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 MARCH 31, 2007
[ ] 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
BPO MANAGEMENT SERVICES, 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.)
1290 N HANCOCK STREET, ANAHEIM HILLS, CA 92630
(Address of principal executive offices)
(714) 974-2670
(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 8,619,400 on May 10, 2007.
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 months ended March 31, 2007 and 2006 (unaudited)............. 3
Condensed Consolidated Balance Sheet as of
March 31, 2007 (unaudited)........................................ 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2007 and 2005 (unaudited)............. 5
Notes to Condensed Consolidated Financial Statements (unaudited)... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 20
Item 3. Controls and Procedures............................................ 29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 30
Item 3. Defaults Upon Senior Securities.................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ............... 30
Item 5. Other Information ................................................. 30
Item 6. Exhibits .......................................................... 30
Signatures.................................................................. 31
Exhibits Attached to this Quarterly Report on Form 10-QSB................... 32
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2007 2006
---------------- ----------------
Revenues:
Enterprise content management (a) $ 1,009,771 $ 1,069,378
IT outsourcing services 980,305 441,115
Human resource outsourcing services 10,518 111,375
---------------- ----------------
Total revenues 2,000,594 1,621,868
---------------- ----------------
Operating expenses:
Cost of services provided 902,473 419,640
Selling, general and administrative 1,843,587 1,654,642
Research and development 66,011 -
Share-based compensation 53,999 19,976
---------------- ----------------
Total operating expenses 2,866,070 2,094,258
---------------- ----------------
Loss from operations (865,476) (472,390)
---------------- ----------------
Interest (expense) income
Related parties (35,671) -
Other (net) (468,623) 2,125
Other income 12,239 (243)
---------------- ----------------
Total interest and other (expense) income (492,055) 1,882
---------------- ----------------
Net loss $ (1,357,531) $ (470,508)
================ ================
Basic and diluted net loss per common share $ (0.16) $ (0.07)
================ ================
Basic and diluted weighted average common
shares outstanding 8,619,400 7,131,277
================ ================
Note (a): Enterprise content management revenue in the quarter ended March 31, 2006
includes $414,566 in revenue from a contract that ended February 2006.
See accompanying notes to condensed consolidated financial statements.
3
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007,
(UNAUDITED)
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 612,017
Accounts receivable (net of allowance for doubtful accounts of
$110,526) 1,111,299
Inventory (net of reserves of $0) 44,575
Prepaid expenses and other current assets 296,732
---------------
Total current assets 2,064,623
Equipment, net 834,380
Goodwill 4,115,041
Intangible assets (net of accumulated amortization of $139,302) 1,055,557
Other assets 53,251
---------------
$ 8,122,852
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of discount of $2,891 $ 307,334
Current portion of capital lease obligations 92,712
Accounts payable 2,061,266
Accrued expenses 538,145
Amount due former Novus shareholders, current portion 977,473
Deferred revenues 458,429
Related party notes payable, net of discount of $163,939 1,161,061
Severance obligations payable 490,755
Other current liabilities 9,741
---------------
Total current liabilities 6,096,916
Long-term debt, net of current portion and net of discount of $6,264 36,181
Capital lease obligations, net of current portion 426,136
Amount due former Novus shareholders 179,579
Other long-term liabilities 33,115
---------------
Total liabilities 6,771,927
---------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Convertible preferred stock, Series A, par value $.01; authorized
1,608,612 shares; 1,605,598 shares issued and outstanding 16,056
Convertible preferred stock, Series B, par value $.01; authorized
1,449,204 shares; 1,449,204 shares issued and outstanding 14,492
Non-convertible preferred stock, Series C, par value $.01; authorized
21,738,000 shares; 916,667 shares issued and outstanding 9,167
Common stock, par value $.01; authorized 150,000,000 shares;
8,619,400 shares issued and outstanding 86,194
Additional paid-in capital 6,776,395
Accumulated deficit (5,458,237)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustments (93,142)
===============
Total stockholders' equity 1,350,925
---------------
$ 8,122,852
===============
See accompanying notes to condensed consolidated financial statements.
4
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,357,531) $ (470,508)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation 46,130 42,759
Amortization of intangible assets 60,572 245,265
Increase in the reserve for doubtful accounts 6,503 -
Non-cash compensation expense recognized on issuance of stock options 53,999 19,976
Amortization of loan discount 430,802 -
Changes in operating assets and liabilities:
Accounts receivable (371,675) (218,474)
Income tax receivable 250,000 -
Prepaid expenses and other current assets 9,660 (19,238)
Pending business combination direct costs (182,776) -
Other assets 87,815 (939)
Accounts payable 677,233 (224,511)
Accrued expenses (189,385) 244,200
Deferred revenues 127,648 25,934
Payments of severance liability (57,221) -
Other current liabilities (22,898) (2,612)
-------------- --------------
Net cash used in operating activities (431,124) (358,148)
-------------- --------------
Cash flows from investing activities:
Purchase of equipment (6,713) (52,062)
Payments for business combinations direct costs (1,102) (375,595)
-------------- --------------
Net cash used in investing activities (7,815) (427,657)
-------------- --------------
Cash flows from financing activities:
Proceeds from bank loans - 292,721
Repayment of bank loans (22,507) -
Repayment of capital lease obligations (22,545) (11,456)
Proceeds from related party loans 400,000 -
-------------- --------------
Net cash provided by financing activities 354,948 281,265
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (10,189) (6,720)
-------------- --------------
Net cash used in operations (94,180) (511,260)
-------------- --------------
Cash and cash equivalents, beginning of period 706,197 1,223,169
-------------- --------------
Cash and cash equivalents, end of period $ 612,017 $ 711,909
============== ==============
(continued on the following page)
5
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continuation)
(Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 19,562 $ 2,654
============== ==============
Income taxes $ - $ -
============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases $ 360,090 $ -
Issuance of warrants $ 185,187 $ -
Preferred Stock Series A dividend $ 315 $ 310
Acquisition of a company:
Net assets acquired $ - $ 901,885
Net liabilities assumed $ - $ 422,688
Common stock issued as consideration for acquisition $ - $ 79,197
See accompanying notes to condensed consolidated financial statements.
