Add
INS to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| INS > SEC Filings for INS > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
Economic and marketplace trends may impact our subsidiaries differently or not at all and our software subsidiaries have limited experience in their marketplaces which makes it difficult to identify and evaluate trends that may impact their business.
CoreCard Software has been involved in major new product development initiatives for a number of years and has limited experience delivering and installing products at customer sites, making it difficult to predict with certainty when it may recognize revenue on individual software contracts.
Our subsidiaries are relatively small in revenue size and, in the Information Technology sector, revenue in a given period may consist of a relatively small number of contracts. Consequently, even small delays in a delivery under a software contract (which may be out of our control) could have a significant and unpredictable impact on consolidated revenue that we can recognize in a given quarterly or annual period.
Frequently we recognize consolidated operating losses on a quarterly and annual basis and are likely to do so in the future from time to time. Our operating expenses consist of the aggregate of our subsidiaries' expenses and the corporate office expenses. Our ChemFree subsidiary generates an operating profit on a regular basis but our early stage subsidiary, CoreCard, is not consistently profitable, mainly due to significant research and development expense that is invested to complete new product offerings and the deferral of revenue recognition until such products are delivered to and accepted by customers. Depending upon the size and number of software licenses recognized in a particular period and the level of expenses incurred to support development and sales activities, CoreCard may report operating profits on an irregular basis as it builds its customer base. A significant portion of our subsidiaries' expense is related to personnel which is relatively fixed in the short-term. For these and other reasons, our operating profits or losses may vary from quarter to quarter and at the present time are generally not predictable with any degree of certainty.
We also frequently generate income or incur losses from non-operating sources
and we may do so from time to time in the future. We may derive income from
sales of holdings in subsidiary, affiliate and other minority-owned companies,
as exemplified in the VISaer sale, discussed in more detail in Note 3 to the
consolidated financial statements. Occasionally, we record a charge if we
believe the value of a non-consolidated company is impaired. We also recognize
on a quarterly basis our pro rata share of the income or losses of affiliate
companies accounted for by the equity method. The timing and amount of gain or
loss recognized as a result of a sale or the amount of equity in the income or
losses of affiliates generally are not under our control and are not necessarily
indicative of future results, either on a quarterly or annual basis.
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and the notes to consolidated financial statements
presented in this quarterly report.
Revenue - Total revenue from continuing operations in the three month periods
ended June 30, 2008 was $3.7 million, a 23 percent increase compared to the
second quarter of 2007. For the six month period ended June 30, 2008, total
revenue from continuing operations was $7.8 million, an increase of 24 percent
compared to the six month period in 2007.
Revenue from products, which includes sales of equipment in our Industrial
Products segment as well as software license fees related to the
Information Technology segment, was $3.4 million in the three month period
ended June 30, 2008, a 33 percent increase compared to $2.6 million in the
three months ended June 30, 2007. For the six month period ended June 30,
2008, revenue from products increased by 31 percent to $7.4 million
compared to $5.7 million in the same period in 2007. Product revenue
associated with the ChemFree products (our Industrial Products segment)
grew by 41 percent and 69 percent, respectively, in the three and six
months ended June 30, 2008, compared to the same periods in 2007 and
represented over 99 percent of product revenue in the three and six month
periods ended June 30, 2008. ChemFree sales in the domestic market
increased 41 percent and 74 percent in the three and six month periods of
2008 compared to the respective periods in 2007, principally due to
increased volume of products sold to a single end-user customer that began
purchasing ChemFree products in mid-2007. ChemFree also experienced an
increase in revenue in international markets of 37 percent and 42 percent,
respectively, in the three and six month periods of 2008 compared to the
same periods in 2007 due mainly to an increase in quantity of goods sold
in the European markets, offset in part by lower revenue levels at certain
domestic US resellers. ChemFree does not expect the same period-to-period
growth in the second half of 2008 as was reported in the first half of
2008. Software license revenue associated with the Information Technology
segment was minimal in the three and six month periods ended June 30, 2008
compared to approximately $1.3 million in license revenue in the six
months ended June 30, 2007, which reflected primarily a single software
license contract recognized by our CoreCard Software subsidiary in the
first quarter of 2007. The company recognizes software license revenue
only upon completion of each contract and acceptance by customers. At
June 30, 2008, CoreCard Software had approximately $1.8 million in
deferred revenue associated with in-process customer contracts that it
expects to recognize upon contract completion within the next six months
or so.
