Sales and marketing expenses consist primarily of salaries, commissions and bonuses related to sales and marketing personnel as well as travel and promotional expenses. Sales and marketing expenses increased $5.5 million from 2004 to 2005 primarily due to an increase of employee related costs due to the hiring of more highly qualified sales and marketing personnel during the period, a partial redeployment of Enterprise Solutions resources to focus on the RCM product line and increased marketing programs.
Research and development expenses consist primarily of personnel costs, costs of equipment, facilities and third party software development cost. Research and development expenses are generally charged to operations as incurred. However, certain software development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86. Such capitalized software development costs are amortized to cost of license fees on a straight-line basis over periods not exceeding three years. Research and development expenses (net of capitalized software development costs) increased $4.5 million from 2004 to 2005 due primarily to a redeployment of Enterprise Solutions resources to focus on the RCM product line and an inc rease in personnel related expense.
General and administrative expenses consist primarily of salaries of administrative, executive and financial personnel and outside professional fees. General and administrative expenses decreased $1.1 million or 20% from 2004 to 2005 primarily as a result of a decrease in professional fees, a decrease in employee related expenses, a decrease in variable compensation expense and a decrease of other miscellaneous expenses.
In June 2005, in order to reduce operating costs to better position ourselves in the current market, we eliminated 6 positions from continuing operations. We recorded a charge to operations of $0.3 million related to involuntary termination benefits to be paid to the terminated employees. All restructuring costs related to the 2005 reduction in force have now been paid. Additionally, the executive management team reduced their base salaries by 10% and the Board of Directors waived all cash compensation for the second half of 2005, resulting in a savings of $0.1 million. Such salary and Board fee reductions were reinstated in 2006. (See Note 12 to the Consolidated Financial Statements.) In addition, in the second quarter, we exp ensed approximately $0.3 million related to a retirement agreement with our former CEO. The retirement benefits were paid in the first quarter of 2005.
Operating loss increased from $3.2 million in 2004 to $14.7 million in 2005 due to an increase in operating expenses of $12.7 million offset partially by an increase of $1.2 million in revenue.
Other income (expense), net was $0.4 million expense in 2005 as compared to $0.3 million income in 2004 mainly as a result of foreign exchange transaction losses of $0.5 million in 2005 as compared to transaction gains of $0.2 million in 2004.
We recorded an income tax benefit of $25,000 in 2005 from one foreign entity. We recorded an income tax benefit of $0.2 million in 2004 from the sale to third parties of certain New Jersey State Tax net operating loss carry-forwards and research and development credits. We cannot be certain that the State of New Jersey will continue to allow such sales in the future or, if it did, that sales to third parties could be consummated. For 2004 there was an additional tax benefit of $23,000 in one foreign entity.
Loss from continuing operations increased $12.4 million in 2005, as compared to 2004 primarily due to the reasons stated above.
Income from discontinued operations increased $7.8 million for 2005, as compared to 2004 due to the transfer of certain personnel from the Enterprise Solutions business to the RCM business, offset somewhat by reduced revenue relating to customer cancellations of maintenance contracts and lower professional services revenue.
Table of ContentsNet loss
Net loss was $9.0 million or $(0.28) per diluted share in 2005 compared to a net loss of $5.2 million or $(0.19) per diluted share in 2004. This increase of $3.8 million or $(0.09) per diluted share was primarily due to losses from continuing operations offset partially by income from discontinued operations.
Liquidity and Capital Resources
At December 31, 2006, we had cash and cash equivalents of $7.5 million and a working capital of $2.9 million which included $2.6 million of deferred revenue. The increase in working capital of $6.5 million compared to a working capital deficit of $3.6 million at December 31, 2005 is primarily due to cash received from the sale of the Enterprise Solutions business on October 31, 2006.
On June 21, 2005 and September 21, 2005 we completed a private placement of shares of common stock and warrants that resulted in the receipt of net proceeds of approximately $5.8 million and $0.6 million, respectively. On April 5, 2004, we completed a private placement of shares of common stock and warrants that resulted in the receipt of net proceeds of approximately $7.7 million.
On August 11, 2004, the Company entered into a two-year Loan and Security Agreement (the ‘‘Agreement’’) which contains a revolving line of credit under which the Company had available the lesser of $4.0 million or 80% of eligible accounts, as defined (See Note 3 to the Consolidated Financial Statements).
On January 27, 2005, March 28, 2005 and September 13, 2005, the Company entered into modifications to the Agreement (the ‘‘Amended Agreement’’) in order to revise certain terms of the Agreement including the loan fees, interest on the loan and the financial covenants. The Amended Agreement included a waiver of the Company’s June 30, 2005 financial covenant default.
Borrowings under the revolving line of credit, per the Amended Agreement, bore interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial covenants set forth in the Amended Agreement, the interest rate would increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment fee of $30 per year and an unused revolving line facility fee of 0.25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additi onal $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Amended Agreement, the loan is subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company’s EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amortization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There is also a monthly transition event covenant which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.0.
As of March 31, 2006, the Company was in compliance with the monthly adjusted quick ratio covenant and the transition event covenant, but was not in compliance with the quarterly EBITDAS covenant, which requires the Company to achieve EBITDAS of the lesser of $1 better than the immediately preceding quarter EBITDAS or $1. On May 11, 2006, the Bank granted a waiver of the EBITDAS covenant as of March 31, 2006. The waiver was for the March 31, 2006 date only.
As of June 30, 2006, the Company was in compliance with the quarterly EBITDAS covenant and the monthly adjusted quick ratio covenant, but was not in compliance with the transition event covenant, which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.00. As result of such violation, the Bank moved the Company to the higher interest rate facility which required the Company to pay interest on outstanding balances of prime plus 2.5% incur minimum monthly interest expense of $8 and pay a one-time warrant waiver fee of $10.
As of September 30, 2006, there was $1,844 outstanding under the Amended Agreement, which was the full amount of availability under the Amended Agreement based on the lesser of $4,000 or 80% of
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Table of Contentseligible accounts receivable. The Company was not in compliance with the quarterly EBITDAS covenant or the monthly adjusted quick ratio covenant as of September 30, 2006. On October 20, 2006, the Company received a notice of default from the Bank in connection with these covenant violations. As a result, the effective interest rate of the loan has increased by 4.0%, any additional loans were at the Bank’s sole discretion and the Bank reserved the right to declare all obligations to be immediately due and payable in full, a right which they did not exercise.
On October 31, 2006 the Company and the Bank entered into a Second Loan Modification Agreement and an Intellectual Property Security Agreement. The Second Loan Modification Agreement serves (a) to amend the Amended Agreement by reducing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4 million or (B) 80.0% of the Eligible Accounts to (ii) up to the lesser of (A) $2 million or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to forbear until November 10, 2006 from exercising its rights and remedies with respect to the default of the Company for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006. The IP Security Agreement serves to supplement the Amended Agreement by including among the assets securing the Company’s indebtedness to the Bank, a security interest in all of the Company’s right, title and interest in, to and under its intellectual property collateral.
On November 11, 2006 the Company and the Bank entered into a Third Loan Modification Agreement. The Third Loan Modification Agreement serves (a) to amend the Second Loan Modification Agreement by increasing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $2 million or (B) 70.0% of the Eligible Accounts to (ii) up to the lesser of (A) $4 million or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to extend the forbearance from exercising its rights and remedies with respect to the default of the Company through December 10, 2006 for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006.
As of December 31, 2006 and March 15, 2007, they were no amounts outstanding under the loan agreement. Funds received on October 31, 2006 as part of the sale of the Enterprise Financials segment were used to repay all outstanding balances of the loan. The Company’s borrowing availability as of December 31, 2006 was $1,022. The Company was in compliance with all covenants as of December 31, 2006. Further, the Company believes that it will be in compliance with its financial covenants during the first quarter of 2007 and does not expect to borrow on the facility during that period.
On March 6, 2007, the Company entered into a Fourth Loan Modification Agreement (the ‘‘Fourth Modification Agreement’’) with the Bank effective as of February 15, 2007 to amend and supplement its Amended and Restated Loan and Security Agreement dated as of September 13, 2005 between the Company and the Bank, as amended by a First Loan Modification Agreement dated as of March 14, 2006, a Second Loan Modification Agreement dated as of October 31, 2006, and a Third Loan Modification Agreement dated as of November 11, 2006 (as amended, the ‘‘Loan Agreement’’).
Subject to certain borrowing base limitations and compliance with covenants, the Fourth Modification Agreement serves to amend the Loan Agreement by changing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000,000 or (B) 70.0% of the Eligible Accounts (as such term is defined in the Loan Agreement) to (ii) up to the lesser of (A) $2,500,000 or (B) 80.0% of the Eligible Accounts (as such term is defined in the Loan Agreement). The Fourth Modification Agreement also extends the maturity date of the Loan Agreement from February 15, 2007 to April 1, 2008.
In addition, the Fourth Modification Agreement deletes the existing financial covenants contained in the Loan Agreement and adds two new financial covenants: (i) a covenant requiring the Company to maintain a Tangible Net Worth (as defined in the Fourth Modification Agreement) of at least (A) $1,700,000 as of the months ending January 31, 2007, February 28, 2007 and March 31, 2007, (B) $600,000 as of the months ending April 30, 2007, May 31, 2007 and June 30, 2007, (C) ($150,000) as of the months ending July 31, 2007, August 31, 2007 and September 30, 2007, and (D) $1.00 as of the month ending October 31, 2007 and as of the last day of each month thereafter and (ii) a covenant requiring the Company to maintai n Liquidity (representing the amount of unrestricted cash of the Company at the Bank plus the unused availability under the Loan Agreement) at all times of at least $1,000,000.
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Table of ContentsThe Bank also waived the Company’s existing defaults under the Loan Agreement based on certain failures to meet prior financial covenants during the year ended December 31, 2006.
We have no significant capital commitments. Planned capital expenditures for 2007 are less than $0.5 million, including any software development costs that may qualify for capitalization under SFAS No. 86. Our aggregate minimum operating lease payments for 2007 will be approximately $1.2 million. Our aggregate minimum royalties payable for third party software used in conjunction with our software are approximately $0.3 million for 2007. We expect to fund these commitments from cash on hand and cash generated by operating activities, but it may be necessary to seek other sources of financing should we fail to generate sufficient cash.
Future payments due under lease obligations and third party software providers as of December 31, 2006 are as follows:
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | | Non-Cancelable
Operating
Leases | | | Third-Party
Software
Providers | | | Total |
| 2007 | | | | $ | 1,172 | | | | | $ | 275 | | | | | $ | 1,447 | |
| 2008 | | | | | 920 | | | | | | 50 | | | | | | 970 | |
| 2009 | | | | | 803 | | | | | | 50 | | | | | | 853 | |
| 2010 | | | | | 756 | | | | | | — | | | | | | 756 | |
| 2011 & thereafter | | | | | 734 | | | | | | — | | | | | | 734 | |
| Total | | | | $ | 4,385 | | | | | $ | 375 | | | | | $ | 4,760 | |
|
Our continuing operating activities used cash of $17.8 million, $14.5 million and $1.4 million in 2006, 2005 and 2004 respectively. Net cash used by continuing operating activities in 2006 is primarily the result of the net loss, a decrease in deferred revenue and increased prepaid expenses and other current assets slightly offset by an increase in accounts payable and accrued expenses, non-cash depreciation and amortization charges and by a decrease in accounts receivable. The decrease in deferred revenue and the increase in accounts payable and accrued expenses in 2006 are mainly due to the reclassification of a prepayment of revenue from one customer that has chosen not to install our software which may result in a refund of payment in the future. The decrease in accounts receivable in 2006, mainly in US operations, is due to lower revenue during the fourth quarter of 2006. The increase in prepaid and other current assets relates to services rendered and payments made on behalf of Computron Software, LLC for which payment has not been received in 2006.
Net cash used by continuing operating activities in 2005 is primarily the result of the net loss, an increase in accounts receivable and a decrease in accounts payable and accrued expenses partially offset by an increase in deferred revenue and non-cash depreciation and amortization charges. Net cash used in continuing operating activities in 2004 was primarily the result of the net loss and increases in accounts receivable and prepaid and other current assets offset partially by increased accounts payable and accrued expenses and non-cash depreciation and amortization charges.
Our continuing investing activities provided cash of $11.0 million in 2006 and used cash of $0.1 million and $0.1 million in 2005 and 2004, respectively. Cash provided by continuing investing activities in 2006 was principally from proceeds from the sale of the Enterprise Solutions business offset slightly by purchases of equipment and leasehold improvements. Cash used by continuing investing activities in 2005 and 2004 were principally for purchases of equipment and leasehold improvements and in 2004, capitalized software development costs.
Our financing activities provided cash of $0.2 million, $7.3 million and $7.7 million in 2006, 2005 and 2004 respectively. Cash provided in 2006 was primarily the result of proceeds from the exercise of stock options. Cash provided by financing activities in 2005 and 2004 was primarily the result of the net proceeds received from the private placements and the exercise of stock options and warrants during the period. This was partially offset in 2004 by the payment of the remaining balance of the outstanding term loan.
