| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 |
| OR |
| [ ] | TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________ |
Commission File No.: 0-22693
| InfoTech USA, Inc. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 11-2889809 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 7 Kingsbridge Road, Fairfield, New Jersey 07004 |
| (Address of principal executive offices) (Zip code) |
Registrant's telephone number, including area code: (973) 227-8772
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of each class of our common stock as of May 12, 2004 is as follows:
| Class of Common Stock | Number of Shares |
| Common Stock, par value $.01 | 4,895,998 |
INFOTECH USA, INC.
TABLE OF CONTENTS
| Item | Description | Page |
| PART I – FINANCIAL INFORMATION |
| 1. | Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets - March 31, 2004 (unaudited) and September 30, 2003 |
3 |
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| Consolidated Condensed Statements of Operations - Three and Six Months Ended March 31, 2004 and 2003 (unaudited) |
4 |
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| Consolidated Condensed Statement of Stockholders' Equity - Six Months Ended March 31, 2004 (unaudited) |
5 |
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| Consolidated Condensed Statements of Cash Flows - Six Months Ended March 31, 2004 and 2003 (unaudited) |
6 |
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| Notes to Consolidated Condensed Financial Statements (unaudited) | 7 | |||
| 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
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| 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 | ||
| 4. | Controls and Procedures | 14 |
| PART II – OTHER INFORMATION |
| 4. | Submission of Matters to a Vote of Security Holders | 15 | ||
| |
6. |
Exhibits and Reports on Form 8-K |
15 |
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| SIGNATURE | 16 | |||
| EXHIBITS | 17 | |||
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED BALANCE SHEETS |
| (In thousands, except par value) |
| Assets | |||||
| March 31, 2004 | September 30, 2003 | ||||
| (Unaudited) | |||||
| Current Assets Cash and cash equivalents |
$ 509 | $ 855 | |||
| Accounts receivable, net of allowance for doubtful accounts of $99 and $113 | 4,000 | 2,955 | |||
| Inventories | 187 | 120 | |||
| Note receivable - Parent Company | 1,000 | 1,013 | |||
| Deferred tax assets | 65 | 44 | |||
| Other current assets | 324 | 283 | |||
| Total Current Assets | 6,085 | 5,270 | |||
| Property, equipment and improvements, net | 257 | 325 | |||
| Goodwill, net | 2,154 | 2,154 | |||
| Other assets | 1,651 | 1,619 | |||
| Total Assets | $ 10,147 | $ 9,368 | |||
| Liabilities and Stockholders' Equity | |||||
| Current Liabilities | |||||
| Current maturities of capital lease obligation | $ 9 | $ 21 | |||
| Amounts due to Parent Company | 135 | 105 | |||
| Accounts payable | 1,470 | 146 | |||
| Accrued expenses and other liabilities | 1,044 | 1,502 | |||
| Total Liabilities | 2,658 | 1,774 | |||
| Commitments and Contingencies | |||||
| Stockholders' Equity | |||||
| Preferred shares: | |||||
| Authorized 5,000 shares, no par value; none issued | – | – | |||
| Common shares: | |||||
| Authorized 80,000 shares of $.01 par value; 5,757 shares issued; 4,896 | 58 | 58 | |||
| shares outstanding | |||||
| Additional paid-in capital | 6,653 | 6,653 | |||
| Retained earnings | 1,696 | 1,801 | |||
| Treasury stock (861 shares, carried at cost) | (918 | ) | (918 | ) | |
| Total Stockholders' Equity | 7,489 | 7,594 | |||
| Total Liabilities and Stockholders' Equity | $ 10,147 | $ 9,368 | |||
See the accompanying notes to consolidated condensed financial statements.
