SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: MARCH 31, 2005
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _____to______
Commission file number: 0-30629
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SPEARHEAD LIMITED, INC.
(Name of small business issuer in its charter)
FLORIDA 65-0729332
------- ----------
(State of incorporation) (IRS employer Ident. No.)
1900 Corporate Boulevard N.W
Suite 305 West, Boca Raton, Florida 33431
561 912-9977
------------
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant: (1) has 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 [ ]
The number of shares outstanding of each of the issuer's classes of equity as of
March 31, 2005: 40,058,071 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
SPEARHEAD LIMITED, INC.
TABLE OF CONTENTS
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2005
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet (Unaudited)
as of March 31, 2005 Page 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2005 and 2004 Page 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2005 and 2004 Page 5
Notes to Condensed Consolidated Financial Statements Page 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Exhibits
SPEARHEAD LIMITED, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
Current assets:
Cash $ 5,489
Accounts receivable - trade 3,757,200
Prepaid expenses 459,404
Future income taxes 165,344
-----------
Total current assets 4,387,437
-----------
Property and equipment net 209,444
Goodwill 2,743,091
Future income taxes 22,731
-----------
Total assets $ 7,362,703
===========
Current liabilities
Loans payable bank $ 1,483,414
Accounts payable and accrued expenses 2,670,044
Accounts payable - stockholders 885,000
Income taxes payable 27,621
-----------
Total current liabilities 5,066,079
-----------
Stockholders' equity
Capital stock, $.001 par value; 200,000,000 shares
authorized; 40,058,071 issued and outstanding 40,058
Additional Paid-in capital 3,108,355
Capital stock not issued 504,425
Retained deficit (1,482,092)
Accumulated other comprehensive income 125,878
-----------
Total stockholders' equity 2,296,624
-----------
Total liabilities and stockholders' equity $ 7,362,703
===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SPEARHEAD LIMITED, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
------------ ------------
Consulting revenue $ 4,357,291 $ 2,271,926
Direct expenses 3,614,234 2,075,906
------------ ------------
Gross profit 743,057 196,020
Selling, general and administrative expenses 934,121 385,385
------------ ------------
Loss from continuing operations (191,064) (189,365)
------------ ------------
Loss before provision for income taxes (191,064) (189,365)
Provision for Income taxes -- --
------------ ------------
Net loss $ (191,064) $ (189,365)
============ ============
Net loss per common share:
Continuing operations $ (.00) $ (.01)
============ ============
Weighted average number of common shares -
Basic and diluted, restated 39,684,072 37,275,799
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SPEARHEAD LIMITED, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
--------- ---------
Cash flow from operating activities:
Net loss $(191,064) $(189,365)
--------- ---------
Adjustments to reconcile net loss to net cash used by operations
Depreciation and amortization 19,285 1,890
Stock in exchange for services 425 --
(Increase in accounts receivable (621,050) (260,195)
(Increase) decrease in prepaid expenses (76,599) (22,102)
Increase (decrease) in accounts payable and accrued expenses 502,244 (102,494)
(Increase) decrease in income taxes future 1,189 --
--------- ---------
Total adjustments (174,506) (382,901)
--------- ---------
Net cash used by operations (365,570) (572,266)
--------- ---------
Cash flows from investing activities:
Purchase of equipment (23,885) (12,787)
--------- ---------
Cash flows from financing activities:
Borrowings (repayment) on line of credit 357,097 (3,857)
Sale of common stock from private placements -- 591,508
--------- ---------
Cash flows from financing activities 357,097 587,651
--------- ---------
Effect of exchange rate changes on cash (549) 3,042
Net increase (decrease) in cash (32,907) 5,640
Cash at beginning of period 38,396 337,491
--------- ---------
Cash at end of period $ 5,489 $ 343,131
========= =========
Cash paid for interest $ 32,847 $ 555
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SPEARHEAD LIMITED, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Spearhead Limited, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Regulation S-B. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. For further
information, refer to the financial statements and footnotes for the year ended
December 31, 2004 found in the Company's Form 10-KSB.
The fiscal years ended December 31, 2005 and December 31,2004 are herein
referred to as "fiscal 2005" and "fiscal 2004", respectively.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
Basis of Presentation
On October 31, 2003, the stockholders of 3323455 Canada Inc. ("3323"), a
Canadian company, exchanged all of their issued and outstanding shares for
shares of Total First Aid, Inc. The exchange was accounted for as a
recapitalization of the Company, wherein the shareholders of 3323 retained
the majority of the outstanding stock of Total First Aid, Inc. after the
merger. (see Note 2) At the time of the acquisition, both companies were
substantially inactive. Collectively, 3323 and Total First Aid, Inc. are
known as the "Company".