Our cash flows from discontinued operations provided cash of $10.9 million and $5.8 million in 2006 and 2005 respectively, and used cash of $4.0 million in 2004. Cash provided in 2006 was primarily from
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Table of Contentsincome from discontinued operations offset slightly by the change in operating assets from discontinued operations. Cash provided in 2005 was primarily from income from discontinued operations. Cash used in 2004 was primarily from losses from discontinued operations, the change in operating assets from discontinued operations and the change in investing assets from discontinued operations. Liabilities from discontinued operations at December 31, 2006 related principally to cash collected during November and December 2006 on behalf of Computron Software LLC. This cash was paid to Computron Software LLC during the first quarter of 2007.
AXS-One recorded net income of $5.5 million in 2006 primarily related to the sale of the Enterprise Solutions business, and recorded net losses of $9.0 million and $5.2 million in 2005 and 2004 respectively. AXS-One incurred a loss of $19.6 million, $15.1 million and $2.7 million for 2006, 2005 and 2004, respectively, from continuing operations. We were not able to obtain operating profitability in 2004, 2005 and 2006 from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management’s initiatives over the last two years, including the restructurings in December 2006, June 2005 and June 2004, the private placements of common stock in June 2005 and April 2004, t he executive management salary reductions for most of the second half of 2005 and for all of 2007, and the sale of the Enterprise Solutions business, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. As a result of these efforts, we expect that our current cash balance, availability of borrowing capacity under our bank line of credit, and operating cash flow should be sufficient to meet the financial requirements of the business through April 2008. However, we may in the future be required to seek new sources of financing or future accommodations from our existing lender or other financial institutions, or we may seek equity infusions from private investors. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations, particularly given the recent sale of the Enterprise Solutions business, which was our profitable segment. We may be required to fu rther reduce operating costs in order to meet our obligations. If we are unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about our long term ability to fund future operations. Additionally, there is a risk that cash held by one foreign subsidiary approximating $0.4 million at December 31, 2006 may not be readily available for use in our U.S. operations to pay our obligations as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available. (See Item 1A ‘‘Risk Factors.’’)
Critical Accounting Policies
Our critical accounting policies are as follows:
• Revenue recognition and
• Capitalized software development costs.
Revenue Recognition
We derive our revenue primarily from two sources: (i) software licenses and (ii) services and support revenue, which includes software maintenance, subscription services, training, consulting and custom programming revenue. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
We normally license our software products on a perpetual basis. Each license agreement generally includes a provision for initial post-contract support (maintenance). For the majority of license sales we use a signed license agreement as evidence of an arrangement. For maintenance fees, we use a signed maintenance agreement as evidence of the arrangement. We use a signed professional services agreement as evidence of an arrangement for our training, subscription, custom programming and consulting revenues. Occasionally, where a master license or services agreement with a customer already exists, we accept the customer’s purchase order as evidence of an arrangement.
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Table of ContentsWe recognize revenue in accordance with Statement of Position 97-2, ‘‘Software Revenue Recognition’’ (‘‘SOP 97-2’’), and Statement of Position 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.’’ Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. In multiple element arrangements, we defe r revenue based on the vendor-specific objective evidence (‘‘VSOE’’) of fair value for the undelivered elements and recognize revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of fair value for maintenance is determined by using a relatively consistent percentage of maintenance fees to discounted license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of fair value of services is determined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.
Delivery of software generally occurs when the product (on CDs) is delivered to a common carrier. Occasionally, delivery occurs through electronic means where the software is made available through our secure FTP (File Transfer Protocol) site. The Company generally does not offer any customers or resellers a right of return.
For software license, services and maintenance revenue, we assess whether the fee is fixed and determinable and whether or not collection is probable. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from invoice date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.
The majority of our training and consulting services are billed based on hourly rates. We generally recognize revenue as these services are performed. However, when we enter into an arrangement that is based on a fixed fee, revenue is recognized using the percentage of completion method of accounting. When we enter into an arrangement that requires us to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests, we recognize the license revenue and service revenue using the percentage of completion method of accounting. This would apply to our custom programming services, which are generally contracted on a fixed fee basis. Anti cipated losses, if any, are charged to operations in the period such losses are determined to be probable.
Revenues from transaction fees associated with our subscription arrangements, billable on a per transaction basis and included in services revenue in the Consolidated Statements of Operations, are recognized based on the actual number of transactions processed during the period.
We assess assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.
Our arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period.
In accordance with EITF Issue No. 01-14, ‘‘Income Statement Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,’’ reimbursements received for out-of-pocket expenses incurred are classified as services revenue and the related expense is recorded in cost of services in the Consolidated Statements of Operations.
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Table of ContentsCapitalized Software Development Costs
Our policy is to capitalize certain software development costs in accordance with Statement of Financial Accounting Standards No. 86, ‘‘Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed’’ (‘‘SFAS 86’’). Under SFAS 86, costs incurred to develop or significantly enhance computer software products are charged to research and development expense as incurred until technological feasibility has been established. We establish technological feasibility upon completion of a working model or completion of a detailed program design. Generally costs related to projects that reach technological feasibility upon completion of a working model are not capitalize d as the time period between establishment of the working model and general availability is of short duration. For projects that meet technological feasibility upon completion of a detailed program design, all research and development costs for that project are capitalized from that point until the product is available for general release to customers. The nature of our current development for RCM products is generally such that we can measure technological feasibility most effectively using the working model method where the time between establishment of a working model and general availability is of short duration which results in very little or no costs that qualify for capitalization. We historically used a detailed program design model to measure technological feasibility for our enterprise solutions products. This shift in development of our product lines will result in lower capitalized costs in the future. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology. It is reasonably possible that estimates of anticipated future revenues, the remaining estimated economic life of the products, or both will be reduced in the future due to competitive pressures. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized (using the straight-line method) over the estimated life, which is generally three years.
Recently Issued Accounting Standards
In July 2006, the FASB issued FIN 48 ‘‘Accounting for Uncertainty in Income Taxes.’’ This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We believe the impact of adopting FIN 48 on our financial statements will not be material.
In September 2006, the FASB issued Statement No. 157 ‘‘Fair Value Measurements’’, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurement. FASB Statement No. 157 applies to other accounting pronouncements that require fair value measurements or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
| |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
In the normal course of business, we are exposed to fluctuations in interest rates and equity market risks as we seek debt and equity capital to sustain our operations. We are also exposed to fluctuations in foreign currency exchange rates as the financial results of our foreign subsidiaries are translated into U.S. dollars in consolidation. We do not use derivative instruments or hedging to manage our exposures and do not currently hold any market risk sensitive instruments for trading purposes.
| |
| Item 8. | Financial Statements and Supplementary Data |
The information required by this Item is incorporated by reference herein from Part IV Item 15(a) (1) and (2) and is set forth immediately following the signature page of this report.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
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Table of Contents | |
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our ‘‘disclosure controls and procedures’’ (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of December 31, 2006 (the ‘‘Evaluation Date’’), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries would be collected and made known to them by others within those entities as appropriate to allow timely decisions regarding required disclosure of such information.
Internal controls over financial reporting
During the most recent fiscal quarter, there has not been any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The Company incorporates herein by reference the information required by Items 401, 405, 406, 407(c)(3), (d)(4) and (d)(5) of Regulation S-K to be set forth in its Notice of Annual Stockholders’ Meeting and Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year (the ‘‘2007 Proxy Statement’’).
| |
| Item 11. | Executive Compensation |
The Company incorporates herein by reference the information required by Items 402 and 407 (e)(4) and (e)(5) of Regulation S-K to be set forth in the 2007 Proxy Statement.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The Company incorporates herein by reference the information required by Items 201(d) and 403 of Regulation S-K to be set forth in the 2007 Proxy Statement.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The Company incorporates herein by reference the information required by Items 404 and 407 (a) of Regulation S-K to be set forth in the 2007 Proxy Statement.
| |
| Item 14. | Principal Accountant Fees and Services |
The Company incorporates herein by reference the information required by Item 9(e) of Schedule 14A to be set forth in the 2007 Proxy Statement.
36
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Consolidated Financial Statements:
| | | |
| | | | Page No. |
Report of Independent Registered Public Accounting Firm, Amper, Politziner and
Mattia, P.C. | | | 41 |
| Report of Independent Registered Public Accounting Firm, KPMG LLP | | | 42 |
| Consolidated Balance Sheets at December 31, 2006 and 2005 | | | 43 |
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 | | | 44 |
Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2006, 2005 and 2004 | | | 45 |
Consolidated Statements of Stockholders’ Equity (Deficit)
for the years ended December 31, 2006, 2005 and 2004 | | | 46 |
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 | | | 47 |
| Notes to Consolidated Financial Statements | | | 48 |
| (a) (2) Consolidated Financial Statement Schedules: | | | |
Report of Independent Registered Public Accounting Firm
on 2005 and 2004 Consolidated Financial Statement Schedule, KPMG LLP | | | 69 |
| Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004 | | | 70 |
|
(a) (3) Exhibits:
| | | |
| 3.1(a) | | | Fourth Amended and Restated Certificate of Incorporation |
| 3.2(a) | | | Amended and Restated Bylaws of the Company |
| 4.1(a) | | | Specimen Common Stock Certificate |
| 4.2 | | | See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws of the Company defining rights of holders of Common Stock of the Company |
| 10.1(a) | | | Employment Agreement between the Company and Elias Typaldos, as amended |
| 10.2(c) | | | 1995 Stock Option Plan, as amended |
| 10.3(b) | | | Securities Purchase Agreement |
| 10.4(c) | | | Amendment to Securities Purchase Agreement |
| 10.5(d) | | | 1998 Stock Option Plan |
| 10.6(e) | | | Stock Purchase Agreement, dated as of September 1, 2001, between the Company and Porterfield Ltd. relating to the sale of all shares of AXS-One Sp. z.o.o. |
| 10.7(f) | | | Investor Relations Services Agreement between the Company and Hayden Communications, Inc. |
| 10.8(g) | | | Loan and Security Agreement with Silicon Valley Bank dated August 11, 2004 |
| 10.9(h) | | | Employment Agreement between the Company and William P. Lyons |
| 10.10(i) | | | Employment Agreement between the Company and Joseph P. Dwyer |
| 10.11(i) | | | First Loan Modification to the Loan & Security Agreement dated January 27, 2005 |
| 10.12(j) | | | Unit subscription agreement dated April 1, 2004, Class A Warrants, Class B Warrants, and Investor Rights Agreements dated April 5, 2004 |
| 10.13(k) | | | 2005 Stock Incentive Plan, as amended |
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Table of Contents
| | | |
| 10.14(l) | | | Unit subscription agreement dated June 17, 2005, Class C Warrants, Class D Warrants, and Investor Rights Agreements dated June 17, 2005 |
| 10.15(m) | | | Amended and Restated Loan and Security Agreement dated September 13, 2005 |
| 10.16(n) | | | Agreement and General Release between the Company and Gennaro Vendome dated October 13, 2005 |
| 10.17(o) | | | Form of Resale Restriction Agreement for accelerated Stock Options dated October 26, 2005 |
| 10.18(p) | | | Agreement and General Release between the Company and Matthew Suffoletto dated February 9, 2006 |
| 10.19(q) | | | First Loan Modification Agreement with Silicon Valley Bank dated March 14, 2006 |
| 10.20(r) | | | Form of Restricted Stock Agreement for grants pursuant to 1998 Stock Option Plan |
| 10.21(r) | | | Form of Restricted Stock Agreement for grants pursuant to 2005 Stock Incentive Plan |
| 10.22(s) | | | Asset Purchase Agreement between the Company and Computron Software, LLC dated October 31, 2006 |
| 10.23(t) | | | Second Loan Modification Agreement with Silicon Valley Bank dated October 31, 2006 |
| 10.24(t) | | | Intellectual Property Security Agreement in favor of Silicon Valley Bank dated October 31, 2006 |
| 10.25(u) | | | Third Loan Modification Agreement with Silicon Valley Bank dated November 11, 2006 |
| 10.26(v) | | | Letter Agreement with William P. Lyons dated December 14, 2006 |
| 10.27(v) | | | Letter Agreement with Joseph Dwyer dated December 14, 2006 |
| 10.28(v) | | | Letter Agreement with Elias Typaldos dated December 14, 2006 |
| 10.29(v) | | | Form of Restricted Stock Agreement for grants pursuant to 1998 Stock Option Plan dated December 14, 2006 |
| 10.30(w) | | | Employment Agreement with Joseph Dwyer dated February 15, 2007 |
| 10.31(w) | | | Employment Agreement with Elias Typaldos dated February 15, 2007 |
| 10.32(x) | | | Fourth Loan Modification Agreement with Silicon Valley Bank dated March 6, 2007 |
| 21.1** | | | List of Subsidiaries |
| 23.1** | | | Consent of Amper, Politziner and Mattia, P.C. |
| 23.2** | | | Consent of KPMG LLP |
| 31.1** | | | Rule 13a-14(a)/15d-14(a) certifications – William P. Lyons |
| 31.2** | | | Rule 13a-14(a)/15d-14(a) certifications – Joseph Dwyer |
| 32** | | | Officer Certifications under 18 USC 1350 |
|
| |
| (a) | Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-l, File No. 33-93990. |
| |
| (b) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on January 8, 1998 |
| |
| (c) | Incorporated by reference to the Exhibits filed with the Company’s 1997 Form 10-K |
| |
| (d) | Incorporated by reference to the Exhibits filed with the Company’s March 31, 1998 Form 10-Q |
| |
| (e) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on October 5, 2001 |
| |
| (f) | Incorporated by reference to the Exhibits filed with the Company’s 2002 Form 10-K |
| |
| (g) | Incorporated by reference to the Exhibits filed with the Company’s June 30, 2004 10-Q |
38
Table of Contents | |
| (h) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on April 30, 2004 |
| |
| (i) | Incorporated by reference to the Exhibits filed with the Company’s 2004 Form 10-K |
| |
| (j) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on April 8, 2004 |
| |
| (k) | Incorporated by reference to the Exhibits filed with the Company’s Proxy Statement filed on April 12, 2006 |
| |
| (l) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on June 23, 2005 |
| |
| (m) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on September 19, 2005 |
| |
| (n) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on October 24, 2005 |
| |
| (o) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on November 1, 2005 |
| |
| (p) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on February 9, 2006 |
| |
| (q) | Incorporated by reference to the Exhibits filed with the Company’s 2005 Form 10-K |
| |
| (r) | Incorporated by reference to the Exhibits filed with the Company’s March 30, 2006 10-Q |
| |
| (s) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on November 2, 2006 |
| |
| (t) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on November 11, 2006 |
| |
| (u) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on November 16, 2006 |
| |
| (v) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on December 18, 2006 |
| |
| (w) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on February 16, 2007 |
| |
| (x) | Incorporated by reference to the Exhibits filed with the Company’s Form 8-K filed on March 7, 2007 |
| |
| ** | Filed herewith |
by
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| | | |
| AXS-ONE INC. |
| By: | | | /s/ William P. Lyons |
| | | | William P. Lyons,
Chairman of the Board and Chief Executive Officer |
|
Date: March 23, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 23, 2007.
