SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended September 30, 2001
Commission File No. 000-27869
AUTHORISZOR INC.
(Exact name of registrant as specified in charter)
Delaware 75-2661571
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
Windsor House, Cornwall Road,
Harrogate, North Yorkshire,
HG1 2 PW HG1 2 PW
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(Address of principal (Postal Code)
executive offices)
Registrant's telephone number, including area code: 011-44-1423-730-300
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of November 14, 2001, there were 18,456,698 shares of the common stock, $0.01
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (check one)
YES NO X
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AUTHORISZOR INC.
September 30, 2001
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and June 30, 2001 (audited) ............................................................F-1
Consolidated Statements of Operations for the three months
ended September 30, 2001 and 2000 (unaudited)...........................................F-2
Consolidated Statements of Cash Flows for the three months ended
September 30, 2001 and 2000 (unaudited).................................................F-3
Notes to Consolidated Financial Statements (unaudited)..................................F-4
Item 2. Management's Discussion and Analysis and Plan of Operation................................1
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Item 3. Quantitative and Qualitative Disclosure of Market Risk....................................5
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................6
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Item 2. Changes in Securities ....................................................................6
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Item 3. Defaults Upon Senior Securities...........................................................7
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Item 4. Submission of Matters to a Vote of Security Holders.......................................7
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Item 5. Other Information.........................................................................7
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Item 6. Exhibits and Reports on Form 8-K..........................................................7
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SIGNATURES..................................................................................................8
i
AUTHORISZOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, June 30, 2001
2001 (audited)
(unaudited)
$ $
ASSETS
Cash 6,437,359 9,340,029
Receivables
Trade 2,142,986 1,912,158
Accrued interest 22,223 489,783
Other Debtors and VAT 464,763 119,215
Prepaid expenses 411,309 677,912
Work-in-progress and amounts recoverable on contracts 245,956 -
Restricted cash 1,734,058 1,728,276
--------------------------------
Total current assets 11,458,654 14,267,373
Investment in securities, available-for-sale - 875,655
Computer and office equipment, net of accumulated depreciation 636,489 612,527
Goodwill net of accumulated amortization 7,816,854 6,000,252
Other 229,326 233,270
--------------------------------
8,682,669 7,721,704
--------------------------------
$20,141,323 $21,989,077
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade 1,547,878 1,060,688
Accrued liabilities and other payables 2,923,344 3,707,960
Bank overdraft 302,751 -
Deferred revenue 893,164 1,089,887
Payable related to WRDC acquisition 3,121,292 3,121,292
Payable related to Logsys acquisition 134,738 99,304
Current maturities of capital lease obligations 95,035 -
-------------------------------
Total current liabilities 9,018,202 9,079,131
Long term capital lease obligations, less current maturities 145,748 127,546
Stockholders' equity
Preferred stock, par value $.01 per share; authorized: 2,000,000
shares; issued: none
Common stock, $.01 par value per share; authorized: 30,000,000
shares; issued and outstanding: 18,456,698 shares at
September 30, 2001 and 18,456,698 at June 30, 2001 184,567 184,567
Additional paid-in capital 36,181,317 36,174,317
Accumulated other comprehensive income:
Cumulative foreign exchange translation adjustment 792,894 982,753
Unrealized gains on available for sale securities - 364,725
Accumulated deficit during the development stage (26,181,405) (24,923,962)
-------------------------------
Total stockholders' equity 10,977,373 12,782,400
-------------------------------
$20,141,323 $21,989,077
===============================
The accompanying notes are an integral part of these statements.
F-1
AUTHORISZOR AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
September 30,
2001 2000
$ $
Net sales 1,934,260 8,239
Cost of sales 606,857 1,678
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Gross profit 1,327,403 6,561
Operating expenses
Administrative 3,078,365 3,175,862
Marketing and advertising 42,588 300,534
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Total operating expenses 3,120,953 3,476,396
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Operating loss (1,793,550) (3,469,835)
Other income (expense)
Interest income, net 87,870 383,885
Gain on sale of investments 283,018 -
Currency transaction gains (losses) 154,186 (1,022,229)
Equity in earnings of WRDC - 11,710
---------------- ---------------
Total other income (expense), net 525,074 (626,634)
---------------- ---------------
Net loss $(1,268,476) $(4,096,469)
================ ===============
Weighted average shares outstanding:
Basic and diluted: 18,456,698 17,414,081
================ ===============
Loss per common share:
Basic and diluted $(0.07) $(0.24)
================ ===============
The accompanying notes are an integral part of these statements.
