees of approximately $151,000. The net proceeds to the Company were
approximately $4,359,000. The fees were allocated between debt issuance costs
and debt discount. The debt issuance costs of $478,000 are recorded in Other
Assets in the accompanying consolidated balance sheets and are being amortized
and charged to interest expense over the term of the loan using the effective
interest method. Debt discount of $163,000 is recorded in the consolidated
balance sheet as a reduction in the carrying value of the debt, and is being
amortized and charged to interest expense over the term of the loan using the
effective interest method.
Warrants. In connection with
the Loan Agreement, the Company issued warrants to ComVest to purchase the
following amounts of shares of the Company’s Common Stock, exercisable after the
Closing Date and expiring December 31, 2013: a) Warrant to purchase 1,000,000
shares of common stock at an exercise price of $0.3125 per share; b) Warrant to
purchase 2,000,000 shares of common stock at an exercise price of $0.39 per
share; and c) Warrant to purchase 2,083,333 shares of common stock at an
exercise price of $0.3625 per share; (each, a “Warrant”) (the 5,083,333 shares
collectively issuable upon exercise of the Warrants are referred to herein as
the “Warrant Shares”). The exercise prices of certain of these
warrants were amended, as described under “ComVest Loan Agreement” above. The relative fair value
of the Warrants is $868,000 using a Black Scholes valuation model and also
contains a cashless exercise feature.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The
warrant valuation was computed using a 3.5% risk-free interest rate, a 99%
volatility and a six-year life. The value of the warrants is included in debt
discount, is recorded in the consolidated balance sheet as a reduction in the
carrying value of the debt, and is being amortized and charged to interest
expense over the term of the loan using the effective interest
method.
The
number of shares issuable upon exercise of the Warrants, and/or the applicable
exercise prices, may be proportionately adjusted in the event of any stock
dividend, distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar transaction. In addition, the
number of shares issuable upon exercise of the Warrants, and/or the applicable
exercise prices may be adjusted in the event of certain issuances of shares of
the Company’s common stock, or securities entitling any person to acquire shares
of common stock, at any time while the Warrants are outstanding, at an effective
price per share which is less than the then-effective exercise prices of the
Warrants.
The
Company also granted certain registration rights and piggyback registration
rights to the holder(s) of the securities underlying the Term Note and
Warrants.
The
Company issued warrants to purchase 250,000 shares of common stock as
compensation for assistance in securing the $5,000,000 Term Loan. The warrants
were valued at $42,000 using a Black Sholes valuation model and are included in
debt issuance cost. The warrant valuation was computed using a 3.5% risk free
interest rate, a 99% volatility and a six-year life.
Amortization
of debt discount was $277,000 and amortization of debt issuance costs was
$132,000 for the six months ended December 31, 2008 and was $139,000 and $66,000
for the three months ended December 31, 2008, respectively.
Homann
Note
The
Company has an unsecured note payable to Homann Tire LTD (“Homann”) in the
amount of $125,000, bearing interest at 8% per annum and due April 29, 2009 (see
Note 7). The terms of the note include interest only payments of $833 per month.
A principal payment of $25,000 was made in April 2007. The remaining balance of
$125,000 is payable in April 2009, and the Company expects to be able to repay
this from free cash flow at that time.
McKenna
Note
The
Company issued an unsecured note payable to Mr. A. McKenna in the amount of
$825,000, due July 2009, with interest at 8% per annum, in 24 monthly
installments of $37,313 including interest (see Note 7). The Company expects to
satisfy this obligation from free cash flow.
Secured
Notes
The
Company has secured notes totaling $403,000 payable over 24 to 60 with monthly
payments of $4,137 and quarterly payments of $6,278. The notes bear
interest rates of 5.49% to 9.54% and are secured by leasehold improvements and
equipment with a carrying value of $431,400.
NOTE 7. 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 consolidated financial
position or results of operations of the Company.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
Aidan J.
McKenna
On August
1, 2007, the Company and Mr. McKenna entered into an agreement resolving all
outstanding actions by Mr. McKenna against the Company and its subsidiaries
related to the initial action against CarParts Technologies, Inc., which is now
known as ASNA. The agreement provided that the Company would pay Mr. McKenna
$2,000,000 in cash, $825,000 on a promissory note with an interest rate of 8%
amortized in equal payments over a 24-month period (see Note 6) and in addition
would issue Mr. McKenna 1,718,750 shares of Common Stock of the Company, which
represented an aggregate number of shares of common stock of the Company that
the parties determined fairly represented $825,000 (assuming a price of $0.48
per share of common stock, the closing price of the Company’s common stock on
the date of settlement). Mr. McKenna was also entitled to warrants to purchase
an equivalent number of shares of common stock at the same price, which was
valued at $412,000 (using the Black-Scholes valuation model) and recorded as an
additional litigation cost for the year ended June 30, 2007. Upon entering this
agreement all parties agreed to withdraw all existing litigation and claims. The
Company recorded the settlement with McKenna as of June 30, 2007. The shares
were issued in fiscal 2008 (see Note 8). This settlement was amended during
fiscal 2008 (see Note 8).
Arthur
Blumenthal
Additionally,
the Company entered into a settlement agreement with Mr. Arthur Blumenthal, a
former shareholder of Anderson BDG, Inc. Mr. Blumenthal’s lawsuit against the
Company’s parent ADNW emanated from an agreement Mr. Blumenthal had with a
subsidiary of the Company, ASNA (f/k/a CarParts Technologies, Inc.) for the
purchase of Anderson BDG, that had not been settled although it was past due.
The Company assumed the liability as part of a plan of spinning off certain
businesses into the Company and renegotiated the agreement with Mr. Blumenthal,
the terms of which required the Company to make a payment of $50,000 cash and
the issuance to Mr. Blumenthal and registration of 300,000 shares of the
Company’s common stock, which were issued in fiscal 2007 and valued at $0.48 per
share, (the closing price of the Company’s common stock on the date of
settlement) or $144,000. The Company subsequently completely settled the lawsuit
with Mr. Blumenthal and repaid his notes in fiscal 2008. In fiscal 2009, the
Company is in the process of negotiating a settlement with Mr. Blumenthal in
another matter on behalf of ADNW (see Note 4).
Homann Tire
LTD
Homann
Tire LTD (“Homann”) filed a complaint against the Company’s subsidiary ASNA
(f/k/a CarParts Technologies, Inc.) 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
Company started to implement the system but full installation was never
completed and Homann moved to another system six months later. During
depositions pursuant to this case, the Company negotiated an agreement with
Homann on March 29, 2007. The terms of the agreement provide for a settlement
payment to Homann of $150,000 bearing interest at 8% per annum. Payment of
$25,000 cash was made in April 2007. The remaining balance of $125,000 is
payable in April 2009, and the Company expects to be able to repay this from
free cash flow at that time. Interest on the note payable is payable in equal
monthly installments of $833 (see Note 6).