6
BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
BPO Management Services, Inc and Subsidiaries (the "Company") was incorporated
in Delaware and commenced operations on July 26, 2005. On December 15, 2006, the
Company entered into a merger agreement with netGuru, Inc. (netGuru). The
shareholders of the Company received aggregate netGuru equity comprised of
7,336,575 shares of common stock, 1,567,095 shares of Series A preferred stock,
1,449,200 shares of Series B preferred stock, and 916,666 shares of Series C
preferred stock, which represented the majority of the outstanding shares after
the merger. Therefore, the merger was treated as a "reverse merger" and the
previously outstanding shares of netGuru were treated as an equity transaction
by the Company. The Company is a provider of business process outsourcing
services offering enterprise content management ("ECM") services, information
technology outsourcing ("ITO") services and human resource outsourcing ("HRO")
services to middle market enterprises located primarily in the United States and
Canada.
For accounting purposes, the acquisition has been treated as a recapitalization
of Former BPOMS with Former BPOMS as the acquirer. The historical financial
statements prior to December 15, 2006, are those of the Former BPOMS which began
operations on July 26, 2005. All share-related data has been presented giving
effect to the recapitalization resulting from the reverse merger.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements are
prepared on a consistent basis in accordance with accounting principles
generally accepted in the United States (GAAP) for interim financial information
and with the instructions to Form 10-QSB and Item 10 of Regulation SB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and consolidation and
elimination entries) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2007 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2007. The interim financial statements should be read in
conjunction with the Company's consolidated financial statements and related
footnotes included in our Annual Report on Form 10-KSB for the year ended
December 31, 2006.
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BPOMS and its
wholly-owned subsidiaries. All significant intercompany accounts, transactions
and profits among the consolidated entities have been eliminated upon
consolidation. Each of the following entities is included in consolidation as of
the Company's formation or the subsidiary's date of acquisition.
COMPANY INCEPTION/ACQUISITION DATE
------- --------------------------
BPO Management Services, Inc. Inception date: July 26, 2005
Adapsys Document Management LP Acquired: July 29, 2005
Adapsys LP Acquired: July 29, 2005
Digica, Inc. Acquired: January 1, 2006
Novus Imaging Solutions, Inc. Acquired: September 30, 2006
netGuru, Inc. Acquired: December 15, 2006
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent obligations in the financial
statements and accompanying notes. Our most significant assumptions are employed
in determining values for uncollectible accounts receivable, depreciation,
intangible asset valuation and useful lives, goodwill impairments contingencies,
determination of the remaining severance obligation, valuation of share based
payments revenue recognition and the valuation of liabilities resulting from a
business combination as well as estimates used in applying our revenue
recognition policy . The estimation process requires assumptions to be made
about future events and conditions, and as such, is inherently subjective and
uncertain. Actual results could differ materially from our estimates. In
estimating the fair value of stock-based payments, we use the current quoted
market price of our underlying common share for stock awards, and the
Black-Scholes Option Pricing Model for stock options and warrants. We estimate
our expected volatility of our common share based on the average volatilities of
similar entities for an appropriate period following their going public; and we
estimate the expected term of the option, taking into account both the
contractual term of the option and the effects of employees' expected exercise
and post-vesting employment termination behavior.
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 March 31, 2007, 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 also believed that the carrying amounts of
its capital lease obligations approximated their fair value, as the interest
rates approximated a rate that the Company could have obtained under similar
terms at the balance sheet date.
FOREIGN CURRENCY TRANSLATION
The financial position and operating results of all foreign operations are
consolidated using the local currencies of the countries in which the Company
operates as the functional currency. Local currency assets and liabilities are
translated at the rates of exchange on the balance sheet date, and local
currency revenues and expenses are translated at average rates of exchange
during the period. The resulting translation adjustments are recorded directly
into a separate component of shareholders' equity. Gains and losses resulting
from foreign currency transactions are included in operations and were not
material for the three months ended March 31, 2007 and 2006.
8
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with maturities of three months or
less at the date of purchase to be cash equivalents. The Company maintains its
cash balances at financial institutions that management believes possess
high-credit quality. At March 31, 2007, the Company had $249,808 on deposit that
exceeded the United States (FDIC) federal insurance limit. At March 31, 2007,
the Company has $13,394 (the accounts are in Canadian dollars with a value of
$15,475 CDN) on deposit that exceeded the Canadian (CDIC) insurable limit of
$100,000 CDN per entity per bank. The Canadian funds insurance is limited to
Canadian currency deposits only and does provide coverage to money master high
interest savings accounts (money market accounts) but all accounts are
considered in the overall limitation per entity per bank.
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 of the product or service 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: ECM solutions
including collaborative software products and services and FAO, ITO services and
HRO 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 modifies 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.
9
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 March 31, 2007. Fees for certain services are variable based on an
objectively determinable factor such as usage. Those factors are included in the
written contract such that the customer's fee is determinable. The customer's
fee is negotiated at the onset of the arrangement.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company sells its products and services to its customers on credit terms;
granting credit to those who are identified credit worthy based on an analysis
of the entities credit history. A provision is made for an allowance for
doubtful accounts equal to the estimated uncollectible amounts. The Company's
estimate is based upon its historical collection experience and a review of the
current collectibility status of accounts receivable - trade. Specific accounts
receivable that are eventually determined to be uncollectible are charged
against the allowance for doubtful accounts when identified. It is reasonably
possible that the Company's estimate of the allowance for doubtful accounts will
change.
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.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") costs consist mainly of software
developers' salaries. The Company follows the provisions of SFAS No. 86 to
capitalize software development costs when technological feasibility has been
established and to stop capitalization when the product is available for general
release to customers. The Company expenses development costs when they are
related to enhancement of existing software products.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
10
SHARE-BASED COMPENSATION
The Company accounts for share-based compensation to employees pursuant to SFAS
No.123(R), "Share Based Payment," which requires that all share-based
compensation to employees, including grants of employee stock options, be
recognized as expense in the Company's financial statements based on their
respective grant date fair values. As SFAS No. 123(R) requires that share-based
compensation expense be based on awards that are ultimately expected to vest,
share based compensation for 2006 has been reduced by estimated forfeitures.
