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FORM 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended December 31, 2002 | ||
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT | |
| For the transition period from to | ||
(Exact name of small business issuer as specified in its charter)
| OHIO | 31-1200684 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
| incorporation or organization) | ||
(Address of principal executive offices)
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
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State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,327,227 shares of common stock as of December 31, 2002.
Transitional Small Business Disclosure Format (check one): Yes No [X] [ ]
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements attached to the end of this quarterly report are filed as part of this quarterly report. The financial statements include all adjustments, which in the opinion of management are necessary in order to make the financial statements not misleading.
Item 2. Management’s Discussions and Analysis or Plan of Operation.
The following selected financial information set forth below has been derived from the unaudited condensed financial statements of the Company. This discussion and analysis should be read in conjunction with such financial statements. All amounts are in US dollars.
Results of Operations
For the three months ended December 31, 2002 compared to the three months ended December 31, 2001
Sales for the three months ended December 31, 2002 were $1,336,000 compared to $1,764,000 for the same period last year. Overall sales decreased by $428,000. On a comparative basis, revenues from contact center applications decreased by 30%, services revenue increased by 3% while other Company products decreased by 48%.
Gross profit of $796,000 was $500,000, or 39%, lower than the corresponding period of last year. This decrease in gross profit is a direct result of the decrease in sales volume. Gross profit as a percentage of sales was 60%, a reduction of 13% from that experienced during the same period of the prior year. The decline in gross profit percentage is attributable to amortization of software development costs and certain licensing fees associated with product sales.
The Company continued its efforts to control expenses. Total operating expenses decreased by 12%. Research and development expenses of $310,000 were $8,000, or 3%, higher than the comparable prior year period while selling, general and administrative expenses of $1,515,000 were $155,000, or 9%, lower than the comparable prior year period. This decrease was due to lower payroll costs during the quarter, which were partially offset by increased occupancy costs as a result of the Company’s new Blue Ash facility. The operating expense decline is the result of cost cutting programs implemented by the Company throughout fiscal year 2002.
The Company realized a loss from operations of $1,028,000 for the three months ended December 31, 2002 as compared to a loss from operations of $780,000 reported for the same period last year.
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Other income was $30,000 as compared to $29,000 for the comparable prior year period due primarily to a $28,000 gain on the sale of common stock that was offset by a decrease in the amount of funds invested in marketable securities and the rate of return on investments.
No income tax benefit was recorded during the second quarter of fiscal 2003 as a result of establishing a valuation allowance against current quarter net operating losses in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Such allowance may be adjusted in future periods if it becomes more likely than not that the Company will utilize such benefits.
The Company realized a net loss of $998,000 for the three months ended December 31, 2002 compared to a net loss of $512,000 reported for the same period last year. Loss per share, basic and diluted, was $0.08 versus a net loss of $0.04 per share, basic and diluted, reported for the comparable prior year period.
For the six months ended December 31, 2002 compared to the six months ended December 31, 2001
Sales for the six months ended December 31, 2002 were $2,942,000 compared to $3,377,000 for the same period last year. Overall sales decreased by $435,000. On a comparative basis, revenues from contact center applications decreased by 13%, services revenue decreased by 7% while other Company products decreased by 37%.
Gross profit of $1,804,000 was $525,000, or 23%, lower than the corresponding period of last year. This decrease in gross profit is a direct result of the decrease in sales volume. Gross profit as a percentage of sales was 61%, a reduction of 8% from that experienced during the same period of the prior year. The decline in gross profit percentage is attributable to amortization of software development costs and certain licensing fees associated with product sales.
The Company continued its efforts to control expenses. Total operating expenses decreased by 7%. Research and development expenses of $573,000 were $8,000, or 1%, lower than the comparable prior year period while selling, general and administrative expenses of $3,191,000 were $171,000, or 5%, lower than the comparable prior year period. This decrease was due to lower payroll costs during the quarter, which were partially offset by increased occupancy costs as a result of the Company’s new Blue Ash facility. The operating expense decline is the result of cost cutting programs implemented by the Company throughout fiscal year 2002.
The Company realized a loss from operations of $1,960,000 for the six months ended December 31, 2002 as compared to a loss from operations of $1,718,000 reported for the same period last year.
