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 December 31, 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 2PW
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(Address of principal (Postal Code)
executive offices)
Registrant's telephone number, including area code: (+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 February 14, 2002, there were 20,768,511 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.
December 31, 2001
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
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Consolidated Balance Sheets as of December 31, 2001 (unaudited)
and June 30, 2001 (audited) ............................................................F-1
Consolidated Statements of Operations for the three and six months
ended December 31, 2001 and 2000 (unaudited)............................................F-2
Consolidated Statements of Cash Flows for the six months ended
December 31, 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
INDEX TO EXHIBITS
i
AUTHORISZOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2001
(unaudited) (audited)
$ $
ASSETS
Cash 2,659,071 9,340,029
Receivables
VAT recoverable and trade 2,126,966 1,912,158
Accrued interest - 489,783
Other 311,964 119,215
Prepaid expenses 228,575 677,912
Work-in-progress and amounts recoverable on contracts 258,566 -
Restricted cash 448,799 1,728,276
-----------------------------------
Total current assets 6,033,941 14,267,373
Investment in securities, available-for-sale - 875,655
Computer and office equipment, net of accumulated depreciation 572,757 612,527
Goodwill 7,060,776 6,000,252
Intangibles and other assets 220,804 233,270
-----------------------------------
7,854,337 7,721,704
-----------------------------------
TOTAL ASSETS $13,888,278 $21,989,077
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - trade 930,074 1,060,688
Accrued liabilities 2,136,457 3,707,960
Deferred revenue 714,770 1,089,887
Payable related to WRDC acquisition 68,444 3,480,792
Payable related to Logsys acquisition 73,479 -
Current maturities of capital lease obligations 95,982 99,304
-----------------------------------
Total current liabilities 4,019,206 9,438,631
Long term capital lease obligations, less current maturities 127,147 127,546
Cumulative redeemable preferred stock, $0.01 par value, 779,588 -
389,794 shares issued at $2.00 redemption value
-----------------------------------
Total long term liabilities 906,735 127,546
Stockholders' equity
Common stock, $.01 par value per share; authorized: 30,000,000
shares; issued and outstanding: 18,456,698 shares at
June 30, 2001 and 20,582,058 at December 31, 2001 205,821 184,567
Additional paid-in capital 36,903,135 36,174,317
Accumulated other comprehensive income:
Cumulative foreign exchange translation adjustment 303,705 623,253
Unrealized gains on available-for-sale securities - 364,725
Accumulated deficit (28,450,324) (24,923,962)
-----------------------------------
Total stockholders' equity 8,962,337 12,422,900
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,888,278 $21,989,077
===================================
The accompanying notes are an integral part of these statements.
F-1
AUTHORISZOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the six months ended
December 31, December 31,
2001 2000 2001 2000
$ $ $ $
Net sales 2,132,760 15,937 4,067,020 24,176
Cost of sales 736,009 1,027 1,342,866 2,705
---------------- --------------- ----------------- ---------------
Gross profit 1,396,751 14,910 2,724,154 21,471
Operating expenses
Marketing and advertising 87,010 676,029 129,598 976,563
Administrative 3,422,595 6,318,698 6,342,323 9,494,560
---------------- --------------- ----------------- ---------------
Total operating expenses 3,509,605 6,994,727 6,471,921 10,471,123
---------------- --------------- ----------------- ---------------
Operating loss (2,112,854) (6,979,817) (3,747,767) (10,449,652)
Other income (expense)
Interest income, net 36,374 286,668 124,244 670,553
Gain on sale of investments - - 283,018 -
Currency transaction gains (losses) (27,529) 390,975 126,657 (631,254)
Goodwill amortization (158,637) - (317,274) -
Equity in earnings of WRDC - 44,335 - 56,045
---------------- --------------- ----------------- ---------------
Total other income (expense), net (149,792) 721,978 216,645 95,344
---------------- --------------- ----------------- ---------------
Net loss $(2,262,646) $(6,257,839) $(3,531,122) $(10,354,308)
Preferred stock dividend (6,497) - (6,497) -
---------------- --------------- ----------------- ---------------
Net loss attributable to common
shareholders $(2,269,143) $(6,257,839) $(3,537,619) $(10,354,308)
================ =============== ================= ===============
Weighted average shares outstanding:
Basic and diluted 18,988,038 17,486,907 18,760,321 17,450,494
================ =============== ================= ===============
Loss per common share:
Basic and diluted $(0.12) $(0.36) $(0.19) $(0.59)
================ =============== ================= ===============
The accompanying notes are an integral part of these statements.
