U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27083
Aftersoft Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1108035
--------------------------- ----------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Savannah House 5th Floor 11 Charles II Street; London SW1Y 4AU UK
(Address of principal executive offices)
+44 20 7451 2468
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of May 17, 2006 the Company had 34,101,167 shares of its $0.0001 par
value common stock issued and outstanding.
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements for the Three months and Nine months
ended March 31, 2006 3
Notes to the consolidated financial statements 7
Item 2. Management discussion and analysis or plan of operation 15
Item 3. Controls and Procedures 21
Part II - Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other information 22
Item 6. Exhibits 24
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Aftersoft Group, Inc.
Consolidated Balance Sheet
(In thousands, except share data)
As of 03/31/2006
-------------------------
ASSETS (unaudited)
-------------------------
Current Assets
Cash $ 580
Accounts receivable, net of allowance of $195 4,033
Inventories 221
Other 173
-------------------------
Total Current Assets 5,007
Property and Equipment, Net 262
Other Assets
Goodwill 22,061
Amortizable intangible assets, net 5,932
Software development costs, net 996
Other 38
-------------------------
Total Other Assets 29,027
-------------------------
Total Assets $ 34,296
=========================
LIABILITIES
Current Liabilities
Accounts payable $ 1,844
Accrued expenses 1,296
Accrued legal expenses 1,970
Current portion of long-term debt 412
Deferred revenue 1,363
Taxes payable 571
-------------------------
Total Current Liabilities 7,456
Long-Term Liabilities
Deferred revenue 862
Deferred income taxes 899
Long-term debt 539
Loan - ADN Inc. 484
Other 487
-------------------------
Total Liabilities 10,727
-------------------------
STOCKHOLDERS' EQUITY
Preferred Stock
Par value $0.0001 per share; 10,000,000 shares authorized,
none issued and outstanding -
Common stock
Par value $0.0001 per share; 100,000,000 shares authorized,
34,101,167 shares issued and outstanding 3
Additional paid-in-capital 20,934
Accumulated other comprehensive loss (391)
Retained earnings 3,023
-------------------------
Total Stockholders' Equity 23,569
-------------------------
Total Liabilities and Stockholders' Equity $ 34,296
=========================
The accompanying notes are an integral part of these consolidated financial
statements
3
Aftersoft Group, Inc.
Consolidated Statements of Operations and Comprehensive Operations
(In thousands, except share data)
For The Three Months Ended For The Nine Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- --------------- --------------- ---------------
Revenues $ 5,766 $ 5,086 $ 15,390 $ 17,071
Cost of revenues 2,455 2,823 7,184 7,565
-------------- --------------- --------------- ---------------
Gross Profit 3,311 2,263 8,206 9,506
-------------- --------------- --------------- ---------------
Operating Expenses
Research and development 792 554 2,328 2,087
Sales and marketing 421 650 1,387 1,733
General and administrative 971 894 2,530 2,407
Depreciation and amortization 436 318 980 1,317
-------------- --------------- --------------- ---------------
Total Operating Expenses 2,620 2,416 7,225 7,544
-------------- --------------- --------------- ---------------
Operating income / (loss) 691 (153) 981 1,962
-------------- --------------- --------------- ---------------
Other Income (Expense)
Other, net 2 (12) 20 (9)
Interest (30) (38) (88) (106)
Gain/(loss) on disposal of fixed assets 4 (3) 308 (3)
-------------- --------------- --------------- ---------------
Total other income (expense), net (24) (53) 240 (118)
-------------- --------------- --------------- ---------------
Pretax income . (loss) 667 (206) 1,221 1,844
Provision for income taxes 165 - 350 179
-------------- --------------- --------------- ---------------
Net income / (loss) 502 (206) 871 1,665
Foreign currency translation loss (32) (70) (89) (32)
-------------- --------------- --------------- ---------------
Comprehensive income / (loss) $ 470 $ (276) $ 782 $ 1,633
============== =============== =============== ===============
Income /(Loss) per share attributed to
common stockholders
- basic and fully diluted $ 0.015 $ (0.006) $ 0.026 $ 0.053
Weighted average number of shares of
common stock outstanding
- basic and diluted 34,101,167 32,500,000 33,091,736 31,275,889
The accompanying notes are an integral part of these financial statements.