| | |
| Signature | | Title(s) |
|
| /s/ William P. Lyons | | Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
|
| (William P. Lyons) |
|
| /s/ Joseph Dwyer | | Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
|
| (Joseph Dwyer) |
|
| /s/ Elias Typaldos | | Executive Vice President Technology and Director |
|
| (Elias Typaldos) |
|
| /s/ Gennaro Vendome | | Director |
|
| (Gennaro Vendome) |
|
| /s/ Daniel H. Burch | | Director |
|
| (Daniel H. Burch) |
|
| /s/ Robert Migliorino | | Director |
|
| (Robert Migliorino) |
|
| /s/ Anthony Bloom | | Director |
|
| (Anthony Bloom) |
|
| /s/ Harold Copperman | | Director |
|
| (Harold Copperman) |
|
| /s/ Allan Weingarten | | Director |
|
| (Allan Weingarten) |
|
40
Table of ContentsReport of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AXS-One Inc.
We have audited the accompanying consolidated balance sheet of AXS-One Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the year ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AXS-One Inc. and subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
We have also audited the adjustments to the 2005 and 2004 financial statements to retrospectively apply the change in accounting for discontinued operations, as described in Note 2. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2005 and 2004 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any form of assurance on the 2005 and 2004 financial statements taken as a whole.
In connection with our audit of the consolidated financial statements referred to above, we audited the consolidated Schedule II-Valuation and Qualifying Accounts. In our opinion, the consolidated financial schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.
During the year ended December 31, 2006, the Company changed its method of accounting for ‘‘stock-based compensation’’, as discussed under Note (1) (m) to the financial statements.
/s/ Amper, Politziner & Mattia, P.C.
March 21, 2007
Edison, New Jersey
41
Table of ContentsReport of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AXS-One Inc.:
We have audited, before the effects of the adjustments to retrospectively report the discontinued operations described in Note 2 to the consolidated financial statements, the consolidated balance sheet of AXS-One Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the years ended December 31, 2005 and 2004 (the consolidated financial statements referred to above, before the effects of the adjustments discussed in Note 2, are not presented herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these conso lidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, before the effects of the adjustments to retrospectively report the discontinued operations described in Note 2 to the consolidated financial statements, present fairly, in all material respects, the financial position of AXS-One Inc. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively report the discontinued operations described in Note 2 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Amper, Politziner & Mattia, P.C.
/s/ KPMG LLP
Short Hills, New Jersey
March 23, 2006
42
Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | | | | | | | | | |
| | | | December 31,
2006 | | | December 31,
2005 |
| ASSETS | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 7,492 | | | | | $ | 3,613 | |
| Restricted cash | | | | | 7 | | | | | | 57 | |
| Accounts receivable, net of allowance for doubtful accounts of $83 and $167 at December 31, 2006 and December 31, 2005, respectively | | | | | 2,258 | | | | | | 5,153 | |
| Prepaid expenses and other current assets | | | | | 1,255 | | | | | | 718 | |
| Total current assets | | | | | 11,012 | | | | | | 9,541 | |
| Equipment and leasehold improvements, at cost: | | | | | | | | | | | | |
| Computer and office equipment | | | | | 2,590 | | | | | | 10,967 | |
| Furniture and fixtures | | | | | 630 | | | | | | 924 | |
| Leasehold improvements | | | | | 706 | | | | | | 865 | |
| | | | | | 3,926 | | | | | | 12,756 | |
| Less – accumulated depreciation and amortization | | | | | 3,507 | | | | | | 12,361 | |
| | | | | | 419 | | | | | | 395 | |
| Capitalized software development costs, net of accumulated amortization | | | | | | | | | | | | |
| of $1,091 and $11,432 at December 31, 2006 and December 31, 2005, respectively | | | | | — | | | | | | 1,038 | |
| Other assets | | | | | 102 | | | | | | 92 | |
| | | | | $ | 11,533 | | | | | $ | 11,066 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | |
| Accounts payable . | | | | $ | 962 | | | | | $ | 1,576 | |
| Accrued expenses . | | | | | 3,541 | | | | | | 3,267 | |
| Due to joint venture | | | | | — | | | | | | 52 | |
| Deferred revenue | | | | | 2,594 | | | | | | 8,224 | |
| Liabilities of discontinued operations | | | | | 981 | | | | | | — | |
| Total current liabilities | | | | | 8,078 | | | | | | 13,119 | |
| Long-term liabilities: | | | | | | | | | | | | |
| Long-term deferred revenue | | | | | 44 | | | | | | 63 | |
| Commitments and contingencies | | | | | | | | | | | | |
| Stockholders’ equity (deficit): | | | | | | | | | | | | |
| Preferred stock, $.01 par value, authorized 5,000 shares, no shares issued and outstanding | | | | | — | | | | | | — | |
| Common stock, $.01 par value, authorized 50,000 shares; 35,637 and 34,316 shares issued and outstanding at December 31, 2006 and December 31, 2005, respectively | | | | | 357 | | | | | | 343 | |
| Additional paid-in capital | | | | | 88,365 | | | | | | 87,884 | |
| Accumulated deficit | | | | | (85,162 | | | | | | (90,663 | |
| Accumulated other comprehensive income (loss) | | | | | (149 | | | | | | 497 | |
| Unearned stock compensation | | | | | — | | | | | | (177 | |
| Total stockholders’ equity (deficit) | | | | | 3,411 | | | | | | (2,116 | |
| | | | | $ | 11,533 | | | | | $ | 11,066 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
43
Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Revenues: | | | | | | | | | | | | | | | | | | |
| License fees | | | | $ | 2,432 | | | | | $ | 4,109 | | | | | $ | 4,363 | |
| Services | | | | | 7,864 | | | | | | 7,179 | | | | | | 5,742 | |
| Total revenues | | | | | 10,296 | | | | | | 11,288 | | | | | | 10,105 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Cost of license fees | | | | | 1,181 | | | | | | 1,081 | | | | | | 857 | |
| Cost of services | | | | | 8,219 | | | | | | 6,837 | | | | | | 3,616 | |
| Sales and marketing | | | | | 9,623 | | | | | | 7,425 | | | | | | 1,880 | |
| Research and development | | | | | 6,454 | | | | | | 5,978 | | | | | | 1,469 | |
| General and administrative | | | | | 4,649 | | | | | | 4,360 | | | | | | 5,449 | |
| Restructuring and other costs | | | | | 432 | | | | | | 322 | | | | | | — | |
| Total operating expenses | | | | | 30,558 | | | | | | 26,003 | | | | | | 13,271 | |
| Operating loss | | | | | (20,262 | | | | | | (14,715 | | | | | | (3,166 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | |
| Interest income | | | | | 229 | | | | | | 156 | | | | | | 144 | |
| Interest expense | | | | | (149 | | | | | | (44 | | | | | | (14 | |
| Other income (expense), net | | | | | 567 | | | | | | (483 | | | | | | 171 | |
| Other income (expense), net | | | | | 647 | | | | | | (371 | | | | | | 301 | |
| Loss before income taxes | | | | | (19,615 | | | | | | (15,086 | | | | | | (2,865 | |
| Income tax benefit | | | | | — | | | | | | 25 | | | | | | 217 | |
| Loss from continuing operations | | | | | (19,615 | | | | | | (15,061 | | | | | | (2,648 | |
| Income (loss) from discontinued operations: | | | | | | | | | | | | | | | | | | |
| Income (loss) from discontinued operations net of tax | | | | | | | | | | | | | | | | | | |
| provision of $ – for all periods | | | | | 7,875 | | | | | | 6,063 | | | | | | (2,564 | |
| Gain on sale of discontinued operations net of tax | | | | | | | | | | | | | | | | | | |
| provision of $ 200 for 2006 | | | | | 17,241 | | | | | | — | | | | | | — | |
| Income (loss) from discontinued operations | | | | | 25,116 | | | | | | 6,063 | | | | | | (2,564 | |
| Net income (loss) | | | | $ | 5,501 | | | | | $ | (8,998 | | | | | $ | (5,212 | |
| Basic & diluted net income (loss) per share data: | | | | | | | | | | | | | | | | | | |
| (Loss) from continuing operations | | | | $ | (0.57 | | | | | $ | (0.47 | | | | | $ | (0.10 | |
| Income (loss) from discontinued operations | | | | | 0.73 | | | | | | 0.19 | | | | | | (0.09 | |
| Net income (loss) | | | | $ | 0.16 | | | | | $ | (0.28 | | | | | $ | (0.19 | |
| Weighted average basic & diluted common shares outstanding | | | | | 34,405 | | | | | | 31,629 | | | | | | 27,395 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
44
Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Net income (loss) | | | | $ | 5,501 | | | | | $ | (8,998 | | | | | $ | (5,212 | |
| Foreign currency translation adjustment | | | | | (646 | | | | | | 478 | | | | | | (337 | |
| Comprehensive income (loss) | | | | $ | 4,855 | | | | | $ | (8,520 | | | | | $ | (5,549 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
45
Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common
Stock | | | Additional
Paid-in
Capital | | | Accumulated
Deficit | | | Unearned
Stock
Compensation | | | Accumulated
Other
Comprehensive
Income
(Loss) | | | Total
Stockholders'
Equity
(Deficit) |
| | | | Shares | | | Amount |
| Balance – December 31, 2003 | | | | | 25,026 | | | | | $ | 250 | | | | | $ | 72,148 | | | | | $ | (76,453 | | | | | $ | — | | | | | $ | 356 | | | | | $ | (3,699 | |
| Net loss | | | | | — | | | | | | — | | | | | | — | | | | | | (5,212 | | | | | | — | | | | | | — | | | | | | (5,212 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (337 | | | | | | (337 | |
| Sale of common stock and warrants | | | | | 2,581 | | | | | | 26 | | | | | | 7,666 | | | | | | — | | | | | | — | | | | | | — | | | | | | 7,692 | |
| Exercise of stock options and warrants | | | | | 734 | | | | | | 7 | | | | | | 525 | | | | | | — | | | | | | — | | | | | | — | | | | | | 532 | |
| Balance – December 31, 2004 | | | | | 28,341 | | | | | | 283 | | | | | | 80,339 | | | | | | (81,665 | | | | | | — | | | | | | 19 | | | | | | (1,024 | |
| Net loss | | | | | — | | | | | | — | | | | | | — | | | | | | (8,998 | | | | | | — | | | | | | — | | | | | | (8,998 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 478 | | | | | | 478 | |
| Issuance of non-vested stock, net of cancellations | | | | | 95 | | | | | | 1 | | | | | | 204 | | | | | | — | | | | | | (205 | | | | | | — | | | | | | — | |
| Stock based compensation expense | | | | | — | | | | | | — | | | | | | 9 | | | | | | — | | | | | | 28 | | | | | | — | | | | | | 37 | |
| Sale of common stock and warrants | | | | | 4,535 | | | | | | 45 | | | | | | 6,317 | | | | | | — | | | | | | — | | | | | | — | | | | | | 6,362 | |
| Exercise of stock options | | | | | 1,345 | | | | | | 14 | | | | | | 1,015 | | | | | | — | | | | | | — | | | | | | — | | | | | | 1,029 | |
| Balance – December 31, 2005 | | | | | 34,316 | | | | | | 343 | | | | | | 87,884 | | | | | | (90,663 | | | | | | (177 | | | | | | 497 | | | | | | (2,116 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | 5,501 | | | | | | — | | | | | | — | | | | | | 5,501 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (646 | | | | | | (646 | |
| Elimination of deferred compensation due to the adoption of SFAS 123R | | | | | — | | | | | | — | | | | | | (177 | | | | | | — | | | | | | 177 | | | | | | — | | | | | | — | |
| Stock based compensation expense | | | | | 1,026 | | | | | | 11 | | | | | | 418 | | | | | | — | | | | | | — | | | | | | — | | | | | | 429 | |
| Exercise of stock options | | | | | 295 | | | | | | 3 | | | | | | 240 | | | | | | — | | | | | | — | | | | | | — | | | | | | 243 | |
| Balance – December 31, 2006 | | | | | 35,637 | | | | | $ | 357 | | | | | $ | 88,365 | | | | | $ | (85,162 | | | | | $ | — | | | | | $ | (149 | | | | | $ | 3,411 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
46
Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net Income (loss) | | | | $ | 5,501 | | | | | $ | (8,998 | | | | | $ | (5,212 | |
| Less income (loss) from discontinued operations | | | | | 25,116 | | | | | | 6,063 | | | | | | (2,564 | |
| Loss from continuing operations | | | | | (19,615 | | | | | | (15,061 | | | | | | (2,648 | |
| Adjustments to reconcile net loss to net cash flows used in continuing operating activities: | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 569 | | | | | | 386 | | | | | | 374 | |
| Provision for doubtful accounts, net | | | | | 6 | | | | | | — | | | | | | 154 | |
| Stock option compensation expense | | | | | 200 | | | | | | — | | | | | | — | |
| Stock based compensation expense | | | | | 229 | | | | | | 37 | | | | | | — | |
| Changes in assets and liabilities | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | | | 892 | | | | | | (1,069 | | | | | | (414 | |
| Prepaid expenses and other current assets | | | | | (644 | | | | | | (10 | | | | | | (455 | |
| Change in other current assets | | | | | 9 | | | | | | 72 | | | | | | (16 | |
| Accounts payable and accrued expenses | | | | | 1,665 | | | | | | (438 | | | | | | 1,556 | |
| Deferred revenue. | | | | | (1,082 | | | | | | 1,587 | | | | | | 68 | |
| Net cash flows used in continuing operating activities | | | | | (17,771 | | | | | | (14,496 | | | | | | (1,381 | |
| Cash flows from continuing investing activities: | | | | | | | | | | | | | | | | | | |
| Restricted cash, net | | | | | 51 | | | | | | 2 | | | | | | (3 | |