F-2
AUTHORISZOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months
Ended December 31,
2001 2000
---- ----
$ $
Cash flows used in operating activities
Net loss during the period (3,537,619) (10,354,308)
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Issuance of stock and stock options in exchange for services 7,000 645,845
Equity in earnings in WRDC - (56,045)
Gain on sale of investments (283,018) -
Depreciation and amortization 520,640 189,501
Changes in operating assets and liabilities:
Receivables and other assets 1,030,674 95,525
Accounts payable and accrued liabilities (3,425,360) 2,639,549
---------------------------------
Net cash (used) in operating activities (5,687,683) (6,839,933)
Cash flows (used in) provided by investing activities
Acquisition of equipment (35,255) (276,743)
Sale of investments 793,948 -
Investment in WRDC (1,236,560) -
Investment in Logsys (1,372,610) -
Purchase of intangible assets (28,257) (75,690)
Reduction (increase) in restricted bank deposits 1,279,477 (300,000)
---------------------------------
Net cash flows (used in) provided by investing activities (599,257) (652,433)
Cash flows (used in) provided by financing activities:
Payments on capital leases (22,595) (28,664)
Proceeds from the issuance of common stock - 400,000
---------------------------------
Net cash flows (used in) provided by financing activities (22,595) 371,336
Effect of exchange rate changes on cash (371,423) (195,133)
---------------------------------
Net (decrease) increase in cash and cash equivalents (6,680,958) (7,316,163)
Cash and cash equivalents at beginning of period 9,340,029 27,095,734
---------------------------------
Cash and cash equivalents at end of period $2,659,071 $19,779,571
=================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $31,342 $ -
Income taxes - -
Supplemental disclosure of non cash financing and investing activities:
Cumulative Preference stock, $0.01 par value , 389,794 shares issued
at $2.00 for settlement of investment consideration in WRDC $779,588 -
Issuance of 2,125,360 shares of Common Stock, par value
$0.01 per share, for settlement of investment consideration in
WRDC at fair value $0.35 $743,876 -
The accompanying notes are an integral part of these statements.
F-3
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
(the "SEC"). 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 SEC. 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, as amended by the Company's Form 10-KSB/A.
NOTE B - CURRENCY TRANSACTION GAINS AND (LOSSES)
The Company incurred currency transaction losses of approximately
$(27,529) during the three months ended December 31, 2001 and currency
transaction gains of $126,657 for the six months ended December 31, 2001. These
movements are a result of the Company (i) maintaining the majority of its
operating cash in pound sterling during the three month period ended December
31, 2001, and (ii) transaction losses related to short term loans. During the
three months ended December 31, 2001, the Company reclassified the short-term
obligation repayable by UK operations to Authoriszor Inc. from $3,967,379.60 to
$719,343.64, reflecting certain costs attributable to the winding down of our
U.S. operations. This reclassification mitigated the loss that was reflected by
the strengthening of the U.S. dollar against the UK pound during the three
months ended December 31, 2001. During the period beginning September 30, 2001
and ending December 31, 2001, the U.S. dollar strengthened against the UK pound
from (pound)1=$1.4752 to (pound)1=$1.4515. At June 30, 2001 the currency
exchange rate was (pound)1=$1.4152.
NOTE C - COMPREHENSIVE INCOME (LOSS)
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
Foreign currency translation
adjustment $ (129,689) $ (241,480) $ (319,548) $ (229,418)
Reclassifications of gains on sale - (1,329,085) - (818,768)
Net loss (2,269,143) (6,257,839) (3,537,619) (10,354,308)
-------------- ------------------ --------------- -------------------
Comprehensive loss $(2,398,832) $ (7,828,404) $(3,857,167) $(11,402,494)
NOTE D - ACQUISITION
In December 2001, the Company acquired the remaining equity in WRDC
Ltd., a company incorporated in the United Kingdom ("WRDC"), that it did not
already then own (increasing its previous ownership interest from approximately
66.4% to 100% of the outstanding capital stock of WRDC) for total consideration
equal to the following: (i) $1,236,650 payable in cash, (ii) the issuance of
2,125,360 shares of common stock, par value $.01 per share ("Common Stock"), of
the Company, and (iii) the issuance of 389,794 shares of Series A Cumulative
Redeemable Preferred Stock, par value $.01 per share ("Preferred Stock"). For
more information concerning the Company's acquisition of the remaining capital
stock of WRDC, please see the Company's Current Report on Form 8-K/A filed with
the SEC on January 30, 2002.