4
Aftersoft Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Nine months Ended March 31,
-----------------------------------
2006 2005
Operating Activities: (Unaudited) (Unaudited)
--------------- ---------------
Net income $ 871 $ 1,665
Adjustments to net income
Depreciation and amortization 980 1,317
Gain on disposal of fixed assets (308) 3
Changes in assets and liabilities (net of the effect of
acquisition):
Trade accounts receivable (496) 269
Inventories 137 77
Prepaid expenses and other assets (59) (345)
Accounts payable (85) 130
Taxes payable 352 179
Deferred revenue (369) (4,143)
Accrued expenses and other liabilities 264 699
--------------- ---------------
Net cash provided by (used in) operating activities 1,287 (149)
--------------- ---------------
Investing Activities:
Cash acquired in acquisition - 490
Purchase of property and equipment (41) (343)
Property and equipment sale proceeds 308 -
Capitalized software development costs (187) (247)
--------------- ---------------
Net cash provided by (used in) investing activities 80 (100)
--------------- ---------------
Financing Activities:
Proceeds from related party 327 1,147
Payment on long-term debt (999) (698)
Payment to related party (219) -
--------------- ---------------
Net cash provided by (used in) financing activities (890) 449
--------------- ---------------
Effect of exchange rate changes (91) (19)
--------------- ---------------
Net change in cash 386 181
Cash, beginning of period 194 7
--------------- ---------------
Cash, end of period $ 580 $ 188
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
Aftersoft Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Continued)
For the Nine months Ended March
31,
--------------------------------
2006 2005
(Unaudited) (Unaudited)
--------------- -------------
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 88 $ 106
Income taxes $ 0 $ 0
Non cash investing and financing transactions during the period for:
Settlement of note receivable $ 510 $ -
Shares issued for CarParts Technologies, Inc. acquisition
Cash $ 490
Other current assets 1,132
Property and equipment 140
Other long-term assets 37
Other current liabilities (3,264)
Deferred income (4,872)
Long-term debt (1,151)
Other long-term liabilities (487)
Goodwill 14,549
Amortizable Intangibles 5,300
-------------
$ 11,874
=============
The accompanying notes are an integral part of these financial statements.
6
AFTERSOFT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Periods Ended March 31, 2006 and 2005
NOTE 1. Management's Representation
The consolidated financial statements included herein have been prepared by
Aftersoft Group, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America has
been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting primarily
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the nine months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2006. It is suggested that the consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 2005.
NOTE 2. Nature of Business
Basis of Presentation
Aftersoft Group, Inc. is a subsidiary of Auto Data Network, Inc. ("ADN, Inc."),
which owns approximately 95% of the outstanding common stock.
Aftersoft Group is a leading provider of business and supply chain management
solutions primarily to automotive parts manufacturers, retailers, tire and
service chains, independent installers and wholesale distributors in the
automotive aftermarket. The Company conducts its businesses through subsidiaries
with operations in Europe and North America. MAM Software Limited is the leading
supplier of software to the automotive parts market in the U.K. MAM Software
consists of MAM Autopart Ltd, MAM AutoCat Ltd. ., which are all based in
Sheffield, UK. Aftersoft Licencing Ltd previously Mam Autopart Ltd based at
Savannah House in London and Aftersoft Network North America, Inc. AFS Warehouse
Distribution Management, Inc. and AFS Tire Management Inc., which are based in
San Juan Capistrano, California and AFS Autoservice, Inc., which is based in
Allentown PA. Aftersoft Network North America was formerly known as CarParts
Technologies Acquisition Corp. and AFS Tire Management was formerly known as
CarParts Technologies, Inc. Together these subsidiaries form the second largest
supplier of software to the automotive parts market in the U.S.