| Proceeds from sale of Enterprise Solutions Business, net | | | | | 11,286 | | | | | | — | | | | | | — | |
| Capitalized software development costs . | | | | | — | | | | | | — | | | | | | (100 | |
| Purchase of equipment and leasehold improvements | | | | | (300 | | | | | | (123 | | | | | | (39 | |
| Net cash flows provided by (used in) continuing investing activities. | | | | | 11,037 | | | | | | (121 | | | | | | (142 | |
| Cash flows from continuing financing activities: | | | | | | | | | | | | | | | | | | |
| Proceeds from exercise of stock options and warrants. | | | | | 243 | | | | | | 1,029 | | | | | | 532 | |
| Net proceeds from sales of common stock. | | | | | — | | | | | | 6,362 | | | | | | 7,692 | |
| Payment of debt issuance costs. | | | | | (31 | | | | | | (71 | | | | | | — | |
| Borrowing of revolving line-of-credit .. | | | | | 4,833 | | | | | | 1,500 | | | | | | — | |
| Repayment of revolving line-of-credit | | | | | (4,833 | | | | | | (1,500 | | | | | | — | |
| Repayments of long-term debt | | | | | — | | | | | | — | | | | | | (547 | |
| Net cash flows provided by continuing financing activities | | | | | 212 | | | | | | 7,320 | | | | | | 7,677 | |
| Cash flows from discontinued operations: | | | | | | | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities . | | | | | 11,062 | | | | | | 5,884 | | | | | | (3,116 | |
| Net cash used in investing activities | | | | | (187 | | | | | | (91 | | | | | | (888 | |
| Net cash flows provided by (used in) discontinued operations . | | | | | 10,875 | | | | | | 5,793 | | | | | | (4,004 | |
| Foreign currency exchange rate effects on cash and cash equivalents | | | | | (474 | | | | | | 308 | | | | | | (287 | |
| Net increase (decrease) in cash and cash equivalents. | | | | | 3,879 | | | | | | (1,196 | | | | | | 1,863 | |
| Cash and cash equivalents, beginning of year . | | | | | 3,613 | | | | | | 4,809 | | | | | | 2,946 | |
| Cash and cash equivalents, end of year | | | | $ | 7,492 | | | | | $ | 3,613 | | | | | $ | 4,809 | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | |
| Cash paid during the year for | | | | | | | | | | | | | | | | | | |
| Interest | | | | $ | 112 | | | | | $ | 6 | | | | | $ | 21 | |
| Income taxes | | | | | 123 | | | | | | — | | | | | | 20 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) Operations, Business Conditions, Liquidity and Significant Accounting Policies
The Company was incorporated under the laws of the State of Delaware in September 1978. The name of the Company was changed to AXS-One Inc. in November 2000. AXS-One Inc. designs, markets and supports records compliance management solutions that include digital archiving, business process management, electronic document delivery and integrated records disposition and discovery for e-mail, instant messaging, images, SAP and other corporate records, and until October 31, 2006, financial management applications for global 2000 businesses, and scheduling and time and expense solutions for professional services organizations. The Company also offers consulting, implementation, training, technical support and maintenance services in support of its customers’ use of its software products.
On October 31, 2006, the Company sold certain assets and liabilities through which it operated the AXS-One Enterprise Solutions financial management and accounting applications business (‘‘Enterprise Solutions’’) to Computron Software, LLC for the sum of $12 million in cash plus future potential consideration for exceeding specified license revenue targets. Additionally, Computron Software, LLC assumed net liabilities of approximately $6.2 million. The Company recorded a gain of $17.2 million on the sale. The assets sold primarily consist of client contracts, marketing agreements, internally developed software, accounts receivable and fixed assets of the business. The liabilities sold consist primarily of employee related liabilities, accounts payable and deferred revenue. The Company has classified the Enterprise Solutions business as a discontinued operation in these financial statements. Previously, the Company had two reporting segments, Records Compliance Management and Enterprise Solutions. As a result of the sale of the Enterprise Solutions, Records Compliance Management is the Company’s only reporting segment.
AXS-One recorded net income of $5.5 million in 2006 primarily related to the sale of the Enterprise Solutions business, and recorded net losses of $9.0 million and $5.2 million in 2005 and 2004 respectively. AXS-One incurred a loss of $19.6 million, $15.1 million and $2.7 million for 2006, 2005 and 2004, respectively, from continuing operations. We were not able to obtain operating profitability in 2004, 2005 and 2006 from continuing operations and may not be able to be profitable on a quarterly or annual basis in the future. Management’s initiatives over the last two years, including the restructurings in December 2006, June 2005 and June 2004, the private placements of common stock in June 2005 and April 2004, t he executive management salary reductions for most of the second half of 2005 and for all of 2007, and the sale of the Enterprise Solutions business, have been designed to improve operating results and liquidity and better position AXS-One to compete under current market conditions. As a result of these efforts, we expect that our current cash balance, availability of borrowing capacity under our bank line of credit, and operating cash flow should be sufficient to meet the financial requirements of the business through April 2008. However, we may in the future be required to seek new sources of financing or future accommodations from our existing lender or other financial institutions, or we may seek equity infusions from private investors. Our ability to fund our operations is heavily dependent on the growth of our revenues over current levels to achieve profitable operations, particularly given the recent sale of the Enterprise Solutions business, which was our historically profitable segment. We may be r equired to further reduce operating costs in order to meet our obligations. If we are unable to achieve profitable operations or secure additional sources of capital, there would be substantial doubt about our long term ability to fund future operations. Additionally, there is a risk that cash held by one foreign subsidiary approximating $0.4 million at December 31, 2006 may not be readily available for use in our U.S. operations to pay our obligations as the transfer of funds is sometimes delayed due to various foreign government restrictions. No assurance can be given that management’s initiatives will be successful or that any such additional sources of financing, lender accommodations or equity infusions will be available.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of AXS-One Inc.; and its wholly owned subsidiaries located in Australia, Singapore, South Africa and the United Kingdom (collectively, the
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
‘‘Company’’). In December 2003, the Company dissolved the legal entity of its subsidiary located in Canada. The Canadian operation is now a part of the U.S. operation and as such continues to be included in the consolidated financial statements of the Company. All intercompany transactions and balances have been eliminated.
Until May 31, 2006, the Company had a 49% ownership in a joint venture in its South African operation, AXS-One African Solutions (Pty) Ltd (‘‘African Solutions’’). The joint venture was considered to be a variable interest entity as defined in FASB Interpretation No. 46R, ‘‘Consolidation of Variable Interest Entities’’ (FIN 46R). However, the Company had determined that it was not the primary beneficiary. Accordingly, until May 31, 2006, the Company used the equity method of accounting for the joint venture whereby investments, including loans to the joint venture, were stated at cost plus or minus the Company’s equity in undistributed earnings or losses. On May 31, 2006, the Company purchased the remaining 51% of African Solutions from African Legends Technology for $161 less cash acquired of $20, to make it a wholly owned subsidiary. The Company applied purchase accounting to record the transaction. The purchase price was less than the fair value of assets acquired and therefore the Company wrote – down the value of all long-term assets to zero and recorded a gain of $37. As of June 1, 2006, 100% of the results of African Solutions are included in the consolidated results of the Company in discontinued operations as it was part of the Enterprise Solutions business segment.
(b) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position 97-2, ‘‘Software Revenue Recognition’’ (‘‘SOP 97-2’’), and Statement of Position 98-9, ‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.’’ Revenue from non-cancelable software licenses is recognized when the license agreement has been signed, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes license revenue from resellers when an end user has placed an order with the reseller and the above revenue recognition criteria have been met with respect to the reseller. In multiple element arr angements, the Company defers the vendor-specific objective evidence of fair value (‘‘VSOE’’) related to the undelivered elements and recognizes revenue on the delivered elements using the residual method. The most commonly deferred elements are initial maintenance and consulting services. Initial maintenance is recognized on a straight-line basis over the initial maintenance term. The VSOE of maintenance is determined by using a consistent percentage of maintenance fee to license fee based on renewal rates. Maintenance fees in subsequent years are recognized on a straight-line basis over the life of the applicable agreement. Maintenance contracts entitle the customer to hot-line support and all unspecified product upgrades released during the term of the maintenance contract. Upgrades include any and all unspecified patches or releases related to a licensed software product. Maintenance does not include implementation services to install these upgrades. The VSOE of services is determ ined by using an average consulting rate per hour for consulting services sold separately multiplied by the estimate of hours required to complete the consulting engagement.
Delivery of software generally occurs when the product (on CDs) is delivered to a common carrier. Occasionally, delivery occurs through electronic means where the software is made available through our secure FTP (File Transfer Protocol) site. The Company generally does not offer any customers or resellers a right of return.
For software license, services and maintenance revenue, the Company assesses whether the fee is fixed and determinable and whether or not collection is probable. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30 to 90 days from invoice date, the fee is considered not fixed and determinable. In these cases, the Company recognizes revenue as the fees become due.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
The Company assesses assuredness of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Collateral is not requested from customers. If it is determined that collection of a fee is not probable, the fee is deferred and revenue is recognized at the time collection becomes probable, which is generally upon receipt of cash.
The Company’s arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period.
The majority of our training and consulting services are billed based on hourly rates. The Company generally recognizes revenue as these services are performed. However, when there is an arrangement that is based on a fixed fee or requires significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests, the Company recognizes the related revenue using the percentage of completion method of accounting. This would apply to our custom programming services, which are generally contracted on a fixed fee basis. Anticipated losses, if any, are charged to operations in the period such losses are determined to be probable.
Revenues from transaction fees associated with subscription arrangements, billable on a per transaction basis and included in services revenue on the Consolidated Statements of Operations, are recognized based on the actual number of transactions processed during the period.
In accordance with EITF Issue No. 01-14, ‘‘Income Statement Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,’’ reimbursements received for out-of-pocket expenses incurred are classified as services revenue in the Consolidated Statements of Operations.
(c) Variable Interest Entity
The Company adopted FIN 46R as required on March 31, 2004. The Company’s formerly 49% owned joint venture, African Solutions (Pty) Ltd (‘‘African Solutions’’), was considered to be a variable interest entity as defined in FIN 46R. However, the Company determined that the former majority owner, African Legends Technology, absorbed the majority of the expected losses and therefore, African Legends Technology, was the primary beneficiary. Due to the fact that the Company was not the primary beneficiary of African Solutions, the results of African Solutions were not consolidated, but instead the Company accounted for its interest using the equity method of accounting.
