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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
[_] 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 000-30271
Paradigm Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0211506
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
9715 KEY WEST AVE., 3RD FLOOR
Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 468-1200
Registrant's telephone number, including area code
None
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer [_] Accelerated filer [_] Non-accelerated
filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Shares of common stock outstanding on May 1, 2007 were 19,019,871.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Condensed Consolidated Financial Statements (Unaudited).............3
Condensed Consolidated Balance Sheets (Unaudited)...................3
Condensed Consolidated Statements of Operations (Unaudited).........5
Condensed Consolidated Statements of Cash Flows (Unaudited).........6
Notes to Condensed Consolidated Financial Statements.(Unaudited)....8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........22
Item 4. Controls and Procedures............................................22
PART II. OTHER INFORMATION....................................................24
Item 1. Legal Proceedings..................................................24
Item 1A. Risk Factors.......................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........24
Item 3. Defaults Upon Senior Securities....................................24
Item 4. Submission of Matters to a Vote of Security Holders................24
Item 5. Other Information..................................................24
Item 6: Exhibits...........................................................25
SIGNATURES....................................................................26
CERTIFICATIONS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
2
PARADIGM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
3/31/2007 12/31/2006
- -------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,910,674 $ 371,176
Accounts receivable - contracts, net 13,724,630 15,768,449
Prepaid expenses 421,244 745,140
Prepaid corporate income taxes 171,343 215,044
Other current assets 22,385 25,903
Current assets of discontinued operations -- 1,594,141
------------ ------------
TOTAL CURRENT ASSETS 17,250,276 18,719,853
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Furniture and fixtures 151,802 151,802
Equipment 889,530 889,530
Software 625,383 625,383
Leasehold improvements 20,577 20,577
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 1,687,292 1,687,292
Less: Accumulated depreciation (1,178,317) (1,093,981)
------------ ------------
NET PROPERTY AND EQUIPMENT 508,975 593,311
------------ ------------
OTHER ASSETS
Deposits 126,228 96,228
Deferred rent assets 78,954 78,827
Deferred income taxes 55,792 58,359
------------ ------------
TOTAL ASSETS $ 18,020,225 $ 19,546,578
============ ============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated financial statements.
3
PARADIGM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
3/31/2007 12/31/2006
- --------------------------------------------------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ -- $ 2,464,022
Note payable - line of credit 9,971,747 5,559,649
Capital leases payable, current portion 33,528 32,837
Accounts payable and accrued expenses 5,656,184 5,619,834
Accrued salaries and related liabilities 1,508,066 2,137,002
Expected loss on contract -- 613,742
Deferred revenue 430,674 452,491
Deferred rent, current portion 5,635 77,674
Deferred income taxes 199,404 72,259
Current liabilities of discontinued operations -- 616,889
------------ ------------
TOTAL CURRENT LIABILITIES 17,805,238 17,646,399
------------ ------------
LONG-TERM LIABILITIES
Capital leases payable, net of current portion 23,819 32,320
Security deposit held 33,408 33,408
Deferred rent, net of current portion 224,005 179,219
------------ ------------
TOTAL LIABILITIES 18,086,470 17,891,346
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 50,000,000 shares authorized, 19,019,871 shares
and 20,795,152 shares issued and outstanding as of March 31, 2007
and December 31, 2006, respectively 190,199 207,951
Additional paid-in capital 614,006 2,106,641
Accumulated deficit (870,450) (659,360)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (66,245) 1,655,232
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,020,225 $ 19,546,578
============ ============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated financial statements.
4
PARADIGM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31, 2007 2006
- --------------------------------------------------------------- ------------ ------------
Contract revenue
Service contracts $ 6,728,350 $ 11,934,632
Repair and maintenance contracts 4,822,264 3,939,708
------------ ------------
Total contract revenue 11,550,614 15,874,340
------------ ------------
Cost of revenue
Service contracts 6,580,283 9,348,921
Repair and maintenance contracts 3,494,113 3,593,268
------------ ------------
Total cost of revenue 10,074,396 12,942,189
------------ ------------
Gross margin 1,476,218 2,932,151
Selling, general and administrative 1,432,919 2,057,563
------------ ------------
Income from operations 43,299 874,588
------------ ------------
Other income (expense)
Interest income -- 373
Interest expense (204,498) (101,145)
Other income -- 2,674
------------ ------------
Total other expense (204,498) (98,098)
------------ ------------
(Loss) income from continuing operations
before income taxes (161,199) 776,490
------------ ------------
(Benefit) provision for income taxes (58,697) 298,974
------------ ------------
(Loss) income from continuing operations (102,502) 477,516
Loss from operations of discontinued component,
net of income tax benefits (186,804) (221,234)
Gain on sale of discontinued operations, net of income taxes 78,216 --
------------ ------------
Loss from discontinued operations, net of income taxes (108,588) (221,234)
------------ ------------
Net (loss) income $ (211,090) $ 256,282
============ ============
Weighted average number of common shares:
Basic 20,203,392 20,503,486
Diluted 20,203,392 21,069,557
Basic net (loss) income per common share:
(Loss) income from continuing operations $ (0.00) $ 0.02
Loss from discontinued operations $ (0.01) $ (0.01)
Net (loss) income $ (0.01) $ 0.01
------------ ------------
Diluted net (loss) income per common share:
(Loss) income from continuing operations $ (0.00) $ 0.02
Loss from discontinued operations $ (0.01) $ (0.01)
Net (loss) income $ (0.01) $ 0.01
------------ ------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated financial statements.
5
PARADIGM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended March 31, 2007 2006
- ----------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (211,090) $ 256,282
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
Loss from operations of discontinued component, net of income tax benefits 186,804 221,234
Gain on sale of discontinued operations, net of income taxes (78,216) --
Share-based compensation 69,613 --
Depreciation and amortization 84,336 97,607
Deferred income taxes 129,712 (136,319)
(INCREASE) DECREASE IN
Accounts receivable - contracts, net 2,043,819 (2,222,739)
Prepaid expenses 323,896 333,411
Prepaid corporate income taxes 43,701 19,643
Other current assets 3,518 62,348
Other noncurrent assets (30,127) --
(DECREASE) INCREASE IN
Accounts payable and accrued expenses 36,350 225,331
Accrued salaries and related liabilities (628,936) 44,973
Expected loss on contract (613,742) --
Income taxes payable -- 208,496
Deferred revenue (21,817) (7)
Deferred rent (27,253) (3,698)
------------ ------------
Net cash provided by (used in) operating activities
from continuing operations 1,310,568 (893,438)
Net cash used in operating activities
from discontinued operations (677,311) (179,845)
------------ ------------
NET CASH PROVIDED BY (USED IN) BY OPERATING ACTIVITIES 633,257 (1,073,283)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (23,431)
------------ ------------
Net cash used in investing activities
from continuing operations -- (23,431)
Net cash used in investing activities
from discontinued operations (34,025) (146,537)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (34,025) (169,968)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (2,464,022) 400,067
Payments on capital leases (7,810) (4,770)
Proceeds from line of credit 22,079,716 11,717,570
Payments on line of credit (18,378,954) (11,961,422)
------------ ------------
Net cash provided by financing activities
from continuing operations 1,228,930 151,445
Net cash provided by proceeds from line of credit to
finance discontinued operations 711,336 326,382
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,940,266 477,827
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,539,498 (765,424)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 371,176 943,017
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,910,674 $ 177,593
============ ============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated financial statements
6
For the three months ended March 31, 2007 2006
- ------------------------------------------------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing activities:
Non-cash sale price of commercial business $1,580,000 $ --
========== ==========
Cash paid for income taxes $ 52,334 $ 71,160
========== ==========
Cash paid for interest $ 166,491 $ 97,395
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated financial statements.