Service revenue associated with the Information Technology segment decreased by 34 percent and 39 percent, respectively, in the three and six month periods ended June 30, 2008 as compared to the same periods last year. The change is attributed mainly to a decline in professional services billings for software services. More resources were involved in product development activities and in-process contracts rather than billable services in the first six months of 2008.
Cost of Revenue - Total cost of revenue was 57 percent of total revenue in both
the three and six month periods ended June 30, 2008 compared to 61 percent and
48 percent of total revenue in the comparable periods in 2007. The change is
related principally to changes in the product mix from period to period.
Cost of product revenue was approximately the same, averaging 55 percent
of product revenue, in the three and six month periods of 2008 compared to
58 percent and 45 percent of product revenue in the same periods in 2007.
The principal reason for the difference in product cost as a percent of
product revenue is that almost all of the product revenue in the first
half of 2008 is from sales of ChemFree's parts washers and consumables
which have a higher cost of revenue than do software licenses. By
comparison, in the first half of 2007, product revenue included
$1.1 million in software licenses which have a low cost of revenue.
Cost of service revenue (which relates to the software subsidiaries only) was 72 percent and 105 percent of service revenue in the three and six month periods ended June 30, 2008 compared to 78 percent and 74 percent of service revenue in the respective periods in 2007. The change between periods reflects primarily the fact that costs associated with CoreCard's customer support activities were significantly higher in the first three months of 2008 than in the same period in 2007. CoreCard is providing a high level of support to its initial customers to ensure it builds a solid base of reference customers and puts in place an infrastructure for future growth. Cost of services as a percentage of service revenue is expected to decrease as the installed base of CoreCard customers increases.
Operating Expenses - In the three month period ended June 30, 2008, total
consolidated operating expenses were 42 percent higher than in the corresponding
period in 2007. In the six month periods ended June 30, 2008, total consolidated
operating expenses were 39 percent higher than in the same period in 2007.
Consolidated marketing expenses grew 51 percent and 78 percent, respectively, in
the three and six month periods in 2008 compared to the same periods in 2007,
principally reflecting higher sales commission expense associated with the
increase in ChemFree's domestic sales in 2008 as well as an increase in
CoreCard's marketing personnel expense. Consolidated general and administrative
expenses increased by 52 percent and 51 percent, respectively, in the three and
six months periods ended June 30, 2008 as compared to the corresponding periods
in 2007. The increase is mainly due to higher legal expenses related to the
patent matter described in Note 8 to the consolidated financial statements as
well as increased payroll and bonus expense at the ChemFree subsidiary.
Consolidated research and development expenses was higher by 24 percent and six
percent, respectively, in the three and six month periods ended June 30, 2008 as
compared to the corresponding periods in 2007. The increase in the second
quarter of 2008 is due principally to an increase in US employee payroll and
consultant expenses at CoreCard, an increase in average wages for our Romania
and India based employees in part due to relatively stronger local currencies
compared to the US dollar, and a lower allocation of R&D expenses to specific
in-process contracts in the second quarter of 2008 as compared with 2007.
Interest Income (Expense) - We recorded net interest expense of $4,000 and
$9,000 in the three and six month periods ended June 30, 2008 compared to
$45,000 and $111,000 in net interest income in the respective periods in 2007.
The difference between periods is due to greater interest expense related to
higher bank borrowings in 2008, mainly during the first quarter of 2008 prior to
the sale of the VISaer business.
Investment Income (Loss) - We did not have any investment income or loss in the
three and six month periods ended June 30, 2008. We recorded investment income
of $92,000 and $81,000 in the three and six month periods ended June 30, 2007
reflecting cash distributions related to previously owned investments in Horizon
Software and Aderis Pharmaceuticals offset in part by a loss on the sale of a
marketable security.