On December 21, 2005, W3 Group, Inc. ("W3") consummated an Acquisition Agreement
("Agreement") to acquire all of the outstanding shares of common stock of Old
Aftersoft Group, Inc. ("Oldco") in exchange for the issuance of 32,500,000 newly
issued shares of W3, par value $0.0001 per share (the "Common Stock"), to ADN,
Inc., the sole shareholder of Oldco.
7
Pursuant to the Agreement and as a result of consummation of the Agreement, the
existing shareholders of W3 owned 1,601,167 shares, or approximately 4.7% of the
34,101,167 total outstanding shares of the Common Stock and ADN owned 32,500,000
shares or approximately 95.3% of the total outstanding shares. Concurrent with
the closing of the transaction, the Board of Directors of W3 appointed three
additional directors designated by ADN to serve until the next annual election
of directors. In addition, concurrent with the close of the transaction, W3 (1)
changed its corporate name from W3 Group, Inc. to Aftersoft Group, Inc., (2)
changed its corporate address to California, and replaced the corporate
officers.
The acquisition was recorded as a reverse acquisition, whereby the assets and
liabilities and 32,500,000 outstanding shares of common stock of Oldco were
reported at their historical cost and the 1,601,167 shares of W3 reflected as
being issued by the Company on December 21, 2005 as a corporate reorganization.
In addition, the results of Oldco for all comparative periods prior to the
reverse acquisition are reported as the results of the Company.
The Company operates on a June 30 fiscal year end.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Concentrations of Credit Risk
Cash
The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At March
31, 2006, the Company did not have any balances in these accounts in excess of
the FDIC insurance limits.
Customers
The Company performs periodic evaluations of its customers and maintains
allowances for potential credit losses as deemed necessary. The Company
generally does not require collateral to secure its accounts receivable. Credit
risk is managed by discontinuing sales to customers who are delinquent. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company expects
to collect amounts due, actual collections may differ from the estimated
amounts.
No customer accounted for more than 10% of the Company's revenues during the
three- and nine-month periods ended March 31, 2006 and 2005.
8
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires public companies to report selected segment information
in their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company believes it operates in only one segment and as such has
not presented additional segment disclosures.
Geographic Concentrations
The Company conducts business in the United States, Canada, and the United
Kingdom ("UK"). From customers headquartered in their respective countries, the
Company derived 1% of its revenues from Canada, 29% of its revenues from the
United States and 70% from its UK operations during the three months ended March
31, 2006 compared to 1% from Canada, 32% from the United States and 67% from the
UK for the three months ended March 31, 2005. For the nine months ended March
31,2006, the Company derived 1% of its revenues from Canada, 32% of its revenues
from the United States and 67% from its UK operations compared to 1% from
Canada, 43% from the United States and 56% from the UK for the nine months ended
March 31, 2005. At March 31, 2006, the Company maintains 81% of its net property
and equipment in the UK with the remaining 19% in North America.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made by
the Company's management include, but are not limited to, the collectibility of
accounts receivable, realizability of inventories, the recoverability of
long-lived assets and valuation of deferred tax assets. Actual results could
materially differ from those estimates.
Fair Value of Financial Instruments
The Company's consolidated financial instruments consist of cash, accounts
receivable, related party loans, long-term debt, accounts payable and accrued
expenses. The carrying values of such instruments classified as current
approximate their fair values as of March 31, 2006 due to their short-term
maturities. The difference between the fair value and recorded values of the
related party loans and long-debt are not significant due to the lack of
significant differential between current prevailing rates of similar instruments
and the rates of the Company's non-current instruments.
Inventories
Inventories are stated at the lower of standard cost or current estimated market
value. Cost is determined using the first-in, first-out method. Inventories
consist primarily of hardware that will be sold to customers. The Company
periodically reviews its inventories and records a provision for excess and
obsolete inventories based primarily on the Company's estimated forecast of
product demand and production requirements. Once established, write-downs of
inventories are considered permanent adjustments to the cost basis of the
obsolete or excess inventories.