SFAS 123(R) requires the use of a valuation model to calculate the fair value of
share-based awards. The Company has elected to use the Black-Scholes-Merton
option pricing model, which incorporates various assumptions including
volatility, expected life, expected dividend and interest rates. As a private
company, Former BPOMS did not have a history of market prices of its common
stock, and as such, the Company used an estimated volatility in accordance with
SAB No. 107 "Share Based Payment." In 2006, the Company used the volatility of
the stock price of netGuru, BPOMS' predecessor company, adjusted to remove the
effects of divestitures, cash distributions, and the reverse merger which BPOMS
deems not representative of the events that would take place during expected
term of the options that were valued. The expected life of awards was based on
the simplified method as defined in SAB No. 107. The risk-free interest rate
assumption was based on observed interest rates appropriate for the terms of the
awards. The dividend yield assumption was based on the company's history and
expectation of not paying any dividends in the foreseeable future. Forfeitures
were estimated at the time of grant and will be revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The
Company uses the straight line amortization method to record expenses under this
statement and recognized share-based compensation expense. The fair value of the
Company's stock options granted to employees was estimated using the following
assumptions:
Expected Dividend yield --
Expected volatility 125%
Risk-free interest rate 4.6%-5.03%
Expected option lives (in years) 7
Estimated forfeiture rate 7%
For the three months ended March 31, 2007 and 2006, respectively, the Company
recognized $53,999 and $19,976 in share-based compensation expense. The Company
may be required to accelerate, increase or cancel any remaining unearned
share-based compensation expense if there are any modifications or cancellation
of the underlying unvested securities. Future share-based compensation expense
and unearned share-based compensation will increase to the extent that we grant
additional equity awards to employees or we assume unvested equity awards in
connection with acquisitions. Share-based compensation expense was recorded in
selling, general and administrative expense.
VALUATION OF THE COMPANY'S COMMON SHARES AT THE TIME OF GRANT
The Company granted shares of its common stock as partial consideration for the
acquisition of Digica in January 2006. The fair values of these grants were
determined based on recent sales of the Company's securities.
11
SEGMENT REPORTING
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. See Note 10 "Segment and Geographic Data"
for a description of and disclosures regarding the Company's significant
reportable segments.
RETIREMENT PLANS
The Company and certain of its United States subsidiaries have qualified cash or
deferred 401(k) retirement savings plans. The plans cover substantially all
United States employees who have attained age 21 and have one year of service.
Employees may contribute up to 15% of their compensation. The Company does not
make matching contributions to the plan, except in one subsidiary, where it
matches 100% of the employee contribution up to a maximum of 4%. For the
quarters ended March 31, 2007 and 2006, the Company contributions to the plan
amounted to $6,465 and $7,257, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2006 consolidated
financial statements to conform to the fiscal 2007 presentation. The primary
reclassifications relate to the presentation of the three business segments and
the presentation of share and per share data giving effect to the
one-for-fifteen reverse stock split, the reverse merger of BPOMS into netGuru,
Inc. and the resulting recapitalization of equity.
BASIC AND DILUTED LOSS PER SHARE
In accordance with FASB Statement No. 128, Earnings Per Share, we calculate
basic and diluted net loss per share using the weighted average number of common
shares outstanding during the periods presented and adjust the amount of net
loss, used in this calculation, for preferred stock dividends declared during
the period.
We incurred a net loss in each period presented, and as such, did not include
the effect of potentially dilutive common stock equivalents in the diluted net
loss per share calculation, as their effect would be anti-dilutive for all
periods. Potentially dilutive common stock equivalents would include the common
stock issuable upon the conversion of preferred stock and the exercise of
warrants and stock options that have conversion or exercise prices below the
market value of our common stock at the measurement date. As of March 31, 2007
and 2006, all potentially dilutive common stock equivalents amounted to
4,775,127 and 2,978,602 shares, respectively.
The following table illustrates the computation of basic and diluted net loss
per share:
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2007 2006
-------------- --------------
Numerator:
Net Loss $ (1,357,531) $ (470,508)
Less:
Preferred Dividends paid in stock (31,797) -
Loss and numerator used in computing basic
and diluted loss per share
$ (1,389,328) $ (470,508)
============== ==============
Denominator:
Denominator for basic and diluted net loss per share -
Weighted average number of common shares
outstanding 8,619,400 7,131,277
============== ==============
Basic and diluted net loss per share $ (0.16) $ (0.07)
============== ==============
12
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share because to do so would be
antidilutive since the company reported net losses in both the reporting
periods:
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2007 2006
-------------- --------------
Options to purchase shares of common stock 783,400 212,778
Warrants to purchase shares of common stock 936,929 170,736
Shares of convertible preferred stock - Series A 1,605,598 1,145,888
Shares of convertible preferred stock - Series B 1,449,200 1,449,200
-------------- --------------
Total 4,775,127 2,978,602
============== ==============
COMPREHENSIVE INCOME (LOSS)
The net loss reflected on our Consolidated Statements of Operations
substantially represents the total comprehensive loss for the periods presented.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
In June 2006, the FASB issued Interpretation ("FIN") 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
which clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
recognition of tax benefits that satisfy a greater than 50% probability
threshold. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for the Company beginning January 1, 2007. The
Company believes that adoption of FIN 48 will not have a material effect on its
financial position, results of operations or cash flows.
FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective for us beginning January 1, 2008. Adoption of SFAS No.
157 did not have a material effect on our financial position, results of
operations or cash flows.
