MTM Technologies, Inc. - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission File Number: 0-22122

MTM Technologies, Inc.
(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization)

13-3354896
(I.R.S. Employer
Identification Number)

614 Corporate Way
Valley Cottage, New York
(Address of principal executive offices)

10989
(Zip Code)

(845) 268-5000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were a total of 5,503,427 shares of the issuer’s common stock, par value $.001 per share, outstanding as of August 12, 2004.

MTM Technologies, Inc.

Quarterly Report on Form 10-Q
Quarter Ended June 30, 2004

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and March 31, 2004	3
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and 2003 (Unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2004 and 2003 (Unaudited)	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	20
Item 2. Changes in Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	23
Item 4. Submission of Matters to a Vote of Security Holders	23
Item 5. Other Information	23
Item 6. Exhibits and Reports on Form 8-K	23

SIGNATURES	25

EXHIBIT INDEX	26

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MTM Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

	June 30, 2004			March 31, 2004

	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,569,230		$	370,361
Restricted cash		1,000,000			—
Accounts receivable - trade, net of allowance of $233,000, respectively		11,999,407			11,278,932
Inventories		888,925			858,544
Prepaid expenses and other current assets		499,440			525,970

Total current assets		18,957,002			13,033,807

Property and equipment		9,864,478			9,746,254
Less accumulated deprecation and amortization		7,440,562			7,038,281

		2,423,916			2,707,973

Goodwill		3,228,729			3,228,729
Other assets		142,612			504,945

Total assets	$	24,752,259		$	19,475,454

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Secured notes payable	$	5,518,935		$	5,918,784
Inventory financing agreements		5,141,091			3,455,635
Accounts payable and accrued expenses		4,403,079			3,252,736
Deferred revenue		971,965			1,583,938
Current portion of capital lease obligations		12,400			100,070

Total current liabilities		16,047,470			14,311,163
Commitments and contingencies
Shareholders’ equity:
Series A Convertible Preferred Stock, par value $.001 per share; 14,000,000 shares authorized; 3,255,814 shares issued and outstanding at June 30, 2004		2,900,000			—
Common stock - $.001 par value; 80,000,000 and 10,000,000 shares authorized at June 30, 2004 and March 31, 2004, respectively; 4,750,415 and 4,723,052 shares issued and outstanding at June 30, 2004 and March 31, 2004, respectively		4,751			4,724
Additional paid-in capital		18,509,350			15,364,227
Accumulated deficit		(12,709,312	)		(10,204,660	)

Total shareholders’ equity		8,704,789			5,164,291

Total liabilities and shareholders’ equity	$	24,752,259		$	19,475,454

See Notes to Condensed Consolidated Financial Statements

MTM Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations

	Three Months Ended June 30,

	2004			2003

	(Unaudited)

Net revenues:
Products	$	12,236,389		$	8,367,376
Services		2,996,959			5,271,376

		15,233,348			13,638,752

Costs and expenses:
Cost of products sold		11,416,599			8,039,110
Cost of services provided		2,355,407			3,051,432
Selling, general and administrative expenses		3,841,466			2,408,322

		17,613,472			13,498,864

Other income		—			1,897
Interest expense		124,528			104,646

Net (loss) income	$	(2,504,652	)	$	37,139

Net (loss) income per common shares:
Basic and diluted	$	(0.53	)	$	0.01

Weighted average number of common shares outstanding:
Basic and diluted		4,731,471			4,723,152

See Notes to Condensed Consolidated Financial Statements

MTM Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows

	Three Months Ended June 30,

	2004			2003

	(Unaudited)

Cash flows from operating activities:
Net (loss) income	$	(2,504,652	)	$	37,139
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		402,281			399,056
Changes in operating assets and liabilities:
Increase in accounts receivable		(720,475	)		(1,613,509	)
(Increase) decrease in inventory		(30,381	)		51,238
Decrease in prepaid expenses and other current assets		26,530			133,751
Decrease in other assets		362,333			—
Increase in accounts payable and accrued expenses		1,150,343			68,645
Decrease in deferred revenue		(611,973	)		—

Net cash used in operating activities		(1,925,994	)		(923,680	)