9
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the related lease terms. Equipment under capital lease obligations is
depreciated over the shorter of the estimated useful lives of the related assets
or the term of the lease. Maintenance and routine repairs are charged to expense
as incurred. Significant renewals and betterments are capitalized. At the time
of retirement or other disposition of property and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in the statement of operations.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development cost is recorded at its
estimated fair market value. When a product is ready for general release, its
capitalized costs are amortized using the straight-line method over a period of
three years. If the future market viability of a software product is less than
anticipated, impairment of the related unamortized development costs could
occur, which could significantly impact the recorded net income/loss of the
Company.
Goodwill
Statement of Financial Accounting Standards No. 142, ("SFAS 142"), "Goodwill and
Other Intangible Assets," addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
be tested at least annually for impairment, and intangible assets that have
finite useful lives be amortized over their useful lives. In addition, SFAS 142
expands the disclosure requirements about goodwill and other intangible assets
in the years subsequent to their acquisition.
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. Based on its analysis, the Company's
management believes that no impairment of the carrying value of its goodwill
existed at March 31, 2006. There can be no assurance however, that market
conditions will not change or demand for the Company's products and services
will continue which could result in impairment of goodwill in the future.
10
Long-Lived Assets
The Company's management assesses the recoverability of other long-lived assets
by determining whether the depreciation and amortization of long-lived assets
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of long-lived asset impairment, if any, is
measured based on fair value and is charged to operations in the period in which
long-lived asset impairment is determined by management. At March 31, 2006 the
Company's management believes there is no impairment of its long-lived assets.
There can be no assurance, however, that market conditions will not change or
demand for the Company's products and services will continue, which could result
in impairment of long-lived assets in the future.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions."
Accordingly, software license revenue is recognized when persuasive evidence of
an arrangement exists, delivery of the product component has occurred, the fee
is fixed and determinable, and collectibility is probable. If any of these
criteria are not met, revenue recognition is deferred until such time as all of
the criteria are met. In accordance with SOP 98-9, the Company accounts for
delivered elements in accordance with the residual method when arrangements
include multiple product components or other elements and vendor-specific
objective evidence exists for the value of all undelivered elements. Revenues on
undelivered elements are recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion of
the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as deferred revenue in the accompanying consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
11
Advertising Expense
The Company expenses advertising costs as incurred. For the nine months ended
March 31, 2006 and 2005, advertising expense totaled $29,000 and $29,000,
respectively.
Foreign Currency
Management has determined that the functional currency of its subsidiaries is
the local currency. Assets and liabilities of the UK subsidiary are translated
into U.S. dollars at the quarter end exchange rates. Income and expenses are
translated at an average exchange rate for the period and the resulting
translation gain (loss) adjustments are accumulated as a separate component of
stockholders' equity, which totaled $(89,000) and $(32,000) for the nine months
ended March 31, 2006 and 2005, respectively.
Foreign currency gains and losses from transactions denominated in other than
respective local currencies are included in income. The Company had no foreign
currency gains (losses) for all periods presented.
Comprehensive Income
Comprehensive income (loss) includes all changes in equity (net assets) during a
period from non-owner sources. For the nine months ended March 31, 2006 and
2005, the components of comprehensive income (loss) consist of foreign currency
translation gains (losses).
Income Taxes
The Company accounts for domestic and foreign income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. Deferred taxation is provided in full in respect of taxation
deferred by timing differences between the treatment of certain items for
taxation and accounting purposes.
Basic and Diluted Earnings Per Share
Basic earnings per common share is computed based on the weighted average number
of shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted average shares outstanding assuming all
potential dilutive common shares were issued. Basic and diluted earnings per
share is the same for the periods presented as the Company has no dilutive
securities.
