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MAMS > SEC Filings for MAMS > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for MAM SOFTWARE GROUP, INC.


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the statements contained in this Quarterly Report on Form 10-Q, which are not purely historical, are forward-looking statements, including, but not limited to, statements regarding the Company's objectives, expectations, hopes, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by the use of the words "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties affecting our business. We caution you not to place undue reliance on these forward-looking statements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements and we do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis of Financial Condition and Results of Operation in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2012 and our other filings with the SEC.

Overview

MAM Software Group, Inc. ("MAM," the "Company," "we," "our," or "us") is a technology holding company that has one wholly owned subsidiary based in the U.S., MAM Software, Inc. ("MAM US") which is located in Allentown, Pennsylvania, and one in the U.K., MAM Software Limited ("MAM Ltd.") based in Tankersley, Barnsley, U.K.. The subsidiaries operate independently from one another. As of April, 10, 2013, MAM Software, Inc. merged with Aftersoft Network, N.A., Inc. and Aftersoft Network, N.A., Inc. changed its name to MAM Software, Inc. Prior to the merger, Aftersoft Network, N.A., Inc. had one wholly owned operating subsidiary (i) MAM Software, Inc., and two inactive wholly owned subsidiaries,
(ii) AFS Warehouse Distribution Management, Inc., and (iii) AFS Tire Management, Inc., which are all based in Allentown, Pennsylvania. MAM has offices in Allentown, Pennsylvania. We have and continue to market and develop business management software solutions that manage both the business and supply chain for small- and medium-sized firms in the automotive aftermarket. The automotive aftermarket includes those businesses that supply servicing, parts, oil, tires, and performance extras to the retail market.

We believe that the largest single issue facing the automotive aftermarket at this time is the downturn of the global economy, especially its impact on the economies in which we operate. Although new car sales have increased in recent years, the average age of the automobile on the road has also increased. Many U.S. and U.K. automobile owners are retaining their existing automobiles far longer than they may have previously planned. This phenomenon is forcing owners to seek out more economic ways of maintaining their vehicles, and we believe this presents an opportunity for the Company because the need for consumers to maintain their vehicles longer requires service suppliers to offer a wide range of services at highly competitive prices. We believe that this can be achieved only by those businesses that are able to efficiently manage their businesses and find methods to reduce costs without affecting service levels, which may best be done through investments in 'up to date' management information systems, specifically those designed for the automotive market. Many businesses are reluctant to make the financial commitment required to purchase a new system and other businesses wishing to invest in new management systems are also finding their access to credit reduced. The unavailability of credit for businesses may have a detrimental effect on our revenues if customers are unable to identify adequate resources necessary to fund purchases. As a means to addressing the lack of availability of credit for customers or potential customers, we have introduced Autopart Online which is a 'rental' or SaaS (Software as a Service) version of Autopart. Autopart Online does not require the customer to purchase hardware and software licenses upfront, they simply 'rent' the infrastructure and purchase the professional services required to implement the system. We believe that by removing the capital investment associated with Autopart, we will see an increase in interest in our Autopart Online solution.

Our revenue and income is derived primarily from the sale of software, data, e-commerce, services and support. In the U.K., we also earn a percentage of our revenue and income from the sale of hardware systems to clients. In the three months ended March 31, 2013, we generated revenues of $6,825,000 and had net income of $812,000; 69% of these revenues came from the U.K. market. During the nine months ended March 31, 2013, we generated revenues of $20,062,000 with net income of $2,220,000; 70% of these revenues came from the U.K. market. Our corporate offices are located in Tankersley, Barnsley, U.K. and we maintain additional offices for our U.S. operating subsidiary in Allentown, Pennsylvania, and, for our U.K. operating subsidiary, in Barnsley, Northampton and Wareham.