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.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The
Company has agreed to indemnify ComVest and its directors, officers, employees,
attorneys and agents against, and to hold ComVest and such persons harmless
from, any and all losses, claims, damages and liabilities and related expenses,
including reasonable counsel fees and expenses, they may incur, arising out of,
related to, or as a result of, certain transactions or events in connection with
the Credit Facility and Term Loan (see Note 6).
NOTE 8. Stockholders'
Equity
On July
5, 2007, the Company issued 5,208,333 shares of common stock and an equivalent
number of warrants with an exercise price of $1.00 to investors in connection
with a private placement of common stock and warrants to purchase common stock.
The net proceeds from this transaction amounted to $2,036,000.
On August
1, 2007, the Company issued 1,718,750 shares of common stock and 1,718,750
warrants to purchase shares of common stock at $0.48 per share to Mr. McKenna in
partial settlement of the outstanding litigation costs (see Note 7). These
shares were valued at the issue price of the private placement on the date of
the transaction of $0.48 per share, totaling $825,000, and the warrants were
valued using the Black-Scholes pricing model, totaling $412,000. In November
2007, the parties amended the settlement agreement pursuant to which Mr.
McKenna returned the 1,718,750 shares and the Company issued to him an
additional 1,718,750 warrants to purchase common stock at $0.48 per share.
The fair value of the shares received back was $275,000 and the
new warrants were valued at $152,000 using a Black Scholes valuation model.
The warrant valuation was computed using a 3.5% risk free interest rate, a 99%
volatility and a 4.5 year life. The Company realized a net reduction in
litigation settlement expenses of $123,000 for the year ended June 30,
2008.
On May
13, 2008, the Compensation Committee of the Board of Directors approved
restricted stock awards of an aggregate of 2,985,000 shares of its common stock
to certain employees, a corporate officer and three outside directors in respect
of services previously rendered. The shares vest as follows: 34% of the shares
vested immediately on the date of issuance, and the remaining 66% of the shares
will be issued in three equal installments on each of the first, second and
third anniversaries of the grant date. The Company issued 994,500 shares of
common stock that were fully vested on the date of grant. The Company did not
receive any consideration and recorded an expense of $99,450 based on the market
price on the date of issuance. The additional shares will be valued based on the
dates the shares are issued in the future.
On July
3, 2008, the Company sold to an investor group, 5,231,622 shares of ADNW common
stock for $889,000 before fees and expenses. The Company incurred cash expenses
and fees of approximately $48,000 and agreed to issue to the selling agent
five-year warrants to purchase for $0.30 per share 1,000,000 shares of common
stock. The warrants were valued at $137,978 using a Black-Scholes valuation
model, with a risk free interest rate of 1.84 %, a volatility of 117% and a
five-year life. This transaction resulted in a gain of $337,000, which is
recorded as an increase to additional paid-in capital (see Note 4).
During
the quarter ended September 30, 2008, the Company reached an agreement with
three creditors of ADNW, and issued them 2,000,000 shares of ADNW common stock
owned by the Company in satisfaction of certain obligations of ADNW totaling
$140,000. At the time of settlement, the ADNW shares were trading at less than
the carrying value of the shares held by the Company, and the Company incurred a
loss of $53,000 on the settlement, which is recorded as a reduction to
additional paid-in-capital (see Note 4).
During
the quarter ended September 30, 2008, the Company approved the issuance of
483,000 shares to the non-management members of the Board of Directors under the
Company’s 2007 Long-Term Incentive Plan. The shares will be issued over a
three-year period. On October 6, 2008, the Company issued 47,890 shares of these
awards, which were valued at $7,184.
On
October 6, 2008, the Company issued a director of the Company 35,000 shares of
common stock in lieu of $8,750 of cash compensation.
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
On
November 24, 2008 (the “Dividend Distribution Date”), ADNW distributed the
dividend of the 71,250,000 shares of the Company’s common stock that ADNW owned
at such time in order to complete the spin-off of the Company’s businesses. The
dividend shares were distributed in the form of a pro rata dividend to the
holders of record as of November 17, 2008 (the “Record Date”) of ADNW’s common
and convertible preferred stock. Each holder of record of shares of ADNW common
and preferred stock as of the close of business on the Record Date was entitled
to receive 0.6864782 shares of the Company’s common stock for each share of
common stock of ADNW held at such time, and/or for each share of ADNW common
stock that such holder would own, assuming the convertible preferred stock owned
on the Record Date was converted in full. Prior to the spin-off, ADNW
owned approximately 77% of the Company’s issued and outstanding common stock.
Subsequent to and as a result of the spin-off, the Company is no longer a
subsidiary of ADNW.
As a
result of the Company’s ownership of certain ADNW securities, the Company
received approximately 13,965,295 shares of its own common stock in connection
with the spin-off dividend distribution. On December 31, 2008, the
Company retired 13,730,413 of the shares. The remaining 234,882 shares were used
by the Company for rounding of fractional shares issued in respect of the
spin-off dividend, to make adjustments for the benefit of the holders of ADNW’s
Series B Convertible Preferred Stock which received fewer shares in connection
with the spin-off than the number to which they were entitled as a result of a
calculation error relating to the Series B conversion rate, and for other minor
adjustments. The value of these shares of approximately $29,000 was
recorded as a distribution.
Warrants:
At
December 31, 2008, the Company has the following warrants
outstanding:
Issuance
of warrants in connection with the ComVest Loan Agreement (see Note
6):
|
|
|
|
ComVest
|
|
|
5,083,333 |
|
Other
|
|
|
250,000 |
|
|
|
|
5,333,333 |
|
Issuance
of warrants to a service provider (valued at $27,000)
|
|
|
155,549 |
|
Issuance of
warrants in McKenna settlement (see Note 7 and above)
|
|
|
3,437,500 |
|
Issuance of
warrants to investors in private placement (see
above)
|
|
|
5,208,337 |
|
Issuance
of warrants to placement agent in private placement
|
|
|
260,417 |
|
Issuance
of warrants to Lewis Asset Management Corp. funds (see Note
4)
|
|
|
6,402,999 |
|
Issuance
of warrants to placement agent (see above )
|
|
|
1,000,000 |
|
Total
issued
|
|
|
21,798,135 |
|
The
outstanding warrants have an exercise price range of $0.11 to $1.00 and a
remaining life ranging from 3.10 years to 5.30 years. The weighted average
exercise price is $0.70 per share and the weighted average remaining life is
4.65 years.