Additionally on October 31, 2003, the Company acquired Kischi Konsulting
Inc., 2906694 Canada Inc., and 3054276 Canada Inc, all Canadian companies,
which was accounted for as a purchase and at that time were wholly-owned
subsidiaries of the Company.
The consolidated Statements of Operations and Cash Flows present the
operations of the Company, and the acquired subsidiaries from date of
acquisition. The operations of First Aid Direct, Inc. that were sold during
the year 2003 have been reflected in discontinued operations. Certain
expenses, totaling $749,090, incurred by 3323 as part of the acquisition and
reorganization have been included as recapitalization costs and reflected in
the Statement of Stockholders' Equity.
6
During the year ended December 31, 2004, Total First Aid Inc. changed its
name to Spearhead Limited, Inc. Additionally on June 3, 2004, the Company
acquired Progestic International and FSG Consulting and those operations
have been included in the consolidated statement of operations since the
date of acquisition. Furthermore, on December 31, 2004 all subsidiaries were
merged into Spearhead Management Canada Limited, Inc., the only subsidiary
as of December 31, 2004.
All amounts included in the consolidated financial statements are reflected
in US dollars, except where it is indicated as Canadian dollars (CDN).
Effective March 31, 2004 3054276 Canada Inc. ("3054") and 2906694 Canada
Inc. ("Centos") were "wound up" into Spearhead Management f/k/n as 3323455
Canada Inc ("3332") pursuant to and in compliance with Canadian tax
regulations. As a result of this action the corporate existence of 3054276
Canada Inc, ("3054") and 2906694 Canada Inc. ("Centos") ceased.
On April 1, 2004, 3323455 Canada Inc. changed its name to Spearhead Canada
Limited, Inc.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Spearhead Management Canada Limited. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying disclosures. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(e) Goodwill
Goodwill represents the excess of cost over fair value of net assets acquired
through March 31, 2005. The Company had previously adopted SFAS 142 effective
January 1, 2002. With the adoption of SFAS 142, goodwill is not subject to
7
amortization. Rather, goodwill is subject to at least an annual assessment for
impairment by applying a fair-value based test. The Company performed an
additional fair-value based impairment test as of March 31, 2005, and no
impairment charge was deemed necessary.
(f) Revenue Recognition
The Company recognizes revenue at the time the services are rendered and
reasonable assurance exists as to the measurement of the consideration derived
from the rendering of the services.
(g) Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
("Accounting For Stock Issued to Employees") ("APB No. 25"), and related
interpretations, in accounting for its employee stock based compensation rather
than the alternative fair value accounting allowed by SFAS No. 123, ("Accounting
for Stock-based Compensation"). APB No. 25 provides that the compensation
expense relative to the Company's employee stock options is measured based on
the intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of the impact of
applying the fair value method of SFAS No. 123.
(h) Foreign Currency Translation
The accounts of the Company's foreign subsidiary are translated into U.S.
dollars. For a subsidiary where the functional currency is other than the U.S.
dollar, balance sheet accounts are translated at the exchange rate in effect at
the end of the year. Income and expense accounts are translated at the average
exchange rates in effect during the year. Resulting translation adjustments are
reflected as a separate component of stockholders' equity ("other comprehensive
income (loss)"). Realized foreign currency transaction gains and losses are
included in operations.
(i) Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS 148"), amends SFAS 123,
"Accounting for Stock-Based Compensation." In response to a growing number of
companies announcing plans to record expenses for the fair value of stock
options, SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The Statement also
improves the timeliness of those disclosures by requiring that this information
be included in interim as well as annual financial statements. In the past,
companies were required to make pro forma disclosures only in annual financial
statements. The transition guidance and annual disclosure provisions of SFAS 148
8
are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
In December 2003, the issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"), rescinded the accounting guidance contained in SAB
101, "Revenue Recognition in Financial Statements," and incorporated the body of
previously issued guidance related to multiple-element revenue arrangements. The
Company's adoption of SAB 104 did not have any impact on its financial
statements.
In July 2004, the FASB issued EITF Issue No. 02-14, "Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other than Common Stock"
("EITF 02-14") EITF 002-14 requires application of the equity method of
accounting when an investor is able to exert significant influence over
operating and financial policies of an investee through ownership of common
stock or in-substance common stock. EITF 02-14 is effective for reporting
periods beginning after September 15, 2004. The adoption of EITF 02-14 will not
have a significant impact on the Company's financial statements.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment, ("SFAS 123R").
