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| SCLD > SEC Filings for SCLD > Form 10-Q on 15-Jun-2009 | All Recent SEC Filings |
15-Jun-2009
Quarterly Report
References herein to "we", "our", "ours" and "us" are to SteelCloud, Inc.
Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements." Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, our ability to obtain financing in the short term, risks associated with the integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of our significant contracts or partnerships, our inability to maintain working capital requirements to fund future operations or our inability to attract and retain highly qualified management, technical and sales personnel. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission (the "SEC") and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion should be read in conjunction with the consolidated financial statements and Footnotes thereto included in Item 1 in this Quarterly Report on Form 10-Q,and with our Annual Report on Form 10-K for the fiscal year ended October 31, 2008 as amended, filed by us with the SEC.
OVERVIEW
Founded in 1987, we are a developer and manufacturer of integrated computer systems and appliance solutions for the federal, ISV, and Blackberry markets. We design, manufacture and integrate specialized servers for federal market prime contractors ("federal integrators") and Independent Software Vendors ("ISV"s) who use the specialized servers to deliver application software to their clients.
BlackBerry® Enterprise Server Solution (SteelWorks® Mobile)
As an extension of our ISV business, we developed SteelWorks® Mobile ("SteelWorks Mobile"), an appliance solution specifically for the BlackBerry Enterprise Server ("BES"). SteelWorks Mobile was developed in conjunction with Research in Motion ("RIM"). SteelWorks Mobile is an integrated server appliance that enables virtually any size organization to implement the BES at a fraction of the cost, time, and resource commitment. We have filed for patent protection for the SteelWorks Mobile technology we created for the installation wizard, backup and restore features. These patents are currently pending approval from the U.S. Patent and Trademark Office.
In addition, we developed SteelWorks FedMobile, our BlackBerry Enterprise Server appliance solution specifically for the Department of Defense ("DoD") and other related agencies. The SteelWorks FedMobile appliance builds upon SteelWorks Mobile by automating the application of the Defense Information Systems Agency's and DoD's Security Technical Implementation Guide ("STIG") to the BES installation process. The STIG mandates the policies for which the DoD and related agencies must operate their wireless communications. As a result, our FedMobile appliance allows DoD organizations to implement a STIG compliant BES infrastructure in a fraction of the time, cost, or resources necessary to what is otherwise a time intensive and manual STIG process.
Federal Systems Integrator
Federal integrators outsource their specialized requirements to us and consider us to be an integral part of their product and service delivery capability. We design and manufacture specialized embedded and integrated computing systems that are the foundation upon which the integrators develop and deliver their application software.
Our specialized service allows our customers to outsource computer system integration in order that they may concentrate on their core application software and services. As a result, integrators improve customer satisfaction, shorten time to delivery and lower overall development costs.
We complement our embedded integrated computing systems, which are often designed to withstand harsh environmental conditions, with software integration, quality testing and program lifecycle management services. We also provide configuration management, logistics and support services that are unavailable from traditional computer vendors.
Independent Software Vendors
For our ISV customers, we are their "virtual hardware engineering division." Similar to our federal integrator business, we create a unique product for the ISV by integrating the ISV's software onto a specialized appliance platform running Linux, FreeBSD, or one of Microsoft's operating systems.
In addition, we augment the ISV's internal capabilities by taking responsibility for those tasks which are necessary to successfully bring an appliance to market, but which are impractical for the ISV to perform. Services include branding, asset tagging, supply chain and inventory management, fulfillment, logistics and program management. The final ISV deliverable is a branded, unique, optimized appliance that is ready-to-deploy when it arrives at the ISV's end customer's site.
Our specialized servers and appliances are engineered and developed according to New Product Realization procedures which are compliant with our ISO 9001:2000 Certified Quality Management System.