The software that we sell is mainly a Microsoft Windows™ based technology, although we do still have an older 'Green Screen' terminal-based product. The four main products that we support in the U.S. cover all of the components of the automotive aftermarket supply chain. First is "warehouse distribution." Into this market we sell our Autopart product in conjunction with our warehouse management software (WMS) module to new prospects and continue to support our Direct Step product. Both products enable large warehouses with hundreds of thousands of stock keeping units (SKUs) to locate, manage, pack and deliver the parts with ease and efficiency. Second, these parts are distributed to the next business in the chain, which is the "jobber." Into this market segment we also sell our Autopart product, which manages a jobber's whole business (i.e., financial, stock control and order management) but more importantly enables the jobber to quickly identify the parts that his client needs, either via the Internet or telephone, so that the correct product for the vehicle on the ramp can be supplied. The third and next segment of the automotive aftermarket supply chain is the "installer," which repairs and maintains automobiles. The installer needs systems that enable him to efficiently and simply manage his businesses, whether as a single entity or national multi-site franchise. Into this segment we sell VAST. The fourth segment is the "OpenWebs™." This technology allows these three separate business solutions to connect to each other to allow, among other processes, ordering, invoicing and stock checking to take place in real-time both up and down the supply chain. The U.K. market differs from that of the U.S. in that it does not have the same number of large warehouse distribution centers. We do not sell the Direct Step product in the U.K. We do sell Autopart in conjunction with our WMS module to UK-based suppliers. We continue to sell the Autopart product to the jobber market (which are known as "motor factors" in the UK), but sell Autowork Online to the installer market. In the U.K., we also sell our catalog solution, Autocat+, which is an Internet-based identification tool used by the warehouse distributor, jobber and installer.

To date, our management has identified four areas that it believes we need to focus on.

The first area is the continued success of Autowork Online, our 'cloud'-based "installer" solution in the U.K. The product has been developed by MAM Ltd., our U.K. subsidiary, under the 'cloud' computing model. This is where software solutions are made available to end-users via the Internet and does not require them to purchase the software directly but 'rent' it over a fixed period of time. Our management believes that this will be a rapidly growing market for the U.K. as businesses continue to look for ways of reducing capital expenditures while maintaining levels of service. Autowork Online was launched in 2010 and, as of March 31, 2013, we had 2,678 subscribers of this service in the UK. The product has been localized for the North American market and is being introduced and demonstrated to potential partners.

The second area of focus is the sales and marketing strategy within the U.S. market. Our management believes that continued investment in this key area is required to help the development of the MAM brand. During the three and nine month periods ended March 31, 2013, the Company added eight sales and marketing person and is actively seeking to recruit additional sales personnel. During the twelve month period ended June 30, 2012, the Company added seven sales and marketing personnel.

The third area is within the U.K. market and we are continually working to sustain the levels of growth in the U.K. business by introducing Autopart Online to our automotive customers and prospects and also by focusing on additional vertical markets, which share common characteristics and industry dynamics to that of the automotive market. We have developed a reputation of high levels of service and knowledge within the automotive market and are now working on replicating this reputation in these additional vertical markets. Our management intends to carefully monitor this expansion as a result of the current state of the global economy. Our Autopart Online offering is considered a cloud computing program.

Cloud computing is the current terminology for describing the delivery of software-as-a-service ("SaaS"). Market acceptance of cloud computing for mission critical enterprise applications has become increasingly common in recent years since software can be delivered cost-effectively, reliably, and securely to businesses over the Internet without the need for them to purchase supporting software and hardware for an on-premise system or the need to large levels of internal staff to monitor and upgrade such a system. Through cloud computing, we supply and manage the hardware, infrastructure, ongoing maintenance, and backup services for our customers. We install the latest version of our software for our customers, thereby reducing their need to buy and maintain their own IT resources. As a part of our cloud model, we also provide activation and training services to our customers as well as support services, The cloud computing model differs in many respects from the traditional on-premise software model: rather than significant sales of a software program and related implementation costs at the outset of a contract, the cloud or SaaS model is premised on recurring revenues and services revenues. Subscription revenues from a cloud-based offering and customer support and maintenance revenues are the primary components of recurring revenues, and the majority of services revenues are derived from implementation consulting services. Our SaaS product offering has deployment and implementation efficiencies, increased efficiencies in support, reduction in distribution costs and results in improved margin vs. revenue from an on-premise system sale. As we promote our cloud-based solution and increase our Autopart Online revenue, we expect to experience a short term reduction in total revenue from our UK operations due to differences in recognized revenue relative to a traditional on-premise system sale.