NOTE 9. DISCONTINUED
OPERATIONS
The sale
of MMI resulted in a loss of sale of discontinued operations (in the second
quarter of fiscal 2008) as follows (in thousands):
Cash
|
|
$ |
157 |
|
Accounts
receivable
|
|
|
439 |
|
Inventories
|
|
|
6 |
|
Other
|
|
|
27 |
|
Current
Assets
|
|
|
629 |
|
Property
and equipment
|
|
|
156 |
|
Other
long term assets
|
|
|
219 |
|
Goodwill
|
|
|
723 |
|
Amortizable
intangible assets, net
|
|
|
2,242 |
|
Total
Assets
|
|
|
3,969 |
|
Liabilities
assumed
|
|
|
(1,739 |
) |
Net
assets divested
|
|
|
2,230 |
|
Proceeds
|
|
|
0 |
|
Loss
on disposal
|
|
$ |
(2,230 |
) |
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
The sale
of EXP resulted in a gain on the sale of discontinued operations (in the second
quarter of fiscal 2008) as follows (in thousands):
Accounts
receivable
|
|
$ |
1,050 |
|
Investments
in available-for-sale securities
|
|
|
369 |
|
Current
Assets
|
|
|
1,419 |
|
Goodwill
|
|
|
1,640 |
|
Total
Assets
|
|
|
3,059 |
|
Liabilities
assumed
|
|
|
(1,405 |
) |
Net
assets divested
|
|
|
1,654 |
|
Proceeds
- value of shares and receivable (see Note 3)
|
|
|
4,041 |
|
Gain
on disposal
|
|
$ |
2,387 |
|
Included
in discontinued operations of the Company are the following results of EXP,
including MMI (in thousands):
|
|
For the
Period October 1, 2007
until the Date of sale
|
|
Revenue
|
|
$ |
410 |
|
Cost
of sales and operating expenses
|
|
|
433 |
|
Loss
from operations
|
|
|
(23 |
) |
|
|
|
|
|
Income
taxes
|
|
|
0 |
|
Net
loss, net of taxes
|
|
$ |
(23 |
) |
AFTERSOFT
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (cont’d)
December
31, 2008
(Unaudited)
|
|
For the
Period July 1, 2007
Until the Date of sale
|
|
Revenue
|
|
$ |
1,670 |
|
Cost
of sales and operating expenses
|
|
|
1,656 |
|
Income
from operations
|
|
|
14 |
|
|
|
|
|
|
Income
taxes
|
|
|
0 |
|
Net
income, net of taxes
|
|
$ |
14 |
|
NOTE
10. SUBSEQUENT EVENTS
During
the quarter ended September 30, 2008, the Company approved the issuance of
483,000 shares to the non-management members of the Board of Directors under the
Company’s 2007 Long-Term Incentive Plan. The shares vest over a three-year
period. On January 6, 2009, the Company issued 31,955 shares of these
awards, which were valued at $2,876, and remitted income tax deposits in the
amount of $684 for certain directors.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Some
of the statements contained in this Quarterly Report on Form 10-Q, which are not
purely historical, are forward-looking statements, including, but not limited
to, statements regarding the Company’s objectives, expectations, hopes, beliefs,
intentions or strategies regarding the future. In some cases, you can identify
forward-looking statements by the use of the words “may,” “will,” “should,”
“expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, our actual results could differ
materially from those disclosed in these statements due to various risk factors
and uncertainties affecting our business. We caution you not to place undue
reliance on these forward-looking statements. We do not assume responsibility
for the accuracy and completeness of the forward-looking statements and we do
not intend to update any of the forward-looking statements after the date of
this report to conform them to actual results. You should read the following
discussion in conjunction with our financial statements and related notes
included elsewhere in this report. For a more complete understanding of our
industry, the drivers of our business and our current period results, you should
read the following Management’s Discussion and Analysis of Financial Condition
and Results of Operation in conjunction with our Annual Report on Form 10-K for
the year ended June 30, 2008 and our other filings with the SEC.
Overview
Aftersoft
Group Inc. is a company that operates through two wholly owned subsidiaries
based in the US (ASNA) and the UK (MAM), which operate independently of one
another. We market and develop business management software solutions that
manage both the business and supply chain for small and medium-sized firms in
the automotive aftermarket. The automotive aftermarket includes those businesses
that supply servicing, parts, oil, tires, and performance extras to the retail
market.
Management
believes that the largest single issue facing the automotive aftermarket at this
time is the downturn of the global economy, especially the economics in which we
operate. The constraint of credit within the U.S. and U.K. markets is forcing
automobile owners to retain their existing automobiles far longer than they may
have previously planned. This is forcing owners to seek out more economic ways
of maintaining their vehicles, and management believes this presents an
opportunity to the Company. The need for consumers to maintain their vehicles
longer requires service suppliers to offer a wide range of services at highly
competitive prices. Management believes that this can be achieved only by those
businesses that are able to efficiently manage their businesses and find methods
to reduce costs without affecting service levels, which may best be done through
investments in ‘up to date’ management information systems, specifically those
designed for the automotive market. However, management also has recently
noticed that some businesses wishing to invest in new management systems are
also finding their access to credit reduced. This may have a detrimental effect
on our revenues if customers are unable to fund purchases. Management still
believes that the aftermarket landscape will continue to change over the next 18
months, with the convergence of the aftermarket and tire markets, but this rate
of change may be slower than first expected. Management still believes that the
desire of parts manufacturers to produce and control their own product
catalogues, rather than allowing this information to be made available by
third-party catalog suppliers, will present opportunities to the
Company.
Our
revenue and income is derived primarily from the sale of software, services and
support, although in the UK we also earn a percentage of our revenue and income
from the sale of hardware systems to clients. During the six months ended
December 31, 2008, we generated revenues of $10,850,000 with an operating loss
of $305,000. Of these revenues, 76% were derived from the U.K.
market.
We are
headquartered in Chester, U.K. and maintain additional offices for our U.S.
operating subsidiary in Dana Point, California; Allentown, Pennsylvania and
Wintersville, Ohio, and, for our U.K. operating subsidiary, in Sheffield,
Northampton and Wareham in the U.K.