Professional Services
We provide information technology ("IT") consulting and contract staffing solutions for our commercial and government clients. Our consultants are subject matter experts in network infrastructure complexities and security technologies including firewalls, content inspection, intrusion detection, spam and vulnerability scanning. For our contract staffing solutions, our personnel function as "virtual" employees, performing work directly under the auspices of client management and serve as an extension of the client's in-house staff resources.
Research and Product Development
By investing in product development, we believe we will have more control over the functionality and marketing of our products. We also believe that the resulting intellectual property will increase the competitiveness of our offerings and improve product margins. For the three and six months ended April 30, 2009, we incurred research and development costs of approximately $102,000 and $204,000, respectively. We will continue to incur costs for product development in the future.
GSA Contract
We have a multiple award schedule contract with the U.S. General Services Administration (the "GSA Contract"). The GSA Contract was originally awarded in April 1996. It was renewed in fiscal years 2002 and 2007, and is valid through March 31, 2012. In August 2006, GSA Contract auditors awarded us an "Outstanding" rating for our management and execution of the GSA Contract. The GSA Contract enables government IT purchasers to acquire all of their needed goods and services from a particular vendor and largely limits the competition to selected vendors holding GSA Contracts. For the three and six months ended April 30, 2009, our GSA Contract had sales of approximately $174,000 and $433,000, respectively, which accounted for approximately 15% and 21%, respectively, of our net revenues.
Nasdaq
On March 23, 2009, we received notice, under Marketplace Rule 4310(c)(3)(the "Rule"), that our common stock is subject to potential delisting from the Nasdaq Capital Market because we do not have a minimum of $2,500,000 in stockholders' equity, $35,000,000 market value of listed securities, or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. We provided NASDAQ with a specific plan of how we intend to achieve and sustain compliance with all the Nasdaq Capital Market listing requirements, including a time frame for completion of such plan. Our plan includes the following two strategies: (i) increasing our stockholders equity in excess of the minimum $2,500,000 requirement by raising between $3,000,000 to $4,000,000 through an equity transaction; and (ii) identifying a strategic partner interested in either merging with or acquiring us. On April 28, 2009 we received notice from Nasdaq indicating that Nasdaq had granted our request for an extension of time to regain compliance with the Nasdaq listing requirements. The terms of the extension include: (a) on or before July 6, 2009, we must complete an equity transaction or a merger/and or acquisition, and (b) we must make appropriate disclosures to the SEC and Nasdaq on a Form 8-K. In the event we do not satisfy the terms of this extension, Nasdaq will provide us with written notification that our securities will be delisted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with US Generally Accepted Accounting Principles requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We based our estimates and assumptions on historical experience and on various other assumptions believed to be applicable, and evaluated them on an on-going basis to ensure they remained reasonable under current conditions. Actual results could differ significantly from those estimates. No changes to our critical accounting policies have taken place since October 31, 2008.
Recently Issued Accounting Pronouncements
Effective November 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157") and Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS 157, which defines fair value, establishes a framework for measuring fair value in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), and expands disclosures about fair value measurements. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. For the three and six month periods ended April 30, 2009, we have elected not to use the fair value option permitted under SFAS 159 for any of our financial assets and financial liabilities that are not already recorded at fair value.
In February 2008, the FASB issued Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-2 deferred the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. We are in the process of evaluating the effect, if any, the adoption of FSP 157-2 will have on our financial statements.
In October 2008, the FASB issued Staff Position No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active" ("FSP 157-3"). FSP 157-3 provides guidance for determining the fair value of a financial asset in an inactive market. We are in the process of evaluating the effect, if any, the adoption of FSP 157-3 will have on our financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R, which replaces SFAS No. 141, requires that the acquisition method of accounting (which SFAS No. 141 called the "purchase method") be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R also establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R also requires that acquisition-related costs be recognized separately from the business combination. SFAS No. 141R will apply prospectively to business combinations for which the acquisition date is after fiscal years beginning on or after December 15, 2008. We are in the process of evaluating the effect, if any, the adoption of SFAS No. 141R will have on our financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are in the process of evaluating the effect, if any, the adoption of SFAS No. 160 will have on our financial statements.