7
PARADIGM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Paradigm Holdings, Inc. (the "Company") is the parent of the wholly owned
subsidiary, Paradigm Solutions Corp. Reference is made to the Annual Report on
Form 10-K for the Company for the year ended December 31, 2006 filed with the
Securities and Exchange Commission (the "SEC") for additional information on the
corporate structure.
The interim condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Therefore, certain financial
information and footnote disclosures accompanying annual financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP") are omitted in this interim report. The
interim condensed consolidated financial statements and notes thereto should be
read in conjunction with the Annual Report on Form 10-K for the Company for the
year ended December 31, 2006.
The accompanying unaudited condensed consolidated financial statements for the
Company reflect all normal recurring adjustments that are necessary, in the
opinion of management, to present fairly the results of operations in accordance
with GAAP. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain reclassifications have been made to the Consolidated Financial
Statements of Paradigm Holdings for all prior periods presented to conform to
the presentation for current periods. Certain of these reclassifications reflect
the discontinued operations of the Commercial business as presented on Paradigm
Holdings' Consolidated Financial Statements.
For a description of the Company's accounting policies, refer to Note 1 of the
Notes to Consolidated Financial Statements of the Annual Report on Form 10-K for
Paradigm Holdings, Inc. for the year ended December 31, 2006.
REVENUE RECOGNITION
Substantially all of the Company's revenue is derived from service and solutions
provided to the federal government by Company employees and subcontractors.
The Company generates its revenue from three different types of contractual
arrangements: (i) time and materials contracts, (ii) cost-plus reimbursement
contracts, and (iii) fixed price contracts.
Time and Materials (T&M). For T&M contracts, revenue is recognized based on
direct labor hours expended in the performance of the contract by the contract
billing rates and adding other billable direct costs.
Cost-Plus Reimbursement (CP). Under CP contracts, revenue is recognized as costs
are incurred and include an estimate of applicable fees earned. For award based
fees under CP contracts, the Company recognizes the relevant portion of the
expected fee to be awarded by the client at the time such fee can be reasonably
estimated and collection is reasonably assured, based on factors such as prior
award experience and communications with the client regarding performance.
Fixed Price (FP). The Company has two basic categories of FP contracts: (i)
fixed price- level of effort (FP-LOE) and (ii) firm fixed price (FFP).
o Under FP-LOE contracts, revenue is recognized based upon the number of
units of labor actually delivered multiplied by the agreed rate for each
unit of labor. Revenue on fixed unit price contracts, where specific units
of output under service agreements are delivered, is recognized as units
are delivered based on the specific price per unit. For FP maintenance
contracts, revenue is recognized on a pro-rata basis over the life of the
contract.
o Under FFP contracts, revenue is recognized subject to the provision of
U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 104. The Company has one FFP contract. This contract includes several
contractual milestones. Revenue is recognized over the course of each
phase or milestone using percentage of completion accounting. Achievement
and delivery of contractual milestones occurs throughout the life of the
contract. Delivery and revenue recognition inherently involve estimation.
During the performance of the FFP contracts, the Company periodically
reviews and revises the estimated total contract costs and/or profit
margin at completion of the contract. The impact on revenue and contract
profit as a result of these revisions is included in the periods in which
the revisions are made. This method can result in the deferral of costs or
the deferral of profit on these contracts. Because the Company assumes the
risk of performing a FFP contract at a set price, the failure to
accurately estimate ultimate costs or to control costs during performance
of the work could result, and in some instances has resulted, in reduced
profits or losses for such contracts. Estimated losses on contracts at
completion are recognized when identified. In certain circumstances,
revenues are recognized when contract amendments have not been finalized.
8
In certain arrangements, the Company enters into contracts that include the
delivery of a combination of two or more of its service offerings. Such
contracts are divided into separate units of accounting and revenue is
recognized separately, and in accordance with, the Company's revenue recognition
policy for each element. Further, if an arrangement requires the delivery or
performance of multiple deliveries or elements under a bundled sale, the Company
determines whether the individual elements represent "separate units of
accounting" under the requirements of Emerging Issues Task Force Issue (EITF)
No. 00-21, "Multiple Delivery Revenue Arrangements."
Software revenue recognition for sales of OpsPlanner is in accordance with AICPA
Statement of Position 97-2, "Software Revenue Recognition." Since the Company
has not yet established vendor specific objective evidence of fair value for the
multiple arrangements typically contained within an OpsPlanner sale, revenues
from the sale of OpsPlanner are recognized ratably over the term of the
contract.
In certain contracts, revenue includes third-party hardware and software
purchased on behalf of clients. The level of hardware and software purchases
made for clients may vary from period to period depending on specific contract
and client requirements. The Company recognizes the gross revenue under EITF No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", for
certain of its contracts which contain third-party products and services,
because in those contracts, the Company is contractually bound to provide a
complete solution which includes labor and additional services in which the
Company maintains contractual, technical and delivery risks for all services and
agreements provided to the customers, and the Company may be subject to
financial penalties for non delivery.
The Company is subject to audits from federal government agencies. The Company
has reviewed its contracts and determined there is no material risk of financial
adjustments due to government audit. To date, we have not had any adjustments as
a result of a government audit of our contracts.
Revenue recognized on contracts for which billings have not yet been presented
to customers is included in unbilled receivables.
Deferred revenue relates to contracts for which customers pay in advance for
services to be performed at a future date. The Company recognizes deferred
revenue attributable to our software and maintenance contracts over the related
service periods, which run through 2007.
SHARE-BASED COMPENSATION
The Company currently has one equity incentive plan, the 2006 Stock Incentive
Plan (the Plan), which provides the Company the opportunity to compensate
selected employees with stock options. A stock option entitles the recipient to
purchase shares of common stock from the Company at the specified exercise
price. All grants made under the Plan are governed by written agreements between
the Company and the participants.
On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
2004), "Share-Based Payment", (SFAS No. 123 (revised)). SFAS No. 123 (revised)
replaces SFAS No. 123 and supersedes APB No. 25 and subsequently issued stock
option related guidance. The Company elected to use the modified-prospective
method of implementation. The Company did not grant any share-based awards for
the three months ended March 31, 2007 and 2006. Total share-based compensation
expense included in selling, general and administrative expenses in the
accompanying Condensed Consolidated Statements of Operations for the three ended
March 31, 2007 was $70 thousand for options granted in May and December 2006. As
of March 31, 2007, there was $581 thousand of total unrecognized compensation
costs related to nonvested stock option arrangements granted during 2006. The
Company did not record any share-based compensation expense for the three months
ended March 31, 2006.
