UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 000-28515
FIREPOND, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 20-3446646
(State or other jurisdiction of (IRS Employer
incorporation or organization) �� identification no.)
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11 Civic Center Plaza, Suite 310, Mankato, MN 56001
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(Address of principal executive offices)
(507) 388 5000
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(Issuer's telephone number)
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(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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 |X| No
The number of shares outstanding of the issuer's common stock, par value $.001 per share, as of November 12, 2008 is 16,263,822 shares.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
INDEX
; Page No.
| | PART I. FINANCIAL INFORMATION |
| ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEET
September 30, 2008
(Unaudited)
| ASSETS | | |
| | | | | | | |
| Current assets | | |
| | Cash and cash equivalents | | $ 95,893 |
| | Accounts receivable, net of allowance for doubtful | | |
| | | accounts of $10,000 | | 1,155,102 |
| | Other current assets | | 441,171 |
| | | | | | | |
| | | Total current assets | | 1,692,166 |
| | | | | | | |
| Property and equipment, net | | 47,933 |
| Debt issuance costs | | 586,430 |
| Deposits and other assets | | 39,638 |
| | | | | | | |
| | | | | Total assets | | $ 2,366,167 |
| | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | |
| | | | | | | |
| Current liabilities | | |
| | Short-term notes payable | | 3,346,290 |
| | Accounts payable | | 712,507 |
| | Accrued liabilities | | 1,199,881 |
| | Deferred revenue | | 1,624,593 |
| | | | | | | |
| | | Total current liabilities | | 6,883,271 |
| | | | | | | |
| | Non-current deferred revenue | | 58,917 |
| | Long-term debt net of unamortized discount of $1,566,667 | | 3,697,333 |
| | | | | Total liabilities | | 10,639,521 |
| | | | | | | |
| Commitments and contingencies | | |
| | | | | | | |
| Stockholders' equity (deficit) | | |
| | Preferred stock, $0.001 par value | | |
| | | Authorized - 5,000,000 shares | | |
| | | Issued and outstanding - none | | - |
| | Common stock, $0.001 par value | | |
| | | Authorized - 100,000,000 shares | | |
| | | Issued - 10,272,223 shares | | 10,272 |
| | Treasury Stock - 8,401 shares, at cost | | (10) |
| | Additional paid-in capital | | 33,232,380 |
| | Accumulated deficit | | (41,444,161) |
| | Deferred compensation | | (71,835) |
| | | | | | | |
| | | | Total stockholders' equity (deficit) | | (8,273,354) |
| | | | | | | |
| | | | | Total liabilities and stockholders' equity | | $ 2,366,167 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2007 and 2008
(Unaudited)
| | | | | | | | 2007 | 2008 |
| | | | | | | | | |
| Revenues | | | | | | |
| | OnDemand revenues | | $ 549,665 | $ 782,021 |
| | Enterprise revenues | | 616,421 | 529,854 |
| | Total revenues | | | 1,166,086 | 1,311,875 |
| | | | | | | | | |
| Cost of revenues | | | | | |
| | OnDemand costs | | | 380,676 | 520,800 |
| | Enterprises costs | | | 78,166 | 45,337 |
| | Total cost of revenues | | 458,842 | 566,137 |
| | | | | | | | | |
| Gross profit | | | | | 707,244 | 745,738 |
| | | | | | | | | |
| Operating expenses | | | | |
| | Sales and marketing | | 554,514 | 326,366 |
| | General and administrative | 1,013,542 | 462,849 |
| | Research and development | 470,293 | 244,113 |
| | Restructuring charges | | - | 7,524 |
| | | | | | | | | |
| | | | Total operating expenses | 2,038,349 | 1,040,852 |
| | | | | | | | | |
| Profit (Loss) from operations | | (1,331,105) | (295,114) |
| | | | | | | | | |
| Other income (expense), net | | | |
| Interest expense | | | | (1,314,835) | (730,766) |
| Other income expense | | | 24,111 | 16,711 |
| Total other income (expense), net | (1,290,724) | (714,055) |
| | | | | | | | | |
| | | | | | | | | |
| Net Loss | | | | | | $ (2,621,829) | $ (1,009,169) |
| | | | | | | | | |
| | Net loss per share | | | $ (0.34) | $ (0.10) |
| | | | | | | | | |
| | Basic and diluted weighted average | | |
| | common shares outstanding | 7,676,451 | 10,085,251 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three Months Ended September 30, 2007 and 2008
(Unaudited)
| | | | Common Stock | | | Retained Earnings | | |
| | | | | $0.001 | Additional Paid | Treasury | (Accumulated | Deferred | Stockholders' |
| | | | Shares | Par Value | In Capital | Stock | Deficit) | Compensation | Equity (Deficit) |
| | | | | | | | | | |
| Balance, June 30, 2008 | 9,915,080 | $ 9,915 | $ 32,695,863 | $ (10) | $ (40,434,992) | $ (88,002) | $ (7,817,226) |
| | | | | | | | | | |
| | Imputed executive compensation | | | 46,875 | | | | 46,875 |
| | | | | | | | | | |
| | Sale of common stock net of expenses | 357,143 | 357 | 489,642 | | | | 489,999 |
| | | | | | | | | | |
| | Net loss for the three months ended September 30, 2008 | - | - | - | - | (1,009,169) | 16,167 | (993,002) |
| | | | | | | | | | |
| Balance, September 30, 2008 | 10,272,223 | 10,272 | 33,232,380 | (10) | (41,444,161) | (71,835) | (8,273,354) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended September 30, 2007 and 2008
| | | | | | 2007 | 2008 |
| Cash flows from operating activities | | |
| | Net loss | | | $ (2,621,829) | $ (1,009,169) |
| | Adjustments to reconcile net loss to net cash used in operating activities | | |
| | | Imputed executive compensation | - | 46,876 |
| | | Depreciation and amortization | 1,060,485 | 456,650 |
| | | Amortization of stock based compensation | 442,375 | 16,167 |
| | Changes in assets and liabilities | | |
| | | Accounts receivables | 90,552 | (138,642) |
| | | Other current assets | 3,856 | 73,744 |
| | | Accounts payable | 70,493 | (2,424) |
| | | Accrued liabilities | 124,220 | 71,337 |
| | | Deferred revenue | (124,721) | (1,145) |
| | | | | | | |
| | | | Net cash used in operating activities | (954,569) | (486,606) |
| | | | | | | |
| Cash flows from investing activities | | |
| | Purchase of property and equipment | (30,958) | - |
| | Restricted cash | 152,810 | - |
| | Other assets | | (6,031) | 5,800 |
| | | | | | | |
| | | | Net cash provided by investing activities | 115,821 | 5,800 |
| | | | | | | |
| Cash flows from financing activities | | |
| | Proceeds from sale of stock net of expenses | - | 490,000 |
| | Borrowings under notes payable | 3,000,000 | - |
| | Payments under notes payable | (1,191,328) | (26,196) |
| | Deferred offering costs | (364,614) | - |
| | Debt issuance costs | 112,145 | - |
| | | | | | | |
| | | | Net cash provided by financing activities | 1,556,203 | 463,804 |
| | | | | | | |
| | | | | Net increase (decrease) in cash and cash equivalents | 717,455 | (17,002) |
| | | | | | | |
| Cash and cash equivalents, on June 30, 2007 and 2008 | 689,972 | 112,895 |
| | | | | | | |
| Cash and cash equivalents, on September 30, 2007 and 2008 | $ 1,407,427 | $ 95,893 |
| | | | | | | |
| | Interest paid | | $ 136,430 | $ 396 |
| | | | | | | |