13
3. DEBT
SHORT-TERM RELATED PARTY DEBT
Short-term related party debt consisted of the following at March 31, 2007:
a. Notes payable to 2 officers, who are also significant
shareholders, secured by all assets of the Company,
interest rate of 9%, effective interest rate of 42% $ 1,200,000
b. Note payable to a former owner of an acquired
Subsidiary, secured by the Company's main operating
account and related proceeds, which has not been
perfected, interest rate of 10% 125,000
--------------
Total short-term related party debt before
Unamortized discount 1,325,000
Less: Unamortized discount (163,939)
--------------
$ 1,161,061
--------------
Long-term debt, including capital lease obligations, consisted of the following
at March 31, 2007:
a. Credit facility from Bank of Nova Scotia,
secured by assets of the Company, variable
annual interest rate of 7% at March 31, 2007 $ 196,280
b. Operating line of credit from Bank of Nova Scotia,
secured by assets of the Company, variable annual
interest rate of 7.25% at March 31, 2007 94,042
c. Loan from Business Development Bank of Canada,
expiring May 21, 2010, variable annual interest
rate of 11.25% at March 31, 2007 54,924
d. Collateralized loan payable to Chrysler Financial,
expiring March 2008, fixed interest rate of 13.9% 7,424
e. Capital lease obligations maturing at dates ranging
from November 30, 2009 to December 31, 2011, secured
by the leased assets 658,429
-------------
Total long-term debt before unamortized discount
and imputed interest 1,011,099
Less: Imputed interest and unamortized discount (148,736)
-------------
Long-term debt 862,363
Less: current portion 400,046
-------------
$ 462,317
-------------
14
A. CREDIT FACILITY FROM BANK OF NOVA SCOTIA
Adapsys LP has a credit facility with Bank of Nova Scotia. The credit facility
is an operating line of credit with a maximum availability of approximately
$258,000, secured by all present and future personal property of the Company and
carries an annual interest rate of Canadian prime rate plus 1%, which amounted
to 7% at March 31, 2007. The credit facility is subject to two covenants, the
borrowing base covenant and the tangible net worth covenant. The borrowing base
covenant limits the Company's operating loans not to exceed the lesser of
$258,000 or the operating limit of the borrowing base, defined as an amount
equivalent to 75% of the Company's certain accounts receivables less security
interest or charges or specific payables which have or may have priority over
the bank's security. The tangible net worth covenant requires the Company to
maintain a tangible net worth in excess of approximately $429,000. Tangible net
worth is defined by the bank as stockholders' equity less amounts due from
related parties, investment in affiliates and intangible assets as defined by
the bank. At March 31, 2007, the Company was not in compliance with the tangible
net worth or the borrowing base covenants, and had an outstanding balance of
approximately $196,280.
B. OPERATING LINE OF CREDIT FROM BANK OF NOVA SCOTIA
Adapsys Document Management LP ("ADM") has a operating line of credit with the
Bank of Nova Scotia. The operating line of credit has a maximum availability of
approximately $129,000, secured by all present and future personal property of
the Company and carries an annual interest rate of Canadian prime rate plus
1.25% which amounted to 7.25% at March 31, 2007. The operating line is subject
to two covenants, the borrowing base covenant and the tangible net worth
covenant. The borrowing base covenant limits ADM's operating loans not to exceed
the lesser of $129,000 or the operating limit of the borrowing base, defined as
an amount equivalent to 75% of ADM's certain accounts receivables less security
interest or charges or specific payables which have or may have priority over
the bank's security. The tangible net worth covenant requires ADM to maintain a
tangible net worth in excess of approximately $129,000. Tangible net worth is
defined by the bank as stockholders' equity less amounts due from related
parties, investment in affiliates and intangible assets as defined by the bank.
At March 31, 2007, ADM was not in compliance with the tangible net worth
covenant but was in compliance with the borrowing base covenant and had an
outstanding balance of approximately $94,042 under this operating line.
C. TERM LOAN FROM BUSINESS DEVELOPMENT BANK OF CANADA
ADM has a term loan with the Business Development Bank of Canada that expires on
May 21, 2010. The interest rate on this loan is bank's floating rate plus 3.25%
and monthly principal re-payments are approximately $1,433. At March 31, 2007,
the annual rate of interest on this loan was 11.25% and the balance outstanding
was approximately $54,924. The loan is secured by a general security agreement
from ADM and joint and several personal guarantees in the amount of
approximately $43,000 by two former principals of ADM who were also the
Company's 5% shareholders. The Company issued a 7-year warrant to purchase 5,435
shares of the Company's common stock at an exercise price of $0.03 per share to
each of these shareholders in return for their loan guarantees. The warrants,
valued at approximately $11,049, were recorded as a discount to the term loan.
The value of the warrants is being amortized to interest expense over the term
of the loan. Unamortized discount at March 31, 2007 was approximately $9,155.
15
D. LOAN PAYABLE TO CHRYSLER FINANCIAL
Digica has a loan payable to Chrysler Financial collateralized by a vehicle with
a net book value of $12,000. The loan has a fixed annual interest rate of 13.9%
and matures in March 2008. At March 31, 2007, the loan balance was $7,424.
E. CAPITAL LEASES
Capital leases consist primarily of equipment leases for the U.S. entities. The
Company added approximately $360,090 to capital leases in the first quarter of
fiscal 2007.
Long-term debt, excluding unamortized discount, and capital lease obligations
mature in each of the following years ending March 31:
Long-Term Debt Capital Lease Obligations
2008 $ 310,225 $ 142,446
2009 17,287 141,376
2010 14,883 139,660
2011 10,275 134,256
2012 - 100,692
Thereafter - -
-------------- --------------
Total minimum payments $ 352,670 $ 658,430
Less: amount representing interest (139,581)
--------------
Present value of minimum capital lease payments $ 518,849
--------------
4. ESTIMATED SEVERANCE LIABILITY
As part of the acquisition of the ADAPSYS entities, the Company acquired the
remaining term of a contract to provide services to IATA. This contract expired
in February 2006. As a result of the expiration of this contract, the Company
terminated 36 employees. The Company believes that it has a termination
obligation to certain of these terminated employees. The Company recorded the
estimated liability as part of the allocation of the purchase price of the
ADAPSYS entities in August 2005, and reduces the liability as individual prior
employees and the Company reach agreement on the amount of termination payment
due.
