UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ to __________
Commission file number: 0-28560
NETGURU, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2356861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22700 SAVI RANCH PARKWAY, YORBA LINDA, CA 92887
(Address of principal executive offices)
(714) 974-2500
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 19,235,041 on November 13, 2006.
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements................................................................. 3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30, 2006 and 2005 (unaudited)......................... 3
Condensed Consolidated Balance Sheets as of
September 30, 2006 (unaudited) and March 31, 2006.................................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 2006 and 2005 (unaudited)............................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation............................ 18
Item 3. Controls and Procedures.............................................................. 32
PART II
OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 34
Item 6. Exhibits .............................................................................. 34
Signatures...................................................................................... 35
Exhibits Attached to this Report on Form 10-QSB................................................. 36
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($ in thousands except share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net revenues:
Collaborative software products and services $ 152 $ 208 $ 602 $ 450
IT services 423 418 843 972
------------ ------------ ------------ ------------
Total net revenues 575 626 1,445 1,422
------------ ------------ ------------ ------------
Cost of revenues:
Collaborative software products and services 26 1 80 2
IT services 312 340 619 728
------------ ------------ ------------ ------------
Total cost of revenues 338 341 699 730
------------ ------------ ------------ ------------
Gross profit 237 285 746 692
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 794 621 1,532 1,103
Research and development 107 136 215 286
Depreciation 45 53 79 109
------------ ------------ ------------ ------------
Total operating expenses 946 810 1,826 1,498
------------ ------------ ------------ ------------
Operating loss (709) (525) (1,080) (806)
------------ ------------ ------------ ------------
Other (income) expense (287) 112 (288) 235
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (422) (637) (792) (1,041)
Income tax (benefit) expense -- (3) -- 7
------------ ------------ ------------ ------------
Loss from continuing operations (422) (634) (792) (1,048)
------------ ------------ ------------ ------------
Loss from discontinued operations (Note 12) (140) (360) (222) (280)
------------ ------------ ------------ ------------
Net loss $ (562) $ (994) $ (1,014) $ (1,328)
============ ============ ============ ============
Basic and diluted net loss per common share:
Net loss per common share from continuing
operations $ (0.02) $ (0.03) $ (0.04) $ (0.05)
Net loss per common share from discontinued
operations $ (0.01) $ (0.02) $ (0.01) $ (0.02)
------------ ------------ ------------ ------------
Basic and diluted net loss per common share (0.03) (0.05) (0.05) (0.07)
============ ============ ============ ============
Common equivalent shares used in computing basic and
diluted net loss per common share 19,235,041 19,117,154 19,235,041 19,117,154
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
3
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
SEPTEMBER 30,
2006 MARCH 31,
(UNAUDITED) 2006
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,421 $ 2,497
Restricted cash -- 1,070
Accounts receivable (net of allowance for doubtful accounts of $14 at
September 30, 2006 and $20 at March 31, 2006) 396 606
Note receivable 25 103
Prepaid expenses and other current assets 80 239
Assets held for sale (Note 12) 1,931 2,133
--------------- ---------------
Total current assets 3,853 6,648
Property and equipment, net 101 179
Other assets 105 109
--------------- ---------------
$ 4,059 6,936
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 118 $ 117
Accounts payable 205 205
Accrued expenses 191 451
Income taxes payable 31 52
Deferred revenues 78 199
Accrued settlement for REI sale (Note 12) -- 760
Other liabilities 29 53
Current liabilities held for sale (Note 12) 405 717
--------------- ---------------
Total current liabilities 1,057 2,554
Capital lease obligations, net of current portion 76 136
Deferred gain on sale-leaseback (Note 13) 295 608
--------------- ---------------
Total liabilities 1,428 3,298
--------------- ---------------
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity:
Preferred stock, par value $.01 (Authorized 5,000,000 shares; no shares -- --
issued and outstanding)
Common stock, par value $.01; authorized 150,000,000 shares; 19,235,041
shares outstanding as of September 30, 2006 and March 31, 2006 192 192
Additional paid-in capital 20,685 20,685
Accumulated deficit (17,577) (16,563)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (669) (676)
--------------- ---------------
Total stockholders' equity 2,631 3,638
--------------- ---------------
$ 4,059 6,936
=============== ===============
See accompanying notes to condensed consolidated financial statements.
4
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,014) $ (1,328)
Less: Loss from discontinued operations (222) (280)
--------------- ---------------
Loss from continuing operations (792) (1,048)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 83 74
Amortization of debt discount -- 105
Bad debt expense 13 15
Changes in operating assets and liabilities:
Accounts receivable 76 464
Notes and related party loans receivable 82 --
Prepaid expenses and other current assets 159 73
Other assets 4 9
Accounts payable (1) 195
Accrued expenses (263) (163)
Income taxes payable (23) --
Other current liabilities (27) (3)
Deferred revenues 3 (182)
Deferred gain on sale-leaseback (313) (35)
--------------- ---------------
Net cash used in operating activities (999) (496)
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1) (119)
Proceeds from sale of equipment -- 1
Decrease in restricted cash 1,070 --
--------------- ---------------
Net cash provided by (used in) investing activities 1,069 (118)
--------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt -- (566)
Repayment of capital lease obligations (59) (60)
--------------- ---------------
Net cash used in financing activities (59) (626)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 28 33
--------------- ---------------
Net cash provided by (used in) continuing operations 39 (1,207)
--------------- ---------------
Cash flows from discontinued operations:
Cash (used in) provided by operating activities (1,205) 195
Cash provided by investing activities 143 95
Cash used in financing activities (54) (51)
--------------- ---------------
Net cash (used in) provided by discontinued operations (1,116) 239
Cash and cash equivalents, beginning of period 2,497 3,227
--------------- ---------------
Cash and cash equivalents, end of period $ 1,421 $ 2,259
=============== ===============
(continued on the following page)
5
NETGURU, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(In thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
------------------ ------------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 22 $ 91
================== ==================
Income taxes $ -- $ 8
================== ==================
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases $ -- $ 29
See accompanying notes to condensed consolidated financial statements.
6
NETGURU, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
netGuru, Inc. and its subsidiaries (the "Company"). All significant transactions
among the consolidated entities have been eliminated upon consolidation.
These condensed consolidated financial statements have been prepared by
the Company and include all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at September 30, 2006 and the results of operations and the cash flows
for the six months ended September 30, 2006 and 2005, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America, ("GAAP") for annual
consolidated financial statements. Results of operations for the six months
ended September 30, 2006 are not necessarily indicative of results to be
expected for the full year ending March 31, 2007 or any other period. It is
suggested that the accompanying condensed consolidated financial statements be
read in conjunction with the Company's audited consolidated financial statements
included in the Company's annual report on Form 10-KSB for the fiscal year ended
March 31, 2006.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
On November 18, 2005, the Company completed its sale of the assets of
its Research Engineers International ("REI") business and STAAD product lines to
privately-held Bentley Systems, Incorporated ("Bentley") for approximately $23.5
million. On January 5, 2006, the Company sold its France subsidiary to Mr.
Badreddine Ziane for approximately $100,000.
On August 29, 2006, the Company entered into an Agreement and Plan of
Merger with privately-held BPO Management Services, Inc. ("BPOMS") and BPO
Acquisition Corp., a newly-created wholly-owned subsidiary of the Company
specifically created to effect the merger. On August 29, 2006, the Company also
entered into a separate stock and asset sale agreement pursuant to which the
Company would, concurrently with the consummation of the merger transaction,
sell and transfer its interest in Research Engineers Ltd., the Company's
majority-owned Indian subsidiary that engages in engineering business process
outsourcing services ("REL"), and certain additional assets and liabilities to
Das Family Holdings ("DFH"). DFH is owned and controlled by Amrit K. Das, who is
the Company's Chairman, Chief Executive Officer, President and beneficial owner
of more than 10% of the Company's outstanding common stock, Santanu K. Das, who
is one of the Company's directors and former executive officers and holds more
than 10% of the Company's outstanding common stock, and their affiliates. The
Company has filed a definitive proxy with the Securities and Exchange Commission
covering the proposed merger and sale transactions.
In accordance with GAAP, the balance sheet at March 31, 2006 has been
reclassified to reflect the Indian subsidiary and additional assets and
liabilities to be sold to DFH as assets and liabilities held for sale.
Additionally, the statements of operations and cash flows have been reclassified
to reflect the results of the REI business and STAAD product lines, the France
subsidiary, and the Indian subsidiary as discontinued for the periods presented.
As such, unless otherwise noted, all amounts presented, including all note
disclosures, contain only information related to the Company's continuing
operations.