| Non cash investing and financing activities: | | |
| | | | | | | |
| | During the quarter ended September 30, 2007, the Company issued 125,000 shares | | |
| | of common stock valued at $768,750 in connection with the bridge loan. | | |
| | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
NOTE 1 – ORGANIZATION AND LINES OF BUSINESS
Description of Business
Firepond, Inc. is leading pioneer of multi-tenant, on-demand software that automates and simplifies the process companies use to sell complex products and services. Our Configure, Price, Quote, or CPQ, software-as-a-service automates complex sales processes, improves order accuracy, and accelerates sales cycles. Companies with complex products may achieve measurable and meaningful returns on investment using the Company’s technology by reducing total cost of sales, whether sales are generated through a direct sales force, an indirect channel network or via the web.
The Company generates revenue from its Software-as-a-Service or OnDemand, multi-tenant, subscription based software as well as legacy enterprise license and service revenue. Our Software-as-a-Service product was launched in commercial form in January 2006 and the Company is transitioning from its historic enterprise software model to a web based delivery model to access new markets and broaden the base of end users. License revenue is generated from licensing the rights to the use of Company’s packaged software products. Service revenue is generated from sales of maintenance; consulting and training services performed for customers that license the Company’s products. Reported revenue is delineated between our OnDemand business segment and our legacy enterprise software business segment.
Prior to September 13, 2005, the Company’s assets were owned and operated by a predecessor company also named Firepond, Inc., or Old Firepond, which was subsequently liquidated. Its remaining assets and liabilities are being administered by a trust.
Principles of Consolidation
Pursuant to FIN 46(R), the financial statements presented herein for the fiscal periods ended September 30, 2007 and 2008 include the consolidated financial statements of Firepond and the Firepond liquidating trust.
Basis of Presentation and Continuance of Operations
The accompanying unaudited, consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results for the three months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009, or for any future period. These unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K for the fiscal year ended June 30, 2008.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
Furthermore, these unaudited, consolidated financial statements have been prepared by the Company on a going concern basis. As such, the statements anticipate the realization of assets and the liquidation of liabilities in the normal course of business.
Notwithstanding this fact, the Company has for some time been incurring losses and negative cash flow from operations. For the fiscal year ended June 30, 2008, we incurred a net loss of approximately $14.4 million and negative cash flows from operations of approximately $4.9 million. For the three month period ended September 30, 2008 we incurred a net loss of approximately $1.0 million and a negative cash flow from operations of approximately $487,000. The Company does not believe operational cash flows over the ensuing months will be sufficient either to sustain present operations or service its indebtedness. Given the recent turmoil in the financial markets, the Company does not believe it will be able to access the financial markets to fund capital requirements. Based on current operational performance, the Company believes it will not be able to comply with financial covenants of its senior secured indebtedness as of December 31, 2008.
Since April 2008, the Company has been dependent upon its majority shareholder to provide funding. Given the Company’s performance to date and turmoil in the financial markets, the majority shareholder has indicated it is unlikely to provide additional equity financing. The Company is in preliminary communications with its senior lenders (the holders of the Exchanged CAP Notes) regarding its state of financial affairs. These communications have included several alternatives, including a transaction in which the holders of the Exchange CAP Notes acquire ownership of the Company. Such a transaction would have serious impact on the value of the Company’s existing common stock as well as any obligations ranking junior to the Exchanged CAP Notes. In connection with such a transaction, the Company’s largest holder of Exchange CAP Notes has indicated preliminarily that it may be prepared to provide senior debt financing to the Company if the current holders of the Exchange CAP Notes agree to convert their entire holdings to equity in the Company pursuant to a foreclosure. There can be no assurance that any such transaction or any other transaction can or will be consummated.
The Company completed a financial restructuring in April 2008 that included from FP Tech Holdings, LLC, a member of the affiliated group that owns a majority of the Company’s outstanding common stock, (1) an investment of $1,500,000 cash, (2) conversion of $336,000 senior secured convertible notes plus accrued interest held by it to common stock, and (3) conversion of $100,000 of other debt plus accrued interest held by it to common stock. The financial restructuring also included extension of the maturity dates of the Company’s senior secured debt facilities (Exchanged CAP Notes and Exchanged Bridge Notes) to December 31, 2009 and July 1, 2009, respectively.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
Furthermore, in August 2008, as provided in the April 2008 financial restructuring, FP Tech contributed an additional $500,000 in equity to the Company. (See, Management Discussion and Analysis, Liquidity and Capital Resources, Funding Agreement – August 2008).
Some aspects of the Company’s operational restructuring commenced in May 2008 are beginning to be reflected in its Statement of Operations for the three months ended September 30, 2008, but are not sufficient to permit the Company to continue to fund losses, attract new equity investment or service its indebtedness.
Operations are being severely affected as a result of the Company’s high levels of indebtedness and inability to access the financial markets. The Company believes it will not be able to comply with financial covenants of its senior secured indebtedness as of December 31, 2008. The Company anticipates entering into further discussions with the holders of its Exchange CAP Notes that may result in a transaction that could have severe impact on the value of the Company’s common stock and any obligations ranking junior to the Exchange CAP Notes.
The accompanying consolidated financial statements do not include any adjustments that might result from such adverse outcomes.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and have not changed as of September 30, 2008.