African Solutions was acting as a non-exclusive authorized third party service provider to provide consulting and implementation services, and as a non-exclusive representative in providing marketing and promotional services directly to end users in regard to, among other things, AXS-One’s software products. African Solutions conducts business throughout the African continent where its target markets are the Financial Sector and Government Departments.
On May 31, 2006, the Company purchased the remaining 51% share of African Solutions from African Legends Technology for $161 less cash acquired of $20, to make it a wholly owned subsidiary. The Company applied purchase accounting to record the transaction. The purchase price was less than the fair value of assets acquired and therefore the Company wrote down the value of all long-term assets to zero and recorded a gain of $37. Results prior to May 31, 2006 were recorded using the equity method of accounting. As of June 1, 2006, 100% of the results of African Solutions are included in the consolidated results of the Company in discontinued operations as it was part of the Enterprise Solutions business segment. At the time of the acquisition the investment in the joint venture was $122. Pro forma results as if African Solutions had been acquired on January 1, 2006 are not significantly different than the reported 2006 consolidated results.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(d) Use of Management Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Some of the significant estimates involve allowance for doubtful accounts, accrued expenses, provision for income taxes in foreign jurisdictions, assessment of contingencies, revenue recognition, valuation of deferred tax asset and compensation ex pense pursuant to SFAS No. 123R.
(e) Cash and Cash Equivalents and Restricted Cash
Cash equivalents are stated at cost, which approximates market value, and consist of short-term, highly liquid investments with original maturities of less than three months. Restricted cash at December 31, 2006 and 2005 represents amounts on deposit for payments of lease obligations by the South African and Australian subsidiaries.
(f) Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due, and thereby reduces the net receivable to the amount management believes is probable of collection. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, the current business environment and historical experience. The Company does not require collateral and does not charge interest on outstanding balances.
(g) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets (two to five years). Leasehold improvements are amortized using the straight-line method over the lesser of the remaining term of the lease or their estimated useful lives.
(h) Software Development Costs
The Company’s policy is to capitalize certain software development costs in accordance with Statement of Financial Accounting Standards No. 86, ‘‘Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed’’ (‘‘SFAS 86’’). Under SFAS 86, costs incurred to develop or significantly enhance computer software products are charged to research and development expense as incurred until technological feasibility has been established. The Company establishes technological feasibility upon completion of a working model or completion of a detailed program design. Generally costs related to projects that reach technological feasibility upon completion of a worki ng model are not capitalized as the time period between establishment of the working model and general availability is of short duration. For projects that meet technological feasibility upon completion of a detailed program design, all research and development costs for that project are capitalized from that point until the product is available for general release to customers. The nature of the Company’s current development for RCM products is generally such that we can measure technological feasibility most effectively using the working model method where the time between establishment of a working model and general availability is of short duration which results in very little or no costs that qualify for capitalization. The
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
Company historically used a detailed program design model to measure technological feasibility for its enterprise solutions products. This shift in development of the Company’s product lines will result in lower capitalized costs in the future. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life and changes in technology. It is reasonably possible that estimates of anticipated future revenues, the remaining estimated economic life of the products, or both will be reduced in the future due to competitive pressures. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized (using the straight-line method) over the estimated life, which is generally three years.
During 2006 and 2005 the Company did not capitalize any software development cost for continuing operations. During 2004 capitalized software development costs amounted to $100. Annual amortization of software development costs of $313, $355 and $341 for 2006, 2005 and 2004, respectively, was recorded using the straight-line method over three years, the estimated economic life of the products.
(i) Impairment or Disposal of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (‘‘SFAS’’) No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,’’ the Company monitors events or changes in circumstances that may indicate carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of its assets by determining whether the carrying amount of its assets will be recovered through undiscounted, expected future cash flows. Should the Company determine that the carrying values of specific long-lived assets are not recoverable, the Company would record a charge to operations to reduce t he carrying value of such assets to their fair values. The Company considers various valuation factors, principally discounted cash flows, to assess the fair values of long-lived assets.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. The asset and liability method requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of such assets will not be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
(k) Concentration of Credit Risk
SFAS No. 105, ‘‘Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk,’’ requires disclosure of any significant off-balance sheet and credit risk concentrations. The Company has no off-balance sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of cash balances with four financial institutions and its accounts receivable credit risk is not concentrated within any geographic area. The Company’s revenues are concentrated in the computer software industry, which is highly competitive and rapidly changing. Sign ificant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies, could adversely affect operating results.
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
As of December 31, 2006, three customers represented 44.6% of total gross receivables (17.6%, 15.8% and 11.2% individually). As of December 31, 2005, three customers represented 45.6% of total gross receivables (17.1%, 16.8% and 11.7%, individually). As of December 31, 2004, no one customer represented more than 10% of total gross receivables. For the year ended December 31, 2006, two customers, represented 13.6% and 13.3%, individually of total revenues. For the year ended December 31, 2005, one customer represented 18.4% of total revenues. For the year ended December 31, 2004, one customer represented 10.3%, individually, of total revenues. For the year ended December 31, 2006, two customers represented 31.5% and 1 4.3% of license revenue. For the year ended December 31, 2005, three customers represented 26.8%, 16.4% and 12.2%, individually, of license revenue. For the year ended December 31, 2004, two customers represented 15.3% and 14.0%, individually, of license revenue. For the year ended December 31, 2006, one customer represented 13.0% of service revenue. For the year ended December 31, 2005, one customer represented 13.6% of service revenue. For the year ended December 31, 2004, no one customer represented more than 10% of service revenues.
(l) Foreign Currency Translation
The functional currency for foreign subsidiaries is the local currency. The results of operations for these foreign subsidiaries are translated from local currencies into U.S. dollars using the average exchange rates during each period. Assets and liabilities are translated using exchange rates at the end of the period with translation adjustments accumulated in stockholders’ earnings (deficit). Intercompany loans are denominated in U.S. currency. Foreign currency transaction gains and losses, related to short-term intercompany loans, are recorded in the consolidated statements of operations as incurred. Intercompany loans that are of a long-term nature are accounted for in accordance with SFAS 52, ‘‘Foreign Curr ency Translation,’’ whereby foreign currency transaction gains and losses are recorded in cumulative foreign currency translation adjustment, a component of stockholders’ equity (deficit). As of December 31, 2006, 2005, and 2004, intercompany loans to one foreign subsidiary were considered long-term in nature.
(m) Stock-Based Compensation
Historically, the Company accounted for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion (‘‘APB’’) No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), and related interpretations and disclosure provisions of Statement of Accounting Standards SFAS 123 ‘‘Accounting For Stock-Based Compensation’’. Under this pronouncement, no compensation expense related to stock option plans was reflected in the Company’s Consolidated Statements of Operations as all options had an exercise price equal to the market value of the underlying common stock on the date of grant . Compensation cost for non-vested restricted stock grants was recorded based on its market value on the date of grant and was included in the Company’s Consolidated Statements of Operations ratably over the vesting period. Upon the grant of non-vested restricted stock, unearned stock compensation was recorded as an offset to additional paid-in capital and was amortized on a straight-line basis as compensation expense over the vesting period.
On January 1, 2006, the start of the first quarter of fiscal 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’) which requires that the costs resulting from all share-based payment transactions be recognized in the financial statements at their fair values. The Company adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards granted after the adoption date and to awards modified, repurchased, or cancelled after the adoption date. Additionally, compensation cost for the portion of the awards for which the requisi te service has not been rendered that are outstanding as of the adoption date is recognized in the Consolidated Statement of Operations over the remaining service period after the adoption date based on the award’s original estimate of fair value. In connection with the adoption of SFAS 123R, the unearned stock compensation
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
at December 31, 2005 of $177 relating to previous grants of non-vested restricted stock was offset against additional paid-in capital during the first quarter of fiscal 2006. Results for prior periods have not been restated. Total share-based compensation expense recorded in the Consolidated Statements of Operations for 2006 is $429.
As a result of adopting SFAS 123R on January 1, 2006, the Company’s net income for 2006 is $200 lower than if it had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for 2006 did not change as a result of the Company adopting SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (‘‘FSP 123R-3’’), ‘‘Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards,’’ that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R (the ‘‘APIC Pool’’) to the method otherwise required by paragraph 81 of SFAS 123R. The Company is currently using prior period net operating losses and has not realized any tax benefits under SFAS 123R.
On October 26, 2005, the Board of Directors of the Company approved the acceleration of vesting of all unvested ‘‘out-of-the money’’ stock options previously awarded to current employees and directors under the Company’s stock option plans. The accelerated options had exercise prices ranging from $2.15 to $6.25 with a weighted average exercise price of $2.99. Options to purchase approximately 2,200 shares became exercisable immediately as a result of the vesting acceleration. To avoid any unintended personal benefits, the Company also imposed a holding period on the shares underlying the accelerated options in the form of a Resale Restriction Agreement. This agreement requires all optionees to refra in from selling any shares acquired upon the exercise of the accelerated options until the earlier of the date such shares would have vested under the options’ original vesting terms or the date of the employee’s or director’s termination from the Company. As a result of this acceleration, the Company reduced the stock compensation expense it otherwise would have been required to record beginning in January 2006 upon adoption of SFAS 123R by approximately $4,100 over approximately 2.5 years. In making the decision to accelerate these options, the Board of Directors considered the interests of the Company’s stockholders, as this acceleration will reduce compensation expense in future periods. The acceleration did not result in a compensation expense in 2005 as the option modification did not have any intrinsic value as of the date of the modification.
The following table illustrates the effect on net loss and net loss per common share applicable to common stockholders for 2005 and 2004, as if the Company had applied the fair value recognition provisions for stock-based employee compensation of SFAS 123, as amended:
| | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2005 | | | 2004 |
| Net loss as reported | | | | $ | (8,998 | | | | | $ | (5,212 | |
| Add: Stock based compensation expense | | | | | 37 | | | | | | — | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | | | | | (5,633 | | | | | | (1,434 | |
| Pro forma net loss | | | | $ | (14,594 | | | | | $ | (6,646 | |
| Net (loss) per common share: | | | | | | | | | | | | |
| Basic and diluted – as reported | | | | $ | (0.28 | | | | | $ | (0.19 | |
| Basic and diluted – pro forma | | | | $ | (0.46 | | | | | $ | (0.24 | |
|
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
The fair value of options granted is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatilities are calculated in part based on the historical volatility of the Company’s stock. Management monitors share option exercise and employee termination patterns to estimate forfeiture rates within the valuation model. The expected life of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the expected life of the option is based on the interest rate of a 5-year U.S. Treasury note in effect on the date of the grant.
The table below presents the assumptions used to calculate the fair value of options granted during 2006, 2005 and 2004.
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Risk-free interest rates | | | | | 4.65 | | | | | | 4.60 | | | | | | 5.02 | |
| Expected dividend yield | | | | | — | | | | | | — | | | | | | — | |
| Expected lives | | | 5 years | | | 5 years | | | 5 years |
| Expected volatility | | | | | 92 | | | | | | 99 | | | | | | 103 | |
| Forfeiture rate | | | | | 14.4 | | | | | | n/a | | | | | | n/a | |
Weighted-average grant date fair value of
options granted during the period | | | | $ | 1.37 | | | | | $ | 1.59 | | | | | $ | 2.30 | |
|
(n) Basic and Diluted Net Income (Loss) per Common Share
Basic and diluted net income (loss) per common share is presented in accordance with SFAS No. 128, ‘‘Earnings per Share’’ (‘‘SFAS No. 128’’). Basic net income (loss) per common share is based on the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares consist of stock options, non-vested stock and warrants. Diluted net loss per common share was the same as basic net loss per common share for the years ended December 31, 2006, 2005 and 2004 since the effect of stock options, non-vested stock and warrants was anti-dilutive for all years. As of December 31, 2006, 2005 and 2004, there were outstanding options to purchase 5,528, 6,370 and 7,453 shares of common stock and outstanding warrants to purchase 1,143, 1,423 and 516 shares of common stock. As of December 31, 2006, 2005 and 2004, there were 1,076, 95 and 0 shares of non-vested stock outstanding.
The following represents the calculations of the basic and diluted net income (loss) per common share for the years ended December 31, 2006, 2005 and 2004.
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Net income (loss) | | | | $ | 5,501 | | | | | $ | (8,998 | | | | | $ | (5,212 | |
Weighted average basic common shares
outstanding during the year | | | | | 34,405 | | | | | | 31,629 | | | | | | 27,395 | |
| Dilutive effect of stock options and warrants | | | | | — | | | | | | — | | | | | | — | |
Weighted average diluted common shares
outstanding during the year | | | | | 34,405 | | | | | | 31,629 | | | | | | 27,395 | |
| Basic and diluted net income (loss) per common share | | | | $ | 0.16 | | | | | $ | (0.28 | | | | | $ | (0.19 | |
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(o) Fair Value of Financial Instruments
Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other current liabilities reported in the consolidated balance sheets equal or approximate fair values.
(p) Deferred Revenue
Deferred revenue primarily relates to customer software maintenance agreements that have been paid for by customers prior to the performance of those services and, to a lesser extent, prepaid consulting and deferred license fees.
(q) Accounting for Guarantees
The Company warrants that each version of its software will substantially conform to the latest edition of the documentation applicable to that version. Such warranties are accounted for in accordance with SFAS No. 5, ‘‘Accounting for Contingencies.’’ To date the Company has not incurred significant costs related to warranty obligations.