MAJOR CUSTOMERS
All of the Company's revenue is from work performed for U.S. Federal civilian
agencies and 71% and 75% of total revenue was generated from three and four
major customers during the three months ended March 31, 2007 and 2006,
respectively. The Company's accounts receivable related to these three major
customers was 44% of total accounts receivable at March 31, 2007. The Company's
accounts receivable related to the four major customers was 78% of total
accounts receivable at December 31, 2006. The Company defines major customer by
agencies within the federal government.
A majority of the Company's customer concentration is in the Mid-Atlantic states
of the United States.
9
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements", which defines fair value, establishes a
framework for a measuring fair value in GAAP, and expands disclosures about fair
value measurements. The Company will adopt SFAS No. 157 on January 1, 2008. The
adoption of SFAS No. 157 is not expected to have a material impact on the
Company's statements of operations, financial position, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", which permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS No. 159 will be
effective for the Company on January 1, 2008. The adoption of SFAS No. 159 is
not expected to have a material impact on the Company's statements of
operations, financial position, or cash flows.
2. DISCONTIUNED OPERATIONS
On September 22, 2006, the Company established an independent committee of its
Board of Directors to evaluate strategic alternatives with regard to the
Company's Commercial business activities, including the potential divestiture of
the Commercial business. The Company defines the Commercial business as all of
the outstanding capital stock of Paradigm Solutions International ("PSI"), which
includes all of the capital stock of Blair Technology Group, a wholly-owned
subsidiary of PSI, and certain assets associated with the OpsPlanner software
tool. The decision to divest was made during the fourth quarter of 2006
following the completion of the independent committee's evaluation of strategic
alternatives. The Company classified the Commercial business as discontinued
operations at December 31, 2006 based on the Company meeting the necessary
criteria listed in paragraph 30 of SFAS No. 144 in the fourth quarter. The
divestiture supports the Company's efforts to refocus Paradigm on its core
information technology services business supporting the Federal government.
On February 23, 2007, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Mr. Raymond Huger, the Company's Chairman of
the Board of Directors, co-founder and former Chief Executive Officer. On
February 28, 2007, the Company completed the sale of the Company's Commercial
business, in the form of a sale of all of the capital stock of the business.
This transaction resulted in a gain of $78 thousand, net of $84 thousand of
selling costs and $405 thousand of income taxes, recorded in the first quarter
of 2007.
The Commercial business has been reported as a discontinued operation of the
Company and, accordingly, its operating results, financial position and cash
flows have been presented separately from the Company's continuing operations in
the Condensed Consolidated Financial Statements for all current and prior
periods presented.
The following tables summarize selected financial information related to the
operating results and financial position of the Commercial business. There were
no assets and liabilities held for sale as of March 31, 2007.
Three months ended March, 31, 2007 2006
--------- ---------
Revenue $ 279,604 $ 855,442
Loss before income tax benefits $(304,340) $(360,434)
Income tax benefits (117,536) (139,200)
--------- ---------
Loss from operations of discontinued component, net of
income tax benefits $(186,804) $(221,234)
========= =========
The assets and liabilities are as follows:
Dec. 31, 2006
--------------
ASSETS
Accounts receivable(1) $ 467,156
Prepaid expenses 42,005
Net property and equipment 123,796
Capitalized software, net 91,410
Intangible assets, net(2) 173,856
Goodwill 683,814
Other 12,104
--------------
Total current assets of discontinued operations $ 1,594,141
==============
10
Dec. 31, 2006
--------------
LIABILITIES
Accounts payable and accrued expenses $ 156,198
Deferred revenue 222,730
Payroll and payroll related liabilities 129,646
Deferred income taxes, net 108,315
--------------
Total liabilities of discontinued operations $ 616,889
==============
(1) There was no allowance for doubtful accounts at December 31, 2006.
(2) Intangible assets are as follows:
December 31, 2006
----------------------
Accumulated
Cost Amortization
-------- --------
Non-compete agreements $ 97,903 $ 97,903
Customer relationships 260,771 86,915
-------- --------
Total $358,674 $184,818
======== ========
The intangible assets have no residual value at the end of their useful lives.
Amortization expense recorded in net loss from discontinued operations in the
Company's Condensed Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 was $0 and $34,595, respectively.
After the sale of its Commercial business, the Company does not have any
financial relationship with PSI except for a Reseller Agreement.
According to the Reseller Agreement with PSI, the Company is the exclusive
reseller in the federal market for the proprietary software tool, OpsPlanner
(TM) and is committed to pay PSI a minimum of $60,000 annually for software
usage after the sale of the Commercial business. The Company expects to pay
approximately the minimum amount committed during the terms of the Reseller
Agreement which is two years.
3. ACCOUNTS RECEIVABLE
The accounts receivable consist of billed and unbilled amounts under contracts
in progress with governmental units, principally the Department of Housing and
Urban Development Office of Community Planning and Development, Bureau of
Alcohol, Tobacco, Firearms and Explosives, the Office of the Comptroller of the
Currency, the U.S. Secret Service, and the Internal Revenue Service. The
components of accounts receivable are as follows:
Mar. 31, 2007 Dec. 31, 2006
----------- -----------
Billed receivables $ 4,156,868 $ 4,453,132
Unbilled receivables 9,567,762 11,315,317
----------- -----------
Total $13,724,630 $15,768,449
=========== ===========
All receivables are expected to be collected within the next twelve months and
are pledged to Silicon Valley Bank as collateral for the line of credit. The
Company's unbilled receivables are comprised of contract costs that cover the
current service period and are normally billed in the following month and do not
include the offset of any advances received. The forgoing excludes the Company's
firm fixed price contracts, principally with the Office of Community Planning
Development, which is billed upon delivery and acceptance. In general, for
cost-plus and time and material contracts, invoicing of the unbilled receivables
occurred when contractual obligations or milestones are met. Invoicing for firm
fixed price contracts occurs on delivery and acceptance. The Company's unbilled
receivables at March 31, 2007 does not contain retainage. All advance payments
received, if any, are recorded as deferred revenue.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the historical trends and other information of the government
agencies it conducts business with. Such losses have been within management's
expectations. The Company reserved $50,000 as an allowance for doubtful accounts
related to certain of its customers at March 31, 2007 and December 31, 2006.
11
4. PREPAID EXPENSES
Prepaid expenses are as follows:
Mar. 31, 2007 Dec. 31, 2006
-------- --------
Prepaid insurance, rent and
software maintenance agreements $153,081 $308,788
Contract-related prepaid expenses 11,052 233,465
Other prepaid expenses 257,111 202,887
-------- --------
Total prepaid expenses $421,244 $745,140
======== ========
5. NOTE PAYABLE - LINE OF CREDIT
On March 13, 2007, the Company entered into a two year Loan and Security
Agreement (the "Loan and Security Agreement") with Silicon Valley Bank that
provides for a revolving line of credit facility of up to $10 million and a line
of credit agreement of up to $12 million under which agreements total funds are
available up to a limit of $12.5 million based on the Company's collateral. The
agreements became effective March 13, 2007. The Loan and Security Agreement will
be used to borrow funds for working capital and general corporate purposes. The
Loan and Security Agreement is collateralized by a first priority perfected
security interest in any and all properties, rights and assets of the Company,
wherever located, whether now owned or thereafter acquired or arising and all
proceeds and products thereof as described in the Loan and Security Agreement.