The Company believes that the severance liability balance of $490,755 at March
31, 2007 is sufficient to satisfy the remaining amounts due.
5. 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. None of the Company's customers accounted for more than 10% of the
Company's consolidated net sales during the three months ended March 31, 2007.
6. 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.
16
7. SEGMENT AND GEOGRAPHIC DATA
The Company is a business process outsourcing services provider. The Company's
operating segments are:
o ECM
o ITO and
o HRO
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
"Corporate," which is reflected in the tables below.
The significant components of worldwide operations by reportable operating
segment are:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
2007 2006
-------------- --------------
NET REVENUES
ECM (a) $ 1,009,771 $ 1,069,378
ITO 980,305 441,115
HRO 10,518 111,375
-------------- --------------
Consolidated $ 2,000,594 $ 1,621,868
============== ==============
OPERATING LOSS
ECM $ (365,573) $ (56,500)
ITO (16,644) (103,298)
HRO (70,816) (279,953)
Corporate (412,443) (32,639)
-------------- --------------
Consolidated $ (865,476) $ (472,390)
============== ==============
DEPRECIATION AND AMORTIZATION EXPENSE
ECM $ 21,832 $ 8,226
ITO 29,139 29,913
HRO 2,598 -
Corporate 53,133 4,620
-------------- --------------
Consolidated $ 106,702 $ 42,759
============== ==============
(a) ECM revenue for the quarter ended March 31, 2006 includes $414,566 in
revenue from a contract that ended in February 2006
17
The Company's operations are based in foreign and domestic subsidiaries and
branch offices in the U.S., Canada and Germany. The following are significant
components of worldwide operations by geographic location:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
2007 2006
-------------- --------------
NET REVENUE
North America $ 1,884,311 $ 1,621,868
Europe 116,283 -
-------------- --------------
Consolidated $ 2,000,594 $ 1,621,868
============== ==============
EXPORT SALES
North America $ - $ -
============== ==============
AT AT
MARCH 31, DECEMBER 31,
LONG-LIVED ASSETS 2007 2006
-------------- --------------
North America $ 6,034,339 $ 5,638,220
Europe 23,890 25,874
-------------- --------------
Consolidated $ 6,058,229 $ 5,664,094
============== ==============
8. COMMITMENTS AND CONTINGENCIES
Financial Results, Liquidity and Management's Plan activities
The Company has incurred losses for the three-month periods ended March 31, 2007
and 2006 of $1,357,531 and $470,508, respectively. Despite its negative cash
flows from operations for the three-month periods ended March 31, 2007 and 2006
of $431,124 and $358,148, reactively , the Company has been able to obtain
operating capital through a private debt funding source, the sale of shares of
its common stock and through the exercise of warrants to purchase shares of its
common stock. Management's plans include the continued development and
implementation of its business plan.
No assurances can be given that the Company can obtain sufficient working
capital through the sale of the Company's common stock and borrowing or that the
continued implementation of its business plan will generate sufficient revenues
in the future to sustain ongoing operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Amount due former Novus shareholders
The purchase agreement pursuant to which the Company acquired Novus provides for
the cash portion of the purchase price to be paid on the earlier of the extended
date of May 18, 2007 or the closing of a one million dollars investment in the
Company by persons other than the Company's current shareholders. If the cash
portion of the purchase price is not paid when required, then the former owners
of Novus will have the right to rescind the Novus sales agreement and to
purchase for $1.00 from the Company all of the assets and liabilities of the
Deines business unit.
18
OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. The facility leases include options to extend the lease terms
and provisions for payment of property taxes, insurance and maintenance
expenses.
At March 2007, future minimum annual rental commitments under these lease
obligations were as follows:
For the twelve months ending March 31:
2008 $ 342,183
2009 256,935
2010 258,859
2011 170,864
2012 3,503
Thereafter 914
------------
$ 1,033,258
============
Rent expense was $150,218 and $184,103 for the three months ended March 31, 2007
and 2006, respectively.
LITIGATION
The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of its business activities.
Management believes that any liability that may ultimately result from the
resolution of these matters will not have a material adverse effect on the
financial condition or results of operations of the Company.
The Company is currently the defendant in three Canadian civil lawsuits, all of
which involve individuals who were former employees of the Adapsys entities. The
basis for all three lawsuits by the former employees is the amount and timing of
payments due them from the Company resulting from their termination. The Company
believes that it has created an adequate liability to cover the amounts that
will eventually be determined to be due the still remaining plaintiffs.
19
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 and Section 21E of the Securities Exchange Act of
1934, as amended, (the "Exchange Act"). We intend that those forward-looking
statements be subject to the safe harbors created by those sections. These
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 and the
possibility of strategic acquisitions;
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 this
report could cause our future 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.
OVERVIEW
We were incorporated in 1981 under the name Research Engineers, Inc. and changed
our name to netGuru, Inc. in 2000. On December 15, 2006, we acquired all of the
outstanding common stock of privately held BPO Management Services, Inc.
("Former BPOMS") in a reverse merger ("Merger"). Upon Merger, we adopted the
accounting acquirer's year end of December 31. We are a Delaware corporation.
We provide business process outsourcing (BPO) services to enterprises in the
United States and Canada. "BPO" refers to the outsourcing of entire business
processes, typically to reduce cost and/or to improve the performance of that
process. Our objective is to provide a comprehensive suite of BPO functions to
support the back-office business requirements of middle-market enterprises
throughout North America and Europe on an outsourced and/or recurring revenue
basis.
20
Our primary business offerings are:
o Document and data management solutions, also known as enterprise
content management or "ECM" including Finance and Accounting
Services Outsourcing or "FAO";
o Information technology services outsourcing or "ITO"; and
o Human resources outsourcing or "HRO".
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;
o allowance for doubtful accounts receivable; and
o impairment of long-lived assets, including goodwill.