The
software that we sell is mainly based on a Microsoft Windows-based technology
although we do still have an older ‘Green Screen’ terminal-based product. The
four main products that we sell in the US each relate to a specific component of
the automotive aftermarket supply chain, including warehouse distributing, the
jobber, the installing and the “open web.” We sell our Direct Step product into
the warehouse segment, which enables large warehouses with millions of parts to
locate, manage, pack and deliver the parts with ease and efficiency. We sell our
Autopart product into the jobber segment, which manages a jobber’s entire
business (i.e., financial, stock control and order management) but more
importantly, enables the jobber quickly to identify the parts that his client
needs, either via the internet or telephone, so that the correct product for the
vehicle on the ramp can be supplied. We sell our VAST product into the installer
segment, which repairs and maintains automobiles. The installer needs systems
that enable it to efficiently and simply manage its businesses, whether as a
single entity or national multi-site franchise. The fourth and final segment is
the “open webs.” This technology allows these three separate business solutions
to connect to each other and/or other third party systems to allow, among other
processes, ordering, invoicing and stock checking to take place in real-time
both up and down the supply chain. The UK market differs from that of the US in
that it does not have the same number of large warehouse distribution centers,
so we do not sell the Direct Step product in the UK We continue to sell the
Autopart product to the jobber market, but sell Autowork and Autocat+ to the
installer market.
To date,
management has identified four areas that it believes we need to focus
on.
The first
area is the release of one of our U.K. products developed by MAM, our U.K.
subsidiary, under a Software as a Service (SaaS) model. This is where software
solutions are made available to end-users via the internet and does not require
them to purchase the software directly but ‘rent’ it over a fixed period of
time. Management believes that this will be a rapidly growing market for the
U.K. as businesses continue to look for ways of reducing capital expenditures
while maintaining levels of service. Once this has been successfully deployed in
the U.K., we will look to use a similar model in the U.S.
The
second area of focus is the sales and marketing strategy within the U.S. market.
To date, although increased resources have been made available for sales and
marketing, they have not brought the levels of return that management had
expected. Management has reviewed the U.S. business’ sales processes and
marketing efforts and made what it feels are significant improvements that will
bear fruit over the next six months. In addition to this, a Head of
Communications and Marketing has recently been appointed and the Company expects
this appointment to further increase the profile of the U.S. business and its
product offering. However, management still recognizes that if it is unable to
recruit, train and deploy suitably capable personnel within the market, the
businesses products will be undervalued and its market potential will not be
reached.
The third
area of focus relates to the continued sales and market initiatives tied to the
Autopart product within the U.S. market. A senior member of the U.K. management
team has been appointed to join the U.S. business to head the efforts relating
to this product along with a complementary DirectStep product. To date this move
has proved successful, as we have increased levels of service and knowledge of
our U.S. staff members, and management believes that this will lead to
significant revenue increases within the next 6 months. While management
believes that this is the correct route to follow, it is aware that this effort
and the move of personnel may affect the U.K. business following the transfer of
a key member of former U.K. management.
The
fourth area is other English-speaking markets in auto industry aftermarkets
as opposed to focusing on additional vertical markets that share common
characteristics to that of the automotive market. Management intends to
carefully monitor this expansion as a result of the current state of the global
economy.
Critical
Accounting Policies
There
were no changes to those policies disclosed in the Annual Report on Form 10-K
for the fiscal year ended June 30, 2008.
Impact
of Currency Exchange Rate
Our net
revenue derived from sales in currencies other than the U.S. dollar was 75% and
76% for the three and six month periods ended December 31, 2008, respectively,
as compared to 75% and 75% for the corresponding periods in 2007. As
the US dollar strengthens in relation to the Great Britain Pound (“GBP”), as it
has recently done, our revenue and income, which is reported in US dollars, is
negatively impacted. Changes in the currency values occur regularly
and in some instances may have a significant effect on our results of
operations.
Income
and expenses of our MAM subsidiary are translated at the average exchange rate
for the period. During the three and six month periods ended December 31, 2008,
the exchange rate for MAM’s operating results was US$1.7364 per GBP1, compared
with US$2.0331 per GBP1 for the three and six month periods ended December 31,
2007.
Assets
and liabilities of our MAM subsidiary are translated into US dollars at the
quarter-end exchange rates. The exchange rate used for translating
our MAM subsidiary was US$1.4479 per GBP1 at December 31, 2008 and US$1.9954 per
GBP1 at June 30, 2008.
Currency
translation (loss) and gain adjustments are accumulated as a separate component
of stockholders’ equity, which totaled ($2,595,000) and $238,000 for the three
months ended December 31, 2008 and 2007, respectively, and ($3,643,000) and
$618,000 for the six months ended December 31, 2008 and 2007,
respectively.
Results
of Operations
Our
results of operations for the three months and six months ended December 31,
2008 compared with the three months and six months ended December 31, 2007 were
as follows:
Revenues. Revenues were
$5,005,000 and $10,850,000 for the three and six months ended December 31, 2008,
respectively, compared with revenues of $5,645,000 and $11,000,000 for the three
and six months ended December 31, 2007, respectively. Our U.S.
operation experienced slightly higher revenues for the three and six month
periods ended December 31, 2007 than it did during the 2008 periods, due to a
contract which we completed during the quarter ended December 31, 2007, and did
not also have in 2008, for which we billed the customer approximately $121,000.
Additionally, our UK revenues were negatively impacted by the strength of the US
dollar vs. the British Pound, as discussed above.
Cost of Revenues. Total cost
of revenues for the three months and six months ended December 31, 2008, were
$2,235,000 and $4,990,000, respectively, compared with $2,508,000 and $5,167,
000 for the same periods of December 31, 2007, respectively. This was
consistent with the decrease in revenues during the three and six month periods
ended December 31, 2008.