F-2
AUTHORISZOR AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months
ended September 30,
2001 2000
---- ----
$ $
Cash flows used in operating activities
Net loss during the period (1,268,476) (4,096,469)
Adjustments to reconcile net loss to net cash used in operating
activities:
Issuance of stock and stock options in exchange for services 7,000 258,338
Equity in earnings in WRDC - (11,710)
Gain on sale of investments (283,018) -
Depreciation and amortization 244,039 86,963
Changes in operating assets and liabilities
Receivables and other assets 669,509 263,323
Accounts payable and accrued liabilities (1,701,284) (611,770)
---------------------------------
Net cash used in operating activities (2,332,230) (4,111,325)
Cash flows (used in) provided by investing activities
Acquisition of equipment (4,640) (219,389)
Sale of investments 793,948 -
Investment in WRDC AG (28,681) -
Investment in Logsys (1,311,350) -
Investment in PAD (41,754) -
Purchase of intangible assets (28,257) (31,312)
Increase in restricted bank deposits (5,782) -
---------------------------------
Net cash flows (used in) provided by investing activities (626,516) (250,701)
Cash flows provided by financing activities
Payments on capital leases (4,941) (14,130)
Increase in bank overdraft 302,751 -
---------------------------------
Net cash flows provided by financing activities 297,810 (14,130)
Effect of exchange rate changes on cash (241,734) (152,791)
---------------------------------
Net (decrease) increase in cash and cash equivalents (2,902,670) (4,528,947)
Cash and cash equivalents at beginning of period 9,340,029 27,095,762
---------------------------------
Cash and cash equivalents at end of period $ 6,437,359 $22,566,815
=================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 20,783 -
Income taxes - -
=================================
Assets and liabilities recognized upon acquisition of Logsys:
Receivables 436,951 -
Prepaid and other 71,282 -
Amounts recoverable on contracts 153,796 -
Fixed assets 67,980 -
Trade payables (243,925) -
Other liabilities (323,787) -
Accruals (565,418) -
Deferred income (164,503) -
Current maturities (5,199) -
Long term maturities (13,675) -
Goodwill 1,897,848 -
---------------------------------
Total consideration, including bank overdraft 1,311,350 -
=================================
The accompanying notes are an integral part of these statements.
F-3
AUTHORISZOR AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PREPARATION
The consolidated financial statements of Authoriszor Inc. and
subsidiaries (the "Company") contained herein, have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments necessary for a fair presentation
of the consolidated financial statements have been made. All such adjustments,
in the opinion of management, are of a normal recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to the
interim reporting rules of the Securities and Exchange Commission. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes as of June 30, 2001,
included in the Company's Form 10-KSB.
NOTE B - CURRENCY TRANSACTION LOSSES
The Company incurred currency transaction gain of approximately
$154,000 during the three months ended September 30, 2001. The gain is a result
of the Company maintaining the majority of its operating cash in pound sterling
during the three month period ended September 30, 2001. The British Pound has
strengthened against the U.S. dollar during the three months ended September 30,
2001.
NOTE C - COMPREHENSIVE INCOME (LOSS)
Three months ended
September 30,
2001 2000
Foreign currency translation
adjustment $ (189,859) $ (183,452)
Reclassification of gains on
available-for-sale securities (364,725) 512,447
Net loss (1,268,476) (4,096,469)
-------------- ------------------
Comprehensive loss $(1,823,060) $(3,767,474)
NOTE D - STOCK BASED COMPENSATION
In July 2001, the Company granted to Mr. S. Ashton, a consultant of
Logsys Solutions Limited, a company incorporated in the United Kingdom
("Logsys"), a stock option to purchase 25,000 shares of common stock of the
Company pursuant to the Authoriszor Inc. 2000 Omnibus Stock and Incentive Plan
at an exercise price equal to $0.38, which was the market price of the Company's
common stock on the date of grant. The stock option is immediately exercisable.
Based on a fair market valuation a charge of $7,000 has been applied to this
quarter's financial results.
NOTE E - ACQUISITION
In September 2001, the Company, though its wholly-owned subsidiary
Authoriszor Holdings Ltd. ("AHL"), acquired approximately 99.8% of the
outstanding capital stock of Logsys, a subsidiary of Logsys Holdings Limited
("LHL"), for cash of approximately $396,000. In addition, the Company is
obligated to issue to LHL up to 186,453 shares of common stock subject to the
realization by Logsys of certain outstanding trade debt receivables and certain
itemized works in progress identified by Logsys. As of September 30, 2001, the
Company owned approximately 99.8% of the outstanding capital stock of Logsys.