Under the Loan and Security Agreement, the line of credit is due on demand and
interest is payable monthly based on a floating per annum rate equal to the
aggregate of the Prime Rate plus the applicable spread which ranges from 1.00%
to 2.00%, as well as other fees and expenses as set forth more fully in the
agreements. Under the Loan and Security Agreement, the Company may use up to
$500,000 for letters of credit. The Loan and Security Agreement, requires the
Company to maintain certain EBITDA covenants as specified in the Loan and
Security Agreement. The Company was in compliance with the EBITDA covenant
requirements as of March 31, 2007. The Company had sufficient cash on hand to
cover other liabilities and had $0 additional availability on its revolving line
of credit with Silicon Valley Bank at March 31, 2007. The interest rates charged
by Silicon Valley Bank ranges from 10.75% to 13.25% at March 31, 2007.
The Company terminated its revolving line of credit facility with Chevy Chase
Bank when the Silicon Valley Bank agreement was activated. The Company paid off
the outstanding Chevy Chase Bank balance on March 23, 2007.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Silicon Valley
Bank is entitled to, among other things, accelerate all obligations of the
Company and sell the Company's assets to satisfy the Company's obligations under
the Loan and Security Agreement.
6. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the Company recognizes
deferred income taxes for all temporary differences between the financial
statement basis and the tax basis of assets and liabilities at currently enacted
income tax rates.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109"
("FIN No. 48"), on January 1, 2007. FIN No. 48 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", and prescribes a
recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
12
Based on the evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in the financial statements. The
evaluation was performed for the tax years ended December 31, 2004, 2005 and
2006, the tax years which remain subject to examination by major tax
jurisdictions as of March 31, 2007. Because of the Company's S-Corporation
status for fiscal year 2003, any corporate level tax exposures would not be
material to the Company for tax year ended December 31, 2003; therefore, the
Company did not perform an evaluation for tax year ended December 31, 2003. The
Company revoked its S-Corporation status and became a C-Corporation effective
November 5, 2004.
The Company may from time to time be assessed interest or penalties by major tax
jurisdictions, although any such assessments historically have been minimal and
immaterial to the financial results. As of March 31, 2007, the Company had no
unrecognized tax benefits that would have an effect on the effective tax rate.
The Company elected to continue to report interest and penalties as income
taxes. No interest and penalties were accrued as of January 1, 2007 as a result
of the adoption of FIN No. 48.
7. NET (LOSS) INCOME PER COMMON SHARE
Net (loss) income per common share is computed by dividing net (loss) income by
the weighted average number of common shares outstanding during the reported
period. Shares issued during the period and shares reacquired during the period
are weighted for the portion of the period in which the shares were outstanding.
Diluted net (loss) income per common share has been computed in a manner
consistent with that of basic net (loss) income per common share while giving
effect to all potentially dilutive common shares that were outstanding during
each period. The following table reflects the computation of the Company's basic
and diluted net (loss) income per common share for the three months ended March
31, 2007 and 2006.
Three Months Ended
March 31, March 31,
2007 2006
------------ ------------
Basic net (loss) income per common share:
(Loss) income from continuing operations $ (102,502) $ 477,516
Loss from discontinued operations,
net of income tax benefits (108,588) (221,234)
------------ ------------
Net (loss) income available to common stockholders $ (211,090) $ 256,282
============ ============
Weighted average common shares outstanding - basic 20,203,392 20,503,486
Basic net (loss) income per common share:
(Loss) income from continuing operations $ (0.00) $ 0.02
Loss from discontinued operations (0.01) (0.01)
------------ ------------
Basic net (loss) income per common share $ (0.01) $ 0.01
============ ============
Diluted net (loss) income per common share:
(Loss) income from continuing operations $ (102,502) $ 477,516
Loss from discontinued operations,
net of income tax benefits (108,588) (221,234)
------------ ------------
Net (loss) income available to common stockholders $ (211,090) $ 256,282
============ ============
Weighted average common shares outstanding - basic 20,203,392 20,503,486
Stock options -- 566,071
------------ ------------
Total weighted average common shares outstanding - diluted 20,203,392 21,069,557
============ ============
Diluted net (loss) income per common share:
(Loss) income from continuing operations $ (0.00) $ 0.02
Loss from discontinued operations (0.01) (0.01)
------------ ------------
Diluted net (loss) income per common share $ (0.01) $ 0.01
============ ============
The loss from continuing operations and loss from discontinued operations on a
per share basis were $0.00507 and $0.00537, respectively, for the three months
ended March 31, 2007. The net loss per common share was $0.01045 for the three
months ended March 31, 2007. In order for the sum of the loss from continuing
operations and loss from discontinued operations on a rounded per share basis to
equal the rounded net loss per common share, the Company rounded the lesser of
the loss amounts to ($0.00) per common share and the greater to ($0.01).
13
The Company incurred net losses for the three months ended March 31, 2007.
Therefore, all common shares issuable pursuant to share-based compensation plans
were not considered in the diluted loss per common share calculations due to the
anti-dilutive effect of such shares. For the three months ended March 31, 2007,
the Company had total weighted average stock options of 9,202 shares that were
not included in the calculation of diluted net loss per common share as their
effect would be anti-dilutive.
8. CONTRACT STATUS
EXPECT LOSS ON CONTRACT
The Company performed an updated and revised estimate at completion ("EAC")
analysis during the quarter ended September 31, 2006. Based on the EAC analysis,
the Company estimated that one of its firm fixed price software development
contracts is expected to perform at an operating loss for the remainder of the
contract term which ended in March 2007. The Company recorded the expected
future operating loss of approximately $964 thousand during the quarter ended
September 30, 2006. The Company incurred $350 thousand and $614 thousand of the
expected future operating loss in the fourth quarter of 2006 and first quarter
of 2007, respectively.
PROVISIONAL INDIRECT COST RATES
Billings under cost-type government contracts are calculated using provisional
rates which permit recovery of indirect costs. These rates are subject to audit
on an annual basis by governmental audit agencies. The cost audits will result
in the negotiation and determination of the final indirect cost rates which the
Company may use for the period(s) audited. The final rates, if different from
the provisionals, may create an additional receivable or liability.
As of March 31, 2007, the Company has had no final settlements on indirect
rates. The Company periodically reviews its cost estimates and experience rates
and adjustments, if needed, are made and reflected in the period in which the
estimates are revised. In the opinion of management, redetermination of any
cost-based contracts for the open years will not have any material effect on the
Company's financial position or results of operations.
The Company has authorized but uncompleted contracts on which work is in
progress at March 31, 2007 approximately, as follows:
Total contract prices of initial contract awards, including exercised options
and approved change orders (modifications) $ 169,349,957
Completed to date 149,295,493
-------------
Authorized backlog $ 20,054,464
=============
In addition, the foregoing contracts contain unfunded and unexercised options
not reflected in the above amounts of approximately $53,143,000.