Equity Earnings of Affiliate Companies - On a quarterly basis, we recognize our
pro rata share of the earnings or losses of affiliate companies that we record
on the equity method. We recorded $27,000 and $53,000 in net equity income of
one affiliate company in the three and six month periods ended June 30, 2008
compared to net equity income of $41,000 and $42,000 in the respective three and
six month periods of 2007. The change between periods reflects changes in
profitability of the affiliate company.
Income Taxes - We recorded $5,000 and $17,000 in the three and six month periods
ended June 30, 2008 for income tax liability related to several miscellaneous
state tax liabilities. We did not accrue for any income tax liability in the
first half of 2008 and we believe our net deferred tax assets should be fully
reserved at June 30, 2008 given their character and our historical losses.
Discontinued Operations
Net loss from Discontinued Operations - The amounts recorded in 2008 and 2007
reflect the operations of our VISaer subsidiary which has been classified as a
discontinued operation as a result of the sale of the VISaer business as
explained in Note 3 to the consolidated financial statements.
Gain on Sale of Discontinued Operations - In the second quarter of 2008, we
recorded a gain of $2,884,000 reflecting the sale of the VISaer business. In the
six month period in 2007, we recorded an additional gain of $97,000 on the 2006
sale of our QS business as a result of the buyer confirming that no post-closing
adjustments would be asserted.
Liquidity and Capital Resources
Our cash balance at June 30, 2008 was $1,162,000 compared to a cash balance of
$554,000 at December 31, 2007. During the six months ended June 30, 2008, our
principal sources of cash were cash proceeds of $3,025,000 from the sale of the
VISaer business, $1,225,000 representing payment in full of the earnout payments
due from the buyer of our QS business in 2006 which had been earned in 2007 and
recorded in the category "other current assets", and bank borrowings aggregating
$1.5 million, including $1.4 million under our line of credit and $122,000 under
a term loan for ChemFree's new accounting software system. In the six months
ended June 30, 2008, we used proceeds from the VISaer sale to pay down the
outstanding balance of $1.4 million on our line of credit and used approximately
$1.7 million in the aggregate to support CoreCard Software and our international
R&D operations. We also paid $125,000 to purchase additional common stock in
VISaer as explained in Note 8 to the consolidated financial statements. Other
changes in working capital included a decline of $112,000 in ChemFree inventory
and a decrease of $565,000 in accounts payable, reflecting primarily payables
assumed by the VISaer buyer as well as a lower volume of inventory purchases at
ChemFree.
We currently project that we will have sufficient liquidity from cash on hand,
monthly payments on notes receivable, projected customer payments and working
capital borrowings to support our current level of operations in the foreseeable
future. We are also considering the possibility of raising additional funding in
order to accelerate and support our CoreCard subsidiary's new marketing
initiatives, product development and rollout, and infrastructure investment,
although it is too early to tell in what form or whether such funding would be
available, if at all, on terms acceptable to the company. We renewed our
$2.0 million line of credit on December 1, 2007 and will use it as necessary to
support any short-term cash needs. We presently project that we will have
sufficient accounts receivable and inventory balances throughout the year to
support the borrowing base for any required draws under our bank line of credit;
however, if we fail to do so, we could experience a short-term cash shortfall.
Delays in meeting project milestones or software delivery commitments could
cause customers to postpone payments and increase our need for cash during 2008.
Presently, we do not believe there is a material risk to successfully performing
under these contracts but if customer payments are delayed for any reason, if we
do not control costs or if we encounter unforeseen technical or quality
problems, then we could require more cash than planned. As a result, we may need
to increase the use of our bank line of credit, scale back operations or seek
alternative financing.
Beyond the next twelve months, we currently expect that liquidity will continue
to improve and consolidated operations will generate sufficient cash to fund
their requirements with use of our credit facility to accommodate short-term
needs. Other long-term sources of liquidity include potential sales of
investments, subsidiaries or other assets although the timing and amount of any
such transactions are uncertain and, to the extent they involve non-consolidated
companies, generally not within our control.