NOTE 3 - INCOME TAXES
No provision for income taxes is required at September 30, 2008, because, in management’s estimation the Company will not recognize any taxable income through the fiscal year ended June 30, 2009.
As a result of the issuance of common stock to FP Tech and its affiliate in April 2008, a change of control may have occurred pursuant to Section 382 of the Internal Revenue Code of 1986 which could limit the Company’s ability to utilize its net operating loss in future periods.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
NOTE 4 – LEASE AGREEMENT
Equipment Lease Agreement
On February 11, 2008, the Company entered into an equipment lease agreement with FP Tech, wherein the Company established a credit facility of up to $200,000 to be used for capital purchases and general corporate purposes. The agreement has a twenty four month lease commitment term. Outstanding principal accrues interest at the rate of 8% per annum during the first twelve months, 9% per annum during months 13-24 and 20% thereafter. There is no minimum monthly repayment required. Accrued interest is due and payable at the earlier of the end of the lease commitment term or upon optional repayment of Principal. Principal may be repaid in full or in part at any time without penalty, but in no case later than expiration of the lease commitment term. The outstanding principal and accrued interest was converted to common stock of the Company on April 25, 2008. At September 30, 2008, principal outstanding on the equipment lease agreement was $0. (See Note 8 - Subsequent Events).
NOTE 5 – NOTES PAYABLE
Senior Secured Convertible Notes due December 2009
As part of the Funding Agreement, the Company and the holders of its senior secured convertible notes due December 2009 (the “Exchanged CAP Notes”) agreed to extend the maturity of the Exchanged CAP Notes under certain conditions described below. For a more complete discussion of the Exchanged CAP Notes, see Note 5 of the Company’s Form 10-K for the fiscal 2008.
Senior Secured Subordinated Notes due July 2009
As part of the Funding Agreement, the Company and the holders of its senior secured subordinated notes due July 2009 (the “Exchanged Bridge Notes”) agreed additional shares of common stock would be issued such holders and to extend the maturity of the Exchanged Bridge Notes under certain conditions described below. For a more complete discussion of the Exchanged Bridge Notes, see Note 5 of the Company’s Form 10-K for the fiscal 2008.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
Funding Agreement – August 2008
Pursuant to the Common Stock Purchase Agreement, dated as of April 25, 2008, FP Tech, an affiliate member of the Company’s majority shareholder group, was granted by Firepond an option to purchase approximately 357,143 shares of Common Stock at a purchase price of no more than $1.40 per share with gross cash proceeds to the Company of at least $500,000 (the "Subject Financing"). The Subject Financing was completed as of August 13, 2008, with the Company receiving $500,000 in cash from FP Tech and the Company issuing 357,143 shares of common stock to FP Tech.
As part of the August 2008 funding agreement (the “Funding Agreement”) among Firepond, FP Tech and the holders (“Investors”) of the Company’s secured notes (“Secured Notes”), the Investors agreed to exchange their Secured Notes in certain circumstances which circumstances include exercise by FP Tech of an option to invest additional equity in the Company and the Company’s election to extend the maturity of its Secured Notes (the “Transaction”) as follows:
| (i) | Additional Funding. Effective the business day after the closing of the Funding Agreement and for a period expiring on June 30, 2009, the Company granted to FP Tech or its assigns an option to purchase, at an exercise price of $1.40 per share of Common Stock (such amount, the "AF Purchase Price"), a total of $1.5 million in aggregate amount of Common Stock (the "Additional Funding"). |
| (ii) | Exchange Election. During the period commencing on the closing of the Additional Funding and ending on the earlier to occur of (a) June 30, 2009 and (b) the fifth (5th) Business Day following the closing of the Additional Funding, the Company may, by written notice to each of the Investors during such period, elect to consummate the Exchange (as defined below) (the "Exchange Election"). |
| (iii) | Exchanged CAP Notes. Upon the exercise of the Exchange Election, the Company shall exchange (the "CAP Note Exchange") its Exchanged CAP Notes of each Investor for new senior secured convertible notes (the "New Exchanged CAP Notes"), which are convertible into Common Stock (as converted, the "New Exchanged CAP Conversion Shares") and are identical to the Exchanged CAP Notes except as follows: |
| a. | Maturity. The Maturity Date (as defined in the New Exchanged CAP Notes) shall be December 31, 2010. |
| b. | Interest. Interest on the principal balance outstanding from time to time of the New Exchange CAP Notes accruing at the rate of 12% per annum after December 31, 2009 shall be due and payable quarterly in arrears on the second business day following the end of each fiscal quarter end beginning March 31, 2010 through the Maturity Date. |
| c. | Conversion Price. The Conversion Price of the New Exchanged CAP Notes shall be $2.00 per share of Common Stock. |
| (iv) | Exchanged Bridge Notes. Upon exercise of the Exchange Election, the Company shall exchange the Exchanged Bridge Notes for a number of shares of Common Stock (the "New Exchanged Common Shares") determined according to the following formula: |
| | |
| | Original Principal Amount of the Exchanged Bridge Notes of each Exchanged Bridge Note holder / (AF Purchase Price X 1.1) X 0.1 and senior secured notes identical to the Exchanged Bridge Notes (the "New Exchanged Bridge Notes"), except as follows: |
| a. | Maturity Date. The Maturity Date in the New Exchanged Bridge Notes shall be July 1, 2010. |
| | |
| b. | Interest. Interest accruing on the principal balance of the New Exchanged Bridge Notes at the rate of 15% per annum beginning July 2, 2009 shall be due and payable quarterly in arrears on the second business day following the end of each fiscal quarter end beginning September 30, 2009 through the Maturity Date. |
| | |
| (v) | Waiver of Existing Defaults. Upon closing the Subject Financing all existing defaults under the Exchanged CAP Notes and the Exchanged Bridge Notes were waived. |
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
NOTE 6 – LITIGATION
In August 2001, Old Firepond was named as a defendant in a securities class action filed in United States District Court for the Southern District of New York related to its initial public offering (“IPO”) in February, 2000. The lawsuit also named certain of the underwriters of the IPO, including FleetBoston, Dain Rauscher, and SG Cowen, as well as officers and directors of Old Firepond, Klaus P. Besier and Paul K. McDermott, as defendants. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which have been included in a single coordinated proceeding in the Southern District of New York (the “IPO Litigations”). The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of Old Firepond’s stock. An amended complaint was filed on April 19, 2002. Old Firepond and the officers and directors identified above were named in the suits pursuant to Section 11 of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and other related provisions. The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.
