August 19, 2003
All statements other than statements of historical fact included in this Form 10-QSB including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-QSB, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, the ability to recruit personnel and the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph.
We primarily operate as an application service provider ("ASP") and, market an integrated "fee for services" offering providing high volume processing of transactional data for billing purposes, electronic invoice presentation and payment ("EIP&P") as well as visual data analysis and reporting tools delivered via the Internet for our customers. Our core technology is d.b.Express?, the proprietary and patented management information tool, which provides targeted access through the mining of large volumes of transactional data via the Internet. In 2001 we acquired, Platinum Communications, Inc. ("Platinum"), a Dallas, Texas based company, which markets its integrated proprietary back office software solutions, Account Management Systems ("AMS" or sometimes referred to as "TAMS") to the telecommunications industry either as a license or as an ASP. We completed a merger with Platinum under an Agreement and Plan of Merger ("Merger Agreement"). Under the Merger Agreement, our newly formed wholly owned subsidiary acquired all of the outstanding common stock of Platinum. Further, as an added source of revenue, we began in 2001 to provide custom engineering services for our customers.
This newly assembled suite of services enables us to provide a comprehensive Internet delivered service from the raw transaction record through all of the internal workflow management processes including an electronically delivered invoice with customer analytics. This comprehensive service offering provides back office operations, cuts costs and provides for improved customer service by providing the end customer with easy access to all of the detailed information about their bill. We operate fully redundant data centers located at our main office in Bohemia, N.Y. and in Newark, N.J. Our facility in New Jersey is leased at an IBM,e-business Hosting Center. This co-location / redundancy feature enables us to offer virtually down time free service.
IBM continues to be our largest customer accounting for 87% of total revenue for the three-month period ended June 30, 2003, as compared to 80% for the three-month period ended June 30, 2002. We derive revenue from IBM from the sale of managed services (ASP) as well as custom engineering. During the second half of 2001, we entered into an agreement with IBM wherein for a per transaction fee, we enable IBM to present invoices to a portion of its customers via the Internet. This EIP&P offering has since been expanded to include additional functionality. In March 2002, the parties signed a new agreement, which allows IBM to expand this EIP&P offering to more of its customers, both domestic and international. In addition, the Company continues to provide data analysis and reporting services for IBM's telecommunications customers. We are actively pursuing new sales opportunities to further reduce sales concentration.
For the three months ended June 30, 2003, total revenue increased $88,000 from
$1,982,000 for the three months ended June 30, 2002 to $2,070,000 for the
three months ended June 30, 2003. An analysis of the increase is as follows:
ASP revenue increased $434,000, or 39%, to $1,546,000 in 2003 from $1,112,000
in 2002. This increase was offset by decreases in engineering fees and AMS
fees of $234,000 and $113,000, respectively.
Total revenue for the six month period ended June 30, 2003 aggregated to $4,269,000. When compared to $3,496,000, the total revenue earned during the same time period total in 2002, the Company achieved an increase in overall revenue of $773,000 or 22%. During the six month time-frame, ASP revenue increased $739,000 to $2,672,000, representing a 38% increase in revenue from this service compared to the six month total in 2002 of $1,933,000. The most significant factor contributing to the increase in ASP revenue has been the expansion of the EIP&P services. As of June 30, 2003 this service is offered in the U.S., Canada, Brazil, and eight nations in Europe, enabling our customers to deliver their invoices in all local languages. The Company believes that this service will continue to expand into additional countries in Europe, Middle East and into the Pacific Rim within the next six to nine months. Engineering revenue remained virtually the same, decreasing by $2,000 when comparing 2003 and 2002 amounts of $1,222,000 and $1,224,000, respectively. During the six-month period ended June 30, 2003, AMS revenue increased $36,000 to $375,000, when compared to $339,000 in the 2002 period. However, the Company is uncertain that AMS Revenue for the full year of 2003 will exceed 2002.
Operations, research and development expenses consist primarily of salaries and related costs (benefits, travel and training) for developers, programmers, custom engineers, network services, quality control / quality assurance and documentation personnel, applicable overhead allocations, as well as co-location facilities expenses and all costs directly associated with the production and or development of the Company's services.
When comparing the three months ended June 30, 2003 and 2002, the Company increased its operations, research and development expenses by $240,000. The Company continues to upgrade, improve and enhance its current products and services. As a result, the most significant items contributing to this increase was additional staffing costs and professional fees totaling $268,000.
When comparing the six months ended June 30, 2003 and 2002, the Company increased its operations, research and development expenses by $419,000 or 54% of incremental revenue growth of $773,000. The most significant item contributing to this increase was additional staffing costs and professional fees totaling $402,000. Additional operations, research and development expenses incurred associated with Platinum amounted to $32,000. All other expenses decreased by $15,000. Management believes that it is critical to maintain a qualified personnel staff and, further, to continue to enhance as well as develop new and innovative services and products. It is expected that operations, research and development costs will increase in future periods as a result of anticipated increases in future revenue as well as costs associated with its product/service enhancement and development activities.
Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff.
Sales and marketing expenses increased $131,000 to $746,000 for the three months ended June 30, 2003, when compared to $615,000 for the three months ended June 30, 2002. Wages and consulting fees increased $82,000 and costs associated with Platinum increased $66,000. All other items, such as travel, entertainment, commissions and rent, in the aggregate, decreased $17,000.