The Company’s product license and services agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The indemnification is generally limited to the amount paid by the customer. To date, claims under such indemnification provisions have not been significant.
From time to time, the Company may provide guarantees to third parties on behalf of a foreign subsidiary. These guarantees are generally related to maintaining operations in a certain locality or to secure leases or other operating obligations of a subsidiary. The maximum exposure on these guarantees is not significant, either individually or in the aggregate.
(r) Recently Issued Accounting Standards
In July 2006, the FASB issued FIN 48 ‘‘Accounting for Uncertainty in Income Taxes.’’ This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We believe the impact of adopting FIN 48 on our financial statements will not be material.
In September 2006, the FASB issued Statement No. 157 ‘‘Fair Value Measurements’’, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurement. FASB Statement No. 157 applies to other accounting pronouncements that require fair value measurements or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
(2) Discontinued operations
On October 31, 2006, the Company sold certain assets and liabilities through which it operated the AXS-One Enterprise Solutions financial management and accounting applications business (‘‘Enterprise Solutions’’) to Computron Software, LLC for the sum of $12,000 in cash plus future potential consideration for exceeding specified license revenue targets. The assets sold of approximately $2,100 primarily consist of client contracts, marketing agreements, internally developed software, accounts receivable and fixed assets of the business. The liabilities assumed of approximately $8,300, consist
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
primarily of employee related liabilities, accounts payable and deferred revenue. As part of the transaction, Computron Software, LLC agreed, among other things, to hire certain former AXS-One employees assigned to the Enterprise Solutions business. Further, AXS-One agreed to a non-competition agreement which prohibits the Company from engaging in the enterprise financial business for a period of five years. As a result of the transaction with Computron Software, LLC, our employee headcount has been reduced by approximately 70 positions.
Liabilities held for sale as of December 31, 2006 totaling $981 consisted primarily of customer payments made to AXS-One on behalf of Computron Software, LLC. This amount was remitted to Computron Software, LLC during the first quarter of 2007.
The following chart summarizes the income statement for discontinued operations for 2006, 2005 and 2004:
| | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | 2004 |
| Revenues | | | | $ | 16,495 | | | | | $ | 21,520 | | | | | $ | 28,331 | |
| Operating expenses | | | | | 8,550 | | | | | | 15,368 | | | | | | 30,732 | |
| Operating income (loss) | | | | | 7,945 | | | | | | 6,152 | | | | | | (2,401 | |
| Other income/(expense) net | | | | | (70 | | | | | | (89 | | | | | | (163 | |
| Income (loss) from discontinued operations | | | | $ | 7,875 | | | | | $ | 6,063 | | | | | $ | (2,564 | |
|
The Company recorded a gain on sale of the Enterprise Solutions business to Computron Software, LLC of $17,200. Due to the utilization of available net operating loss tax carryforwards in each of the relevant jurisdictions, the tax provision required on the transaction is estimated to be only $200. In determining the estimated gain on the sale of the Enterprise Solutions business to be recognized in the fourth quarter of 2006, the Company has estimated the following sales price, expenses and disposal cost using the October 31, 2006 balance sheet:
| | | | | | |
| Sales price | | | | $ | 12,000 | |
| Assets sold | | | | | (2,093 | |
| Liabilities sold | | | | | 8,248 | |
| Transaction expenses | | | | | (714 | |
| Tax provision | | | | | (200 | |
| Gain on sale | | | | $ | 17,241 | |
|
(3) Revolving Line of Credit and Long-Term Debt
The Company had no outstanding debt as of December 31, 2006 or 2005.
On August 11, 2004, the Company entered into a two-year Loan and Security Agreement (the ‘‘Agreement’’) which contains a revolving line of credit under which the Company had available the lesser of $4.0 million or 80% of eligible accounts, as defined.
On January 27, 2005, March 28, 2005 and September 13, 2005, the Company entered into modifications to the Agreement (the ‘‘Amended Agreement’’) in order to revise certain terms of the Agreement including the loan fees, interest on the loan and the financial covenants. The Amended Agreement included a waiver of the Company’s June 30, 2005 financial covenant default.
Borrowings under the revolving line of credit, per the Amended Agreement, bore interest at prime rate plus one and one half percent (1.5%). Should, however, the Company fail to meet certain of the financial covenants set forth in the Amended Agreement, the interest rate would increase to the prime rate plus two and one half percent (2.5%). The Agreement provided for a non-refundable commitment
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
fee of $30 per year and an unused revolving line facility fee of 0.25% per annum. The Amended Agreement increased the second year commitment fee to $40 and the unused line fee to 0.375% per annum. The Amended Agreement includes a warrant waiver fee of $20 and upon the occurrence of certain events, minimum monthly interest of $8 and an additional $20 warrant waiver fee. The Agreement is secured by substantially all domestic assets of the Company. The maturity date of the loan was August 9, 2006. As described in greater detail in the Amended Agreement, the loan is subject to acceleration upon breach of: (i) a covenant tested monthly regarding the ratio of unrestricted cash and net billed accounts receivable to current liabilities minus deferred revenue, which is to be no less than 1.35 to 1.0 (‘‘adjusted quick ratio covenant’’), (ii) a covenant tested quarterly regarding the Company’s EBITDAS (earnings before interest expense (excluding interest income), taxes, depreciation, amo rtization and stock compensation expense in accordance with GAAP), and (iii) other customary non-financial covenants. There is also a monthly transition event covenant which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.0.
As of March 31, 2006, the Company was in compliance with the monthly adjusted quick ratio covenant and the transition event covenant, but was not in compliance with the quarterly EBITDAS covenant, which requires the Company to achieve EBITDAS of the lesser of $1 better than the immediately preceding quarter EBITDAS or $1. On May 11, 2006, the Bank granted a waiver of the EBITDAS covenant as of March 31, 2006. The waiver was for the March 31, 2006 date only.
As of June 30, 2006, the Company was in compliance with the quarterly EBITDAS covenant and the monthly adjusted quick ratio covenant, but was not in compliance with the transition event covenant, which requires the Company to maintain an adjusted quick ratio covenant greater than or equal to 1.60 to 1.00. As result of such violation, the Bank moved the Company to the higher interest rate facility which required the Company to pay interest on outstanding balances of prime plus 2.5%, incur minimum monthly interest expense of $8 and pay a one-time warrant waiver fee of $10.
As of September 30, 2006, there was $1,844 outstanding under the Amended Agreement, which was the full amount of availability under the Amended Agreement based on the lesser of $4,000 or 80% of eligible accounts receivable. The Company was not in compliance with the quarterly EBITDAS covenant or the monthly adjusted quick ratio covenant as of September 30, 2006. On October 20, 2006, the Company received a notice of default from the Bank in connection with these covenant violations. As a result, the effective interest rate of the loan has increased by 4.0%, any additional loans were at the Bank’s sole discretion and the Bank reserved the right to declare all obligations to be immediately due and payable in full, a right which they did not exercise.
On October 31, 2006 the Company and the Bank entered into a Second Loan Modification Agreement and an Intellectual Property Security Agreement. The Second Loan Modification Agreement serves (a) to amend the Amended Agreement by reducing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 80.0% of the Eligible Accounts to (ii) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to forbear until November 10, 2006 from exercising its rights and remedies with respect to the default of the Company for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006. The IP Security Agreement serves to supplement the Amended Agreement by including among the assets securing the Company’s indebtedness to the Bank, a security interest in all of the Company’s right, title and interest in, to and under its intellectual property.
On November 11, 2006 the Company and the Bank entered into a Third Loan Modification Agreement. The Third Loan Modification Agreement serves (a) to amend the Second Loan Modification Agreement by increasing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $2,000 or (B) 70.0% of the Eligible Accounts to (ii) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts, and (b) as an agreement by the Bank to extend the forbearance from
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
exercising its rights and remedies with respect to the default of the Company through December 10, 2006 for failure to comply with certain financial covenants under the Amended Agreement at September 30, 2006.
As of December 31, 2006 and March 15, 2007, they were no amounts outstanding under the Amended Agreement. The Company’s borrowing availability as of December 31, 2006 was $1,022. The Company was in compliance with all covenants as of December 31, 2006. Further, the Company believes that it will be in compliance with its financial covenants during the first quarter of 2007 and does not expect to borrow on the facility during that period.
On March 6, 2007, the Company entered into a Fourth Loan Modification Agreement (the ‘‘Fourth Modification Agreement’’) with the Bank effective as of February 15, 2007 to amend and supplement its Amended and Restated Loan and Security Agreement dated as of September 13, 2005 between the Company and the Bank, as amended by a First Loan Modification Agreement dated as of March 14, 2006, a Second Loan Modification Agreement dated as of October 31, 2006, and a Third Loan Modification Agreement dated as of November 11, 2006 (as amended, the ‘‘Loan Agreement’’).
Subject to certain borrowing base limitations and compliance with covenants, the Fourth Modification Agreement serves to amend the Loan Agreement by changing the amount the Company may borrow on a revolving basis from (i) up to the lesser of (A) $4,000 or (B) 70.0% of the Eligible Accounts (as such term is defined in the Loan Agreement) to (ii) up to the lesser of (A) $2,500 or (B) 80.0% of the Eligible Accounts (as such term is defined in the Loan Agreement). The Fourth Modification Agreement also extends the maturity date of the Loan Agreement from February 15, 2007 to April 1, 2008.
In addition, the Fourth Modification Agreement deletes the existing financial covenants contained in the Loan Agreement and adds two new financial covenants: (i) a covenant requiring the Company to maintain a Tangible Net Worth (as defined in the Fourth Modification Agreement) of at least (A) $1,700 as of the months ending January 31, 2007, February 28, 2007 and March 31, 2007, (B) $600 as of the months ending April 30, 2007, May 31, 2007 and June 30, 2007, (C) ($150) as of the months ending July 31, 2007, August 31, 2007 and September 30, 2007, and (D) $1.00 as of the month ending October 31, 2007 and as of the last day of each month thereafter and (ii) a covenant requiring the Company to maintain Liquidity (r epresenting the amount of unrestricted cash of the Company at the Bank plus the unused availability under the Loan Agreement) at all times of at least $1,000.
The Bank also waived the Company’s existing defaults under the Loan Agreement based on certain failures to meet prior financial covenants during the year ended December 31, 2006.
(4) Lease Obligations
The Company leases office space and equipment under non-cancelable operating leases. Rent expense charged to continuing operations in the accompanying consolidated statements of operations for office space, vehicles and equipment under operating leases was $1,812, $1,010 and $1,077 for the years ended December 31, 2006, 2005 and 2004, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
Scheduled future minimum payments required for all non-cancelable operating leases are as follows:
| | | | | | |
| Years Ending December 31, | | | |
| 2007 | | | | $ | 1,172 | |
| 2008 | | | | | 920 | |
| 2009 | | | | | 803 | |
| 2010 | | | | | 756 | |
| 2011/Thereafter | | | | | 734 | |
| Total | | | | $ | 4,385 | |
|
(5) Related Party Transactions
In August 2003, the Company entered into a business relationship with an entity that is owned by the Company’s former chairman and a significant stockholder. This entity was providing consulting services related to the development of the Company’s instant messaging archiving product. For the year ended December 31, 2004, the Company recorded $84 as research and development expense to this related party. The Company discontinued use of this entity’s services in June 2004.
During January 2001, the Company entered into a South African joint venture: AXS-One African Solutions (Pty) Ltd (‘‘African Solutions’’). African Solutions had been acting as a non-exclusive authorized third party service provider to provide consulting and implementation services, and as a non-exclusive representative in providing marketing and promotional services directly to the end users in regard to, among other things, AXS-One’s software products. African Solutions conducts business throughout the African continent where its target markets are the Financial Sector and Government Departments. On May 31, 2006, the Company purchased the remaining 51% of African Solutions from African Legends Tech nology for $161 less cash acquired of $20, to make it a wholly owned subsidiary. The Company applied purchase accounting to record the transaction. The purchase price was less than the fair value of assets acquired and therefore the Company wrote – down the value of all long-term assets to zero and recorded a gain of $37. As of June 1, 2006, 100% of the results of African Solutions are included in the consolidated results of the Company in discontinued operations as it is part of the Enterprise Solutions business segment (See Notes 1(a) and 1(c) for further information).
(6) Income Taxes
The components of income (loss) before income tax benefit, net are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Domestic | | | | $ | 7,119 | | | | | $ | (3,488 | | | | | $ | (1,503 | |
| Foreign | | | | | (1,418 | | | | | | (5,535 | | | | | | (3,926 | |
| Total | | | | $ | 5,701 | | | | | $ | (9,023 | | | | | $ | (5,429 | |
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
Income tax (provision) benefit is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Federal | | | | $ | (143 | | | | | $ | — | | | | | $ | — | |
| State | | | | | (57 | | | | | | — | | | | | | 194 | |
| Foreign | | | | | — | | | | | | 25 | | | | | | 23 | |
| Total | | | | $ | (200 | | | | | $ | 25 | | | | | $ | 217 | |
|
The tax provision in 2006 was recorded in discontinued operations as it related to the gain on the sale of the Enterprise Solutions business segment. The tax provisions in 2005 and 2004 were recorded in continuing operations as they related to ongoing business entities.