7
Certain reclassifications have been made to the fiscal 2006 condensed
consolidated financial statements to conform to the fiscal 2007 presentation.
The primary reclassifications relate to the separate reporting for the
discontinued operations of the REI business and STAAD product lines, the France
subsidiary and the Indian subsidiary (note 12).
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value Of Financial Instruments," requires management to
disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. At September 30, 2006, the Company's
management believed the carrying amounts of cash and cash equivalents,
receivable and payable amounts, and accrued expenses approximated fair value
because of the short maturity of these financial instruments. The Company's
management also believed that the carrying amounts of its capital lease
obligations approximated their fair values, as the interest rates approximated a
rate that the Company could have obtained under similar terms at the balance
sheet date.
3. REVENUE RECOGNITION
The Company recognizes revenue when the following criteria are met: (1)
persuasive evidence of an arrangement, such as agreements, purchase orders or
written or online requests, exists; (2) delivery has been completed and no
significant obligations remain; (3) the Company's price to the buyer is fixed or
determinable; and (4) collection is reasonably assured. The Company's revenues
arise from the following segments: collaborative software products and services
and IT services.
Revenue from software sales is recognized upon shipment if no
significant post-contract support obligations remain outstanding and collection
of the resulting receivable is reasonably assured. Customers may choose to
purchase maintenance contracts that include telephone, e-mail and other methods
of support, and the right to unspecified upgrades on a when-and-if available
basis. Revenue from these maintenance contracts is deferred and recognized
ratably over the life of the contract, usually twelve months.
In October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the AICPA issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 distinguishes between significant and insignificant
vendor obligations as a basis for recording revenue, with a requirement that
each element of a software licensing arrangement be separately identified and
accounted for based on relative fair values of each element. The Company
determines the fair value of each element in multi-element transactions based on
vendor-specific objective evidence ("VSOE"). VSOE for each element is based on
the price charged when the same element is sold separately.
In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which modified SOP
97-2 to allow for use of the residual method of revenue recognition if certain
criteria have been met. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of
the transaction fee is recognized as revenue.
The Company sells its collaborative software along with a maintenance
package. This constitutes a multi-element arrangement. The price charged for the
maintenance portion is the same as when the maintenance is sold separately. The
fair values of the maintenance contracts sold in all multi-element arrangements
are recognized over the terms of the maintenance contracts. The collaborative
software portion is recognized when persuasive evidence of an arrangement exits,
price is fixed and determinable, when delivery is complete, collection of the
resulting receivable is reasonably assured and no significant obligations
remain.
8
Revenues from providing IT services are recognized primarily on a time
and materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, once the services are completed and no significant
obligations remain. Certain IT services contracts are fixed price contracts
where progress toward completion is measured by mutually agreed upon
pre-determined milestones for which the Company recognizes revenue upon
achieving such milestones. Fixed price IT contracts are typically for a short
duration of one to nine months. The Company did not have any fixed price
contracts at September 30, 2006. Other products and services sold via Internet
portals, where the Company is an agent, are recognized net of purchase costs
when the products and services are delivered and collection is reasonably
assured.
4. CONCENTRATION OF SALES AND CREDIT RISK
The Company is subject to credit risk primarily through its accounts
receivable balances. The Company does not require collateral for its accounts
receivable balances. Four of the Company's customers each accounted for more
than 10% of the Company's consolidated net sales during the six months ended
September 30, 2006. Deutsche Rentenversicherung Bund, Course Technology, Inc.,
and BBK Healthcare, Inc. accounted for approximately 17.3%, 15.7%, and 12.5,
respectively, of the Company's consolidated net sales for the six months ended
September 30, 2006. During the six months ended September 30, 2005, Sharp
Laboratories of America, Course Technology, and Deutsche Bank accounted for
approximately 13.8%, 19.9% and 15.6%, respectively, of the Company's
consolidated net sales. No other customer accounted for more than 10% of the
Company's consolidated net sales during those periods.
5. DEFERRED REVENUES
The Company defers revenues for its maintenance contracts and for its
collaborative software sales that are not considered earned. The Company defers
its maintenance revenues when the maintenance contracts are sold, and then
recognizes the maintenance revenues over the term of the maintenance contracts.
The Company defers its collaborative software sales revenues if it invoices or
receives payment prior to the completion of a project, and then recognizes these
revenues upon completion of the project when no significant obligations remain.
6. STOCK-BASED COMPENSATION
The Company's shareholder-approved 1996, 1997, 1998, 2000, and 2003
Stock Option Plans, permit the grant of stock options as either incentive or
non-qualified to eligible directors, officers, employees and, in certain cases,
consultants, of the Company and its subsidiaries. Option awards are generally
granted with an exercise price equal to or greater than the market price of the
Company's stock at the date of grant. Options under all plans generally vest
over three years, though the vesting periods may vary from option to option, and
are exercisable subject to continued service and other conditions.
Effective as of the beginning of the first quarter of fiscal year 2007,
the Company adopted the provisions of SFAS No. 123(R), "Share-Based Payment",
using the modified-prospective transition method. Under this method, prior
period financial statements will not be restated but disclosure of the pro forma
net loss calculation will be included in the footnotes to the financial
statements for periods prior to fiscal 2007 and the adoption of SFAS No. 123(R).
The provisions of SFAS No. 123(R) apply to new stock options issued on or after
the adoption date and stock options outstanding, but not yet vested, on the
adoption date. SFAS No. 123(R) requires the Company to estimate future
forfeitures of stock based compensation while the pro forma disclosure for the
three and six months ended September 30, 2005 includes only those options that
had been forfeited during those periods. In January 2006 the Company cancelled
all outstanding employee stock options and so as of March 31, 2006, there were
9
no options outstanding and unexercisable under any of the employee stock option
plans. No stock options were granted during the six months ended September 30,
2006. Accordingly, fair value was not determined and stock-based compensation
expense was not recorded during this period.
Prior to April 1, 2006, the Company measured stock based compensation
expense using the intrinsic value method of accounting in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations (APB No. 25). Stock-based compensation
expense was previously recognized on stock options issued to employees only if
the option exercise price was less than the market price of the underlying stock
on the date of grant. During the three and six months ended September 30, 2005,
no stock-based compensation expense was recorded under the intrinsic value
method.
The following represents pro forma information as if the Company
applied the fair value method of accounting for stock-based compensation in
accordance with SFAS No. 123(R) during the three and six months ended September
30, 2005 (in thousands, except amounts per share):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
----------------- -----------------
Net loss - as reported $ (994) $ (1,328)
Deduct: Stock-based compensation expense
determined under the fair value based
method for all awards, net of tax 36 72
----------------- -----------------
Net loss - pro forma $ (1,030) $ (1,400)
================= =================
Basic and diluted net loss per share -
as reported $ (0.05) $ (0.07)
================= =================
pro forma $ (0.05) $ (0.07)
================= =================
Weighted average fair value of options
granted $ 1.02 $ 1.02
================= =================
The fair value of stock options granted during the periods indicated
has been determined using the Black-Scholes option pricing model. The
weighted-average assumptions used in estimating the fair value of stock options
granted during the period, along with the weighted-average grant date fair
values, were as follows:
SIX MONTHS ENDED
SEPTEMBER 30, 2005
------------------
Black-Scholes option pricing model assumptions:
Dividend yield --
Expected volatility 81.0%
Risk-free interest rate 4.26
Expected option lives (in years) 7.01
Expected forfeiture rate --
10
No dividend yield is expected since the Company historically did not
pay cash dividends. The expected volatility is based on the historical
volatility of the Company's common stock over the period commensurate with the
expected life of the options. The risk-free interest rate is based on the
implied yield currently available on U.S Treasury securities with an equivalent
remaining term. The expected life represents the period the Company's
stock-based award are expected to be outstanding, giving consideration to the
contractual terms of the stock-based awards and vesting schedules. The
forfeiture rate is an estimate of the percentage of granted stock options that
will be cancelled prior to becoming vested. The Company has estimated this to be
0% because of the historically small amount of forfeitures in the prior periods.
7. FOREIGN CURRENCY TRANSLATION
The financial condition and results of operations of the Company's
foreign subsidiaries are accounted for using the local currency as the
functional currency. Assets and liabilities of the subsidiaries are translated
into United States dollars (the reporting currency) at the exchange rate in
effect at the end of the interim period. Statements of operations accounts are
translated at the average rate of exchange prevailing during the respective
interim periods. Translation adjustments arising from the use of differing
exchange rates from period to period are included in accumulated other
comprehensive income (loss) in the consolidated balance sheet. Gains and losses
resulting from foreign currency transactions are included in operations and were
not material to the first six months of fiscal 2007 and 2006.
8. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which prescribes rules for the reporting and display of
comprehensive income (loss) and its components. SFAS No. 130 requires foreign
currency translation adjustments, which are reported separately in stockholders'
equity, to be included in other comprehensive income (loss). The components of
comprehensive loss for the three and six months ended September 30, 2006 and
2005 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net loss $ (562) $ (994) $ (1,014) $ (1,328)
Foreign currency translation adjustment 27 (37) 7 (37)
------------ ------------ ------------ ------------
Comprehensive loss $ (535) $ (1,031) $ (1,007) $ (1,365)
============ ============ ============ ============
9. NET LOSS PER SHARE
Basic earnings (loss) per share ("EPS") is calculated by dividing net
income (loss) by the weighted-average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that could
occur upon conversion or exercise of securities, options, or other such items,
to common shares using the treasury stock method based upon the weighted-average
fair value of the Company's common shares during the period.
11
The following table illustrates the computation of basic and diluted
net loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
-------- -------- -------- --------
Numerator:
Net loss and numerator for basic
and diluted loss per share $ (562) $ (994) $ (1,014) $ (1,328)
======== ======== ======== ========
Denominator:
Denominator for basic net loss per share -
average number of common shares
outstanding during the period 19,235 19,117 19,235 19,117
Incremental common shares attributable
to exercise of outstanding options,
warrants and other common stock
equivalents -- -- 16 --
-------- -------- -------- --------
Denominator for diluted net loss per share 19,235 19,117 19,251 19,117
======== ======== ======== ========
Basic and diluted net loss per share $ (0.03) $ (0.05) $ (0.05) $ (0.07)
======== ======== ======== ========
In January 2006 the Company cancelled all outstanding employee stock
options. Non-employee options, warrants and other common stock equivalents
amounting to 1,073,000 and 873,000 potential common shares were excluded from
the computation of diluted EPS for the three and six months ended September 30,
2006 because the Company reported net losses and, therefore, the effect would
have been anti-dilutive. Non-employee options, warrants and other common stock
equivalents amounting to 1,790,000 potential common shares were excluded from
the computations of diluted EPS for the three and six months ended September 30,
2006 and 2005, because the Company reported net losses and, therefore, the
effect would have been anti-dilutive.
10. SEGMENT AND GEOGRAPHIC DATA
The Company is an integrated Internet and information technology ("IT")
and services company. The Company's operating segments are:
o Collaborative software products and services; and
o IT services.
The Company applies the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources. The Company's
management monitors unallocable expenses related to the Company's corporate
activities in a separate "Center," which is reflected in the tables below.
12
The significant components of worldwide operations by reportable
operating segment are:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
NET REVENUE
Collaborative software products
and services $ 152 $ 208 $ 602 $ 450
IT services 423 418 843 972
----------- ----------- ----------- -----------
Consolidated $ 575 $ 626 $ 1,445 $ 1,422
=========== =========== =========== ===========
GROSS PROFIT
Collaborative software products
and services $ 126 $ 207 $ 522 $ 448
IT services 111 78 224 244
----------- ----------- ----------- -----------
Consolidated $ 237 $ 285 $ 746 $ 692
=========== =========== =========== ===========
OPERATING (LOSS) INCOME
Collaborative software products
and services $ (77) $ (9) $ 91 $ 10
IT services (9) (32) 2 31
Center (623) (484) (1,173) (847)
----------- ----------- ----------- -----------
Consolidated $ (709) $ (525) $ (1,080) $ (806)
=========== =========== =========== ===========
The Company's operations are based worldwide through foreign and
domestic subsidiaries and branch offices in the United States, India, Germany
and Asia-Pacific. The following are significant components of worldwide
operations by geographic location:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
NET REVENUE
United States $ 474 $ 566 $ 1,018 $ 1,242
Europe -- 36 18 101
Asia-Pacific 101 24 409 79
---------- ---------- ---------- ----------
Consolidated $ 575 $ 626 $ 1,445 $ 1,422
========== ========== ========== ==========
EXPORT SALES
United States $ -- $ 24 $ 19 $ 110
========== ========== ========== ==========
SEPTEMBER 30, MARCH 31,
2006 2006
------------ ------------
(IN THOUSANDS)
LONG-LIVED ASSETS
United States $ 179 $ 257
Europe 27 31
------------ ------------
Consolidated $ 206 $ 288
============ ============
13
11. CONTINGENCIES
REL (FORMERLY RESEARCH ENGINEERS PRIVATE LTD.) V. VITAL COMMUNICATIONS,
AND VITAL COMMUNICATIONS V. REL.
REL is a plaintiff in a civil action commenced by REL and is a
defendant in a counter suit by Vital Communications stemming from actions in
2001 in Tiz Hazari Court, India and Delhi High Court, India, SUIT NO. 256 OF
2001 LYING PENDING AT THE HIGH COURT OF DELHI, INDIA.
In the actions, REL alleges causes of action for breach of contract and
seeks alleged damages of approximately $450,000. Vital Communications denies any
breach of contract or other wrongdoing and/or contends and alleges that REL is
in breach of contract and is demanding $1,350,000 in damages. The Company
further denies that Vital Communications is entitled to the claimed damages.
Both REL and Vital Communications are engaged in settlement
discussions. No reserves regarding this dispute have been recorded under accrued
expenses in the September 30, 2006 consolidated balance sheet. If the pending
sale of the Indian subsidiary to DFH is consummated as proposed, DFH has agreed
to assume certain liabilities and obligations relating to REL, including
potential liabilities associated with the existing legal dispute with Vital
Communications.
AUTODESK, INC. V. NETGURU SYSTEMS LIMITED AND REPL
(NETGURU SYSTEMS LIMITED WAS AMALGAMATED INTO REPL)
REPL was a defendant in a civil action commenced against it by
plaintiff Autodesk, Inc. ("Autodesk") on May 4, 2006, SUIT NO. 752 OF 2006, IN
THE HIGH COURT OF DELHI, INDIA. In the action, plaintiff alleged infringement of
copyright on account of unlicensed use of software programs being utilized by
defendant.
On June 29, 2006, REPL entered into a deed of settlement agreement with
Autodesk, Inc whereby REPL would purchase all software programs allegedly being
used and would agree to periodic audits by plaintiff over a period of 12 months.
The agreement called for a payment of 5 million Indian rupees for the purchase
of the software and 1 million Indian Rupees towards legal fees, for a total of 6
million Indian Rupees, or approximately $131,600. At March 31, 2006, the Company
accrued $120,000 for the settlement of this lawsuit and recorded the additional
expense of $11,600 in the first quarter ended June 30, 2006. The entire payment
of $131,600 was paid in July 2006.
OTHER LITIGATION
The Company is a party to various litigation matters arising in the
normal course of business. Management believes the disposition of these matters
will not have a material impact on the Company's consolidated financial
condition or results of operations.
12. DISCONTINUED OPERATIONS
On November 18, 2005, the Company completed the sale of assets of its
REI business and STAAD product lines to Bentley for approximately $23.5 million
in cash. In November 2005, the Company set aside a cash reserve of $1.07 million
in accordance with the asset sale agreement with Bentley. As of May 17, 2006 the
sum of the prepaid assets assigned to Bentley at closing and the assigned
accounts receivable for which payments have been received by Bentley was less
than the aggregate amount of the assumed current liabilities, which resulted in
a shortfall of approximately $760,000. According to the asset sale agreement,
the Company was obligated to pay the amount of the shortfall to Bentley. The
entire amount of the shortfall was recorded under accrued settlement for REI
sale on the balance sheet as of March 31, 2006 and was subsequently paid in May
2006.
14
On January 5, 2006, the Company sold its France subsidiary to Mr.
Badreddine Ziane for approximately $100,000. The France subsidiary was in the
business of selling the Company's STAAD structural analysis and design product
lines and provided technical support and maintenance for their customers. Mr.
Ziane agreed to purchase all the outstanding shares of the subsidiary and has
indicated that he intends to sell the REI products and offer related consulting
services as an independent contractor to Bentley. Per the agreement, $65,000 was
due upon signing of the agreement and $35,000 was due over the next 6 months. As
of June 30, 2006, the Company had received $65,000 and had a remaining balance
of $35,000 recorded under note receivable on the balance sheet as of June 30,
2006. In July 2006, the Company received another payment of approximately
$12,000, leaving a balance of approximately $23,000 as of September 30, 2006.
As discussed in note 1, on August 29, 2006, the Company entered into an
Agreement and Plan of Merger with BPOMS and also entered into a separate stock
and asset sale agreement to sell and transfer the Company's interest in its
Indian subsidiary and certain additional assets and liabilities to DFH. As a
result of the pending sale, the Company's Indian subsidiary and additional
assets and liabilities to be sold to DFH have been classified as assets held for
sale.