Recent Accounting Pronouncements
12
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-based Payment" ("Statement 123(R)") to provide
investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the equity or liability instrument
used. Statement 123 (R) covers a wide range of share based compensation
arrangements including share options, restricted share plans, performance based
awards, share appreciation rights, and employee share purchase plans. Statement
123(R) replaces SFAS No. 123 and supersedes APB25. The Company will be required
to apply Statement 123(R) in 2006. The Company does not believe the adoption of
Statement 123(R) will have a significant impact on the Company's overall results
of operations or financial position as it has no stock based payments as of
December 31, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets
- an amendment to ABP Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 eliminates the exception for non-monetary exchanges of similar
productive assets, which were previously required to be recorded on a carry over
basis rather then a fair value basis. Instead, this statement provides that
exchanges of non-monetary assets do not have a commercial substance be reported
at a carryover basis rather then a fair value basis. A non-monetary exchange is
considered to have commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of this statement are effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 153 to have an impact on its financial condition or results
of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its results of operations, cash flows or
financial position.
NOTE 3. Note Receivable
The Company transferred its note receivable with a related party known as MAM
North America, Inc. in the amount of $510,000, to ADN, Inc. ADN, Inc. has agreed
to accept the assignment of all the issued shares of MAM North America, Inc.
from the Company and to repay the $510,000 note receivable on October 1, 2005 by
allowing the Company to reduce its balance of loans due to ADN, Inc.
Furthermore, MAM North America has indemnified MAM UK against all past or
current liabilities.
13
From time to time ADN, Inc. advances funds to the Company. Such advances are non
interest bearing and currently have no specific due date. ADN, Inc. has
indicated that it will not make any demands on this balance prior to April 1,
2007; as a result, the Company has classified this loan as a long-term
liability.
NOTE 4. Commitments and Contingencies
Legal Matters
From time to time, the Company is subject to various legal claims and
proceedings arising in the ordinary course of business. The ultimate disposition
of these proceedings could have a materially adverse effect on the consolidated
financial position or results of operations of the Company.
The Company has been informed of a verdict against it in a litigation in the
Court of Common Please of Allegheny County, Pennsylvania, in favor of Aidan
McKenna totaling $3,555,000, which it intends to vigorously appeal. The Company
filed a claim against McKenna for $1,000,000 for breach of contract alleging
that McKenna continued to conduct business in the Open Webs Corporation in
violation of the asset purchase agreement. The Company has made a provision of
$1,650,000 in its legal expense accrual account to cover the cost of any verdict
with respect to this litigation as of March 31, 2006.
Homann Tire LTD Vs. CarParts Technologies filed a complaint against the Company
in California District Court on August 11, 2005 regarding the Company's
obligations pursuant to a software license agreement that it entered into with
Homann on October 18, 2002 (the "Agreement"). Homann alleges breach of contract,
breach of warranty and intentional and negligent misrepresentation. The Company
maintains the complaint is without merit.
Indemnities and Guarantees
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party, in relation to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State of
Delaware. In connection with its facility leases, the Company has indemnified
its lessors for certain claims arising from the use of the facilities. In
connection with its customers' contracts the Company indemnifies the customer
that the software provided does not violate any US patent. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated.balance sheet.
14
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion of the Company's consolidated financial condition and
results of operations should be read in conjunction with the audited historical
consolidated financial statements and the notes accompanying those statements.
The results described below are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on the Company's current expectations, which are inherently
subject to risks and uncertainties. Actual results and the timing of certain
events may differ significantly from those projected in such forward-looking
statements due to a number of factors. The Company undertakes no obligation
beyond what is required under applicable securities law to publicly update or
revise any forward looking statement to reflect current or future events or
circumstances, including those set forth herein.
Overview
The Company is a leading provider of business management solutions primarily to
retailers, tire and service chains, independent installers and wholesale
distributors in the Automotive Aftermarket. The Company's business management
solutions include systems, professional services, customer support and data
services that its customers use to manage their critical day-to-day business
operations through automated point-of-sale, inventory management, general
accounting and e-commerce connectivity. The Company's revenues are derived from
the following:
Business management systems comprised of proprietary software applications,
implementation and training; and
Subscription-based services, including software support and maintenance,
information (content) products and online services.
The Company acquired CarParts Technologies on August 6, 2004 to increase its
presence in the North American market as well as to provide an operational
foundation to penetrate its parts store software, from its subsidiary MAM
Limited into the North American market.