F-4
NOTE E - GOODWILL
New Accounting Standards Not Yet Adopted In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 141 (SFAS 141), "Business Combinations". This standard eliminates the
pooling method of accounting for business combinations initiated after June 30,
2001. In addition, SFAS 141 addresses the accounting for intangible assets and
goodwill acquired in a business combination. This portion of SFAS 141 is
effective for business combinations completed after June 30, 2001. The Company
does not expect SFAS 141 to have a material effect on the Company's financial
position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Intangible
Assets", which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually, and
also in the event of an impairment indicator. The Company will fully adopt SFAS
142 on July 1, 2002 and accordingly any existing goodwill as at June 30, 2001
will continue to be amortized until June 30, 2002. Goodwill arising from
business combinations after June 1, 2001 will no longer be amortized. The
adoption of SFAS 142 will reduce annual expenses by approximately $600,000.
Within six months of adopting SFAS 142, the Company will be required to perform
an impairment test on the goodwill. Management is unable to determine the impact
of the impairment test at this time
Goodwill that resulted from the Company's acquisition of WRDC is being
amortized using the straight-line method over a period of ten years. At December
31, 2001 the carrying value of such goodwill was $5,186,961.
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 Company's acquisition of 99.75% of the
capital stock of Logsys Solutions Limited, a company incorporated in the United
Kingdom ("Logsys"), completed on July 3, 2001, will not be amortized. In
connection with a fair value impairment review at December 31, 2001, the Company
considers the carrying value of $1,873,814 as appropriate at December 31, 2001.
For more information concerning the Company's acquisition of the capital stock
of Logsys, please see the Company's Current Report on Form 8-K/A filed with the
SEC on July 16, 2001.
NOTE F - NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable as a result of the exercise of stock options and warrants. A total of
3,233,913 potentially dilutive securities for the six months ended December 31,
2001 and 3,027,413 for the six months ended December 31, 2000 have not been
included because their inclusion would be anti-dilutive.
F-5
Item 2. Management's Discussion and Analysis or Plan of Operation
The following description of "Management's Discussion and Analysis or
Plan of Operation" constitutes forward-looking statements for purposes of the
Securities Act of 1933, as amended (the "Securities Act" ), and the Securities
Exchange Act of 1934, as amended (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. Important factors that could
cause our actual results, performance or achievement to differ materially from
our expectations include the following:
o one or more of the assumptions or other cautionary factors discussed in
connection with particular forward-looking statements or elsewhere in this
Form 10-QSB prove not to be accurate;
o we are unsuccessful in securing sales through its anticipated sales and
marketing efforts;
o errors in our cost estimates and cost overruns;
o our inability to obtain financing for general operations and for the
marketing of our products, including, without limitation, as a result of
being delisted from the Nasdaq National Market System ("Nasdaq NMS");
o non-acceptance of one or more of our products in the market place for
whatever reason;
o our inability to supply any product to meet market demand;
o generally unfavorable economic conditions that would adversely effect
purchasing decisions by distributors, resellers or end-users;
o development of a similar competing product at a similar price point;
o our inability to successfully integrate one or more acquisitions, joint
ventures or new subsidiaries operations (including the inability to
successfully integrate businesses, such as WRDC and Logsys Solutions
Limited ("Logsys"), that may be diverse as to type, geographic area, or
customer base and the diversion of management's attention among several
acquired businesses) without substantial costs, delays or other problems;
o if we experience labor and/or employment problems such as the loss of key
personnel, inability to hire and/or retain competent personnel, etc.;
o if we experience unanticipated problems and/or force majeure events
(including, but not limited to, accidents, fires, acts of God or terrorism,
etc.), or we are adversely affected by problems of our suppliers, shippers,
customers or others;
o a slowing of the growth of the acceptance and use of the internet as a
source of information and a vehicle for commerce and business;
o if we encounter difficulties in expanding and conducting business in
foreign markets;
o if we experience additional currency translation losses due to the
continued decline of the UK pound sterling versus the U.S. dollar;
o if larger and more established competitors successfully employ their
greater financial, marketing and sales resources, name recognition,
customer contacts and/or relationships with business and technology
partners to gain significant advantages over us;
o if our new management team recently put in place is unable or unqualified
to lead us; and/or
1
o those factors identified in our Annual Report on Form 10-KSB, dated October
22, 2001, as amended by our Form 10-KSB/A, dated November 7, 2001,
including without limitation, those factors identified as risk factors in
our Prospectus, dated May 19, 2000, as supplemented, and other factors that
affect the business generally.