The Company's condensed consolidated financial statements have been
reclassified for all periods presented to reflect the REI business, France
subsidiary and Indian subsidiary as discontinued operations. The Company first
reflected the REI business and France subsidiary operations as discontinued in
the second quarter of fiscal 2006 and the Indian subsidiary and operations as
discontinued in the first quarter of fiscal 2007 when the Company decided to
sell those respective operations. In accordance with GAAP, the revenues, costs,
and expenses directly associated with those businesses have been reclassified as
discontinued operations on the condensed consolidated statements of operations
for all periods presented. Corporate expenses such as general corporate overhead
and interest have not been allocated to discontinued operations. Additionally,
assets and liabilities of the Indian subsidiary have been reclassified as held
for sale on the Company's condensed consolidated balance sheets for all periods
presented, and the Company's condensed consolidated statements of cash flows
have been reclassified to reflect the operations of the REI business, France
subsidiary and Indian subsidiary as discontinued operations for all periods
presented. There were no assets or liabilities held for sale for the REI
business or France subsidiary for the periods presented due to the fact that
these businesses were sold prior to the Company's prior year end of March 31,
2006.
15
The carrying value of the assets and liabilities held for sale of the
Indian subsidiary included in the consolidated balance sheets are as follows:
SEPTEMBER 30, MARCH 31,
2006 2006
-------------- --------------
Cash and cash equivalents $ 291 $ 251
Restricted cash -- 147
Accounts receivable, net 224 276
Deposits 39 69
Prepaid expenses and other current assets 553 515
-------------- --------------
Total current assets 1,107 1,258
Property and equipment, net 824 875
-------------- --------------
$ 1,931 $ 2,133
============== ==============
Current portion of capital lease obligations $ 15 $ 18
Current portion of long term debt, net of discount 26 57
Accounts payable 69 109
Accrued expenses 247 458
Income taxes payable 5 8
Deferred revenues 8 9
-------------- --------------
Total current liabilities 370 659
Capital lease obligations, net of current portion 35 41
Long term debt, net of current portion and discount -- 17
-------------- --------------
Total liabilities $ 405 $ 717
============== ==============
The net revenues and net loss of the Company's discontinued operations,
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net revenues:
Indian subsidiary $ 219 $ 276 $ 414 $ 473
REI business -- 2,835 -- 5,523
France subsidiary -- 132 -- 299
----------- ----------- ----------- -----------
$ 219 $ 3,243 $ 414 $ 6,295
=========== =========== =========== ===========
Net (loss) income from operations of:
Indian subsidiary (140) (265) (250) (461)
REI business -- (106) 28 159
France subsidiary -- 11 -- 22
----------- ----------- ----------- -----------
$ (140) $ (360) $ (222) $ (280)
=========== =========== =========== ===========
16
13. DEFERRED GAIN ON SALE AND LEASEBACK
As part of the November 2005 transaction to sell the operations of REI
business and STAAD product lines, the Company assigned, and Bentley, the buyer,
assumed all rights under the lease of approximately 40,000 square feet of the
Yorba Linda, California facility that houses the Company's corporate
headquarters. Simultaneous with the assignment, the Company signed a sublease
with Bentley for approximately 3,000 square feet of office space, representing
approximately 8% of the facility for a monthly rate of $3,400, which was the
market rate at that time. Under the assignment, Bentley assumed all obligations
under the lease and agreed to perform all covenants and agreements of tenant
under the lease but the Company remained liable under the terms of the lease.
During the three months ended September 30, 2006, the original lessor agreed to
refund the rental deposit to the Company, subject to completion of certain
maintenance work. Also during the three months ended September 30, 2006, Bentley
and the Company agreed to terminate the Company's sublease as of December 31,
2006. The Company will vacate the facility and move its headquarters to a more
suitable location. Pursuant to SFAS No. 13, "Accounting for Leases," and
interpretations thereof, the Company is recognizing the unamortized balance of
the deferred gain on sale and leaseback over the modified term of the sublease.
The Company recognized in other income approximately $295,000 in gain on sale
and leaseback during the three months ended September 30, 2006.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend that the forward-looking
statements be subject to the safe harbors created by those sections. The
forward-looking statements generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance, and can generally be identified by the use of the
words "believe," "intend," "plan," "expect," "forecast," "project," "may,"
"should," "could," "seek," "pro forma," "goal," "estimates," "continues,"
"anticipate" and similar words. The forward-looking statements and associated
risks may include, relate to, or be qualified by other important factors,
including, without limitation:
o Our ability to continue as a going concern;
o Our ability to obtain additional debt or equity financing to
the extent needed for our continued operations or for planned
expansion, particularly if we are unable to attain and
maintain profitable operations in the future;
o Our ability to successfully implement our business plans,
including the pending merger and sale transactions;
o Our ability to attract and retain strategic partners and
alliances;
o Our ability to hire and retain qualified personnel;
o The risks of uncertainty of protection of our intellectual
property;
o Risks associated with existing and future governmental
regulation to which we are subject; and
o Uncertainties relating to economic conditions in the markets
in which we currently operate and in which we intend to
operate in the future.
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section of
our latest annual report on Form 10-KSB and our definitive proxy statement for
our annual stockholders' meeting scheduled for November 28, 2006 or our other
filings could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
RECENT DEVELOPMENTS
As part of the November 2005 transaction to sell the operations of our
REI business and STAAD product lines, we assigned, and Bentley, the buyer,
assumed all rights under the lease of approximately 40,000 square feet of the
Yorba Linda, California facility that houses our corporate headquarters.
Simultaneous with the assignment, we signed a sublease with Bentley for
approximately 3,000 square feet of office space, representing approximately 8%
of the facility for a monthly rate of $3,400, which was the market rate at that
time. Under the assignment, Bentley assumed all obligations under the lease and
agreed to perform all covenants and agreements of tenant under the lease but we
remain liable under the terms of the lease. During the three months ended
18
September 30, 2006, the original lessor also agreed to refund the rental deposit
to us, subject to completion of certain maintenance work. Additionally, during
the three months ended September 30, 2006, we and Bentley agreed to terminate
our sublease as of December 31, 2006. We will vacate the facility and move our
headquarters to a more suitable location. Pursuant to SFAS No. 13, "Accounting
for Leases," and interpretations thereof, we are recognizing the unamortized
balance of the deferred gain on sale and leaseback over the modified term of the
sublease. We recognized in other income approximately $295,000 in gain on sale
and leaseback during the three months ended September 30, 2006.
OVERVIEW
We operate in the following two business segments:
o Collaborative software products and services for businesses
worldwide; and
o Information technology ("IT") services.
Our net revenues from continuing operations during the three months
ended September 30, 2006 were $576,000, a decrease of $50,000 (8.1%) over the
corresponding prior year period, of which collaborative software products and
services net revenues decreased $55,000 (26.8%), and IT services net revenues
increased $5,000 (1.3%).
Our net revenues from continuing operations during the six months ended
September 30, 2006 were $1,445,000, an increase of $23,000 (1.7%) over the
corresponding prior year period, of which collaborative software products and
services net revenues increased $152,000 (33.8%), and IT services net revenues
declined $129,000 (13.2%).
COLLABORATIVE SOFTWARE
Once installed at a host location, our eReview collaborative software
enables a host and other participants to engage in real-time Web-based
conferencing and document sharing anywhere and anytime in over 150 widely used
document formats. eReview allows our customers to bridge physical distances in
their global business environments by enabling decision makers to communicate
without costly and time consuming travel to geographically dispersed locations.
Complementing eReview, our WebWorks software provides comprehensive
project-based document and team management functions. Our collaborative products
can be implemented as stand-alone enterprise solutions or as an integrated
system working in concert with other products.
We have also developed workflow management solutions by embedding our
collaborative software in the software of our major original equipment
manufacturer, or OEM, partners, who then market the combined solution to their
customers. Some of our OEM partners are Fuji Xerox, CMStat and, Service Point.
We are also working closely with both FileNet and Oracle to develop integrations
with their document collaboration tools.
We generate revenues from software licensing fees and annual support
fees established at the time of the initial contract. Most of our customers who
purchase eReview buy a site license to cover their entire company's
requirements. Our primary sales strategy for our collaborative software is to
develop close relationships with our OEM partners and create recurring revenues
through royalties and maintenance.