A reconciliation of Federal income tax (expense) benefit at the statutory rate of 34% to income tax benefit reflected in the accompanying consolidated statements of operations is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2006 | | | 2005 | | | 2004 |
| Federal income tax (expense) benefit at 34% | | | | $ | (1,953 | | | | | $ | 3,068 | | | | | $ | 1,846 | |
| Federal alternative minimum tax | | | | | (143 | | | | | | — | | | | | | — | |
State income tax (expense) benefit,
net of Federal tax (expense) benefit | | | | | (483 | | | | | | 206 | | | | | | 213 | |
| Change in valuation allowance | | | | | 2,712 | | | | | | (3,260 | | | | | | (2,511 | |
| Foreign tax rate differential and change in foreign NOLs | | | | | (326 | | | | | | (5 | | | | | | 868 | |
Reduction of state NOLs due to sale of New Jersey NOLs,
net of federal benefit | | | | | — | | | | | | — | | | | | | (149 | |
| Other, net | | | | | (7 | | | | | | 16 | | | | | | (50 | |
| | | | | $ | (200 | | | | | $ | 25 | | | | | $ | 217 | |
|
The principal components of the Company’s deferred taxes are as follows:
| | | | | | | | | | | | |
| | | | December 31, |
| | | | 2006 | | | 2005 |
| Deferred tax assets: | | | | | | | | | | | | |
| Accruals and other | | | | $ | 158 | | | | | $ | 295 | |
| Allowance for doubtful accounts | | | | | 24 | | | | | | 50 | |
| Depreciation | | | | | 361 | | | | | | 426 | |
| Research and development credit carry-forwards | | | | | 2,895 | | | | | | 2,895 | |
| Net operating loss carry-forwards | | | | | 20,844 | | | | | | 24,755 | |
| Deferred tax assets | | | | | 24,282 | | | | | | 28,421 | |
| Less valuation allowance | | | | | 24,282 | | | | | | 28,004 | |
| Net deferred tax assets | | | | | — | | | | | | 417 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Software development costs | | | | | — | | | | | | 417 | |
| Net deferred taxes | | | | $ | — | | | | | $ | — | |
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
As of December 31, 2006, the Company had United States net operating loss carry-forwards of approximately $47,000 which are available to offset future Federal taxable income, if any, and which begin to expire in 2007. In addition, foreign net operating loss carry-forwards aggregated approximately $13,413 at December 31, 2006, which are not subject to expiration. None of the net operating loss carry-forwards are limited by IRC section 382, however subsequent changes in the ownership of the Company may trigger a limitation in our ability to utilize the NOL’s each year.
The Company has recorded a valuation allowance for its net deferred tax assets and will continue to monitor the realizability of such assets. Approximately $2,436 and $2,360 of the Company’s deferred tax asset pertaining to NOLs and the corresponding valuation allowance at December 31, 2006 and 2005, respectively, relates to tax deductions arising from the exercise of stock options and/or subsequent sales of the underlying stock. For book purposes, the tax benefits related to such stock option transactions are recorded through equity when realized.
Foreign subsidiaries have paid, and are expected to continue to pay, appropriate taxes, if and when due, to their respective taxation authorities. It is the intention of the Company to reinvest the earnings of its non-U.S. subsidiaries, if any, in those operations. Accordingly, no Federal taxes have been provided on undistributed foreign earnings and no deferred tax liability for temporary differences related to the Company’s foreign subsidiaries have been established as the determination of the amounts is not practical.
During state fiscal years 2002 through 2005, AXS-One was authorized by the New Jersey Economic Development Authority (‘‘NJEDA’’) in conjunction with the New Jersey Division of Taxation to sell a portion of its New Jersey net operating losses and research and development credits for consideration that is to be used to fund its research activities in the State of New Jersey. For the State’s fiscal year 2005 (July 1, 2004 to June 30, 2005), AXS-One was authorized to sell $226 of its available tax benefit of $226. AXS-One sold the entire authorized amount for consideration of $194, net of broker commissions. For the State’s fiscal year 2004 (July 1, 2003 to June 30, 2004), AXS-One was authorize d to sell $165 of its available tax benefit of $165. AXS-One sold the entire authorized amount for consideration of $142, net of broker commissions. Approximately 66% of the tax benefits sold is reflected as reduction of state NOLs due to sales of New Jersey NOLs, net of federal benefit in the income tax rate reconciliation table above. As of December 31, 2006, there were no remaining New Jersey net operating losses available for sale.
(7) Stockholders’ Equity (Deficit)
(a) Warrants
On April 5, 2004, the Company completed an offer and sale of 2,581 shares of common stock for $3.10 per share in a private placement for total consideration of $8,000. Upon closing, the Company received net proceeds of approximately $7,700. The Company also issued, at the same time, warrants to purchase an aggregate of 258 shares of common stock at $3.98 per share and warrants to purchase 258 shares of common stock at $4.50 per share. These warrants are exercisable for a period of three years beginning April 5, 2004. This private placement and issuance of warrants were made pursuant to the terms of a Unit Subscription Agreement, dated as of April 1, 2004, among the Company and several investors.
On June 17, 2005, the Company entered into a definitive agreement with a number of investors as well as certain members of AXS-One Management and Board members to sell 4,534 shares of its common stock for total consideration of $6,750. On June 21, 2005, the initial closing date, the Company received net proceeds of approximately $5,775 from the investors and issued 4,081 shares of common stock. This excluded amounts due from members of the Company’s management and Board which together represented 10% of the investment. The closing with respect to the shares being offered to members of the Company’s management and Board members was subject to shareholder approval. The Company also issued, at the same time, warrants to purchase an aggregate of 408 shares of common stock at $1.90 per
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
share and warrants to purchase 408 shares of common stock at $2.15 per share. These warrants are exercisable for a period of three years beginning June 21, 2005. The warrants were classified within permanent equity in accordance with EITF 00-19, ‘‘Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock.’’ Warrants to purchase an additional 46 shares of common stock at $1.90 per share and 45 shares of common stock at $2.15 per share were issuable to members of the Company’s management and Board member investors upon approval of the shareholders. This private placement and issuance of warrants was made pursuant to the terms of a Unit Subscription Agreement, dated as of June 17, 2005, among the Company and several investors.
On September 20, 2005, the shareholders approved the above sale of the Company’s common stock and warrants to certain members of the Company’s management and Board members. On September 21, 2005, the closing date, the Company received net proceeds of $587, issued 453 shares of common stock and warrants to purchase 46 shares of common stock at $1.90 per share and 45 shares of common stock at $2.15 per share.
A summary of warrant activity is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Number of
Shares | | | Weighted Average
Exercise Price | | | Weighted Average
Remaining Life
(Years) |
| Balance, December 31, 2003 | | | | | 220 | | | | | $ | 1.13 | | | | | | 2.20 | |
| Granted | | | | | 516 | | | | | $ | 4.24 | | | | | | | |
| Exercised | | | | | 220 | | | | | $ | 1.13 | | | | | | | |
| Balance, December 31, 2004 | | | | | 516 | | | | | $ | 4.24 | | | | | | 2.25 | |
| Granted | | | | | 907 | | | | | $ | 2.03 | | | | | | | |
| Exercised | | | | | — | | | | | | — | | | | | | | |
| Balance, December 31, 2005 | | | | | 1,423 | | | | | $ | 2.83 | | | | | | 2.04 | |
| Granted | | | | | — | | | | | | — | | | | | | | |
| Exercised | | | | | — | | | | | | — | | | | | | | |
| Balance, December 31, 2006 | | | | | 1,423 | | | | | $ | 2.83 | | | | | | 1.04 | |
|
516 of these warrants expire in April 2007 and 907 of these warrants expire in June 2008. All were exercisable upon issuance.
(b) Stock Option Plans
Pursuant to the 1995 Stock Option Plan, as amended (the 1995 Plan), the Company may grant statutory and non-statutory options to purchase an aggregate of up to 4,500 shares of Common Stock. The Company has specifically reserved such shares. Options may be granted under the discretionary option program to employees, consultants, independent advisors and non-employee directors. Prior to adoption of the 1998 Plan discussed below, options were automatically granted to non-employee directors under the automatic option grant programs. Options granted under the discretionary grant program have an exercise price of not less than 85% of the fair market value of the Common Stock on the grant date. Options granted under the automatic grant p rogram have an exercise price of 100% of the fair market value on the grant date. The 1995 Plan has expired and no further options can be issued under this plan. Outstanding options under this plan will continue to vest.
In April 1998, the Company adopted the 1998 Stock Option Plan (the 1998 Plan). Pursuant to the 1998 Plan, the Company may grant stock options or stock appreciation rights to purchase an aggregate of up to 5,000 shares of Common Stock (inclusive of 2,000 and 1,500 shares added to the 1998 Plan by the stockholders in June 2004 and 2001, respectively). In accordance with a June 2004 amendment, up to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
300 shares of the total shares may be used for non-vested stock awards. Options may be granted under the discretionary option program (as amended in June 2004) to employees and consultants of the Company not to exceed 500 shares per person during any calendar year except that in the first year of employment, the maximum grant will not exceed 1,000 shares per person. Non-employee directors receive an automatic grant of stock options to purchase 20 shares of Common Stock upon date of commencement of service as a non-employee director and thereafter, 10 shares on the date of each annual meeting of stockholders, provided that on, and as of, such date, such individual has been a non-employee director for the previous 12-month period. No option may have an exercise price less than the fair market value of the Common Stock at the time of grant.
All options granted under the Plans expire ten years from the date of grant (or five years for statutory options granted to 10% stockholders), unless terminated earlier. Substantially all options vest over a four-year period.
On April 13, 2005 the Company approved the AXS-One Inc. 2005 Stock Incentive Plan (the 2005 Plan). The Plan was approved by the Company’s stockholders at the 2005 Annual Meeting of Stockholders on May 25, 2005. All employees and consultants of the Company and its affiliates are eligible to receive stock options, stock appreciation rights and non-vested stock under the 2005 Plan, as determined by the committee (as described below) in its sole discretion. Non-employee directors of the Company automatically receive grants of stock options under the 2005 Plan and are also eligible to receive discretionary grants of stock options. A maximum of 1,500 shares of the Company’s common stock are available for awards under the 2005 Plan, (subject to adjustment as provided in the 2005 Plan). At the 2006 annual shareholders meeting, approval was granted to remove the limitation on restricted stock awards available under the 2005 Plan. Formerly, 375 shares of common stock were available for awards as restricted stock. Approval was received to allow grants of restricted stock up to the total maximum number of shares available under the 2005 Plan. The maximum number of shares subject to awards intended to be ‘‘performance-based’’ compensation within the meaning of Section 162(m) of the Internal Revenue Code that may be granted to any employee during any calendar year will not exceed 500 shares, except for the calendar year in which such individual commences his or her employment, the maximum grant will not exceed 1,000 shares (in each case subject to adjustment as provided in the 2005 Plan). The 2005 Plan is administered by a committee of the Board of Directors (currently the Compensation Committee) consisting of two or more non-employee directors, each of whom is intended to be (to the extent required by applicable law) a non-employee director as defined in Rule 16b-3 of the Securities Exchange Act of 1934, an outside director as defined under Section 162(m) and an ‘‘independent director’’ as defined under American Stock Exchange Rule 121A. With regard to options granted under the 2005 Plan to non-employee directors, the Board of Directors administers the 2005 Plan. All options granted under the 2005 Plan expire ten years from the date of grant (or five years for statutory options granted to 10% stockholders), unless terminated earlier. Options generally vest over a four-year period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
A summary of stock option activity under the Plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Number of
Shares | | | Weighted Average
Exercise Price | | | Weighted Average
Remaining
Contractual Life | | | Aggregate Intrinsic
Value as of
12/31/06 |
| Balance, December 31, 2003 | | | | | 5,651 | | | | | $ | 1.54 | | | | | | | | | | | | | |
| Granted | | | | | 2,770 | | | | | $ | 2.95 | | | | | | | | | | | | | |
| Exercised | | | | | (588 | | | | | $ | 0.94 | | | | | | | | | | | | | |
| Canceled | | | | | (380 | | | | | $ | 2.32 | | | | | | | | | | | | | |
| Balance, December 31, 2004 | | | | | 7,453 | | | | | $ | 2.07 | | | | | | | | | | | | | |
| Granted | | | | | 861 | | | | | $ | 2.12 | | | | | | | | | | | | | |
| Exercised | | | | | (1,345 | | | | | $ | 0.76 | | | | | | | | | | | | | |
| Canceled | | | | | (599 | | | | | $ | 2.50 | | | | | | | | | | | | | |
| Balance, December 31, 2005 | | | | | 6,370 | | | | | $ | 2.31 | | | | | | | | | | | | | |
| Granted | | | | | 254 | | | | | $ | 1.91 | | | | | | | | | | | | | |
| Exercised | | | | | (295 | | | | | $ | 0.82 | | | | | | | | | | | | | |
| Forfeited | | | | | (155 | | | | | $ | 1.72 | | | | | | | | | | | | | |
| Expired | | | | | (646 | | | | | $ | 2.41 | | | | | | | | | | | | | |
| Balance, December 31, 2006 | | | | | 5,528 | | | | | $ | 2.38 | | | | | | 5.73 | | | | | $ | 285 | |
| Vested and expected to vest at December 31, 2006 | | | | | 5,416 | | | | | $ | 2.39 | | | | | | | | | | | $ | 282 | |
| Exercisable at December 31, 2006 | | | | | 4,952 | | | | | $ | 2.46 | | | | | | 5.42 | | | | | $ | 272 | |
|
The total intrinsic value of stock options exercised during 2006, 2005 and 2004 were $299, $2,834 and $1,216 respectively. As of December 31, 2006, there was approximately $517 of total unrecognized compensation cost related to stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.45 years.