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 that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The following is a discussion of the results of operations for the
three and six months ended December 31, 2001 compared with the three and six
months ended December 31, 2000.
Revenues
Revenues for the three and six months ended December 31, 2001 increased
by $2,116,823 and $4,042,844, respectively, from $15,937 and $24,176 for the
three and six month period ended December 31, 2000, to $2,132,760 and
$4,067,020. This increase resulted primarily from consolidating the operations
of WRDC and Logsys following our acquisition of 66.4% of the outstanding capital
stock of WRDC, effective May 8, 2001, the subsequent acquisition of all the
remaining outstanding shares of capital stock of WRDC not then already owned by
us, effective December 4, 2001, and our acquisition of 99.75% of the capital
stock of Logsys on July 3, 2001.
Cost of Revenues
Cost of revenues for the three and six months ended December 31, 2001
increased in line with the revenue growth. The percentage gross margin for the
three months and six months ended December 31, 2001 was 65% and 67%,
respectively. This change in gross margin percentage reflects a change in sales
mix, with a higher percentage of third party product and maintenance services
being sold in the quarter ended December 31, 2001 than in the quarter ended
September 30, 2001.
Expenses
Marketing and advertising costs for the three and six months ended
December 31, 2001 were reduced by $589,019 and $846,965, respectively. This
reduction is attributable primarily to our ongoing review of company-wide
expenditures and our increased focus on cost reduction. This reduction in
expenses was accompanied by a significant increase in sales.
Administrative expenses consist primarily of salaries and benefits paid
to our employees, related travel costs, occupancy and office costs, and
severance costs as a result of the continued implementation of management's
revised business plan.
Administrative expenses for the three and six months ended December 31,
2001 reduced by $2,896,103 and $3,152,237 respectively. It should be noted that
administrative expenses for WRDC and Logsys for the three and six months ended
December 31, 2001 were approximately $1,743,500 and $3,400,000, respectively.
Accordingly, our administrative expenses without regard to these subsidiaries
were $4,639,603 and $6,552,237 less than our administrative expenses compared to
the three and six months ended December 31, 2000. This significant reduction
reflects the closure of all US operations, the closure of certain UK sales
offices, a reduction in UK corporate and development office space and
termination of the respective employees associated with such closures. The
management team reviews costs on a continuous basis in the light of the levels
of revenues that we expect to achieve. Management believes that further cost
reductions will be necessary.
Other Income and Expense
Interest income for the three and six months ended December 31, 2001
were $250,294 and $546,309 less than for the three and six months ended December
31, 2000. This reduction is primarily a result of our significantly reduced cash
balances during such periods.
2
Gain on sale of investments for the six months ended December 31, 2001
was$283,018, compared to none for the same period a year ago. The gain is a
result of the disposal of the remaining Minmet shares owned by us.
Foreign currency (losses)/gains for the three and six months ended
December 31, 2001 were ($27,529) and $126,657, respectively, compared to
$390,975 and ($631,1254) for the three and six months ended December 31, 2000.
Goodwill amortization for the three and six months ended December 31,
2001 increased by $158,637 and $317,274, respectively, compared to the three and
six months ended December 31, 2000. This change reflects the amortization of
goodwill which resulted from the acquisition of WRDC using the straight-line
method over a period of ten years.