The results of Logsys have been consolidated at 100% since July 3, 2001. For
F-4
AUTHORISZOR AND SUBSIDIARIES
more information concerning the Company's acquisition of Logsys, please see the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 3, 2001.
NOTE F - GOODWILL
Goodwill which resulted from the Company's acquisition of WRDC Ltd. is
being amortized using the straight-line method over a period of ten years.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until July 1, 2002,
at which time annual and quarterly goodwill amortization of approximately
$632,000 and $158,000 will no longer be recognized. By June 30, 2003, the
Company will have completed a transitional fair value based impairment test of
goodwill as of July 1, 2002. By September 30, 2002, the Company will have
completed a transitional impairment test of all intangible assets with
indefinite lives, resulting impairment losses, if any, will be recognized in the
quarter ended September 30, 2002, as a cumulative effect of a change in
accounting principle.
The goodwill arising from the Logsys acquisition, which was completed
on July 3,2001, will not be amortized. The Company will test this goodwill for
possible impairment by December 31, 2001.
F-5
Item 6. Management's Discussion and Plan of Operations
The following description of "Management's Plan of Operation"
constitutes forward-looking statements for purposes of the Securities Act and
the Exchange Act and as such involves known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. The words "expect",
"estimate", "anticipate", "predict", "believes", "plan", "seek", "objective" and
similar expressions are intended to identify forward-looking statements or
elsewhere in this report. Important factors that could cause our actual results,
performance or achievement to differ materially from our expectations include
the following: 1) one or more of the assumptions or other factors discussed in
connection with particular forward-looking statements or elsewhere in this
report prove not to be accurate; 2) we are unsuccessful in increasing sales
through our anticipated marketing efforts; 3) mistakes in cost estimates and
cost overruns with respect to our products or services, particularly our fixed
price contracts; 4) our inability to obtain financing for general operations
including the marketing of our technology consulting services and products, and
acquisitions; 5) non-acceptance, generally of our technology consulting services
or one or more of our products in the marketplace for whatever reason; 6) our
inability to supply any of our technology consulting services or products to
meet market demand; 7) generally unfavorable economic conditions that would
adversely effect purchasing decisions by purchasers of our technology consulting
services or distributors, resellers or consumers of our products; 8) development
of a similar competing product at a similar price point; 9) the inability to
negotiate a favorable agreement for or to adequately protect our intellectual
property; (10) if we experience labor and/or employment problems such as the
loss of key personnel, inability to hire and/or retain competent personnel,
etc.; (11) if we experience unanticipated problems and/or force majeure events
(including but not limited to accidents, fires, acts of God etc.), or we are
adversely affected by problems of our suppliers, shippers, customers or others;
(12) our revenues could be negatively affected by the loss of a major client
with respect to our technology consulting services; (13) the inability to keep
up with the internet's rapid technological changes, evolving industry standards
and changing client requirements; (14) the reorientation of our business model
to include providing technology consulting services; (15) our risk factors as
described in the section entitled "Risk Factors" contained in the Registration
Statement on Form S-1, declared effective May 18, 2000, as amended, and the
Prospectus contained therein, dated May 19, 2000, as supplemented; and (16) any
risk factors contained in our Annual Report on Form 10-KSB/A, filed with the
Securities and Exchange Commission as of November 7, 2001. All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by such factors. We undertake no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
Overview
Following a detailed review of our business, our new management team
revised our previous business plan to reduce the focus that had previously been
given to sales of our suite of security software and to focus on the delivery of
technology consulting services to our customers. Our strategy, therefore,
changed and is now focused on two strategic directions:
o becoming a full service vendor of consulting, systems integration and
systems development services to the e-commerce, security and work flow
sectors of the information technology industry; and
o to a lesser degree, licensing our suite of security products to
companies who have an established sales channel and route to market.
A large majority of our revenue is now derived from business and
technology consulting services, as a result of the acquisitions of WRDC Ltd.
("WRDC") and Logsys Solutions Limited ("Logsys"), each a company incorporated
under the laws of England and Wales. For more information concerning the
acquisitions of WRDC and Logsys, please refer to the heading captioned
"Financing Management's Plan of Operation" contained in this Item. In addition,
we expect that our revenue will, to a great degree, continue to be derived from
such consulting services in the future. Though we expect to experience growth in
our revenues derived from business and technology consulting services, the
market for advanced technology consulting skills has declined significantly over
the last several months.