In May 2008, The FASB issued Statement of Financial Accounting Standards No.162 "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), which reorganizes the GAAP hierarchy. SFAS 162 is intended to improve financial reporting by providing a consistent framework for determining what accounting principles should be used in preparing GAAP financial statements. With the issuance of SFAS 162, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". SFAS 162 will become effective 60 days following the SEC's approval of the Public Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles" and is not expected to have any impact on our financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. We are in the process of evaluating the effect, if any, the adoption of SFAS No. 165 will have on our financial statements.
RESULTS OF OPERATIONS
The overall economic downturn has impacted virtually every area of our business. There were and continue to be reductions in quantities ordered from our commercial and government clients as well as continued delays of anticipated program awards that were originally planned for late fiscal 2008 and early fiscal 2009.
For the three months ended April 30, 2009 compared to the three months ended April 30, 2008:
Net Revenue Discussion:
The following table summarizes our net revenue for the three months ended April
30, 2008 and 2009 in dollars and as a percentage of net revenues.
Three Months Ended April 30,
2008 2009 Increase (decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Products $ 7,827,740 93.36 % $ 958,263 80.06 % $ (6,869,477 ) (87.76 )%
Services 556,894 6.64 % 238,600 19.94 % (318,294 ) (57.16 )%
Total net revenues $ 8,384,634 100.00 % $ 1,196,863 100.00 % $ (7,187,771 ) (85.73 )%
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The decrease in product revenue is primarily attributable to our exiting the reseller business and continued program delays with our integrator business. Due to the current economic decline, we experienced a significant reduction in our Integrator and ISV opportunities. Our ISV opportunities also declined as our customers merged and/or were acquired resulting in lower demand for our products.
The decrease in service revenue for the three-month period ended April 30, 2009 as compared to the same period in fiscal 2008 is the result of our completing a large services contract in December 2008. We anticipate service revenues to fluctuate in the near future due to the current state of the U.S. economy.
Gross Profit Discussion:
The following table summarizes our gross profit for the three months ended April
30, 2008 and 2009 in dollars, as a percentage of gross profit and as a
percentage of net revenues.
Three Months Ended April 30,
2008 2009 Increase (decrease)
% of % of
Gross Gross
Dollars Profit Dollars Profit Dollars Percentage
Products $ 1,392,420 94.78 % $ 132,215 64.78 % $ (1,260,205 ) (90.50 )%
Products - GM% 17.79 % 13.80 %
Services 76,690 5.22 % 71,891 35.22 % $ (4,799 ) (6.26 )%
Services - GM% 13.77 % 30.13 %
Total gross profit $ 1,469,110 100.00 % $ 204,106 100.00 % $ (1,265,004 ) (86.11 )%
Total - GM% 17.52 % 17.05 %
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The decrease in gross profit percentage for the three months ended April 30, 2009 as compared to the same period in fiscal 2008 is primarily due to the allocation of our fixed cost. Although we were able to better align our variable expenses with our revenue, we were not able to significantly reduce our fixed facility expenses during the three months ended April 30, 2009. As a result of the reduced volume of revenue and corresponding production activity that occurred during the three months ended April 30, 2009, we included abnormal amounts of idle facility expense in our cost of goods sold for the three months ended April 30, 2009 compared to the same period in 2008.
The increase in services gross profit for the three months ended April 30, 2009 as compared to the same period in fiscal 2008 is primarily attributable to the completion of a low margin services contract in December 2008.
Operating Expense Discussion:
The following table summarizes our operating expenses for the three months ended
April 30, 2008 and 2009 in dollars and as a percentage of net revenues.