Financing Management's Plan of Operation
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 us. As a result, a new management team was
appointed to our executive positions. 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 and Secretary,
we have incurred severance costs of approximately $840,000 for the year ended
June 30, 2001. This amount includes $250,000 (prior to applicable tax
withholdings) that was paid in January 2002 pursuant to the terms of his
severance agreement but was accrued as of June 30, 2001.
Effective January 29, 2001 and May 18, 2001, each of James L. Jackson
and Barry Jones, respectively, resigned their various executive officer
positions with us; however Mr. Jackson continues as a member of our Board. In
connection with these resignations, we have agreed to continue to pay the
salary, car allowance and pension benefits of Messrs. Jackson and Jones in
accordance with the 12 month notice provision contained in their respective
contacts. However, each of the costs associated with the resignations of Messrs.
Jackson and Jones were accrued at June 30, 2001. Effective July 1, 2001, Alec
Karys resigned from his position as our Vice President - Engineering. In
connection with his resignation, we reached an agreement in principle with Mr.
Karys, which is subject to the negotiation of definitive documentation, to pay
to Mr. Karys severance payments in the aggregate amount of $270,833.32, payable
bi-monthly in arrears, beginning on July 1, 2001 and ending June 30, 2002. The
costs associated with the payments made to Mr. Karys pursuant to this severance
agreement were accrued as of June 30, 2001.
Upon taking office in February 2001, 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 group headcount to 78 as of January 31, 2002 (including 39 employees
and 27 employees at WRDC and Logsys, respectively). Of these, 15 employees were
primarily involved in research and development, 13 employees were involved in
sales and marketing, 15 in general administration and support and 35 engaged in
professional services. These measures have been undertaken to enable the
business to operate at more realistic financial levels that bring costs into
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. As of the date of this report, we have not finalized our
determination as to whether the requirements for the issuance of the 195,555
shares of Common Stock have been satisfied.
3
Upon the occurrence of certain events, but in no event later than
January 1, 2002, we were obligated to acquire the remaining capital stock of
WRDC not then owned by us in a second step transaction. Accordingly, the second
step transaction was consummated at a closing on December 4, 2001. At this
closing, we made a cash payment to each of Messrs. Hanson and Edmondson in the
amount of $618,325.15 ((pound)438,546.15) and issued to each of Messrs. Hanson
and Edmondson 1,062,680 shares of Common Stock and 194,897 shares of Preferred
Stock. The powers, preferences and rights of the Preferred Stock are set forth
in the Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions, as disclosed in our Form 8-K/A
filing made with the SEC on January 30, 2002.
The terms and conditions of the Preferred Stock requires us to pay
cumulative dividends to each of Messrs. Hanson and Edmondson at a rate of ten
percent (10%) per annum of the original purchase price of $2.00 per share of the
Preferred Stock (the "Original Purchase Price") annually on December 31 of each
year commencing December 31, 2002. In addition, upon any liquidation,
dissolution or winding up of our operations, each of Messrs. Hanson and
Edmondson shall be entitled to receive, in preference to the holders of Common
Stock, a per share amount equal to the Original Purchase Price plus any accrued
but unpaid dividends.
Further, the holders of at least fifty-one percent (51%) of the then
outstanding shares of Preferred Stock may elect to require us to redeem their
shares of Preferred Stock upon (i) the occurrence of certain Redemption Dates
(as defined in the Certificate of Designations), (ii) the closing of a secondary
fundraising by us in which we raise at least $5 million (exclusive of fees and
commissions), or (iii) our consolidation, merger or reorganization with or into
any other corporation, where the holders of Common Stock determined on a fully
diluted basis immediately before such merger, consolidation or reorganization
hold less than fifty percent (50%) of our Common Stock or the capital stock of
the surviving entity as so determined immediately after such transaction. Upon
such redemption, the holders of the Preferred Stock shall be entitled to receive
an amount in cash equal to the Original Purchase Price plus any accrued but
unpaid dividends then owed.
On July 3, 2001, our wholly owned subsidiary, Authoriszor Holdings
Limited, initially acquired approximately a 66.4% 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. Effective January 28,
2002, these shares have 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.