Operating Expenses. The
following tables set forth, for the periods indicated, our operating expenses
and the variance thereof:
|
|
For the Three Months
|
|
|
|
|
|
|
|
(In thousands)
|
|
Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
709,000 |
|
|
$ |
766,000 |
|
|
$ |
(57,000 |
) |
|
|
-7.4 |
% |
Sales
and marketing
|
|
|
561,000 |
|
|
|
661,000 |
|
|
|
(100,000 |
) |
|
|
-15.2 |
% |
General
and administrative
|
|
|
1,478,000 |
|
|
|
2,254,000 |
|
|
|
(776,000 |
) |
|
|
-34.4 |
% |
Depreciation
and amortization
|
|
|
260,000 |
|
|
|
327,000 |
|
|
|
(67,000 |
) |
|
|
-20.5 |
% |
Total
Operating Expenses
|
|
$ |
3,008,000 |
|
|
$ |
4,008,000 |
|
|
$ |
(1,000,000 |
) |
|
|
-25.0 |
% |
(In thousands)
|
|
For the Six Months
Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance $
|
|
|
Variance %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
1,494,000 |
|
|
$ |
1,458,000 |
|
|
$ |
36,000 |
|
|
|
2.5 |
% |
Sales
and marketing
|
|
|
1,160,000 |
|
|
|
1,189,000 |
|
|
|
(29,000 |
) |
|
|
-2.4 |
% |
General
and administrative
|
|
|
2,983,000 |
|
|
|
3,564,000 |
|
|
|
(581,000 |
) |
|
|
-16.3 |
% |
Depreciation
and amortization
|
|
|
528,000 |
|
|
|
682,000 |
|
|
|
(154,000 |
) |
|
|
-22.6 |
% |
Total
Operating Expenses
|
|
$ |
6,165,000 |
|
|
$ |
6,893,000 |
|
|
$ |
(728,000 |
) |
|
|
-10.6 |
% |
Operating
expenses decreased by $1,000,000, or 25% for the three months ended December 31,
2008, compared with the three months ended December 31, 2007, and decreased by
$728,000 or 10.6% for the six months ended December 31, 2008, compared with the
six months ended December 31, 2007. This is due to the following:
Research and Development
Expenses. Research and Development expenses decreased by 7.4%
for the three month period ended December 31, 2008, compared to the same period
in the prior fiscal year, and increased by 2.5% for the six month period ended
December 31, 2008 compared to the same periods in the prior fiscal
year. The decrease for the quarter ended December 31, 2008 is
primarily a result of a reduction in the number of personnel working on
development projects during the quarter.
Sales and Marketing Expenses.
Sales and Marketing expenses decreased by $100,000 during the three months ended
December 31, 2008 as compared with the same period in 2007, and decreased by
$29,000 for the six months ended December 31, 2008 compared with the six months
ended December 31, 2007. This decrease is due to a reduction in sales personnel
within the U.S. operation during the three months ended December 31, 2008 when
compared with the same period in the prior fiscal year.
General and Administrative
Expenses. General and Administrative expenses decreased by $776,000 or
34.4% for the three months ended December 31, 2008 as compared to the same
period in 2007, and decreased $581,000 or 16.3% for the six months ended
December 31, 2008 as compared with the same period in 2007. The
decrease is effectively due to our spin-off from our former parent, ADNW, in
November 2008, as a result of which we were not burdened with extra costs
associated with ADNW as of the end of our three and six month periods ended
December 31, 2008. This decrease during the quarter ended December 31, 2008 was
offset in part by $75,000 of increased financial consulting costs and $76,000 of
legal, accounting and printing costs associated with the registration statement
on Form S-1 filed with the SEC relating to our spin-off from
ADNW. Similarly, the decrease of expenses during the six month period
ended December 31, 2008 was offset in part by $150,000 of increased financial
consulting costs and $124,000 of legal, accounting and printing costs associated
with the registration statement.
Depreciation and Amortization
Expenses. Depreciation and amortization expenses decreased $67,000, or
20.5%, and $154,000, or 22.6%, for the three month and six month periods ended
December 31, 2008, respectively, as compared to the same periods in 2007, which
is primarily due to the U.K. operation having fully amortized capital
development projects during the 2008 fiscal periods, when compared to the same
periods of the prior fiscal year.
Interest Expense. Interest
expense increased by $364,000 or 568% to $428,000 for the three months ended
December 31, 2008, as compared to the three months ended December 31, 2007, and
increased $718,000 or 875% to $800,000 for the six months ended December 31,
2008 as compared to the six months ended December 31, 2007. The
increase in interest expense is related to our interest payments associated with
our loan from ComVest Capital LLC. For the three months ended
December 31, 2008 we paid ComVest $224,000 in cash, and $204,000 was accounted
for in amortization of debt discount and debt issuance costs. For the
six months ending December 31, 2008, we paid $396,000 in cash, and $404,000 was
accounted for in amortization of debt discount and debt issuance
costs.
Other Income (Loss). The three
and six month periods ended December 31, 2008 include a write down of $3,957,000
available-for-sale securities because of an other-than-temporary decline in the
market value of the securities. Other income includes $76,000 from
the net settlement of litigation for the three and six month periods ended
December 31, 2007. The six months ended December 31, 2007
includes $1,312,000 from the sale of non-marketable securities.
Income Taxes. Income taxes
decreased by $18,000, or 8.2%, and $75,000, or 19.3%, for the three and six
month period ended December 31, 2008 as compared to the same periods in 2007,
due to a reduced effective tax rate for our U.K. subsidiaries for the respective
periods.
Net Income (Loss). As a result
of the above, we recorded a net loss of $4,797,000 for the three month period
ended December 31, 2008, compared with a net loss of $1,123,000 for the three
month period ended December 31, 2007, and realized a net loss of $5,349,000 for
the six months ended December 31, 2008, compared with a net loss of $155,000 for
the six months ended December 31, 2007.
Discontinued Operations. The
(loss) from
discontinued operations was ($23,000) for the three months ended December 31,
2007 and earnings of $14,000 for the six months ended December 31,
2007. Loss on the sale of discontinued operations was $26,000 for the
three and six months ended December 31, 2007. There were no
discontinued operations during the three and six month periods ended December
31, 2008.
Liquidity
and Capital Resources
To date,
most of our profits have been generated in Europe, but with the introduction of
new products and efforts to streamline U.S. operations, we expect to see an
increase in overall revenues with a contribution from U.S. operations in fiscal
2009. As of December 31, 2008, we had cash of $1,315,000. We also own
4,433,284 ordinary shares of First London, PLC (formerly known as First London
Securities, PLC). carried on the balance sheet at $957,000. Currently
the stock is thinly traded and if an active market develops for the shares, this
investment could be an additional source of working capital.
If
internal revenues prove insufficient to support our growth plans, we may
consider raising additional funds through debt or equity financing. There can be
no assurance that such funding will be available on acceptable terms, in a
timely fashion or even available at all. Should new funds be delayed, we plan to
reduce the burden on our current funding to a sustainable level and to tailor
our development programs accordingly.
Revolving
Credit and Term Loan Agreement with ComVest Capital LLC
On
December 21, 2007, we entered into a Revolving Credit and Term Loan Agreement
(the “Loan Agreement”) with ComVest Capital LLC (“ComVest”), as lender, pursuant
to which ComVest agreed to extend to us a $1,000,000 secured revolving Credit
Facility and a $5,000,000 Term Loan.