REVENUE RECOGNITION
We derive revenues from:
o Enterprise content management services, including collaborative
software products and services;
o IT outsourcing services; and
o Human resources outsourcing 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.
PERSUASIVE EVIDENCE OF AN ARRANGEMENT
We document all terms of an arrangement in a written contract signed by the
customer prior to recognizing revenue.
DELIVERY HAS OCCURRED OR SERVICES HAVE BEEN PERFORMED
We perform all services or deliver all products prior to recognizing revenue.
Monthly services are considered to be performed ratably over the term of the
arrangement. Professional consulting services are considered to be performed
when the services are complete. Equipment is considered delivered upon delivery
to a customer's designated location.
21
THE FEE FOR THE ARRANGEMENT IS FIXED OR DETERMINABLE
Prior to recognizing revenue, a customer's fee is either fixed or determinable
under the terms of the written contract. Fees for most monthly services,
professional consulting services, and equipment sales are fixed under the terms
of the written contract. Fees for certain services are variable based on an
objectively determinable factor such as usage. Those factors are included in the
written contract such that the customer's fee is determinable. The customer's
fee is negotiated at the outset of the arrangement.
COLLECTIBILITY IS REASONABLY ASSURED
We determine that collectibility is reasonably assured prior to recognizing
revenue. We assess collectibility on a customer by customer basis based on
criteria outlined by management. New customers are subject to a credit review
process, which evaluates the customer's financial position and ultimately its
ability to pay. We do not enter into arrangements unless collectibility is
reasonably assured at the outset. Existing customers are subject to ongoing
credit evaluations based on payment history and other factors. If it is
determined during the arrangement that collectibility is not reasonably assured,
revenue will be recognized on a cash basis.
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 may be fixed
price contracts where we would 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
March 31, 2007.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
We sell to our customers on credit and grant credit to those who are deemed
credit worthy based on our analysis of their credit history. We review our
accounts receivable balances and the collectibility of these balances on a
periodic basis. Based on our analysis of the length of time that the balances
have been outstanding, the pattern of customer payments, our understanding of
22
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.
IMPAIRMENT OF LONG-LIVED ASSETS INCLUDING GOODWILL
At inception, we adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144. Pursuant to SFAS No. 142, we were required to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption.
We are required to perform reviews for impairment annually, or more frequently
when events occur or circumstances change that would more likely than not reduce
the fair value of the net carrying amount. The evaluation of goodwill impairment
involves assumptions about the fair values of assets and liabilities of each
reporting unit. If these assumptions are materially different from actual
outcomes, the carrying value of goodwill will be incorrect. In addition, the
Company's results of operations could be materially affected by the write-down
of the carrying amount of goodwill to its estimated fair value.
We assessed the fair value of its three reporting units by considering their
projected cash flows, using risk-adjusted discount rates and other valuation
techniques and determined that there was no impairment to goodwill. As of March
31, 2007, our goodwill account balance was $4,115,041.
23
CONSOLIDATED RESULTS OF OPERATIONS -
THREE MONTHS ENDED MARCH 31, 2007 VS. THREE MONTHS ENDED MARCH 31, 2006
The privately held Former BPOMS began operations in July 26, 2005 and merged
with the then publicly-held netGuru, Inc. on December 15, 2006 in a reverse
merger ("Merger"). For accounting purposes, the acquisition has been treated as
a recapitalization of Former BPOMS with Former BPOMS as the acquirer. The
historical financial statements prior to December 15, 2006, are those of the
Former BPOMS.
Certain reclassifications have been made to the fiscal 2006 consolidated
financial statements to conform to the fiscal 2007 presentation. The primary
reclassifications relate to the presentation of the three business segments and
the presentation of share and per share data giving effect to the
one-for-fifteen reverse stock split, the Merger, and the resulting
recapitalization of equity.
The following entities of BPOMS are included in the consolidated results of
operations from the date of their respective acquisitions:
ACQUISITION DATE
-------------------------
ADAPSYS Document Management LP July 29, 2005
ADAPSYS LP July 29, 2005
Digica, Inc. January 1, 2006
Novus Imaging Solutions, Inc. September 30,2006
netGuru, Inc. December 15, 2006
During the quarter ended March 31, 2007 the Company incurred a number of
expenses that are not necessarily indicative of its ongoing activities, rather,
the result of acquisition activities or because the economies of planned
consolidation had been delayed while negotiations for equity financing
continued. These include:
o Legal fees in excess of an estimated normal run-rate, estimated to
be approximately $80,000;
o Moving expenses of approximately $15,000;
o Interest charges of approximately $54,000;
o Incremental payroll costs of $59,000; and
o Increased operating expenses associated with the ongoing integration
of the Novus and netGuru business units.
Additionally, during the quarter ended March 31, 2007, the Company incurred
non-cash expenses that were not incurred in the same quarter in fiscal 2006.
These included amortization of deferred debt discount of $430,802, compensation
expense recognized on issuance of stock options of $53,999, and amortization of
intangible assets of $60,572.
Net Revenues
The following table presents our net revenues by operating segment:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2007 2006
-------------- --------------
NET REVENUES
ECM (a) $ 1,009,771 $ 1,069,378
% of total net revenues 50.5% 65.9%
ITO 980,305 441,115
% of total net revenues 49.0% 27.2%
HRO $ 10,518 $ 111,375
% of total net revenues 0.5% 6.9%
-------------- --------------
Total net revenues $ 2,000,594 $ 1,621,868
============== ==============
Note (a): ECM revenue in the quarter ended March 31, 2006 includes
$414,566 in revenue from a contract that ended February 2006.
24
Total net revenues increased by $378,725 (23.4 %) to $2,000,594 during the
three months ended March 31, 2007 from $1,621,869 during the same period in the
prior year. Our total net revenues primarily consisted of net revenues from (1)
enterprise content management (2) IT Outsourcing services and (3) human resource
outsourcing services.