1
We expect that our revenues will be driven primarily by the number and
scope of our client engagements, our professional services headcount, and our
ability to appropriately staff those engagements and price our services. To the
extent that any significant client uses less of our services or terminates its
relationship with us, our revenues could be adversely impacted.
Results Of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER,
30, 2000
Revenues
Revenues for the quarter ended September 30, 2001 were $1,934,260
compared to $8,239 for the quarter ended September 30, 2000. This increase
resulted primarily from consolidating 100% of the operations of WRDC and Logsys
following our acquisition of WRDC and Logsys on May 8, 2001 and July 3, 2001,
respectively
Cost of Revenues
Cost of revenues during the quarter ended September 30, 2001 increased
to $606,857 compared to $1,678 for the quarter ended September 30, 2000. This
increase resulted from consolidating the operations of WRDC and Logsys following
our acquisition of WRDC and Logsys on May 8, 2001 and July 3, 2001, respectively
.
Expenses
o Administrative expenses consist primarily of salaries and benefits
paid to our employees, travel costs incurred by our employees,
occupancy and office costs, and severance costs a result of the
implementation of management's new business plan. Administrative
expenses for the quarter ended September 30, 2001 were reduced to
$3,078,365 compared to $3,175,862 in the quarter ended September 30,
2000. Administrative expenses for WRDC and Logsys for the three month
period ended September 30, 2001 were approximately $1,800,000.
Accordingly, our administrative expenses without regard to these
subsidiaries for the period ended September 30, 2001 were
approximately $1,300,000 (or approximately $1,050,000 adjusted for
non-cash compensation expense in relation to a U.S. consultant in the
quarter ended September 30, 2000)less than our administrative expenses
for the quarter ended September 30, 2000. This significant reduction
in the quarter ended September 30, 2001 compared to the quarter ended
September 30, 2000 is due to the reorganization of the group carried
out between December 2000 and June 2001, involving the closure of all
operations in the U.S., the closure of certain UK sales offices, a
reduction in UK corporate office space and the termination of the
respective employees associated with such closures.
o Marketing and advertising expenses were $42,588 for the quarter ended
September 30, 2001 compared to $300,534 a year ago. This reduction is
attributable primarily to our ongoing review and focus on cost
reduction. This reduction in expenses was accompanied by a significant
increase in sales.
Other Income and Expense
o Interest income was $87,870 for the quarter ended September 30, 2001
compared to $383,885 for the three months ended September 30, 2001.
This reduction in interest income is a result of significantly reduced
cash balances.
o Gain on sale of investments was $283,018 for the quarter ended
September 30,2001 compared to none a year ago. The gain is a result of
our disposal of our remaining Minmet shares.
o Foreign currency gains for the quarter ended September 30, 2001 were
$154,186 compared to losses of $1,022,229 a year ago. The increase in
this quarter was due primarily to the British pound strengthening
against the U.S. dollar throughout the quarter ended September 30,
2001.
2
Financing Management's Plan of Operation
At the time of the acquisition of Authoriszor Ltd. in July 1999, we had
approximately $1,600,000 in cash and other liquid assets, including securities
of Minmet. Following the acquisition of Authoriszor Ltd., we sold in the quarter
ended September 30, 1999 10.5 million Minmet shares with Minmet's consent at the
price of 8 pence (sterling) per share. These transactions resulted in net cash
proceeds to the Company of approximately $1,360,000.
In January 2000, in an effort to raise capital, we reduced the exercise
price of certain options to purchase 350,000 shares of common stock from $1.00
to $.66 per share if such stock options were exercised by January 31, 2000. All
of such stock options were exercised by January 31, 2000.
In addition, in January 2000 we sold the stock of our subsidiary Toucan
Mining for $809,750 ((pound)500,000) in cash. This transaction was undertaken
because of our need to dispose of our mining interests (except for the retained
Minmet securities) in a timely fashion to be able to pursue our current business
and to facilitate the Regulation S private placement that was being arranged by
Beeson Gregory. Prior to the sale, Toucan Mining transferred to us warrants to
purchase 7.7 million shares of Minmet at an exercise price of 8 pence (sterling)
per share and 2 million Minmet shares. In May 2000, we exercised the warrants
and sold the underlying 7.7 million shares of Minmet for sales proceeds, net of
the exercise price, of approximately $2,078,000. Subsequently, we have sold the
remaining Minmet shares owned by us.