Effective November 30, 2001, David R. Wray, a member of our Board and
Chief Technical Officer of Authoriszor Limited resigned. In addition, effective
November 30, 2001, David J. Blanchfield, Research and Development Director of
Authoriszor Limited resigned his position with us. In connection with the
resignations of Messrs. Wray and Blanchfield, we have entered into Compromise
Agreements with each of said officers. Pursuant to the terms of the Compromise
Agreements, we are not obligated to pay any consideration to either Mr. Wray or
Blanchfield. Accordingly, we have accrued no expenses related to the
resignations of Messrs. Wray and Blanchfield. In addition, effective October 31,
2001, we have discontinued all payments that were otherwise due to members of
our Board in exchange for their service to our Board, with the exception that
all stock option agreements previously entered into by and between us and
certain members of our Board remain in full force and effect.
Prior to the events of September 11, 2001, we had received deficiency
letters from Nasdaq NMS with respect to the minimum bid price and minimum market
value of the public float of our Common Stock, and our Common Stock was at risk
of being delisted by Nasdaq NMS. However, following the events of September 11,
2001, Nasdaq NMS suspended the listing requirements for Nasdaq NMS traded
companies at least until January 2, 2002. Following January 2, 2002, Nasdaq NMS
re-instituted the prior listing requirements for Nasdaq NMS listed companies.
Accordingly, since January 2, 2002, the bid price of our Common Stock has closed
below $1.00 and may continue to do so in the future. We may receive notice from
Nasdaq NMS at any time following February 12, 2002 to the effect that we need to
comply with the listing maintenance requirements, including the minimum bid
price requirement and the minimum public float requirement, for continued
listing on Nasdaq NMS within 90 calendar days from such notification or be
delisted. If our Common Stock is delisted from Nasdaq NMS, we expect that our
Common Stock will continue to be quoted on the Over the Counter Bulletin Board
("OTC") quotation medium. However, if our Common Stock is delisted from Nasdaq
NMS, an investor could find it more difficult to dispose of, or to obtain
4
accurate quotations as to the market value of, our Common Stock, notwithstanding
the fact that our Common Stock is quoted on the OTC. In addition, if our Common
Stock is delisted from the Nasdaq NMS, it may be difficult for us to obtain any
additional financing from third-parties.
We have primarily funded our operations from (i) the net proceeds of
approximately $28 million we received from the private placement in February
2000 of our Common Stock to investors in a transaction that was exempt from
registration in accordance with Regulation S of the Securities Act, and (ii) the
proceeds of the sale of Minmet securities. In addition, following the
acquisition of WRDC and Logsys, we believe that a portion of the costs of our
operations may be funded from revenues generated by WRDC and Logsys; however, to
the extent that we experience a decrease in demand for our services, we could
experience a corresponding reduction in our revenues provided by operations.
Notwithstanding the foregoing, we believe that our existing cash, cash
equivalents and short-term investments remaining for such sources, in addition
to our revenues from operations provided by our acquisitions of WRDC and Logsys
will be insufficient to meet our working capital requirements for the next 12
months. To the extent our capital and operating resources are insufficient to
meet our future requirements, it is likely that we will have to raise additional
funds to continue the development and commercialization of our services. These
funds may not be available on favorable terms, or at all. If adequate funds are
not available on attractive terms, we may be required to curtail operations
significantly or to obtain funds by entering into financing, supply or other
agreements on unattractive terms.
Item 3. 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. A portion of our
cash flows are expected to be received in non-U.S. currencies. In addition, as
of December 31, 2001, our UK subsidiaries had deposited cash in pound sterling
denominated accounts in the amount of $2,379,000. A ten (10%) percent
fluctuation in currency rates would have a $237,900 effect on our stockholders'
equity. Also, as of December 31, 2001, there are U.S. dollar denominated loans
outstanding from us to our UK subsidiaries of approximately $881,000 that are
not of a long-term investment nature. A ten (10%) percent fluctuation in
currency rates would have a $88,100 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) Since the period beginning with the quarter ended September 30, 2001
and the date hereof, we have issued the following securities in
transactions not registered under the Securities Act:
(i) Effective December 4, 2001 and in connection with the closing
of the second step transaction with WRDC, whereby we purchased
all of the outstanding capital stock of WRDC not then already
owned by us, we issued 1,062,680 shares of Common Stock and
194,897 shares of Preferred Stock to each of Messrs. Hanson
and Edmondson (shares of Common Stock and Preferred Stock are
collectively referred to herein as the "WRDC Shares"). The
WRDC Shares issued to Messrs. Hanson and Edmondson
(collectively, the "Shareholders") were not registered under
the Securities Act in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
WRDC was a closely held company, and the acquisition of WRDC
by us was a privately negotiated transaction without any
general solicitation or advertising in which WRDC and the
Shareholders were represented by counsel. The Shareholders who
received the WRDC Shares each represented to us that they were
"sophisticated investors" who were acquiring the WRDC Shares
for investment and not with a view towards a public
distribution, and further that each had access to all material
information concerning us that was necessary to make an
informed decision with respect to the transaction. Each
Shareholder also acknowledged that there would be restriction
on transfer of the WRDC Shares received in the transaction.