As of March 31, 2007, none of the Company's existing contracts are subject to
renegotiation during the remainder of 2007.
9. RELATED PARTY TRANSACTIONS
On February 23, 2007, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") by and among the Company, PSI, a Maryland
corporation and wholly-owned subsidiary of the Company, and Mr. Raymond Huger ,
the Company's Chairman of the Board of Directors, co-founder and former Chief
Executive Officer. Pursuant to the terms and conditions set forth in the Stock
Purchase Agreement, Mr. Huger purchased from the Company all of the outstanding
capital stock of PSI in consideration of $1,580,000.00 payable in 1,775,281
shares of common stock of the Company based on the closing price per share of
the Company's common stock as of February 28, 2007. This transaction resulted in
a gain of $78 thousand, net of $84 thousand of selling costs and $405 thousand
of income taxes, recorded in the first quarter of 2007. On March 1, 2007, the
Company issued a press release with respect to the successful consummation of
the transactions set forth in the Stock Purchase Agreement among the Company,
PSI and Mr. Huger. Mr. Huger was and remains as the major shareholder of the
Company before and after the transaction described above. Mr. Huger owns 55.7%
of total issued and outstanding shares of common stock following the
consummation of the transaction. On February 28, 2007, the Company entered into
a Voting Agreement by and between the Company and Mr. Raymond Huger. Pursuant to
the terms and conditions set forth in the Voting Agreement, Mr. Huger appointed
the Company as Mr. Huger's proxy and attorney-in-fact, with full power of
substitution and resubstitution, to vote or act by written consent the number of
shares which limits Mr. Huger's remaining voting to a maximum of 49%.
14
10. SUBSEQUENT EVENTS
On January 29, 2007, the Company entered into a Stock Purchase Agreement (the
"Trinity Stock Purchase Agreement") by and among the Company, Trinity IMS, Inc.,
a Nevada corporation ("Trinity") and the shareholders of Trinity (the
"Shareholders"). Pursuant to the terms and conditions set forth in the Trinity
Stock Purchase Agreement, the Company purchased from the Shareholders, all of
the issued and outstanding capital stock of Trinity and Trinity became a
wholly-owned subsidiary of the Company in exchange for a promissory note issued
to the Shareholders. In addition, under certain conditions as set forth in the
Stock Purchase Agreement, the Shareholders will be eligible for incentive
bonuses for winning new contracts for Trinity. On April 9, 2007, the Company,
Trinity and the Shareholders completed the transactions contemplated in the
Trinity Stock Purchase Agreement.
On May 3, 2007, the Board of Directors of the Company granted restricted shares
of common stock, par value $0.01 per share, of the Company to certain
individuals, as set forth below.
Number of
Shares of
Common Fair Vesting/Expiration
Individual Title Stock Value Date
- ---------- ----- ----- ----- ----
President, Chief
Executive Officer and
Peter B. LaMontagne Director 600,000 $480,000 January 2, 2012
Senior Vice President
and Chief Financial
Richard Sawchak Officer 400,000 $320,000 January 2, 2012
Senior Vice President,
Business Development and
Anthony Verna Strategy 100,000 $80,000 January 2, 2012
Francis X. Ryan Director 100,000 $80,000 January 2, 2012
John A. Moore Director 100,000 $80,000 January 2, 2012
Edwin M. Avery Director 100,000 $80,000 January 2, 2012
The restricted shares were issued from the Company's 2006 Stock Incentive Plan
with the intent of providing a longer-term employment retention mechanism to key
management and board members. The restricted shares vest 100% on January 2,
2012.
15
PARADIGM HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
readers can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "forecasts," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "see," "target," "projects,"
"position," or "continue" or the negative of such terms and other comparable
terminology. These statements reflect our current expectations, estimates, and
projections. These statements are not guarantees of future performance and
involve risks, uncertainties, and assumptions that are difficult to predict.
Actual events or results may differ materially from what is expressed or
forecasted in these forward-looking statements. We disclaim any intention or
obligation to update any forward-looking statement.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Paradigm Holdings, Inc. (the "Company" or "Paradigm") provides information
technology, information assurance, and business continuity solutions, primarily
to U.S. Federal Government customers. Headquartered in Rockville, Maryland, the
Company was founded based upon strong commitment to high standards of
performance, integrity, customer satisfaction, and employee development.
With an established core of experienced executives, the Company has grown from
six employees in 1996 to the current level of 200 personnel at March 31, 2007.
Revenues have grown from $51 million in 2003 to almost $60 million by the end of
2006. The annual run-rate of revenue as of March 31, 2007 was approximately $44
million, based on annualized first quarter 2007 revenue.
As of March 31, 2007, Paradigm has one wholly-owned subsidiary, Paradigm
Solutions Corp. ("PSC"), which was incorporated in 1996 to deliver information
technology ("IT") services to federal agencies. Paradigm Solutions International
("PSI"), which was incorporated in 2004, to deliver IT solutions (with a special
focus in Business Continuity Planning and Emergency Management) and software to
commercial clients was divested on February 28, 2007. Mr. Raymond Huger, the
Company's Chairman of the Board of Directors, co-founder and former Chief
Executive Officer purchased from the Company all of the outstanding capital
stock of PSI in consideration of $1,580,000.00 payable in 1,775,281 shares of
common stock of the Company based on the closing price per share of the
Company's common stock as of February 28, 2007.
We derive substantially all of our revenues from fees for information technology
solutions and services. We generate these fees from contracts with various
payment arrangements, including time and materials contracts, fixed-price
contracts and cost-plus contracts. We typically issue invoices monthly to manage
outstanding accounts receivable balances. We recognize revenues on time and
materials contracts as the services are provided. For the quarter ended March
31, 2007, Paradigm's revenue was comprised of 62% fixed price, 27% time and
material, and 11% cost-reimbursable contracts.
Paradigm's historical revenue growth is attributable to various factors,
including an increase in the size and number of projects for existing and new
clients. For the quarter ended March 31, 2007, contracts with the federal
government and contracts with prime contractors of the federal government
accounted for 100% of our revenues. During that same period, our three largest
clients, all agencies within the federal government, generated approximately 71%
of our revenue. In most of these engagements, we retain full responsibility for
the end-client relationship and direct and manage the activities of our contract
staff.
PSC utilized the Small Business Administration ("SBA") 8(a) Business Development
("BD") Program to access the federal marketplace starting in October of 1995 and
graduated from the program in October of 2004. This program allowed PSC to build
a base of business with various federal civilian agencies. As of March 31, 2007,
all of the Company's remaining SBA 8(a) contracts had been re-competed. Paradigm
believes it can mitigate the impact of transitioning from the 8(a) program
through the acquisition of new contract vehicles and the expansion of work with
current customers.