On February 18, 2000, we sold 2,727,273 shares of common stock at
$11.00 per share. The placement was made pursuant to Regulation S under the
Securities Act in the United Kingdom and Europe. The gross proceeds of the
placement were $30,000,003. In addition, we granted an option to Beeson Gregory
Limited, the placement agent, to purchase 136,363 shares of common stock at an
exercise price of $11.00 per share for a term of two years. Beeson Gregory also
received a commission of 5% of the total gross proceeds, the reimbursement of
certain of its expenses and has been appointed as our financial advisor at an
annual advisory fee of approximately $40,000 which has been waived for each of
the three months ended September 30, 2001.
The proceeds of the offering, net of commissions payable to Beeson
Gregory and reimbursement of Beeson Gregory's expenses and other expenses,
resulted in cash available to the Company of approximately $28,015,000. Pursuant
to the applicable placing documents, on March 20, 2000 we filed a Registration
Statement under the Securities Act to register the resale of the placement
shares and made application to list the Company's common stock on the Nasdaq
National Market System. The Registration Statement, as amended, was subsequently
declared effective under the Securities Act on May 18, 2000. As of such date, we
had incurred a cost of approximately $375,000 in connection with the resale of
the placement shares and for payment of the Nasdaq listing fee. Thereafter, we
incurred additional expenses in connection with the resale of the placement
shares under the Registration Statement, including the filing of a
Post-Effective Amendment No. 1 to the Registration Statement. In the future we
may incur additional costs related to the effectiveness of the Post-Effective
Amendment and the resale of the placement shares thereunder. We expect to use
the remaining net proceeds from the placement to provide working capital to the
Company and its subsidiaries.
Upon completion of the placement, we, through Authoriszor Holdings Ltd.
("AHL"), acquired 27.2% of the stock of WRDC Ltd. ("WRDC") (25.1% on a fully
diluted basis) for an aggregate subscription price of $604,800 ((pound)378,000).
In addition, on making the subscription, AHL made a loan in the principal amount
of $195,200 ((pound)122,000) to WRDC, repayable (with interest) over a five year
period beginning on the second anniversary date of the first drawdown.
Authoriszor Ltd. has converted the terms of the existing interest free loan to
WRDC in the principal amount of $160,800 ((pound)100,000) to a loan to WRDC with
similar terms.
Prior to changing our business model to the delivery of consulting
services, we had intended to grow our internet security software business
through the opening of our headquarters in Burlington, Massachusetts, hiring
employees in the U.S. and U.K. and recruiting field staff in 6 major cities in
the U.S. to provide local sales and technical support to the market place and
customer base for our suite of security software products. In addition, we
established home office locations in these 6 cities. As of January 31, 2001 our
employee headcount stood at 74.
The Company entered into and announced several contracts with third
parties that had agreed to purchase the Company's technologies and/or services.
These contracts did not represent material contracts with such third parties in
terms of the amount of revenue received by the Company.
3
Effective January 31, 2001, our then current President, Chief Executive
Officer and Interim Chief Financial Officer resigned the various executive
officer and director positions that he had previously held with us and entered
into a severance agreement with the Company. As a result, a new management team
was appointed to executive positions in the Company. Paul Ayres was appointed
our Chief Executive Officer and President, and Andrew Cussons was appointed our
Chief Financial Officer and Secretary. Pursuant to the terms of the severance
agreement with our former President and Chief Executive Officer, we have
incurred severance costs of approximately $840,000 for the year ended June 30,
2001. This amount includes $250,000 that is payable in January 2002 but has been
accrued as of June 30, 2001.
Effective January 29, 2001, James L. Jackson resigned from his position
as Chairman of the Board of Authoriszor Ltd. and from his position as our Vice
President and Secretary. Mr. Jackson continues as a member of our Board of
Directors. In connection with Mr. Jackson's resignation, we agreed to continue
to pay Mr. Jackson's salary, car allowance and pension contribution benefits
following his resignation during the remaining term of the service agreement,
and the Company and Mr. Jackson agreed to increase Mr. Jackson's salary for a
limited time during this period in consideration for certain payments owed to
Mr. Jackson. After paying Mr. Jackson the increased rate for two months, we
returned the level of payments owed to Mr. Jackson under the notice provision of
his service agreement to approximately the same level prior to the increase for
the remainder of the term. In addition, effective May 18, 2001, Barry Jones
resigned from his position as Director of Sales and Marketing for Authoriszor
Ltd. In connection with Mr. Jones' resignation, we agreed to pay Mr. Jones'
salary, car allowance and pension contribution benefits following his
resignation during the 12 months' notice period of his service agreement, and we
and Mr. Jones agreed to increase Mr. Jones' salary in consideration of certain
payments owed to Mr. Jones during this period. Finally, effective July 1, 2001,
Mr. Karys resigned his position as our Vice President - Engineering. We have
agreed to continue to pay Mr. Karys' salary and car allowance in accordance with
the 12 month notice provision contained in his amended employment agreement.