Credit Facility and
Revolving Credit Note. Pursuant to the terms of the Loan Agreement, the
Credit Facility is available to us through November 30, 2009, unless the
maturity date is extended, or we prepay the Term Loan (described below) in full,
in each case in accordance with the terms of the Loan Agreement. The Credit
Facility provides for borrowing capacity of an amount up to (at any time
outstanding) the lesser of the Borrowing Base at the time of each advance under
the Credit Facility, or $1,000,000. The borrowing base at any time will be an
amount determined in accordance with a borrowing base report we are required to
provide to the lender, based upon our Eligible Accounts and Eligible Inventory,
as such terms are defined in the Loan Agreement. The Loan Agreement
provides for advances to be limited to (i) 80% of Eligible Accounts plus, in
ComVest’s sole discretion, (ii) 40% of Eligible Inventory, minus (iii) such
reserves as ComVest may establish from time to time in its
discretion. As of December 31, 2008, the borrowing base was
$1,228,000.
In
connection with the Credit Facility, we issued a Revolving Credit Note (the
“Credit Note”) on December 21, 2007 payable to ComVest in the principal amount
of $1,000,000, initially bearing interest at a rate per annum equal to the
greater of (a) the prime rate, as announced by Citibank, N.A. from time to time,
plus two percent (2%), or (b) nine and one-half percent (9.5%). The applicable
interest rate will be increased by four hundred (400) basis points during the
continuance of any event of default under the Loan Agreement. Interest is
computed on the daily unpaid principal balance and is payable monthly in
arrears on the first day of each calendar month commencing
January 1, 2008. Interest is also payable upon maturity or
acceleration of the Credit Note. On February 10, 2009, the interest
rate was increased from 9.5% to 11% in connection with a waiver we received for
violating one of our debt covenants at December 31, 2008 (discussed
below).
We have
the right to prepay all or a portion of the principal balance on the Credit Note
at any time, upon written notice, with no penalty. The Credit Note is secured
pursuant to the provisions of certain Security Documents which we entered into
on the same date.
We have
the right, at our option, and provided that the maturity date of the Credit
Facility has not been accelerated due to our prepayment in full of the Term
Loan, to elect to extend the Credit Facility for one additional year, through
November 30, 2010, upon written notice to ComVest, provided that no default or
event of default has occurred and is continuing at that time. We also have the
option to terminate the Credit Facility at any time upon five business days’
prior written notice, and upon payment to ComVest of all outstanding principal
and accrued interest of the advances on the Credit Facility, and prorated
accrued commitment fees. The Credit Facility commitment also terminates, and all
obligations become immediately due and payable, upon the consummation of a Sale,
which is defined in the Loan Agreement as certain changes of control or sale or
transfers of a material portion of our assets.
During
the quarter ended June 30, 2008, we drew down $500,000 of the Credit
Facility. We drew down the remaining $500,000 during the quarter
ended December 31, 2008.
Term Loan and Convertible
Term Note. In addition to the Credit Facility, ComVest
extended us a Term Loan, evidenced by a Convertible Term Note (the “Term Note”)
we issued on December 21, 2007 in the principal amount of $5,000,000. The Term
Loan was a one-time loan, and unlike the Credit Facility, the principal amount
is not available for re-borrowing. The Term Note bears interest at a
rate of eleven percent (11%) per annum, except that during the continuance of
any event of default, the interest rate will be increased to sixteen percent
(16%).
Initially,
the Term Note was payable in 23 equal monthly installments of $208,333.33 each,
payable on first day of each calendar month commencing January 1, 2009, through
November 1, 2010, with the balance due on November 30, 2010. The
amortization schedule was subsequently modified, and was delayed for one year so
that payments will commence on January 1, 2010, pursuant to an amendment of the
Loan Agreement during the quarter ended June 30, 2008 (see below).
We have
the option to prepay the principal balance of the Term Note in whole or in part,
at any time, upon 15 days’ prior written notice. We will be required to prepay
the Term Loan in whole or part under certain circumstances. In the event that we
prepay all or a portion of the Term Loan, we will ordinarily pay a prepayment
premium in an amount equal to (i) three percent (3%) of the principal amount
being prepaid if such prepayment is made or is required to be made on or prior
to the second anniversary of the Closing Date, and (ii) one percent (1%) of the
principal amount being prepaid if such prepayment is made or is required to be
made after December 21, 2009.
The
number of shares issuable upon conversion of the Term Note and the conversion
price may be proportionately adjusted in the event of any stock dividend,
distribution, stock split, stock combination, stock consolidation,
recapitalization or reclassification or similar
transaction. In addition, the number of conversion shares, and/or the
conversion price may be adjusted in the event of certain sales or issuances of
shares of our common stock, or securities entitling any person to acquire shares
of common stock, at any time while the Term Note is outstanding, at an effective
price per share which is less than the then-effective conversion price of the
Term Note. The principal and interest payable on the Term Note was
initially convertible into shares of our common stock at the option of ComVest,
at an initial conversion price of $1.50 per share. On July 3, 2008, the
conversion price was reduced to approximately $1.49 per share following our
subsequent issuance of shares of common stock and warrants at an effectively
lower price. Consequently, the number of shares issuable upon
conversion of the principal amount of the Term Note was increased to 3,361,345
shares from 3,333,333 shares. We also may require conversion of the principal
and interest under certain circumstances.
As of
December 31, 2008 and the date hereof, the principal balance due on the Term
Note was and is $5,000,000.00.
Warrants. In connection with the
Loan Agreement, we issued warrants to ComVest to purchase the following amounts
of shares of our common stock, exercisable after December 21, 2007 and expiring
December 31, 2013: a) warrants to purchase 1,000,000 shares of common stock at
an exercise price of $0.3125 per share; b) warrants to purchase
2,000,000 shares of common stock at an exercise price of $0.39 per share; and c)
warrants to purchase 2,083,333 shares of our common stock at an exercise price
of $0.3625 per share. The warrants also contain a cashless exercise
feature. The number of shares of common stock issuable upon exercise
of the warrants, and/or the applicable exercise prices, may be proportionately
adjusted in the event of any stock dividend, distribution, stock split, stock
combination, stock consolidation, recapitalization or reclassification or
similar transaction. In addition, the number of shares issuable upon exercise of
the warrants, and/or the applicable exercise prices may be adjusted, at any time
while the warrants are outstanding, in the event of certain issuances of shares
of our common stock, or securities entitling any person to acquire shares of our
common stock, at an effective price per share which is less than the
then-effective exercise prices of the warrants.
The
exercise prices for 3,000,000 of these warrants were subsequently modified in
connection with waivers we received for violations of one of our debt covenants,
as discussed further below.