3
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS |
| (In thousands except per share data) (Unaudited) |
| For The Three Months Ended March 31, |
For the Six Months Ended March 31, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Revenues: Product revenue |
$ 3,613 | $ 1,934 | $ 6,534 | $ 4,320 | |||||
| Service revenue | 907 | 600 | 1,714 | 1,094 | |||||
| Total revenues | 4,520 | 2,534 | 8,248 | 5,414 | |||||
| Cost of sales: | |||||||||
| Cost of products sold | 3,131 | 1,648 | 5,618 | 3,615 | |||||
| Cost of services sold | 610 | 399 | 1,151 | 667 | |||||
| Total cost of products and services sold | 3,741 | 2,047 | 6,769 | 4,282 | |||||
| Gross profit | 779 | 487 | 1,479 | 1,132 | |||||
| Selling, general and administrative expenses | 748 | 887 | 1,603 | 1,830 | |||||
| Depreciation and amortization | 46 | 55 | 92 | 112 | |||||
| Loss from operations | (15 | ) | (455 | ) | (216 | ) | (810 | ) | |
| Other expense | 13 | 2 | 19 | – | |||||
| Interest (income) expense | (37 | ) | 3 | (78 | ) | 10 | |||
| Income (loss) before income tax expense (benefit) | 9 | (460 | ) | (157 | ) | (820 | ) | ||
| Income tax expense (benefit) | 4 | (171 | ) | (52 | ) | (312 | ) | ||
| Net income (loss) applicable to common stockholders | $ 5 | $ (289 | ) | $ (105 | ) | $ (508 | ) | ||
| Net income (loss) per common share - basic | $ 0.00 | $(0.06 | ) | $(0.02 | ) | $(0.10 | ) | ||
| Weighted average number of common | |||||||||
| shares outstanding - basic | 4,896 | 4,896 | 4,896 | 4,896 | |||||
See the accompanying notes to consolidated condensed financial statements.
4
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended March 31, 2004 |
| (In thousands) (Unaudited) |
| Preferred Stock | Common Stock | Additional | Treasury Stock | Total | |||||||||||||||
| Paid-In | Retained | Stockholders | |||||||||||||||||
| Number | Amount | Number | Amount | Capital | Earnings | Number | Amount | Equity | |||||||||||
| Balance, September 30, 2003 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 1,801 | (861 | ) | $ (918 | ) | $ 7,594 | ||||||||
| Net loss | – | – | – | – | – | (105 | ) | – | – | (105 | ) | ||||||||
| Balance, March 31, 2004 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 1,696 | (861 | ) | $ (918 | ) | $ 7,489 | ||||||||
See the accompanying notes to consolidated condensed financial statements.
5
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
| (In thousands) (Unaudited) |
| For the Six Months Ended March 31, |
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| 2004 | 2003 | ||||
| Cash flows from operating activities Net loss |
$ (105 | ) | $ (508 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||
| Depreciation and amortization | 92 | 112 | |||
| Deferred income taxes | (52 | ) | (312 | ) | |
| Changes in operating assets and liabilities: | |||||
| Increase in accounts receivable | (1,045 | ) | (69 | ) | |
| (Increase) decrease in inventories | (67 | ) | 33 | ||
| Increase in other current assets | (41 | ) | (185 | ) | |
| Increase in other assets | (1 | ) | (3 | ) | |
| Increase (decrease) in accounts payable and accrued expenses | 866 | (424 | ) | ||
| Net cash used in operating activities | (353 | ) | (1,356 | ) | |
| Cash flows from investing activities | |||||
| Capital expenditures | (29 | ) | (10 | ) | |
| Payments received on notes receivable - other | – | 18 | |||
| Payments received on loan to Parent Company | 13 | – | |||
| Proceeds from disposition of property and equipment | 5 | – | |||
| Net cash (used in) provided by investing activities | (11 | ) | 8 | ||
| Cash flows from financing activities | |||||
| Payments on capital lease obligation | (12 | ) | (10 | ) | |
| Net borrowings (payments) on Parent Company line of credit | 30 | (16 | ) | ||
| Net cash provided by (used in) financing activities | 18 | (26 | ) | ||
| Net decrease in cash and cash equivalents | (346 | ) | (1,374 | ) | |
| Cash and cash equivalents - beginning of period | 855 | 3,398 | |||
| Cash and cash equivalents - end of period | $ 509 | $ 2,024 | |||
See the accompanying notes to consolidated condensed financial statements.