ENTERPRISE CONTENT MANAGEMENT ("ECM")
Net revenue from ECM products and services during the three months ended
March 31, 2007 decreased by $59,607 or 5.6% to $1,009,771 from $1,069,378 during
the three months ended March 31, 2006. Excluding the effect of the terminated
Adapsys contract in the first quarter of fiscal 2006, ECM net revenues increased
by $354,959 or 54.2%. Net revenue in the ECM business segment in the first
quarter of fiscal 2007 also includes net revenue from Novus Imaging Solutions,
Inc. ("Novus") which was acquired in October 2006 and net revenues from netGuru,
Inc. ("netGuru"), which was acquired in December 2006. The ECM segment includes
our ECM solutions group and our collaborative software products and related
services. The majority of our ECM solutions group services and our collaborative
software revenue are generated from service-oriented projects where the revenue
is recognized only upon the completion of specific project deliverables. The
timing of these projects and the completion and recognition of revenue from
various size projects creates variability in our ECM solutions group services
revenues and collaborative software net revenues between quarters and fiscal
years.
In addition, the Company is working on completing a previously announced
acquisition in this segment, which, if completed, is expected to significantly
increase both revenues and profitability of this segment in the near future.
IT OUTSOURCING SERVICES ("ITO")
Net revenue from ITO increased 122.2% to $980,305 during the first quarter
of fiscal 2007 from $441,115 in the first quarter of fiscal 2006. The ITO
segment includes approximately $453,000 of revenues from our newly acquired IT
operations in Massachusetts in the first quarter of fiscal 2007 which were
absent in the first quarter of fiscal 2006 and approximately $86,000 in higher
revenues from the Digica operations.
HUMAN RESOURCE OUTSOURCING SERVICES ("HRO")
During the first quarter of fiscal 2007, net revenues from HRO declined
90.6% to $10,518 from $111,375 during the first quarter of fiscal 2006. The HRO
segment currently consists of a small project/consulting group that delivers HRO
related services to our clients on a project basis. We have developed a strong
pipeline of HRO related opportunities which we estimate will bring increasing
revenues in future periods. In addition, we are working to complete a previously
announced acquisition, which upon completion, is expected to form the
cornerstone of our HRO offering in the future and bring increasing revenues and
profitability to this segment.
25
OPERATING EXPENSES
The following table presents our operating expenses and the percentage of
total net revenues:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2007 2006
-------------- --------------
OPERATING EXPENSES
Cost of services $ 902,473 $ 419,640
% of total net revenue 45.1% 25.9%
Selling, general and administrative expenses $ 1,843,587 $ 1,654,642
% of total net revenue 92.2% 102.0%
Research and development expenses 66,011 -
% of total net revenue 3.3% -%
Share-based compensation expense 53,999 19,976
% of total net revenue 2.7% 1.2%
Total operating expenses $ 2,866,070 $ 2,094,258
% of total net revenue 143.5% 129.2%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by
$188,945 (11.4%) to $1,843,587 during the first quarter of fiscal 2007 from
$1,654,642 during the first quarter of fiscal 2006 primarily due to higher
professional fees and higher intangible amortization expense from the assets
acquired in the previous year, and higher business integration expense
associated with the consolidation of the newly acquired business operations.
Additionally, SG&A expenses in the first quarter of fiscal 2007 included those
of Novus in the amount of $193,721 and of entities acquired from netGuru in the
amount of $228,350 that were not present in the first quarter of 2006 since they
were acquired in the fourth quarter ended December 2006.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses consist primarily of software
developers' wages. In the first quarter of fiscal 2006 there were no R&D
expenses since the Web4 division which is the primary generator of R&D expense
was acquired in the fourth quarter of fiscal 2006. We anticipate that R&D
expenses will be approximately $645,000 in 2007.
SHARE-BASED COMPENSATION EXPENSE
We recorded share-based compensation expense of $53,999 in the first
quarter of fiscal 2007 compared to $19,976 in the same period in the prior year.
26
OPERATING LOSS BY SEGMENT
Operating loss in the ECM segment increased to $365,573 in the first
quarter of fiscal 2007 from $56,499 due to the absence of contribution from a
large contract that ended in February 2006 as well as higher business
integration expenses and an increase in the ratio of lower margin third party
product sales compared to higher margin project revenues in the first quarter of
fiscal 2007 compared to the first quarter of fiscal 2006. The decrease in
operating loss in the ITO segment to $16,644 in the first quarter of fiscal 2007
from $103,297 in the first quarter of fiscal 2006 is primarily due to higher
revenues from acquired entities and organic growth in the ITO segment during the
first quarter of fiscal 2007 compared to the same period in the prior year. The
decrease in operating loss in the HRO segment is primarily due to decrease in
salaries in the first quarter of fiscal 2007 compared to the first quarter of
fiscal 2006. Corporate expenses increased to $412,443 in the first quarter of
fiscal 2007 from $32,540 in the first quarter of 2006 primarily due to
additional employees in the corporate headquarters, increased professional fees,
intangible amortization expense and share-based compensation expense. The
following table details the operating loss by segment:
THREE MONTHS ENDED MARCH 31,
2007 % OF TOTAL 2006 % OF TOTAL
-------------- ---------- ------------ ----------
ECM (365,573) 42.2% (56,499) 11.9%
ITO (16,644) 1.9% (103,297) 21.9%
HRO (70,816) 8.2% (279,953) 59.3%
Corporate (412,443) 47.7% (32,541) 6.9%
-------------- ------------
Consolidated (865,476) 100.0% (472,290) 100.0%
============== ============
OTHER EXPENSE (INCOME)
The following table presents our other expense (income) and its percentage
of total net revenues:
THREE MONTHS ENDED MARCH 31,
--------------------------------
2006 2005
-------------- --------------
OTHER EXPENSE (INCOME)
Interest expense, net $ 504,294 $ (2,125)
% of total net revenue 25.2% (0.1)%
Other income $ (12,239) $ 243
% of total net revenue (0.6)% (0.0)%
Total other expense $ 492,055 $ (1,882)
% of total net revenue 24.6% (0.1)%
INTEREST EXPENSE, NET
Net interest expense increased by $506,419 in the first quarter of fiscal
2007 to $504,294 from net interest income of $2,125 in the first quarter of
fiscal 2006 primarily due to $430,802 in amortization of the value of warrants
issued pursuant to bridge loans, $23,671in interest expense on bridge loans,
$18,320 in interest expense related to purchase price payable to sellers of
Novus and $12,000 in loan origination fees.