Cash flows used in investing activities:
Acquisition of property and equipment		(118,224	)		(135,125	)
Increase in restricted cash		(1,000,000	)		—

Net cash used in investing activities		(1,118,224	)		(135,125	)

Cash flows from financing activities:
(Repayment) borrowing of secured notes payable		(399,849	)		708,664
Borrowing on inventory financing		1,685,456			471,731
Proceeds from issuance of preferred stock, net		6,045,150			—
Payments on capital lease obligations		(87,670	)		(92,585	)

Net cash provided by financing activities		7,243,087			1,087,810

Net increase in cash and cash equivalents		4,198,869			29,005
Cash and cash equivalents at beginning of period		370,361			118,452

Cash and cash equivalents at end of period	$	4,569,230		$	147,457

Supplemental disclosures of cash flow information:
Cash paid during the quarter for -
Interest	$	164,728		$	84,864

See Notes to Condensed Consolidated Financial Statements

MTM Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation and Nature of Operations

The accompanying unaudited condensed consolidated financial statements include the accounts of MTM Technologies, Inc. (formerly Micro-to-Mainframes, Inc.) and its wholly owned subsidiaries, Data.Com RESULTS, Inc. (“Data.Com”), MTM Advanced Technology, Inc. (“MTM”) and PTI Corporation (formerly known as Pivot Technologies, Inc.) (“Pivot”), hereinafter collectively referred to as the “Company.” All significant intercompany accounts and transactions have been eliminated.

The Company is a leading computer and communications technology management company providing IT networking and data center services, including storage, security, messaging, and IP telephony solutions. The Company serves as a single source provider of advanced technology solutions to large corporations, mid-sized companies, municipalities and educational institutions. The Company provides its clients with a suite of outsourced support services, network and mainframe connectivity consulting, remote network monitoring and management, network and system diagnostics, product maintenance and support, training, and product procurement solutions. The Company also provides total solutions to its clients by delivering systems design, installation, consulting, maintenance and integration of network computer products, including the design and implementation of WANS, LANS, wireless network solutions and computer hardware and software products. The Company provides its remote network solutions utilizing its proprietary solution marketed as “Pivot Technology.”

The Company purchases computers and related products directly from suppliers as either an authorized dealer or a value-added reseller. The Company has entered into authorization agreements with major suppliers, which can be terminated by the supplier, with or without cause, upon 30 to 90 days’ notice, or immediately upon the occurrence of certain events. The sales of products from the Company’s three largest suppliers accounted for 47%, 18% and 4% of all product sales for the three months ended June 30, 2004. The sales of products from the Company’s three largest suppliers were 40%, 25% and 5% of all product sales for the three months ended June 30, 2003. The Company believes that it has excellent relationships with its major suppliers; however, there can be no assurance that the aforementioned agreements will be renewed. If these agreements are not renewed, the Company may have difficulty in obtaining inventory at a sufficiently low cost, which would allow for resale at a competitive market price.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the Company’s fiscal year ending March 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K (Commission file number: 0-22122) for the fiscal year ended March 31, 2004.

Estimates

The preparation of 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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Restricted Cash

The Company has restricted $1,000,000 of cash in a blocked account for the benefit of our lender under the amended financing facility discussed in Note 2.

MTM Technologies, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

Accounts Receivable

Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts, based on certain percentages of aged receivables. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.

Inventories

Inventories, comprised principally of computer hardware and software, are stated at the lower of cost or market using the first-in, first-out method.

Per Share Data

Basic net income (loss) per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. Dilutive securities have not been included in the weighted-average shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in annual and interim financial statements concerning the method of accounting for stock-based employee compensation and the effect in measuring compensation expense. The disclosure requirements of SFAS No. 148 are effective for periods beginning after December 15, 2002.

The Company has elected, in accordance with the provisions of SFAS No. 123, as amended by SFAS No. 148, to apply the current accounting rules under APB Opinion No. 25 and related interpretations in accounting for employee stock options and, accordingly, has presented the disclosure-only information as required by SFAS No. 123. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date, as prescribed by SFAS No. 123, the Company’s net (loss) income and net (loss) income per common share for the three months ended June 30, 2004 and 2003 would approximate the pro forma amounts indicated in the table below.

		Three Months Ended June 30,

		2004			2003