The shares of Common Stock issued to the Shareholders are
reflected on the cover page indicating our total number of
currently issued and outstanding shares; however, the shares
of Preferred Stock are not so included.
(ii) Effective January 28, 2002 and in connection with the
realization of certain accounts receivable by Logsys, we
issued 186,453 shares of our Common Stock to Logsys Holdings
Limited, the parent company of Logsys ("Logsys Holdings"). The
Shares issued to Logsys Holdings were not registered under the
Securities Act in reliance on the exemption from registration
set forth in Section 4(2) of the Securities Act and Regulation
D promulgated thereunder.
The 186,453 shares of Common Stock ("Logsys Shares") issued to
Logsys Holdings related to an agreement between us and Logsys
Holdings to issue such shares of Common Stock in the event
that certain accounts receivable were met by Logsys Holdings.
This agreement was embodied in the Share Purchase Agreement,
dated July 3, 2001, whereby we acquired (direct and
indirectly) all of the outstanding capital stock of Logsys.
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 and
Logsys Holdings were represented by counsel. Logsys Holdings
represented to us that it was a "sophisticated investor" who
was acquiring the Logsys 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 there
would be restriction on transfer of the Logsys Shares received
in the transaction. The shares of Common Stock issued to
Logsys is reflected on the cover page indicating our total
number of currently issued and outstanding shares.
6
Item 3. Default Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
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+ Deed of Agreement, dated as of December 4, 2001, by and among
Authoriszor Inc., Authoriszor Holdings Limited, WRDC Limited, Garcia
Hanson and Brian Edmondson (Exhibit 2.5).
2.2+ Side Letter to the Deed of Agreement, dated as of December 4, 2001, by
and among Authoriszor Inc., Authoriszor Holdings Limited, Garcia Hanson
and Brian Edmondson (Exhibit 2.6).
4.1+ Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions of the Series A Cumulative
Redeemable Preferred Stock of Authoriszor Inc (Exhibit 4.1).
- --------------------------------------------------------
+ Incorporated by reference to the Exhibit indicated in parenthesis in
our Current Report on Form 8-K/A, field with the SEC on January 30,
2002.
REPORTS ON FORM 8-K
1. We filed a Current Report on Form 8-K/A with the SEC on January 30,
2002, reporting the acquisition of all of the outstanding capital stock
of WRDC not then already owned by us.
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: February 14, 2002 By: /s/ Andrew Cussons
---------------------------------
Andrew Cussons
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
8
INDEX TO EXHIBITS
2.1+ Deed of Agreement, dated as of December 4, 2001, by and among
Authoriszor Inc., Authoriszor Holdings Limited, WRDC Limited, Garcia
Hanson and Brian Edmondson (Exhibit 2.5).
2.2+ Side Letter to the Deed of Agreement, dated as of December 4, 2001, by
and among Authoriszor Inc., Authoriszor Holdings Limited, Garcia Hanson
and Brian Edmondson (Exhibit 2.6).
4.1+ Certificate of Designations, Preferences and Relative Rights,
Qualifications, Limitations and Restrictions of the Series A Cumulative
Redeemable Preferred Stock of Authoriszor Inc (Exhibit 4.1).
- --------------------------------------------------
+ Incorporated by reference to the Exhibit indicated in parenthesis in
our Current Report on Form 8-K/A, field with the SEC on January 30,
2002.