16
Due to graduation from the SBA 8(a) BD Program, PSC is no longer classified as a
small disadvantaged business by the federal government. Accordingly, the Company
will no longer have access to as a prime contractor contractual vehicles set
aside for 8(a) businesses. As of October 2004, PSC began competing solely in the
open marketplace for federal business. The Company has a history of winning
contracts in "full and open" competitions, including contracts at the Department
of Housing and Urban Development, Department of Treasury and the Department of
Commerce. PSC will continue to pursue opportunities aggressively in the federal
marketplace.
Our most significant expense is direct costs, which consist primarily of direct
labor, subcontractors, materials, equipment, travel and an allocation of
indirect costs including fringe benefits. The number of subcontract and
consulting employees assigned to a project will vary according to the size,
complexity, duration and demands of the project.
Selling, general and administrative expenses consist primarily of costs
associated with executive management, finance and administrative groups, human
resources, marketing and business development resources, employee training,
occupancy costs, research and development expenses, depreciation and
amortization, travel, and all other corporate costs.
Other income and expense consists primarily of interest income earned on cash
and cash equivalents and interest payable on our revolving credit facility.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these condensed
consolidated financial statements requires management to make estimates and
judgments that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates including those related to contingent liabilities, revenue
recognition, and other intangible assets. Management bases its estimates on
historical experience and on various other factors that are believed to be
reasonable at the time the estimates are made. Actual results may differ from
these estimates under different assumptions or conditions.
The following critical accounting policies require management's judgment and
estimation, where such estimates have a material effect on the condensed
consolidated financial statements:
o accounting for revenue recognition
o accounting for cost of revenue
o accounting for goodwill and intangible assets
o accounting for impairment of long-lived assets
o accounting for capitalized software costs
For a description of these critical accounting policies, refer to Management's
Discussion section within the Annual Report on Form 10-K for Paradigm for the
fiscal year ended December 31, 2006, and Management's Discussion contained
herein.
Recent Accounting Pronouncements
New accounting pronouncements that have a current or future potential impact on
the condensed consolidated financial statements are as follows:
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 157
FAIR VALUE MEASUREMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements."
SCOPE OF THIS STATEMENT
The statement defines fair value, establishes a framework for a measuring fair
value in GAAP, and expands disclosures about fair value measurements. The
Company will adopt SFAS No. 157 on January 1, 2008. The adoption of SFAS No. 157
is not expected to have a material impact on the Company's statements of
operations, financial position or cash flows.
17
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 159
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities."
SCOPE OF THIS STATEMENT
The statement permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 will be effective for the Company on
January 1, 2008. The adoption of SFAS No. 159 is not expected to have a material
impact on the Company's statements of operations, financial position, or cash
flows.
Results of Operations
The following discussion and analysis should be read in conjunction with
Paradigm's Condensed Consolidated Financial Statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q and with Paradigm's
Consolidated Financial Statements and the information under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in Paradigm's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.
The following table sets forth certain items from our condensed consolidated
statements of operations for the periods indicated.
Three months ended March 31,
------------------------------------------------
(Dollars in thousands) 2007 2006 2007 2006
-------- -------- ----- -----
Revenue $ 11,551 $ 15,874 100.0% 100.0%
Cost of revenue 10,074 12,942 87.2 81.5
-------- -------- ----- -----
Gross margin 1,477 2,932 12.8 18.5
Selling, general & administrative 1,433 2,058 12.4 13.0
-------- -------- ----- -----
(Loss) income from operations 44 874 0.4 5.5
Other expense (205) (98) (1.8) (0.6)
Income tax (benefit) provision (59) 299 (0.5) 1.9
-------- -------- ----- -----
(Loss) income from continuing
operations (102) 477 (0.9) 3.0
Net (loss) income $ (211) $ 256 (1.8)% 1.6%
The table below sets forth, for the periods indicated the service mix in revenue
with related percentages of total contract revenue.
Three months ended March 31,
------------------------------------------------
(Dollars in thousands) 2007 2006 2007 2006
-------- -------- ----- -----
Federal service contracts $ 6,729 $11,934 58.3% 75.2%
Federal repair & maintenance
Contracts 4,822 3,940 41.7 24.8
-------- -------- ----- -----
Total revenue $11,551 $15,874 100.0% 100.0%
The Company's revenues and operating results may be subject to significant
variation from quarter to quarter depending on a number of factors, including
the progress of contracts, revenues earned on contracts, the number of billable
days in a quarter, the timing of the pass-through of other direct costs, the
commencement and completion of contracts during any particular quarter, the
schedule of the government agencies for awarding contracts, the term of each
contract that has been awarded and general economic conditions. Because a
significant portion of total expenses, such as personnel and facilities costs,
are fixed in the short term, successful contract performance and variation in
the volume of activity as well as in the number of contracts commenced or
completed during any quarter may cause significant variations in operating
results from quarter to quarter.
18
The Federal Government's fiscal year ends September 30. If a budget for the next
fiscal year has not been approved by that date, the Company's clients may have
to suspend engagements that are in progress until a budget has been approved.
Such suspensions may cause the Company to realize lower revenues in the fourth
quarter of the year. Further, a change in presidential administrations and in
senior government officials may negatively affect the rate at which the Federal
Government purchases technology.
As a result of the factors above, period-to-period comparisons of Paradigm's
revenues and operating results may not be meaningful. Readers should not rely on
these comparisons as indicators of future performance as no assurances can be
given that quarterly results will not fluctuate, causing a possible material
adverse effect on Paradigm's operating results and financial condition.
Comparison of the Three Months Ended March 31, 2007 and 2006
Revenue. For the three months ended March 31, 2007, revenue decreased 27.2% to
$11.6 million from $15.9 million for the same period in 2006. The decrease in
revenue is attributable to a decrease in our federal service contracts business
of $5.2 million. The decrease in service business was partially off-set by an
increase of $0.9 million in the federal repair and maintenance business. The
decrease in service business is attributable to the completion of three of our
federal contracts, which were not renewed subsequent to the quarter ended March
31, 2006. The increase in maintenance business is attributable to higher revenue
on the Company's primary maintenance contract.
Cost of Revenue. Cost of revenue includes direct labor, materials,
subcontractors and an allocation for indirect costs. Generally, charges in cost
of revenue correlate to fluctuations in revenue as resources are consumed in the
production of that revenue. For the three months ended March 31, 2007, cost of
revenue decreased 22.2% to $10.1 million from $12.9 million for the same period
in 2006. The decrease in cost of revenue was primarily attributable to the
corresponding decrease in revenue. As a percentage of revenue, cost of revenue
was 87.2% for the three months ended March 31, 2007 as compared to 81.5% for the
same period in 2006. The increase in cost as a percentage of revenue was
primarily due to severance paid to employees who worked on the completed federal
service contracts discussed above during the quarter ended March 31, 2007 which
were not off-set by additional operating expense reductions during the quarter.
Gross Margin. For the three months ended March 31, 2007, gross margin decreased
49.7% to $1.5 million from $2.9 million for the same period in 2006. Gross
margin as a percentage of revenue decreased to 12.8% for the three months ended
March 31, 2007 from 18.5% for the same period in 2006. Gross margin as a
percentage of revenue decreased due to lower services revenue and increased
operating expenses. Gross margin as it relates to the service contracts
decreased 94.3% to $0.1 million from $2.6 million for the same period in 2006.