19
IT SERVICES
We offer our IT services through our service office located in Boston,
Massachusetts. We provide IT services both on a project basis and through
on-site consulting. When we provide IT services on a project basis, we assume
full project management responsibility. Typically, projects are of a fixed
duration and are charged at a fixed price. When we provide on-site consulting
services, we bill our clients on a time and materials basis. Our goal is to
migrate our staffing model to a project-based on-site/off-site model where most
of the work is done by our lower cost off-site centers in India or by our
outside contractors in Russia.
We were chosen as the global technology partner by BBK Healthcare to
create their latest version of TrialCentralNet portal application for clinical
study team collaboration. This project was done by our netGuru IT services group
using the above-mentioned on-site/off-site model.
As a result of the steep decline in the IT services net revenues, we
scaled back our domestic IT services operations in fiscal 2004. For the past
several years, the IT services industry has been adversely affected by a slow
economy and many of our customers reduced, and continue to reduce, spending on
technology consulting and systems integration services. We anticipate that
revenue from IT services will now stabilize and remain at approximately current
levels.
SALE OF REI BUSINESS AND STAAD PRODUCT LINES AND FRANCE SUBSIDIARY
On November 18, 2005, we completed our sale of assets of our REI
business and STAAD product lines to Bentley for approximately $23.5 million and
recorded a net gain of $21.6 million in the third quarter of fiscal 2006. On
January 5, 2006, we entered into an agreement with Mr. Badreddine Ziane to sell
our France subsidiary for approximately $100,000 and recorded a net loss of
approximately $120,000 during the three months ended March 31, 2006.
Accordingly, the results of operations relating to our REI business and STAAD
product lines and France subsidiary are discussed below as discontinued
operations.
PENDING SALE OF INDIAN SUBSIDIARY, REL
A special committee was appointed by our board of directors in August
2005 to evaluate strategic alternatives and options for our information
technology, Web 4, and engineering business process outsourcing businesses
following the consummation of our sale of assets to Bentley in November 2005.
On August 29, 2006, we entered into an Agreement and Plan of Merger
with privately-held BPO Management Services, Inc. ("BPOMS") and BPO Acquisition
Corp., a newly-created wholly-owned subsidiary of ours specifically created to
effect the merger. On August 29, 2006, we also entered into a separate stock and
asset sale agreement pursuant to which we would, concurrently with the
consummation of the merger transaction, sell and transfer our interest in
Research Engineers Ltd. ("REL"), our majority-owned Indian subsidiary that
engages in engineering business process outsourcing services, and certain
additional assets and liabilities to Das Family Holdings ("DFH"). DFH is owned
and controlled by Amrit K. Das, who is our Chairman, Chief Executive Officer,
President and beneficial owner of more than 10% of our outstanding common stock,
Santanu K. Das, who is one of our directors and former executive officers and
holds more than 10% of our outstanding common stock, and their affiliates.
The additional assets to be sold to DFH would include certain marks and
Internet domain names, including the "netGuru" name, a copy of the source code
for our WEBWORKS(TM) software, and certain contracts, licenses and accounts
receivable primarily relating to REL's business. DFH would assume certain
obligations and liabilities, and the change in control and executive retention
20
agreement and the split dollar life insurance arrangement between Amrit K. Das
and us would be terminated. At the closing of the sale transaction, we would
enter into an outsourcing services agreement covering services that may be
provided to us by REL after the closing, a value-added reseller agreement
covering our WEB4 products that may be distributed by REL after the closing, and
a transition agreement that covers the transition of the netGuru name and mark
and our hosting of the "netguru.com" website for a limited time following the
closing.
The closings of the merger and sale transactions are subject to various
conditions, including approval of the transactions by our stockholders. If all
closing conditions are met, we anticipate that the merger and sale transactions
would occur by December 22, 2006. However, each party has certain rights to
terminate the merger and/or sale agreements, including the right to unilaterally
terminate the agreements with or without reason if the transactions do not close
by December 22, 2006. Depending upon the reasons a termination occurs, we might
be required to pay to, or we may receive from, BPOMS and/or DFH termination fees
totaling up to $400,000.
In connection with the merger and sale transactions, we plan to declare
a cash dividend and to conduct a reverse stock split prior to the closings. The
cash dividend, if declared, would be approximately $3.5 million, or
approximately $0.18 cents per share of our common stock outstanding prior to the
planned reverse stock split, and would become payable out of the $1.5 million in
cash anticipated to be provided by BPOMS in the merger transaction and the $2.0
million in cash anticipated to be received from DFH in the sale transaction. The
dividend would be paid after the closings and only to holders of our common
stock outstanding on a record date to be set prior to the closings.
After the declaration of the dividend but prior to the payment of the
dividend and the consummation of the merger, we would effect a reverse stock
split ranging from 1-for-4 to 1-for-30 of our 19.2 million outstanding common
shares. In addition, we would create three series of preferred stock containing,
among other terms, various conversion, liquidation, redemption, voting and
director election and board observation provisions. Shares of BPOMS preferred
stock would convert into shares of the newly created netGuru preferred stock at
the closing of the proposed merger.
The agreements relating to the merger transaction and the sale
transaction require that we change our name to BPO Management Services, Inc. at
or after the effective time of the merger. We are seeking stockholder approval
of the merger and sale transactions, the stock split, the name change and
related matters via a definitive proxy statement relating to our upcoming 2006
annual meeting of stockholders that we filed with the Securities and Exchange
Commission on November 3, 2006.
In connection with our entry into the merger and sale agreements, on
August 29, 2006, we entered into voting agreements with BPOMS and the owners of
DFH. The voting agreements provide that the owners of DFH will vote their shares
of our common stock in favor of the merger and sale transactions, our corporate
name change and the reverse stock split, and against any opposing or competing
transactions.
During the six months ended September 30, 2006, we incurred certain
professional fees related to these strategic alternatives, which are included in
general and administrative expenses, and aggregate approximately $355,000.
As a result of the pending sale, our Indian subsidiary and additional
assets and liabilities to be sold to DFH have been classified as assets held for
sale. Accordingly, the results of operations relating to REL are discussed below
as discontinued operations.
21
CRITICAL ACCOUNTING POLICIES
We have identified the following as accounting policies that are the
most critical to aid in understanding and evaluating our financial results:
o revenue recognition; and
o allowance for doubtful accounts receivable.
REVENUE RECOGNITION
We derive revenues from:
o Collaborative software products and services; and
o IT services.
We recognize revenues when the following criteria are met:
o Persuasive evidence of an arrangement, such as agreements,
purchase orders or written or online requests, exists;
o Delivery has been completed and no significant obligations
remain;
o Our price to the buyer is fixed or determinable; and
o Collection is reasonably assured.
We recognize revenues from software that we customize to fit a
customer's requirements based on satisfactory completion of pre-determined
milestones (evidenced by written acceptance from the customer) and delivery of
the product to the customer, provided no significant obligations remain and
collection of the resulting receivable is reasonably assured. Customers may
choose to purchase ongoing maintenance contracts that include telephone, e-mail
and other methods of support, and unspecified upgrades on a when-and-if
available basis. Revenue from the maintenance contracts is deferred and
recognized ratably over the life of the contract, usually twelve months.
In 1997, the Accounting Standards Executive Committee ("AcSec") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 distinguishes
between significant and insignificant vendor obligations as a basis for
recording revenue and requires that each element of a software licensing
arrangement be separately identified and accounted for based on relative fair
values of each element. We determine the fair value of each element in
multi-element transactions based on vendor-specific objective evidence ("VSOE").
VSOE for each element is based on the price charged when the same element is
sold separately.
In 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, "Software
Revenue Recognition, With Respect to Certain Transactions," which modified SOP
97-2 to allow for use of the residual method of revenue recognition if certain
criteria are met. If evidence of fair value of all undelivered elements exists
but evidence does not exist for one or more delivered elements, then we
recognize revenue using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred, and the remaining portion of the
transaction fee is recognized as revenue.
We recognize revenues from our IT services primarily on a time and
materials basis, with time at a marked-up rate and materials and other
reasonable expenses at cost, as we perform IT services. Certain IT services
contracts are fixed price contracts where we measure progress toward completion
by mutually agreed upon pre-determined milestones and recognize revenue upon
reaching those milestones. Our fixed price IT contracts typically are for a
short duration of one to nine months. We did not have any uncompleted fixed
price IT contracts at September 30, 2006.
22
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
We sell to our customers on credit and grant credit to those we deem
credit worthy based on our analysis of their credit history. We periodically
review our accounts receivable balances and the collectibility of those
balances. Based on our analysis of the length of time that the balances have
been outstanding, the pattern of customer payments, our understanding of the
general business conditions of our customers and our communications with our
customers, we estimate the recoverability of these balances. When recoverability
is uncertain, we record bad debt expense and increase the allowance for accounts
receivable by an amount equal to the amount estimated to be unrecoverable. If
the historical data we use to calculate the allowance provided for doubtful
accounts does not reflect our future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and our future results
of operations could be materially affected.