At the end of fiscal year 2004, the Company decided to discontinue the sales
efforts of its software application focused on the tire distribution market
temporarily. The Company decided to reengineer two of its other products with
the necessary tire distributor functionality, over time, while it targeted
select areas of the tire distribution market. This change in focus was expected
to create a decrease in revenues during this reengineering period as well as
increase the overall profitability of the Company through a reduction of cost of
revenue and operational expenses. The Company did expect an initial increase in
revenues associated with this product due to the large balance it maintained in
deferred revenues as these revenues were recognized over the first six months of
fiscal year 2005.
Critical Accounting Policies
The Company's consolidated financial statements 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 amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
15
The Company believes the following critical accounting policies, among others,
affect the Company's more significant judgments and estimates used in the
preparation of the Company's financial statements:
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of the Company's receivables at least quarterly. The allowance
for doubtful accounts is subject to estimates based on the historical actual
costs of bad debt experienced, total accounts receivable amounts, age of
accounts receivable and any knowledge of the customers' ability or inability to
pay outstanding balances. If the financial condition of the Company's customers
were to deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required. The differences could be material and
could significantly impact cash flows from operating activities.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise
marketed are charged to expense until technological feasibility of the product
has been established. Once technological feasibility has been established,
computer software development costs (consisting primarily of internal labor
costs) are capitalized and reported at the lower of amortized cost or estimated
realizable value. Purchased software development is recorded at its estimated
fair market value. When a product is ready for general release, its capitalized
costs are amortized using the straight-line method over a period of three years.
If the future market viability of a software product is less than anticipated,
impairment of the related unamortized development costs could occur, which could
significantly impact the recorded net income/loss of the Company.
Goodwill
SFAS 142, Goodwill and Other Intangible Assets, addresses how intangible assets
that are acquired individually or with a group of other assets should be
accounted for in the financial statements upon their acquisition and after they
have been initially recognized in the financial statements. SFAS 142 requires
that goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition.
16
SFAS 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. Goodwill will be subject to
impairment reviews by applying a fair-value-based test at the reporting unit
level, which generally represents operations one level below the segments
reported by the Company. An impairment loss will be recorded for any goodwill
that is determined to be impaired. The Company performs impairment testing on
all existing goodwill at least annually. If the actual fair value of the
reporting unit is less than estimated, impairment of the related goodwill could
occur, which could significantly impact the recorded net income/loss of the
Company.
Long-Lived Assets
The Company's management assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of long-lived assets over
their remaining lives can be recovered through projected undiscounted future
cash flows. The amount of long-lived asset impairment, if any, is measured based
on fair value and is charged to operations in the period in which long-lived
asset impairment is determined by management. If the actual fair value of the
long-lived assets are less than estimated, impairment of the related asset could
occur, which could significantly impact the recorded net income/loss of the
Company
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. Accordingly, software
license revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product component has occurred, the fee is fixed and
determinable, and collectibility is probable. If any of these criteria are not
met, revenue recognition is deferred until such time as all of the criteria are
met. In accordance with SOP 98-9, the Company accounts for delivered elements in
accordance with the residual method when arrangements include multiple product
components or other elements and vendor-specific objective evidence exists for
the value of all undelivered elements. Revenues on undelivered elements are
recognized once delivery is complete.
In those instances where arrangements include significant customization,
contractual milestones, acceptance criteria or other contingencies (which
represents the majority of the Company's arrangements), the Company accounts for
the arrangements using contract accounting, as follows:
1) When customer acceptance can be estimated, expenditures are capitalized as
work in process and deferred until completion of the contract at which time the
costs and revenues are recognized.
2) When customer acceptance cannot be estimated based on historical evidence,
costs are expensed as incurred and revenue is recognized at the completion of
the contract when customer acceptance is obtained.
The Company records amounts billed to customers in excess of recognizable
revenue as customer advances and deferred revenue in the accompanying
consolidated balance sheets.
Revenues for maintenance agreements are recognized ratably over the terms of the
service agreement.