The decrease in services gross margin is due to the decrease in revenue and
increased operating expenses, including wind down costs from one of the
Company's firm fixed price contracts, discussed above. Gross margin, as it
relates to the maintenance contracts, increased to $1.3 million from $0.3
million for the same period in 2006. The increase in maintenance gross margin is
directly attributable to the increase in revenue.
Selling, General & Administrative. For the three months ended March 31, 2007,
selling, general & administrative ("SG&A") expenses decreased 30.4% to $1.4
million from $2.1 million for the same period in 2006. As a percentage of
revenue, SG&A expenses decreased to 12.4% for the three months ended March 31,
2007 from 13.0% for the same period in 2006. The decrease in SG&A expense was
due to decreased compensation expense of $0.4 million associated with reductions
in employees, $0.1 million of professional services incurred in the first
quarter of 2006 but not repeated for the same period in 2007 and cost savings in
other SG&A expenses of $0.2 million as the Company controlled SG&A related
expenses to balance the impact resulting from decreased revenue. Management will
continue monitoring SG&A expenses in 2007.
19
Other Expense. For the three months ended March 31, 2007, other expense
increased to $205 thousand from $98 thousand for the same period in 2006. As a
percentage of revenue, other expense increased to 1.8% for the three months
ended March 31, 2007 from 0.6% for the same period in 2006. The increase in
other expense was primarily attributable to higher interest rates and increased
reliance on borrowings from our line of credit facility with Chevy Chase Bank,
prior to March 23, 2007, and Silicon Valley Bank, after March 23, 2007, to fund
general operations including the Commercial business, the discontinued
operations. The line of credit facility with Silicon Valley Bank has a larger
borrowing base with a higher interest rate. The interest rates charged by
Silicon Valley Bank ranges from 10.75% to 13.25% at March 31, 2007. The interest
rate charged by Chevy Chase Bank was 8.32% at March 23, 2007 compared to 7.13%
at March 31, 2006.
Income Taxes. For the three months ended March 31, 2007, income taxes decreased
to an income tax benefit of $59 thousand from an income tax expense of $299
thousand for the same period in 2006. The decrease in income taxes was primarily
attributable to a pre-tax loss for the three months ended March 31, 2007
compared to a pre-tax income for the same period in 2006. The Company's
discontinued operations had an income tax benefit of $118 thousand from the
operations of discontinued component and an income tax expense of $405 thousand
on sale of the discontinued operations for the three months ended March 31, 2007
compared to an income tax benefit of $139 thousand for the same period in 2006.
Net Income. For the three months ended March 31, 2007, net loss was $211
thousand which included an after-tax loss of $187 thousand from the operations
of discontinued component and an after-tax gain of $78 thousand on sale of the
discontinued operations, the Commercial business. For the three months ended
March 31, 2006, net income was $256 thousand which included an after-tax loss of
$221 thousand from the discontinued operations.
For the three months ended March 31, 2007, net loss from continuing operations
decreased to $102 thousand from an income of $477 thousand for the same period
in 2006. The net loss was due to decreases in gross margin as discussed above,
which was partially off-set by lower SG&A expenses.
Liquidity and Capital Resources
The Company's primary liquidity needs are financing the cost of operations,
capital expenditures and servicing its debt. The Company's sources of liquidity
are its existing cash, cash generated from operations, and cash available from
borrowings under its revolving credit facility. The Company has historically
financed its operations through its existing cash, cash generated from
operations and cash available from borrowings under its revolving credit
facility. Based upon the current level of operations, the Company believes that
cash flow from operations, together with borrowings available from its existing
credit facility, are adequate to meet future liquidity needs for the next twelve
months.
For the three months ended March 31, 2007, the Company generated $2.5 million in
cash and cash equivalents versus $0.8 million in cash used for the same period
in 2006. For the three months ended March 31, 2007, the Company funded its
discontinued operations with cash flow from financing activities of $0.7 million
versus $0.3 million for the same period in 2006.
Cash flow from operating activities provided by continuing operations was $1.3
million for the three months ended March 31, 2007 compared to $0.9 million of
cash used for the same period in 2006. Cash flow from operating activities used
by discontinued operations was $0.7 million for the three months ended March 31,
2007 compared to $0.2 million for the same period in 2006. Cash flow from
operating activities from continuing operations increased due to a decrease in
accounts receivable. As of March 31, 2007, the Company had cash on hand of $2.9
million.
Net loss was $211 thousand for the three months ended March 31, 2007 versus net
income of $256 thousand for the same period in 2006. The net loss was primarily
due to the after-tax net loss of $102 thousand from the continuing operations
and the after-tax net loss of $187 thousand from the discontinued operations
which was off-set by the after-tax gain of $78 thousand on the sale of the
discontinued operations.
Accounts receivable decreased by $2.0 million for the three months ended March
31, 2007 versus an increase of $2.2 million for the same period in 2006. The
decrease in the accounts receivable balance for 2007 is reflective of decreased
revenue and more focused billings and collection efforts with our customers. The
increase in the accounts receivable balance for 2006 was attributable to
continued delays in the collection of civilian agency customer invoices.
Prepaid expenses decreased by $0.3 million for the three months ended March 31,
2007 versus $0.3 million for the same period in 2006 as the Company fulfilled
its contractual obligations on the IRS LTMCC and U.S. Secret Service contracts.
Deferred revenue remained flat for the three months ended March 31, 2007 and
2006.
20
Accounts payable and accrued expenses remained flat for the three months ended
March 31, 2007 versus an increase of $0.2 million for the same period in 2006.
The increase during the three months ended March 31, 2006 was due to the timing
of vendor invoices at end of the period.
Accrued salaries and related liabilities decreased by $0.6 million for the three
months ended March 31, 2007 versus no change for the same period in 2006. The
decrease in accrued salaries and related liabilities balance for 2007 is primary
attributable to reductions in employees. The Company had 207 personnel at March
31, 2007 versus 288 personnel at December 31, 2006.
Expected loss on contract decreased by $0.6 million for the three months ended
March 31, 2007 versus zero for the same period in 2006. The decrease in expected
loss on contract balance for 2007 is due to the Company incurring the costs
during the quarter related to the contract which were accrued on the Company's
firm fixed price federal service contracts in 2006.
Net cash used by investing activities from continuing operations was zero for
the three months ended March 31, 2007 versus $23 thousand for the same period in
2006. Net cash used by investing activities from discontinued operations was $34
thousand for the three months ended March 31, 2007 versus $147 thousand for the
same period in 2006. Cash used by investing activities from discontinued
operations in 2006 was primarily a result of the capitalization of software
development costs associated with the Company's OpsPlanner software solution.
Net cash provided by financing activities from continuing operations was $1.2
million for the three months ended March 31, 2007 compared to $0.2 million for
the same period in 2006. The increase in cash provided is due to proceeds from
the line of credit to fund operations. Net cash provided by financing activities
from discontinued operations was $0.7 million for the three months ended March
31, 2007 compared to $0.3 million for the same period in 2006. Net cash provided
for 2007 and 2006 is due to funding the Company provided to the discontinued
operations from the Company's line of credit which were used to fund operating
and investing activities of the discontinued operations.