Each of the foregoing costs associated with the resignations of Messrs. Jackson,
Jones and Karys were accrued at June 30, 2001; however, pursuant to the
provisions of each officers' employment agreement, we are obligated to continue
to make certain monthly cash payments in accordance with the respective
employment agreements of each officer.
Upon taking office our new management team began a detailed review of
our past business plan and the scalability of our business plan for the future.
As a result of a detailed review of the business undertaken by the new
management team, a series of cost-cutting measures were initiated. On May 8,
2001, as part of a company-wide restructuring designed to fully implement our
changed business model, we announced a reduction in our staffing levels to 38
permanent staff, comprised of five employees in the U.S. and 33 employees in the
UK, in addition to 51 employees at WRDC. Also, in connection with our
restructuring, we closed all of the field offices, consolidating all U.S.
operations in the Burlington, Massachusetts office. Subsequently, management
made the decision to close the U.S. office, and in May 2001, we entered into a
sub-lease agreement with Directech, Inc. to lease the entire office space that
previously functioned as our U.S. headquarters, moving our headquarters to our
Harrogate, England office. The sublease calls for payments in an amount that is
substantially equal to the amount that we are obligated to pay in rent under our
lease that we entered into in May 2000. In addition, the sublease is effective
until April 28, 2005, the term of our lease. Management has further reduced the
employee headcount to 22 as of September 30, 2001 (excluding 44 employees and 27
employees at WRDC and Logsys). Of these, 5 employees were primarily involved in
research and development, 5 employees were involved in sales and marketing, 9 in
general administration and support and 3 engaged in professional services. These
measures were undertaken to enable the business to operate at more realistic
financial levels that were in line with our expected revenues in the future.
Moreover, as a result of the restructuring and series of cost-cutting measures
imposed, we terminated or failed to renew certain consulting agreements.
We have, therefore, consolidated substantially all of our operations
out of our Harrogate, England office, with a view to achieving growth through
acquisition, rather than organic growth.
To this end, on May 8, 2001, we consummated an agreement that increased
our ownership of WRDC from 27.1% to 66.4%. At the initial closing, in exchange
for certain shares of capital stock of WRDC held by shareholders of WRDC, Garcia
Hanson and Brian Edmondson, we issued, in the aggregate, 929,914 shares of
common stock to Messrs. Hanson and Edmondson, and paid them approximately $1.7
million in cash. We are also obligated with respect to the first step of the
acquisition to issue to Messrs. Hanson and Edmondson up to 195,555 additional
shares of common stock, subject to the realization of certain accounts
receivables of WRDC.
4
Upon the occurrence of certain events, but in no event later than
January 1, 2002, we are obligated to acquire the remaining capital stock of WRDC
not then owned by us in a second step transaction. Subject to certain
exceptions, the consideration payable in connection with the second step of the
acquisition will consist of $1.6 million in cash and the remaining portion in
shares of common stock; provided, however, that in no event will we issue more
than 19.9% of the issued and outstanding shares of common stock as of the date
of the initial closing. In the event that the exchange ratio set forth in the
acquisition agreements would otherwise require us to issue more than 19.9% of
the issued and outstanding shares of common stock, as of the initial closing,
whether due to changes in the market price of the common stock or currency
fluctuations during the interim between the initial closing and the second
closing or otherwise, we will instead pay to Messrs. Hanson and Edmondson an
amount in cash equivalent to the aggregate market value of the shares of our
common stock over the threshold of 19.9% of our outstanding common stock. Under
the terms of our agreement with WRDC, assuming that the currency exchange rate
remains at or near $1.45 per (pound)1.00, and further assuming that the market
price of our common stock remains at or near $.21 per share, we may be
obligated, upon the consummation of the acquisition of the remaining shares of
WRDC we do not already own, to make an additional cash payment to the WRDC
shareholders of approximately $1.0 million (such sum is in addition to the cash
payment representing 45% of the total consideration payable to WRDC
shareholders).