17
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period the enactment occurs. Deferred
taxation is provided in full in respect of taxation deferred by timing
differences between the treatment of certain items for taxation and accounting
purposes.
For the three months ended March 31, 2006 and 2005
Key Components of Results of Operations
Total Revenues. Total revenues for three months ended March 31, 2006, increased
by approximately $680,000, or 13.4%, compared to the three months ended March
31, 2005. The increase in revenue was mostly generated in the UK subsidiaries
with additional sales across the software portfolio due to increased marketing
effort.
Total Cost of Revenues. Total cost of revenues for the three months ended March
31, 2006, decreased by approximately $368,000 or 13%, compared to the three
months ended March 31, 2005. This decreased despite higher revenues for the
period as a result of a reduction in professional services staff. Additionally,
the Company consolidated the staff to enable the them to handle the deployment
of multiple product lines.
For the reasons noted above, total gross profit increased by $1.048 million, or
46.3% for the three months ended March 31, 2006 as compared with the three
months ended March 31, 2005.
Operating Expenses. The following table sets forth, for the periods indicated,
the Company's operating expenses and the variance thereof.
For The Three Months Ended March 31,
-----------------------------------------------------
2006 2005 Variance $ Variance %
--------- -------- ------------ ------------
(In thousands $)
Research and development $ 792 $ 554 $ 238 (43%)
Sales and marketing 421 650 (229) (35%)
General and administrative 971 894 77 8.6%
Depreciation and amortization 436 318 118 (37%)
--------- -------- ------------
Total Operating Expenses $ 2,620 $ 2,416 $ 204 (8.4%)
--------- -------- ------------
18
Operating Expenses increased by $204,000 for the three months ended March 31,
2006 compared with the three months ended March 31, 2005. This is due to the
following:
Research and Development Expenses. Increased due to the costs associated with
development of the Trader System and software updates.
Sales and Marketing. Increased as a result of higher business activity in the
period.
Depreciation and Amortization. Depreciation and amortization expenses increased
due to the purchase of various fixed assets during the last six months of the
2005 fiscal year.
Interest Expense. Interest expense decreased by $8,000, or 21%, compared to the
three months ended March 31, 2005. This decrease was a result of the reduction
of long-term debt between fiscal year 2005 and fiscal year 2006.
Net Income. As a result of the above, the Company realized net income $502,000
for the three months ended March 31, 2006, compared with $(206,000) for the
three months ended March 31, 2005, an increase of $708,000.
For the nine months ended March 31, 2006 and 2005
Key Components of Results of Operations
Total Revenues. Total revenues for the nine months ended March 31, 2006
decreased by approximately $1.7 million, or 9.8%, compared to the nine months
ended March 31, 2005. The decrease in revenues was due to the temporary
discontinuation of the sales efforts of its software application focused on the
tire distribution market. Management decided to target this market with its
other software products to which the tire functionality has been added.
Total Cost of Revenues. Total cost of revenues for the nine months ended March
31, 2006, decreased by approximately $381,000, or 5%, compared with the nine
months ended March 31, 2005. This decrease was a result of lower revenues for
the period as well as a reduction in Professional services staff. Additionally,
the company consolidated the team to enable them to be able to handle the
deployment of multiple product lines.
For the reasons noted above, total gross profit decreased by $1.3 million, or
13.6% for the nine months ended March 31, 2006 as compared with the nine months
ended March 31, 2005.
19
Operating Expenses. The following table sets forth, for the periods indicated,
the Company's operating expenses and the variance thereof.
For The Nine months Ended March 31,
----------------------------------------------------------
2006 2005 Variance $ Variance %
--------- --------- -------------- -------------
In thousands $
Research and development $ 2,328 $ 2,087 $ 241 11.5%
Sales and marketing 1,387 1,733 (346) (20%)
General and administrative 2,530 2,407 123 5.1%
Depreciation and amortization 980 1,317 (337) (25.6%)
--------- ---------- ---------------
Total Operating Expenses $ 7,225 $ 7,544 $ (319) (4.2%)
--------- ---------- ---------------
Operating expenses decreased by $ 319,000 for the nine months ended March 31,
2006 compared with the nine months ended March 31, 2005. This is due to the
following:
Research and Development Expenses. Increased in the period by $241,000 due to
costs related to new product and updates.