CONSOLIDATED RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30,
2006 VS. THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2005
CONTINUING OPERATIONS
NET REVENUES
The following table presents our net revenues by segment (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
-------------- -------------- --------------- --------------
NET REVENUES
Collaborative software
products and services $ 152 $ 208 $ 602 $ 450
% of total net revenues 26.4% 33.2% 41.7% 31.6%
IT services 423 418 843 972
% of total net revenues 73.6% 66.8% 58.3% 68.4%
-------------- -------------- --------------- --------------
Total net revenues $ 575 $ 626 $ 1,445 $ 1,422
============== ============== =============== ==============
Net revenues for the three months ended September 30, 2006 decreased
$51,000 (8.1%) compared to the same period in the prior year. Net revenues for
the six months ended September 30, 2006 increased $23,000 (1.6%) compared to the
same period in the prior year. Our revenues consisted of revenues from (1)
collaborative software products and services, and (2) IT services.
COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES
Net revenues from collaborative software products and services for the
three months ended September 30, 2006 decreased by $56,000 (26.9%) compared to
the three months ended September 30, 2005. During the three months ended
September 30, 2005 a large collaborative software project was completed. No such
revenues were recognized during the three months ended September 30, 2006.
Net revenues from collaborative software products and services for the
six months ended September 30, 2006 increased $152,000 (33.8%) primarily due to
the completion and recognition of revenues in June 2006 from collaborative
software project in our Germany office representing approximately $227,000.
Following the sale of our REI business in November 2005, more focus has been
placed on collaborative software revenues in our German office, whereas
prior to that, the majority of our focus was on our REI revenues. The majority
of our collaborative software revenue is generated from customized modification
projects where the revenue is recognized generally upon completion of the entire
project. The timing of completion and recognition of revenue from our large
projects creates variability in our collaborative software net revenues between
quarters.
23
IT SERVICES
IT services net revenues increased $5,000 (1.2%) for the three months
ended September 30, 2006, compared to the same period in the prior year. Net
revenues from IT services for the six months ended September 30, 2006 decreased
$129,000 (13.3%) compared to the same period in the prior year. IT services net
revenues have decreased due to the scaling back of one of our domestic IT
services offices, a decrease in the number of customers, and a decrease in the
number of qualified employees available to staff various jobs. For the past
several years, the IT services industry has been adversely affected by a slow
economy and many of our customers reduced, and continue to reduce, spending on
technology consulting and systems integration services. We anticipate that
revenue from IT services will now stabilize and remain at approximately current
levels.
GROSS PROFIT AND GROSS MARGIN
The following table presents our gross profit by segment and gross
profit as a percentage of each segment's net revenue, or gross margin (dollars
in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- -------------
GROSS PROFIT
Collaborative software
products and services $ 126 $ 207 $ 522 $ 448
IT services 111 78 224 244
-------------- -------------- -------------- -------------
Consolidated $ 237 $ 285 $ 746 $ 692
============== ============== ============== =============
GROSS MARGIN
Collaborative software
products and services 82.9% 99.5% 86.7% 99.6%
IT services 26.2% 18.7% 26.6% 25.1%
-------------- -------------- -------------- -------------
Consolidated 41.2% 45.5% 51.6% 48.7%
============== ============== ============== =============
Consolidated gross margin decreased to 41.2% for the three months ended
September 30, 2006 from 45.5% during the same period in the prior year primarily
due to lower gross margin from collaborative software. Consolidated gross margin
increased to 51.6% for the six months ended September 30, 2006 from 48.7% for
the comparable period in the prior year due to higher gross margin from the IT
services business.
COLLABORATIVE SOFTWARE PRODUCTS AND SERVICES
Our collaborative software products and services segment generally
produces a higher gross margin than our IT services segment due to the
relatively lower costs associated with each sale. Additionally, research and
development costs are typically written off when developing software and only
certain amounts are capitalized and subsequently amortized. The cost of net
revenues for the collaborative software products and services segment includes
royalty fees, salaries of the engineers working on specific service
customization jobs, and software amortization expense.
24
Gross margin in the collaborative software products and services
segment decreased 16.6 and 12.9 percentage points, respectively, for the three
and six months ended September 30, 2006 compared to the same periods in the
prior year. The cost of sales for the collaborative software products and
services segment for the six months ended September 30, 2006 included an
increase of $39,000 for salaries of a engineers who worked on service-oriented
collaborative software jobs that were not underway in the prior year and an
increase of $21,000 for royalties and purchases made.
IT SERVICES
Gross margin in the IT services segment increased 7.5 and 1.5
percentage points, respectively, for the three and six months ended September
30, 2006 compared to the same periods in the prior year. IT services segment
gross margin increased due to better utilization of employees with a decrease in
the number of employees remaining idle or "on the bench." Historically, gross
margin from the IT services segment has been lower than gross margin from the
collaborative software products and services segment due to the higher cost of
labor associated with IT services. The cost of net revenues for IT services
includes the salaries, bonuses, and benefits for the consulting employees.
OPERATING EXPENSES
The following table presents our operating expenses in dollars and as a
percentage of total net revenues (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and
administrative expenses $ 794 $ 621 $ 1,532 $ 1,103
% of total net revenues 138.1% 99.2% 106.0% 77.6%
Research and development
expenses $ 107 $ 136 $ 215 $ 286
% of total net revenues 18.6% 21.7% 14.9% 20.1%
Depreciation $ 45 $ 53 $ 79 $ 109
% of total net revenues 7.8% 8.5% 5.5% 7.7%
Total operating expenses $ 946 $ 810 $ 1,826 $ 1,498
% of total net revenues 164.5% 129.4% 126.4% 105.3%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased
$173,000 (27.9%) for the three months ended September 30, 2006, compared to the
three months ended September 30, 2005 primarily due to the following:
o An $86,000 increase in employee salaries and taxes due to
additional sales employees hired, raises given, and a $32,000
bonus payment made to our Chief Financial Officer per his
employment agreement;
o A $43,000 increase in consulting and sales commission fees due
to commissions paid to an outside consultant for the
additional collaborative software revenue brought in to our
Germany office; and
25
o A $135,000 increase in legal fees for additional work
related to potential strategic transactions.
SG&A expenses increased $429,000 (38.9%) for the six months ended
September 30, 2006, compared to the six months ended September 30, 2005
primarily due to the following:
o A $143,000 increase in employee salaries and taxes due to
additional sales employees hired, raises given, and a $64,000
bonus payment made to our Chief Financial Officer per his
employment agreement;
o A $78,000 increase in board compensation expenses primarily
due to an additional $25,000 cash compensation paid to each of
the three members of the special committee in recognition of
additional efforts expensed by each member;
o A $110,000 increase in consulting and sales commission fees
due to commissions paid to an outside consultant for the
additional collaborative software revenue brought in to our
Germany office; and
o A $179,000 increase in legal fees for additional work related
to potential strategic transactions.
We anticipate our legal and professional fees will increase in the
third quarter of fiscal 2007 due to our efforts in connection with potential
strategic transactions. However, we are continuing to control and cut costs
where feasible and anticipate that our overall corporate overhead costs,
excluding any integration-related costs resulting from the merger with BPOMS,
may decrease during the fourth quarter of fiscal 2007.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses consist primarily of software
developers' wages. R&D expenses decreased $29,000 (21.3%) for the three months
ended September 30, 2006. R&D expenses decreased $71,000 (24.8%) for the six
months ended September 30, 2006. The decrease in R&D expenses is primarily due
to many of our R&D developers working on customized projects for our customers,
and, as a result, their costs were re-classified to cost of sales. Total costs
re-classified from R&D expense to cost of sales for the six months ended
September 30, 2006 were $39,000. As a percentage of collaborative software net
revenues, to which they mostly relate, R&D expenses increased to 70.4% from
65.4% due to a decline in collaborative software net revenues during the three
months ended September 30, 2006 and decreased to 35.7% from 63.6% due to higher
collaborative software revenues during the six months ended September 30, 2006.
DEPRECIATION
Depreciation expenses (excluding amounts charged to cost of revenues)
decreased $8,000 (15.1%) and $30,000 (27.5%) for the three and six months ended
September 30, 2006, respectively compared to the same periods in the prior year
due to depreciation of existing fixed assets, which are not being replaced. We
anticipate that depreciation expenses will remain at this level through the end
of fiscal 2007.