On July 3, 2001, our wholly owned subsidiary, AHL., initially acquired
approximately a 68% interest in Logsys Solutions Limited ("LSL") in exchange for
a cash payment of approximately $237,000, and, if certain conditions are met,
the issuance of 186,453 shares of our common stock. These shares have not
currently been issued. In addition, our ownership interest in Logsys has
increased to approximately 99.75% of the outstanding capital stock of Logsys as
a result of the solicitation by Logsys of holders of its capital stock, other
than shares of capital stock already owned by us, to tender their respective
shares of capital stock in exchange for cash consideration payable by us at the
same price per share as our initial acquisition of capital stock of Logsys.
During the fiscal year ended June 30, 2001, we realized $117,000 net
proceeds from the sale of Minmet shares. Subsequent to such fiscal year, we sold
our remaining Minmet shares and realized $794,000 in net proceeds.
We have primarily funded our operations from the net proceeds from the
private placement of our common stock to investors of approximately $28 million
and the proceeds of the sale of Minmet securities. We believe that our existing
cash, cash equivalents and short-term investments remaining for such sources
will be sufficient to meet our working capital requirements for at least the
next 12 months; however, we will likely need additional financing to effectuate
any future material acquisitions.
Quantitative and Qualitative Disclosure of Market Risk
We have risk related to currency exchange rate fluctuations and a
majority of our cash flows will be received in pound sterling. The majority of
our cash flows are expected to be received in non-U.S. currencies. In addition,
as of September 30, 2001, Authoriszor Inc. had deposited cash in pound sterling
denominated accounts in the amount of $266,076. A ten percent fluctuation in
currency rates would have a $26,608 effect on our annual income. Our UK
subsidiaries had deposited cash in pound sterling denominated accounts in the
amount of $5,334,300. A ten (10%) percent fluctuation in currency rates would
have a $533,430 effect on our stockholders' equity. Following the closing of our
U.S. operations, approximately 90% of our current working capital requirements
is in pound sterling. Also, as of September 30, 2001, there are U.S. dollar
denominated loans outstanding from us to our UK subsidiaries of approximately
$3,908,000 that are not of a long-term investment nature. A ten (10%) percent
fluctuation in currency rates would have a $390,800 effect on income. Although
we may choose to do so in the future, to date, we have not engaged in foreign
exchange hedging transactions.
5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
(a) None
(b) None
(c) During the quarter ended September 30, 2001, the Company has issued, or
agreed to issue, the following securities in transactions not
registered under the Securities Act of 1933, as amended (the
"Securities Act").
1. On July 3, 2001, we, through our wholly owned subsidiary,
Authoriszor Holdings Ltd., consummated an agreement to
initially acquire approximately a 68% interest in Logsys in
exchange for a cash payment of approximately $237,000, and, if
certain conditions are met, the issuance of 186,453 shares of
our common stock to the parent company of Logsys, Logsys
Holdings Limited ("Logsys Holdings"). These shares have not
currently been issued. In addition, our ownership interest in
Logsys has increased to approximately 99.75% of the
outstanding capital stock of Logsys as a result of the
solicitation by Logsys of holders of its capital stock, other
than shares of capital stock already owned by us, to tender
their respective shares of capital stock in exchange for cash
consideration payable by us at the same price per share as our
initial acquisition of capital stock of Logsys.
The shares of common stock that will be issued to
Logsys Holdings will not be registered under the Securities
Act, in reliance upon an exemption from registration set forth
in Section 4(2) of the Securities Act. Logsys was a closely
held company, and the acquisition of Logsys by us was a
privately negotiated transaction without any general
solicitation or advertising in which Logsys Holdings was
represented by counsel. Logsys Holdings represented to us that
it was a "sophisticated investor" that was acquiring the
shares for investment and not with a view towards a public
distribution, and further that it had access to all material
information concerning us that was necessary to make an
informed decision with respect to the transaction. Logsys
Holdings also acknowledged that the shares were restricted
securities under the Securities Act and were subject to
restrictions set forth in Rule 144 thereunder. The share
certificates with respect to the shares issuable by us to
Logsys Holdings will contain a Rule 144 legend.
2. In July, 2001, we entered into a Consulting Agreement with
Stewart Leslie Ashton pursuant to which Mr. Aston would
provide a broad array of operational and other
business-related consulting services for our subsidiary,
Logsys. In accordance with the terms of the Consulting
Agreement, pursuant to which we entered into a Stock Option
Agreement with Mr. Ashton, we agreed to grant to Mr. Ashton a
stock option to purchase 25,000 shares of our common stock to
pursuant to the Authoriszor Inc. 2000 Omnibus Stock and
Incentive Plan (the "2000 Plan") at an exercise price equal to
$0.38, the market price of our common stock on the date of
grant. The stock option is immediately exercisable for a ten
year term. The stock options granted to Mr. Ashton were
granted, and, except as provided below, the shares of common
stock issuable upon the exercise of the options granted to Mr.