In June 2003, a proposed settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. In July 2003, a committee of Old Firepond’s Board of Directors conditionally approved the proposed partial settlement. The settlement would have provided, among other things, a release of Old Firepond and the individual defendants for the alleged wrongful conduct in the amended complaint in exchange for a guarantee from Old Firepond’s insurers regarding recovery from the underwriter defendants and other consideration from the company regarding its underwriters.
The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus” cases” rather than in all of the 300 cases that have been consolidated. Old Firepond’s case is one of the focus cases. On October 13, 2004, the district court certified six focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision, which had the effect of de-certifying the classes involved in the focus cases. In light of the Second Circuit opinion, the district court has been informed that the overall settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified.
On August 14, 2007, plaintiffs filed a second consolidated amended class action complaint for violations of the federal securities laws against Old Firepond and others. The Court has directed the issuer defendants to answer by January 30, 2009. The parties presently are engaged in discovery with regard to focus cases that include Old Firepond.
Recent news articles indicate settlement discussions in this matter are occurring. The Company cannot predict whether the parties will conclude a settlement that complies with the Second Circuit’s mandate or what the result of the litigation will be if no settlement is agreed upon and approved.
Firepond, Inc.
Notes to Consolidated Financial Statements
September 30, 2008
Unaudited
The Company is currently involved in other litigation with a vendor, the outcome of which is uncertain. However, a finding of material liability in any Company litigation or the incurrence of significant expense in defending or prosecuting such litigation would be material and adverse to the Company. In addition, we may from time to time be subject to various other claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters can not be determined at this time.
NOTE 7 - STOCKHOLDERS' EQUITY
Equity Contribution
On August 13, 2008, the Company issued 357,143 shares of common stock to FP Tech for a purchase price of $500,000, or $1.40 per share.
NOTE 8 – SUBSEQUENT EVENTS
Equipment Lease Agreement
In October 2008 the Company drew down approximately $152,000 under the equipment lease agreement outlined in Note 4 for the purchase of computer equipment and related maintenance support.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
Our discussion includes forward-looking statements, which involve certain risks and uncertainties. Certain statements in the “Management’s Discussion and Analysis of Financial Condition or Plan of Operations” are forward-looking statements that involve risks and uncertainties. Words such as anticipates, expects, intends, plans, believes, seeks, estimates, and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those set forth under “Corporate Overview” and “Liquidity and Capital Resources” included in these sections and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. Rounding of figures for presentation purposes sometimes results in inconsistent results for comparison purposes. We believe these inconsistencies to be immaterial. As used in this report, the terms “we”, “us”, “our” or “the Company” mean Firepond, Inc.
The Company is facing a critical cash crisis. The Company does not believe operational cash flows over the ensuing months will be sufficient either to sustain present operations or service its indebtedness. Given the recent turmoil in the financial markets, the Company does not believe it will be able to access the financial markets to fund capital requirements. It also appears, based on current operational performance, the Company will not be able to comply with financial covenants of its senior secured indebtedness as of December 31, 2008.
Given the Company’s performance to date and turmoil in the financial markets, the Company’s majority shareholder has indicated it is unlikely to provide additional equity financing. The Company is in preliminary communications with its senior lenders (the holders of the Exchanged CAP Notes) regarding its state of financial affairs. These communications have included several alternatives, including a transaction in which the holders of the Exchange CAP Notes acquire ownership of the Company. Such a transaction would have serious impact on the value of the Company’s existing common stock as well as any obligations ranking junior to the Exchanged CAP Notes. In connection with such a transaction, the Company’s largest holder of Exchange CAP Notes has indicated preliminarily that it may be prepared to provide senior debt financing to the Company if the current holders of the Exchange CAP Notes agree to convert their entire holdings to equity in the Company pursuant to a foreclosure. There can be no assurance that any such transaction or any other transaction can or will be consummated. See, “Liquidity and Capital Resources,” below.
Corporate Overview
We are a leading provider of multi-tenant, on-demand software that automates and simplifies the process companies use to sell complex products and services. Our Configure, Price, Quote tm, or CPQ, Software-as-a-Service automates complex sales processes, improves order accuracy, and accelerates sales cycles. We have designed our Firepond CPQ tm product to be a low-cost Internet-based software application delivered on a subscription basis. This model allows us to provide functionality to companies of all sizes that have typically been available only to large enterprises with substantial information technology resources and budgets. Our Firepond CPQ OnDemand product offering capitalizes on our extensive expertise in sales automation software and combines it with the positive attributes of multi-tenant, Internet-based delivery.
We offer our solutions on an annual or multi-year subscription basis. We sell our products by targeting selected vertical markets, currently consisting of high technology, transportation, construction machinery, agricultural equipment, and service companies selling complex products and services. Unrecognized revenue for existing contracts totals approximately $7.9 million at September 30, 2008. Our current customers include Bell Helicopter, Alcan Cable (Division of Alcan Products), Cummins, Inc., Deere & Co., G.E. Equipment Services Europe BV, Redback Networks, Rolls Royce Motor Cars, SRI Surgical, and Symantec Corporation.
Our history dates back to 1983. As such, the Company’s predecessor, Old Firepond, was focused on providing enterprise software solutions. We inherited the legacy portion of that business which continues to generate revenue from maintenance and service contracts. However, our resources are no longer focused on producing new enterprise revenue.
Industry Background
The Enterprise Application Software Market
Over the last thirty-five years, there have been several shifts in the way vendors deliver enterprise software applications. In the 1970s and 1980s, vendors delivered application software through centralized mainframe based systems. This evolved in the 1990s to client/server computing. Historically, only large businesses could afford to make investments in enterprise applications to gain an enterprise-wide view and automate and improve basic processes. In addition, large businesses often attempted to customize and connect various incompatible packaged applications through lengthy and costly integration efforts. Many large enterprises never realized the benefits of these applications for a variety of reasons, including the difficulty of deployment, low user adoption rates, lack of ubiquitous access, high total cost of ownership and a relatively low return on investment.
In an attempt to address these challenges, many enterprise software application vendors adapted their products to be accessible over the Internet. However, as these products were not designed originally to be delivered over the Internet as a service and were limited in their ability to serve all sizes of business across many industries, they often failed to address many of the shortcomings of traditional business application software. In addition, because these applications were not easy to use, users were hesitant to adopt these complex, non-intuitive installed applications.