SFAS 123R requires all share-based payments to employees to be recognized at
fair value in the financial statements. SFAS 123R replaces SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), supersedes Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and SFAS No. 148, Accounting for Stock-Based Compensation
- -- Transition and Disclosure -- an Amendment of FASB Statement No. 123 and
amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123R is effective
for public companies at the beginning of the first interim or annual period
beginning after June 15, 2005. Accordingly, we will be adopting SFAS 123R
effective July 1, 2005.
9
As such, effective with the Company's fiscal quarter ending September 30, 2005,
SFAS 123R will eliminate the Company's ability to account for stock options
using the method permitted under APB 25 and instead require us to recognize
compensation expense should the Company issue options to its employees or
non-employee directors. The Company is in the process of evaluating the impact
adoption of SFAS No. 123R will have on the consolidated financial statements.
On December 21, 2004, the Financial Accounting Standards Board (the "FASB")
issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earning Repatriation Provision within the American Jobs Creation Act of
2004 ("FSP 109-2"). The American Jobs Creation Act of 2004 (the "Act") was
enacted on October 22, 2004, and introduces, among other things; a special
one-time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer ("repatriation provision"), provided certain
criteria are met. FSP 109-2 was issued to allow additional time for companies to
determine whether any foreign earnings will be repatriated under the Act's
repatriation provision, given the law was enacted late in the year and certain
provisions are unclear. Under FSP 109-2, companies that take the additional time
are required to provide disclosures about the status of the Company's evaluation
and the potential effects of its decision. FSP 109-2 is effective for the year
ended December 31, 2004. The adoption of this standard does not have an effect
on the Company's financial statements.
SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29
("SFAS 153"), was issued in December 2004. APB Opinion No. 29, Accounting for
Nonmonetary Transactions ("APB 29"), provides the basic principle that exchanges
of nonmonetary assets should be measured based on the fair value of the assets
exchanged. However, APB 29 includes certain exceptions to that principle. SFAS
153 amends APB 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS 153 is
effective for nonmonetary exchanges occurring on or after July 1, 2005. The
adoption of this standard does not have an effect on the Company's financial
statements.
On March 9, 2004, the U.S. Securities and Exchange Commission ("SEC") Staff
issued Staff Accounting Bulletin ("SAB") 105, Application of Accounting
Principles to Loan Commitments ("SAB 105"), in which the SEC Staff expressed
their view that the fair value of recorded loan commitments, including interest
rate lock commitments ("IRLCs"), that are required to follow derivative
accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), should not consider the expected future cash flows
related to the associated servicing of the loan. The adoption of this standard
does not have an effect on the Company's financial statements.
10
(2) DISPOSITIONS AND ACQUISITIONS
Sale of Discontinued Operations
- -------------------------------
Effective September 30, 2003, we sold substantially all of the assets of our
First Aid Direct wholesale first aid and supply business to VDC Safety and
Supply LLC, a limited liability company controlled by Van-Dyne Crotty, Inc. At
the time of the sale, Van-Dyne Crotty was a principal shareholder of First Aid
Direct, and a majority of our board of directors was affiliates of Van-Dyne
Crotty. At the closing, Kevin M. Crotty, Stephen D. Smiley and James Striplen
III, affiliates of Van Dyne-Crotty, resigned as directors of First Aid Direct.
The purchase price for the assets disposed of was $1,215,000 and was paid at
closing. Approximately $215,000 of the purchase price was used to retire the
Company's indebtedness to Key Bank. The Company was also entitled to receive its
accounts receivable ($259,150) collected by VDC First Aid and Safety Supply
during the 120-day period following the closing. At closing, a $250,000 deposit
against those accounts receivable was paid to the Company. The Company has
recorded a gain on the sale of this product line of approximately $672,000. The
purchase price for the assets was supported by a valuation and fairness opinion
received from an unaffiliated financial consulting firm.
On October 26, 2003 the Company transferred approximately $103,000 of fixed
assets to VanDyne Crotty in exchange for VanDyne Crotty assuming the existing
facility lease, which would have obligated the Company in the amount of
$675,000, over the remaining lease term (four years and four months). The
transaction resulted in a loss of $103,000 to the Company.
On December 19, 2003, the Company disposed of the assets comprising the
Roehampton Supply Product line and the Total First Aid product line to
Roehampton Aid Corp. Roehampton Aid Corp. assumed all of the liabilities of
Total First Aid relating to the assets assigned, including all obligations
associated with the current employees of the operations transferred, and
outstanding purchase orders. The Company has recorded a loss on the disposition
of these assets of approximately $265,000.