Off-Balance Sheet Arrangements
We do not currently have any off balance sheet arrangements that are reasonably
likely to have a current or future material effect on our financial condition,
liquidity or results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and
expenses. We consider certain accounting policies related to revenue
recognition, valuation of acquired intangibles and impairment of long-lived
assets, and valuation of investments to be critical policies due to the
estimation processes involved in each. Management discusses its estimates and
judgments with the Audit Committee of the Board of Directors. For a detailed
description on the application of these and other accounting policies, see Note
1 to the consolidated financial statements contained in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2007. Reference is also made
to the discussion of the application of these critical accounting policies and
estimates contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-KSB for
2007. During the six month period ended June 30, 2008, there were no significant
or material changes in the application of critical accounting policies that
would require an update to the information provided in the Form 10-KSB for 2007.
Factors That May Affect Future Operations
Future operations in both the Information Technology and Industrial Products
segments are subject to risks and uncertainties that may negatively impact our
future results of operations or projected cash requirements. It is difficult to
predict future quarterly and annual results with any certainty mainly because
CoreCard is an early stage company with limited revenue and experience in its
markets, is relatively small in size and, revenue tends to be associated with
fewer and larger sales than in the Industrial Products segment. Thus any trend
or delay that affects our subsidiary could have a negative impact on the
company's consolidated results of operations or cash requirements on a quarterly
or annual basis. In addition, the carrying value of our investments is impacted
by a number of factors which are generally beyond our control since we are
typically a non-control shareholder in a private company with limited liquidity.
Among the numerous factors that may affect our consolidated results of
operations or financial condition are the following:
Delays in CoreCard's software development projects could cause customers to
delay implementations, delay payments or cancel contracts, which would
increase our costs and reduce our revenue.
Our CoreCard subsidiary could fail to deliver software products which meet the business and technology requirements of its target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model.
One of ChemFree's customers represented approximately 45 percent of consolidated revenue in the first six months of 2008; any unplanned changes in the volume of orders or timeliness of payments from such customer could have a negative impact on inventory levels and cash, at least in the near-term.
Failure by our ChemFree subsidiary to protect its intellectual property assets could increase competition in the marketplace and result in greater price pressure and lower margins, thus potentially impacting sales, profits and projected cash flows.
Software errors or poor quality control may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition.
Compliance with the internal controls over financial reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002 could increase operating expenses and divert management and staff resources.
Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or increased losses).
CoreCard could fail to establish a base of reference customers for its product offerings, resulting in lower revenue and profits (or increased losses) and increased cash needs.
In certain limited situations, ChemFree's lease customers are permitted to terminate the lease covering a SmartWasherฎ machine, requiring the unamortized balance of the original machine cost to be written off which could reduce profits in that reporting period and result in lower revenue in future periods.
CoreCard could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products, or fail to attract and train a sufficient number of new software developers and testers to support our product development plans and customer requirements at projected cost levels.
Further increases in the price of oil could increase the cost of certain plastic components used in ChemFree's products.
Delays in anticipated customer payments for any reason would increase our cash requirements and possibly our losses.
Declines in performance, financial condition or valuation of minority-owned companies could cause us to write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively impact our earnings and cash.
Failure to meet the continued listing standards of The American Stock Exchange could result in delisting of our common stock, with a potentially negative impact on market price and liquidity of our common stock.
Other general economic and political conditions could cause customers to delay or cancel software purchases.
We have certain lease commitments, legal matters and contingent liabilities
described in detail in Note 9 to the consolidated financial statements included
in our 2007 Form 10-KSB. Except as explained in Note 8 in this Form 10-Q, we are
not aware presently of any facts or circumstances related to these that are
likely to have a material negative impact on our results of operations or
financial condition.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the company carried out an
evaluation, under the supervision and with the participation of the company's
management, including the company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange
Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the company's disclosure controls and procedures are
effective. There were no significant changes in the company's internal control
over financial reporting or in other factors identified in connection with this
evaluation that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
|
|