A summary of stock options outstanding and exercisable as of December 31, 2006 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | | Options Exercisable |
| Range of exercise prices | | | Number
outstanding | | | Weighted average
remaining life
(years) | | | Weighted average
exercise price | | | Number
exercisable | | | Weighted average
exercise price |
| $0.21-$0.72 | | | | | 1,177 | | | | | | 4.83 | | | | | $ | 0.54 | | | | | | 1,151 | | | | | $ | 0.54 | |
| $0.75–$1.75 | | | | | 1,234 | | | | | | 4.34 | | | | | $ | 1.42 | | | | | | 902 | | | | | $ | 1.38 | |
| $1.80–$2.44 | | | | | 1,144 | | | | | | 7.12 | | | | | $ | 2.19 | | | | | | 937 | | | | | $ | 2.24 | |
| $2.49–$4.21 | | | | | 1,505 | | | | | | 7.29 | | | | | $ | 3.60 | | | | | | 1,494 | | | | | $ | 3.61 | |
| $6.00–$6.25 | | | | | 468 | | | | | | 3.26 | | | | | $ | 6.02 | | | | | | 468 | | | | | $ | 6.02 | |
| | | | | | 5,528 | | | | | | | | | | | | | | | | | | 4,952 | | | | | | | |
|
(c) Non-Vested Restricted Stock
Compensation expense for non-vested restricted stock was historically recorded based on its market value on the date of grant and recognized ratably over the associated service period, the period in which restrictions are removed. Compensation expense for non-vested restricted stock was reported as unamortized stock compensation on the Consolidated Balance Sheets. With the adoption of SFAS 123R,
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
effective January 1, 2006, unamortized stock compensation has been offset against additional paid-in capital where it is reflected on the Consolidated Balance Sheet as of December 31, 2006. During 2006 there were 1,071 shares of non-vested restricted stock granted. 410 shares were issued to employees with 4-year vesting and 661 shares were issued to employees with 2-year vesting. In the year ended December 31, 2005, 120 shares of non-vested restricted stock were granted with a vesting term of five years subject to acceleration in accordance with the grant stipulations. During 2006, 45 shares were forfeited as a result of employee terminations. During fiscal 2005, 25 shares issued were forfeited as a result of employee terminations and the corresponding compensation expense and remaining unamortized stock compensation amounts were reversed. As of December 31, 2006, 1,076 restricted shares are unvested.
A summary of non-vested restricted stock under the plans is as follows:
| | | | | | | | | | | | |
| | | | Number of
shares | | | Weighted average
price per share |
| Balance, December 31, 2004 | | | | | — | | | | | | — | |
| Granted | | | | | 120 | | | | | $ | 2.25 | |
| Vested | | | | | — | | | | | | — | |
| Forfeited | | | | | (25 | | | | | $ | 2.58 | |
| Balance, December 31, 2005 | | | | | 95 | | | | | $ | 2.16 | |
| Granted | | | | | 1,071 | | | | | $ | 1.36 | |
| Vested | | | | | (45 | | | | | $ | 1.69 | |
| Forfeited | | | | | (45 | | | | | $ | 2.54 | |
| Balance, December 31, 2006 | | | | | 1,076 | | | | | $ | 1.37 | |
|
As of December 31, 2006, there was approximately $241 of total recognized compensation cost and $943 of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.59 years.
Stock options and non-vested restricted stock awards available for grant under all plans were 933 at December 31, 2006.
(8) Employee 401(k) Plan
The Company’s 401(k) Plan (the Plan) is a defined contribution plan. All North America employees who are at least 21 years of age are eligible on the first day in the month following their date of hire to become participants in the Plan and to make voluntary contributions based on a percentage of their compensation within certain Plan limitations.
The Plan falls under the provisions of Section 401(k) of the Internal Revenue Code. Employees may elect to contribute a percentage of their pretax salary, subject to statutory limitations, as well as certain percentages of their after-tax salary, to the Plan. By approval of the Board of Directors, the Company may elect to match a pre-determined percentage of the employees’ contribution. In addition, the Company may make additional contributions at the discretion of the Board of Directors, which would be allocated among all participants in proportion to each participant’s compensation, as defined. During the years ended December 31, 2006, 2005 and 2004, no additional contributions were made by the Company under the Pl an.
Beginning in 2002, all contributions by the Company are on a discretionary basis only as approved by the Board of Directors. For the year ended December 31, 2006, 2005 and 2004, the Company contributed 50% of the employees’ first 6% of pretax salary contribution. The Company’s contributions charged to operations in the accompanying consolidated statements of operations were approximately $269, $272 and $308 for the years ended December 31, 2006, 2005 and 2004, respectively.
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
(9) Financial Information by Geographic Area
SFAS No. 131, ‘‘Disclosure about Segments of an Enterprise and Related Information,’’ established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reporting segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers.
Revenues from continuing operations and long-lived assets for the Company’s United States, United Kingdom, Australia and Southeast Asia and other international operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | United States | | | United
Kingdom | | | Australia
and
Southeast
Asia | | | South Africa | | | Consolidated |
| 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues(1) | | | | $ | 6,376 | | | | | $ | 1,406 | | | | | $ | 1,593 | | | | | $ | 921 | | | | | $ | 10,296 | |
| Long-lived assets | | | | | 159 | | | | | | 54 | | | | | | 169 | | | | | | 37 | | | | | | 419 | |
| 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues(1) | | | | $ | 6,984 | | | | | $ | 2,143 | | | | | $ | 948 | | | | | $ | 1,213 | | | | | $ | 11,288 | |
| Long-lived assets | | | | | 1,184 | | | | | | 75 | | | | | | 151 | | | | | | 23 | | | | | | 1,433 | |
| 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues(1) | | | | $ | 8,057 | | | | | $ | 583 | | | | | $ | 390 | | | | | $ | 1,075 | | | | | $ | 10,105 | |
| Long-lived assets | | | | | 2,094 | | | | | | 87 | | | | | | 185 | | | | | | 29 | | | | | | 2,395 | |
|
| |
| (1) | Revenues are attributed to geographic area based on location of sales office. |
(10) Operating Segments
As a result of the Company meeting the criteria for reporting the sale of the Enterprise Solutions business as discontinued operations, the Company has only one reportable segment in continuing operations, AXS-One Records Compliance Management, and therefore no longer meets the requirement for segment reporting.
(11) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2006, 2005 and 2004 is as follows (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter |
| 2006 | | | First | | | Second | | | Third | | | Fourth |
| Total revenues | | | | | 2,312 | | | | | | 3,216 | | | | | | 2,230 | | | | | | 2,538 | |
| Gross profit | | | | | 190 | | | | | | 562 | | | | | | (223 | | | | | | 367 | |
| Loss from continuing operations | | | | | (5,257 | | | | | | (4,601 | | | | | | (5,171 | | | | | | (4,586 | |
| Income from discontinued operations | | | | | 2,512 | | | | | | 2,110 | | | | | | 2,333 | | | | | | 920 | |
| Gain of sale of discontinued operations | | | | | — | | | | | | — | | | | | | — | | | | | | 17,241 | |
| Net income (loss) | | | | | (2,744 | | | | | | (2,490 | | | | | | (2,840 | | | | | | 13,575 | |
| Basic & diluted net income (loss) per common share(1) | | | | | (0.08 | | | | | | (0.07 | | | | | | (0.08 | | | | | | 0.39 | |
|
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Table of ContentsAXS-ONE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter |
| 2005 | | | First | | | Second | | | Third | | | Fourth |
| Total revenues | | | | | 2,478 | | | | | | 2,131 | | | | | | 3,707 | | | | | | 2,972 | |
| Gross profit | | | | | 161 | | | | | | (186 | | | | | | 1,998 | | | | | | 1,395 | |
| Loss from continuing operations | | | | | (4,603 | | | | | | (5,747 | | | | | | (1,797 | | | | | | (2,914 | |
| Income from discontinued operations | | | | | 1,434 | | | | | | 1,388 | | | | | | 1,974 | | | | | | 1,267 | |
| Net income (loss) | | | | | (3,169 | | | | | | (4,359 | | | | | | 177 | | | | | | (1,647 | |
| Basic & diluted net income (loss) per common share(1) | | | | | (0.11 | | | | | | (0.15 | | | | | | 0.01 | | | | | | (0.05 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Quarter |
| 2004 | | | First | | | Second | | | Third | | | Fourth |
| Total revenues | | | | | 3,018 | | | | | | 2,304 | | | | | | 2,484 | | | | | | 2,299 | |
| Gross profit | | | | | 2,231 | | | | | | 1,225 | | | | | | 1,012 | | | | | | 1,164 | |
| Income (loss) from continuing operations | | | | | 436 | | | | | | (1,506 | | | | | | (991 | | | | | | (587 | |
| Income (loss) from discontinued operations | | | | | 317 | | | | | | (1,074 | | | | | | (668 | | | | | | (1,139 | |
| Net (loss) income | | | | | 753 | | | | | | (2,580 | | | | | | (1,659 | | | | | | (1,726 | |
| Basic & diluted net income (loss) per common share(1) | | | | | 0.03 | | | | | | (0.09 | | | | | | (0.06 | | | | | | (0.06 | |
|
| |
| (1) | Basic and diluted net income (loss) per common share are computed independently for each quarter. Therefore, the sum of the quarters will not necessarily equal the basic and diluted net income (loss) per common share for the full year. |
(12) Restructuring Costs
In June 2005 the Company eliminated 6 positions in continuing operations in order to further streamline the organization. The Company recorded a charge to continuing operations in the second quarter of 2005 totaling approximately $322 related to involuntary termination benefits to be paid to the terminated employees. All restructuring costs related to the 2005 reduction in force have been paid as of December 31, 2006.
In December 2006, in order to reduce operating costs to better position ourselves in the current market, we eliminated 19 positions from continuing operations. We recorded a charge to operations of $431 in 2006 related to involuntary termination benefits to be paid to the terminated employees. Approximately $382 of the 2006 restructuring costs has been paid. The remaining liability at December 31, 2006 is $49 and is expected to be paid in 2007.
The activities related to the restructurings are as follows:
| | | | | | | | | | | | |
| | | | 2006 | | | 2005 |
| Restructuring liability at January 1 | | | | $ | 319 | | | | | $ | — | |
| Involuntary termination costs | | | | | 431 | | | | | | 322 | |
| Cash payments | | | | | (701 | | | | | | (3 | |
| Adjustment to severance accrual | | | | | — | | | | | | — | |
| Restructuring liability at December 31 | | | | $ | 49 | | | | | $ | 319 | |
|
(13) Contingencies
Historically, the Company has been involved in disputes and/or litigation encountered in its normal course of business. The Company believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s business, consolidated financial condition, results of operations or cash flows.
68
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AXS-One Inc.:
Under date of March 23, 2006, we reported, before the effects of the adjustments to retrospectively report the discontinued operations described in Note 2 to the consolidated financial statements, on the consolidated balance sheet of AXS-One Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for the years ended December 31, 2005 and 2004 (the consolidated financial statements referred to above before the effects of the adjustments discussed in Note 2, are not presented herein). In connection with our audits of the aforementioned consolidated financial statements, we also audited the accompanying related cons olidated financial statement schedule for the years ended December 31, 2005 and 2004. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule for the years ended December 31, 2005 and 2004, when considered in relation to the basic consolidated financial statements, before the effects of the adjustments to retrospectively report the discontinued operations described in Note 2 to the consolidated financial statements, taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey
March 23, 2006
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Table of ContentsSCHEDULE II
AXS-ONE INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2006, 2005 and 2004
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts(a): | | | Balance at
Beginning
of Year | | | Charged
to Costs and
Expenses, net | | | Amounts
Written
Off | | | Balance
at End
of Year |
| Year ended December 31, 2006 | | | | $ | 167 | | | | | $ | 6 | | | | | $ | (90 | | | | | $ | 83 | |
| Year ended December 31, 2005 | | | | $ | 577 | | | | | $ | 11 | | | | | $ | (421 | | | | | $ | 167 | |
| Year ended December 31, 2004 | | | | $ | 200 | | | | | $ | 465 | | | | | $ | (88 | | | | | $ | 577 | |
|
| |
| (a) | Balances for all time periods except December 31, 2006 include allowances for doubtful accounts for the Enterprise Solutions business segment. Amounts written off in 2006 include amounts for the Enterprise Solutions business segment. |
70
NO 