The Company reported a net gain on these transactions of approximately $304,000,
before income taxes, in discontinued operations on their statement of operations
for the year ended December 31, 2003.
On October 26, 2003, we changed our name from First Aid Direct, Inc. to Total
First Aid, Inc., and our trading symbol on the over-the-counter bulletin board
was changed to "TFAI".
On October 31, 2003, the Company consummated the acquisition of 3323455 Canada
Inc. ("3323"). Simultaneous with the acquisition, 3323 acquired Kischi
Konsulting Inc. ("Kischi"), 3054276 Canada Inc. ("3054") and 2906694 Canada Inc.
("Centos"). The acquisition of 3323 was effected through a securities exchange
agreement in which the Company issued 26,692,285 shares of its common stock for
all of the issued and outstanding shares of 3323. This acquisition has been
accounted for as a recapitalization of the Company (see Note 1(a)) Kischi, 3054
and Centos were acquired for 4,000,000 shares ($440,000) of the Company's common
stock, and cash in the amount of $1,115,682. The cash portion of the acquisition
11
of Kischi and the other companies was derived from a private placement of units
of securities of the Company, as well as cash on hand. The purchase price for
the acquisitions resulted from arms-length bargaining among the parties, and
there was no prior affiliation or relationship among management of the Company
and the acquired companies. Kischi Konsulting, Inc., 2906694 Canada Inc. and
3054276 Canada Inc. became our indirect wholly owned subsidiaries following the
acquisition. At the closing of these transactions, (a) Jeffrey Tabin and Bruce
Widnes resigned as members of our board of directors, (b) Michel L. Marengere
and Jacques R. Delorme were appointed to our board, and assumed the duties of
Chief Executive Officer and Vice President, respectively, and (c) Scott Siegel
resigned as our Chief Executive Officer (and continues to serve on our Board of
Directors).
On April 1, 2004, 3323455 Canada Inc. changed its name to Spearhead Canada
Limited, Inc.
On June 3, 2004, Spearhead Limited, Inc. (the "Company") acquired all of the
issued and outstanding capital stock of Progestic International Inc.
("Progestic") and FSG Consultants Inc. ("FSG"). Each of the acquired companies
is a Canadian corporation engaged in providing information technology-related
consulting services. Progestic and FSG are each operated as a wholly owned
subsidiary of the Company.
Effective March 31, 2004 3054276 Canada Inc. ("3054") and 2906694 Canada Inc.
("Centos") were "wound up" into Spearhead Management f/k/n as 3323455 Canada Inc
("3332") pursuant to and in compliance with Canadian tax regulations. As a
result of this action the corporate existence of 3054276 Canada Inc, ("3054")
and 2906694 Canada Inc. ("Centos") ceased.
PROGESTIC INTERNATIONAL INC.
The Company acquired all of the issued and outstanding capital stock of
Progestic for a purchase price consisting of cash in the amount of CDN$500,000
and the issuance of 863,824 shares of the Company's common stock. The
consideration was paid to the former shareholders of Progestic, pro-rata to
their ownership interests in Progestic. The source of the funds used by the
Company to pay the cash portion of the purchase price was a combination of the
sale of equity securities and loans from shareholders and an officer.
Progestic, incorporated in 1983, generated revenues of $5,981,475 and sustained
net losses of $(263,675) for its most recently completed fiscal year ended
September 30, 2003. Progestic provides consulting services to Canadian
government and private sector clients primarily in the areas of: problem solving
to management designed to increase effectiveness and productivity, information
technology and audit and audit-related services.
In connection with the acquisition of Progestic, the Company entered into a
consulting agreement with Jean LaBelle, the former principal shareholder of
Progestic, and his controlled corporation. The agreement is for an initial term
12
of two years and is subject to a one-year renewal terms at the election of the
parties. Mr. LaBelle's corporation will receive a consulting fee in the amount
of $7,500 per month during the term of the agreement, and has been granted
three-year options to purchase 150,000 shares of the Company's common stock,
exercisable at $.85 per share. Five additional executives of Progestic who will
continue in the employ of Progestic were granted options to purchase an
aggregate of 450,000 shares of the Company's common stock upon the same terms
and conditions as those granted to Mr. LaBelle. The options may not be exercised
prior to March 3, 2005. The shares issued as part of the purchase consideration,
as well as the shares issuable upon exercise of the options, have been accorded
"piggy-back" registration rights in connection with future registration
statements that may be filed by the Company.