26
SEGMENT PROFITABILITY AND OPERATING INCOME (LOSS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS)
Collaborative software
products and services $ (77) $ (9) $ 91 $ 10
IT services (9) (32) 2 31
Center (623) (484) (1,173) (847)
------------ ------------ ------------ ------------
Consolidated $ (709) $ (525) $ (1,080) $ (806)
============ ============ ============ ============
During the three months ended September 30, 2006, consolidated
operating loss increased 184,000. Operating loss in the collaborative software
products and services segment increased $68,000 and operating loss in the IT
services segment decreased $23,000 during the three months ended September 30,
2006. Operating loss in Center increased $139,000 during the three months ended
September 30, 2006.
The decrease in collaborative software revenues and higher operating
and professional fees related to the proposed merger and sale transactions
contributed to the greater consolidated operating loss for the three months
ended September 30, 2006 compared to the same period in the prior year.
Consolidated operating loss increased $274,000 during the six months
ended September 30, 2006. Operating income in the collaborative software
products and services segment increased $81,000 and operating income in the IT
services segment decreased $29,000 during the six months ended September 30,
2006. Operating loss in Center increased $326,000 during the six months ended
September 30, 2006.
Operating income in the collaborative software products and services
segment increased due to an increase in revenues from larger value projects
completed. Operating income in the IT services segment decreased due to a
decrease in gross profit resulting from a decrease in the number of customers
and projects that caused a reduction in sales. Higher operating loss in Center
due to higher professional fees related to the proposed merger and sale
transactions contributed to the greater consolidating operating loss for the six
months ended September 30, 2006 compared to the same period in the prior year.
OTHER INCOME
Other income increased $399,000 (356.3%) and $523,000 (222.6%),
respectively, during the three and six months ended September 30, 2006 compared
to the same periods in the prior year. This increase was primarily due to our
recognition of $295,000 in deferred gain on sale and leaseback of the facility
that houses our corporate headquarters in California during the three months
ended September 30, 2006, compared to $17,000 during the three months ended
September 30, 2005, as described above under the heading "Recent Developments."
Interest expense decreased $121,000 and $240,000 for the three and six
months ended September 30, 2006, respectively, compared to the same periods in
the prior year due to loan payoffs in November 2005. Our debt to Laurus Master
Fund, Ltd. ("Laurus") and our debt in our Indian subsidiary were paid off in
November 2005. When the Laurus debt was paid off, we expensed the remaining
unamortized discount related to the debt, and therefore there was no additional
interest expense relating to Laurus after November 2005. Total interest expense
27
related to the Laurus debt was approximately $98,000 and $196,000, respectively,
for the three and six months ended September 30, 2005. Due to the Laurus debt
payoff, we anticipate our interest expense in fiscal 2007 will decrease
significantly from fiscal 2006 unless we engage in a transaction that requires
us to obtain additional debt financing.
INCOME TAXES
We recorded no income tax during the three and months ended September
30, 2006 compared to an income tax benefit of $3,000 for the three months ended
September 30, 2005 and an income tax expense of $7,000 for the six months ended
September 30, 2005. Tax expense for the six months ended September 30, 2005
resulted from provisions for domestic income taxes.
DISCONTINUED OPERATIONS
As discussed in the section titled "Overview," we
o sold our REI business and STAAD product lines to Bentley in
November 2005;
o sold our France subsidiary in January 2006; and
o entered into a stock and asset sale agreement to sell our
Indian subsidiary and certain assets and liabilities to DFH on
August 29, 2006.
In accordance with accounting principles generally accepted in the
United States, the revenues, costs, and expenses directly associated with the
Indian subsidiary, REI business, and France subsidiary have been reclassified as
discontinued operations on the condensed consolidated statements of operations
for all periods presented. Corporate expenses such as general corporate overhead
and interest have not been allocated to discontinued operations.
Net loss from discontinued operations for the three months ended
September 30, 2006 was $140,000 compared to a net loss of $360,000 for the same
period in the prior year, a decrease of $220,000. Net loss from discontinued
operations for the three months ended September 30, 2006 consisted of a net loss
from our Indian subsidiary. Net loss from discontinued operations for the three
months ended September 30, 2005 consisted of a net loss of $265,000 from our
Indian subsidiary, a $106,000 net loss from our REI business and a net income of
$11,000 from our France subsidiary. The decrease in the net loss from
discontinued operations during the three months ended September 30, 2005 was
primarily due to a lower net loss from our Indian subsidiary due to a $165,000
decrease in bad debt expense and because there were no REI operations during the
three months ended September 30, 2006 since we sold that business in November
2005.
Net loss from discontinued operations for the six months ended
September 30, 2006 was $222,000 compared to a net loss of $280,000 from
discontinued operations during the same period in the prior year. Net loss from
discontinued operations for the six months ended September 30, 2006 consisted of
a net loss of $250,000 from our Indian subsidiary and a net income of $28,000
from our REI business. Net loss during the six months ended September 30, 2005
comprised a net income of $159,000 from our REI business and a net income of
$22,000 from our France subsidiary offset by a net loss of $461,000 from our
Indian subsidiary.
The decrease in net loss from discontinued operations was primarily
due to a decrease in net loss from our Indian subsidiary as a result of a
$221,000 decrease in bad debt expense.
28
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have relied upon cash from financing activities to
fund the majority of the cash requirements of our operating and investing
activities. We have not been able to generate sufficient cash from our operating
activities in the past, and there is no assurance we will be able to do so in
the future. Until the close of the sale of our REI business during the quarter
ended December 31, 2005, we financed our operations (including capital
expenditures) primarily through existing cash and cash equivalent balances and
issuance of convertible notes. As a result of the sale, we allocated a portion
of the approximately $23.5 million sale proceeds to transaction costs,
applicable taxes and the retirement of approximately $3.3 million of outstanding
debt. On December 29, 2005, we announced that our board of directors had
approved a cash distribution in the amount of $0.85 per share payable on January
27, 2006 to stockholders of record as of January 17, 2006. The total amount that
was distributed on January 27, 2006 was approximately $16.25 million.
Our principal sources of liquidity at September 30, 2006 consisted of
approximately $1.4 million of cash and cash equivalents. Cash and cash
equivalents decreased by approximately $1,076,000 during the six months ended
September 30, 2006. Total cash provided by our continuing operations was $39,000
for the six months ended September 30, 2006, compared to total cash used of
$1,207,000 for the six months ended September 30, 2005. Total cash used in our
discontinued operations was $1,116,000 for the six months ended September 30,
2006, compared to total cash provided of $239,000 for the six months ended
September 30, 2005.
Net cash used in continuing operating activities was $999,000 for the
six months ended September 30, 2006 compared to $496,000 for the six months
ended September 30, 2005, an increase of $503,000. The primary reason for cash
used in operations during the current period was a $792,000 net loss from
continuing operations. In addition, the following contributed to cash usage for
the six months ended September 30, 2006:
o A non-cash gain on sale and leaseback of the corporate
headquarters in California contributed $313,000 to reduce the
net loss from continuing operations but not the cash used in
operations; and
o A $263,000 decrease in accrued expenses primarily due to
payment of year-end audit and tax fees and payment of lawsuit
settlements.
The above cash usages were offset primarily by the following
contributors to cash during the three months ended September 30, 2006:
o A $76,000 decrease in accounts receivable due to a large
payment received for a collaborative software contract,
increased amount of payments received for our IT customers,
and a decrease in the overall level of sales in our IT
division;
o A $159,000 decrease in prepaid expenses and other current
assets due to the collection of other receivables that Bentley
transferred back to us in May 2006 as uncollectible; and
o An $82,000 increase in note receivables primarily due to a
payment made to us for the sale of the France subsidiary.
The primary reason for cash used in operations during the six months
ended September 30, 2005 was net loss from continuing operations of $1,048,000
offset by depreciation expense of $74,000 and amortization of discount on loan
of $105,000. In addition, the following contributed to the cash usage for the
six months ended September 30, 2005:
29
o A $163,000 decrease in accrued expenses due to payments made
for year-end audit and tax fees and legal fees; and
o A $182,000 decrease in deferred revenues due to the
recognition of a large collaborative software project that was
deferred at March 31, 2005.
The above cash usages were offset primarily by the following
contributors to cash during the three months ended September 30, 2005:
o A $464,000 decrease in accounts receivable due to payments
received for three large collaborative software projects that
were billed at the end of the previous year;
o A $195,000 increase in accounts payable; and
o A $73,000 decrease in prepaid and other current assets due
primarily to a decrease in prepaid insurance payments and due
to payments received for the sale of our telecom division.
