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MAMS > SEC Filings for MAMS > Form 10-K on 25-Sep-2013All Recent SEC Filings

Show all filings for MAM SOFTWARE GROUP, INC.

Form 10-K for MAM SOFTWARE GROUP, INC.


25-Sep-2013

Annual Report


Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations.

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 U.S".) and one in the U.K., MAM Software Limited ("MAM Ltd.") based in Tankersley, Barnsley, U.K. These subsidiaries operate independently from one another. MAM U.S. has two divisions, VAST and Autopart, which are both based 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 down turn of the global economy, especially the economies in which we operate. The constraint of credit within the U.S. and U.K. markets is forcing automobile owners to retain 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 to the Company. 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. However, we have recently noticed that some businesses wishing to invest in new management systems are also finding their access to credit reduced. This may have a detrimental effect on our revenues if customers are unable to fund purchases. We still believe that the aftermarket landscape will continue to change over the next 18 months, with the convergence of the aftermarket and tire markets, but this rate of change maybe slower than first expected.

Our revenue and income is derived primarily from the sale of business management software, data, ecommerce solutions and 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 year ended June 30, 2013, we generated revenues of $27,500,000 and had net income of $3,013,000; 69% of these revenues came from the U.K. market.

We are headquartered in Tankersley, Barnsley, U.K. and maintain additional offices for our U.S. operating subsidiary in Allentown, Pennsylvania, and, for our U.K. operating subsidiary, in Northampton and Wareham. The software that we sell is mainly a Microsoft Windows TM 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. The first segment is "warehouse distribution." Into this market we sell our Autopart product to new prospects and continue to support our Direct Step product. Both products enable large warehouses with hundreds of thousands of stock keeping units (sku's) to locate, manage, pack and deliver the parts with ease and efficiency. During the second segment, 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. market in that it does not have the same number of large warehouse distribution centers, so we do not sell the Direct Step product in the U.K. We continue to sell the Autopart product to the jobber market, 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 distribution, jobber and installer.

To date, our management has identified five areas that it believes we need to focus on. The first area is the continued growth of revenues derived from delivering our business management software as a service, commonly known as Software as a Service or (SaaS). To date our Autowork Online, "installer" solution in the U.K and Autopart Online, our parts store solutions are being delivered in this way. Both products have 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 June 30, 2013 we had 2,807 subscribers of this service. The product has just been localized and released into the U.S. market. Autopart Online was launched in August 2011, and as of June 30, 2013 we had 216 end users subscribing to this service.

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 twelve month period ending June 30, 2013, the Company added two sales associates and two marketing personnel and is actively seeking to recruit additional sales personnel.

The third area of focus relates to the launch of our information service, Autocat+ in the U.S. Autocat+ is an auto parts catalog that uses the Data as a Service (Daas) distribution model. MAM Software Ltd. centrally hosts and maintains the data, which is accessed by users via MAM's business management software, a standalone desktop application, or web application. Data can also be 'consumed' via a Web Service for integration into B2C websites. Information in Autocat+ is maintained through an automatic verification and standardization process, with updates published daily.

In the U.K., there are approximately 11,500 end-users (warehouse distributors, parts stores and auto service providers) who use our information products, for which a monthly or annual subscription fee is charged. Our management believes that launching a US version of Autocat+ will help to sell our business management software solutions.

The fourth area is within the U.K. market as we are continually working to sustain the levels of growth in the U.K. business by focusing on additional vertical markets, which share common issues 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.

The fifth 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 year ended June 30, 2013, 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.

Strategic Goals

It is our objective to increase our share of the U.S. and Canadian markets by
(i) increasing the sales and marketing presence of our Autopart product, (ii), focusing on the service station element of the market (iii) and establishing OpenWebs™ as the e-commerce standard within the Automotive market. In the U.K. we expect to continue to grow our market share through (i) moving our supply chain management software into new vertical markets, (ii) alliances with major manufacturers and national retail chains within the automotive aftermarket, and
(iii) an increased marketing presence. We believe that our successful experience within the automotive market will translate well into other vertical markets that have similarly complex supply chains. By developing specific sales teams with relevant market experience and supporting with them suitable marketing collateral, we believe that within two years these teams will generate significant revenue and earnings. The Company plans, at this stage, to focus only on the U.K. for these additional vertical market opportunities.

Summary

We expect to see continued revenue growth from both the U.S. and U.K. operations during fiscal 2014 with increase operating income from the UK. Our U.S. operating income will be negatively impacted by our investment in new staff for sales and marketing, and professional services and support. 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 also expect to see increases in revenue over the next two quarters, specifically due to new products and modules being released as well as enhancements to existing products.