FSG CONSULTANTS INC.
The Company acquired all of the issued and outstanding capital stock of FSG for
a purchase price consisting of cash in the amount of CDN$350,000 and the
issuance of 558,235 shares of the Company's common stock. The consideration was
paid to the former shareholders of FSG, pro-rata to their ownership interests in
FSG. The source of the funds used by the Company to pay the cash portion of the
purchase price was a combination of the sale of equity securities and loans from
shareholders and an officer.
FSG, incorporated in 1993, generated revenues of $3,764,378 and sustained net
losses of $(1,476) for its most recently completed fiscal year ended March 31,
2004. FSG provides consulting services to government and private sector clients
primarily in the areas of knowledge management, business and technology
solutions, tracking solutions, Government 0n-line (eGovernment), records and
document information management systems.
In connection with the acquisition of FSG, the Company entered into a consulting
agreement with Gilles Caron, the former principal shareholder of FSG. The
agreement is for an initial term of two years and is subject to a one-year
renewal terms at the election of the parties. Mr. Caron's corporation will
receive a consulting fee in the amount of $7,500 per month during the term of
the agreement, and has been granted three-year options to purchase 150,000
shares of the Company's common stock, exercisable at $.85 per share. In
connection with the acquisition of FSG, the Company granted three-year options
to purchase an aggregate of 250,000 shares of the Company's common stock,
exercisable at $.85 per share to FSG's former principal shareholder and three
additional executive officers of FSG who will continue to render their services
to FSG. The options may not be exercised prior to March 3, 2005. The shares
issued as part of the purchase consideration, as well as the shares issuable
upon exercise of the options, have been accorded "piggy-back" registration
rights in connection with future registration statements that may be filed by
the Company.
On June 3, 2004 Spearhead Limited, Inc. sold/transferred its shares of Kischi
Konsulting, Progestic International, Inc., FSG Consulting, Inc. and Spearhead
Canada Limited to its wholly owned subsidiary Spearhead Management Canada
13
Limited ("SMCL"). In exchange Spearhead Management Canada, Inc. issued 2,500,000
shares of common stock to Spearhead Limited, Inc.
On July 2, 2004, the Company changed its name to Spearhead Limited, Inc. As a
result, effective, July 7, 2004, the trading symbol for the Company's common
stock was changed to SPHE.
On December 19, 2004 Spearhead Management Canada, Limited negotiated a demand
revolving operating loan with the Bank of Montreal (BMO) which provides
borrowing up to $3,000,000 (CND), $2,498,840 (US) bearing interest at the banks
prime rate plus 1% per annum. As at December 31, 2004 the wholly owned
subsidiary SMCL was utilizing $1,353,833 (CDN), $1,126,317 (US).
Concurrently with the signing of the BMO facility Spearhead Limited, Inc. placed
an insurance policy with Great American Insurance Company (GAI) effectively
insuring all of the accounts receivable of its wholly owned subsidiary Spearhead
Management Canada Limited.
Effective December 31, 2004 SMCL amalgamated all of its wholly-owned
subsidiaries, namely Kischi Konsulting Inc., Progestic International Inc., FSG
Consulting Inc. and Spearhead Management Canada Limited, in a wind-up thereby
consolidating the operations into one company, Spearhead Management Canada
Limited.
(3) RELATED PARTY TRANSACTIONS
Consulting Agreements
- ---------------------
Effective November 1, 2003, we entered into a consulting agreement with Michel
L. Marengere and his affiliated corporation, covering consulting services to be
rendered to us through such corporation, by Mr. Marengere. The term of the
consulting agreement commenced November 1, 2003 and will terminate on October
31, 2005, subject to one additional twelve-month renewal term. Under the
consulting agreement Mr. Marengere serves as our Chief Executive Officer, and
his affiliated corporation is entitled to a consulting fee in the amount of
$20,000 per month, plus applicable taxes. The agreement contains standard
confidentiality provisions, as well as a non-compete provision covering a period
of 12 months following termination of the agreement within the state of Florida
and the provinces of Ontario and Quebec, Canada. The non-compete provision may
be shortened to three months or six months depending upon the basis for
termination of the agreement.