INCOME TAXES
In first quarter of fiscal 2007 and fiscal 2006, we recorded no income tax
expense since we had incurred net losses from operations.
27
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity at March 31, 2007 consisted of $612,017
in cash and cash equivalents. Cash and cash equivalents decreased by $94,180
during the first quarter of fiscal 2007. We incurred net losses from operations
of $865,476 and $472,389 and used cash in operations of $431,124 and $358,148 in
the first quarter of 2007 and 2006, respectively.
The primary reasons for cash used in operations during the first quarter
of fiscal 2007 were: net loss of $1,357,531 that included non-cash charges
related amortization of the loan discount in the amount of $430,802,
depreciation and amortization expense of $106,702, and share-based compensation
expense of $53,999. In addition, the timing differences in the payment of our
current liabilities and collection of our current assets also contributed to the
cash used in operations.
The primary reason for cash used in operations during the first quarter of
2006 was net loss of $470,508 which included $245,265 of cost allocated to one
large contract acquired from the ADAPSYS entities in 2005.
Net cash used in investing activities in the first quarter of fiscal 2007
was $7,815, primarily for purchase of property, plant and equipment. In the
first quarter of 2006, net cash used in investing activities was $427,657,
primarily due to the payment to acquire Digica, net of cash acquired.
Net cash provided by financing activities during the first quarter of 2007
was $354,948 compared to $281,265 in the first quarter of 2006. In the first
quarter of fiscal 2007, we received $400,000 in cash proceeds from bridge loans
and repaid bank debt in the amount of $22,508. The bridge loan was provided by
Mr. Dolan, our chief executive officer and we issued a warrant to purchase
133,333 shares of common stock pursuant to the bridge loan agreement.
We have funded our operations primarily from the private placement of
shares of our common stock and preferred stock and through the founders bridge
loan facility established in August 2006. During the next twelve months, we
anticipate raising capital necessary to grow our business and complete
additional acquisitions by issuing our equity securities and/or debt in one or
more private transactions. We have retained C. E. Unterberg, Towbin as our
investment banker to spearhead this effort.
In the event that such transaction(s) do not take place at all and/or are
unreasonably delayed, our future capital requirements will depend upon many
factors. These factors include but are not limited to sales and marketing
efforts, the development of new products and services, possible future corporate
mergers or strategic acquisitions or divestitures, the progress of research and
development efforts, and the status of competitive products and services. If our
anticipated financing transactions do not take place at all and/or are
unreasonably delayed, we may not have adequate funds to extinguish all our
remaining liabilities and fund our current operations going forward.
Although we expect to meet our operating capital needs by additional
private equity and/or debt transactions, additional draw down on the founders'
bridge loan facility, and current economic resources, there can be no assurance
that funds required will be available on terms acceptable to us, if at all. If
we are unable to raise sufficient funds on acceptable terms, we may be not be
able to complete our business plan. If equity financing is available to us on
acceptable terms, it could result in additional dilution to our existing
stockholders.
This uncertainty, recurring losses from operations, limited cash
resources, and an accumulated deficit, among other factors, raised doubt about
our ability to continue as a going concern and led our independent registered
28
public accounting firm to include an explanatory paragraph related to our
ability to continue as a going concern in their report that accompanied our
financial statements for the year ended December 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.
The following table summarizes our contractual obligations and commercial
commitments at March 31, 2007:
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
Long-term debt 352,670 310,225 32,170 10,275 -
Capital lease obligations* 658,429 142,446 281,036 234,948 -
Operating leases 1,033,258 342,183 515,794 174,366 914
Novus purchase price payable 1,157,052 977,473 179,579 - -
Short term loan payable 125,000 125,000 - - -
Bridge loan payable** 1,200,000 1,200,000 - - -
------------ ------------ ------------ ------------ ------------
Total contractual obligations 4,526,409 3,097,327 1,008,579 419,589 914
============ ============ ============ ============ ============
* Excludes imputed interest of $139,580
** Excludes debt discount of $163,939
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer
and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures as of March 31, 2007. Based on such
evaluation, our principal executive officer and principal financial officer have
concluded, as of the end of such period, that our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in our reports that
we file or submit under the Securities Exchange Act of 1934.
During the first quarter of fiscal 2007, there were no changes to our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
29
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2007, we received cash proceeds of $400,000 from Mr. Patrick Dolan as
bridge loan. Pursuant to the bridge loan agreement, we issued Mr. Dolan a 7-year
warrant to purchase 133,333 shares of our common stock. The exercise price of
the shares is $0.035 and the warrant vested immediately. Using the Black-Scholes
Merton option valuation model, a volatility of 125%, risk free rate of 4.75% and
the fair value at grant date of $1.40 per share, we valued the warrant to be
approximately $185,187. The value of the warrant was recorded as a discount to
the bridge loan and is being amortized over the term of the loan. Unamortized
loan discount balance at March 31, 2007 was $163,989. In addition to the warrant
Mr. Dolan is also entitled to a 3% loan guarantee fee, amounting to $12,000,
which has been accrued as of March 31, 2007.
In January 2007, we also issued 309 shares of Series A preferred stock as
paid-in-kind dividend to Messrs. Dolan and Cortens based on 1,543,251 shares of
Series A preferred stock outstanding as of December 31, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 Employment Agreement dated January 26, 2007, by and between the
registrant and Donald Rutherford (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 January 31,
2007, and incorporated herein by reference.
(2) Attached as an exhibit to this Form 10-QSB.
30
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: May 14, 2007 BPO MANAGEMENT SERVICES, INC.
By: /s/ Donald W. Rutherford
------------------------
Donald W. Rutherford
Chief Financial Officer
(principal financial officer and
duly authorized officer)
31
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
32