Sales and Marketing Expenses. This decrease of $346,000 was a result of the
reduction of the sales force focused on selling into the tire segment and the
increase in the use of distributors to sell its products. Additionally, the
Company realigned its sales force to more efficiently target the North American
market.
General and Administrative Expenses. This increased 5.1% but there has been a
streamlining of the administrative staff earlier in the year and a general
reduction in operating expenses through business streamlining and expense
analysis.
Depreciation and Amortization. Depreciation and amortization expenses declined
due to a complete amortization of the backlog portion of Aftersoft Network North
America intangible asset in fiscal year 2005.
Interest Expense. Interest expense decreased by $18,000, or 17%, compared to the
nine months ended March 31, 2005. This decrease was a result of the reduction of
long-term debt between fiscal year 2005 and fiscal year 2006.
Gain on Disposal of Fixed Assets. The Company made a $308,000 gain on sale of
surplus office and computer equipment during the nine months ended March 31,
2006.
Net Income. As a result of the above factors, the Company realized a net income
of $871,000 for the nine months ended March 31, 2006, compared with a net income
of $1.67 million for the nine months ended March 31, 2005, a decrease of
$794,000 or 47%.
20
Liquidity and Capital Resources
The Company does not have outside sources of finance and will need to raise
funds from existing stockholders or the capital markets to maintain its
development plans. If it should encounter any unforeseen problems, the Company
will review its budget and adjust the scheduling and costs of the development
programs accordingly to allow the Company to operate until sufficient long term
funding is achieved. However, a key element of our business strategy is to
continue to acquire, obtain licenses for, and develop, new technologies and
products that we believe offer unique market opportunities and/or complement our
existing product lines.
The Company realized positive cash flows from operations of $1,287,000 for the
nine months ended March 31, 2006. The positive cash flow was generated primarily
by the Company's net income increased by depreciation and amortization. The
Company had positive cash flows from investing activities of $80,000 for the
nine months ended March 31, 2006 compared with cash flows of $(100,000) in 2005,
a change of $180,000. This change is mainly due to the $308,000 of cash obtained
by proceeds from sale of property and equipment of $308,000 in the 2006 fiscal
year. The Company incurred negative cash flows in financing activities of
$890,000 for the nine months ended March 31, 2006 compared with positive cash
flows of $449,000 in 2005. This decrease is mainly due to a reduction of
principal on both its long term liabilities and its borrowings from its related
party, Auto Data Networks.
Forward Looking Statements
This Form 10-QSB contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements made by the Company involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially from
the forward looking statements include, but are not limited to, risks associated
with lack of significant operating history, demand for the Company's products,
international business operations, dependence on licensees, governmental
regulations, technological changes, intense competition and dependence on
management. Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The Company's management disclaims
any obligation to forward-looking statements contained herein to reflect any
change in the Company's expectation with regard thereto or any change in events,
conditions, circumstances or assumptions underlying such statements.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer carried out an
evaluation of the effectiveness and operation of the Company's disclosure
controls and procedures. They have concluded after evaluating the effectiveness
of the Company's disclosure controls and procedures as of March 31, 2006, that
as of such date, the Company's disclosure controls and procedures were effective
and designed to ensure that material information relating to the Company would
be made known to them by others.
21
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls during the three
months ended March 31, 2006.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable
Item 2. Unregistered Sales of Equity Securities
None
Item 3. Defaults Upon Senior Securities Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits
Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. ss.1350 of Chief Executive Officer
32.1 Certification Pursuant to 18 U.S.C. ss.1350 of Chief Financial Officer
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Aftersoft Group, Inc.
By /s/ Ian Warwick
--------------------------------------
Ian Warwick
Chief Executive and President
Date: May 17, 2006
23