On-Demand Application Services
The pervasiveness of the Internet, along with the dramatic declines in the pricing of computing technology and network bandwidth, have enabled a new generation of enterprise computing in which substantial components of information technology, or IT, infrastructure can be provisioned and delivered dynamically over the Internet on an outsourced basis. This new computing paradigm is sometimes referred to as utility computing or cloud computing, while the outsourced software applications are referred to as on-demand application services.
Software-as-a-Service (“SaaS”), which is an on-demand application service, enables businesses to subscribe to a wide variety of application services that are developed specifically for, and delivered over, the Internet on an as-needed basis with little or no implementation services required and without the need to install and manage third-party software in-house.
Software-as-a-Service application services contrast with the traditional enterprise software model, which requires each customer to install, configure, manage and maintain the hardware, software and network services to implement the software application in-house. Moreover, traditional enterprise software vendors must maintain support for numerous legacy versions of their software and compatibility with a wide array of hardware devices and operating environments. As a result, they dedicate fewer resources to innovation and incur higher research and development expenses as a percentage of revenue than on-demand application service providers.
Software-as-a-Service applications are typically multi-tenant in nature, leveraging a common infrastructure and software code among all customers. With multi-tenancy, customers benefit from access to the latest release of the application, automated upgrades, more rapid innovation and the economies of a shared infrastructure.
An independent research group forecasts that Software-as-a Service will grow at a 22.1% compound annual growth rate through 2011, more than double the growth rate for enterprise software. Businesses are able to realize many of the benefits offered by traditional enterprise software vendors, such as a comprehensive set of features and functionality and the ability to customize and integrate with other applications, while at the same time reducing the risks and lowering the total costs of owning enterprise software. As a result, we believe the continued emergence of Software-as-a-Service applications is bringing about a fundamental transformation in the enterprise software industry as businesses will be able to replace their purchased software with subscriptions to a wide range of application services.
Partners
Firepond partners with other solution providers adding value to our comprehensive solution for optimizing the sales process. We partner with global leaders in their respective fields to extend and enhance our product offering, provide consulting and leverage complementary solutions, including industry-specific solutions.
salesforce.com - - Firepond has partnered with salesforce.com, the leading provider, based on revenues and market share, of Software-as-a-Service offerings. Salesforce.com has more than 47,000 customers. Salesforce.com provides comprehensive customer relationship management, or CRM, service to businesses of all sizes and industries worldwide. Firepond CPQ™ OnDemand provides an out-of-the-box seamless integration, single sign-on experience with salesforce.com’s sales force automation (SFA) application as well as salesforce.com’s partner relationship management (PRM) application, salesforce.com’s principal offerings. Now both direct and indirect sales channel users can take full advantage of salesforce.com’s SFA and PRM applications and Firepond’s configuration and quoting application as if the user were utilizing a single application.
Kozo Keikaku Engineering, Inc., or KKE, is one of the largest engineering firms in Japan providing consulting services to manufacturers throughout Japan and Asia. KKE resells and implements our products, on a non-exclusive basis, in the Japanese market.
Financial Condition
At September 30, 2008, the Company had net assets of negative $8.3 million as compared to $1.4 million at September 30, 2007. Accounts payable at September 30, 2008 were $713,000 as compared to $641,000 at September 30, 2007. Accrued liabilities were $1.2 million at September 30, 2008 as compared to $1.4 million at September 30, 2007. Notes payable were $7.0 million at September 30, 2008 as compared to $5.0 million at September 30, 2007. The increase in notes payable was due primarily to the amortization of the debt discount associated with the notes under the Exchange Agreement (See Note 4 to the Consolidated Financial Statements). The Company had a working capital deficit of $5.2 million as of September 30, 2008 as compared to working capital deficit of $3.3 million at September 30, 2007 which resulted largely from the maturity of the Exchanged Bridge Notes changing from long term reporting status to short term reporting status in this reporting period.
Results of Operations
Three Months Ended September 30, 2007 and September 30, 2008
| | | | | | | | 2007 | | 2008 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | Amount | | Percent of | | | Amount | | Percent of |
| | | | | | | | | | Revenues | | | | | Revenues |
| Revenues | | | | | | | | | | | | |
| | OnDemand revenues | | $ 549,665 | | | | | $ 782,021 | | |
| | Enterprise revenues | | 616,421 | | | | | 529,854 | | |
| | Total revenues | | | 1,166,086 | | 100.0 | | | 1,311,875 | | 100.0 |
| | | | | | | | | | | | | | | |
| Cost of revenues | | | | | | | | | | | |
| | OnDemand costs | | | 380,676 | | 32.6 | | | 520,800 | | 39.7 |
| | Enterprises costs | | | 78,166 | | 6.7 | | | 45,337 | | 3.5 |
| | Total cost of revenues | | 458,842 | | 39.3 | | | 566,137 | | 43.2 |
| | | | | | | | | | | | | | | |
| Gross profit | | | | | 707,244 | | 60.7 | | | 745,738 | | 56.8 |
| | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | |
| | Sales and marketing | | 554,514 | | 47.6 | | | 326,366 | | 24.9 |
| | General and administrative | 1,013,542 | | 86.9 | | | 462,849 | | 35.3 |
| | Research and development | 470,293 | | 40.3 | | | 244,113 | | 18.6 |
| | Restructuring charges | | - | | - | | | 7,524 | | 0.5 |
| | | | | | | | | | | | | | | |
| | | | Total operating expenses | 2,038,349 | | 174.8 | | | 1,040,852 | | 79.3 |
| | | | | | | | | | | | | | | |
| Profit (Loss) from operations | | (1,331,105) | | (114.1) | | | (295,114) | | (22.5) |
| | | | | | | | | | | | | | | |
| Other income (expense), net | | | | | | | | | |
| Interest expense | | | | (1,314,835) | | (112.8) | | | (730,766) | | (55.7) |
| Other income expense | | | 24,111 | | 2.1 | | | 16,711 | | 1.3 |
| Total other income (expense), net | (1,290,724) | | (110.7) | | | (714,055) | | (54.4) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net Loss | | | | | | $ (2,621,829) | | (224.8) | | | $ (1,009,169) | | (76.9) |
| | | | | | | | | | | | | | | |
Revenues
Revenues for the three months ended September 30, 2008 were approximately $1.3 million as compared to revenues of approximately $1.2 million for the three months ended September 30, 2007, an increase of $146,000 or 12.5%. This increase in revenues resulted primarily from new customer contracts or renewals of existing customer contracts in our OnDemand business segment. This increase was offset, in part, by a reduction in revenues earned from the Enterprise segment of our business. We continue to assist existing customers with maintenance issues in this business segment, but do not expend any resources for new Enterprise clients. OnDemand revenues totaling $782,021 during the quarter ended September 30, 2008 increased by approximately $232,000, or 42.3%, from approximately $550,000 in the prior year fiscal quarter ended September 30, 2007. Due to the recurring nature of our OnDemand revenue we anticipate that this segment of our business will continue to grow. Enterprises revenues for the three months ended September 30, 2008 were approximately $530,000 as compared to Enterprise revenues of approximately $616,000 for the three months ended September 30, 2007, a decrease of $87,000 due to the declining focus on this business segment. Enterprise revenues are expected to decrease in future periods due to the Company’s continuing focus on its OnDemand segment.