Effective November 1, 2003, we entered into a consulting agreement with Jacques
R. Delorme and his affiliated corporation, covering consulting services to be
rendered to us through such corporation, by Mr. Delorme. The term of the
consulting agreement commenced November 1, 2003 and will terminate on October
31, 2005, subject to one additional twelve-month renewal term. Under the
consulting agreement Mr. Delorme serves as a Vice President, and his affiliated
14
corporation is entitled to a consulting fee in the amount of $7,500 per month,
plus applicable taxes. The agreement contains standard confidentiality
provisions, as well as a non-compete provision covering a period of 12 months
following termination of the agreement within the state of Florida and the
provinces of Ontario and Quebec, Canada. The non-compete provision may be
shortened to three months or six months depending upon the basis for termination
of the agreement.
Effective November 1, 2003, we entered into a consulting agreement with Scott
Siegel, a director, and his affiliated corporation, to provide us with
consulting services and advice in the areas of business development, mergers,
acquisitions, combinations and strategic alliances, as well as internal
relationships with our officers and directors and United States corporate
governance matters. The term of the consulting agreement commenced November 1,
2003 and will terminate on October 31, 2005, subject to one additional
twelve-month renewal term. For his services Mr. Siegel's affiliated corporation
is entitled to a consulting fee in the amount of $12,500 per month. The
agreement contains standard confidentiality provisions, as well as a non-compete
provision covering a period of 12 months following termination of the agreement
within the state of Florida. The non-compete provision may be shortened to three
months or six months depending upon the basis for termination of the agreement.
Effective November 1, 2003, we entered into a consulting agreement with Jeffrey
Tabin, and his affiliated corporation, to provide us with consulting services.
Under the consulting agreement Mr. Tabin serves as CFO, and his affiliated
corporation is entitled to a consulting fee in the amount of $6,500 per month,
plus applicable taxes. The term of the consulting agreement commenced November
1, 2003 and will terminate on October 31, 2004, subject to one additional
twelve-month renewal term. Mr. Tabin's agreement has been extended for an
additional twelve months through October 31, 2005. The agreement contains
standard confidentiality provisions, as well as a non-compete provision covering
a period of 12 months following termination of the agreement within the state of
Florida. The non-compete provision may be shortened to three months or six
months depending upon the basis for termination of the agreement.
We have no other written agreements with any of our executive officers or
directors and we maintain no retirement, fringe benefit or similar plans for the
benefit of executive officers or directors. We may, however, enter into
employment or consulting contracts with our officers and key employees, adopt
various benefit plans and begin paying compensation to our officers and
directors as we deem appropriate to attract and retain the services of such
persons.
We do not pay fees to directors for their attendance at meetings of the board of
directors or of committees; however, we may adopt a policy of making such
payments in the future. We will reimburse out-of-pocket expenses incurred by
directors in attending board and committee meetings.
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(4) STOCK OPTIONS
Had compensation cost for the Company's stock options been determined based on
the fair value at the grant dates for awards consistent with the method of SFAS
123, the Company's pro forma net loss and pro forma net loss per share would
have been as indicated below:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Net loss to common shareholders -
As reported $ (191,064) $ (189,365)
=========== ===========
Pro forma $ (191,064) $ (895,879)
=========== ===========
Basic and diluted loss per share -
As reported $ (.00) $ (.01)
=========== ===========
Pro forma $ (.00) $ (.02)
=========== ===========
For purposes of the preceding pro forma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2005: no dividend yield; volatility of 100.7;
risk-free interest rate of 4% and an expected term of five years.
FORWARD-LOOKING STATEMENTS
Portions of this report, including disclosure under "Management's Discussion and
Analysis or Plan of Operation," contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), Section 21E of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and the Private Securities Litigation Reform Act
of 1995, as amended. These forward-looking statements are subject to risks and
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from the results, performance or
achievements expressed or implied by the forward-looking statements. You should
not unduly rely on these statements. Forward-looking statements involve
assumptions and describe our plans, strategies, and expectations. You can
generally identify a forward-looking statement by words such as may, will,
should, expect, anticipate, estimate, believe, intend, contemplate or project.
With respect to any forward-looking statement that includes a statement of its
underlying assumptions or bases, we caution that, while we believe such
assumptions or bases to be reasonable and have formed them in good faith,
assumed facts or bases almost always vary from actual results, and the
16
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, we or
our management express an expectation or belief as to future results, that
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the stated expectation or
belief will result or be achieved or accomplished. All subsequent written and
oral forward-looking statements attributable to us, or anyone acting on our
behalf, are expressly qualified in their entirety by the cautionary statements.