6
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
In the opinion of management, the accompanying unaudited consolidated condensed financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of InfoTech USA, Inc. (the “Company”) and its wholly-owned subsidiaries as of March 31, 2004, their results of operations for the three and six months ended March 31, 2004 and 2003, changes in stockholders’ equity for the six months ended March 31, 2004 and cash flows for the six months ended March 31, 2004 and 2003. Information included in the consolidated condensed balance sheet as of September 30, 2003 has been derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K/A for the year ended September 30, 2003 (the “10-K/A”) previously filed with the Securities and Exchange Commission (the “SEC”). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these consolidated condensed financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the 10-K/A.
The consolidated results of operations for the three and six months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year ending September 30, 2004.
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Inventories at March 31, 2004 and September 30, 2003 consist of:
| March 31, 2004 |
September 30, 2003 |
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| Finished goods | $ 219 | $ 159 | |||
| Allowance for excess and obsolescence | (32) | (39) | |||
| Totals | $ 187 | $ 120 | |||
As further explained in Note 1 to the Company’s audited financial statements included in the 10-K/A previously filed with the SEC, the Company presents basic net income (loss) per common share and, if appropriate, diluted net income per common share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, ” Earnings per Share”.
7
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
At March 31, 2004 and 2003, the Company had options and warrants outstanding for the purchase of shares of common stock upon exercise as follows:
| 2004 | 2003 | ||||
| Employee stock options | 4,055 | 4,660 | |||
| Warrants (exercisable at $0.5775 per share) | 300 | 300 | |||
| Total | 4,355 | 4,960 | |||
Since the Company had net losses for the six months ended March 31, 2004 and the three and six months ended March 31, 2003, the assumed effects of the exercise of employee stock options and warrants would have been anti-dilutive. The assumed effects of the exercise of employee stock options and warrants and the application of the treasury stock method for the three months ended March 31, 2004 would have been immaterial. Accordingly, diluted net income (loss) per common share was equal to the basic net income (loss) per common share in each of those periods.
The Company continues to measure compensation cost related to stock options issued to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” Accordingly, no earned or unearned compensation cost was recognized in the accompanying consolidated condensed financial statements for the stock options granted by the Company to its employees since all of those options have been granted at exercise prices that equaled or exceeded the market value at the date of grant. The Company’s historical net income (loss) and net income (loss) per common share and pro forma net income (loss) and net loss per common share assuming compensation cost had been determined based on the fair value at the grant date for all awards by the Company and amortized over the vesting period consistent with the provisions of SFAS 123 are set forth below:
| Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Net income (loss) - as reported | $ 5 | $ (289 | ) | $ (105 | ) | $ (508 | ) | ||
| Deduct total stock-based employee compensation | |||||||||
| expense determined under a fair value based | |||||||||
| method for all awards, net of related tax effects | (22 | ) | (22 | ) | (45 | ) | (45 | ) | |
| Net loss - pro forma | $ (17 | ) | $ (311 | ) | $ (150 | ) | $ (553 | ) | |
| Net income (loss) per share: | |||||||||
| Basic - as reported | $ (.00 | ) | $ (.06 | ) | $ (.02 | ) | $ (.10 | ) | |
| Basic - pro forma | $ (.00 | ) | $ (.06 | ) | $ (.03 | ) | $ (.11 | ) | |
On June 27, 2003, the Company loaned $1.0 million to its majority stockholder, Applied Digital Solutions, Inc. (“Applied Digital”). Under the terms of the loan, interest, which accrues at an annual rate of 16%, is due and payable on a monthly basis beginning July 31, 2003. The principal amount of the loan and any unpaid interest is due
8
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except per share data) |
| (Unaudited) |
on or before June 30, 2004. Applied Digital made all payments as of March 31, 2004. As collateral for the loan, Applied Digital pledged 750,000 shares of common stock of Digital Angel Corporation (“Digital Angel”), a majority-owned subsidiary of Applied Digital. As of March 31, 2004, the market value of the shares of stock of Digital Angel was approximately $2,722 based on the closing price of Digital Angel’s common stock.