Cost of Revenues
Cost of revenues, which consist of license costs, maintenance costs, hosting costs and service costs were $566.000 for the three months ended September 30, 2008 as compared to $459,000 for the three months ended September 30, 2007, an increase of $107,000, or 23.4%. Specifically, OnDemand cost of revenues increased $140,000 or approximately 36.8% during the three months ended September 30, 2008 over the prior year fiscal quarter ended September 30, 2007 while Enterprise cost of revenues declined $33,000, or 42.0%, in comparison to the prior year three month period. The increase in OnDemand costs was primarily characterized by increased hosting and support costs attributable to the growth in the recurring revenue portion of our OnDemand business as well as a temporary shift of personnel from our research and development department to assist in implementing our OnDemand product and supporting customer enhancement projects. The decline in Enterprise costs was attributable to our shifting focus to the OnDemand segment and a continuing decline in support requirements to the Enterprise segment.
Operating Expenses
Operating expenses were $1.0 million in the three months ended September 30, 2008 as compared to $2.0 million for the three months ended September 30, 2007, a decrease of $1.0 million, or 48.9%. The decrease was primarily the result of the operational restructuring implemented in May 2008 that included closing our Boston-area headquarters and related operations. Sales and marketing expenses decreased by $228,000, or 41.1%. The decrease is directly attributable to the May 2008 operational restructuring that included elimination of the marketing department in our former Boston-area headquarters. General and administrative expenses decreased by $551,000, or 54.3%, again primarily the result of the closing of our Boston-area headquarters in May 2008 that included resignation of our former Chief Executive Officer and other executive management. The decrease was offset in small measure by the granting of stock options to two of our three new board members and our interim President in April and May 2008, respectively. Research and development costs decreased in the three months ended September 30, 2008 to $244,000 from $470,000 in the prior year three month period, a decrease of $226,000, or 48.1%. The decrease is primarily attributable to staff attrition related to the closing of our Boston-area headquarters as well as a temporary shift of personnel from our research and development center to assist in implementing our OnDemand product and supporting customer enhancement projects. A restructuring charge of approximately $8,000 was experienced in the fiscal quarter ended September 30, 2008 that was not experienced in the comparable period in 2007. This charge is associated with closing of our Boston-area headquarters.
Other Income (Expense)
Other expense was approximately $714,000 for the three months ended September 30, 2008 as compared to approximately $1.3 million for the three months ended September 30, 2007, a decrease of $577,000, or 44.7%. Interest expense was $731,000 during the three months ended September 30, 2008, including amortization of certain debt issuance and debt discount costs of $447,000. During the three months ended September 30, 2007 interest expense was $1.3 million, including amortization of certain debt issuance costs equal to $1,047,000, a difference of $584,000. The decrease between compared periods was primarily due to conversion of approximately $300,000 of our previously issued secured debt to equity and the extension of the maturity of our remaining secured debt, thus, extending the period over which debt issuance costs and discounts are being amortized.
Cash Used in Operating Activities
Cash used in operating activities for the three months ended September 30, 2008 was approximately $487,000 as compared to approximately $955,000 for the three months ended September 30, 2007. The cash used in operating activities for the three months ended September 30, 2008 period was primarily attributable to a net loss of approximately $1.0 million, offset by non-cash charges of approximately $457,000 related to depreciation and amortization, non-cash imputed executive compensation of $47,000 and changes in the amount of current assets and current liabilities. The cash used in operating activities for the three months ended September 30, 2007 period was primarily attributable to a net loss of approximately $2.6 million adjusted for non-cash charges for depreciation and amortization expenses of approximately $1.1 million and changes in the amounts of current assets and current liabilities.
Cash Provided by Investing Activities
For the three months ended September 30, 2008, the Company generated approximately $6,000 net from investing activities resulting from an adjustment to other assets. For the three months ended September 30, 2007, cash provided by investing activities was approximately $116,000 arising from the release of $153,000 in restricted cash under the former escrow agreement to the Exchanged CAP Notes offset by the purchase of property and equipment totaling $31,000 and an adjustment to other assets of approximately $6,000.
Cash Provided by Financing Activities
For the three months ended September 30, 2008, the Company generated approximately $464,000 from financing activities. In August, the Company received $490,000, net, from the sale of common stock to its majority stockholder while making principal payments totaling approximately $26,000 under notes payable. For the three months ended September 30, 2007, the Company generated approximately $1.6 million from financing activities as the result of receiving $3.0 million in cash from new borrowings (the Bridge Loan), offset by repayment of $1.2 million of notes payable and deferred offering costs of $365,000. During this later period the Company also experienced a positive net adjustment to debt issuance costs of approximately $112,000.
Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for working capital, repayment of debt, and general corporate needs. Our main sources of liquidity and capital have been a variety of debt and equity financings (see below). As of September 30, 2008, cash and cash equivalents were approximately $96,000 as compared with cash and cash equivalents of approximately $1.4 million as of September 30, 2007. (See, “Financial Condition,” above). Our working capital at September 30, 2008 represented a working capital deficit of approximately $5.2 million compared to a working capital deficit of approximately $3.3 million at September 30, 2007.
The Company is facing a critical cash crisis at a time of general economic downturn and turmoil. Sustaining operations through even to the end of March 2009 or sooner is dependent on (1) the timely collection of all accounts receivable, (2) deferment of interest payments due senior secured creditors, and (3) the non-occurrence of unexpected events or circumstances. The failure of any one of these factors will adversely affect cash balances and our ability to maintain operations.