We have limited cash resources, and these resources may diminish in the
future. As of September 30, 2006, we had working capital of $2.8 million,
including $1.5 million of net assets and liabilities held for sale, and an
accumulated deficit of $17.6 million. As of that date, we had $1.4 million of
cash and cash equivalents and $396,000 of accounts receivable, net of allowance
for doubtful accounts. Our total cash "burn" rate is estimated to be
approximately $300,000 per month. Our future capital requirements will depend
upon many factors, including whether we consummate the proposed merger and sale
transactions, sales and marketing efforts, the development of new products and
services, future strategic mergers and/or divestitures/acquisitions, the
progress of our research and development efforts, and the status of competitive
products and services.
We recorded net operating losses of $6.1 million and $792,000 from
continuing operations and used $2.2 million and $999,000 of cash in continuing
operating activities during the fiscal year ended March 31, 2006 and the six
months ended September 30, 2006, respectively. There is no assurance that we
will be able to generate sufficient operating cash in future quarters. We
believe that our cash resources may not be sufficient to fund our operations
beyond December 31, 2006.
Net cash provided by investing activities for the six months ended
September 30, 2006 was approximately $1.1 million compared to cash used in
investing activities of $118,000 for the six months ended September 30, 2005.
Net cash provided by investing activities primarily consisted of a decrease in
restricted cash of approximately $1.1 million due to the release of the cash
reserve set aside for the Bentley asset sale agreement after we made a $760,000
shortfall settlement payment to Bentley in May 2006 to cover the amount by which
the current liabilities assumed by Bentley exceeded the sum of the prepaid
assets assigned to Bentley at closing and assigned accounts receivable for which
payments had been received by Bentley through May 17, 2006. The $760,000 payment
is included under cash flows related to the discontinued operations. Net cash
used in investing activities for the six months ended September 30, 2005
consisted of purchases for property, plant and equipment.
Net cash used in financing activities during the six months ended
September 30, 2006 was $59,000 compared to $626,000 during the six months ended
September 30, 2005. Net cash used in financing activities primarily resulted
from payments of capital lease obligations. Cash used in financing activities
for the six months ended September 30, 2005 was due to $566,000 in repayments of
long-term debt and $60,000 in payments of capital lease obligations.
We expect to incur exit and disposal charges in connection with the
sale of our Indian subsidiary. We estimate future cash expenditures related to
the sale to be approximately $847,000 and anticipate the charges will be made up
of approximately $470,000 in asset liquidation and employee termination costs,
approximately $326,000 in fees associated with the sale, and approximately
30
$51,000 in additional legal and accounting fees. We are unable to estimate
related tax liabilities at this time. We incurred $317,000 during the six months
ended September 30, 2006 and expect to incur the remaining charges before
December 31, 2006.
We have incurred and expect to continue to incur significant costs in
connection with the consummation of the proposed merger and sale transactions,
much of which we will expend in preparation for the closings and regardless of
whether the proposed transactions ultimately are consummated.
We and BPOMS will need financing to conduct operations and make desired
acquisitions following the consummation of the proposed merger and sale
transactions. BPOMS is currently seeking to raise up to $15 million in one or
more private financing transactions that would close immediately following the
consummation of the merger. However, financing may not be available on terms
favorable to the combined company, or at all. If adequate funds are not
available when required or on acceptable terms, the combined company may be
unable to continue its operations as planned or at all.
In addition, financing transactions, if successful, are likely to
result in significant additional dilution to the voting and economic rights of
our existing stockholders. Financings may also result in the issuance of
securities with rights, preferences and other characteristics superior to those
of our common stock and, in the case of debt or preferred stock financings, may
subject the combined company to covenants that restrict its ability to freely
operate its business.
We do not have any debt instruments in place that we could use for
future borrowings. Thus, if the merger and sale transactions are not consummated
or are not consummated on a timely basis, we may be forced to seek additional
capital in order to continue our operations. Our inability to obtain any needed
financing on terms acceptable to us, or at all, could result in a significant
loss of ownership and/or control of our proprietary technology and other
important assets and could also hinder our ability to fund our continued
operations and our product development efforts that historically have
contributed significantly to our competitiveness. We could also find it
necessary to pursue a plan of complete liquidation and dissolution. In that
event, we would incur additional costs related to the disposal of our remaining
assets and businesses, which would reduce or eliminate the cash available for
distribution to our stockholders.
To the extent we need any additional financing, we cannot assure you
that any such additional financing will be available to us on acceptable terms,
or will be available at all. In addition, any future financing may cause
significant dilution to existing stockholders. Because of this uncertainty, our
recurring losses from operations, excluding gains on the sale of significant
portions of our operating assets, our limited cash resources, our accumulated
deficit and the contemplated sale of additional operating assets, among other
factors, raised substantial doubt about our ability to continue as a going
concern and led our independent registered public accounting firm to include an
explanatory paragraph related to our ability to continue as a going concern in
their report for the year ended March 31, 2006. Reports of independent auditors
questioning a company's ability to continue as a going concern generally are
viewed unfavorably by analysts and investors. This report may make it difficult
for us to raise additional debt or equity financing to the extent needed for our
continued operations or for planned expansion, particularly if we are unable to
attain and maintain profitable operations in the future. Consequently, future
losses may adversely affect our business, prospects, financial condition,
results of operations and cash flows. We urge potential investors to review the
report of our independent registered public accounting firm in our Annual 10-KSB
for the year ended March 31, 2006 and our consolidated financial statements
before making a decision to invest in netGuru.
31
The following table summarizes our contractual obligations and
commercial commitments at September 30, 2006 (in thousands):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
---------- ---------- ---------- ----------- ----------
Capital Lease Obligations* $ 233 $ 146 $ 87 $ -- $ --
Operating Leases 30 30 -- -- --
---------- ---------- ---------- ----------- ----------
Total Contractual Cash Obligations $ 263 $ 176 $ 87 $ -- $ --
========== ========== ========== =========== ==========
* Represents future minimum lease payments excluding deductions for imputed interest of $39.
ITEM 3. CONTROLS AND PROCEDURES.
We conducted an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer (our principal executive officer
and principal financial officer, respectively), of the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), as of September
30, 2006, to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's ("SEC's") rules and forms, including to ensure that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of September 30, 2006, our
disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weakness described below.
A material weakness is a control deficiency (within the meaning of the
Public Company Accounting Oversight Board (United States) Auditing Standard No.
2) or combination of control deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has identified as a
material weakness our need for additional staff with expertise in preparing
accounting estimates and performing reconciliation procedures relating to
inclusion of financial information in our consolidated financial statements.
Our need for such additional staff resulted from the major sale of
assets we completed during the quarter ended December 31, 2005, which resulted
in our loss of accounting staff in our Indian and United States operations. We
have continued to lose additional staff members due to the uncertainties
resulting from the proposed merger transaction. We have worked to remediate this
weakness by using our remaining accounting staff, temporary help and outside
consulting services to perform additional manual controls, procedures and
analysis and other pre- and post-closing procedures designed to ensure that our
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. Accordingly, we believe that the consolidated
financial statements included in this report fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented. Management is unable, however, to estimate our capital or
other expenditures associated with allocation of time of certain company
personnel to assist us in performing the additional controls and procedures or
other expenditures relating to higher fees paid to our independent auditors in
connection with their review of this remediation.
32
The changes noted above, specifically, the changes relating to our use
of temporary help and outside consulting services to assist us in preparing our
consolidated financial statements and relating to our performance of additional
controls and procedures, are the only changes during the quarter ended September
30, 2006 in our "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
33
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A description of certain legal proceedings to which we or our
subsidiaries are parties is contained in Note 11 to the financial statements
included in Item 1 of Part I of this report and incorporated herein by
reference.
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 Agreement and Plan of Merger dated August 29, 2006 among BPO
Management Services, Inc., netGuru, Inc. and BPO Acquisition Corp.
(1)
10.2 Purchase Agreement dated August 29, 2006 between Das Family Holdings
and netGuru, Inc. (1)
10.3 Form of Voting Agreement dated August 29, 2006 among netGuru, Inc.,
BPO Management Services, Inc. and each of Sormistha Das, Santanu
Das, The Purabi Das Foundation, The Purabi Das Marital Trust, The
A&P Living Trust, Amrit and/or Tamisra Das and the Amrit Das IRA (1)
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (2)
______________________
(1) Filed as an exhibit to our Current Report on Form 8-K for August 28,
2006, and incorporated herein by reference.
(2) Attached as an exhibit to this Form 10-QSB.
34
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 14, 2006 NETGURU, INC.
By: /s/ BRUCE K. NELSON
--------------------------------------------
Bruce K. Nelson
Chief Financial Officer (principal financial
officer and duly authorized officer)
35
EXHIBITS ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-QSB
Exh. No. Description
- -------- -----------
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
36