Sales and marketing expenses increased $429,000 to $1,579,000 for the six months ended June 30, 2003 when compared to $1,150,000 for the six months ended June 30, 2002. Costs associated with Platinum increased expenses by $216,000. Further, wages and consulting fees increased $176,000. Additionally, rent expense increased $30,000.
General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead.
Expenses decreased $85,000 to $911,000 for three months ended June 30, 2003, when compared to $996,000 reported for the three months ended June 30, 2002. Major factors contributing to this decrease include reductions in professional fees and business insurance of $104,000 and $27,000, respectively, as well as a reduction in expenses related to salaries and benefits totaling $24,000. Offsetting these decreases, among other things, were an increase in rent expense of $26,000 and general and administrative expenses related to Platinum that increased by $47,000 when compared to the same period in 2002. Other expenses showed a net increase of $3,000.
Expenses decreased $137,000 to $1,804,000 for the six months ended June 30, 2003 when compared to the six months ended June 30, 2002. Major factors contributing to this decrease include, among other things, a decrease in professional fees and business insurance of $204,000 and $16,000, respectively. Offsetting the reductions were increases in salaries and benefits of $41,000, an increase of rent expense of $65,000, as well as $11,000 of expenses attributable to Platinum. Other expenses showed a net increase of $34,000.
Amortization and depreciation expenses decreased $23,000 for the three months ended June 30, 2003 when compared to the three months ended June 30, 2002 and decreased $46,000 for the six months ended June 30, 2003 when compared to the six months ended June 30, 2002.
For the six months ended June 30, 2003, the Company incurred net operating losses thereby requiring cash from sources other than normal operations to fund its operating activities. In order to fund its operating losses, the Company:
as described in Note 4e, in January 2003, received an unsecured $500,000 loan from Tall Oaks. as described in Note 5, in December 2002, sold 23,365 shares of its Preferred Stock in consideration for $500,000 less fees and expenses of $61,000, to Metropolitan. The proceeds from this transaction were received January 3, 2003. as described in Note 5, in June 2003, sold 17,857 shares of its Preferred Stock in consideration for $250,000, less fees and expenses of $5,000, to Metropolitan. as described in Note 5, reduced future cash outflows by exchanging $974,000 of Company obligations for 974 shares of its Series A-1 Preferred stock. continues to make use of its financing arrangement with an asset based lending institution. as described in Note 9, in July 2003, the Company drew the full $500,000 amount of a line of credit obtained from JP Morgan Private Bank.
As detailed in the Condensed Consolidated Statement of Cash Flows, during the six month period ended June 30, 2003, the Company utilized $1,612,000 in operating activities, which includes, among other items, a net loss of $2,323,000, an increase in accounts receivable of $92,000, a decrease in deferred revenue of $3,000, and $16,000 paid toward the restructuring, partially offset by non-cash expenses totaling $636,000, an increase in accounts payable and accrued expenses of $87,000 and a decrease in prepaid expenses and other current assets of $64,000. Further, during the six months ended June 30, 2003, the Company expended approximately $163,000 for capital expenditures.
The Company's management has and will continue to take numerous steps that it believes will create positive operating cash flow for the Company. Key measures are as follows:
Management has commenced on a major cost reduction plan involving staff reductions, executive pay rate reductions, and downsizing of office space. Continue to expand the Company's products and services; Actively pursue channel partner opportunities;
Continue to market its custom engineering fees. The Company generated in excess
of $2,500,000 in custom engineering fees in 2002, and has generated $1,222,000
for the six months ended June 30, 2003. Management believes this revenue
should continue throughout 2003; Increase revenue as a result of the agreement
entered into in 2002 between the Company and IBM, which allows IBM the ability
to electronically attach supporting documentation to an electronic invoice,
all submitted via the Internet to their customers; Capitalize on the growing
trend for outsource services within the communications sector. The acquisition
of Platinum broadened the Company's product offerings in this market sector.
For the six month period ended June 30, 2003, AMS revenue is ten percent
ahead of the same period during 2002. However, the Company is uncertain that
AMS revenue for the full year of 2003 will exceed 2002. In January 2003,
the Company received $500,000 through the issuance of long term debt to Tall
Oaks Group, LLC. See Notes 4e and 5 In January 2003, the Company received
$500,000 through the sale of 23,365 shares of its Preferred stock to Metropolitan,
with terms similar to their previous transaction. See Note 5. Additionally,
in June 2003, the Company raised $250,000 through the sale of 17,857 shares
of its Preferred Stock to Metropolitan. See Note 5. In July 2003, the Company
obtained a $500,000 line of credit. See Note 9. The Company received has
a firm commitment of $250,000 from its chairman to guarantee a line of credit
expected to be obtained from a major bank. Additionally, the senior executives
have pledged an aggregate of $250,000 in the event the Company would require
capital in excess of $1,000,000 described in the three previous items. These
commitments and pledges extend through at least March 31, 2004.
Management believes that its plan will ultimately enable the Company to generate
positive cash flows from operations. Until such time, the Company believes
that its present cash on hand as well as obtaining additional debt and/or equity
financing should provide adequate funding through at least June 30, 2004. However,
there can be no assurances that the Company will have sufficient funds to implement
its current plan. In such an event, the Company could be forced to significantly
alter its plan and reduce its operating expenses, which could have an adverse
effect on revenue generation and operations in the near term.