Accordingly, the Company is seeking to achieve resolution with its senior creditors in an effort to preserve value for the relevant constituencies, including its senior creditors, employees, customers and vendors, at the earliest practicable date. See Note 1. The Company believes it has the support of the largest holder of its Exchanged CAP Notes, but there can be no assurance that the Company will be able to effect such a transaction. If unable to achieve this or a similar transaction, the Company’s strategic and financial alternatives will be extremely limited.
The Company has for some time been incurring losses and negative cash flow from operations. For the fiscal year ended June 30, 2008, we incurred a net loss of approximately $14.4 million and negative cash flows from operations of approximately $4.9 million. For the three month period ended September 30, 2008 we incurred a net loss of approximately $1.0 million and a negative cash flow from operations of approximately $487,000. The Company does not believe operational cash flows over the ensuing months will be sufficient either to sustain present operations or service its indebtedness. Given the recent turmoil in the financial markets, the Company does not believe it will be able to access the financial markets to fund capital requirements. Based on current operational performance, the Company believes it will not be able to comply with financial covenants of its senior secured indebtedness as of December 31, 2008.
Since April 2008, the Company has been dependent upon its majority shareholder to provide funding. Given the Company’s performance to date and turmoil in the financial markets, the majority shareholder has indicated it is unlikely to provide additional equity financing. The Company is in preliminary communications with its senior lenders (the holders of the Exchanged CAP Notes) regarding its state of financial affairs. These communications have included several alternatives, including a transaction in which the holders of the Exchange CAP Notes acquire ownership of the Company. Such a transaction would have serious impact on the value of the Company’s existing common stock as well as any obligations ranking junior to the Exchanged CAP Notes. In connection with such a transaction, the Company’s largest holder of Exchange CAP Notes has indicated preliminarily that it may be prepared to provide senior debt financing to the Company if the current holders of the Exchange CAP Notes agree to convert their entire holdings to equity in the Company pursuant to a foreclosure. There can be no assurance that any such transaction or any other transaction can or will be consummated.
The Company completed a financial restructuring in April 2008 that included from FP Tech Holdings, LLC, a member of the affiliated group that owns a majority of the Company’s outstanding common stock, (1) an investment of $1,500,000 cash, (2) conversion of $336,000 senior secured convertible notes plus accrued interest held by it to common stock, and (3) conversion of $100,000 of other debt plus accrued interest held by it to common stock. The financial restructuring also included extension of the maturity dates of the Company’s senior secured debt facilities (Exchanged CAP Notes and Exchanged Bridge Notes) to December 31, 2009 and July 1, 2009, respectively.
Furthermore, in August 2008, as provided in the April 2008 financial restructuring, FP Tech contributed an additional $500,000 in equity to the Company. (See, Management Discussion and Analysis, Liquidity and Capital Resources, Funding Agreement – August 2008).
Some aspects of the Company’s operational restructuring commenced in May 2008 are beginning to be reflected in its Statement of Operations for the three months ended September 30, 2008, but are not sufficient to permit the Company to continue to fund losses, attract new equity investment or service its indebtedness.
Operations are being severely affected as a result of the Company’s high levels of indebtedness and inability to access the financial markets. The Company believes it will not be able to comply with financial covenants of its senior secured indebtedness as of December 31, 2008. The Company anticipates entering into further discussions with the holders of its Exchange CAP Notes that may result in a transaction that could have severe impact on the value of the Company’s common stock and any obligations ranking junior to the Exchange CAP Notes.
The accompanying consolidated financial statements do not include any adjustments that might result from such adverse outcomes.
Funding Agreement – August 2008
Pursuant to the Common Stock Purchase Agreement, dated as of April 25, 2008 (the "Stock Purchase Agreement"), FP Tech, an affiliate member of the Company’s majority shareholder group, was granted by Firepond an option to purchase approximately 357,143 shares of Common Stock at a purchase price of no more than $1.40 per share with gross cash proceeds to the Company of at least $500,000 (the "Subject Financing"). The Subject Financing was completed as of August 13, 2008, with the Company receiving $500,000 in cash from FP Tech and the Company issuing 357,143 shares of common stock to FP Tech.
As part of the August 2008 funding agreement (the “Funding Agreement”) among Firepond, FP Tech and the holders (“Investors”) of the Company’s secured notes (“Secured Notes”), the Investors agreed to exchange their Secured Notes in certain circumstances which circumstances include exercise by FP Tech of an option to invest additional equity in the Company and the Company’s election to extend the maturity of its Secured Notes (the “Transaction”) as follows:
| (i) | Additional Funding. Effective the business day after the closing of the Funding Agreement and for a period expiring on June 30, 2009, the Company granted to FP Tech or its assigns an option to purchase, at an exercise price of $1.40 per share of Common Stock (such amount, the "AF Purchase Price"), a total of $1.5 million in aggregate amount of Common Stock (the "Additional Funding"). |
| (ii) | Exchange Election. During the period commencing on the closing of the Additional Funding and ending on the earlier to occur of (a) June 30, 2009 and (b) the fifth (5th) Business Day following the closing of the Additional Funding, the Company may, by written notice to each of the Investors during such period, elect to consummate the Exchange (as defined below) (the "Exchange Election"). |
| (iii) | Exchanged CAP Notes. Upon the exercise of the Exchange Election, the Company shall exchange (the "CAP Note Exchange") its Exchanged CAP Notes of each Investor for new senior secured convertible notes (the "New Exchanged CAP Notes"), which are convertible into Common Stock (as converted, the "New Exchanged CAP Conversion Shares") and are identical to the Exchanged CAP Notes except as follows: |
| a. | Maturity. The Maturity Date (as defined in the New Exchanged CAP Notes) shall be December 31, 2010. |
| b. | Interest. Interest on the principal balance outstanding from time to time of the New Exchange CAP Notes accruing at the rate of 12% per annum after December 31, 2009 shall be due and payable quarterly in arrears on the second business day following the end of each fiscal quarter end beginning March 31, 2010 through the Maturity Date. |
| c. | Conversion Price. The Conversion Price of the New Exchanged CAP Notes shall be $2.00 per share of Common Stock. |
| (iv) | Exchanged Bridge Notes. Upon exercise of the Exchange Election, the Company shall exchange the Exchanged Bridge Notes for a number of shares of Common Stock (the "New Exchanged Common Shares") determined according to the following formula: |
| | |
| | Original Principal Amount of the Exchanged Bridge Notes of each Exchanged Bridge Note holder / (AF Purchase Price X 1.1) X 0.1 and senior secured notes identical to the Exchanged Bridge Notes (the "New Exchanged Bridge Notes"), except as follows: |
| a. | Maturity Date. The Maturity Date in the New Exchanged Bridge Notes shall be July 1, 2010. |
| | |
| b. | Interest. Interest accruing on the principal balance of the New Exchanged Bridge Notes at the rate of 15% per annum beginning July 2, 2009 shall be due and payable quarterly in arrears on the second business day following the end of each fiscal quarter end beginning September 30, 2009 through the Maturity Date. |
| | |
| (v) | Waiver of Existing Defaults. Upon closing the Subject Financing all existing defaults under the Exchanged CAP Notes and the Exchanged Bridge Notes were waived. |
February 2008 Equipment Lease Agreement
On February 11, 2008, the Company entered into an equipment lease agreement with FP Tech, wherein the Company established a credit facility of up to $200,000 to be used for capital purchases and general corporate purposes. The agreement has a twenty four month lease commitment term. Outstanding principal accrues interest at the rate of 8% per annum during the first twelve months, 9% per annum during months 13-24 and 20% thereafter. Accrued interest is due and payable at the earlier of the end of the lease commitment term or upon optional repayment of Principal. Principal may be repaid in full or in part at any time without penalty, but in no case later than expiration of the lease commitment term. In February 2008, the Company borrowed $100,000 on this facility. The outstanding principal and accrued interest was converted to common stock of the Company on April 25, 2008.