Other income was $37,000 as compared to $81,000 for the comparable prior year period due primarily to a $28,000 gain on the sale of common stock that was offset by a decrease in the amount of funds invested in marketable securities and the rate of return on investments.
No income tax benefit was recorded during the second quarter of fiscal 2003 as a result of establishing a valuation allowance against current quarter net operating losses in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Such allowance may be adjusted in future periods if it becomes more likely than not that the Company will utilize such benefits.
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The Company realized a net loss of $1,923,000 for the six months ended December 31, 2002 compared to a net loss of $1,073,000 reported for the same period last year. Loss per share, basic and diluted, was $0.16 versus a net loss of $0.09 per share, basic and diluted, reported for the comparable prior year period.
Liquidity and Capital Resources
Working Capital decreased to $959,000 as compared to $4,353,000 for the corresponding period of last year. The decrease of $3,394,000 is due to a decrease in cash and marketable securities of $3,461,000, and decreases in accounts payable of $139,000, accrued wages and compensation of $122,000 that were offset by an increase in deferred maintenance revenue of $180,000 and other liabilities of $148,000.
As of December 31, 2002, the Company held cash and marketable securities totaling approximately $1.2 million and had no outstanding long-term debt obligations. The Company has operating lease agreements as previously described in the Company’s 10-KSB filed on or about September 27, 2002. For the annual minimum rent to be paid under the operating lease agreements refer to “Notes to Condensed Financial Statements” (see Exhibit 99.1, re: Note 3: Operating Leases). With respect to the operating lease agreement for office equipment and furniture, the Company has agreed to maintain a compensating balance equal to amounts owed under the lease agreement, effective August 2002 and as amended in January 2003, and continuing through the expiration of the lease agreement. This compensating balance at December 2002 was $1.1 million. In the event that the Company’s marketable securities and 85% of the Company’s trade accounts receivable less than ninety days past due were to decline below the compensating balance requirement, the lessor is entitled to exercise certain remedies as provided in the lease agreement and amendments. Such remedies include the lessor’s right to take possession of cash, marketable securities and trade accounts receivable in the amount of the outstanding lease obligation. Upon such event, the Company would seek to renegotiate the terms of the lease agreement, however the lessor is under no obligation to modify the agreement.
During December 2002, the Company engaged a financial advisor to assist in the development of a program to raise additional capital, however management cannot predict the likelihood of the Company’s ability to raise such capital.
The Company’s plan of operation is to continue distributing its contact center solutions and development of services revenue. The Company feels that there is no significant element of income or loss that does not arise from the Company’s continuing operations.
Critical Accounting Policies
The accounting policies of the Company conform to those generally accepted in the United States of America and are summarized in the footnotes to the Company’s financial statements. Certain of the Company’s accounting policies require management to use estimations and assumptions that affect the amounts reported in the financial statements and the Company acknowledges that actual results could differ from those estimates.
Software Development Costs incurred for the creation of software products, primarily NetVIA, are charged to research and development expense when incurred until technological feasibility has been
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established for the product. Thereafter, until general release, all software production costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. The capitalized costs are amortized on a straight-line basis over the estimated economic life of the product. The Company periodically evaluates the capitalized cost relative to potential sales. If potential sales revenue is not sufficient to cover these capitalized costs, the Company will accelerate the write-off as appropriate. Furthermore, as discussed in the Business Condition section, current economic conditions have delayed the anticipated contribution to operations of certain recently introduced product lines. If management determines that this delay will extend the realization of potential sales revenue beyond the estimated product life it is reasonably possible that the Company may be required to accelerate the write-off of capitalized costs as appropriate.
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Beginning July 1, 2002, the Company has provided a valuation allowance on tax benefits created since that date, as realization of such benefits is uncertain. Furthermore, it is reasonably possible that if operating losses continue, the Company may be required to fully reserve its deferred tax assets in future periods.
Business Condition
The Company has experienced net losses of $1.9 million and $1.1 million for the six-month periods ended December 31, 2002 and 2001, respectively. Restrictions under certain of the Company’s operating lease financing arrangements require the maintenance of a compensating balance equivalent to $1.1 million in marketable securities and trade accounts receivable. Additionally, current economic conditions have delayed the anticipated contribution to operations of the Company’s recently introduced product lines. The Company’s continued existence is dependent upon several factors including the ability to generate sufficient cash flow from operations to satisfy existing creditors and sustain normal operations. At this time it is not possible to predict the ultimate resolution of these matters.