The fourth area is the continued investment in research and development that will allow us to deliver innovative new solutions and modules in support of the previous four key areas. During the fiscal year ending June 30, 2012, a number of new modules were launched including EMI+, a new business intelligence solution with mobile capability and a new warehouse management software module that integrates seamlessly with Autopart. During the three and nine month periods ended March 31, 2013, our U.K. SaaS solution, Autowork Online was modified for the North American market.

Critical Accounting Policies

There were no changes to those policies disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Impact of Currency Exchange Rate

Our net revenue derived from sales in currencies other than the U.S. dollar was 70% and 71% for the three and nine month periods ended March 31, 2013, respectively, as compared to 75% and 74% for the corresponding periods in 2012. As the U.S. Dollar strengthens in relation to the British Pound ("GBP"), as it has recently done, our revenue and income, which is reported in U.S. dollars, is negatively impacted. Changes in the currency values occur regularly and in some instances may have a significant effect on our results of operations.

Income and expenses of our MAM Ltd. subsidiary are translated at the average exchange rate for the period. During the three and nine month periods ended March 31, 2013, the exchange rate for MAM Ltd.'s operating results was U.S. $1.5797 per GBP, compared with U.S. $1.5848 per GBP for the three and nine periods ended March 31, 2012.

Assets and liabilities of our MAM Ltd. subsidiary are translated into U.S. dollars at the period-end exchange rates. The exchange rate used for translating our MAM Ltd. subsidiary was US$1.5189 per GBP at March 31, 2013 and US$1.5615 per GBP at June 30, 2012.

Currency translation (loss) and gain adjustments are accumulated as a separate component of stockholders' equity, which totaled ($529,000) and $381,000 for the three months ended March 31, 2013 and 2012, respectively, and ($233,000) and $108,000 for the nine months ended March 31, 2013 and 2012, respectively.

Results of Operations

Our results of operations for the three and nine months ended March 31, 2013 compared with the three and nine months ended March 31, 2012 were as follows:

Revenues. Revenues were $6,825,000 and $20,062,000 for the three and nine months ended March 31, 2013, respectively, an increase of $695,000 or 11.3% and $1,084,000 or 5.7%, respectively, compared with revenues of $6,130,000 and $18,978,000 for the three and nine months ended March 31, 2012, respectively.

U.S. operations increased revenue by $481,000 and the U.K. operation increased revenue by $214,000 for the three month period. U.S. operations increased revenue by $913,000 and the U.K. operation increased revenue by $171,000 for the nine month period. Our U.S. operation experienced higher revenues for the three and the nine month periods ended March 31, 2013 than it did during the 2012 periods due to increased recurring revenue and increased software revenue for the year. U.K. revenues were positively impacted by the increase recurring revenue which was partially offset by the decrease in system sales.

Revenues in the U.K. for the three months ended March 31, 2013 were 3,068,000GBP vs. 2,902,000GBP in March 31, 2012, an increase of 166,000GBP or 5.7%. Revenues in the U.K. for the nine months ended March 31, 2013 were 8,840,000GBP vs. 8,704,000GBP for March 31, 2012, an increase of 136,000GBP or 1.6%. Revenue from our U.K. subscribers to Autowork Online, our 'cloud' based application, in the U.K. have increased each month of this fiscal year and totaled $367,000 for the three months and $1,038,000 for the nine months ended March 31, 2013 as compared to $300,000 for the three months and $849,000 for the nine months ended March 31, 2012, respectively. The U.K. was negatively impacted by the growth of our Autopart Online product (SaaS offering). Autopart Online generated $90,000 in revenue for the three months ended March 31, 2013 and $192,000 for the nine months ended March 31, 2013, which represents approximately $135,000 and $399,000 less respectively than had the Autopart Online product been sold as a traditional on-premise system sale.

The strength of the U.S. dollar vs. the British Pound for the quarter ended March 31, 2013 when compared to the quarter ended March 31, 2012 had a negative effect on reported revenue for our U.K. operations and resulted in dollar denominated revenue of $4,772,000 for the three months ended March 31, 2013 as compared to $4,558,000 for the three months ended March 31, 2012, an increase of $214,000 or 4.7%. The strength of the U.S. dollar vs. the British Pound for the nine months ended March 31, 2013 when compared to the nine months ended March 31, 2012 had a negative effect on reported revenue for our U.K. operations and resulted in dollar denominated revenue of $13,965,000 for the nine months ended March 31, 2013 vs. $13,794,000 for the 2012 period, an increase of $171,000 or 1.2%.