Ashton will be issued, pursuant to the exemption from
registration under the Securities Act set forth in Section
4(2) of the Securities Act.
The grant of the stock options to Mr. Ashton was not
registered under the Securities Act and such stock option is a
restricted security under the Securities Act. In addition,
except as set forth below, the issuance of the shares of our
common stock upon the exercise of the stock options granted to
Mr. Ashton will not be registered under the Securities Act and
such shares will be restricted securities under the Securities
Act subject to the restrictions on transfer set forth in Rule
144 thereunder. The Consulting Agreement and Stock Option
Agreement with Mr. Ashton were privately negotiated
transactions without general solicitation or advertising with
a consultant that was a "sophisticated investor" within the
meaning of the Securities Act and who had access to all
information concerning us that such consultant deemed
6
necessary to make an informed decision with respect to the
Consulting Agreement and the Stock Option Agreement. Except as
set forth below, the share certificates issuable to the
consultant upon the exercise of the stock options will contain
a legend with respect to the restrictions on transfer of such
shares. We intend to file a registration statement on Form S-8
under the Securities Act with respect to the 2000 Plan. If Mr.
Ashton exercises his stock option after the effectiveness of
this registration statement, the issuance of the shares of
common stock upon exercise of the stock option will have been
registered under the Securities Act
Item 3. Default Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
The following significant event occurred during the quarter ended
September 30, 2001:
Effective July 3, 2001, we consummated an acquisition whereby
our wholly owned subsidiary, Authoriszor Holdings Ltd.,
initially acquired approximately a 68% interest in Logsys in
exchange for a cash payment of approximately $237,000, and, if
certain conditions are met, the issuance of 186,453 shares of
our common stock. These shares have not currently been issued.
In addition, our ownership interest in Logsys has increased to
approximately 99.75% of the outstanding capital stock of
Logsys as a result of the solicitation by Logsys of holders of
its capital stock, other than shares of capital stock already
owned by us, to tender their respective shares of capital
stock in exchange for cash consideration payable by us at the
same price per share as our initial acquisition of capital
stock of Logsys. For further information concerning the terms
and conditions upon which we acquired Logsys, please see our
Current Report on Form 8-K that was filed with the Securities
and Exchange Commission on July 16, 2001.
Item 6. Exhibits and Reports on Form 8-K .
EXHIBITS
The following exhibits are furnished in accordance with Item 601 of Regulation
S-B.
2.1* Stock Purchase Agreement, dated as of July 3, 2001, by and among
Authoriszor Holdings Ltd., Logsys Holdings Limited and Stewart Leslie
Ashton (Exhibit 2.1).
+10.1# Stock Option Agreement, dated as of July 3, 2001, by and between the
Authoriszor Inc. and S. Ashton.
- --------------------------------
* Incorporated by reference to the exhibit shown in parenthesis from the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 3, 2001.
# Filed herewith.
+ Compensation plan, benefit plan or employment contract or arrangement.
REPORTS ON FORM 8-K
1. We filed a Current Report on Form 8-K with the Securities and
Exchange Commission on May 9, 2001, reporting the execution
and consummation of the acquisition by us of all of the issued
and outstanding capital stock of WRDC. We also filed a Current
Report on Form 8-K/A with the Securities and Exchange
Commission on September 17, 2001 with respect to the WRDC
acquisition.
2. We filed a Current Report on Form 8-K with the Securities and
Exchange Commission on July 16, 2001, reporting the execution
and consummation of the acquisition by us of approximately 68%
of the outstanding capital stock of Logsys.
7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report to be signed on
its behalf by the undersigned thereunto duly authorized.
AUTHORISZOR INC.
(Registrant)
Date: November 14, 2001 By: /s/ Andrew Cussons
---------------------------------
Andrew Cussons
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
8
INDEX TO EXHIBITS
2.1* Stock Purchase Agreement, dated as of July 3, 2001, by and among
Authoriszor Holdings Ltd., Logsys Holdings Limited and Stewart Leslie
Ashton (Exhibit 2.1).
+10.1# Stock Option Agreement, dated as of July 3, 2001, by and between the
Authoriszor Inc. and S. Ashton.
- --------------------------------------
* Incorporated by reference to the exhibit shown in parenthesis from the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 3, 2001.
# Filed herewith.
+ Compensation plan, benefit plan or employment contract or arrangement.