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 at higher levels and increasingly partner with them so that together we both will achieve our goals.

MAM generated approximately $4,182,000 from operations for the year ended June 30, 2013. Revenues in the U.K. are continuing to generate positive cash flow and free cash and the U.S. operations are also generating free cash flow but corporate expenses resulted in a negative cash flow for the year ended June 30, 2013. Our current plans still require us to hire additional sales and marketing staff 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 additional English-speaking auto industry aftermarkets for our Autopart product. If we continue to experience negative cash flow we will be required to limit our growth plan.

Impact of Currency Exchange Rate

Our net revenue derived from sales in currencies other than the U.S. dollar was 69% and 70% for the years ended June 30, 2013 and June 30, 2012, respectively. 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 subsidiary are translated at the average exchange rate. The exchange rate for MAM's operating results was US $1.5676 per GBP for the year ended June 30, 2013, compared with US $1.5844 per GBP for the year ended June 30, 2012.

Assets and liabilities of our MAM subsidiary are translated into U.S. dollars at the period-end exchange rates. The exchange rate used for translating our MAM subsidiary was US $1.5208 per GBP at June 30, 2013 and US $1.5615 per GBP at June 30, 2012.

Currency translation (loss) adjustments are accumulated as a separate component of stockholders' equity, which totaled ($1,168,000) and ($930,000) as of June 30, 2013 and 2012, respectively.

Backlog

As of June 30, 2013, we had a backlog of unfilled orders of business management systems of $1,697,000, compared to a backlog of $1,324,000 at June 30, 2012. We expect to fill approximately 65% of such backlog during the next six months.

Results of Operations

Our results of operations for the fiscal year ended June 30, 2013 compared with the year ended June 30, 2012 were as follows:

Revenues. Revenues increased $1,376,000 or 5.3% to $27,466,000 for the year ended June 30, 2013, compared with $26,090,000 for the year ended June 30, 2012.
Revenues in our U.K. business were 12,043,000GBP for the year ended June 30, 2013 as compared to 11,607,000GBP for the year ended June 30, 2012. Revenues increased 436,000GBP or 3.8% primarily from increased recurring revenue offset by lower revenue from new system sales, which resulted in a overall increase in reported revenues of $488,000. The stronger U.S. dollar resulted in lower reported revenues of $202,000. U.K. revenues reported in U.S. dollars were $18,878,000 for 2013 as compared to $18,390,000 for 2012, which is an increase of $488,000. U.S. revenues increased $887,000 or 11.5% to $8,587,000 in 2013 from $7,700,000 in 2012, the result of increased software sales of $358,000 and increased recurring revenues of $529,000.

Cost of Revenues. Total cost of revenues increased $716,000 or 6.7% to $11,392,000 for the year ended June 30, 2013, compared with $10,676,000 for the year ended June 30, 2012. Cost of revenues as a percentage of revenues increased from 40% for the year ended June 30, 2012 to 41% for the year ended June 30, 2013. The increase in cost of revenues was the result of an increased percentage of lower margin sales. MAM Software Ltd.'s expenses increased 217,000GBP or 4.5% in 2013, to 5,006,000GBP from 4,788,000GBP for 2012 because of unfavorable Cost of Revenue variances resulting from reduced software and system revenues offset by increased Data Services and AWOL revenue. U.K. expenses reported in U.S. dollars increased $260,000 or 3.4%. The U.S. expenses increased $456,000 to $3,545,000 from $3,089,000 in 2012, which was in line with the increased U.S. revenues. As a result of ongoing cost-cutting initiatives, we have been able to minimize any increase in the cost of sales after a thorough review of operations throughout the Company, but focused primarily on the U.S. operations, which revealed discretionary items that were capable of being reduced or eliminated without sacrificing revenues. The increase in 2013 Cost of Revenues from 2012 is directly related to the increase in revenues and additional costs for salaries and related expenses being incurred that cannot be passed to the customer, plus U.S. business professional service revenues can be discounted at certain times to close sales deals, further adding to the overall COGS figures.

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

                                        For the Twelve Months Ended
                                                  June 30,
                                           2013                2012         $ Variance      % Variance
Research and development              $     3,405,000      $  3,267,000     $   138,000             4.2 %
Sales and marketing                         3,348,000         2,709,000         639,000            23.6 %
General and administrative                  4,163,000         3,448,000         715,000            20.7 %
Depreciation and amortization               1,149,000         1,198,000         (49,000 )          -4.1 %
Total Operating Expenses              $    12,065,000      $ 10,622,000     $ 1,443,000            13.6 %

Operating expenses increased by $1,443,000 or 13.6% for the year ended June 30, 2013 compared with the year ended June 30, 2012. This is due to the following:

Research and Development Expenses. Research and development expenses increased $138,000 or 4.2% for the year ended June 30, 2013, when compared with the previous fiscal year. This increase was due to an increase in engineering personnel and related costs of approximately $90,000 in the U.K. and approximately $40,000 in the U.S., compared to 2012.