On September 5, 2003, the Company received a letter from IBM Credit constituting formal notice of termination of the Company’s agreement, effective March 10, 2004. On March 3, 2004, the Company entered into an agreement with IBM Credit pursuant to which IBM Credit agreed to extend the termination date of the agreement from March 10, 2004 to April 9, 2004. On April 27, 2004, the Company entered into an agreement with IBM Credit pursuant to which IBM Credit agreed to further extend the termination date of the agreement from April 9, 2004 to June 18, 2004. The Company continues to negotiate with a financing company to replace the credit line under the agreement and expects to replace the agreement with IBM Credit prior to June 18, 2004.
9
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion should be read in conjunction with the accompanying consolidated condensed financial statements and related notes in Item 1 of this report as well as our Annual Report on Form 10-K/A for the year ended September 30, 2003. Certain statements made in this report may contain forward-looking statements. For a description of risks and uncertainties relating to such forward-looking statements, see the Forward-Looking Statements and Associated Risk section later in this Item.
On March 19, 2004, Jeffrey S. Cobb was appointed to the Board of Directors, replacing Anat Ebenstein, whose term expired at our last annual meeting. In April 2004, Mr. Cobb joined IT Resource Solutions.net, Inc. as their Chief Operating Officer. Prior to joining IT Resource Solutions.net, Inc., Mr. Cobb had been the Executive Vice President and Chief Operating Officer of SCB Computer Technology Inc. from 2002 to March of 2004. From 1998 to 2002, Mr. Cobb held various positions at SCB including Executive Vice President and Chief Operating Officer of Professional Services, and Executive Vice President of Operations. Before joing SCB he worked for Cybex and Eastern States Bankcard Association in product development and sales. Mr. Cobb has a B.S. Degree in Marketing from Jacksonville University.
BUSINESS DESCRIPTION
We are a Delaware corporation incorporated in 1997. Through our two wholly-owned subsidiaries, Information Technology Services, Inc. and InfoTech USA, we are a full service provider of information technology, or IT, services and products in the New York City metropolitan area and in New Jersey. We specialize in tailoring our approach to the individual customer needs. Doing business as “InfoTech”, we provide IT consulting, networking, remote access, procurement, storage area networks, deployment, integration and migration services. We also provide on-going system and network maintenance services.
We operate in a highly competitive industry, which in turn places constant pressures on maintaining gross profit margins. Many of our sales are high volume equipment sales, which produce lower than average gross profit margins, but are often accompanied by a service arrangement, which yields higher than average gross profit margins.
The following table sets forth, for the periods indicated, the percentage relationship to total revenue of certain items in our consolidated condensed statements of operations.
10
| Relationship to Revenue | |||||||||
| Three Months Ended March 31, |
Six Months Ended March 31, |
||||||||
| 2004 % |
2003 % |
2004 % |
2003 % |
||||||
| Product revenue | 79.9 | 76.3 | 79.2 | 79.8 | |||||
| Service revenue | 20.1 | 23.7 | 20.8 | 20.2 | |||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | |||||
| Cost of products sold | 69.3 | 65.0 | 68.1 | 66.8 | |||||
| Cost of services sold | 13.5 | 15.8 | 14.0 | 12.3 | |||||
| Total cost of products and services sold | 82.8 | 80.8 | 82.1 | 79.1 | |||||
| Gross profit | 17.2 | 19.2 | 17.9 | 20.9 | |||||
| Selling, general and administrative expenses | 16.5 | 35.0 | 19.4 | 33.8 | |||||
| Depreciation and amortization | 1.0 | 2.1 | 1.1 | 2.1 | |||||
| Lo | |||||||||