At September 30, 2008, principal outstanding on the equipment lease agreement was $ 0. Subsequently, FP Tech advanced sums for the purchase of new computers, monitors, servers, storage capacity and related technology equipment. At the date of this report, approximately $152,000 principal is outstanding under this credit facility.
ITEM 3. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency exchange risk
Our results of operations and cash flows are not significantly subject to fluctuations due to changes in foreign currency exchange rates as most of our contracts are denominated in U.S dollars. However, we occasionally are paid in foreign currency subjecting us to brief periods of currency risk between the time of payment and conversion to U.S. dollars. We do not believe such risk to be material to results. As a result, we do not enter into any hedging contracts.
Interest rate sensitivity
Our cash and cash equivalents are invested primarily in money market funds and government securities. The cash, cash equivalents and short-term marketable securities are held for working capital purposes with capital preservation as the primary objective. We do not enter into investments for trading or speculative purposes.
At September 30, 2008, we had cash and cash equivalents totaling approximately $96,000. We do not believe our short term investments are subject to interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be in disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our President and our Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures.
Our management evaluated, with the participation of our President and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act as of September 30, 2008 (the “Evaluation Date”). Based on this evaluation, our President and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in periodic SEC reports is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
(b) Management’s responsibility for financial statements
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test our internal control over financial reporting and include in this Quarterly Report on Form 10-Q a report on management’s assessment of the effectiveness of our internal control over financial reporting, and to delineate any material weakness in our internal control. A material weakness is a deficiency, or a combination of deficiencies, internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our President and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2008 based on the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal controls over financial reporting are to include policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Based on the results of our evaluation, our management has concluded that our internal control over financial reporting were not effective as of September 30, 2008. In that regard, we identified the following weaknesses in our internal control over financial reporting as of September 30, 2008:
1. Lack of Effective Corporate Governance Policies and Procedures.
Management did not establish an adequate policy and procedures statement governing authority levels within the management group for recording business transactions. The lack of such control permitted a material revenue transaction to be recorded in contravention of the Company’s revenue recognition criteria.
Additionally, certain other management policy statements, including whistle blower, sales commitments, business expense and document retention and destruction policies, were not implemented by September 30, 2008. While management has not identified any specific irregularities as a result of not having such policy statements in place, management has determined that the lack of such policy statements constitutes a material weakness.
Remediation of Material Weakness:
The Company implemented during fiscal 2008 a policy statement approved by the Board of Directors which establishes defined levels of authority for all management levels. Additionally, an additional level review has been implemented for all new revenue contracts and the resulting revenue recognized from such contracts. These procedures have now been adequately tested. Management believes the new procedures remediate this material weakness.
In addition, management has developed and submitted for approval of the Board of Directors certain other policy statements which address the other above identified deficiencies. The Board of Directors is currently reviewing these policies. In the interim, management has instituted these policies.
2. Lack of Effective Control in Certain Accounting Areas.
During the review and documentation of the accounts payable and disbursement process, it was determined that the individual responsible for ACH disbursement activity had the ability to process ACH transfers without a control review by either another accounting staff member or management. While there is segregation of duties established for disbursement and bank reconciliation activities, such a segregation of duties did not exist for ACH activity and as such represents a material weakness.
Additionally, formal testing of certain components of the accounts payable and disbursement process was not timely completed for September 30, 2008 reporting requirements.
Remediation of Material Weakness:
Within the accounting department, a detailed review process for all ACH transfers has been implemented providing oversight on the processing and recording of ACH transfer activity. The new procedure was implemented prior to June 30, 2008, and has now been adequately tested. Management believes the new procedure remediates this material weakness.
We believe the foregoing efforts will enable us to improve our internal controls over financial reporting. Management is committed to continuing efforts aimed at improving the design, adequacy and operational effectiveness of its system of internal controls. The remediation efforts noted above will be subject to continuing internal control assessment, testing and evaluation process.
We reviewed the results of management’s assessment with our Audit Committee.
(c) Changes in internal control over financial reporting
Except as identified above, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Inherent Limitations on Effectiveness of Controls
Our management, including our President and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
The Company is currently involved in other litigation with a vendor, the outcome of which is uncertain. However, a finding of material liability in any Company litigation or the incurrence of significant expense in defending or prosecuting such litigation would be material and adverse to the Company. In addition, we may from time to time be subject to various other claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters can not be determined at this time.
Please refer to Note 6 to our financial statements included elsewhere in this Report for a discussion of a litigation matter involving a predecessor company to us, whose assets are being administered by a trust.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Please refer to ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, Liquidity and Capital Resources, Funding Agreement – August 2008. Also see Form 8-K filed by the Company with the SEC on August 12, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a)
32.1 Certifications 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.
| Date: | November 12, 2008 | Firepond, Inc. (Registrant) |
| | | | |
| /s/ L. Bradlee Sheafe | | | /s/ William P. Stelt |
| | | |
L. Bradlee Sheafe, President | | | William P. Stelt, CFO |