Debt
Covenants. The Loan Agreement contains customary affirmative
and negative covenants, including:
(a) Maximum
limits for capital expenditures of $600,000 per fiscal year;
(b) Limitation
on future borrowings, other than in certain circumstances, including to finance
capital expenditures;
(c) Limitation
on guaranteeing any obligation, except for obligations in the ordinary course of
business and obligations of our wholly owned subsidiaries incurred in the
ordinary course of business;
(d) Limitation
on entering Sales-Leaseback Transactions with respect to the sale or transfer of
property used or useful in our business operations;
(e) Limitation
on acquiring securities or making loans;
(f)
Limitation on
acquiring real property;
(g) Limitation
on selling assets of the Company or permitting any reduction in our ultimate
ownership position of any subsidiary;
(h) Limitation
on paying dividends;
(i)
Limitation on selling any accounts receivable; and
(j)
Requiring that, at the end of any quarter of any fiscal year, the ratio of (a)
Earnings Before Interest, Depreciation, and Amortization (“EBIDA”) minus capital
expenditures incurred to maintain or replace capital assets, to (b) debt service
(all interest and principle payments), for the four (4) consecutive quarters
then ended, to be not less than 1.25 to 1.00 (the “EBIDA Ratio
Covenant”).
The Loan
Agreement is collateralized by a pledge of all of our assets and the stock of
our subsidiaries. Certain of the loan covenants described above prohibit us from
paying dividends or borrowing additional funds for working capital requirements.
The prohibition on paying dividends may restrict our ability to raise capital
through the sale of shares of preferred stock that we may designate in the
future, because such shares are typically more marketable with dividend
rights. If we were to raise capital through the sale of shares of our
common stock and those shares were sold for less than the applicable exercise
price(s) of the warrants issued to ComVest, or were issued for less than the
applicable conversion price of the Term Note, then automatically and without
further consideration, the exercise price of the warrant(s) and the conversion
price of the Term Note will be reduced based on a formula based upon the selling
price of the shares and the number of shares sold. We cannot assure
you that we will be able to sell any shares of our common stock. Even
if we were able to sell such shares, we cannot currently predict the selling
price. The sale of any such shares would result in immediate dilution
to our existing shareholders’ interests.
Amendments to Loan Agreement
and Waivers for Violations of Certain Covenants. Subsequent to
March 31, 2008, we notified ComVest that we had incurred a loss of $1,897,000
for the three month period ending March 31, 2008, and as a result, we had a
ratio of EBIDA to debt service of (4.41):1.00, therefore violating the EBIDA
Ratio Covenant described above. In order for us to have met this
EBIDA ratio as of March 31, 2008, we would have had to generate $1,812,000 of
additional cash flow. ComVest agreed to grant us a waiver for the
violation of this loan covenant. On May 15, 2008 the waiver was
granted and, in consideration therefor, we reduced the exercise price for
1,000,000 warrants issued to ComVest in connection with the Loan Agreement from
$0.3125 per share to $0.11 per share, and recognized the incremental fair value
of the modified warrants of $24,000 as additional interest
expense. As a result of ComVest granting us this waiver, we
were not in violation of any loan covenants at March 31, 2008.
Subsequent
to June 30, 2008, we contacted ComVest to inform it that we had incurred a loss
of $11,664,000 for the six month period ending June 30, 2008, and that as a
result had again violated the EBIDA Ratio Covenant with an EBIDA to debt service
ratio of (2.26):1.00. In order for us to have been in compliance with
the EBIDA Ratio Covenant as of June 30, 2008, we would have needed to generate
$2,180,000 of additional cash flow. ComVest agreed to provide us with
another waiver. In connection therewith, we amended the Loan
Agreement (the “Amendment”) and modified certain covenants on September 23,
2008. The EBIDA Ratio Covenant was waived for the quarter ending
September 30, 2008 and was reduced to 0.62:100 from 1.25:1.00 for the quarter
ended December 31, 2008. Under the Amendment, the EBIDA Ratio
Covenant was reset for future quarters to 0.71:1.00 for the four quarters ended
March 31, 2009; 0.50:1.00 for the four quarters ended June 30, 2009; and
1.25:1.00 for the four quarters ended September 30, 2009 and
thereafter. Additionally, ComVest agreed to delay the commencement of
the loan amortization related to the Term Note for one year, from January 1,
2009 to January 1, 2010. In consideration for these modifications, we
reduced the exercise price related to 2,000,000 warrants issued to ComVest in
connection with the Loan Agreement from $0.39 to $0.11. The
incremental fair value of the modified warrants is $15,000, which was recorded
as an additional debt discount and is being amortized over the remaining life of
the term loan pursuant to EITF 96-19, “Debtor's Accounting for a Modification or
Exchange of Debt Instruments.” As a result of these amendments, we
were not in violation of any loan covenants at June 30, 2008.
As
described in this report, we incurred a net loss of $5,349,000 for the six month
period ended December 31, 2008. Subsequent to the end of the quarter,
we contacted ComVest to inform it of the loss, and that as a result, our ratio
of EBIDA to debt service was (1.41):1.00 in violation of the amended EBIDA Ratio
Covenant. In order for us to have met the required ratio as of
December 31, 2008, we would have had to have generated $2,497,000 of additional
cash flow. ComVest agreed to extend an additional waiver of this
covenant, which was granted on February 10, 2009. In consideration
for the waiver, we agreed to increase the interest rate on the $1,000,000 Credit
Facility from 9.5% to 11%. As a
result of ComVest granting us this waiver, we were not in violation of any loan
covenants at December 31, 2008. If we restore compliance with the EBIDA Ratio
Covenant as of the close of any quarter ending on or after March 31, 2009, then
the annual interest rate will be restored to 9.5%, effective as of the first day
of the calendar month next succeeding our demonstrated quarter-end compliance
with such covenant.
Our
violations of the EBIDA Ratio Covenant described above did not and will not have
any impact on any other loan agreements to which we are a
party. However, pursuant to the terms of the Loan Agreement, if we
default on any other indebtedness in excess of $100,000 and such default creates
an acceleration of the maturity of such indebtedness, then we would be in
default of our ComVest Loan Agreement.
Future
Plans
We expect
to see continued growth from both the US and UK operations during the remainder
of fiscal 2009, with strong growth in revenues and operating income from the US
operation. We have identified a number of opportunities to widen our client base
within the automotive industry and are actively pursuing those at this time. We
also expect to see increases in revenue over the next two quarters, specifically
due to additional products that have been developed by the US operation which
are currently being released to customers, and the reintroduction of our
Autopart line of products in the US market.
We intend
to continue to work at maximizing customer retention by supplying and developing
products that streamline and simplify customer operations, thereby increasing
their profit margin. By supporting our customers’ recurring revenues, we expect
to continue to build our own revenue stream. We believe that we can continue to
grow our customer base through additional sales personnel, targeted media and
marketing campaigns and products that completely fit clients’ requirements. We
also intend to service existing clients at higher levels and increasingly
partner with them so that together we both will achieve our goals.