It is reasonably possible, however, that the Company may be required to obtain waivers under its operating lease financing arrangements for future periods and the lender is under no obligations to provide such waivers. It is also possible that the current economic downturn may be sustained beyond initial forecasts. During the months ahead, the Company will be forced to make difficult decisions regarding, among other things, the future direction of the Company. The Company’s management and Board have been reviewing the financial and operational alternatives available to the Company.
The Company’s near and long term strategies have focused on aggressively pursuing cost cutting programs which are expected to significantly reduce overall operating expense on an annualized basis. Many of these reductions were implemented in fiscal year 2002, the effect of which is expected in fiscal 2003 and future years. The current cost cutting programs through the six-month period ended December 31, 2002 has resulted in an overall reduction in operating expenses of 7%. These reductions have included an 18% reduction in payroll costs. Furthermore, the Company has recently engaged a financial advisor to explore the possibility of raising additional funding sources.
Management believes that, despite the financial hurdles and uncertainties going forward, it has under development a business plan that, if successfully executed, can significantly improve operating
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results. The support of the Company’s vendors, customers, and employees will continue to be the key to the Company’s future success.
Item 3. Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer have reviewed, as of a date within 90 days of this filing, the disclosure controls and procedures that ensure that information relating to the Company required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely and proper manner. Based upon this review, the Company believes that there are adequate controls and procedures in place. There were no significant changes in the internal controls or other factors that could affect these controls after the date of the evaluation.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on October 30, 2002, the following matters were to be voted upon: 1) to elect Directors and 2) to appoint Deloitte & Touche LLP as auditors. Of the proxies received, the following shares were voted For/Against/Withheld:
| For | Against | Withheld | ||||||||||||||
| 1 | ) | To elect Directors: | ||||||||||||||
| Diane M. Kamionka | 9,207,942 | 0 | 1,178,357 | |||||||||||||
| Bryant A. Downey | 9,207,942 | 0 | 1,178,357 | |||||||||||||
| Frank W. Terrizzi | 9,247,942 | 0 | 1,138,357 | |||||||||||||
| Christopher D. Brennan | 9,247,942 | 0 | 1,138,357 | |||||||||||||
| Richard G. Reid | 9,247,942 | 0 | 1,138,357 | |||||||||||||
| 2 | ) | To appoint Deloitte & Touche LLP | 9,097,942 | 0 | 1,288,357 | |||||||||||
| as auditors | ||||||||||||||||
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following Exhibits are required by Item 601 of Regulation S-B:
| Exhibit | ||||
| Number | Description of Document | Page | ||
| 10 | Second Amendment to Lease Agreement between Cintech Solutions, Inc. and Fifth Third Bank dated January 3, 2003 | Attached | ||
| 15 | Letter on Unaudited Interim Financial Information | Attached | ||
| 99.1 | Financial Statements / Independent Accountants’ Report | Attached | ||
| 99.2 | CEO / CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Attached |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, Cintech Solutions, Inc., as Registrant, has caused this Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized.
| CINTECH SOLUTIONS, INC. | ||||
| By: | /s/ Diane M. Kamionka | Date: February 14, 2003 | ||
| Diane M. Kamionka | ||||
| �� | President and Chief Executive Officer | |||
| By: | /s/ Dino Lucarelli | Date: February 14, 2003 | ||
| Dino Lucarelli | ||||
| Chief Financial Officer | ||||
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CERTIFICATIONS
Chief Executive Officer
I, Diane M. Kamionka, certify that:
| 1. | I have reviewed this quarterly report on Form 10-QSB of Cintech Solutions, Inc.; | ||
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | ||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: February 14, 2003 | ||
| /s/ Diane M. Kamionka | ||
| Diane M. Kamionka |
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Chief Financial Officer
I, Dino Lucarelli, certify that:
| 1. | I have reviewed this quarterly report on Form 10-QSB of Cintech Solutions, Inc.; | ||
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | ||
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: February 14, 2003 | ||
| /s/ Dino Lucarelli | ||
| Dino Lucarelli |
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