As of March 31, 2013, we had a backlog of unfilled orders of business management systems of $1,705,000 compared to a backlog of $1,404,000 at March 31, 2012. We expect to recognize approximately 65% of such backlog during the next six months.

Cost of Revenues. Total cost of revenues for the three and nine months ended March 31, 2013 were $2,907,000 and $8,443,000, respectively, compared with $2,688,000 and $8,022,000 for the same periods ended March 31, 2012, respectively. The increase in cost of revenues for the three months was 8.1% or $219,000. Our U.S. operations experienced an increase of $159,000 or 19.8% to $958,000 from $799,000, the result of increased revenues. Our U.K. operations experienced an increase of 51,000GBP from 1,203,000GBP to 1,254,000GBP. The stronger U.S. dollar resulted in a dollar denominated increase of $60,000 to $1,949,000 from $1,889,000.

Our U.K. operation experienced an increase in cost of revenues for the nine months to 3,684,000GBP from 3,642,000GBP, an increase of 42,000GBP or 1.2%. The stronger U.S. dollar resulted in dollar denominated cost of revenues of $5,820,000 for 2013 compared with $5,771,000 for the nine months ended March 31, 2013, an increase of $49,000. Our U.S. operations experienced an increase of $373,000 or 16.5% to $2,624,000 from $2,251,000, the result of increased revenues. This resulted in a total increase of $421,000 or 5.2%.

Operating Expenses. The following tables set forth, for the periods indicated, our operating expenses and the variance thereof:

                                   For the Three Months
(In thousands)                        Ended March 31,
                                       2013            2012       $ Variance      % Variance

Research and development        $   850,000     $   823,000     $     27,000             3.3 %
Sales and marketing                 810,000         615,000          195,000            31.7 %
General and administrative          919,000         889,000           30,000             3.4 %
Depreciation and amortization       285,000         300,000          (15,000 )          -5.0 %
Total Operating Expenses        $ 2,864,000     $ 2,627,000     $    237,000             9.0 %




                                    For the Nine Months
(In thousands)                        Ended March 31,
                                       2013            2012      $Variance       %Variance

Research and development        $ 2,555,000     $ 2,428,000     $  127,000             5.2 %
Sales and marketing               2,443,000       1,904,000        539,000            28.3 %
General and administrative        2,747,000       2,803,000        (56,000 )          -2.0 %
Depreciation and amortization       859,000         898,000        (39,000 )          -4.3 %
Total Operating Expenses        $ 8,604,000     $ 8,033,000     $  571,000             7.1 %

Operating expenses increased by $237,000, or 9.0% for the three months ended March 31, 2013 compared with the three months ended March 31, 2012, and increased by $571,000 or 7.1% for the nine months ended March 31, 2013, compared with the nine months ended March 31, 2012. This is due to the following:

Research and Development Expenses.Research and Development expenses increased by $27,000 or 3.3% for the three month period ended March 31, 2013 and increased by $127,000 or 5.2% for the nine month period ended March 31, 2013 compared to the same periods in the prior fiscal year. The increase for the three and nine month periods ended March 31, 2013 is primarily a result of an increase in the number of personnel working on development projects.

Sales and Marketing Expenses. Sales and marketing expenses increased by $195,000 or 31.7% during the three months ended March 31, 2013 as compared with the same period in 2012 and increased by $539,000 or 28.3% for the nine months ended March 31, 2013 compared with the nine months ended March 31, 2012. The increase for the three month period was the result of new hires in the U.S. business unit. The increase for the nine months ended March 31, 2013 was the result of additional new hires and an increase of $132,000 in advertising and tradeshow expenses compared to 2012.

General and Administrative Expenses.General and administrative expenses increased by $30,000 or 3.4% for the three months ended March 31, 2013 as compared to the same period in 2012, and decreased $56,000 or 2.0% for the nine months ended March 31, 2013 as compared with the same period in 2012. The increase for the three month period was the result of additional headcount including the hiring of senior management for the U.S. based operations and related recruitment expenses, partially offset by a decrease in incentive compensation. The decrease for the nine month period was the result of reductions in most expense items including a reduction in legal fees, SEC fees and related filing expenses and overall better control of overhead expenses company-wide.