Revenues
in the UK are continuing to generate positive cash flow and free cash but the
loss in the US operations and corporate expenses resulted in a negative cash
flow for the quarter ended December 31, 2008. Our current plans still require us
to hire additional sales and marketing staff and to support expanded operations
overall. We believe our plan will strengthen our relationships with our
existing customers and provide new income streams by targeting additional
English-speaking auto industry aftermarkets for our Autopart
product. If we continue to experience negative cash flow we will be
required to limit our growth plan.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4T. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and
Procedures
As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Company’s Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective as
of December 31, 2008.
(b) Changes in internal control over
financial reporting
There
were no changes in the Company’s internal control over financial reporting in
the Company’s second fiscal quarter of the fiscal year ending June 30, 2009
covered by this Quarterly Report on Form 10-Q, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
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 consolidated financial
position or results of operations of the Company.
ITEM
1A. RISK FACTORS
The
following are material changes to our Risk Factors from those reported in
Item 1A of Part I of our June 30, 2008 Annual Report on From 10-K
filed with the Securities and Exchange Commission on September 30,
2008.
WE
WERE NOT IN COMPLIANCE WITH CERTAIN COVENANTS UNDER OUR SENIOR SECURED NOTE. WE
HAVE RECEIVED WAIVERS ON THREE OCCASIONS OF THESE EVENTS OF DEFAULT FROM THE
HOLDER OF THE NOTE, HOWEVER THERE CAN BE NO ASSURANCE THAT WE WILL NOT VIOLATE
ANY ADDITIONAL COVENANTS IN THE FUTURE.
During
the fiscal periods ended March 31, 2008, June 30, 2008 and December 31, 2008, we
violated certain covenants related to cash flow ratios under our senior secured
note with ComVest Capital LLC, dated December 21, 2007. ComVest has provided us
a waiver of these events of default on each occasion. There can be no assurance
that we will be able to meet all of the revised financial covenants and other
conditions required by our loan agreement in the future. If there are future
violations, our lender may not grant additional waivers of future covenant
violations and could also require full repayment of the loan, which would
negatively impact our liquidity and our ability to operate.
OUR
FORMER PARENT IS NOT CURRENT IN ITS REPORTING OBLIGATIONS WITH THE SEC AND DUE
TO LACK OF AVAILABLE INFORMATION ABOUT OUR FORMER PARENT, SHARES OF OUR FORMER
PARENT MAY BECOME WORTHLESS.
Our
former parent, ADNW, is not current in its reporting obligations with the SEC
and may never become compliant in its obligations to file such reports. As a
result there is a limited amount of current and meaningful information about
ADNW. The only meaningful information reported in respect of ADNW is information
that we report as a result of our own independent filing obligations. Now that
the spin-off of our Company from ADNW is complete, even less information will be
available with respect to our former parent. As a result, the price of ADNW’s
shares may fall and the market for shares of ADNW’s common stock may become
non-existent. As a result, any of our shareholders who received shares of our
Common Stock as a result of the distribution of the our shares in the spin-off,
who will remain holders of ADNW’s common stock may be unable to sell their ADNW
stock privately or on the Pink Sheets and their shares in ADNW may become
worthless. Further, the fact that ADNW is non-compliant in its obligations to
file may reflect negatively on us, as a former subsidiary, and the potential
decrease in the price of ADNW’s shares may negatively impact the price of our
shares.
COMMON
EXECUTIVE MANAGEMENT BETWEEN OUR COMPANY AND OUR FORMER PARENT COMPANY MAY
RESULT IN OUR BECOMING NON-COMPLIANT WITH OUR REPORTING OBLIGATIONS AS OUR
FORMER PARENT IS.
As
discussed above, our former parent is not current in its reporting obligations
with the SEC and may never become compliant in its obligations to file such
reports. Mr. Ian Warwick, our President and CEO, also served as President and
CEO of our former parent until immediately following the
spin-off. There is a possibility that, because Mr. Warwick continues
to serve as our President and CEO, we may similarly become non-compliant with
our reporting obligations as our former parent is. If we fail to comply with our
reporting obligations with the SEC, our shareholders will not have adequate
information about us. Further, any trading market currently existing for our
securities may decrease and our shareholders may find it difficult to sell their
shares.
IT
MAY BE DIFFICULT FOR SHAREHOLDERS TO RECOVER AGAINST THOSE OF OUR DIRECTORS AND
OFFICERS THAT ARE NOT RESIDENTS OF THE U.S.
Three of
our directors, of whom two are also executive officers, are residents of the
United Kingdom. In addition, our significant operating subsidiary, MAM Software
is located in the United Kingdom. Were one or more shareholders to bring an
action against us in the United States and succeed, either through default
or on the merits, and obtain a financial award against an officer or director of
the Company, that shareholder may be required to enforce and collect on his or
her judgment in the United Kingdom, unless the officer or director owned assets
which were located in the United States. Further, shareholder efforts to bring
an action in the United Kingdom against its citizens for any alleged breach of a
duty in a foreign jurisdiction may be difficult, as prosecution of a claim in a
foreign jurisdiction, and in particular a foreign nation, is fraught with
difficulty and may be effectively, if not financially, unfeasible.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
There
were no unregistered sales of equity securities by the Company that were not
previously disclosed on a Current Report on Form 8-K filed with the
SEC.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to a vote of security holders in the second quarter of
the Company’s fiscal year ended June 30, 2009.
ITEM
5.
|
OTHER
INFORMATION
|
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors.
Exhibit
Number
|
|
Description
|
|
|
|
10.1
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Ian Warwick
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 5, 2008).
|
|
|
|
10.2
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Charles F.
Trapp (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed December 5, 2008).
|
|
|
|
10.3
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Simon
Chadwick (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K filed December 5,
2008).
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
AFTERSOFT
GROUP, INC.
|
|
|
Date: February
17, 2009
|
By:
|
/s/ Ian Warwick
|
|
|
Ian
Warwick
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
Date
: February 17, 2009
|
By:
|
/s/ Charles F. Trapp
|
|
|
Charles
F. Trapp
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
INDEX
TO EXHIBITS
Exhibit
Number
|
|
Description
|
|
|
|
10.1
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Ian Warwick
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 5, 2008).
|
|
|
|
10.2
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Charles F.
Trapp (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed December 5, 2008).
|
|
|
|
10.3
|
|
Employment
Agreement dated as of December 1, 2008 between the Company and Simon
Chadwick (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K filed December 5, 2008).
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|