We do not undertake any obligations to publicly release any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this report or to reflect unanticipated events that may occur.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
Our primary ongoing sources of cash for operational purposes are net cash flows
from operating activities, borrowings under a credit facility and loans from
stockholders. Based upon management's projections and assessment of current
market conditions, we believe we will have adequate liquidity to meet our needs
for fiscal 2005. Our working capital decreased at March 31, 2005 to ($678,642)
as compared to ($482,998) at December 31, 2004.
Term Loan Facilities
In December 2004, our operating subsidiary, Spearhead Management Canada Limited
negotiated a demand revolving operating loan with the Bank of Montreal (BMO)
which provides borrowing up to $3,000,000 (CND), $2,498,840 (USD) bearing
interest at the banks prime rate plus 1% per annum. As at March 31, 2005 the
wholly owned subsidiary SMCL was utilizing $1,483,414(USD) leaving an additional
$1,015,426(USD) available on the facility. The demand loan is secured by a first
ranking registered security interest in favor of the bank over all of the
property of the Company; corporate guarantee for $3,050,000 (CDN), $2,537,438
(US) from its parent company (Spearhead Limited, Inc.); assignment of accounts
receivable insurance and fire insurance; subordination of dividends payable,
funds due to parent company (Spearhead Limited, Inc.) and funds due a company
controlled by a director.
Sale of Stock
During 2004 the Company generated $810,520 from a secondary private placement of
common stock bring the total funds raised from private placements ($703,700) in
2003 to $1,514,200.
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Borrowings
During 2004 the Company borrowed $885,000 (total borrowings of $1,485,000 less
$600,000 repaid during 2004) from companies controlled by shareholders and a
senior executive officer of the Company. The Company agreed to repay the loans
with interest at a fixed rate of ten (10%) until maturity and at an annual rate
of 20% after maturity until paid in full, compounded monthly and not in advance.
Interest on overdue interest shall accrue and be payable at the interest rate.
In addition, the lenders acquired warrants to purchase 395,001 shares of Company
common stock at $.85 per share and 100,000 shares of Company common stock at
$.50 per share. Interest of $194,125 has been included in the operating expenses
of the business for the year ended December 31, 2004.
The major Shareholders have demonstrated in the past and have indicated a
willingness to continue to fund the Company capital as the need may arise in
its' future expansion/acquisition plans.
The following discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto, and other financial information
included elsewhere herein. Our financial statements are prepared in conformity
with U.S. GAAP
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005.
The Company derives all of its revenues from its Canadian Subsidiary, which in
turn generates over 90% of its business from contracts with the Canadian
(Federal, Province and Local) Government. Operational results for the three
months ended March 31, 2005 represent the consolidated activity of Kischi,
Progestic and FSG as compared to the operating results of only Kischi for the
comparable period ended March 31, 2004.
Revenues:
Over the past year, we have witnessed numerous developments in the
Canadian economy, government, and marketplace that have had a
significant impact on the IT professional services industry in the
National Capital Region. IT Consulting companies are facing an
ever-changing marketplace that is increasingly competitive. While the
marketplace is still in a recovery stage the Company was able to
whether the storm by re-negotiating sub-contractor fees; consolidating
its physical locations; and by consolidating its processes and systems
to create an efficient financial machine. Management believes that it
is well positioned for the eventual improvement in the IT Service
market. With this in mind revenues for the three months ended March 31,
2005 was $4,357,291 as compared to $2,271,926 for 2004, for an increase
of $2,085,365. The acquisition of Progestic and FSG in June 2004
accounted for $2,085,365 of the increase in revenues.
Cost of Sales:
Direct expenses are those costs paid to the sub-contracting consultants
performing the services that generate revenues. Direct costs were
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$3,614,234 for 2005 as compared to $2,075,906 for 2003. Cost of Sales
was 83% of sales for the current period as opposed to 91% of sales for
the comparable period in 2004. The reduction in cost of sales as
percentage of sales results in part from the Company's ability to
re-negotiate sub-contractor fees but more as a result on the
acquisition of Progestic and FSG as these two operations are more
oriented toward and employee base as opposed to a
sub-contractor/outsourcing environment.
Gross Profit:
Gross profit for quarter ended March 31, 2005 amounted to $743,057
(17%) as compared to $196,020 (9%) in 2004 for a favorable variance of
8%, or $547,037. This increase in gross margin rate is directed related
to the reduction in cost of sales as addressed above.