Sales and Marketing Expenses. Sales and marketing expenses increased by $639,000 or 23.6% for the year ended June 30, 2013 compared with the year ended June 30, 2012. The U.K. business experienced an increase in expenses of approximately $260,000 from the addition of sales personnel. The U.S. business experienced a net increase in expenses of approximately $366,000 from additions in advertising and show expenses of $91,000, approximately $242,000 for additional sales personnel including additional travel expenses, and approximately $32,000 for additional marketing salaries and related expenses.

General and Administrative Expenses. General and administrative expenses increased by $715,000 or 20.7% to $4,163,000 for the year ended June 30, 2013 as compared from $3,448,000 for the year ended June 30, 2012. The increased expenses were primarily the result of additional salaries and benefits for administration staff in the U.K and U.S. business units. Additional expenses in the U.S. were approximately $200,000 in officer's equity compensation, additional payroll and related expenses of approximately $230,000, approximately $20,000 of employee equity compensation, $57,000 of NASDAQ fees, $90,000 in director's equity and cash compensation and $86,000 of executive search and recruiting costs compared to the year ending June 30, 2012.

Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased by $49,000 for the year ended June 30, 2013, as compared with the same period in 2012.

Other Income (Expenses). Other income (expenses) for the year ended June 30, 2013, included an adjustment for the change in fair value of derivative liabilities of ($271,000), a gain on settlement of derivative liabilities of $131,000 and gain on the settlement of liabilities of $13,000. Other income (expenses) for the year ended June 30, 2012, included an adjustment for the change in fair value of derivative liabilities of $230,000 and a gain on settlement of liabilities of $215,000.

Interest Expense. Interest expense decreased by $45,000 to $146,000 for the year ended June 30, 2013. The decrease in interest expense is primarily related to the reduction of our interest bearing loans. HSBC cash interest was approximately $120,000 for the year ended June 30, 2013, and debt issuance cost amortization was approximately $11,000, compared to cash interest of approximately $166,000 and debt issuance cost amortization of $25,000 for the year ended June 30, 2012.

Income Taxes. Income taxes decreased $227,000 to $723,000 for the year ended June 30, 2013, as compared to $950,000 for the year ended June 30, 2012. This decrease was the result of decreased U.K. income in fiscal 2013 when compared to 2012.

Net Income. We realized income of $3,013,000 for the year ended June 30, 2013, compared with income of $4,096,000 for the year ended June 30, 2012.

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand and cash generated from operations. To date, most of our profits have been generated in Europe, but with the introduction of new products and our successful efforts to streamline our U.S. operations, all U.S. operating entities experienced increased revenues and profits in fiscal 2013. We expect this revenue trend to continue and look forward to an increase in overall revenues from our U.S. operations in fiscal 2014. We expect to invest in additional sales and marketing staff and to increase our professional services and support staff. These expenditures will have a negative impact on profits for fiscal 2014.

During the year ended June 30, 2013, we repaid approximately $725,000 on our HSBC Loan and on our secured notes. During the year ended June 30, 2012, we repaid approximately $770,000 on our HSBC Loan and on our secured notes. These payments were made from cash flow generated from operations. We purchased 622,815 shares of our Common Stock at a cost of $1,631,000 and were able to increase our cash position by $433,000. As of June 30, 2013, we owe HSBC $292,000 and are repaying approximately $59,000 per month for the term of the loan. As of June 30, 2012, we owed HSBC $945,000.

We believe our existing cash balance, and the cash expected to be generated from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our level of net sales, the timing and extent of expenditures to support our development activities and the continued market acceptance of our products. For the year ending June 30, 2014, we anticipate increasing our marketing department and increasing overall marketing expenditures by approximately $600,000, increasing our sales department by $300,000 and increasing our professional services and support staff by $550,000. We believe these expenditures may result in increased revenue in 2014, but will have a negative impact on profits and cash flow. The investments we will make in 2014 should contribute to the increased growth in 2015. We could be required, or we may choose, to seek additional funding through public or private equity or debt financing. In addition, in connection with any future acquisitions, we may require additional funding which may be provided in the form of additional debt or equity financing or a combination of both. These additional funds may not be available on terms acceptable to us, or at all.