On March 13, 2007, the Company entered into a two year Loan and Security
Agreement with Silicon Valley Bank that provides for a revolving line of credit
facility of up to $10 million and a line of credit agreement of up to $12
million under which agreements total funds are available up to a limit of $12.5
million based on the Company's collateral. The Loan and Security Agreement
became effective March 13, 2007. The Loan and Security Agreement will be used to
borrow funds for working capital and general corporate purposes. The Loan and
Security Agreement is secured by a first priority perfected security interest in
any and all properties, rights and assets of the Company, wherever located,
whether now owned or thereafter acquired or arising and all proceeds and
products thereof as described in the Loan and Security Agreement. Under the Loan
and Security Agreement, the line of credit is due on demand and interest is
payable monthly based on a floating per annum rate equal to the aggregate of the
Prime Rate plus the applicable spread which ranges from 1.00% to 2.00%, as well
as other fees and expenses as set forth more fully in the agreements. Under the
Loan and Security Agreement, the Company may use up to $500,000 for letters of
credit. The Loan and Security Agreement, requires the Company to maintain
certain EBITDA covenants as specified in the Loan and Security Agreement. The
Company was in compliance with the EBITDA covenant requirements as of March 31,
2007. The Company had sufficient cash on hand to cover other liabilities and had
$0 additional availability on it's revolving line of credit with Silicon Valley
Bank at March 31, 2007. The interest rates charged by Silicon Valley Bank ranges
from 10.75% to 13.25% at March 31, 2007.
The Company terminated its revolving line of credit facility with Chevy Chase
Bank when this agreement was activated and paid off the outstanding balance on
March 23, 2007.
The Loan and Security Agreement contains events of default that include among
other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Silicon Valley
Bank is entitled to, among other things, accelerate all obligations of the
Company and sell the Company's assets to satisfy the Company's obligations under
the Loan and Security Agreement.
In the event the Company requires additional funds, whether for acquisitions or
otherwise, the Company may seek additional equity or debt financing. Such
financing may not be available to it on terms that are acceptable to it, if at
all, and any equity financing may be dilutive to its stockholders. To the extent
that it obtains additional debt financing, its debt service obligations will
increase and the relevant debt instruments may, among other things, impose
additional restrictions on its operations, require it to comply with additional
financial covenants or require it to pledge assets to secure its borrowings. As
of March 31, 2007, the Company had total stockholders' equity of ($0.1) million
due to an accumulated deficit of $0.9 million generated by the Company's
Commercial business which was divested on February 28, 2007. The Company
financed the acquisition of Trinity IMS, Inc. on April 9, 2007 through the use
of its existing credit facility with Silicon Valley Bank and a note payable from
the shareholders of Trinity IMS, Inc. In the event, the Company requires
additional funds for Trinity IMS, Inc. or to pay back the note payable, the
Company may seek additional equity or debt financing.
21
In the event cash flows are not sufficient to fund operations at the present
level and the Company is unable to obtain additional financing, it would attempt
to take appropriate actions to tailor its activities to its available financing,
including revising its business strategy and future growth plans to accommodate
the amount of financing available to the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk relates to change in interest rates for
borrowing under its revolving credit facility. At March 31, 2007, the Company
had $10 million outstanding under its two year revolving credit facility with
Silicon Valley Bank that is subject to a variable interest rate. The revolving
credit facility bears interest based on a floating per annum rate equal to the
aggregate of the Prime Rate plus the applicable spread which ranges from 1.00%
to 2.00%, as well as other fees and expenses as set forth more fully in the Loan
and Security Agreement. If the Company's variable interest rate was to increase
or decrease by 100 basis points, respectively, annual interest expense based on
the 2007 average level of borrowing would have been higher or lower by
approximately $83,000.
The Company does not use derivative financial instruments for speculative or
trading purposes. It invests its excess cash in short-term, investment grade,
interest-bearing securities.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as of the quarter ended March 31, 2007. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2007, the Company's disclosure
controls and procedures were not effective in ensuring that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified by the SEC's rules and forms, and accumulated and communicated
to the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
The Company concluded that its disclosure controls and procedures were not
effective as a result of a material weakness in its control over financial
reporting due to material misstatements in the current period financial
statements that were not initially identified by the Company's internal control
over financial reporting. The material misstatements related to recording
additional interest expense as a result of migrating banking relationships and
recording additional income taxes on the gain on the sale of the Company's
Commercial business.
As a result of the material weakness discussed above, the following occurred:
o the Company filed the extension on Form 12b25 to provide adequate
time for it to correct the material misstatements within the quarter
ended March 31, 2007.
The Company corrected the material misstatements in the current period financial
statements prior to the filing of this Form 10-Q.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting of the Company. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
22
As defined by the Public Company Accounting Oversight Board's Auditing Standard
No. 2, a material weakness is defined as a significant deficiency or combination
of significant deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will not
be prevented or detected.
Remediation Plan
In addition to controls and procedures consistent with prior practices, the
Company has developed and is implementing remediation plans. In order to
remediate the aforementioned material weakness, the Company has:
o evaluated the material misstatements and concluded that they are
non-recurring because they were the result of the Company's
migration to a new commercial banking relationship and a result of
the Company's divestiture of the Commercial business;
o initiated a search for a Corporate Controller with the requisite
experience to more adequately address future accounting and
disclosure issues.
The Company believes that, for the reasons described above, it will be able to
improve its disclosure controls and procedures and remedy the identified
material weakness.
Management of the Company will continue to evaluate the effectiveness of its
disclosure controls and procedures. Because of the inherent limitations in all
control systems, controls can provide only reasonable, not absolute, assurance
that all control issues and instances of fraud, if any, will be or 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. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future conditions; over
time, control may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate. Because of
the inherent limitation in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under
the Exchange Act, there was no change identified in the Company's internal
control over financial reporting that occurred during the three months ended
March 31, 2007 that has materially affected, or is reasonably likely to
materially affect, the Company's control over financial reporting.
23
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 1A: RISK FACTORS
There were no material changes to the risk factors set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which
was filed with the Security and Exchange Commission on April 16, 2007.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------- ------------------------------------------------
10.1 Notice of Grant of Restricted Stock Award, dated Incorporated by reference to Exhibits 99s of the
May 3, 2007, by and between the Company and the Registrant's Current Report on Form 8-K as filed
executive officers and board of directors with the Commission on May 9, 2007
31.1 Certification of CEO pursuant to Rule 13a-14(a)/ Provided herewith
15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of CFO pursuant to Rule 13a-14(a)/ Provided herewith
15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of CEO pursuant to 18 U.S.C. Section Provided herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of CFO pursuant to 18 U.S.C. Section Provided herewith
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
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.
PARADIGM HOLDINGS, INC.
(Registrant)
By: /S/ Peter B. LaMontagne By: /S/ RICHARD SAWCHAK
--------------------------- -----------------------
Peter B. LaMontagne Richard Sawchak
Chief Executive Officer Chief Financial Officer
Date: May 21, 2007
26