Selling, General and Administrative Expense:
The selling, general and administrative expenses for the three months
ended March 31, 2005 were $934,121 (21% of sales) as compared to
$385,385 (17%) for 2004 for an increase of $548,736. Included in the
2005 expenses are, $77,000 of interest expense related to borrowing to
finance the acquisition of Progestic and FSG, $45,000 of consulting
fees paid to the previous ownership of Progestic and FSG, and $9,000 of
insurance premiums relating to the insurance of the Company receivables
as part of the Credit Facility. If we adjust March 31, 2005 expenses
for these items ($131,000) then Selling, General and Administrative
expenses for 2005 would be $803,121 or 18% of sales or an increase of
only 1% over the previous comparable period. Management is constantly
examining ways of reducing these expenses.
Net Profit/(Loss):
The Company incurred a net loss of $191,064 (4% of sales) for the three
months ended March 31, 2005 against a loss of $189,365 (8% of sales)
last year. The reduction, of Company losses, as a percentage of sales
relates to the improvement in the Company overall Gross Margin rate and
Management is working diligently at both continuing the increase in
Gross Margin rates as well as bringing down Selling, General and
Administrative expenses in the future.
Other:
No income tax expense or benefit is recorded in the three-month
periods ended March 31, 2005 and 2004.
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Off-Balance Sheet Arrangements:
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
PLAN OF OPERATION
Over the past year, we have witnessed numerous developments in the Canadian
economy, government, and marketplace that have had a significant impact on the
IT professional services industry in the National Capital Region. With the
change in government leadership, widely publicized government scandals and
overall decreased demand for IT services, IT consulting companies are facing a
changing marketplace that is increasingly competitive and fraught with
uncertainty.
Spearhead has always taken great pride in its ability to adapt and respond to
changing market conditions and today is no different. We are committed not only
to maintaining, but also to improving our position in the IT professional
Service industry in Canada and will do so by anticipating and adapting to
emerging trends and opportunity within our industry. To this end, Spearhead's
Corporate Leadership Team has identified five strategic initiatives that were
deemed critical to achieving our growth objective:
1. Broaden our client base within the federal government;
2. Expand our client base with Systems Integrators and Aboriginal companies;
3. Establish ourselves as leaders in strategic specialized practices;
4. Improve profitability (gross margins and bottom line); and
5. Continue improvement of internal business processes to be more efficient.
The primary goal for the Sales organization will be to increase market share by
focusing on maximizing revenue in our core accounts and diversifying into new
government and department by winning RFP's in strategic accounts. This will be
accomplished independently and in partnership with Systems Integrators that will
allow us to target projects and accounts otherwise unattainable. In support of
Spearhead's key initiative, the HR and Recruiting team will focus on improving
Spearhead's profile with current and prospective consultants. The emphasis will
be put on improved recruiting processes to attract consultants with highly
sought after skill sets. In the area of Consulting Services, the key objectives
include; improving our capability to respond to an increasing number of
qualified RFP's, maintaining a high standard of quality in the preparation and
issue of our responses and developing project methodologies and corporate
capabilities that will enable Spearhead to win larger and more complex RFP's.
Enhanced attention will be paid to our specialized practices: management and
audit, knowledge management, and security services. Steady growth is anticipated
for management and audit. Opportunities in knowledge management and RDIMS
services continue to increase and every effort will be made to increase our
market share. Finally, several initiatives are currently being undertaken by
government departments in the area of application security and physical security
and we will establish a practice to compete in these spaces, with an ultimate
goal of establishing ourselves as one of the leading firms in Ottawa to provide
these services. In 2004, our Finance team consolidated their processes and
systems to create an efficient financial machine. Their challenge now is to
integrate the Sales team's client and opportunity tracking system into their
financial processes in evermore efficient manner.
20
Spearhead has a strong team of dedicated individuals committed to achieving the
vision set out in our strategic plan. We are well positioned for the eventual
improvement in the IT Service market and are confident that we will achieve our
financial targets.
ITEM 3. CONTROLS AND PROCEDURES
Disclosure controls and procedures [as defined in Rule 13(a)-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act")] are designed to ensure
that information required to be disclosed in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in applicable laws, rules and regulations. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the reports
filed under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Given the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Further, the design of a control system must
reflect the fact that there are resource constraints, and that benefits of
controls must be considered relative to their costs. The design of any system of
controls is also based in part on certain assumptions regarding the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.
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PART II OTHER INFORMATION
ITEM 1 EXHIBITS
31.1 Certification Pursuant to Rule 13(a)-15(e) or 15d-15e of the
Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes- Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13(a)-15(e) or 15d-15e of the
Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPEARHEAD LIMITED INC.
A FLORIDA CORPORATION
Date: May 13, 2005 By /s/ Michel L. Marengere
- ------------------ --------------------------
Michel L. Marengere CEO
(Principal Executive Officer)
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