Working Capital

Working capital at June 30, 2013 was $3,502,000 compared to $1,674,000 at June 30, 2012. The working capital increase resulted primarily from a $433,000 increase in cash, a $4,000 increase in net accounts receivable, a decrease of $159,000 in inventories, a $1,018,000 increase in prepaid expenses and other assets, a $72,000 increase in accounts payable, a $59,000 decrease in accrued expenses, a $138,000 increase in accrued payroll and other taxes, a $442,000 decrease in derivative liabilities, a $447,000 decrease in the current portion of long-term debt, an increase of $361,000 in the current portion of deferred revenue, an increase of $60,000 in sales tax payable, and a decrease of $215,000 in income tax payable.

Capital Expenditures

Capital expenditures for fiscal 2013 and 2012 were $679,000 and $138,000 respectively.

HSBC Bank plc.

On October 25, 2010, MAM Ltd., entered into a three-year term loan agreement with HSBC Bank plc. ("HSBC") as lender (the "HSBC Term Loan"). The HSBC Term Loan provides for £1,324,550 (approximately $2.0 million at the exchange rate on October 25, 2010) with a term of three years from the date the HSBC Term Loan is first drawn down. The HSBC Term Loan is repayable in thirty-six (36) monthly installments, inclusive of interest, together with such sums in the final month to discharge the balance of the HSBC Term Loan. The proceeds of the HSBC Term Loan were used to fully repay the residual balance of the credit facility due to ComVest Capital LLC ("ComVest") from the Company.

The interest rate under the HSBC Term Loan is 2.9% per annum over HSBC's Sterling Base Rate, as published from time to time, which totals 3.4% at June 30, 2013. A prepayment fee of 1.5% of the amount prepaid will be payable by the Company in the event the Term Loan is refinanced by another lender.

The HSBC Term Loan is secured by the following instruments: a guarantee granted by the Company, VAST and Autopart in favor of HSBC pursuant to which each would guarantee the repayment of the HSBC Term Loan (the "Guarantee"); an all assets debenture granted by MAM Ltd. in favor of HSBC including a first fixed charge over book debts and stock, which would create fixed and floating the charges over the assets and undertaking of MAM Ltd. for the provision of the HSBC Term Loan ("Debenture"); and a mortgage of the life insurance policies in favor of MAM Ltd. in relation to a Company employee and the Company's CEO. The Company recorded debt issuance fees of approximately $60,000 related to the HSBC Term Loan, which is being amortized over the life of the loan. Amortization expense was $11,000 year ended June 30, 2013 and $25,000 year ended June 30, 2012.

The HSBC Term Loan contains various financial covenants. As of June 30, 2013, the Company was in compliance with or obtained waivers for all such covenants.

Off Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Current Products and Services

Meeting the needs of the automotive aftermarket requires a combination of business management systems, information products and online services that combine to deliver benefits for all parties involved in the timely repair of a vehicle. Our products and services include:

· Business management systems comprised of our proprietary software applications, implementation and training and third-party hardware and peripherals;

· Information products such as an accessible catalog database related to parts, tires, labor estimates, scheduled maintenance, repair information, technical service bulletins, pricing and product features and benefits, which are used by the different participants in the automotive aftermarket;

· Online services and products that connect manufacturers, warehouse distributors, retailers and automotive service providers via the internet. These products enable electronic data interchange throughout the automotive aftermarket supply chain among the different trading partners. They also enable procurement and business services to be projected over the internet to an expanded business audience. Some U.K. clients use our information products on their own websites and intranets; some clients in North America and the U.K. use our systems and branded software to obtain relevant and up-to-date information via the internet; and

· Customer support and consulting services that provide phone and online support, implementation and training.

Need for Technology Solutions

A variety of factors drive the automotive market's need for sophisticated technology solutions, including the following:

Inventory Management

Industry sources suggest that approximately 35% of parts produced are never sold and 30% of parts stocked are never sold. Approximately 25% of parts sold are eventually returned due to insufficient knowledge or capability by either the parts supplier counterman or the auto service provider installer. Clearly, there is substantial inefficiency in the automotive aftermarket supply chain. This inefficiency results in excess inventory carrying costs, logistical costs and the over-production of parts and tires at the manufacturer level. Overcoming these challenges requires the combination of business systems software, information products, and connectivity services we offer.

Competition

In the U.S., the need for technology solutions has been accelerated by the expansion of large specialty parts retailers such as Advance Auto Parts, Inc. and large auto service chains like Monro Muffler and Brake, Inc. This expansion . . .

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