Three Months Ended April 30,
2008 2009 Increase (decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Selling and marketing $ 281,718 3.36 % $ 144,280 12.05 % $ (137,438 ) (48.79 )%
Research and product
development 208,888 2.49 % 102,273 8.55 % (106,615 ) (51.04 )%
General and
administrative 973,440 11.61 % 807,921 67.50 % (165,519 ) (17.00 )%
Total operating expenses $ 1,464,046 17.46 % $ 1,054,474 88.10 % $ (409,572 ) (27.98 )%
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The decrease in selling and marketing expense is the result of aligning expenses to our current and future business models. For the three months ended April 30, 2009 compared to the three months ended April 30, 2008, marketing activities and expense associated with selling and marketing personnel decreased as a result of cost cutting efforts. We will continue to evaluate our costs relative to our revenues and gross margins.
The decrease in research and product development expense for the three months ended April 30, 2009 compared to the three months ended April 30, 2008 is the result of our aligning expenses to our current and future business models. We believe that research and product development expenses will fluctuate from quarter to quarter as we develop and introduce new products into the marketplace.
The decrease in general and administrative expenses for the three months ended April 30, 2009 compared to the three months ended April 30, 2008 is primarily attributable to cost cutting efforts. The cost reductions continue to include curtailing expenses related to non-revenue generating activities, terminating non-essential employees, and instituting across the board departmental expense reductions.
Other Income (Expense) Discussion:
The following table summarizes our other income (expense) for the three months
ended April 30, 2008 and 2009 in dollars and as a percentage of net revenues.
Three Months Ended April 30,
2008 2009 Increase (decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Interest income $ 4,827 0.06 % $ 410 0.03 % $ (4,417 ) (91.51 )%
Total interest income $ 4,827 0.06 % $ 410 0.03 % $ (4,417 ) (91.51 )%
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The decrease in net interest income for the three-month period ended April 30, 2009 is attributable to the recording of interest relating to payroll taxes resulting from the failure to report certain employee reimbursements as compensation offsetting lower interest earned as a result of lower cash balances compared to the same period in fiscal year 2008.
Net Income (Loss) Discussion:
The following table summarizes our net (loss) for the three months ended April
30, 2008 and 2009 in dollars and as a percentage of net revenues.
Three Months Ended April 30,
2008 2009 Increase (decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Net income (loss) $ 9,891 0.12 % $ (849,958 ) (71.02 )% $ (859,849 ) (8693.25 )%
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The increase in net loss for the three months ended April 30, 2009 as compared to the same period in fiscal 2008 is a result of lower revenues and corresponding gross margin dollars. We continue to manage our costs relative to our revenue.
For the six months ended April 30, 2009 compared to the six months ended April 30, 2008:
Net Revenue Discussion:
The following table summarizes our net revenue for the six months ended April
30, 2008 and 2009 in dollars and as a percentage of net revenues.
Six Months Ended April 30,
2008 2009 Increase (decrease)
% of Net % of Net
Dollars Revenues Dollars Revenues Dollars Percentage
Products $ 13,080,767 92.18 % $ 1,306,165 62.62 % $ (11,774,602 ) (90.01 )%
Services 1,110,339 7.82 % 779,608 37.38 % (330,731 ) (29.79 )%
Total net revenues $ 14,191,106 100.00 % $ 2,085,773 100.00 % $ (12,105,333 ) (85.30 )%
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The decrease in product revenue is primarily attributable to our exiting of the reseller business and continued program delays with our integrator business. Due to the current economic decline, we experienced a significant reduction in our Integrator and ISV opportunities. Our ISV opportunities also declined as our customers merged and/or were acquired resulting in lower demand for our products.
The decrease in service revenue for the six month period ended April 30, 2009 as compared to the same period in fiscal 2008 is the result of us completing a large services contract in December 2008. We anticipate service revenues to fluctuate in the near future due to the current state of the U.S. economy.
Gross Profit Discussion:
The following table summarizes our gross profit for the six months ended April
30, 2008 and 2009 in dollars, as a percentage of gross profit and as a
percentage of net revenues.
Six Months Ended April 30,
2008 2009 Increase (decrease)
% of % of
Gross Gross
Dollars Profit Dollars Profit Dollars Percentage
. . .
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