Depreciation and Amortization Expenses.Depreciation and amortization expenses decreased $15,000, or 5.0%, and decreased $39,000, or 4.3%, for the three and nine month periods ended March 31, 2013, respectively, as compared to the same periods in 2012, which is primarily due to a number of assets being fully depreciated.

Interest Expense. Interest expense decreased by $13,000 or 28% to $34,000 for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, and decreased $34,000 or 23.0% to $114,000 for the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012. The decrease in interest expense is related to a reduction in our total interest bearing liabilities and a reduction in amortization of debt discount and debt issuance costs, which are included in interest expense. For the three months ended March 31, 2013 we paid or incurred $5,000 in interest expense to HSBC. For the nine months ended March 31, 2013, we paid or incurred $19,000 in interest expense.

Other Income (Expense). Other income (expenses) for the three and nine months ended March 31, 2013, includes a gain on the settlement from the retirement of the final portion of the derivative liabilities of $58,000 and $131,000, respectively. During the three and nine month periods ended March 31, 2013, the Company had a loss from the change in fair value of derivative liabilities of ($23,000) and ($271,000), respectively. During the three and nine month periods ended March 31, 2012, the Company had a loss from the change in fair value of derivative liabilities of ($95,000) and a gain of $181,000, respectively. Other income includes a $13,000 and $96,000 gain from the net settlement of outstanding liabilities for the nine month period ended March 31, 2013 and 2012, respectively.

Income Taxes. Income taxes decreased by $3,000, or 1.2%, to $243,000 for the three month period ended March 31, 2013, and decreased by $204,000, or 26.9%, to $554,000 for the nine month period ended March 31, 2013 as compared to the same periods in 2012, the result of increased earnings in our U.S. business, which have a lower tax rate.

Net Income. As a result of the above, we recorded net income of $812,000 for the three month period ended March 31, 2013, compared with a net income of $427,000 for the three month period ended March 31, 2012, an increase of $385,000 or 90.2%. Net income for the nine months ended March 31, 2013, as was $2,220,000 compared with a net income of $2,294,000, for the nine months ended March 31, 2012, a decrease of $74,000 or 3.2%.

Liquidity and Capital Resources

To date, most of our profits have been generated in Europe, but with the introduction of new products and our efforts to streamline our U.S. operations, our U.S. operating subsidiary generated a profit for the three and nine month periods of fiscal 2013. While there is no guarantee that the trend in profitability in the U.S. will continue, our current goal is to seek to increase overall revenues and earnings from U.S. operations in fiscal 2013. The Company is not capital intensive and currently is generating cash flow in excess of earnings.

At March 31, 2013, we had cash and cash equivalents of $2,884,000, a reduction of $744,000 from June 30, 2012.

During the nine months ended March 31, 2013, we reduced our HSBC Term Loan by $480,000 and our secured term debt by $58,000 using internally generated funds and working capital.

We continued to experience positive cash flow during the period ended March 31, 2013 with our cash position of $2,884,000 after repayment of $529,000 in long-term debt, capital expenditures of $268,000 and the purchase of $2,275,000 of treasury stock and warrants.

We expect to see continued growth from both the U.S. and U.K. operations during fiscal 2013 as we have identified a number of opportunities to widen our client base within the automotive industry and are actively pursuing those at this time.

We intend to continue to work at maximizing customer retention by supplying and developing products that streamline and simplify customer operations, thereby increasing their profit margin. By supporting our customers' recurring revenues, we expect to continue to build our own revenue stream. We believe that we can continue to grow our customer base through additional sales personnel, targeted media and marketing campaigns and products that completely fit clients' requirements. We also intend to service existing clients to higher levels and increasingly partner with them so that together we'll both achieve our goals.

Revenues in the U.K. and U.S. are generating positive cash flow and are sufficient to cover corporate expenses resulting in a positive cash flow for the quarter. Our current plans still require us to hire additional sales and marketing staff, to expand within the U.S. market, to target new vertical markets effectively in the U.K. and to support expanded operations overall.

We believe our plan will strengthen our relationships with our existing customers and provide new income streams by targeting new vertical markets for our Autopart product.

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